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The Daily Reckoning

As the debt crisis drags on, more questions

The financial moves that governments are making aren't enough to solve debt problems, at home or abroad

By Guest blogger / November 19, 2011

German Chancellor Angela Merkel and Britain's Prime Minister David Cameron attend a news conference after talks at the Chancellery in Berlin, November 18, 2011.

Thomas Peter/Reuters


Europe falls apart.

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Dow down again — 134 points. Oil back below $100.

We’re back in the USA after 5 months in Europe. What a delight it was to be Europe. It’s always a pleasure to watch something fall apart.

How far apart the Old World will fall, we don’t know. But it looks as though big chunks of the continent must be cut adrift…or the whole of it will sink.

Sometimes things come together. Sometimes they fall apart. You make money, generally, when they come together. When they fall apart, it’s harder. Because everyone begins to ask questions.

In a boom, question marks disappear. In a bust, they come back.

“What’s this stock really worth?” people want to know.

“Who’s on the other side of the trade?” they ask.

“When the check comes back marked ‘insufficient funds,’ who are they referring to, us…or them?”

The bond holders want to know if the Euro-feds are going to bail them out…the Euro feds want to know if the Chinese are going to bail them out…and the taxpayers want to know how long their pension checks will keep coming.

Angela Merkel gave an answer yesterday.

“If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen,” she said in a speech.

The question she was answering was when the ECB would step in to buy more bonds and bail out the bondholders. Apparently, that’s not a question worth asking, she says.

What the Germans really want to know is whether the Greeks and Italians can act like Germans. What the Greeks and Italians want to know is when the Germans are going to stop acting like Germans.

And what the French want to know is where to get a good piece of fois gras and a good bottle of Bordeaux.

And everybody is counting on something impossible happening. Governments spending has to fall…or at least cease growing. While tax receipts have to rise…or at least, cease falling. And the economy has to grow at 6% per year so that tax receipts can increase enough to support the level of debt. How does the economy grow at three times today’s rates with no boost from government spending…when everybody is cutting back, trimming debt and saving money? You tell us!

In America, there aren’t quite so many questions. Nobody doubts the full faith and credit of the US government. Not yet anyway. And nobody doubts the Fed will backstop America’s public debt…by printing as much money as it needs to.

Trouble is, the thing they count on to save them from having to ask questions comes with a whole bag of question marks too. When the Fed starts printing again, investors will begin to wonder how long it can continue…before all Hell breaks loose.