The International Forecaster Europe continues to struggle from one problem to another. The euro has been strong only because the dollar has been weak. The governments of Greece, Ireland, Portugal and Spain continue their balancing acts on the edge of a financial precipice. All have Socialist governments, which have done terrible jobs, but the opposition is not much better. Each economy is in serious trouble and if Italy and Belgium follow it will take $4 trillion to bail them out. If the solvent EU members bail them out theyâ€™ll fail as well. Americans and Brits can look down their noses, but their problems are just as bad if not worse. They all have practiced different versions of Keynesian economics that has been disastrous. Their fiscal and monetary policies have been and continue to be out of control, as corruption abounds. The solutions are unpalatable, especially for politicians, because they all spell austerity. We have just seen the European Central Bank raise interest rates as euro zone economies slow, as they hope to arrest 2.8% official inflation. Real inflation is double that number.
We predicted $4 trillion would be needed to bail out Europe some time ago and Germany and the other solvent nations have come to the same conclusion. Even if it were possible, those six nations would live in poverty for the next 50 years. That is hardly a solution. The underlying problem lies with the central banks and the lending banks. Loans to these nations for whatever reason should have never been made in the first place. The bankers who lend money that they create out of thin air knew what they were doing and they knew full well the risks they were taking; 80% of the blame lies at their feet, thus, 80% of the bill is their responsibility, not that of the taxpayers of these countries. Months ago Germany was offered 50 cents on the dollar to settle its debt owed by Greece. The offer was rejected. In time that rejection will be viewed as a major mistake. As a result Greeceâ€™s Illuminist president is in the process of laying plans to collateralize new debt repayment commitments with Greek assets such as islands, ports, the rail system, the electric and gas companies and any asset not nailed down. That is why George Soros had top people from JPMorgan Chase and Goldman Sachs with him two weeks ago when be attended secret meetings in Athens. The underlying theme is letâ€™s steal everything. Greek GDP will probably fall 4% this year, as wages and salaries have been slashed. Banks like JPM and GS that create money out of thin air do not care about the money, they want the assets.
Central bank bond buyers last year cut their exposure to Greece, Ireland and Portugal. These actions were prompted by concerns over sovereign default and were replaced by purchases of gold. The euro zone, England and the US have large deficits and only modest growth generated by QE and stimulus. Conditions now question debt sustainability. Debt rollover in Europe is acute, especially for Irish and German banks, with as much as half of their outstanding debt coming due over the next two years. As you know the IMF and EU have bailed out Greece and Ireland with Portugal in process. Spain is next and that is more than a $1 trillion problem. European banks are buried in euro zone sovereign debt, which makes them very vulnerable. In fact bank balance sheets are in terrible straights and need to raise significant amounts of capital to further participate in funding markets. At the present time they are in no condition to take on more paper.
In Greece the budget deficit may be only 8.1% of GDP, but the economy is stagnant as GDP declines. Overall public debt is about 150% of GDP. We have a difficult time envisioning Greece not defaulting. That is why the moneylenders want almost everything the Greek government owns as collateral. The socialist government of Illuminist George Papandreau cannot handle the job just as his Marxist father Andreas couldnâ€™t handle it 25 years ago. Todayâ€™s Greece is still suffering from terrible decisions made during the 1980s. The bottom line is Greece probably will default and they should default. It is the only answer for them and the other five insolvent countries of the euro zone.
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