Thursday, November 3, 2011

The Unraveling of a Dumb Idea

The proposed "deal" that has been crafted by France and Germany for the EU to "save" the Euro is one of the most absurd plans that has ever been concocted. It should be obvious that neither the bailors nor the bailees are going to go along with this (even if their leaders continue to pursue such foolishness).

It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.

It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).

The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.

Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).

A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.

1 comment:

Dan Jiddish said...

"It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default)."

Dear Prof. Burton,

Why is the market not pricing in the possibility of a France and German default?

Current 2 and 5 year yields seem to indicate that these countries are viewed with minimal risk in the eyes of investors.

What is the market missing?