Contagion, the European Union, and the United States
Nov 29, 2011
Posted by Jody Eisenman | Filed under Uncategorized
While US stock markets have now declined for six straight days, all eyes are focusing on Europe. As I wrote a few days ago, the debt problems have begun to spread like a virus all across Europe. On Wednesday, the financial markets were stunned by the news of the German bond auction. Remember, Germany is the main financial arm of the European Central Bank, and has huge control over an eventual bailout. In the bond auction, it is generally accepted that the Finanzagentur (the German debt agency), retains about 10-20% of the auction for themselves. In this case, they were forced to retain 40%. It is now clear that credit is beginning to dry up all over Europe. Without credit, the financial markets freeze up. Everything grinds to a halt, and you will see a slew of bankruptcies. Remember what happened in the United States in 2008? The financial system came very close to a complete meltdown. Multiply this several times, and you have an idea what is going on in Europe. If the strongest country in Europe is having problems selling its’ bonds, what does that say about Italy, Spain and the Netherlands? The future of the Eurozone is on very shaky ground right now.
Meanwhile, comment by Mohammed El-Erian, head of PIMCO (the world’s largest mutual fund) were alarming. El-Erian called US economic conditions “terrifying”, and he believes that the chance of another recession here could be as high as 50%. As the case is in Europe, there is very little movement by the politicians. The debt committee collapsed without any recommendation for a solution. In a nutshell, you cannot continue to spend more than you take in. The longer you do this, the higher your debt gets, and more and more of your expenses must go to pay the interest. If rates start to rise, the interest payments will become almost unmanageable. This is the situation in Europe. In the United States, the debt has still not become catastrophic, as investors are still willing to buy Treasury bonds at very low yields. However, we keep bumping up against debt limits. As long as hard core Democrats will not agree to spending cuts and hard line Republicans will not agree to tax increases, there can be no compromise. Meanwhile, debts continue to increase, and liquidity is drying up. A solution both here and in Europe will need to be found quickly before the situation escalates out of control.
