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May 16, 2010

Revenge of the Gold Bugs

Tyler Durden over at Zerohedge is a "gold bug", but until recently I've never found his arguments about the desirability of gold all that compelling. But with the Euro diving faster than a holed submarine and Europeans stampeding each other to buy up all the gold they can get their hands on, I may have to revise my opinions. Gold is trading at nearly $1250 an ounce and going higher.

This may mean that the Euro bailout has failed a week after it was begun. The markets took a look, raised their eyebrows, and continued shorting the Euro. No one seems to believe that it can succeed. The huge numbers of Europeans looking for gold bespeaks a deep lack of confidence in the Euro, and a belief that hard times rather than recovery lie ahead. Countries like Greece and Portugal are getting caught in a fatal spiral: they must implement draconian austerity measures to bring down public spending, but this in turn slows down the economy, which reduces the public and private coffers. These countries are bound to the Euro and so cannot devalue their own currencies; deflation -- and all the terrible social and political upheaval that follows -- is their only option. (We might speak of "growing their economies" as an alternative, but for deeply uncompetitive countries at the periphery of the Eurozone, this isn't an option either.)

Greece is casting about for someone to blame their troubles on (besides themselves, that is) and have settled on...the Americans! (Or at least US investment banks.) To me this simply means that Greece is trying desperately to open some safety valves so that their own population have some outlet for their anger besides the government. To the investment community, it's simply another sign that the Greeks either will not or cannot pay their debts.

And via Instapundit, we get this story that indicates how low the trust in the European Central Bank (ECB) has fallen in the investment community. The so-called "nuclear option" -- where the ECB directly intervenes into the bond markets of the Euro nations and backstops them -- violates a core ECB tenet of "independence". The EU bureaucrats are completely ignoring their own rules and regulations now; it's panic-time in Brussels, Paris, and Berlin.

The EU may yet slap on enough bandages and sticking-plaster to stop the bleeding for a time, but the wounds are probably mortal. Many analysts both here and in Europe seem to think that the main question now is not if the Euro will collapse, but when.

How should Americans feel about the demise of the Euro, if it comes about? It's possible that a Euro collapse could trigger a wave of sovereign defaults all across Europe, and the ripples would inevitably fetch up here. It could tip us over from a really bad recession into an all-out global depression (if indeed we are not already in one).


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posted by Monty at 04:38 PM

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