"Bailout" Breaking Down the Language Barrier

Well, the Greek story was big this week. ‘The Big Fat Greek Meltdown,’ as Justice Litle calls it. It pushed stocks and bonds down early in the week. By the end of the week it was pushing them up.

What happened in the meantime? Well, the euro-feds made it appear that they were going to do the same dumb things our own feds did. They said they were going to fix the situation. Just like the US fixed Fannie Mae and AIG!

There are 27 different nations in the European Union. And guess how many languages? Two-hundred and thirty. That surprised us too. Spain alone has 6 official languages.

But without doing any real research on the subject, we have discovered one word which is common to all these languages: bailout.

Yes, dear reader, it was ‘bailout’…spoken in hundreds of different languages and dialects…that lit a fire under the financial markets late this week. The embers were still hot yesterday; the Dow rose 106 points. Gold had it best day in weeks – up 18 bucks.

But doth a single bailout a real boom make?

Let us rephrase that. Will bailing out the spendthrift Greeks really make American businesses more profitable?

You know the answer. It won’t. In fact, it will make them less profitable. What it does is allow the Greeks to continue spending in the style to which they’ve become accustomed. And if the Greeks are going to do that you can bet that the Irish aren’t going to want cut back. Or the Portuguese. To say nothing of the Italians. And what about the English?

Bailing out the Greeks is a big mistake. But it’s a mistake everyone seems to want to make. There’s probably a Latin dictum for this sort of thing. But since we don’t know what it is, we’ll have to coin the phrase ourselves: Imbecility begets imbecility; especially when the bankers come out ahead.

What did you think? Who do you think the Greeks owe money to? That’s right, the big banks are behind this. They’ve got hundreds of billions at stake in Greece. If the Greeks can’t pay, the banks take a hit. Since no one wants the bankers to take a loss – except for us – once again, the feds are coming to the rescue.

Oh…why does this make US businesses LESS profitable? Well, it’s a marginal thing. But what we’re witnessing is a shift of economic power away from the private sector towards the public sector. Private businesses no longer borrow like they used to. Now, the feds do the borrowing and the spending. That leaves less capital…and less spending power…in private hands. Ergo, businesses will find it harder to make money.

They’ll also find it harder to make money because interest rates will rise. Instead of letting the bad credit risks default, the feds weaken all credit. They’re giving debt a bad name, in other words. The risk of default for the particular country goes down; the risk of default of the entire system increases. After all, the debt doesn’t disappear. It has to be paid by someone. Sooner or later. Guess who that will be?

The Daily Reckoning