Spain isn’t really any worse off than it was three, six or twelve months ago – why is the market reacting now?
You may remember my post on Mr Market and how is playing us all for chumps. The market is always right, but only in the longest run. In the short run, it will be as abberant in its behaviour as the people that make it work – bankers, brokers, investors, hedge fund managers and the like.
It is also subject to movement that is more dependant on the amount of money looking for things to invest in, rather than smart decisions on the individual things that can be bought and sold. With central banks all over the world printing money and creating liquidity, this is a major force that somewhat “prevents” the market from acting more rationally.
Perhaps this explains why markets only sporadically wake up to the realities facing the European banking sector and the sovereign governments. Last week the markets rallied substantially and debt yields fell. This week, Spain has reached record highs in how much it has to pay to borrow money.
But Spain has not become appreciably worse in the course of a week or even the month since the last big EU debt deal for Spanish banks. Nor has Greece really changed trajectory from its last bailout.
The fact is that only the most extreme solutions (debt federalisation, for example) have even a small chance of saving the euro from a technical perspective. However, those solutions just cannot be implemented in the democratic structures that we have – which is just as well because it is not clear that saving the Euro is actually a good use of resources in the long run.
The Euro will be dragged kicking and screaming to its slow death, when a swift and ruthless execution was needed. The resources poured into saving the Euro will accrue to the private rich and elite, further skewing income inequality. Remember – all money goes somewhere. But whilst the banks and hedge funds are gladly manouvering to take advantage of this, there is no conspiracy. This is cock-up. At your expense.