European debt: the more things change, the more they stay the same
Yesterday it was widely reported that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking to the realization that when you pour bad money after good money, you end up with no money.
A trader reacts as he looks at screens during trading at the Madrid bourse in this April 19, 2012 file photo. France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit.
Susana Vera/Reuters/File
The more things don鈥檛 change鈥he more they remain the same. You can quote us on that.
On the surface, very little changed in the 2 months we were away.
The Dow was about 13,000 in mid-Feb. It鈥檚 still about 13,000.
The yield on the 10 year US note was about 2%. No change there either.
The euro was about $1.30. It鈥檚 $1.30 today.
Gold is a little lower. Big deal.
But down deeper鈥�.did anything more substantial change鈥volve鈥evelop?
Apparently not. Back in the winter, the Europeans were pretending to fix Greece. Now they鈥檙e pretending to fix Spain.
But wait鈥ere鈥檚 something that might be changing鈥ow nobody believes the fixes will stay fixed.
鈥淓urope鈥檚 Rescue Plan Falters,鈥� says the front page of The Wall Street Journal.
Yesterday, widely reported was the fact that Spanish banks held more delinquent loans than at any time since 1995. The world seemed to be waking up too to the realization that when you pour bad money after good money you end up with no money.
The ECB鈥檚 $1.3 trillion worth of loans to banks was supposed to put a stop to liquidity problems. After all, investors know that borrowers can get more money. The ECB lends to the banks. The banks lend to the governments. You can鈥檛 go broke that way. Not as long as the money keeps flowing.
But wait again鈥� 鈥淎fter months of using that cash to buy their government鈥檚 debt,鈥� reports the WSJ, 鈥渂anks in Spain and Italy have little left.鈥�
Let鈥檚 look at this more closely.
The banks have a lot of bad debt, left over from the go-go lending mania in the bubble years.
Led by Ireland, the governments bailed them out. But that put the governments themselves in jeopardy. They didn鈥檛 have any real money to lend the banks. They had to borrow. They just gave the banks money that they had borrowed themselves. So then investors began to wonder about Ireland, Greece, Portugal, Spain and Italy. And guess what? They found that they were going broke too.
That鈥檚 when the central bank came to the rescue. The idea was to bail out the banks and the governments at the same time. The ECB鈥檚 LTRO program looked like a winner, for a while. The plan was simple enough: lend the money to the banks; make sure the banks lend to the governments.
You see the problem, don鈥檛 you? It was just a variation on the US model of trying to fix a debt problem with more debt. In the US version, the Fed buys US government debt, effectively financing the government with printing press cash. In Europe鈥檚 version, the ECB lends to banks鈥ho then lend to, say, Greece. Now, they all have more debt than they can pay.
So now, bond yields are rising again鈥ith Spanish debt back over 6%. And Spanish banks are in worse shape than ever.
Meanwhile, the Italians are staggering under the same kind of weight. In order to get financing last year, they promised to balance the budget next year. But now next year is getting close and a balanced budget is still far away. Says Mario Monti鈥ell, maybe the year after!
You go, Mario鈥eep spending鈥eep borrowing鈥nd tell your friends at the ECB to keep printing鈥�
So what鈥檚 changed?
Nothing. And it鈥檚 going to keep not changing until it can鈥檛 go on any longer.
You see, dear reader, change is a natural thing. So is the desire to prevent it. And what we鈥檙e seeing now is a natural struggle between the Great Correction 鈥� which wants to eliminate debt鈥nd the Great Blundering Reflation 鈥� in which the feds desperately try to add to the world鈥檚 debt supply.
Why are the feds so keen to add debt? They鈥檙e not really. What they want to do to is to prevent change. And the only things they鈥檝e got to work with are brute force鈥ounterfeit money鈥nd debt.
But even the USA is scheduled to enter a phase of European-style austerity. Beginning next on Jan. 1st, a combination of tax hikes and spending cuts should grip America and force it into something the newspapers are calling 鈥淭axmaggedon.鈥�
In Greece, 鈥ebtors kill themselves鈥hildren go hungry鈥he unemployed threaten insurrection.
In Spain, mobs attack banks鈥alf of all youths are unemployed鈥nd the banks face huge losses from bad debt.
So far, America has avoided those scenes of desperation. But unless Congress takes action to deny what it has promised, like Mario Monti did yesterday, the Great Correction is about to get even greater. Tax rates are scheduled to go up. Automatic spending cuts are scheduled to take deficits down. These are the cans that Congress kicked down the road last year. The Bush/Obama tax cuts will expire in 2013. And 鈥� because Congress was unable to come up with a sensible budget 鈥� the axe will fall on government spending too.
What will happen if 鈥渢axmaggedon鈥� comes as scheduled? Experts say GDP will fall by 3%. Hey, that would put it in negative territory.
And the recovery? Over. Finito. Kaput. And unemployment? Up. House prices? Down.
But wait鈥ill the feds allow such a thing?
No, probably not. They will try to block it. Congress will kick the can again. Tax rates will rise鈥ut not as much as they are supposed to rise. Spending will be trimmed鈥round the edges鈥ut not seriously.
And then 鈥� when the economy and stock market take another dive, as they did in August of 2010 and again in September of 2011 鈥� the Fed will announce another program of QE.
If there is any real change 鈥� a real Great Correction, in other words 鈥� it will be over their dead bodies.