The European debt crisis has again hit the headlines. This is not surprising for anyone who actually understands the situation. You can’t fix anything by kicking the can down the road. You can’t fix debt by borrowing more money.
The economy in Greece has been deteriorating rapidly in recent years. The GDP is shrinking rapidly each year, citizens essentially outright refuse to pay taxes, and meanwhile the citizens still expect outsized pensions and government services. It’s quite a mess.
So what causes the debt crisis to re-enter our headlines? Well, some elections in Europe where people voted in “anti-austerity” leaders meant that the Greeks were potentially voting to exit the Euro.
What the Greeks don’t understand is that whether they choose Euro-enforced-austerity or inflation by going back to the Drachma, either way, their standard of living goes down dramatically. They will arrive at the same destination either way.
By getting off the Euro, the Greeks will be able to essentially print their own money and thus “solving” their debt crisis. Of course this will unleash big time inflation and hamper their economy even more. Their best course would be to stay with the Euro but make dramatic cuts to the welfare state.
Interestingly, the Greece situation is peanuts compared to Spain and Italy who have much larger economies and thus, economies that will impact the global economy. It’s yet to be determined how this will shake out, but it will undoubtedly bring volatility.
What does this mean for the US markets and the domestic economy? It means volatility in the markets and a potentially Euro-led global recession this year or next. While we’ve enjoyed a cyclical bounce in the markets and the economy due to unprecedented fiscal and monetary stimulus, the effectiveness of these measures is indeed running out, and does nothing to strengthen the long-term viability of the US economy.
My guess is that the US economy enters back into a recession in 2013, the response will be more government intervention, and we’ll get some significant inflation. With gold taking a hit in 2012 thus far, it’s a good time to add to your stash if possible.