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November 21, 2010

Cheer up! At least we're not Europe! [Fritzworth]

Even as I prepare for my first-ever trip to the European continent, the news keeps pouring in that Europe is, put simply, in deep kimchee. The problem with financial shell games is that you eventually run out of shells, and that's what's happening in the glorious EU:

The government backstopped the banks, and now the European Central Bank has to back up the Irish government?

Yes. And in the end, S&P is estimating out that the bank bailout could cost Ireland taxpayers $80 billion a year, which might be more than a third of GDP.

Who's next?

It's Portugal. Just look at the spreads. Greece is the highest. Then Ireland. Then Portugal. Then Spain. All of these spreads are wider now than in May before the announcement of the safety net. That's showing you that the markets see this as a solvency problem [ie they're fundamentally broke], even as the ECB is dealing with this as a liquidity problem [ie they'll be OK with some cash transfusions].

Oh, and Europe is struggling with shortages of critical materials:

The European Commission expects that economic growth in China, India and Brazil will lead to significantly increased demand for raw materials. The EU strategy paper notes that the manufacture of high-tech products will see demand for some metals rise 20-fold over the next 20 years. The European Commission has identified 14 "critical metals" whose demand could triple by 2030, and which are only extracted in a few countries. The following metals could face supply problems: antimony, beryllium, cobalt, fluorite, gallium, germanium, graphite, indium, magnesium, niobium, platinum group metals, rare earths, tantalum and tungsten.

In the meantime, several European countries, including Spain, Greece, Romania and Sweden, as well as other nations, including the US, Canada and Australia, have started new extraction activities. Their reaction is late, however: The raw materials crisis in Europe has worsened because many companies had scaled back their mining as a result of the economic crisis.

As the article notes, we're facing shortages as well, but we've got domestic sources that Europe doesn't.

So, even with the challenges we face here in the US, at least we have responsive state and federal governments that are already starting to change direction based on the elections a few weeks back. The Fed may be messing with the dollar, but I suspect it has better long-term prospects than the euro.

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posted by Open Blogger at 12:39 AM

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