What’s going on?
Three years after the spectacular downfall of Lehman Brothers, a new crisis has emerged and taken center stage, sovereign debt, while some may present it as separate from the 2008 great recession, it is a direct result of the policies of bailouts operated in late 08 and 09.
When the housing bubble burst, household debt – defaults on mortgages and credit cards – became financial institutions debt who turned to States for help and eventually turned their debt into sovereign or national debt; adding a enormous amount of derivative and other frivolous “asset” losses to the counter. In Europe, to recapitalize banks and pay off their toxic assets, 230 billion euros have been spent by the states, in the U.S., the Troubled Asset Relief Program (TARP) has granted aid to various financial institutions totaling $ 700 billion, at the same time, the Fed lent to these institutions at zero for more than 2.5 trillion dollars. In October 2010, the total cost of the bailout was 7.8 trillion dollars.
An example is the caricature of the Irish State, taking charge of the commitments of banks assets sealed “rotten” by the financial crisis, trying to fill a bottomless pit: 29.3 billion euros, for example, to try to clean the Anglo Irish Bank, 50 billion euros hole in 2010, almost one third of GDP to bail out banks whose losses had previously been hidden.
The inability of households to meet their obligations has jeopardized the financial sphere and the states did not hesitate one second to fly to its aid, without posing any conditions, following the old principle of “privatization of profits, socialization of losses “.
Speculators who have been generously bailed out and saved by taxpayer money are now biting the very hand that fed them, downgrading and betting against countries – the lastest victim being Italy – in the hope of another big winnings day.
Under “markets” pressure, each country is trying to set an example of rigor, cutting public spending; a vicious circle is now in the making for cutting spending and measures of austerity help reduce economic activity and push the world economies into recession, which is what we are witnessing right now.
The market has experienced a severe correction in the last few days but it is not a crash and it isn’t related to the downgrade operated by S&P on the US debt, look to sovereign debt in Europe and an overbought market in the US instead, gold is up a little too much and will correct in the coming days.
In conclusion, this crisis will endure with a very possible double dip into recession, consumers are still broke and states are now battling over currencies, the end game, as I advocated before, can only come from an international debt restructuring and a return to the gold standard.