Europe has lost its head!

First, the weather is completely out-of-sync with the calendar. Perhaps it’s because of the volcano in Iceland… The dust is blotting out the sun. There’s no sun here today. Instead, the sky is pale grey. And it’s raining. The calendar say’s May 11th, but it could easily pass for February.

The euro markets lost their heads too. Yesterday, Europe exploded to the upside. Stocks went up. Bonds went up even more. Especially Greek bonds.

Why the good time? Because Europe decided to follow the US into full- scale combat with the future. Yes, the Europeans are as eager to prevent real change from happening as their American counterparts.

The change they most don’t want is what we’re calling ‘the Great Correction.’ It’s a combination of several corrections at once – including a correction of the welfare state.

Europeans live well. And thanks to so many transfer payments and so many government-provided services, they live well without really having much money to spend. Their incomes go to pay taxes and social charges.

Trouble is, they enjoy a standard of living that they can’t really afford.

This will sound familiar to Markets and Money readers. For many years, we pointed the finger at Americans, claiming that they spent too much money. Americans lived beyond their means. Individual households overspent and went into debt. That over-leveraging in the private sector in the US is now being corrected. At least, we think it is being corrected. (Recent figures are mixed…with some indications that private households are up to their old habits, trying to increase their standards of living by going into debt.)

In Europe, the phenomenon is a little different. It’s the public sector that is living beyond its means. Military budgets are small. Most government spending is focused on services and transfer payments. This social spending is responsible for a big part of the GDP and a big part of living standards. But as in the US, living standards are higher than people can afford. Governments provide more employment, more transfer payments and more ‘services’ than they have tax revenue to pay for. The result is public debt, which is getting worse every year.

Europe, generally – excluding England – does not have high levels of private debt. The debt is in the public sector. That said, government debt in Europe, on average, is no worse than it is in the US. The Eurozone, altogether, has government debt to GDP of 88%.

In terms of deficits, Europe is actually in better shape than the US. US deficits are running around 10% of GDP – or more. In Europe, the average deficit this year is expected to be 6.6%.

In Europe, the center is solid. But like the edges of a carpet, the periphery states tend to get a little worn. Greek public debt is expected to reach 150% of GDP next year. Its budget deficit is as large as that of the US.

You can’t sustain a debt of 150% of GDP – not unless you are Japanese. So, a correction was inevitable. Greece had to change course.

This is what caused a crisis last week, a ‘rescue’ over the weekend, and a sharp rally yesterday. America rescued its private sector. Europe is rescuing its public sector. Both are actually making the situation worse…but that subject is for a different day.

Rather than permit problems to correct themselves, the euro feds stepped in to aggravate them. That is, the euro feds are following the same program as the Americans. If people get into trouble because they have too much debt, the feds come to their aid with more debt!

In the event, EU financial officials worried that the Greek illness could be catchy. They were afraid that Portugal, Spain and maybe Italy would get whatever the Greeks had. So, they decided to inoculate the whole Eurozone with a $1 trillion program.

Where will the money come from? Just as in the US, it will come from people who don’t have any. All the Euro states are borrowing money already. Now they will have to borrow more to pay for people who borrowed too much.

The plan calls for loan guarantees and money from the IMF too. Plus, the European Central Bank will do its part. It will go into public and private debt markets to buy troubled debt, the equivalent of the Fed’s ‘quantitative easing’ program.

Yes, dear reader, the Europeans threw in everything they had. Under no circumstances did they want anyone to say it was ‘too little, too late.’

It was a “historic” occasion for the European Union, said French finance minister Christine Lagarde.

On that point, she was surely right. Up until now, Europe had shown some dignity…some skepticism…and some good sense. It had intervened to protect speculators from their mistakes, but reluctantly. Now, it has thrown in the kitchen sink, the oven, the refrigerator…and everything else.

But what’s this?

Asian markets seemed to slough off the Euro miracle this morning. And even the euro seems to be wondering if this rescue effort will be as smooth and effective as people thought. Markets are quite likely to continue second-guessing today…and then third-guessing tomorrow… The gains could prove very short-lived.

Why? Is it too little, too late?

No, it is not. It is too much…much too early.

More thoughts on this, after we have time to think about it. In the meantime…

And more thoughts…

– “More bullets to dodge on the road from ruin,” is a marvelous headline in The Financial Times. If they had just changed one word it would have been accurate too. Europe, like America, is still on the road TO ruin.

“Everyone has had a wake up call about limitations [to state borrowing,]” the paper quotes an economist with HSBC.

But when the wake-up call sounded, Europe – like the USA, hit the snooze button, rolled over, and went back to sleep. That is the real meaning and real effect of the bailout. Instead of being forced to balance their budgets right away, the wobbly countries, will get to wobble some more before falling down.

What else could happen? If Europe’s fringe states are to avoid falling down, they will actually have to reduce their spending – drastically. And, to judge from the riots in Greece, that would mean dodging real bullets. We don’t think Europe has the stomach for it. Neither does the USA.

– On the Police State we’re in…

Here’s a twist for you: China criticizes US abuse of civil and political rights:

“In the United States, civil and political rights of citizens are severely restricted and violated by the government.

“The country’s police frequently impose violence on the people. Chicago Defender reported on July 8, 2009 that a total of 315 police officers in New York were subject to internal supervision due to unrestrained use of violence during law enforcement. The figure was only 210 in 2007. Over the past two years, the number of New York police officers under review for garnering too many complaints was up 50 percent. According to a New York Police Department firearms discharge report released on Nov. 17, 2009, the city’ s police fired 588 bullets in 2007, killing 10 people, and 354 bullets in 2008, killing 13 people. On September 3, 2009, a student of the San Jose State University was hit repeatedly by four San Jose police officers with batons and a Taser gun for more than ten times. On September 22, 2009, a Chinese student in Eugene, Oregon was beaten by a local police officer for no reason. According to the Amnesty International, in the first ten months of 2009, police officers in the US killed 45 people due to unrestrained use of Taser guns. The youngest of the victims was only 15. From 2001 to October, 2009, 389 people died of Taser guns used by police officers.

“Abuse of power is common among US law enforcers. In July 2009, the Federal Bureau of Investigation put four police officers in the Washington area under investigation for taking money to protect a gambling ring frequented by some of the region’s most powerful drug dealers over the past two years. In September 2009, an off-duty police officer in Chicago attacked a bus driver for ‘cutting him off in traffic’ as he rode a bicycle. In the same month, four former police officers in Chicago were charged with extorting close to 500,000 US dollars from a Hispanic driving an expensive car with out-of-state plates and suspected drug dealers in the name of law enforcement, and offering bribes to their superiors. In November 2009, a former police chief of the Prince George’s County’s town of Morningside was charged with selling a stolen gun to a civilian. In major US cities, police stop, question and frisk more than a million people each year – a sharply higher number than just a few years ago.”


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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