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Spanish Election Sets Precedent: More Debt, and Inflation

Politics / Spain May 27, 2011 - 06:01 AM GMT

By: Dr_Jeff_Lewis


Unbeknownst to most investors in the North American markets, the Spanish went to vote over the weekend.  Their votes proved that there will be no end to the European debt crisis.

When the markets opened early for Asian trading, the results of the election were immediately priced into paper currencies, especially the Euro, as well as real currencies, gold and silver.  Commodities took a dive with the Euro, which was largely to do with institutional investors waking up to the sad reality of a continental banking system: you can’t please everyone.

Over the weekend, Spanish voters showcased just how much they hated the concept of fiscal conservatism and austerity.  Politicians who had fought government spending in entitlement programs and social “butter programs” were thrown out of office.  To take their place is a new crew of politicians who knew all too well how easy it is to buy a vote.  This new wave of political winners won’t be fighting social programs any time soon; instead they’ll continue spending to solve a crisis that started first with debt.

Spain’s election takes crisis to a new level

Spain isn’t Ireland, nor is it Greece.  Those two countries hardly register in the list of the largest economies of the world, but Spain is massive.  In fact, it’s the 12th largest economy on the planet, and the 5th largest in Europe.  For all intents and purposes, Spain is just as important to the Euro as Germany and France, given its size.

When the people of Spain vote against austerity and for further unpaid for spending, the result is surely to be disastrous.  Germany, by far the dominate force in the European Union, remains strong in asserting that there will be no future bailouts and no further easing with interest rate policy.  Instead, Germany and others want Spain to solve its problems with its own money and its own cuts to its own programs.  Why should Germans bear the burden for Spain’s misallocation of resources?

The reality is that the Euro is in decline, both in terms of value and concept.  Less than a decade after the Euro went full-circle to include most of Europe, the concept of a continental currency has been a demonstrable failure.

Rattling the Markets

The Euro’s meltdown will only stand to worsen volatility in the commodities markets, which are priced in dollars.  When the Euro declines, commodities fall, as the dollar strengthens in the selloff.  When the Euro advances as it had for months until recent developments, the commodity markets rise.

Of course, in the long term, nothing has improved; instead, the outlook for the Euro and fiat currencies has worsened.   Those in the market for a paper profit are sure to make billions in these intraweek movements, but the race to the bottom in currency values is still on, even if one fiat currency gains against another fiat currency.

Silver investors should remain in their place.  While the European debt crisis is giving strength to the US dollar, the reality is that all things eventually find value at their intrinsic worth.  For the dollar, a 2.6x6.1 inch piece of paper, this intrinsic worth is just about zero.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


27 May 11, 08:53
Not so Sure

that's BS everyone knows that's Germany who's in charge in Spain Ireland, Greece and Portugal, whichever party has the power they will have to follow what Angela Merkel wants.

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