The pundits would have you believe that Italy and Spain are about to be swept into the European Debt crisis, and that this is somehow going to bring down their economies, and possibly spark enough contagion to bring down others. That's nonsense.
First, we have a commodity bubble, then we have profit warnings, then the stock market stagnates, then investors loose confidence, then the market crashes, then the economy slumps. It happened in 2008 and they blamed it on mortgages, even though mortgage debt losses and all associated debts didn't match the bursting of the commodity bubble. This time there blaming it on the European debt bubble. Bubbles always burst. The question is why.
In 2011 worldwide growth is back with a spring in its step, demand has once again outpaced supply thanks to a constrained global market for oil, and thus pretty much everything else, because it all needs transporting. The cost of running a container ship for a day at sea has doubled this year alone, from $15,000 to $30,000. That's why profits are down again this summer.
Take Italy for instance, it's government is borrowing the equivalent of only 4% of the countries GDP each year, and that doesn't take into account the balancing effect money it's creditors lend out of Italy. Interest rates on 10 year government debt have moved to just over 5%. That only applies to money being borrowed today, not to bonds that have been sold in the past. Effectively therefore, the cost of the Italian government's spending deficit comes in at 0.2% of GDP. Given that is significantly lower than the amount actually being borrowed, the deficit is financially profitable. Simple arithmetic reveals all fears of a 'debt crisis' in this case to be a bad joke at best.
More to the point, investors fear falling tax receipts, which could make the deficit balloon. This scenario is highly realistic, given the bleak outlook for stock prices whilst commodities remain high. Also, although they are high, the boom seems to be stabilizing, and hungry bulls will have to look elsewhere for food. Therefore it's only logical that yields on sovereign debt will be bid up slightly whilst commodities remain high, for both reasons.
The news pretends to mindread investors by using headlines based on this "x/y rises/falls amid fears of..." template. Just because two things are 'amid' doesn't mean they are causing each other, they are just symptoms of the wider crisis in the system. They got it wrong in 2008, and they are getting it wrong in 2011, just as I predicted, how I predicted, when I predicted. But they run the place. Oh well. Perhaps the real problem is that there is no education system for middle aged prime ministers and presidents. 'Political school'; anyone? Didn't think so...
