Europe unraveling.

Yes, I have written about the coming unraveling of the European Union, but now that it is almost upon us, we need to look at its history and mechanism. Many of the words that are involved have histories and concepts in them that are at the heart of the matter. Such as, bonds, bunds, basis points and point spreads.

Bund is a word that refers to several things: 1. a way by the water or just a road; 2. an organization or group of people (root is 'banda' a Sanskrit word) and 3. German government bonds. There were Jewish bunds (East European Socialist groups) and National Socialist bunds (such as Hitler's). World War One killed off the flower of French, German and English youth and left these countries with inflated currencies (the war was financed by printing currency). Rather than devaluing their currency in comparison to gold, these countries decided to withdraw currency, which created a Depression that lasted almost to World War Two. Europe became Socialist: Germany ruled by the Nationalist bunds and England by Fabian Socialists, while the US came under the spell of the Democrats of Roosevelt (an offshoot of Fabian Socialism). In the East, Russia came under the rule of a very virulent rule of Socialism known as Communism or Bolshevism. The Bolsheviks got their name from the Russian word "bolshe," meaning greater. The Bolsheviks came to claim majority status in the population, mush as the 99% er "OCCUPY" crowd does today. The Western brand of Socialism (beginning in England and spreading to the rest of Europe after WWII) left most of the Capitalist system in place, but established income distribution through high taxes and government programs of medical care, education and welfare. The Eastern brand of Socialism expropriated the means of production and established central planning by the Communist Party.

Communism cracked up first. People who were good at achieving political power were not good at running businesses. Fabian Socialism in Europe and in America lasted longer, because it allowed those with the talent to run business to to just that. European Socialism is cracking up, because Europeans are further along than we are. Europeans, for example, have government-run free medicine, free education and government-run retirement. All these things required financing. Since, Western Socialism is anti-growth ( higher earnings jack up your tax rate and that means you work for the government redistribution), the government programs were paid for by borrowing money via issuing government bonds.

There are two kinds of government bonds: plain govt bonds denominated in local currency and sovereign bond, denominated in some other currency. When the EU was formed, members of the EU had accepted the Euro as currency, so all their bonds became sovereign bonds. That is why we read about the "sovereign debt crisis." Still, we see the crisis moving from Greece to Ireland to Portugal and now to Italy. Why? Because these countries must roll over part of their debt and the new bonds reflect their credit worthiness. How? Italian bonds are compared to the German bonds called 'bunds' and the rate of interest the Market demands is higher for the Italian bond than the German bund. The difference is quoted in 'basis points'. One basis point is 0.01% interest rate. Thus, if the Italian bond pays 7.0% and the German bund pays 6.5%, then the difference is 500 basis points. The graph shows how the difference between Italian and German bonds has skyrocketed.

What's the problem? As the spreads widened for Greece, the European Central Bank and the IMF stepped in to essentially become the creditors of Greece, so they would not default. With Italy under the gun, the procedure of rescuing Italy will be impossible. Why? Because the Italian debt is too big to finance without printing up a bunch of Euros. Why is a default bad? Because a lot of Italian bonds are owed by European banks and if Italy goes under, the European banks go under. Why can't the European Central Bank (the ECB) print up enough Euros to buy up the Italian bonds, along with the Irish, Greek, Portuguese and Spanish bonds? They could, but Europeans still remember what happened to the currency of Weimar Republic and they are terrified of the prospect. Can the Chinese step in? Yes they can, but they demand trade concessions Europe can not live with. Besides, China does not have enough money.

Is there another way out? That is what the French and the Germans are looking for. So far, they are thinking about kicking out the dead beats and essentially ending the EU. Unfortunately, the Scandinavian countries and Belgium are soon to get under the same gun as Italy.

Could the US help? Yes, temporarily. With the election of Barak Hussein, the US is now running a deficit of $1.4T and growth has slowed as various Socialist schemes and impediments to growth plague the US economy. If another $3T is added the US will go into hyperinflation.

The only way out is to cut back on government programs, reduce taxes and encourage growth. By now, the electorates are so brainwashed with the concept of "free" government programs that they no longer can think of providing for themselves. Besides, the Media and Academia are run by the Socialists and they keep up the propaganda. Short of transporting these people to another planet little can be accomplished.

Ironically, the Chinese Commies understand and China is growing by leaps and bounds.