Italy's 10 year bond yields rose above 7% on Wednesday and
economists from around the world are now proclaiming that these
interest rates are unsustainable with Italy's national debt now 120%
of its GDP. NIA believes the ECB is currently working on their
largest bailout in history where they will commit to purchasing over
€1 trillion of Italian bonds and bonds of other eurozone
countries that are at risk of becoming insolvent. Despite the signals
currently being given by the ECB, they will not allow Italy to fail
because it will cause a Great Depression throughout the European
Union, which will lead to the destruction of the eurozone.
Economists
today fail to realize that 10 year bond yields of 7% are normal for
not just Italy, but the rest of the eurozone and the United States.
If it wasn't for the ECB holding their benchmark interest rate at
artificially low levels for over a decade, Italy and other eurozone
countries wouldn't have the high levels of debt they do today and
they would be able to withstand yields of 7% or higher. The ECB is
entirely at fault for the European Debt Crisis and they are about to
follow in the footsteps of the Federal Reserve by abandoning their
objective of maintaining price stability and keeping inflation
low.
German
10 year bond yields declined again today to 1.72% and the spread
between Germany and Italy is at a new record of 553 basis points.
Germany is benefiting from safe haven buying from investors selling
Italian bonds and buying German bonds, but investors will soon
realize that German bonds are no better than Italian bonds and the
world will dump all Euro denominated bonds. Bond investors currently expect
very little inflation in the eurozone, as seen by Germany's low bond
yields. The sole reason for the large spread between German and
Italian bonds is Italy's greater risk of default. However, a default
by Italy would lead to the failure of Germany's largest banks.
Germany knows this but they don't want to raise inflation
expectations by making the world think that the ECB will be
monetizing Italy's debt. Therefore, Germany is now telling Italy to
request aid from the European Financial Stability Facility (EFSF) if
needed.
Unfortunately, the EFSF doesn't have the financial resources to
rescue a country the size of Italy. Last week, the EFSF had to cancel
a €3 billion auction of 10 year bonds due to a lack of investor
interest. On Monday, the EFSF finally had the bond sale, but was met
with subdued interest that barely covered the €3 billion in
bonds being offered. So far the EFSF has only raised a total of
€13 billion through bond sales, but has received €440
billion in guarantees from eurozone countries. If Italy becomes a
recipient of EFSF funding, the EFSF will lose one of their largest
contributors. The EFSF
is looking to leverage up its €440 billion in funding to over
€1 trillion. The European Debt Crisis was caused by too much
leverage and debt. It is complete insanity to believe that the EFSF
is going to solve the debt crisis when it too is getting deeply into
debt and planning to use huge leverage to increase their funds
available for bailouts. There was recently a report that a proposal was made at the
G20 summit last week in Cannes for Germany and other leading
countries in the eurozone to pool together their foreign currency
reserves including their gold reserves to back the EFSF, which would
allow it to easily leverage up their funds and raise more money
through bond sales. As soon as this report surfaced, Germany
immediately announced to the world that they will not be using their
gold reserves to boost the EFSF and that their gold reserves are
"untouchable".
Germany's unwillingness to use their gold
reserves clearly shows that gold is the real safe haven where
individuals should store their savings if they want to keep their
purchasing power. Investors buying German 10 year bonds with a yield
of only 1.72% should ask themselves why Germany is willing to fund
the EFSF with Euros but not their gold. Maybe investors will come to
their senses and change their mind about buying any Euro denominated
bonds. For the past
decade there has been a bond bubble in both Europe and the U.S. where
we have seen bond yields at artificially low levels for an
unprecedented amount of time. This has caused modern economists to
believe that low bond yields are the new normal. When central banks
interfere in the free market by manipulating interest rates to
artificially low levels, it creates asset bubbles that eventually
burst.
When asset bubbles burst, the free market takes
over and attempts to correct the damage by raising interest rates to
extremely high levels, which encourages consumers to reduce their
consumption and increase their savings. NIA believes that over the next
five years, 10 year bond yields will reach double digit territory
throughout the eurozone and the U.S. The free market wants countries
like Greece and Italy to default on their debts and restructure them,
which is why their bond yields are rising so high. Although Greece
and Italy have the highest debt levels in the eurozone as a
percentage of GDP, the whole entire eurozone borrowed too much and
has too much debt. Germany and France both know that the failure of
Italy will spread to them when German and French banks with Italian
debt begin to fail.
