European sovereign bond yields are blasting higher again. Sounds familiar doesn’t it? Ahh, yes. I love the smell of Ponzi in the morning!
Here’s a little story about band-aids. Your son falls down, you put a band-aid on his knee, tell the kid to go run around outside, then the kid rips the band-ad off, falls down again and comes back to mommy screaming in pain. You put on another band-aid, rinse wash repeat. No, that’s not a story of your experience at the park last weekend. It’s essentially what’s going on in Europe.
This is a very simple problem. The real crux of the problem in Europe is that none of these nations are autonomous issuers of their own currencies. This is not a debt crisis. It is a currency crisis. So since they all use the same currency they can’t devalue against one another. So they can’t try to grow their way out through trade rebalancing. And they can’t print money to offset growth declines. So they’re in this positive feedback loop that is essentially sucking the life out of each of the peripheral economies. The core wants to impose austerity on the periphery because they don’t want to print and they’re convinced that the cure is reducing the debts of the periphery nations – they think it’s a debt crisis and not a currency crisis. But what’s happening is something that I predicted a long long time ago. The austerity is actually causing the economies to contract at a rate that is faster than the debts are contracting. So you’re getting stagnant or rising debt:GDP levels. So all we’re getting is a whole lot of economic pain.
To make matters worse, the ECB has stepped in time and time again with their quarterly band-aids. This perpetuates what has essentially become one big ponzi scheme. Or to put it more delicately, it’s like a Wayne Rooney sized kick of the can. And Wayne Rooney’s pretty fast for a white guy so he catches up to that can pretty quickly. And he kicks it again. But the can is getting weaker and weaker every time he slams his foot into it. And one day he’s going to kick the can and realize that it can’t be kicked any further. That day in Europe is fast approaching. Europe needs a real fix. It’s time for a US of Europe or it’s time to start sending some sheep to the slaughter in the form of defections. All I know is that Europe needs a sustainable fix in place and they need it sooner rather than later. Bankers aren’t going to wait around long to realize that the ECB’s latest program isn’t going to actually fix the underlying cause of the crisis…..And that’s a currency crisis. Not a debt crisis.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.