Industrialized nation governments will need to borrow over $10 trillion next year...
IMAGINE, for a second, that you've mortgaged your house to the hilt in order to fill it with all the gadgets your heart desires, writes Dan Denning, editor of the Daily Reckoning Australia.
And imagine you have a big heart, with lots of desires. Your home has a comfy lounge with a large new HD television in front of it. There's a plush recliner in which to park your weary behind. And all around the house are the accumulated creature comforts that enhance the quality of your domestic life.
Now imagine you're forced to take a pay cut at work. Your job no longer provides you with enough income to support the interest payments on your mortgage. Your domestic bliss is still undisturbed. But in the back of your mind, you know that you're living way beyond your means. Your lifestyle exceeds your financial resources.
Now imagine you're the European Union – a vast army of faceless bureaucrats desperately trying to save its big 60-year project in social engineering. The private market – investors who buy government bonds – tells you its losing confidence that you can control your spending. More importantly, the private market tells you it doesn't see how you're going to repay the debts you've already accumulated in order to support your lavish, government-sponsored, Welfare State lifestyle.
What do you do to convince them you're a good bet? You tell them that the answer to your problem is bigger government. That's right! Your answer to a debt problem is to turn all the big national governments into one really big supra-national government, and give a few people control over everyone else's money.
That's basically what happened in Europe. All 17 countries that use the Euro agreed to greater "fiscal integration" in Europe. Even 10 or so countries not in the Euro agreed that it was a good idea. The lone exception was that island nation north of France, filled with cranky people drinking warm beer (their beer is warm...no wonder they're cranky). The British politely declined to pledge their allegiance to a European superstate.
Today, then, financial markets will tell you whether private investors believe greater "fiscal integration" is the long-term answer to Europe's debt problem. We can save you the trouble and tell you the answer now: Europe is still doomed. Friday's deal is not an "all clear" signal for stocks (although we concede some people will read it that way and buy anyway).
The trouble is, no matter how you slice it, many of the world's governments need money. If the private markets don't give it to them, their central banks will have to do the job. This will lead inevitably to money printing and currency devaluation. The amount of money these governments require is staggering.
Industrialized welfare state governments will have to borrow some $10.4 trillion next year, according to the Paris-based Organisation for Economic Cooperation and Development (OECD). That's a lot of money. Where will it come from? And with so much demand for new capital, doesn't that mean the global price of money is going up, even if nominal interest rates stay low?
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