Doubling Down on Stupid

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As I noted yesterday in the Macro Minute, the stock market rally is due to nothing more and nothing less  than the expectation that the a 3rd round of quantitative easing is coming…

It is not by any means, as some reports said, a result of Europe getting its act together…

In fact, Spain has now requested bailout funds—begged really—and is finding no love from the Eurozone…yet.

They may have more luck with the IMF...or even the US.

A US bailout of Europe?

It is a possibility.

And just to make sure that no one misses the point, there is talk from many quarters—from CNBC to Forbes—about having the US bail out Europe…

Because Europe, apparently, lacks the ability to take care of itself.

And quite frankly, that does ring true, doesn’t it?

But really, if Europe can’t--or won’t—take the necessary steps to save itself, does that mean the US should?

To what end?

First of all, can the US really bail out Europe anyway, or even afford it?

Sure, it’s just a matter of creating more dollars…

Bernanke can surely do that, can’t he?

But just because we can do something doesn’t mean it’s the right thing to do or that we can even afford it…

I’m highly doubtful that we can afford our own bailout plans…

But as far as Europe is concerned, just what will a US bailout accomplish there that it hasn’t here?

And, the fact is, Europe has been infantilized by relying on the United States to protect it since 1945...

Or 1917, if you really want to get technical about it.

This has allowed the Euro-socialism to be paid for by none other than the USA, since they didn’t have to pay the price of defending themselves.

Fast forward to 2012, and here we are, talking about saving Europe again—this time from itself.

The argument goes like this…

If the Eurozone collapses, then the US economy will be hit hard as well. A Eurozone will throw the entire global economy into recession if not a deep depression.

So the bottom line is that either way, the US will pay for what happens in Europe, so we may as well pony up the cash now to fix it while it’s fixable.

Follow that?

But, a question or two is in order…

Why do some think that a US bailout of Europe will work?

Again, has it worked here? Is the US economy on the fast track to recovery in the wake of our own bailouts? Is unemployment falling?

No one can tell you that the economy is in recovery and keep a straight face, because it’s not.

So far, the bailouts from the Fed I the forms of QE 1 and 2, and of course Operation Twist—which could be counted as QE 3—hasn’t helped the economy, only the banks, some large corporations, and Wall Street firms…

And anyone else who owns stocks. But it is clear, is it not, that the rest of the US economy has not benefitted from it.

Stimulus limits

But that’s not news, is it?

As I pointed out in yesterday’s The Gorrie Details, Bernanke wrote a paper in 1988 showing that stimulus wouldn’t work because by getting “earnings” from an outside source would only stifle banks from lending because they wouldn’t need to.

And that has certainly been the case and continues to be.

But why let the facts get in the way of a bailout ad infinitum?

Another question: What makes people think that Europe would accept US “help” and the political strings that would certainly come with it? Wouldn’t it just make us the bad guys?

That’s a role better suited to the Germans, don’t you think?

Ah, but the Germans don’t want to be the bad guys—but they’re not thrilled about being the good guys right now, either.

The thing of it is, even if Germany wanted to, it couldn’t save the Eurozone by itself…

The European Central Bank would have to inflate—that is, create more euros a la the Fed—in order to put the needed amount of money into Spanish banks…

But again, given the result of that policy in the US, will it even help Europe, or just lead to rampant inflation, or even hyperinflation in Europe?

It is likely that hyperinflation will be in the cards, just as it is here…

And that is just what Germany fears most.

It is what we ought to fear as well.

As I write this, Ben Bernanke is a few hours away from making an appearance…

Will he announce another round of QE? I think it likely, and so does the market. That expectation is already priced into the rally…

So if it doesn’t happen, expect the market to crater. But I fully expect another round to be announced and to be put in over the next 6 months…

As I have said in earlier Details, Bernanke will work with Obama to support the market, because that is all that he can support…

The problem he faces?

Adding in another round of quantitative easing may have already has its effect before it even arrives.

And Europe?

If “we” decide to go down that path, well, it’s doubling down on stupid…

A bet not worth taking with a low upside and a horrible downside.

And those are…The Gorrie Details.

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4 Comments

1. 

   Surfer Dude

   June 8, 2012 at 5:52 pm

   I have been reading your REPORTS for About 3 WEEKS NOW! Its a SHAME that the Amount of COMMON SENSE in your Articles doesnt have a Far Greater range of INFLUENCE or reach in CIRCULATION! You do an Excellent Job of getting to the Important "CORE" Issues of ECONOMIC Problems and Situations. Also, NO "Fancy-Schmancy" Economic Jargon,as they said in that OLD TV Program "Just the FACTS mam" lol KEEP IT UP!!

   Reply
   • 

     James R. Gorrie

     June 11, 2012 at 3:45 pm

     Thanks for the kind words, surfer dude. Help spread the word. JRG

     Reply
2. 

   Peter

   June 8, 2012 at 10:37 pm

   Aren't you missing something here? If I remember correctly it was the US that caused the 2008 mess and still have not learned how to fix the cause!!
   But as far as Europe is concerned, just what will a US bailout accomplish there that it hasn’t here?

   And, the fact is, Europe has been infantilized by relying on the United States to protect it since 1945...

   Or 1917, if you really want to get technical about it.

   This has allowed the Euro-socialism to be paid for by none other than the USA, since they didn’t have to pay the price of defending themselves.

   Fast forward to 2012, and here we are, talking about saving Europe again—this time from itself.

   Reply
   • 

     James R. Gorrie

     June 11, 2012 at 3:47 pm

     Peter,
     Not sure where your disagreement with me is...

     Looks like you we're on the same page.

     JRG

     Reply