Bank bailouts: 'It's absurd economics. It's absurd morality'

After trading above $1640 an ounce last week, the price of gold fell after hopes for another round of quantitative easing was quashed when US Federal Reserve chairman, Ben Bernanke, failed to provide any hint of further monetary easing in his testimony on Thursday. However, on Friday prices rebounded as there were talks of an imminent bailout for Spain's banking sector. Then, on Saturday, Eurozone finance ministers agreed to lend Spain up to 100 billion euros ($125 billion) in order to prevent the Spanish banking sector from collapsing. After a 2 1/2 hour conference call of the 17 European finance ministers, Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

Spain has now become the fourth country to seek assistance since Europe's debt crisis began. With the rescue of Greece, Ireland, Portugal and now Spain, the European Union and International Monetary Fund have now committed around 500 billion euros to finance European bailouts.

If anyone remembers, as recently as May 28, Spanish Prime Minister, Mariano Rajoy, flatly rejected any chance of outside help for distressed banks crippled by a huge exposure to the collapsed property sector. "There will be no rescue of the Spanish banks," he said.

Economy Minister Luis De Guindos said $15 billion would solve the problem. The former Spanish Prime Minister, Jose Zapatero, often vehemently denied that Spain had any financial problems. And, do you remember the former Prime Minister of Greece, George Papandreou, who on numerous occasions stated that Greece did not need any financial aid.  Emilio Botin, chairman of Spain's biggest bank, Banco Santander, told the world, "There is no financial crisis in Spain." And, more than two years ago, there was the former finance minister of Ireland Brian Lenihan, who stated that Ireland was in no need for a bailout.  This pattern of outright lies and deception has become the accepted norm with our current leaders.

As I have mentioned countless times one simply cannot trust the words of our current politicians. And, the one thing you can bet on is the opposite of what they. Recently, former Greek Prime Minister George Papandreou predicted that Greece will stay in the Eurozone and that the austerity measures required by the nation’s bailouts might be eased.

“We can have some modifications to the program,” Papandreou said in an interview with Bloomberg Television.  “Whether we can stretch out the fiscal adjustment for another year or so will take a little bit of pain out.”

Greece has “a few weeks” before its government runs out of money so this is “a make-or-break period,” Papandreou said. A Greek exit from the euro would result in hyperinflation and bank runs as well as lower growth and wages, he said.

Since this is the very same person who said, in 2010, that Greece is not in any financial difficulties, I take his comments to mean that Greece will most definitely exit the Eurozone and that a plan is being discussed right now.

In the meantime, Spain is to receive funding from either from the Eurozone's temporary rescue fund, the European Financial Stability Facility (EFSF), or the permanent mechanism, the European Stability Mechanism, which is due to start next month. Finland said that if money came from the EFSF, it would want collateral.

The EFSF was formed in May of 2010 in order to help solve Europe's sovereign debt crisis. The EFSF issues bonds or other debt instruments to provide loans to the countries that need them. The loans are guaranteed by other 17 countries in the Eurozone which includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.

It's important to note that these bonds are loans, not hand-outs. The loans must be paid back with interest. If a country that receives an EFSF loan defaults on its payments, then those countries who guaranteed the loan become responsible for the debt.

While Spain would join Greece, Ireland, and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.

The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3%  of GDP because of a deep recession. If you believe that this amount needed by Spanish banks is going to be sufficient and that they can reduce their budget deficit to below 3%, or that this is the end of the Eurozone debt crisis, then you also believe in the tooth fairy.

At the moment Spain has almost $2 trillion in debt. Unemployment is at 25% with youth unemployment at 51.5%! Housing prices are down 30%. Bad loans on held by banks are at 8.4%, the highest since 1994. GDP will shrink 1.8% this year. So there's no possibility for Spain to grow its way out of debt.

According to Jim Rogers, bailing out ailing financial institutions adds to debt burdens and gives policymakers wiggle room to put off making tough decisions like paying down debts.

"It's nothing more than pushing the thing out into the future. It's making the situation worse. The solution to too much debt is not more debt. This is the most insane thing I have ever heard," Rogers told CNBC.

"It's going to make the collapse, when it comes, even worse. You should be not careful, you should be worried."

"What we are doing in the West, we are taking the assets from the competent people and giving them to the incompetent people and say 'now you compete with the competent people with their money.' It's absurd economics. It's absurd morality."

This global mountain of debt is going to continue to expand because to a politician or a banker, the answer to a debt crisis is always more debt.  So far, all the bail-out programs as well as the huge quantitative easing programs of the US Fed, the ECB, BoE and BoJ have saved numerous financial institutions from total collapse, but have done nothing to stimulate the deteriorating economies in the Eurozone. And, as unemployment rises, and GDP growth contracts, they will be forced into providing additional stimulus, or in real terms, “print more money” which will lead to the debasement of their respective fiat currencies relative to hard currencies.

Investors are therefore urged to seek alternatives to paper currency to store their wealth for the future. And, in such a challenging investment environment, they would do well to accumulate physical gold and silver


Gold prices hit resistance against the 50 day MA at around the $1600 an ounce level. This is the next key resistance that needs to be breached before we see further upward momentum.




About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.