Sunday, November 20, 2011

Diaster Almost Upon Us?

From a Goldman Sachs report on Zero Hedge

The charts above show serious stress in the Eurozone: Overnight rates are moving up steeply; the ECB is having to be an aggressive buyer, and still sovereign bond yields in Italy and Spain are at dangerous levels; and banks have more money sitting in the ECB than they had there during the 2008-9 crisis.

Here's what The New York Times said on Friday:

"Nervous investors around the globe are accelerating their exit from the debt of European governments and banks, increasing the risk of a credit squeeze that could set off a downward spiral."

Will the ECB step up aggressively? New head Mario Draghi yesterday warned European heads of state not to count on the ECB to bail them out, and that they had to hurry up and put the agreed upon funding facility in place (the European Financial Stability Facility). Nevertheless, when the financial structure begins to shudder, I believe the ECB will step up.

Will it be enough? Short term, perhaps. Longer term, I don't think so, as long as everyone (the ECB, the IMF, the EU, Germany and France) stay on the austerity page. The austerity approach/model is deeply flawed. I believe the fierce insistence on cutting government budgets in order to reduce deficits will not work. Europe, and in particular, those countries being forced into austerity (Greece, Ireland, Portugal, Italy, Spain, and soon, France) will see their budget deficits increase, as withdrawing government spending from the economy lowers GDP, reduces tax revenues, and increases welfare transfer payments (automatic stabilizers).

At some point, like an overworked, overheated engine, something will blow. And then we will have quite a mess, and, I will add, a completely avoidable mess!

And this will not just clobber Europe. It will give us a roundhouse right as well.

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