I return from a wonderful vacation — beardless, tan, and rested … but also very wary of the unfolding events:
Just when everyone thought the debt crisis was over … giant deficits didn't matter … and the global economy was on the mend …
We have witnessed a sudden shift in global events … and the shift is about to hit the fan!
Here are the facts:
First, the European sovereign debt crisis has exploded back into the headlines with a surprise new collapse in the Spanish bond market.
The underlying reason: Spain is caught in the same vicious cycle as Greece …
• The more the government tries to cut spending to reign in its bulging federal deficit, the more its economy sinks.
• And the more the economy sinks, the bigger the deficit, mandating still deeper budget cuts.
The evidence: Last month, Spanish unemployment soared to a record high, forcing the government to admit that Spain's national debt will be a lot bigger than expected, and mandating a second round of austerity measures.
Indeed, just four years ago, Spain's debt was just 35.8% of GDP. This year, Madrid estimates it will soar to more than DOUBLE that level, at 79.8% of GDP. And with the vicious cycle now in full swing, it could hit 100% soon thereafter.
National labor strikes and mass street protests paralyze the already-weak economy even further …
The government responds with measures that are even MORE Draconian. And …
The cycle continues to accelerate.
Consider the actual scene of just a few days ago:
Spanish workers stage a 24-hour general strike to protest the government's new labor reforms, austerity cuts and soaring unemployment. Riot police in Barcelona block the street near Catalunya Square. Picketers, in turn, block trucks from delivering produce.
Shopkeeper Mireia Arnau, 39, is in shock. She stands in tears behind the broken glass of her computer supplies shop, stormed by demonstrators.
The coup de grâce will come when global investors dump Spanish bonds, making it impossible for the government to roll over its debt — the same dark cloud of looming default that's been hovering over Greece.
The big difference: Spain's economy is nearly FIVE times larger than Greece's!
So if you thought the impact of the Greek crisis on global financial markets was big, imagine the impact of Spain's!
And for anyone who thought the crisis was over, the latest eruption in Spain is proof positive that they're dead wrong.
But as a reader of Money and Markets, none of this should come as a surprise to you.
You know that ALL of the PIIGS countries — Portugal, Ireland, Italy, Greece and Spain — are still hanging by a thread, still caught in the same vicious cycle of bulging deficits, forced cutbacks and shrinking economies.
You know that even some of the stronger EU countries, France and Germany included, are also embroiled in the crisis — their banks swimming in toxic sovereign debts … their own budgets strained by the ever-greater demands for bailout funds … their people rebelling against the entire concept of a European Union … and more.
And you know that the ONLY thing that has managed to temporarily tamp down investor fears in recent months has been the unprecedented outpouring of funny money by the European Central Bank — more than one trillion euros pumped straight into private banks, who in turn, have used most of that money to buy distressed sovereign bonds.
But what you may not be fully aware of is this: Now, for the first time in many years, the money-printing central banks around the world are running smack into the natural — and totally unsurprising — consequence of their actions:
The Looming Specter of Surging Inflation
Just last week, the UN's Food and Agriculture Organization (FAO) announced that global food prices rose in March for a third successive month, putting food inflation firmly back on the economic agenda.
And never forget: About one year ago, it was surging food prices that gave rise to the wave of civil unrest now known as the Arab Spring. It was also surging prices that helped fan the fires of the protest movements that swept through Europe at around the same time. And the U.S. was not immune, as similar protests erupted here.
But it's not just food. Overall consumer price inflation is rising steadily in Europe, the U.S. and in most emerging markets.
And what's most remarkable is that it's rising DESPITE faltering recoveries and even outright recessions!
Sure, for those of us who vividly remember the double-digit inflation of the 1970s, today's inflation rates in the neighborhood of 3% or even 4% may not sound like much.
But just remember this critical fact: Back in those days, the global economy was booming. Today, it's doing precisely the opposite!
And this is not just a debate for ivory tower theorists; it's a hard-nosed double-whammy for billions of people around the world:
- No improvement in wages due to the weak global economy, and at the same time …
- Surging costs for essentials like corn, soybeans, gasoline and heating oil.
That's the main reason protest movements spread across the planet last year … and why an even bigger wave of revolts could strike again this year.
All This Leaves the Central Bankers of the
World Between a Rock and a Hard Place.
Right now, most investors are still on a money-printing high, absolutely giddy with the drug of free money that's flowing through the bloodstream of financial markets around the world.
So whenever central bankers so much as hint about the future possibility of backing off from their money-printing binge, those investors suddenly suffer convulsive withdrawal pains.
Look at what happened last just last Wednesday, for example!
Did the Fed announce a hike in interest rates? No!
Did it change its official statement regarding how long it promises to keep interest rates near zero? No!!
All the Fed did was to make one tiny, inconsequential, word change in its regular minutes: Instead of "a few members" favoring more stimulus, it was noted that "a couple of members" favored more stimulus.
Yet, that's all it took to send shock waves through the financial markets.
Investors exclaimed: "Oh no! Some guy at the Fed is thinking about holding back the next big dose of our favorite drug (free money)!"
The Dow plunged.
Meanwhile, in Europe, investors responded with similar panic when they heard rumors of inflation fears creeping into the ranks of the European Central Bank (ECB).
"If the folks at the ECB start to get more worried about rising prices," they reasoned, "then they'll be less willing to continue doling out unlimited quantities of free money. Our sovereign bonds will be toast!"
These fears hit the markets so swiftly and with such great fury last week that ECB President Mario Draghi was forced to do what all government officials due in times of panic: Deny, deny, deny!
With his hands washed spotless and his visage peering from the shadows …
He denied that the ECB was going to back off from their support of Spain (with endless money-printing).
He denied that they were going to be any less vigilant in preventing inflation.
And he denied that there was any contradiction between those two denials.
Right. So if you pour gasoline on a fire with one hand, while holding a fire hose in the other, that makes you a hero, saving the world from the next big conflagration?!
In fact, it's becoming increasingly obvious that world's central bankers are not even achieving the lowly goal of kicking the can down the road.
Quite to the contrary, they are painting themselves into a dangerous corner from which there is no possible escape.
They are setting the stage for a triple-crisis the likes of which we haven't seen since the heyday of 20th century banana republics.
We could soon witness …
- A massive sovereign debt crisis.
- A sinking global economy. PLUS …
- Spiraling global inflation.
All at the same time!
Good luck and God bless!
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.