What does the euro-bailout achieve except raise gold prices?

Posted on 11 May 2010 with 1 comment from readers

Just over twenty-four hours after the near one trillion dollar eurozone bailout package and analysts are already starting to ask what has actually been achieved.

Certainly the immediate sovereign default risk is lifted from bank balance sheets and that has sent their shares skyward, which does help to recapitalize the banking sector. But essentially the super high public debt still exists and has been transfered from the banking sector to the tax payer.

Austerity follows

That means in order for the debt to come down there still has to be austerity, with budget cuts, higher unemployment, and logic implies lower or more likely negative economic growth.

Perhaps that is why it is more reasonable to see the jump in global stock markets yesterday as some sort of grand finale to the recent rally, rather than the dawning of a new age of ever-rising stock markets with European governments stumping up the cash.

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European governments surely would have waved a $1 trillion wand months ago if putting things right was really this simple. The magic of reshuffling loan risk is a sleight of hand, and there really is no such thing as magic.

Sovereign risk has not gone away in the slightest. The medium to long term implications of high government debts are still there, and now have to be tackled.

And although the first impact of the bailout news was to inflate the value of stocks, the longer term implications seem profoundly deflationary. As governments spend less the response will be for economies to contract.

Lower interest rates

But where the measures are supportive to asset values is in keeping interest rates down. However, it is hard to see this doing anything more than lessening the pain of interest rates that will have to rise overtime.

As the value of stocks, real estate and bonds fall the asset class of choice will become precious metals as the last safe haven. Thus a great deal of money will be funneled into what is an asset class with a very tight supply, and the inflation of gold and silver prices will be enormous while other asset classes remain depressed.

So aside from averting an immediate sovereign debt crisis the euro-bailout is just another twist in the road to $5,000 gold.