Debt Car Pile Up

Turns out a trillion euros just ain’t what it used to be.

The moribund currency fell for a third straight session in overnight trading. The downward pressure has been almost unrelenting ever since Europe’s anti-brain trust drove a $957 billion stake through the credibility of the world’s major, alternative fiat currency (the greenback being, for the time being, the paper I.O.U. of choice).

After exhibiting an astounding – for the political class – degree of conviction and fiscal integrity in the face of the rioting Hellenes, European leaders caved like a cheep deck of cards over the weekend. The package promises $560 billion in new loans (debt) and $76 billion under an existing lending program (more debt). The International Monetary Fund plans to contribute up to an additional $321 billion (more debt).

Perhaps the most astounding aspect of the whole euro-crisis is that individuals occupying positions of influence still believe piling new debt upon old debt is akin to some kind of road to future prosperity. Surely the subprime meltdown – itself caused by layer upon layer of unserviceable debt – can’t be that distant a memory for them. Apparently applicants for high office need to check the “goldfish” box when the memory aptitude question comes up.

And what kind of message do they think this conveys to the world’s investors? A few Molotov cocktails and a rowdy bunch of ne’er-do-wells down tools for a few days and the continent’s political backbone turns to Plasticine?

Unsurprisingly, some central banks may have already begun cutting purchases of euros. Stuart Thomson, of Ignis Asset Management in Glasgow, today told Bloomberg, “The ECB is on its way to quantitative easing, its reputation was damaged over the weekend, and the support it had been getting from central banks wasn’t spotted this morning… Central banks are normally in supporting the euro but they haven’t been seen today.”

Of course, it takes more than merely the precipitous collapse of a 16-nation currency to dissuade the marching mobs. Behaving somewhat out of character, the Greeks aren’t taking their portion of the handout lying down. Not by a long shot. This, from Reuters:

“Greek workers on Wednesday called a 24-hour general strike for May 20, the latest in a series of protests against planned pension cuts linked to an international 110-billion-euro ($139.7 billion) bailout for Greece.”

This isn’t over yet, fellow reckoners. Not by a long shot. (As we were writing these words, in fact, news that the leader of Spain’s largest union will call a public sector strike was just coming across the wires.) We can’t wait to see what happens when the Spaniards line up for their “fair share” of the increasingly worthless bailout goop…and the Italians…and the…well, you’ve read this list before…and it ends at Uncle Sam’s doorstep.

Gold, meanwhile, rocketed to another all-time nominal high overnight. It’s still a long way off its real, inflation-adjusted record – somewhere around the $2,300 per ounce mark – and we’re not predicting an end to gold’s secular bull market any time soon. The appeal of the “barbarous relic,” as many are just coming to discover, is that, unlike inked paper supported by spineless politicians and back-patting vote-buyers, it does not owe anybody anything. It is no one else’s liability. To the extent that you do not trust the political will to defend a paper currency, in other words, you ought to trust the yellow metal in your hand.

Joel Bowman
for The Daily Reckoning