Why GDP Is Useless and Deceptive: There Was No Recovery

By Jeff Harding

We have not recovered from the Great Recession and thus our current economic stagnation is less a new event than a continuation of the original collapse. The basis for the so-called “recovery” was a rise in GDP, that measure of what we have spent in the economy. It’s a fairly useless bit of data.

As we all know, GDP measures private Consumption, plus gross private Investment, plus Government spending, plus eXports minus iMports. It is a simple formula:

GDP=C+I+G+(X-M)

According to Ludwig von Mises:

It is possible to determine in terms of money prices the sum of the income or the wealth of a number of people. But it is nonsensical to reckon national income or national wealth. As soon as we embark upon considerations foreign to the reasoning of a man operating within the pale of a market society, we are no longer helped by monetary calculation methods. The attempts to determine in money the wealth of a nation or of the whole of mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramid of Cheops.

If a business calculation values a supply of potatoes at $100, the idea is that it will be possible to sell it or to replace it against this sum. If a whole entrepreneurial unit is estimated $1,000,000, it means that one expects to sell it for this amount. But what is the meaning of the items in a statement of a nation’s total wealth? What is the meaning of the computation’s final result? What must be entered into it and what is to be left outside? Is it correct or not to enclose the “value” of the country’s climate and the people’s innate abilities and acquired skill? The businessman can convert his property into money, but a nation cannot.

Human Action, 4th ed., p. 217.

At best GDP is a defective measure of a nation’s economic productivity. It isn’t as if the “economy” is a thing that produces stuff. Nations don’t produce anything, people do. I don’t know any business owner who uses GDP to tell him anything about his business. (I’m not talking about you traders.) Let’s face it, one can’t get any real important information by averaging the prices of Diet Coke and memory chips.

What does this mean:

Not much, yet that is what the GDP calculation does.

Let me give you another example of the problem in trying to measure economic growth. If GDP measures spending then, does the introduction of more fiat money into the economy represent organic economic growth or is it just a measure of the influx of new dollars. If we all wake up the next morning and find that our money has magically doubled and we go on a spending spree, does 2X spending mean that GDP has increased 100%? I think we know the answer to that. That is why economists and statisticians use deflaters to discount the impact of monetary inflation on prices. [1] As Rick Davis of Consumer Metrics Institute points out, the inflation rate Bureau of Economic Analysis uses for the deflater is behind the curve and if revised upward to reflect the current CPI-U, it would put GDP at a 0.73% annualized rate.

Even if you believe that you can measure “the economy” why does government spending get as much credit as private spending and investment? Talking about a deflater, it’s like comparing FedEx with the USPS in terms of efficiency and productivity. One could effectively argue that much of what the government spends is wasteful since they produce nothing. Yet, an important part of GDP spending measures.

That is why GDP doesn’t yield any useful information.

I don’t wish to get into the entire Austrian theory methodology (methodological individualism, as Mises put it), but it is an important concept in order to understand where I am going with this article.

The concept of GDP was developed during the New Deal by economist Simon Kuznets, a pioneer in econometrics. The New Dealers liked the concept because, as advocates of central economic planning, they believed they could control the economy and needed something to measure the efficacy of their meddling. Austrian theory economics rejects the notion of ”national accounts” and the government’s ability to “manage” the economy. This argument goes back almost 200 years, but let’s say that history has not been very kind to economic meddlers. Especially to Keynesians.

What it all comes down to is the Keynesian belief that a lack of spending is what ails the economy, and conversely, spending, any spending, is good for the economy. If we consumers aren’t spending enough, according to this idea, it is the duty of the government to spend in our stead. And if the government doesn’t have the money, it is OK to borrow and spend.

Economic growth doesn’t start with spending: it starts with saving and production and ends with spending. And that is why we should not rely on GDP to measure the health of the economy.

If spending were the key to economic growth, then, after running Federal deficits of more than $4.8 trillion since 2008, why haven’t we recovered? According to Keynesian theory, at least as defined by Paul Krugman, Brad DeLong, Ben Bernanke, Larry Summers, and Tim Geithner, it should have worked. Of course Krugman would say that we haven’t spent enough, but he always says that when evidence shows that it doesn’t work.

