Tuesday, June 15, 2010

The beginning of markets refusing to finance irresponsible public-sector indebtedness

Felix Zulauf commenting in the recent Barron's Roundtable:

"The world is at a major crossroads. Some countries are at the end of a dead-end street. Greece has hit the wall. Spain and Hungary probably will be next. The Greek debt crisis was the beginning of markets refusing to finance irresponsible public-sector indebtedness. It will travel from the periphery to the center in coming years. The common denominator in the housing crisis, the euro crisis and the banking crisis is that industrialized economies carry too much debt. These crises show that we have to rewrite our system. We have been living a fiction for the past 20 years in order to enjoy a greater standard of living. Hard times are ahead, and the steps that Europe has announced to contain its crisis are only the beginning. Governments must cut spending and promises, such as entitlement programs, and raise taxes. At best this means stagnation for some years, but it could be much worse. Deflationary pressures will increase.
People are losing faith in the central bank and currency. When the euro was introduced in 1999, I predicted that if the European Union stuck to the rules it established, it would be the shortest monetary union in history. I gave it 10 years. After about three years, they broke the rules, which stipulated government deficits couldn't go above 3% of gross domestic product; no member country could help another financially amid a crisis, and the European Central Bank couldn't buy the government bonds of any EU nation. Now they have broken them again. How can one trust the currency when the authorities keep breaking the rules?"

Read more of Zulauf's comments @ The Pragmatic Capitalist.