Friday, May 6, 2011

Fault Lines in Europe

A couple of days ago, Portugal accepted $116 billion in international aid. This was the third time in a year that a nation in Europe needed a bailout. Although many economists still believe that the damage has been contained and a possible contagion has been contained, there is strong evidence that the fault lines continue to grow in number and extent in Europe.

There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.

Here is what has happened in Europe in the last year:

April 2010 - May 2010:  Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.

June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.

Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.

March 2011: Portugal's government collapses, creating the fear of a debt default.

April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.

May 2011: Portugal gets bailed out by the European Union.

The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.

This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.

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