So when the conventional wisdom says that the economy recovered in June 2009, it didn’t. There are a number of other ways to measure this, and the dollar volume of industrial production and unemployment are two ways.

Here is an unemployment chart comparing various recessions:

Courtesy Calculated Risk

This chart shows that since the official NBER dating for the beginning of the recession, December, 2007, to the present, we have 41 months of high unemployment. Compared to past recessions we can see this event is far more serious. We are at 9.1% unemployment now, a rate that is far higher and far longer than in the past.

Another measure to look at it is industrial production:

The dollar measures of industrial output, especially the private ones (such as the ISM and NFIB business surveys), reveals that it is stagnating which doesn’t give you a warm fuzzy feeling about the “recovery.” While we have the same problem in measuring industrial production that we do in measuring GDP, it does measure a specific sector of the economy, (some) manufacturing, which is a capital intensive business, and is a fair proxy for capital investment.

Industrial production and unemployment measures are real indicators of economic health. So how can we have a recovery when unemployment is still very high and industrial production is falling?

The same factors that caused the so-called 2007-2009 recession still exist. Thus, papering over the problems with fiat money and stimulus spending just gave the appearance of economic growth but it wasn’t real. That is why we have economic stagnation: the problems were still there when the money stopped.

Stimulus spending and fiat monetary expansion don’t create organic economic activities. That is, once the federal stimulus spending stops or the money “printing” stops, the economic activity they supported stops. Whereas in the private sector, assuming a business is doing something right, customers will come back and the business continues, jobs are created, and profits are made.

The lesson to take away from this is that you can’t trust GDP numbers to tell you anything important about the quality of the economy. It is a fiction created by economists who believe that the formulas of econometrics is a valid way to understand our behavior. It is even worse than that because they use such data to further meddle with the economy by targeting interest rates, to set money supply goals, to formulate fiscal policy, and to pass laws they think will make the economy grow.

What they miss are the real causes of economic prosperity.

In order to make the economy grow again we need to liquidate the projects that were built on fiat money during the boom years. We need to liquidate the debt attached to these malinvested projects. It’s called ‘bite the bullet and take the pain.’ We need to build up new capital through savings so that we can invest in new productive enterprises and create jobs that aren’t built on money steroids.

This is what people (the economy) do when they aren’t being manipulated by government actions.

If you wish to place blame then start with the Fed and your federal government. High unemployment and stagnation are painful to real people, not the “nation” yet it is government policies that prolong the problems. That is a cruel thing to do to our fellow Americans.

If you made economic decisions on the back of these GDP reports, that would be a mistake. More often than not, these numbers are false flags of growth. You may have bought a home based on a tax credit last year only to find that your new home is worth less than what you paid. You may have been an employer who hired new staff members based on tax credits only to find that demand has not materialized. You may have bought commercial real estate thinking the economy had turned around, but you will find your turnaround period will be far longer than you thought. You may have bought financial assets such as stocks based on a market that was inflated by QE money, and as money growth slows down the markets will suffer.

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Important Battle at Four Dollar Copper

By DoctoRx, on June 28th, 2011

 

This multi-year chart of copper prices on the futures market is from Finviz.com.

Headlines are most often about stocks and oil. Special sites focus on precious metals, but they tend to be more fringe-y.. Almost never in the popular press does copper get a mention. But copper prices may well tell the tale of the coming trend of the current biflation. Will it tilt back toward more price inflation or away from it?

With oil having reached my first downside target of $90, I now have no clue short-term.

Unlike oil, copper did not go wild in 2008, and as you see, it surged and then crashed in 2006 before the mega-crash in 2008. Thus unlike oil, it is now within its 2006 price range. Short-term there is a bit of a bearish downtrend, but on a multi-year basis, I can’t discern any trend at this juncture.

