Europe remains in denial. It is facing a systemic crisis which now threatens the Euros very existence. Italy is now the poster boy for the debt crisis. Soon enough, the citizens of Europe will come to realize they have been led down the garden path. The savers and the prudent investors will pay for the reckless behavior of the bankers and politicians. They will be fleeced as they sleep with negative real rates and mounting inflation.
In the meantime, there is no palatable solution to a debt problem of this magnitude. You can bet, the politicians will now resort to the unthinkable. No, they won’t crank up the printing press yet. The will however institute controls and policies that will hopefully buy more time. As Reinhart and Rogoff pointed out, they end game will likely be as follows:
- banks are forced to hold government bonds,
- pension funds are forced to hold government bonds,
- interest rate ceilings are imposed on private lending; to prevent “usury.”
- finally and “if all else fails, exchange controls are imposed, to ensure nobody can easily escape from such regulations and they will crank up the printing press.”
Initially, this should steadily push bond yields lower and lower, something that combined with a steady dose of inflation has the effect of gradually eroding the national debt. As this plays out, Europeans will come to know they have been fleeced.
Wake up Europe, your politicians stole from you while you slept and are now going to steal from you while you are awake.