I was originally going to title this article, “Shorting the Euro Zone”. But what the heck, there is little difference between them and us. Some states, like California, probably have spending programs for welfare, public services and other social programs at nearly the same levels as those in Greece. Even AFTER the first round of Greece’s recent austerity measures. While the markets dip and rise as sentiment on the latest round of bailouts are rammed through, the long-term outlook for Europe, and the U.S., is bleak at best. The Debt Contagion is not only spreading worldwide, it’s already here!
Last Friday, Governor Arnold Schwarzenegger ( R for RINO, CA) issued yet another austerity plan fro Sacramento to consider. One recent study now places the Golden State in the top five of government entities facing default, joined by Spain, Italy, Greece and Portugal. Ireland, the other member of the Euro PIIGS, has already begun to try to resolve it’s economic woes with the ‘Potato Plan’. A structure to create a national ‘bad bank’ which will take the bad debts off the books of ‘good banks’. Ireland has even starting jailing some bank executives who helped caused the situation. Not a bad idea at all!
Ireland is still in trouble, however, as are the rest of the Euro Zone nations. While countries like Germany and France have lower Debt/GDP ratios than the likes of Greece or the UK, their banks are sitting on top of a huge pile of bonds issued by the more perilous countries. The $1 Trillion dollar bailout program announced last week would be barely enough to cover the bonds of Spain, let alone the rest of the Euro-Turkeys. The Debt Contagion could create a serious, long-term credit crunch, stifling Europe’s economy enough to cause the EU to break up. Germany and France are already making noises along those lines. They do not want to go down with the rest.
Over here on this side of ‘The Pond’, the United States is in pretty much the same predicament. Most of our major banks have substantial holdings in troubled Euro Zone countries. Around $200 Billion in bonds just from Spain are held by U.S. banks. While the calamity in Europe caused an increase in the value of the U.S. Dollar, and encouraged Treasury sales, at best it’s temporary. Why, you ask?
The Congressional Budget Office (CBO) frequently issues long-term forecasts on government spending and expected revenues. Some of their reports extend out to as many as seventy years! Quite a feat given that they’ve already botched forecasts on the cost of Obama-Care signed into law mere weeks ago. CBO projections are not pretty, even with their rosy tinted view.
For example, one such forecast shows public debt in 2035 to range somewhere between about 75% to as high as nearly 200% of GDP. Key factors to consider in CBO long-term forecasts are that they expect historic averages to continue for unemployment, 4.8%, and GDP growth, 3.6%. Given what we have seen in the past 18 months, I would say that those expectations lie somewhere in between optimistic and science fiction!
As I wrote in an article few days ago, the past few weeks have seen a dramatic increase in the sale of credit default swaps, ‘short’ bets against the bonds of those troubled Euro Zone nations. Financial players are already lining up against the success of the European Bailout. They see the Debt Contagion spreading and trashing the EU. Even average European citizens are gearing up for more financial crisis as gold sale shot upwards. The latest polls in Greece show their citizens have lost faith with the current Socialist government, just elected last October. 70% to 80% of Greeks do not believe the Socialists can correct the problems of their socialist system. Duh! Kind of like hiring arsonists to build a fire-resistant home. The smart money now is to ‘short’ Big Government, on either side of the Atlantic.