November 9, 2011
Italy's 10 year bond yields rose above 7% on Wednesday (November 9, 2011) 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 (National Inflation Association) 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.
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.
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.
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.
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".
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.
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.
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.
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.
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.
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,
...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.
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.
The Federal Reserve (FED) 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.