Long called “Dr. Copper” for its alleged ability to “diagnose” (reflect) the strength of the US/global economy, this metal is not politicized as is oil. (NATO is not assisting in getting rid of Mr. Qadaffi because he controls 2% of the world’s copper market.) Thus it more fairly than oil represents supply and demand in diverse parts of the world’s economy.

As you see, copper found intense upside resistance for several years at $4/lb.

It then broke through to all-time highs in the inflationary sequelae to the 2008-9 bust. If $4 can hold, I think that would be big for the commodities bulls. If it falls back well into the prior trading range, that will embolden the deflationists.

It’s worth watching this one.

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Initial Stages of Global Stock Market Crash In Progress?

By: Steven_Vincent

Last week SPX appeared to complete an abc sideways correction. By Friday the index was heading back towards its lows and ended the day and the week just above critical support at the confluence of the 200 EMA and the uptrend from March 2009. The setup is for a potential gap below this support zone on Monday, which could then trigger sell stops leading to a cascading decline.

Commodities continued to lead to the downside, with Crude breaking lower and the Agriculture and Grains sectors breaking key long term support levels. Gold and Silver also broke down from key support.

At the same time, US Dollar Index closed the week above long term downtrend resistance and above the key 76.00 level. VIX hovered just below long term downtrend resistance and has yet to register significant levels of fear in the market.

Technical indicators moved back from oversold and excessively bearish short and intermediate term readings while long term readings continued to deteriorate.

Overall the setup continues to be for a major break of support and a dramatic acceleration of the downtrend. Whether this entails a strong C wave decline to support, similar to the March 2011 decline, or an outright crash, remains to be seen. Either are distinct possibilities.

Late in the week, governmental and monetary authorities made transparently desperate attempts to prevent the breakdown of asset market prices. First, the announcement of a Greece austerity plan was timed to the minute to prevent a break of the 200 EMA and fostered a short covering rally. Next, Obama attempted to stimulate the markets by releasing strategic petroleum reserves to drive down the price of crude oil which would presumably give the economy an across the board "tax cut". Neither of these efforts were successful as corporate and sovereign debt related news triggered additional selling. In fact the net effect of last week's volatile correction and the efforts at keeping the markets above support was probably to exacerbate the situation by expending scarce buying pressure from "buy the dip" traders and investors and short covering in a minor corrective range.

The fundamental news cycle has now shifted into earnings warnings prior to the official onset of earnings season on July 11. Negative corporate news out of Micron (MU) and others hit technology hard and grumblings are heard that companies will be pre-announcing earnings disappointments going forward.

Although European authorities and the IMF would have investors believe that the Greece crisis has been contained, evidence is mounting that Italy is next on the hit list. The downgrade of the Italian banking sector is likely the first salvo in an ongoing attack on Italy's financial stability. No doubt other countries are set to show cracks in the facade of their solvency soon as well.

In the following video I detail the current basic technical picture for global markets. Before viewing it you might like to also review my prior videos and blog postings in this series:

Stock Market Crash Possible Soon?

Global Markets Teeter Precariously on the Edge

As I have been saying for weeks now, the basic technical situation is quite precarious and even a cursory look at the charts of the major markets is enough to alert the open minded investor that there is major risk at hand. Yet even so, most analysts are focused on a perceived short to intermediate term "oversold" condition or an apparent "excessively bearish" sentiment picture. 

The major breakout on the US Dollar Index chart is perhaps the most important indication of that a rapid, dramatic shift from risk to safety is under way.

VIX would be the next big indicator to make a dramatic breakout. It appears to be ready to move.

At the time of publication SPX futures are down .45% in very early Asian trade and have broken the 200 EMA. Dollar is rallying and commodity futures are down across the board. 

Naturally, the market can prove us wrong at any time, and we should not get complacent or take our eyes off the ball. Any move above 1293 on the futures would be enough to get me to close my short positions and reassess the situation.

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How Does the Eurozone Crisis Boost Gold and Silver?