The EFSF will soon be exposed as a
failure itself when it is unable to attract the funding necessary to
rescue eurozone countries in need of bailouts. Unless the ECB decides
to bailout eurozone countries through the EFSF by buying their bonds,
the ECB will be forced to directly monetize debts across the entire
eurozone. Even though the destruction of the eurozone
seems imminent, NIA believes it will take time to play out. Most
likely, in about two or three months from now the media will
begin focusing its attention on the U.S. crisis. When the
spotlight is off Italy, their bond yields will temporarily dip
back down, but U.S. bond yields will skyrocket. The U.S. national
debt is very close to breaking 100% of GDP, which will likely be
a catalyst for investors to begin dumping their U.S. dollar
denominated assets. The U.S. has unfunded liabilities many times
the size of Italy's unfunded liabilities. Including unfunded
liabilities, while Italy's total debts are approximately 300%
of their GDP, the U.S. has total debts equaling about 600% of
its GDP.Austerity cuts are becoming very
common in the eurozone and although citizens still protest them,
it has become politically acceptable for politicians in Italy and
other eurozone countries to support them. Italy's cash budget
deficit as a percentage of GDP is currently only 3.9% and their
national debt has been barely growing.
The U.S. cash
budget deficit as a percentage of GDP is currently 8.7%, more
than double Italy, and the U.S. national debt has been growing at
a record rate. Americans are used to stimulus over austerity.
Members of Congress are too afraid to make necessary spending
cuts. The U.S. has a budget deficit from entitlement programs and
interest payments on the debt alone.The supercommittee created by
Congress to recommend $1.5 trillion in deficit reductions by
November 23rd, so far hasn't agreed to make reductions to any
entitlement programs. The Democrats and Republicans have so far
only reached consensus on changing the way the government
calculates inflation for Social Security cost of living
adjustment (COLA) increases.
They want to calculate
inflation by using a new chain weighted CPI, which will
understate inflation even more than the current CPI they
use.Based on how the current CPI has been
miscalculating inflation for decades, Social Security recipients
today should be receiving approximately triple their current
payments.
All Americans should be outraged that the
government is planning to once again reduce the deficit through
deception, when they should be eliminating wasteful government
agencies like the Department of Energy, the Department of
Education, and the Department of Homeland Security, while
bringing our troops home from the middle east and immediately
cutting overseas military spending in half so that we have the
resources to better protect ourselves at home.
The extremely high
levels of debt in both Europe and the U.S. need to be liquidated as
soon as possible. If Italy can't sustain itself with 7% interest
rates, which is only average on a historical basis, think about how
large the crisis will be in the U.S. when interest rates here reach
15% as price inflation spirals out of control. Less than three months
ago Italy's interest rates were below 5%. Fundamentally, Italy's
economy is the same as it was three months ago, but perceptions in
the marketplace change quickly.
Today, U.S. treasuries
are still perceived to be a safe haven, but this will change 180
degrees in no time. Just like how the U.S.
government understates inflation when calculating COLA
adjustments, they also understate inflation when calculating GDP
growth. The U.S. recently reported 3Q GDP growth of 1.62% on a
year-over-year basis, which used a price deflator of only 2.52%.
If they used the real rate of price inflation, they would have
reported negative GDP growth. The Federal Reserve just lowered
forecasts for U.S. GDP growth in 2012 to between 2.5% and 2.9%,
down from a forecast in June of between 3.3% and 3.7%. In order
to ensure that we even meet the Fed's new projections, the Fed
will soon be launching QE3. NIA predicts that the Fed will use
fears of contagion from the European Debt Crisis as their excuse
for launching QE3 in the near-future. Combined with massive
inflation from Europe as the ECB monetizes debt to save banks
with exposure to Italian bonds, gold will soon skyrocket to new
all time highs with silver likely beginning to once again
outperform gold.
If you would like your friends and family
members to be among the first to see NIA's 'Occupy Wall Street the
Documentary' coming soon, please tell them to become a member of NIA
for free immediately at: http://inflation.us
DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of GoldIRAS.com. Past performance of any investment is no guarantee of future performance. All investments have risk.
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