Beyond the Cusp

June 22, 2012

Consequences for United States Bailing Out European Union Countries

The United States has already quietly taken the initial steps to assist in easing the financial problems being experienced by some countries within the European Union. This was done by, believe it or not, exchanging dollars for equal value of Euros thus tying the two currencies to the other to some extent. Who knew that the dollar was considered to be more stable a currency than any other in this crazy world. So, in order to repair this strength in the dollar, or for whatever reason the politicians and experts are claiming, we have exchanged straight up, charging no exchange fees, of dollars for Euros in order to share the pain. As for which side is sharing whose pain might still be up for debate but it is being sold as assisting the European Union through some rough periods with members’ economies ranging from imminent default to relatively healthy considering the current world economic situations. This will in effect ally the United States with Germany, possibly France and any other country with sufficient economic strength to support and pull the countries suffering from poor economic times, some claim caused by their overly socialist policies, without having any fall into default on their debts. The amount of funding this project will require is currently uncertain, we simply know that it is going to take more and more going into the future. The outlook seems bleak to us but some have said they see the light at the end of the tunnel. Some claim that light is on the onrushing runaway train coming at us in the tunnel.

So, exactly what are the risks being taken by the United States through stepping up to join in the efforts to save the Euro and the European Union from economic disaster? The most obvious risk is that it is possible that pulling the likes of Greece, Spain, Ireland, and possibly Italy and even France through to better times may be a futile endeavor that will simply pull everybody else down with the others. This may end up being the straw that breaks the camel’s back, or the investment that tips the economy into a ruinous spiral. What makes this even more risky is that neither Germany nor the United States nor any of the others who might be called upon to finance those countries in jeopardy will simply not have sufficient treasure to succeed and thus will simply collapse along with those they were supposedly saving. This is made evident due to the facts that in order to make the necessary loans to those desperate countries, the healthy countries are taking out loans as they do not have the money on hand. The United States already has budgetary deficits such that there is insufficient cash to pay for their own bills, let alone make loans to cover other countries’ shortfalls. This leads to the big question, where can the United States turn in order to get loans in order to loan the needy European countries. Who, in their right mind, would make a loan to the United States so the United States can loan the same monies to a country to which the loaning country would not make that same loan? Simply, why would China loan Greece money via the United States when they refuse to loan money directly to Greece; or for that matter even to the United States as things stand.

The simple answer is that nobody is going to loan more to the United States simply so the United States is enabled to make the same loan to a European country in danger of default. Now we have the United States already obligating themselves to assist the European Union’s weaker nations over their current problems by extending them new loans. The United States does not have the money for the loan and nobody is offering to loan the United States the necessary funds. So, what do you think those financial wizards in Washington DC have hit upon as the solution? Believe it or not, they are suggesting that we have another round of printing money under the guise of Quantitative Easing. So, here comes QE3, and no, that is not a new Queen Elizabeth Cruise Ship. Actually, a new Queen Elizabeth Cruise Ship would be both cheaper and very likely a better investment.

So, to give a quick overview of what it means when they say Quantitative Easing as the method to ease our budgetary needs or, as in the current so-called emergency, producing funding to loan as a bailout for the European Union Euro using nations experiencing fiscal difficulties and in danger of default, the mechanisms are that the Federal Reserve instructs the Treasury Department to print money which the Federal Reserve buys and then loans out. The reality is that the money is created electronically and simply added into the currency in circulation totals. This is painless as long as the new money does not gain velocity, another way of saying actually being spent in the economy. The problem comes when all this newly created money begins to be used by the banks to make loans and such which then places the money into actual circulation. Currently, the banks are sitting on most of the invented money resulting from QE1 and QE2. The money in QE3 will not be sitting idle in any banks; it will be used to pay loan interest from one country to another country. These transactions will involve banks but also will be made available to the crediting country to use to pay their debts and fund programs or pay salaries. This will place the QE3 into circulation rather rapidly and beyond the control of our Federal Reserve bankers or the Treasury Department. The result of this will be the beginning of sharper inflation and rising prices as the dollar will be devalued by the percentage of the QE3 totals against the current currency in the economy. This will very likely spark the banks to resume loaning in a more invigorated manner thus placing the rest of the QE1 and QE2 monies into circulation which will result in even faster rising inflation. So, the result of bailing out Europe will be higher prices here at home. Sometimes it pains to be so helpful.

Beyond the Cusp

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