TAKING STOCK: U.S. to Europe's rescue ... again

Dear Mr. Berko:

Is it possible to explain - simply - how the U.S. is lending money to Spain, Italy and other European countries so that they can pay their debts? How important is Europe to the world economy and the U.S.? Is this causing interest rates to rise in Europe, and will this cause interest rates to rise in the U.S.? Do you think this will cause inflation?

TR, Indianapolis

Dear TR:

There are about 500 million people living in the 17 European Union (EU) nations, and together they're responsible for a 2011 gross domestic product (GDP) of $16.8 trillion. The population of the U.S. is about 350 million and our 2011 GDP will be (give or take a few million) $16.2 trillion. So, basically, the U.S. worker is 50 percent more productive than the working population of the EU. The combined 2011 GDP of the world is $74 billion, and the EU is responsible for 23 percent of the GDP of the world.

Meanwhile, the Italian economy is collapsing, and Italian interest rates are zooming. Belgium's sovereign debt was recently downgraded by Standard and Poor's, as the Belgische economy is beginning to look like a train wreck. Hungary's bond rating was reduced to junk, pushing interest rates to a new high. The bond ratings of Spain and Portugal were also cut to junk, Germany had big trouble selling new bonds in early November 2011, France is on the brink of a downgrade by Moody's, Ireland's bonds were reduced to junk, and all across Europe, interest rates are beginning to rise.

Making matters a bit worse, S&P told Congress months ago that if the Super Committee did not offer a solution to the U.S. deficit, it would once again lower the rating on U.S. bonds. Fortunately, a few bloviating members of Congress warned the big shots at S&P that they would launch a "forceful investigation" of the firm for its failure to downgrade billions of dollars of sub-prime mortgages issued by Goldman, Merrill, J.P. Morgan, Bank of America, etc., if U.S. bond ratings were lowered.

And but for that threat, U.S. bonds should have been downgraded too. So with interest rates headed higher in Europe, some might conclude that interest rates should be higher in the U.S. But Ben Bernanke has other ideas.

Europe is in a recession because Italy, Spain, Belgium, Greece, Portugal, Hungary, etc., can't collect enough tax revenues from their failing economies to pay huge government-guaranteed pensions, womb-to-tomb health care systems and numerous union-designed social welfare programs dedicated to keeping the natives quiet. But the butcher's bill is coming due. Germany has had it; its voters refuse to pay for the foolish economic policies of its neighbors. France is barely solvent, and its economy is standing on eggshells. The failing countries don't have the Euros to pay back their banks, and the banks don't have enough euros to pay the very wealthy Europeans, whose capital funded those banks.

Meanwhile, the European Central Bank (ECB), which functions like our Federal Reserve, is so weak that it lacks borrowing power to give the EU banks the liquidity they need to pay back their very wealthy European investors. The very wealthy always get paid first - remember the Solyndra-Kaiser scam - so the noblesse de robe of the EU got together with the anointed of the U.S. and agreed that the ECB would sell bonds (that no one else would buy) to the International Monetary Fund, which has little cash, but a huge portion of which would be purchased with money provided by our Federal Reserve.

The IMF would then lend our Federal Reserve-supplied money to the governments of Spain, Portugal, Italy, etc., at 1 percent rates so that those countries would be able to repay the invested capital of their very wealthy European investors.

Oh, I should have mentioned that investors Bank of America, J.P. Morgan, etc., who own billions of failed Greek, Irish, Spanish and Italian bonds, will also be paid back. And when the borrowing countries get their houses in order, they'd be able to repay their banks, and their banks would be able to pay back the ECB, which would then be able to pay back the IMF, which would then be able to pay back our Federal Reserve Bank.

So the U.S. taxpayer has been given the honor of paying the pensions, the health benefits, the welfare costs, etc., of Europe's profligate countries, even though we lack the money to pay the same costs for our citizens. This is a short-term political fix for a long-term economic problem that will eventually implode.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

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Published: Wed, Jan 4, 2012