By Monty Guild
Earlier this week, the markets cheered the announcement out of Europe of a bailout package by the European Union nations and the International Monetary Fund, and a decision by the European Central Bank to begin buying sovereign debt of weaker states. This bailout plan protects the sovereign bond markets for the short term, but does not solve any of the longer term problems in European bond, stock, and currency markets. In fact, they allow the problems to grow and fester without being addressed.

As we have repeatedly stated, the answer to the European problem is simple. Do not allow any social programs, especially entitlement programs to begin or continue unless there is money in hand to pay for them. The ability to borrow is NOT money in hand.

The specifics of the three-year aid package consist of €60 billion of emergency lending available quickly from the European Commission, €440 billion pledged by the finance ministers of sixteen Euro nations, plus a commitment from the IMF of at least half the European contribution (€250 billion).

A European government struggling to refinance its debts could first tap into the €60 billion Euro emergency fund. If that proved insufficient, it could borrow from the €440 billion fund guaranteed by other euro-zone governments. The IMF’s pledge of €250 billion is viewed by many as a last resort. In addition, the ECB began buying debt of weaker euro-zone countries in bond markets on Monday.

Even the U.S. got involved. The Federal Reserve reactivated a program that allows foreign central banks to swap their currencies for U.S. dollars, thus giving European nations access to more liquidity. Also, as the largest shareholder of the International Monetary Fund, the United States can also participate indirectly in loans the IMF makes to Greece and any other European country.

The nearly $1 trillion EU and IMF safety net announced has another name. It’s called quantitative easing…whatever the cost. In our opinion, the costs will be huge. The policymakers’ message is, to borrow from Marie Antoinette, “Let the future generations eat cake.”

OIL AND GOLD

Why is oil falling while gold is rising during the European sovereign crisis? Gold is rising because the quantitative easing is long term highly inflationary and destructive to the standard of living of every citizen of the developed world, especially Europe.

Oil is falling as investors fear the austerity measures that are required in Europe will shrink economic demand. No one disputes that oil is volatile, but it will in the long term rise very high from the current levels. We have a view that there is plenty of reason to use any short term decline to your long term advantage. Buying oil on dips below $70 per barrel seems wise in our opinion.

Demand for oil will not slacken in Asia. Demand will continue to grow rapidly. New autos, new electrical facilities, new heating, transportation, new construction and new manufacturing all require energy in China, Brazil, India, and many other locales.

This European episode only hastens the handover of economic power and influence to the Chinese, Indians, and others in the developing world.

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook