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The Daily Reckoning

The pain of restoring investor confidence

Americans and Europeans have bailed out banks, run public deficits, and added to debts. What will it take to restore investor confidence?

By Guest blogger / May 25, 2011

The Euro sign is seen in front of the European Central Bank (ECB) in Frankfurt, Germany, in this Sept. 2007 file photo. Would the ECB refuse to give Greece more bailouts?

Bernd Kammerer / AP / File

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Yesterday, the Dow continued to fall – down 130 points. Oil slipped lower too. And gold rose. Just as you’d expect. But two days a trend does not make.

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And what’s in the news this morning?

Europe left reeling as the people revolt against austerity measures,” says a headline in the TIMES.

Spain’s ruling Socialists got hammered at the polls. Borrowing costs are rising – pushing Italy, Spain and Greece closer to default. There is really no way out. The IMF – under DSK – made things worse by lending more money to governments that can’t pay it back. And now, day by day, the whole smelly pile of European government and bank debt gets closer to the fan.

Of course, debt deflation – writing down, defaulting, foreclosing – is what a Great Correction is meant to do.

In America, except at the household level, the authorities have been able to push off the moment of truth…apparently indefinitely. The feds have a ‘little technology called the printing press.’ And they’re ready to use it!

In Europe, it’s not so easy. The Germans don’t want to see their cash cheapened so that the lazy Zorbas, carefree Guidos, and sun-browned Rauls can continue to live in a style to which they have become accustomed.

Naturally, the Greeks are miffed. A Reuters report provides more detail:

…a large majority of Greeks reject more austerity, according to a poll published on Saturday, which also shows the ruling socialists losing their lead versus the conservative opposition for the first time since their 2009 election victory.

“Debt restructuring is not under discussion,” Papandreou said in an interview in Sunday newspaper Ethnos.

One year into its EU/IMF 110-billion euro bailout, Greece is struggling with weak revenues and deep recession, fuelling speculation that it will have to restructure its debt to pull itself out of the fiscal mess that triggered a euro zone crisis.

Everyone sees this tension between the strong center and the weak periphery as a ‘weakness’ of the European system. We see it as a strength. Not being able to debauch your currency is not a bad thing.

But over on the editorial pages of The New York Times, Paul Krugman tells us that austerity is a losing battle. He refers to people who call for spending cutbacks – in the US as in Europe – as the “pain caucus.”