Friday, October 28, 2011

Rejoice! Europe's Problems are Fixed.

Looks like everyone is happy and the prospects for growth are now rosy. Rejoice, for the Europeans have seen sense and we can now party.

Well, maybe.

I know I'm a pessimist, but I think that's founded on good sense. The situation in Europe hasn't been fixed, but papered over (literally). How can using more debt solve the problem of debt? The only thing this plan has done is placate the speculators and enabled them to fire those parked dollars into risk assets and make a buck or two; quickly.

But tell me if I'm wrong with my schoolboy logic. If someone cannot pay their debts then isn't that technically a default if they don't? It seems now it's called a 'haircut'. Perhaps they've run out of names for the old meanings and this was last on the list. Or a whole lot of old balding Eurocrats are thinking lovingly of the old days.

The banks that lent Greece will take a loss of around 50% of all the debt owing to them. Default. Greece cannot pay the money lent to them. At least this has finally been acknowledged after 18 months of fudging and media manipulation.

Behind the scenes though, the banks will be able to re-capitalise themselves with fresh funds from the EFSF. More debt, more printed money. Remember that all countries in Europe are in deficit and have high debt to GDP ratios. This $1.2 trillion dollars doesn't exist. This bailout is new money.

Gold is now telling us that inflation is hurtling don't the tracks. More money in the system, the higher asset prices will go.

Gold in New Zealand dollars: $2120.37 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $42.89 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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