Larry Edelson’s Wednesday missive, “Europe’s Crisis Over? Hogwash!” is both accurate and prescient.
So if you haven’t read it yet, I think you should do so now.
Larry is one of the very few who not only forecast the crisis well ahead of time, but also accurately predicted how it would impact the U.S. dollar, commodities, inflation/deflation and U.S. stocks.
His main points:
Point #1. Greece isn’t the only European country suffering under the heavy weight of severe austerity measures. In fact, their vulnerability to Greek tragedies is now worse than ever. Larry writes …
“The proof is in the numbers. Before the Greek crisis flared up, debt-to-GDP in Greece stood at 113%. Today, Greece’s debt-to-GDP stands at a tad north of a whopping 177%.
“In Spain, pre-crisis debt stood at 40% of GDP. Today it’s more than 97%. In Italy, it was 106%. Now it stands at 132%. In France, it was 68%. Now it’s 95%. Even Germany’s debt-to-GDP is worsening, leaping from almost 67% in 2008 to almost 75% today.
“In each and every case, debt-to-GDP is worse than it was at the beginning of the crisis — and the austerity measures are literally causing the entire European continent to implode.”
Point #2. Austerity and climbing debt are slowing Europe’s economy. GDP is abysmal, missing expectations almost across the
Point #3. Despite — or, arguably, because of — all the bailouts, Europe’s unemployment is still among the worst in modern times.
Point #4. Commodity deflation is picking up momentum. And never forget: Deep deflation and big debts are an explosive mix. When prices decline, governments and businesses take in less revenues. Moreover, with less revenues, sustaining debts can suddenly be far more difficult.
Now comes the next phase of this sad saga …
The Grand Greek Bailout #3, the third major attempt in recent years to pull the country out of the abyss, is now a done deal.
We have ever-more Draconian austerity legislation — passed in Athens … all the needed European approvals in place … and new debt money already flowing into Greece’s coffers.
Because just two months ago, nearly everyone — both lenders and debtors alike — seemed to agree that piling on more debt with still another major wave of austerity was a terrible idea.
* Greek Prime Minister Tsipras denounced the demands by the lenders as “blackmail.” He made the case that the required austerity measures would destroy the Greek economy. In fact, he was so confident in his position, he called a referendum and persuaded the Greek people to overwhelmingly vote against the deal. (Postscript: Yesterday, he resigned.)
* Most Germans, led by German Finance Minister Schäuble, argued that another Greek bailout would be disastrous for Greece, the euro and all of Europe. The only rational solution, they said, would be to eject Greece from the European Union.
* The International Monetary Fund published a landmark report that effectively denounced the entire austerity-and-bailout plan. They argued it could never work unless Greece got major debt relief — something that was never granted and probably won’t be.
No one was able to substantially refute these arguments.
No one was able to explain how this third major attempt to bail out Greece was any different from the first two failed attempts.
Nearly everyone realized that it was insane to try the same exact prescription and expect different results.
Yet they did it anyhow.
All for the sake of political expediency. All because they lacked the collective wisdom and courage to do what they knew (or should have known) was the right thing — to bite the bullet and surgically remove the cancer.
They failed to surgically remove the debt cancer.
They failed to stop its spread.
And they have left Europe — plus much of the world — even more vulnerable to the next debt crisis.
This is one of the reasons why we have avoided long-term government bonds like a plague.
This is why we have insisted investors should maintain huge amounts of cash in their portfolio.
And this is why capital preservation should remain, as before, one of your paramount goals.
Good luck and God bless!