Why Does The Market Still Believe In Something For Nothing?

Reuters ran a bloggers opinion piece which said that the rest of Europe would be better off without Germany. That can only be true if investors will continue to believe in something for nothing. Remember, our David Santschi on a June 13 video suggested Germany would be much better off leaving the Euro mess sooner rather than later.

Now this blogger says the rest of Europe will be better off if Germany leaves. Why? To quote him, “the euro zone would become a more credible and coherent unit without Germany. Liberated from German obstruction, the ECB would be able to follow the examples of the U.S., Japanese, British and Swiss central banks, using quantitative easing to bring down interest rates to zero at the short end and to around 2 percent on long-term bond.” 1

Wow. Would you buy any Euro debt instrument without Germany in the mix? What sane investor would buy newly printed short term 0 interest rate Euro obligations issued by a bunch of broke debtors? Reading the media and watching nitwits opine on CNBC and Bloomberg that just because the Federal Reserve or the European Central Bank prints money, that the new money is worth same as already existing money.

What nonsense. As we and many others have been saying, apparently to no avail, you just cannot print money to solve the worlds problems. Pimco’s Bill Gross in his July Investment Outlook said, “Can a debt crisis be cured with more debt? Yes, if initial debt levels are reasonable and central banks are able to rejuvenate the delicate dance between debtor and creditor. But when debt as a percentage of GDP, or debt service as a percentage of household income, becomes imbalanced then the well-oiled capitalistic engine may sputter and in some cases freeze up. That’s when a debt crisis can’t be cured with more debt.”

Does any sane person doubt that the developed world has much too much debt and promised future spending compared with current and future incomes?. For those of you who do believe in government spending do you really think that the private sector has an infinite store of wealth than can be tapped by governments to pay entitlements?

To me the real problem faced by the US, Europe and Japan remains excruciating simple. The underlying economies are not big enough to payoff all the past and future promises and commitments made by government. Until the problem of too much debt and spending and not enough income is recognized as the real problem, a solution is just not possible.

That is why I think that first the Bernanke put has to die and stock and bond prices begin to deflate before the US, Europe and Japan will start to focus on the real problem. As I said the other day, the black swan is already stalking the Bernanke put. It could be that the black swan pounces when it becomes apparent that the can has become too heavy to keep kicking down the road. My best guess is that could happen perhaps before the end of this year but no later than sometime in 2013.

Below You May Find The Video.