Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Due for 9-10% Pull Back? - 25th April 19
Dow Transportation Stocks Sector Is Testing Resistance - 25th April 19
INSOMNIA i64 UK Best Games Festival Vlog of What it's Like to Attend - 2019 - 25th April 19
In Just 45 Mins., Learn to Spot New Opportunities in ANY Market for FREE! - 25th April 19
If This Pattern Holds True, the US Economy Could Face the Worst Stagnation in History - 25th April 19
8 Reasons Why Investment in Education Always Pays Off - 25th April 19
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Europe's Solution isn't More Inflation

Economics / Inflation Jun 20, 2012 - 01:56 AM GMT

By: Michael_Pento

Economics

We now live in a phony economic world where central bankers rule without check. Any hint of weakening data, which is actually a sign of reality and healing returning to the economy, is quickly met with the promise of more disastrous money printing. Last week we saw U.S. factory orders down and initial jobless claims rise. In Europe, we saw the Spanish bank bailout fall flat on its face and interest rates spike in Spain and Italy. Therefore, in predictable fashion, financial markets soared on the premise that the ECB and Fed must imminently ride to the rescue once again.


Meanwhile, most Main Stream Economists are auditioning for a role with the Weather Channel by blaming the persistently weak economic data on a warmer than typical winter. However, in truth the faltering global economy is resulting from a massive accumulation of debt that has led to a recession/depression in Europe. The same situation will inevitably cause a recession in the U.S., which will continue to cause a reduction in the growth rate of GDP in emerging markets.

But an endless increase in central banks' balance sheets can never be the answer to the malaise we find ourselves in, nor will there be any bailout coming for Europe other than the viability that can eventually arrive out of a cathartic depression.

Don't look for Germany to bailout Europe either. The country will never abdicate its sovereignty to profligate nations and assume the average borrowing costs of southern Europe on their debt. The U.S. shouldn't advise Germany to adopt fiscal unity in Europe unless Treasury Secretary Geithner also thinks it's a good idea to allow Greece the authority to issue T-Bills. Unless they are given complete control of the PIIGS spending and taxing authority, the Germans will most likely abandon their parenting role in Europe in due course.

The only real solution for insolvent Europe is to explicitly default on the debt to a level that brings PIIGS countries to a debt to GDP ratio below 60%. Then to pass balanced budget amendments and adopt tax and regulation reforms that makes them competitive with the rest of the world. Also, they need to adhere to the other strictures of the Maastricht treaty and not fall into the temptation of abandoning the Euro. Their economies will suffer a short depression, but this plan is the least painful option.

Having Greece return to the Drachma and defaulting on their debt through devaluation and money printing is a much worse option. Many are proposing that Greece now leave the Euro and inflate their way out of debt; just like Argentina did during 2002. However, this ignores the fact that the Argentines first defaulted on $100 billion of their external debt before removing their currency's peg to the U.S. dollar. Even though the Peso lost about 75% of its value and caused a brief bout with high inflation, the Argentine central bank did not have to monetize its debt. Therefore, the amount of new money printed was greatly reduced and resulted in a quick rebound in the economy.

In sharp contrast, the Europeans, Japanese and Americans still cling to the idea that inflation is the answer. PIIGS countries are pursuing an inflationary default that will increase borrowing costs and lead to a depression that will be far worse than if they simply admitted their insolvency and defaulted outright. Devaluing your currency to pay foreign creditors leads to hyperinflation and complete economic chaos. Paying off your debt by printing money was tried in Hungary during 1946 and Germany in 1923, but it resulted in complete devastation and hyperinflation.

If the Eurozone economies persist in the belief that the ECB can restore solvency to bankrupt nations, the Euro could fall back to parity with the dollar within the next 16 months. And if such central bank arrogance persists, the Euro could eventually go the way of the Hungarian Pengo.

Mr. Draghi should acknowledge that money printing hasn't fixed Europe's interest rates or economy.

Our central bank suffers from the same hubris as its European counterpart. Bernanke believes a deflationary recession must be avoided at all costs and that prosperity can be found in a printing press. The U.S. already has a higher debt to GDP ratio than EU (17) and is growing that debt at an unsustainable 8% of GDP per annum. Therefore, if America doesn't remove her addictions to borrowing and printing money, our own sovereign debt and currency crisis can't be more than a few years away.

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com
(O) 732-203-1333
(M) 732- 213-1295

Mr. Michael Pento is the President of Pento Portfolio Strategies and serves as Senior Market Analyst for Baltimore-based research firm Agora Financial.

Pento Portfolio Strategies provides strategic advice and research for institutional clients. Agora Financial publishes award-winning newsletters, critically acclaimed feature documentaries and international best-selling books.

Mr. Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.

Prior to starting Pento Portfolio Strategies and joining Agora Financial, Mr. Pento served as a senior economist and vice president of the managed products division of another financial firm. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Mr. Pento has worked for an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career Mr. Pento spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Mr. Pento graduated from Rowan University in 1991.

© 2012 Copyright Michael Pento - 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.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules