Anyone who’s keeping tabs on economic news has certainly heard of the ongoing debt crisis plaguing Europe. Many countries in the Eurozone (…countries that comprise the European Union) have staggering debt levels, some of which are well over 100% of the entire country’s Gross Domestic Product (GDP).
Problems in Greece have been ongoing for quite a while. Several bailout packages have been authored by the European Central Bank (ECB) and International Monetary Fund (IMF), forcing the Greek Parliament to institute austerity measures.
These ‘austerity’ measures have led to mass protests in the tiny country. But considering Greece constitutes only 2.5% of the entire Eurozone economy, the effects of a Greek default would not likely be felt here in the states.
Italy on the other hand is much larger. Their sovereign debt is over 120% of its GDP in fact, which is considerably unsustainable. In a recent bond sale, rates soared to over 7%, which is an unsustainable rate to pay when your country has so much debt. According to official figures, Italy has to refinance 300 billion euros of its debt to remain solvent.
These dramatic fiscal problems have served as the impetus for leaders in both countries to resign.
To try and address these problems, the ECB and IMF have been attempting to recapitalize banks who’ve loaned money to these governments. Much like the financial crisis here in the states in ’08, the ECB at the behest of their two largest member countries (France and Germany) have been printing cash in order to try and avert disaster.
Leaders in these countries have warned Europe and the U.S. could see a severe contraction if any of the so called ‘PIIGS’ countries (Portugal, Ireland, Italy, Greece and Spain) default on their debts. They contend that if something isn’t done, Europe will totally collapse.
German Chancellor Angela Merkel has said Europe is facing its worse crisis since World War II.
Bigger storms in Ireland, Portugal and Spain also threaten the Eurozone. If the crisis gets big enough, it could bleed over to the U.S. economy since many banks here in the states are exposed to these risks. Considering recent history, this could lead to another bailout from the U.S. Federal Reserve.
A larger sovereign debt crisis in Europe certainly has led to many analysts to predict the U.S. will once again slip back into recession in the early part of 2012.
In response to this situation, many investors have flocked to gold as a safe haven with the yellow metal nearing $1800 per ounce.
Bayram Dincer of LGT Capital in Switzerland comments “Gold is responding to the general market mood that the European crisis will develop much worse before it gets better.”
What affect all of this has on gold is really dependent on how governments and central banks react to the situation. If the U.S. Federal Reserve gets involved and bails out Europe, it will certainly be inflationary and lead to higher gold prices.
(As you know from a prior post, inflation is simply an increase in the money supply. Higher prices are the symptom of inflation, not inflation in of itself.)
That’s why we strongly urge folks here to be ahead of the curve and buy gold bullion and other metals like silver to protect the value of their wealth from the ravage effects of inflation.
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