ITALY Bailout Announced ???

[Trevor]

I don't know precisely what it was in the 1970's, but our bond yields are at record lows and yet the part of the budget dedicated to debt interest is nevertheless skyrocketing. If our yields reached European levels, we'd be screwed.

[Reality Check]

Italy and Spain complain about extremely high interest rates killing their economy.

Seven percent is not extremely high.

In fact, by historical standards it is not even high.

About 1980 I took $6,000 I had saved from my paper route and invested in a 20% second deed of trust for 3 years.

If the US had a 7% interest rate now, then the interest on the US government debt would be clearly unsustainable. They are printing money so fast that eventually we will get inflation higher than 7%. So interest rates will go higher or the Fed will be the only buyer of debt, and print even faster. All it takes is for the velocity of money to stop going down.

When you say "then the interest on the US government debt" you are talking about the amount of money the U.S. Government pays in interest each year.

That amount of interest the U.S. government pays is the product of multiplying the Total amount of government Debt that has interest payments due, by the "weighted average interest rate" on that debt. The total such U.S. government debt is now in excess of $16,000,000,000,000.

Even if interest rates on new government debt and refinanced government debt were to go up to 7% for new debt tomorrow, the "weighted average interest rate on all accumulated debt" would not go up to 7%.

My point here is the problem in both Germany and Italy is the same. The size of the total accumulated debt is the problem, not an interest rate of 3%, 5% or 7% on new debt and refinanced debt.

Germany has a huge Gross Domestic Product supported in part by robust exports to countries like Italy, France and Spain using money borrowed by the Italian, French and Spanish governments that allow citizens of those countries to buy German goods.

Germany's total accumulated government Debt ( as a percentage of German GDP ) is not a whole lot less, than Italy's total accumulated Debt as a percentage of Italian GDP.

Going to Euro wide government bonds and government deficit financed stimulus spending in Italy, France and Spain will kick the can down the road a while longer for Germany by keeping those exports flowing to Italy, France and Spain for a few more months or even a few more years. After all it is German "weighted average interest" on it's total accumulated debt that is important, not it's current interest rate on new and refinanced debt.

At least that will be the justification by German elites if they elect to go that route.

[Reality Check]

Problem with the current Euro Plan to save Italy and Spain ( by common Euro bonds, and deficit funded stimulus spending ) is three fold:

1. The Italian Prime Minister may be correct, they must implement it very quickly to avoid reaching the point of no return for the economy in Italy. The EU elites can simply not move that fast.
http://www.telegraph.co.uk/finance/fina ... -deal.html

2. Greece is past the point of no return; Greek society is collapsing; and the Greek economy is collapsing; The whole world will see where Spain and Italy are headed by watching Greece, which in turn may make the collapse of the Spanish and Italian economies a self fulfilling event, regardless of how fast the EU acts.
http://www.ft.com/intl/cms/s/0/e79024a2 ... z1yXqHIEHg
http://www.huffingtonpost.com/2012/06/1 ... 97077.html
http://www.dailymail.co.uk/news/article ... -last.html
http://www.breitbart.com/Big-Peace/2012 ... -Attention


3. The Euro Zone will announce they are going to do things to help Greece, but at this point nothing they can do will help Greece. Greece will get much worse and the Euro Zone will appear powerless to help any country.

[Trevor]

It's a bit difficult to help Greece when they're in recession as well and now they have Spain and Italy to worry about. They're still saying: "We're fine, we're not going to need a bailout" but we've heard that song before.

[Reality Check]

It's a bit difficult to help Greece when they're in recession...

If you read the above links you will note that Greece is not just "in recession".

[Trevor]

I was referring to Europe as a whole. I'm well aware that Greece is in a death spiral.