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European ‘Austerity’ Flames Out with Elections

By Market OverviewMay 07, 2012 06:22AM GMT Add a Comment
 
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Europe’s doomed experiment with the politics of austerity went down in flames over the weekend as voters across the region veered sharply to the left in savaging incumbents. Elections in six European nations on Sunday promised to end any pretense of fiscal sanity in the region.

However, it remains to be seen how quickly and drastically the new leaders will act to unbalance their nations’ books in the name of economic growth. There’s a Catch-22 as well that could make any promises of budget-busting relief for pensioners and public workers impossible to keep. Recall that even the socialists in Greece’s parliament were forced to support austerity measures a few months ago because, without them, the country would have been unable to borrow enough cash to meet payroll.

In fact, Greece is so close to the edge financially that even hard-core socialists might find themselves forced to play ball with the bankers. The “middle way” for them, as has been the case all along, will be to talk austerity while practicing fiscal profligacy.

Eurobank president Draghi offered a preview of how this would be done, cribbing a page from Goebbels’s handbook. At a “whisper campaign” meeting in Barcelona over the weekend, he was quoted as saying Europe could hammer out a “growth compact” to go along with deficit reduction. Like Bernanke, he evidently thinks people are stupid enough to believe such claptrap. But even if it is unworkable as policy, it will be used to “manage expectations” in the same cynical way that the Fed chairman manages them.

Draghi’ s task will be more difficult, however, because he will be at odds not only with Germany’s conservative bankers, but with a German press that harbors no useful idiots like Nobelist Paul Krugman to zealously advocate ruinously inflationary fiscal policies.

Bullish for Gold, Silver

Although the foregoing has bullish implications for gold and silver, the effect is likely to be muted because it will also be quite bullish for the dollar, at least initially. European investors will be seeking a “safe haven” more desperately than ever, implying they will be diving into Treasury paper and other dollar-denominated instruments that are still perceived as safe in the weeks and months ahead.

Rick’s Picks has been predicting a powerful rally in the U.S. dollar, and this weekend’s elections in Europe seem likely to be the catalyst. Under the circumstances, we should also expect the recent weakness in U.S. stocks to continue over the summer.

Bullion will be feeling the weight of this, but we expect precious metals to correct only moderately from current levels nonetheless. Of course, it’s also conceivable that gold and silver will achieve at least middling gains over that time. In the meantime, although Apple shares will remain our bellwether for U.S. stocks, it’ll be interesting to see, as Europe sinks deeper into an economic quagmire, whether there’s enough greed and stupidity left on Wall Street to award Facebook a $100 billion valuation on May 18, when the company is slated to go public.
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