Europe
- -Italy is the worlds 3rd largest bond issuance behind Japan and USA
- -Italy cant print money like USA
- -Bank deposits in Greece and Ireland have been falling rapidly. A modern day bank run.
- -Italy deposits are shrinking. The flow has just entered negative territory.
- -Europe has a banking funding crisis. That is customer deposits are not funding the banks. Currently the EU is funding the banking systems.
- -The private banking sector own 62% of all Italy debt. Italy debt is massive, and a huge challenge for Germany to guarantee all Italy liabilities. Most likely to the amount of $1 trillion Euros.
- -If Germany guarantees Italian debt then this is would be a fiscal union.
- -A fiscal union is against the German constitution and the German high court will battle this decision as unconstitutional. 'All hell could break loose if German court do not support the political decision'.
- -History has shown that monetary unions on there own fail. They must be fiscal, monetary and political unions to succeed.
- -The next six months will be very interesting and volatile.
- -Italy issue is massive government debt. Not private debt.
- -Italy has seen interest rates rising due to the bank funding crisis, this means the government must cut spending, thus force a deflationary environment.
- -Zulauf see the PIGS countries leaving the Euro. To become competitive on a lower currency.
- -Markets are forcing the issue as they are forcing interest rates upwards. The rising cost of debt can not be funded when asset prices are falling.
- -Currently there is a cocktail for a deflation decline for industrialized economies.
- -Zulauf sees a recession for industrialized economies in 2012
- -Merkel is a trained communist, and does not understand free markets. This likely to screw up.
- -So far Germany has aided bailouts and not a fiscal union. The current bailout fund can not handle Italy and Spain. The bailout fund would need to be $2 trillion Euros. Zuluaf thinks the German people would not support a fund this large.
- -If Germany does not support a fiscal union then the European experiment is OVER. The PIGS would have return to there own currencies to survive.
USA
- -Today's economists are using models that are now broken. The stock market used to be a great leading indicator for the economy. Not any more. The use of QE to pump up stock asset prices worked for the stock market but not for final demand from the general economy. Thus QE does not work any more. Bankers are not lending to the consumer.
- -Economists who believe that higher stock prices are better for the economy are mistaken. The wealth effect from stock prices to get better demand and growth is the wrong approach. This approach suffers a reality check when stocks sell off (ie August 2011).
- -Fiscal stimulus works better than QE. All the world economies slowed down late in 2010 when fiscal programs ended. Fiscal stimulus works when final demand is weak.
- -Fiscal stimulus should come in the form of infrastructure projects, get people working and building usable assets. Government should cut spending on entitlements to a bear minimum, government spending should be on projects that increase production.
What’s next, the next crisis, what can be done?
- -Print money is expected as it’s easy to do. But it is a sugar high that will last a few quarters. Then the economy will slump again.
- -Required, must have major fiscal structural change to get true real growth from real demand.
- -Gold will continue to rally as government chooses the sugar high QE option.
- -With each QE cycle the risks are getting higher and higher for a bigger bust.
- -Policy makers have no idea what to do. They have no formula when USA growth is so low. A deflationary accident is very possible.
- -Zulauf knows no formula to fix it, but it will take a lot of pain, whatever is done.
- -Zulauf says preserving capital is critical.
- -Prosperity enjoyed since the 1970s was achieved on accumulating great debt. A consumption dominated economy. Debt must either be deflated away or forgiven. Zulauf expects high inflation from economic misery rather than economy boom to reduce the debt level relative to assets.
- -Gold will continue is rise against paper currencies until we get positive real interest greater than 1%. And this is years away.
- -Gold could rally for years. Gold could fall $100 or $200 dollars as it has gone up in a straight line, if does BUY MORE.
- -Eventually some of the current currencies will be destroyed, and will be replaced by asset back currencies (Gold, commodities, etc)
