Bill Bonner

The Fed is now bailing out the whole world! But who will bail out the Fed?

After the news came out yesterday, the Dow rose 249 points. Gold was up $2.

Here’s the latest from Bloomberg:

Stocks jumped, sending US benchmark indexes to their biggest gains in three months, while the euro and commodities rallied and Treasuries slid amid improving data on the American and Chinese economies and speculation of a larger effort to end Europe’s debt crisis.

The Standard & Poor’s 500 Index gained 2.2 percent, the most since Sept. 1. The MSCI Emerging Markets Index rose 2.2 percent, its biggest gain since Aug. 2. The euro rebounded above $1.31 while Spanish 10-year bonds snapped an 11-day drop. The rate on 10-year Treasury notes increased 17 basis points to 2.97 percent, a four-month high. Oil and copper advanced more than 3 percent. After the US close, S&P 500 futures added 0.1 percent at 7 p.m. in New York and Japan’s stocks rose in early trading.

European Central Bank President Jean-Claude Trichet said yesterday that investors are underestimating policy makers’ determination to halt the region’s debt crisis and shore up the euro ahead of a meeting of the bank’s Governing Council tomorrow.

The Dow Jones Industrial Average surged 249.76 points, or 2.3 percent, to 11,255.78. The Dow has rallied in December more than in any other month over the last century, according to Bespoke Investment Group. The 30-stock gauge rose 1.3 percent on average in the month during the past 100 years and gained 1.5 percent and 1.7 percent over the last 50 and 20 years, respectively, the Bespoke data show.

Stocks and the euro extended gains after Reuters reported that an unidentified official said the US may support enlarging a European financial rescue program by adding cash from the International Monetary Fund. The US is not discussing extra IMF money for Europe, a US official in Washington told Bloomberg News.

“Whoa…did you see that?” asked an Indian analyst we met this morning. “This is it. They’re really turning on the presses now. They’re trying to bail out the entire world. I never would have believed it. But it makes sense.”

The US official may not be discussing it openly, but Fed figures show that the US central banks is already bailing out foreigners. Reports tell us that 35 foreign banks took advantage of its EZ money policies. It appears that the Fed is supporting Europe’s banking sector.

And it would not be surprising if the US also backed the IMF. It’s not just the banks that are in trouble in Europe. Governments are deep in debt too. They are so intertwined, that it’s hard to know where private debt ends and public debt begins.

Americans may see the dollar rising against the euro and feel a little patriotic pride. But this is not a good thing for Americans. If Europe comes unhinged, the crisis will waste no time in hitting American banks and the US economy. Ben Bernanke has been trying to get the dollar to go down. A rising greenback makes Germany’s products less expensive and US exports less competitive. It contributes to the threat of deflation…and encourages a long, drawn-out Japanese-style slump by prompting people to save, rather than spend.

Not only that, collapse of European economies would kill world trade. Exporters would be out of business. Importers would be out of money. The whole planet would be out of luck. The crisis would make its way around the world like a giant tsunami…wiping out stock markets immediately…and then swamping almost all economies.

Yes, dear reader…this is the downside of globalization.. One region’s problem can easily become a disaster for everyone.

So, what’s going to happen? We wish you wouldn’t ask us questions like that, dear reader.

But we’ll take a guess.

The European situation is more dangerous than most Americans realize.

It could still melt down. US authorities must know this. And they must know too that if Europe melts down, so will the USA.

So, the rumors will probably turn out to be true. The US will back the IMF. The IMF will back Europe. Europe will back Ireland. Ireland will back its banks. And the banks will back their lenders.

Meanwhile, the euro will be backed by the dollar, which will also back the US economy, US banks, the US government, and about half the households in Christendom…not to mention the others!

Who’s got the kind of money you need to do all this backing?

Ah…there’s the rub… There’s the weak link in this strange and magical chain.

Let’s see, if all the world’s debts are guaranteed by paper money…isn’t the paper money itself impaired by the amount of the losses? Won’t the losses be passed along to dollar holders everywhere?

