Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16
Will Venezuela Be Forced to Embrace the US Dollar? - 21st May 16
Danish Central Bank Stumbles with Its Currency Peg to the Euro - 21st May 16
SPX Downtrend Underway - 21st May 16
George Osborne Warns of More Affordable UK Housing Market if BrExit Happens - 21st May 16
Gold And Silver 11th Hour: Globalists 10 v People 0 - 21st May 16
David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - 21st May 16
Gold Stocks Following Bull Analogs - 20th May 16
The Gold Chart That Has Central Banks Extremely Worried - 20th May 16
Silver Miners’ Q1’ 2016 Fundamentals - 20th May 16
Stock Market Rally At the End of the Road? - 20th May 16
British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - 20th May 16
NASDAQ 100, FTSE, and British Pound - When Rare Market Data Screams, Listen  - 20th May 16
Unintended Consequences, Part 1: Easy Money = Overcapacity = Deflation - 19th May 16
The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - 19th May 16
Stock Market Final Supports Are Broken - 19th May 16
Gold - Pro-Inflation? Anti-USD? - 19th May 16
Further Stock Market Uncertainty As Indexes Gained On Friday, Will Uptrend Resume? - 19th May 16
What This U.S. Presidential Election Tells Us About Her Millennial Generation - 18th May 16
Stock Market Trendline Broken on Fed Announcement - 18th May 16
An Incredibly Simple, Rarely Used Way to Book 170% Investing Gains - 18th May 16
Statistically Significant Stock Market Death Cross? - 18th May 16
Precisely Wrong on US Dollar, Gold? - 18th May 16
What You Can Gain From One Tech CEO's $355 Million Loss - 18th May 16
The ‘Tide’ has turned… NEGATIVE For STOCKS!!! - 18th May 16
Goldman Sachs's - Regulatory Climate is Chilling Deals; Hatzius Not Worried About a Recession - 18th May 16
Bitcoin Price Remains above $450 - 18th May 16
Crude Oil Price Trend Forecast 2016 Implications for Stock Market - 17 May 16
Could the National Debt Really Grow as High as $31 Trillion by 2023? - 17 May 16
Gold Price Possible $200 Rally - 17 May 16
Crisis Investing - Jim Rogers on “Buying Panic” - 17 May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Sovereign Crisis from Economic Stimulus to Debt Austerity Snowball Effect

Economics / Economic Austerity Jun 18, 2010 - 11:26 AM GMT

By: Mike_Larson

Economics

Best Financial Markets Analysis ArticleA blockbuster draft report from the European Commission saw the light of day recently, thanks to some reporting from Bloomberg. It highlights an incredibly dangerous Catch-22 facing many sovereign nations — the “Snowball Scenario.”

Let me give you an example how this works …


Suppose country A’s economy goes into the tank. The government responds by borrowing boatloads of money and spending like mad on stimulus packages.

The markets allow it to go on for a while. But then investors start to get antsy about all the debt being added to the government’s balance sheet. So they start dumping its bonds, driving prices lower and rates higher. That, in turn, forces the country to implement austerity measures to get its debt and deficit under control.

The problem?

Those moves send the economy BACK into the crapper! Government spending has to rise yet again to pay for things like unemployment insurance, new stimulus packages, and so on … at the same time tax revenues fall. That drives debts and deficits even higher.

The end game in this snowball scenario? A sovereign default!

And that’s not just a theory. In fact …

Snowballs Are Already Rolling Downhill in Spain, Greece, and Portugal

Spain is trying to slash its budget deficit from 11.2 percent to 9.3 percent in 2010 and 6 percent in 2011. Portugal wants to cut its deficit from 9.4 percent to 7.3 percent this year and 4.6 percent next year. They plan to do so by some combination of pension freezes, wage cuts, new taxes, and other measures.

But the European Commission, which is the executive arm of the European Union, says that probably won’t be enough. Its conclusion?

“While the newly announced measures are significant and the targets imply impressive budgetary consolidation, more measures are needed to meet those targets.”

The EU has told Spain and Portugal to get their budgets back in shape.
The EU has told Spain and Portugal to get their budgets back in shape.

In plain English, the message is “Get even tougher! Crack down more! Slash spending! Raise taxes!”

But as the Commission admits, the governments it is counseling face “low GDP growth, poor competitiveness, stable or declining prices and wages and high real interest rates.” So it’s virtually impossible to avoid a “snowball effect on the government debt.”

Stay Cautious! Stay Safe!

Bond traders aren’t dumb. They can see this coming from a mile away. Yields on Spanish 2-year notes shot up recently, then eased a bit. But now they’re rallying yet again — hitting a new cycle high just this week.

Spanish borrowing costs have skyrocketed from 1.51 percent in March to 3.29 percent, the highest in 17 months! It now costs more on a relative basis for Spain to borrow than it does the euro-area’s main economy, Germany. And it’s the highest that the 10-year Spanish/German yield spread has been since 1999 — when the euro currency debuted.

Portugal is seeing costs rise, too. It’s paying 5.58 percent to borrow money for 10 years, up from 4.15 percent back in April.

Reports are surfacing that Spain may need a 250 billion euro ($307 billion) credit line from the International Monetary Fund, the European Union, and possibly the U.S. Treasury.

Naturally, policymakers are denying that anything is in the works. But what do you expect them to do? These guys said the same thing about Greece, claiming it wasn’t at risk of defaulting. Then they pushed through a $135 billion bailout!

Use market rallies as selling opportunities.
Use market rallies as selling opportunities.

In short, this sovereign debt crisis is playing out just like the private credit market crisis did before. It comes in waves — with periodic sharp drops triggered by some event, then some kind of bailout that makes everybody breathe a temporary sigh of relief, and finally yet another plunge as another hole appears in the dike.

My advice?

Don’t get suckered in by the short-term rallies. This sovereign debt crisis is nowhere near over, and that means you have to stay cautious and safe in your investments.

Consider using inverse ETFs to hedge risk, keeping positions small, and dumping stocks into sharp rallies if you’re lucky enough to get them.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jim Green
18 Jul 10, 16:23
Response to article

I think your article is right on. It seems we are chasing a moving target. We pin that target down for a moment's notice and somehow it seems to escape and cause chaos in financial markets. It also seems there is not a right or wrong answer to ours, or the EU's financial woes and taking a more risk averse stance might prove to be the winner in all of this.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife