Sovereign Yields Back In Focus

That debt crisis which had been solved by gargantuan monetary policy backstops in the EU seems to be back, as unfathomable as that must seem to you who were mouthing off last September through December that any further concern about a financial shock from Europe had been “taken off the table.”

“Smoothing out the tail events” is a bumper sticker, not an analysis.  You don’t just smooth over several trillion in short term obligations.

See, the consequence of flinging EFSF/ESF/LTRO money at the bonds is obviously, sharp inflation.  And that’s exactly what the whole of the EU has right now; prices spiking higher on their citizens.  In a place like Spain, that means the 20% of population that is out of work also gets to contend with €8 gasoline.

Joy…

And when your twenty year olds are pushing 50% unemployment, well,…recall that old adage about idle hands.

So the EU is trying to build another €1 trillion backstop?  So what?

It’s not like they can use it.

The price the EU pays by monetizing their debt is enormous.  Look back on all the economic indicators coming out of the EU for the last 3-6 quarters.  Watch in awe as their economies slowly get pulled into recession REGARDLESS of whether or not they print money.

This matters, folks.  Take a good look at the most recent reports of China trade data.  There’s a reason even the Chinese are admitting that European problems are affecting them.  There’s no way they can lie about something that big.  The EU is China’s economy.  Without EU demand, China would have to rely entirely on domestic consumption and growth to spur their economies and organize their labor.

Now if the EU cannot afford to print any more money, how are they in any position to suppress their bond yields?

That seems to be the gist of the yield spike across European countries.  It’s not that the ECB couldn’t just buy up all the bonds and force losses on a few traders.  It’s that they can’t do it without forcing the Greek, Irish, Spanish, Portuguese, and Italian economies into deeper, more painful recessions.

And back home in the USoA, they are getting no support.  Recent reports are that Bernanke met with Republicans about undisclosed conversations.  Is that the kind of behavior one engages in when one is confident they are an autonomous body?

I’ve been saying for a few years now that Bernanke is going to be very aware of Congressional perception to his actions.  He cannot afford the ire of Republicans; even as the minority party, there is a great deal of damage they can do – if not to his actual policy decisions, then to his public relations campaign.

Bernanke has spent the last six months talking down the market, rather than acting.  Having an heavily financed, ideological political party viewing him as the enemy is not a position he wants to be in, because that’s a position where he needs to act rather than speak.

And as Europe has shown us, acting is expensive and riddled with bad tradeoffs.

If you enjoy the content at iBankCoin, please follow us on Twitter