Yes. But, no one knows how much the losses are. And no one knows how much extra “stimulus” money the feds are going to put out. And no one knows when people will get scared and flee the dollar…the euro…and all paper currencies. And no one knows what a panic out of the dollar would produce. And no one wants to find out.

So, what’s the solution? We won’t bother to offer a solution to the world’s financial authorities. They won’t pay any attention anyway.

But how about a solution for you? Did you buy gold when we suggested it, dear reader?

We hope so.

And more thoughts…

The New York Times tells us that astronomers had seriously underestimated the number of stars in the universe. They can’t see the little ones. Which means, their last count was probably a few trillion off. Or maybe a few gazillion off.

Which suggests to us that astronomers and federal debt analysts must be using the same calculators. Both are trillions off the mark.

But the reason we bring this up is to give dear readers hope. Maybe…circulating around one of these invisible stars…a few billion light years away from earth…is a habitable planet. And maybe, the people who live there are very good with figures…and money. And maybe they’re also very accomplished space travelers. And very generous.

And maybe they’ll show up – any time now – and offer to bail out the whole Milky Way …if not the whole damned universe.


Bill Bonner,
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • King Ralph

    I’ve been following you guys for awhile and you see no good in the world economically. The only trouble is the stock market seems to see it another way because it has been steadily rising since March, 2009 and it looks to be heading a lot higher. When The Daily Reckoning turns positive on the world economy that will be the day to sell.

  • crisis garden

    Ron Paul asked Bernanke, oh some 18 months ago, if the Fed was bailing out foreign entities and Bernanke responded that it was a “bizarre” suggestion.

  • Steve K

    They see no good in the world economically because there is in fact no good in the world economically.

    The stock market, on the other hand is rigged to the degree that the headline reads “2,000,000 Americans’ unemployment benefits run out” and the market pops. Shoots don’t even have to be a shade of green anymore. Purple will do. Or, more appropriately, red. As in, it has cost the American taxpayer of the next generation at least $2.7 trillion for this sucker’s rally….

  • Kenn

    To those “BULLS” I say bull….!

    In order to break even with the Stock Market in 2000 it would have to rise to around 15,000 due to inflation! But still morons keep telling me how good the market is.

    Apparently these investor morons believe making a million dollars is a great even if it would only buy a loaf of bread…

    Heck your not even nominally! Have you checked the DOW priced in gold in 2000, then in 2010?

    Insanity is rampant everywhere

  • not_harry

    I feel the presence of Harry around here today.

    Oh, Harry…


    What stock should I buy today?

  • Bob

    They will show up with a cookbook entitled ‘To Serve Man’.

  • The InvestorsFriend

    Inter Galactic Bailout???

    Has Bill finally convinced himself that with so much debt in the world we must surely have borrowed from outerspace?

    Surely all the debt in the world was not borrowed from savers?

    Bill has finally figured it out, it was borrowed from outer space and they are coming soon to zap us all into oblivion and repossess this planet…

    Oh gloom oh doom…

  • The Investors Worst Nightmare

    Investors Friend: klaatu barada nikto

    With your spectacular returns, why do you spend time misunderstanding hyperbole on a lowly permabear blog and not instead be discussing exciting new investing strategies with Warren in Omaha?

  • Peter Rogers

    King Ralph – The stock markets are moving in inverse step with currency moves and QE2, so the dollar value of stocks just keeps pace with the reality of the expanding money supply, gold is doing the same, don’t confuse this with making a real return.

  • CommonCents

    crisis garden said

    Ron Paul asked Bernanke, oh some 18 months ago, if the Fed was bailing out foreign entities and Bernanke responded that it was a “bizarre” suggestion.

    Yes he did here it is.

  • Chris

    No integrity, No system. Free market must be free market and not be tampered with by people with selfish interest and what appears to be for the greater good. It will always result in the problem getting even bigger. Just wait and see.

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