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European Debt and Government Lies

Posted by Steve Markowitz on July 3, 2012

For a significant portion of the last hundred years a company’s stock value was determined by investors using its price to earnings (PE) ratio.  As the chart shows this ratio remained relatively constant at approximately 10-12, meaning that a company’s stock would sell for about 10-12 times annual earnings, until the 1980s s.  Towards the later 1980s this ratio began a steady rise ultimately peaking at nearly 45 to 1 before the meltdown.

As history judges the main cause of the 2008economic meltdown it will point to various asset bubbles.  This includes the Internet, Datacom and housing bubbles, all fueled by misguided interventionists’ policies of governments.

It is more than coincidental that the rise in the P/E ratio began about 1987, the year of a major stock market crash.  Shortly after the crash, the Federal Reserve panicked and intervened by flooding markets with liquidity.  Similar “corrective” steps followed the various sovereign crisis of the 1990s that occurred in South America, Asia and Russia, as well as when the Internet and Datacom bubbles popped.  These interventions stop the markets from cleansing themselves; i.e. rebalancing supply and demand.  The significant increase in money supply and low interest rate policies brought us to the current crisis now manifesting itself in Europe’s sovereign debt crisis.

The news from of Europe gyrates on nearly a daily basis.  One day it is negative with the next more positive, the result of supposedly interventions by European governments and their central banks.  However, given that European sovereign debt problems continue to grow after all of these interventions tell the real story.

Since the beginning of Europe’s sovereign debt problems these governments and their central banks have not been frank with their public pronouncements.  Their goal is and remains to maintain stability, a goal that would be negatively impacted by honest assessment of the challenges the continent faces.  This reality is explained in detail in an article by Eric Sprott and David Baker titled “Ministry of [Un]Truth that starts by quoting Eurogroup President Jean-Claude Juncker at a Brussels conference a year ago discussing the European financial crisis stating: “When it becomes serious, you have to lie.”  While refreshingly honest, Juncker’s statement indicates the inherent dishonesty in which governments treat the electorate.  This is pure progressivism!

Sprott and Baker offer examples of governments and bankers either misrepresenting economic reality or being oblivious to it, including the following:

  • Former Fed Chairman Greenspan down-played US housing bubble in 2004 and 2005.  How could he have gotten such a huge problem so wrong?
  • Current Fed Chairman Bernanke informing the US Congress in March, 2007 that: “At this juncture… the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.” By 2007 the scope of this bubble was evident to many.
  • European Central Bank President Mario Draghi assuring the world in March of this year that “The worst is over… the situation is stabilizing.”  On a nearly weekly basis since this is been proven fallacious.
  • Spain’s Prime Minister Mariano Rajoy assuring the world in late May 2012 that: “There will be no rescue of the Spanish banking sector”.  Two weeks later the Spanish government announced a $125 billion bailout.
  • This past April JP Morgan CEO Jamie Dimon called press reports a “tempest in a teapot” concerning the bank’s derivative exposure.  That “tempest” turned out to be a $2 billion trading loss four weeks later.  A larger concern now relates to JP Morgan’s estimated $70 trillion in derivative exposures.
  • After Austria’s finance minister Maria Fekter called into question Italy’s debt she was castigated by the Italian Prime Minister who said: “The problem is that this is market sensitive.  …  It’s one thing if journalists write this but quite another if a eurozone minister says it. Verbal discipline is very important but she doesn’t seem to get that.”  Translation, governments must be dishonest to protect the people.

Sprott and Baker correctly conclude that the interventionists’ policies of Europe have failed and Western economies are once again weakening.  For example the bailout of the Spanish banks was announced on June 10.  Within one week of it Spanish bonds were again trading over 7%.  In addition, reason for the downward spiral is that Spanish banks’ assets include Spanish bonds that are depreciating in greater amounts than the value of the bailouts.

In late 2011 and early 2012 European central banks primed the pump with over €1 trillion being infused.  Much of this cash has been neutralized by more recent European economic turmoil.

As this Blog has proffered by many times an economic problem caused on excess debt cannot be resolved by adding more debt or moving that debt to other locations.  The writing is on the wall.   The excess sovereign debt will ultimately have to be repudiated before real economic growth can begin.  That will be a painful process that the disingenuous governments are attempting to forestall.  However, their sleight-of-hand will only create still more debt that will ultimately make its repudiation even more painful.  Until then, the politicians will continue deceiving the People.


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