Europe’s finance ministers met in Poland last weekend to try to find a solution to the region’s financial crisis. In an unprecedented move, U.S. Treasury Secretary Timothy Geithner attended, putting in his two cents and urging decisive action. Despite the multitude of "talking heads" present, no attempt was made at a solution to the meltdown of sovereign finances in the European Union.
Greece is not expected to default, yet along with Spain, it continues to totter on the brink. Italy’s credit rating has been downgraded to AA-, while French banks slip ever closer to collapse, bailout or nationalization.
The last meaningful triage action was an arrangement between the European Central Bank and the U.S. Federal Reserve allowing European banks to borrow dollars. In effect, it’s the public sector lending to the private sector. If European banks were forced to borrow from the private sector, interest rates would rocket while the euro collapsed. That would clearly be bad. The United States does not want a strong dollar. No one else wants to weaken the overvalued euro.
Implied is that the United States already is entrenched in the strategy of inflation and dollar depreciation. It’s a prospect I’ve been laying out for nearly two years as the only practical solution to the overwhelming U.S. debt and deficits.
Paul Volcker, former Fed chairman and the slayer of 1970s inflation, is now on record warning against the use of this policy to solve the developed world’s problems. Yet no one has an alternative. It appears the only way forward. The United Kingdom is already going down this path with the United States coming up behind.
Default is the fastest way to inflation and the rebasing of unbalanced economies. As the leaders of Europe dither, the likelihood of the market inflicting a fast solution grows. The flames of the euro crisis are now licking around the edge of France. The market is standing by mute in horror.
Equity trading volumes are down as the players take their money off the table and park it. This draining of liquidity is in itself a negative for stock markets. Day-to-day volatility is also reason enough for investors to stand aside.
Volatility has only one meaning: The market does not know what is going to happen next. The prospect of another heavy fall seems inconceivable for France and Germany. Their markets have already crashed. Yet, if the euro contagion turns Spain, Italy and France into tomorrow’s crippled sovereigns, then the floor on European equity markets will be hard to fathom.
The markets are in a kind of denial. It is almost impossible to contemplate euro-wide default. The cavalry must be about to ride over the hills. Germany surely can’t let Europe disintegrate for want of the will to suffer some inflation?
That’s how I’ve personally felt for a long time. However, evidence of the opposite is clear. Europe is paralyzed, its politicians dangerous, incompetent, dislocated and leaderless. If the market decides there is no cavalry, then the final act of this crisis will begin and we will suffer capitulation.
Nominally, there is a lot of money in this world–more money than there ever has been. However, it is being corralled into financial instruments like bonds, which may well be about to be annihilated through inflation, rising interest rates, recession and austerity.
If the cavalry does not appear in the next few weeks, look for this final stage of the credit crunch to begin.
Anyone able to take advantage of bargain-basement prices will then be able to buy stock at irresistible levels. It will be at this point that the new cycle will begin-in the rubble of the developed world’s old financial system.
It’s no wonder that it’s hard to imagine Italy and Spain being allowed to fall. Such events would set off an unstoppable financial disaster. It remains so much easier to imagine that this crisis will blow over.
For those not of an optimistic bias, what may well happen next will turn into an opportunity that is seldom seen-a chance to buy in at the bottom.
Clem Chambers is CEO of London-based ADVFN.com and author of "101 Ways to Pick Stock Market Winners." He is a regular contributor to Forbes.com.
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