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  1. Wealth
May 24, 2010

Sell in May, Go Away

By Spear's

A bail-out package was announced of ’750.0 billion but it wasn’t even a sticking-plaster, it was a fig-leaf.

While UK citizens were mesmerized by the election and its aftermath, there was high drama unfolding in Europe: the eurozone nearly collapsed. A bail-out package was announced of €750.0 billion but it wasn’t even a sticking-plaster, it was a fig-leaf. What really happened is that the ECB, under political pressure, purchased €16.5 billion of euro bonds from the banks, thereby injecting cash into the real problem, the insolvent German and French banking systems.

Insolvent? Yes, if you deduct their huge portfolios of eurobonds of doubtful value issued by the PIGS, or Club O’Med: German banks hold €522.0 billion and French banks reputedly even more. Merkel, you see, wasn’t out to save Greece, but Germany’s banking system from collapse.

And to make the point abundantly clear, BaFin, the German regulator, unilaterally banned the short selling of eurobonds and bank shares, as if to run up the white flag of surrender for all to see. The Germans have got themselves into a bind where whatever they do next is bound to be wrong.

What’s going on in the EU is akin to a tug-of-war: the Germans are desperate not to bail-out Club O’Med as this will import inflation, while the Club O’Med is desperate to avoid deflationary unemployment caused by the job-destroying single currency.

So far Club O’Med are winning, as they seek to get their hands on Germany’s euros. The riots in Athens were nothing like the 60s’ student riots nor the 80s’ union riots: these are people rioting to protect their economic livelihoods, as the austerity programmes imposed by Germany send Greek unemployment soaring and GDP plunging.

The markets have at last woken up to the implications of the emerging sovereign debt crises, which starts with the EU and then Japan and ends up with the UK and US: as austerity programmes, to reduce budget deficits, necessarily kick in, GDP falls and the percentage of national debt to GDP consequently rises, setting up the debt-deflationary conditions that could be a precursor to Banking Crisis 2 this summer, and Great Depression 2 as early as this autumn.

Is there a way to prevent this? Of course there is: get rid of the eurozone asap, before euro-contagion spreads across the global economy. How do you make this happen? Simple: Germany goes back on the DeutschMark. True, the discontinuity cost would be enormous, but nothing compared to Great Depression 2, which is what is now bothering the rest of the G20.

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When the unelected constructivist folly-merchants dreamed up the single currency, it never seemed to occur to them that they were correlating a whole continent’s risks into one giant potential catastrophe. If they did see this risk, then all the deficit and debt targets and no bail-out clauses they dreamed up have all been broken, and by every €uro-constituent country.

And those two great engines of recovery, China and the US, are already spluttering. Shanghai’s bourse is off 20% in six weeks, exports are falling, house sales in Beijing are off 80% in the first half of May, as the government puts the squeeze on bank lending because the economy is growing out of control at an unsustainable 12% per annum.

And in the US, the Obama administration is letting the public deficit just keep on growing, as its national debt soars past 100% of GDP, unemployment is rising again and house sales are slumping and consumers can hardly get out of bed in the morning on account of the weight of their debts.

The world is poised in a delicate balance between recovery and depression, but the global economy is in more of a deflationary than inflationary mode, with large recent falls in fuel and mineral prices. It only needs Banking Crisis 2 to manifest to tip the balance, and a Spanish bank perhaps has heralded the new wave of bail-outs at the week-end.

So watch out for more QE from The Fed, the BoE, the BoJ, and now the ECB as well. Suddenly the Lib-Con coalition seeking £6.0 billion savings from a £156.0 billion UK deficit looks like a supreme irrelevancy, which could be easily overtaken by events. Then they would need to save £56.0 billion in their first year, and the same again in years 2 and 3, and the same yet again within this “fixed” parliament.

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