By: Julian_DW_Phillips

Over the last year, perhaps the greatest concern of the developed world markets has been the Eurozone debt crisis and its effect on the euro. It has brought into sharp focus the seriousness of a nation's debt situation. In the last decade, we have blithely accepted that a nation can issue debt and be safe from default. Over this last year, that perception has changed considerably, as nations have been seen to have excessive debt. Nations are not unlike individuals, in that if you have too much debt and not enough cash flow, you will go into liquidation. Likewise, a nation can go bust! Two years ago, the euro was seen as counter to the dollar.

Then, the start of the drama with Greece confirmed its horrendous debt situation... Then, the debt crises of Ireland, Portugal and Spain... Now Italy has been put on that list of potential defaulters.

The euro suddenly was not as safe as had been thought. In the last week people realized that the problem could grow and contagion spread to the extent that the E.U. was threatened. Some feel the euro is threatened, while others said, no, the euro will survive but with a changed Eurozone.

The reputation and confidence in the euro has been savaged by the whole process. It's not over yet. Gold and silver prices moved up on the bad news from Europe and have stayed there even after the Greek Prime Minister won his vote of confidence. Why?

 

Euro and Eurozone versus USD and U.S.A.

The Eurozone is a group of 32 sovereign nations, each with its own independent government, its own separate economy, its own national identity, language and character, each retaining its own sovereignty. It manages its own national revenues and politics all of which are independent of the Eurozone, while being part of it. In other words, unlike the U.S.A. there is no fiscal union. All people in the U.S.A. are Americans, speaking English. In Europe, they are first nationals and a distant second they are European. And that's why the E.C.B. doesn't have free rein to bail out Greece by itself. Each nation in the Eurozone is a stand-alone country still, despite having a common currency. Their unity is considerably weaker than that of the United States.

The euro is only ten years-old, having replaced national currencies at its inception. This achievement was remarkable, particularly because such a mixed bag of independent economies with different balance of payments now have the same currency. It is as if the Eurozone members agreed to fixed exchange rates between each other. The weaker nations who joined were fixated by the incentives and loans while the strong nations could stop the continual appreciation of their currencies against its customers (Germany transacts 40% of its business with other E.U. members). This has allowed them the make huge strides as manufacturer to Europe. It also attracted a good bulk of the poorer member's capital to Germany where it could be invested in efficient industries. The poorer nations faced the opposite capital flows. Structurally, there had to be the strains and the crises we see there today.

Every state in the U.S. is part of one country, with one economy under the Federal government. In the States there is a fiscal union, the state's revenues being passed onto the State coffers and Federal taxes, etc, being passed to the Treasury of the United States. That integration has served the States well and ensured its self-sufficiency, but has not avoided some of the crises that Eurozone members are facing today. Many of the individual States are also bankrupt, but many will be bailed out by the Federal government.

One major difference is that the U.S. government debt has a 'ceiling' of $14.3 trillion dollars that needs to be raised urgently. Should it not be raised, but sacrificed on the altar of partisan politics, it too will face the loss of confidence the euro has suffered to date. We all know that U.S. debts will be paid, but the loss of confidence and trust in holding to debt obligations will be irreparably damaged in the eyes of foreign lenders and banks. The Eurozone crisis has placed this U.S. problem in the same light as the Eurozone debt crisis now.

The major common denominator between the two sides of the Atlantic is that debt obligations are not being held to as contracted. How can confidence remain high in these nations and their currencies if debt obligations are treated so badly? It is this loss of confidence and inherent value that lies at the bottom of gold's inherent value!

 

The USD Will Follow the Euro

For so many reasons, we at Gold Forecaster and Silver Forecaster have discussed over the years, the U.S. dollar is structurally dependent on foreign capital investments to keep the dollar stable on foreign exchanges. So long as it is the dominant superpower - able to ensure oil is priced in the dollar - the importance of the structure of the U.S. balance of payments was not of great importance. With the declining value of the dollar on global foreign exchanges and the rise in importance of China and the other emerging (and surplus earning) nations, the U.S. debt crisis has become considerably more serious outside the States than inside it. It is the outside value, or the exchange rate of the dollar, that impacts gold and silver prices.

