Monday, May 7, 2012

The French Disconnection

So, the Socialist Francois Hollande has beaten Nicolas Sarkozy to become France's next president. What does this mean for Europe and especially the euro?

It appears the main policy change, is around stimulus. Simply put, Hollande wants more government spending rather than the austerity forced upon the eurozone via the Germans. He wants to be a true socialist neo-Keynesian. He wants to use other people's money until it runs out.

This idea may have worked in the 1930s in depression time. Back when debt levels were low and money supply small, but it won't work now. Debt has stiffled growth in most western economies causing stagflation. An unfortunate event where prices rise and growth is negative and unemplyment high.

There comes a point in debt cycles where all your hard earned income goes to paying off debt and is not available for capital investment and discretionary spending.

This is where we are now and the answer from the socialists is the same old, same old; print money and hope.

Well Sarkozy had a bet one way and tried to keep the machine running and it failed. Poiticians always have a knack of hoping for the best just to eke out that little bit of time so they can remain in power. They don't really care about their constituents. Power is far more important. Just look across the Atlantic at the beginnings of Obama's election campaign. Obama is trotting out the old slogans from 2008, only adding that hope and change may take longer than you think (in other words, I hope you swallow this rubbish for another four years).

George Clooney still believes in hope and change, he's hosting a dinner for Obama which will fetch $15 million for the campaign. Perhaps celebrities could save the world?

Anyway, who needs hope and change with that sort of financial muscle? Obama is likely, bar a black swan event, to be re-elected for another four years. Change and hope are slow, he said, but don't stop believing. Yes, but will hope and belief feed the masses? There will come a tipping point where the 'dumb' middle-classes can take no more of the debt they are laden with or the price increases forced upon them via money printing. Egypt and Syria may come to a nice first world economy near you.

Hollande will attempt to change the European fiscal pact in order to allow the printing of boat-loads of money to pay debt and to attempt to get the economy moving. It will eventually fail. This policy always has.

Gold and silver were strangely up last Friday while other markets, including commodities, were down. This has occured a couple of times in recent weeks. Strange goings on indeed. Gold is insurance and you have it in your portfolio to rest assured that you have something of value. If all else fails, gold will buy you something. Always.

The French elections throw a bit of a curve-ball into the economic equation. This week will be fascinating indeed.

Gold in New Zealand dollars: $2070.48 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $38.25 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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