The European Union Bank is effectively going “all-in” by pledging $1 trillion in collateral to shore up the economies in the Eurozone.
What people should be fully aware of is that while this might delay the financial issues concerning the countries in the Eurozone, this is not going to solve the underlying problems – too many entitlements promised to people and not enough money to pay the corresponding liabilities. The only solutions are to reduce the entitlements (which is difficult to achieve politically) or raise revenues.
Clearly by stalling for time, they are hoping something might happen that would alleviate themselves of the fiscal mess they are in, but by stalling any action that would clean up the mess, it will just make it worse in the future when the proverbial excrement hits the fan.
It is my market opinion that we have not seen the end of this by any means. How to play this profitably is difficult – increasing cash allocation and playing the risk aversion card seems to be wise until such a time it becomes evident that the markets have discounted sufficient risk to account for the soverign debt mess that is looming.
The United States is not immune to this, but economists do know that countries such as the United Kingdom, other European countries and Japan are more likely to face these big macroeconomic/demographic issues before the USA will.
Countries like Canada, relatively speaking, are in decent shape. While old age security payments and guaranteed income supplements will increase as the baby boomer generation retires, entitlement payments are relatively low and can be managed. Our pension plan (CPP) is solvent and funded by real assets generating real returns (although how those assets will perform in a global debt default remains to be seen). The big liability, accrued healthcare spending, is the big political hot potato. The Canadian economy seems poised to take advantage of one major trend, mainly that consumption of energy will continue to increase – our oil industry is going to boom assuming there is no massive deflation of debt and international trade.
I still have no idea whether the deflationary or inflationary theory will win out.