Likewise, in the Eurozone debt crisis, it is the value and reliability of the euro outside of Europe that will affect gold and silver prices. The consequences of being over-borrowed are, the currency cannot represent stable value. Their failing to do so reflects positively on the ability of gold and silver to do so.

One key similarity now being reached in both the Eurozone and the States is the battle between finance and politics. In the U.S.A. partisan politics is holding government debt ceilings to ransom. Now in Greece, the debt crisis has moved from acceptance by the government to do something to this week's vote on the political acceptability of the austerity measures. That reaches into each M.P.'s constituency and down to each voter. That's key for politicians who will be driven by potential votes rather than by financial sanity. We do feel that an elected official will take a foolish course, if it gets him votes.

So if politics rules finance (and the banking system) it will affect the value of a currency. When we are talking of the 'value' of a currency, we have to include reliability, trustworthiness, the certainty that national debts will be paid on time. Once a nation has lost this, that facet of their day-to-day operation becomes risky and a deterrent to foreign investors. The exchange rate won't reflect this until the reinvestment of foreign capital in those nations starts to drop. But this will only happen when there are viable alternatives.

For instance, we are very certain that once the Chinese Yuan is a global currency, a huge flight of capital will attempt to convert from the dollar and euro to the Yuan. Likewise the position of the dollar as the prime oil pricing currency may wane fast. Once these consequences are included in the pricing of both the dollar and the euro, we will see an ebb tide of investors moving to other currency homes. More importantly the value of both gold and silver as an alternative to the dollar and the euro will be appreciated all the more.

 

Gold and Silver Promotion

When any of the above situations - whether local or international - strike investors, they move into an investment that won't be hurt by such currency crises. Because of the ripple effect of these crises, many of the markets will be avoided. If a currency falls in value or trust, so will those markets dependent on it. Most assets in that scene will appreciate, unless their performance is affected by the falling currency. So a haven is sought that is outside the sphere of influence of currencies.

Gold and silver do fill that category, gold far more than silver. Gold is both an internationally-traded asset and a currency. It is not hurt by a government failing to keep its obligations. It can be paid over by a government when that is all the government has left.

 

A Change in the Tide

Once the credit crunch hit hard, we were reminded that a national currency's performance was linked to its economy, which meant its value depended on its performance and size and was not necessarily related to its underlying value. When quantitative easing began, it became clear that its value lay in the hands of central banks. Their primary task was to maintain price stability internally; however, this role soon extended to supporting the banking system, maintaining the nation's creditworthiness, and stimulating the economy.

From 2005 onwards, the gold price steadily rose to around $1,200. In the credit crunch it dropped back to $1,000 because the frantic search for liquidity caused a sharp sell-off of all assets including the ones that were performing well.

This left a massive gap in the instruments that would hold their value through the decades. Only assets that countered the value swings of all currencies could do that job. Once the liquidation of debt ran its course, investors turned back to gold and silver for wealth preservation. The new wealth of the emerging world added to that demand. In the emerging world gold and silver had and will always be thought of as providing value and financial security. After the worst of the crunch, the gold price resumed its rise, followed by silver.

To emphasize the wisdom of precious metal buyers, the signatories to the Central Bank Gold Agreements slowed their sales of gold to a stop in 2009/10 (this ignores the I.M.F. sales, which were executed for other reasons). Emerging nations, along with their public, began to increase the size of their purchases, taking the gold price up to $1,500 and silver to $35. Today, central banks are either buyers or holders of gold, reinforcing the idea that 'gold is money', as had been the case before currencies abandoned gold backing.

 

The globalization of gold markets removes control

Once we saw nations across the globe - nations like South America, Russia, India and China - buying and holding gold for their reserves, it was clear that gold was being globally recognized as a valued asset in the hands of governments. This turned a potential 34,000 tonne overhang above the gold market into an unlimited, potential group of gold buyers.

No more can the U.S.A. in conjunction with the rest of the developed world join together against gold with an oil-linked, un-backed set of currencies to keep gold on the sidelines.

China is very different than the developed world in this respect. China has been encouraging their citizens and central bank to buy gold for years now. They watch the monetary games and currency uncertainties with alarm. