We are beginning to see the crisis shift to the government sector as we observe what happens in Europe.
They are trying to fight fire with fire in Greece, giving a debt-burdened country more debt to roll over previous obligations and finance out-of-control government spending.
What's ridiculous is the countries that are going to make the loans to Greece also have ample deficits and will need to borrow to lend the money, worsening their own financial condition.
I think politicians have misinterpreted Keynes and pursue policies that lead to huge imbalances.
Western governments borrow and spend in boom times and then double their efforts of borrowing and spending during recessions.
This leads to huge structural deficits like in Greece, the United Kingdom and even the United States. They can continue until the market realizes the risk in this lending and then interest rates spiral out control, worsening the fiscal situation to the point of default.
Central banks keep interest rates below the rate of inflation for extended periods of time, favoring overconsumption, creating asset bubbles, bad investments and speculation.
This also leads to a gradual debasement of paper money. The recent dollar strength is mainly because of the euro. Currencies like the Canadian dollar or Singapore dollar are strong. Hard assets like gold or oil are near their highs.
The gasoline tank that will cause the next worldwide financial fire is being filled. Europe may be the spark that starts the inferno.
Place your bets accordingly.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors.
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