Thursday, September 6, 2012

When The Cheering Stops

The ECB's bond buying program is essentially equivalent to printing Euros and buying bonds of countries whose finances are failing.  This shifts the burden of debt toward France and Germany, all but engulfing them into the same cauldron as Greece, Spain, Italy, Portugal and Ireland.  That all of these countries continue to run large fiscal deficits seems not to concern anyone.  Nothing has changed in regard to the dramatic debt buildup that continues to run apace throughout the Eurozone.

Now to add to their other woes, all of the Eurozone countries are now headed into recession.  Germany had been an exception, but no longer.   Greece and Spain live with daily street riots and unemployment in excess of 25 percent.  It is hard not to see France and Germany headed that way.

Monetary expansion will not solve Europe's problems.  It actually make them worse, because it weakens each country's resolve to get their fiscal house in order.  Rising yields on sovereign debt forces countries to face facts.  An explosion of printed Euros does the opposite.  Now Greece and Spain will think there is no reason to reform their economies.  After all, Germany has ridden to the rescue.

Don't laugh America.  This is coming to your shores sooner than you think.   California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes.  This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.

No one seems to want to face reality.  The welfare state is failing throughout the Eurozone and in the US.  There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state.  The jig is up.  What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away.  It won't.