European Downgrades: Will There Really Be a Fallout?

Bill Bonner
Provided as a courtesy of Agora Publishing
& The Daily Reckoning
Posted Jan 17, 2012

01/16/12 Melbourne, Australia – On Friday, after the close of business in the stock market, S&P downgraded 9 European countries. Spain and Italy were both taken down another notch, leaving Italy with a BBB+ rating and Spain with an A.

But the headline damage was done to France, whose triple-A rating got downgraded to AA+. France had been rated AAA for 36 years.

The French bid adieu to their triple-A status…said they didn’t care about it, expected it, and didn’t believe it anyway. But it was a blow, not just to the French but to the whole European experiment. France, with Germany, was one of the strong, big economies at the center of Europe. It was one of the economies the others were depending on to bail them out. Now, it looks like France may need its own bailout.

The Wall Street Journal warned that markets needed to “brace for European fallout,” this morning.

But maybe there won’t be much fallout. The US lost its AAA status last year. And it wasn’t at all inconvenienced as a result. Instead, yields on US debt went down…meaning, its bonds were more desirable than before. Investors knew they would get their money back, they didn’t seem to care about what the money would be worth.

Mr. Market often plays tricks on investors. He makes the thing that is the most risky seem the safest. The safest asset, on the other hand, he makes seem like the riskiest thing they can buy.

That was what investors thought about US Treasury bonds 30 years ago. Inflation had reached over 13%. The US 10-year note yielded 15% (from memory). Investors had taken to calling them “certificates of guaranteed confiscation.”

But instead of confiscating investors’ money, bonds proved to multiply it. Yields soon began to tumble. They’ve been coming down, more or less, ever since. Which means…people who bought bonds in the early ’80s have made a lot of money. Bonds turned out to be a very safe investment.

Meanwhile, gold was seen as the safest thing you could buy in the early ’80s. It had been going up for the last decade. Investors saw no reason the trend should stop.

But barely had the ’80s begun when gold put on the brakes. Then, it began to back up. The price fell from over $800 to under $300 - over the next 18 years. Investors would have been safer on an Italian cruise ship!

And how about now? Money rushes to the safety of US bonds. Yields are as low as they’ve been in 100 years. But are they safe?

Nope. They’re probably the riskiest investment you can make.

France has about the same financial profile as the US. In this respect, both are at the center of the developed world - with government debt of about 100% of GDP. Neither can expect to work its way out of debt unless it can keep its deficit below its rate of growth. And that’s going to be almost impossible. Europe appears to be heading into a recession (negative GDP growth)…and the US is not far behind. Despite the renewed talk of a ‘recovery’ in the US, the country limps along with a budget deficit of nearly 10% of GDP…and will probably tip back into recession later this year. In any case, there is no end in sight to America’s huge deficits. And no chance that growth will rise high enough to offset them.

This is going to end badly, dear reader…

It is amazing what you find in the newspapers. In Johannesburg was the story - if you can believe it - of a man who threatened three men with a pistol and forced them to rape and mutilate his wife. Then, he shot and killed his son.

He then fled into the bush…only to reappear when he ran out of food and water a few days later.

In Sydney, Australia, the “Elvis Express” left the station last week, without a single unsold seat. The train takes Elvis fans to the 5-day Parkes Elvis Festival, held once a year for the last 6 years.

And all over the world, the press is howling for the heads of the marines seen urinating on the bodies of dead Taliban soldiers on YouTube. Everyone is appalled. Defense industry chief Leon Panetta says he disapproves. And Al Qaida is said to be using the video already and getting a terrific response to its recruiting efforts.

Here at The Daily Reckoning we rise to defend the downtrodden, the diehards…and those too dumb to speak for themselves. Of course, the marines did something disgusting. They should be court-martialed. And put before a firing squad… along with their commanders… right up the chain of command to the commander-in-chief. They all sabotaged America’s war effort.

But we have mixed feelings about the marines. They were sent to fight a savage war. Is it any surprise they act like savages?

A friend of a friend… a doctor in the Army Reserves, just returned from Afghanistan, offers this perspective:

“It was such a waste. It was so expensive, keeping us all there. Most of the time, we did nothing. Then, we would go on patrol. The Afghanis would try to kill us; we’d try to kill them. And they were just drug dealers and goatherds; what was the point?

“I’d get two kinds of patients… those who had just stepped on a landmine and lost a leg… and those who had injured themselves playing football in our camp. Both were a waste…”

Part of the reason the press is so disgusted by the marines is that they show America’s war in Afghanistan is a fraud. Far from cuddly nation-building, the marines act like soldiers always act when they are put to such nasty tasks. They are not fighting a heroes’ war. They are not defending the country. Instead, they are fighting a mean, dirty war - like the French in Algeria…or like the Russians in Afghanistan before them.

It is not an honorable war, in our opinion. It is not a decent war; not a war good men should not be sent to fight. It is a zombie war. It is the sort of war America’s two most celebrated generals - Washington and Eisenhower - warned against. Its only purpose is to enhance the power, wealth, and status of the military industry. In his farewell address, General Washington warned against getting entangled in foreign military adventures. General Eisenhower made the same point: beware the “military industrial complex,” he said.

And yet, here we are. Entangled…for the benefit of the military industrial complex.

The marines were pissing on the wrong people.

Regards,

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source: http://dailyreckoning.com/european-downgrades-will-there-really-be-a-fallout/

Jan 16, 2012
Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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