The US stock market dropped about 2% today as European credit markets came under broadening pressure. The realization is growing that, without the benefit of a printing press, practically none of the Western European nations are solvent. For that matter, neither is the USA, or Japan, or the United Kingdom. It's not a liquidity issue, or a growth issue, or a housing crisis. What we have is a full blown, irrevocable, unavoidable, global, sovereign debt crisis.
The Euro zone is the first manifestation of this catastrophe because EMU countries handcuffed themselves into a situation where they did not individually have the ability to print their currency at will. The effect is as if they borrowed money in a currency other than their own. Sovereign borrowers like the US and the UK have been able to kick the can down the road, hiding their own insolvency by printing money out of thin air. Japan has survived by printing and by borrowing from their own people's vast savings at practically zero return. The Greeks, Portuguese, Italians, Irish, Spaniards, they don't have those choices. Unable to debase the Euro without the consent of the Germans, they'll have to default the old fashioned way; stiff your creditors.
Now I think that a nice round of big fat sovereign defaults would be a good thing in the long run. With the rise of socialism in the western world over the last few decades, spurred on by a global media machine that never saw an unncecessary government expenditure, people have actually forgotten that borrowed money must eventually be repaid; a reminder is in order. Politicians have played right along, assuring their hapless constituents that as long as the economy was growing at an exponential rate, as long as debt/GDP was shrinking, everything was fine. Two minor problems. Economies can't grow exponentially forever in a closed system, i.e. planet Earth, without running into resource constraints. And debt has been growing at a faster exponential pace than the economies. Now the economies have stopped growing and the debt is growing faster. That spells default. Massively globally interconnected, bank destroying, conflict creating, default.
Today, the defaults are beginning. Greece is the canary in the coal mine, but the rest of us are nothing but bigger canaries. In the US we have two options going forward. We can bite the bullet and admit that there is no chance of growing our way out the accumulated debt burden. This will be very painful for some very powerful people, people who wield a lot of money and influence. Or we can invoke the memory of John Maynard Keynes, print more money, lots more money, and increase the debt and money supply faster than our economy can grow. That is the genesis of inflation, actually it's the definition of inflation, and it will be very painful for lots and lots of little people who don't have their congressman's personal number on speed dial. Which path do you think we'll choose?
Today, gold hit a new all time high in terms of the Euro, very close in terms of the US dollar. Tomorrow, Ben Bernanke gets his latest chance to tell us which path the United States has chosen. Don't listen to Ben's words; he's a liar. Watch gold for the next few weeks and you'll have the answer.