Preparing for storm ahead

Who is kidding whom about Europe? Or the United States, for that matter?

Collectively, Europe is broke. There's no way they will ever find the money to pay down their debts without crushing their economies. And it isn't just Greece or Italy. It's also France, and now Germany, because of the common currency, that are having trouble borrowing.

France has run deficits for 37 straight years and counting. The debts just get bigger, and even if there was an economic solution, the political will isn't there. Politicians campaign 24/7, starting the day after they win an election. The system is not designed for anything other than to throw money and entitlements at the voting populace. And when you have -- as Italy does, for example -- $2.5 trillion of debt and your interest rates go up by two percentage points, you are cooked. Your shrinking, unproductive economy can't handle the extra $50 billion a year in interest alone your debt now costs.

Italy's new technocrat premier rules out harsh austerity to shrink the deficit, preferring growth strategies. Good luck with that. He needs to fight ferocious economic headwinds just to create enough GDP to produce enough tax revenue to pay the extra carrying charges on the debt before anything else. It's not going to happen.

And haircuts for Italian bondholders, at least big ones, aren't in the cards. It's just too much debt.

The same holds for all of these European countries. There's too much debt. The money to pay it off doesn't exist. You don't need to be an economist to understand it. And frankly, economists are sometimes the least likely to figure it out. It's just common sense.

Does that mean the world is finished? Not at all. But big, powerful changes are coming. If dissolving the common currency is not in the cards -- and that's not an easy thing to do, even though some countries, like Greece, might not have a choice -- the only option is to create money to pay off the debts. This is something the European Central Bank can do, even if it requires changes to its mandate. And it's looking like the only solution if the Europeans want to save the euro.

Do they? The population doesn't. The Germans' average Joe doesn't. But there are powerful forces that do. German manufacturers aren't bellyaching too much about the euro, which is falling against other countries by the day. They are doing brisk business as their cars, trains and industrial equipment become cheaper to buy overseas.

The other powerful forces are the European Union bureaucrats. There's an army of them, all well-paid and taken care of. While the financial state of Europe deteriorates by the second, they're building a 300-million-euro building to house the offices of the president of the EU and all his functionaries. It's spectacular.

Make no mistake: These bureaucrats wield a lot of power, and they have zero interest in seeing the euro or the eurozone break apart (if the currency goes, the rest will likely follow). Who will hire them if this happens? Who will pay their pensions?

So assuming Europe is serious about saving the euro, and Germany is waiting for the rest of the continent to blink before it agrees to anything, the continent will have to start printing euros by the hundreds of billions to pay down debts.

And what happens when you print money? You get inflation -- lots of it. As I said earlier, the United States is not immune to what's happening in Europe. Eventually, attention will turn to America, which, let's not forget, saw its credit rating downgraded recently.

If Europe and the United States start printing money, which seems inevitable, you don't want to own money. You want to own hard assets and stocks. Gold, some real estate, good shares.

The problem with this advice is we could get another sharp correction in asset prices before the printing presses start to churn out money. So if this argument makes sense to you, start preparing. But keep some money in cash in case the opportunity to buy assets cheaply arises.

Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at fabrice.taylor@gmail.com

Republished from the Winnipeg Free Press print edition December 3, 2011 B19