What Does a Trillion Dollars Buy These Days?

What does a $1,000,000,000,000 buy these days? Apparently not a whole lot, maybe a couple of weeks. Last weekend the leaders of Europe got together and pledged that amount to the weaker members as they struggle to keep the European currency intact. The chiefs said that it needed to be big and had to get done before the Asian markets opened on Monday to avoid a crash. Mission accomplished – no Monday crash and instead a pretty strong rally. Was the rally due to the trillion dollar bailout or due to a bounce from oversold conditions? We will never know.

One thing we do know today is that the Euro is lower today than it was last week. Maybe investors have figured out that there really was no trillion dollars. There is no money! All countries around globe, including the US, are running at a negative deficit. So to give a trillion dollars is in reality just a pledge to create more money out of thin air. Remember that no one can print their way to prosperity. Just as we can’t solve a debt crisis with more debt.

And what about the Americans? What is our take what is going on in Europe? The United States taxpayers through the International Monetary Fund pledged over $50 Billion to bail out the Euro Zone Countries. Aren’t we a philanthropic group? Some economists have been saying that our economy is recovering after our own private sector bailout, so why not be generous and help those Socialists that are less fortunate than us.

I guess I don’t get it. Do Americans not understand what is happening here? Are we so immune to big numbers that $50 Billion US Dollars to reward bad behavior in other countries is a huge burden on the 50% of us who actually pay taxes? We should be outraged. We should take to the streets. We all want to maintain our current lifestyle. However some appear to have a better lifestyle than others – on our dime (or our $50 billion whatever the case may be).

The U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund. That means we have a heavier debt burden than several of the overleveraged countries that we are bailing out. Portugal’s debt, according to the IMF, is 85.9% of its GDP; Ireland’s, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%.

Here is the well documented story. European Union members shocked markets Monday with the announcement of a one trillion dollar safety net, in an attempt to keep Greece and other heavily indebted countries from defaulting. It was assumed that a Euro sovereign country defaulting would cause the whole European Union to fall apart. This money won't create any jobs or build any roads or fix any bridges. It’s just the creation of additional debt to effectively dig a deeper hole.

Too big to fail not only applies to our big banks, but also now applies to outside nations and their debt. So everyone and everything is guaranteed everywhere. Has anyone looked at the balance sheets of the majority of states here in our own country? We need a good old fashion bailout right here at home. California and at least 20 other states need a bailout. I wouldn’t mind getting some bailout money – how about you? When will it end?

But before you start to feel good about this happy news, it is important to ask one simple question. Where do you suppose the trillion dollars is coming from exactly? Did it roll out from under the seat of their car? Did they collectively find some loose change in their pockets? Or perhaps they found a cool trillion in the jacket that they recently picked up from the Thrift store. Short term, they averted disaster, but someday investors will wake up to find that we bailed out a debt problem with more debt and that will have long term repercussions.

Their solution is akin to a consumer trying to solve their own debt problem by transferring debit balances from one credit card to another card with a higher credit limit. That tactic buys some time, but it does not change the fact that one still has a debt problem. The only way that a debt problem gets resolved is to cut spending and to allocate more income toward paying down the debt. If there is no real austerity imposed, moral hazard will soar. Why would anyone reform their spending patterns if Greece, the US bankers, and the like, keep getting their allowance even though they won’t clean their room?

The market reacted very positively to the bailout news on Monday and Wednesday. But by the end of the week the market started showing signs that it understands the unfortunate reality that printing more money is just not going to work. The market has other structural issues that are yet to be resolved. Experts still don’t have a solution to the mini crash that occurred last Thursday. Don’t kid yourself – without a fix this could happen again. The technical charts of the major indices look as though the market has broken. It is called a waterfall pattern or can be visualized as if prices fell of a cliff. Any fix for the market is like climbing up a waterfall, one can do it, but it won’t be easy. There have been 16 times that the Dow Industrials have rallied 400 or more points like it did last Monday. In every instance the markets went lower very shortly after. I just can’t rationalize how this time will be any different.

So what did the money buy us? The markets almost went on a full round trip this week. At one point this week the S&P 500 had rallied up 5.6% from last Friday’s close, only to finish the week only up 2 ¼%. We are still down almost 7% from the peak a few short weeks ago. Be careful! Nothing has been fixed – our problems have only gotten more costly. A trillion dollars more!