TCS Daily

A Big-Bang, Trillion-Dollar Euro Burial?

By Larry Kudlow - May 11, 2010 12:00 AM

Oops. What the European leaders really meant to do with their big-bang, trillion-dollar sovereign-debt rescue was to save the euro currency, not to bury it. But with the cave in by European Central Bank head Jean-Claude Trichet (formerly a hard-money man and closet gold watcher) to use the "nuclear option" to buy up dubious sovereign debt, the euro is likely to keep depreciating.

When central banks buy bonds they pay for it with new cash. That's almost always negative for currency values. Ben Bernanke bought a ton of new mortgage and Treasury bonds last year, and until the Greek crisis came along, the dollar sunk like a stone. Get ready for more euro declines.

And then you wonder if the European leaders came to save welfare socialism rather than bury it. The mere fact that this rescue package will provide loan guarantees to the very countries that boast the largest welfare states and can't afford to pay for them probably suggests that the loan guarantees will guarantee more welfarism.

There's a lot of talk about belt-tightening and spending cuts. But where's the enforcement mechanism? No one knows. This is the Achilles' heel of the whole European Union experiment. The monetary discipline has now been broken while the sought-after fiscal discipline is still broken.

If the trillion-dollar European package succeeds in calming lending markets and stopping an outright credit freeze-up, that's good, at least in the short run. Perhaps it will allow a cyclical-growth recovery, with JPMorgan indexes of Euroland purchasing managers or manufacturing and services showing the possibility of a 3 percent continental growth rate. Yet while a cheap euro will stimulate exports in the short run, in the longer term it will stimulate inflation.

And in addition to Western Europe's failure to enforce real welfare-state reductions, there really is no flat-tax reform -- such as adopted in Eastern Europe -- to promote growth. Ironically, the countries of Western Europe, including the southern tier of Greece, Spain, Portugal, and Italy, have a lower corporate tax rate than the United States. That is good. But they could build on that with real flat-tax reform, rather than jacking up value-added taxes.

So there are no enforced spending cuts, there is no flat tax, and there is plenty of political upheaval. (Angela Merkel just lost an important regional election.) So right now, on the day after a big relief rally in stock and bond markets, a sober assessment of the so-called rescue package doesn't look so great. Actually, the real winner looks to be gold, which is up $20 this morning and is almost at its all-time high of $1,226. That's a sign of no confidence in the European story.

The euro currency has been compromised and the European welfare state continues. Not good.

This article first appeared on Kudlow's Money Politic$.


Portugese debt interest rates SKYROCKETED after the bailout was announced
Why? Because what markets actually lend against is the nation's future tax revenue. What matters is the relationship between the amount of the debt and the estimated present value of future government revenues, discounted at the rate of interest on the bonds.

The higher the percentage of the debt is to GDP, the less wiggle room a country has to paying it off w/o significant increases in the economic growth rate.

And since most tax increases kills economic growth, Portugal just got downgraded in its 'debt capacity' that the markets will allow it to have.

Maggie Thatcher said it best: "The problem with Socialism is that it eventually runs out of other people's money [to spend]."

Why get ticked about this when the real scam is here in the US of A?

Be prepared to become ticked off when reading this. BTW, it is nice 'case study' that clearly shows how it is the FED -- not the banks -- that creates money. If you scroll down to the comments you'll read one that gives a good take on what 'debt slavery' is all about, too.

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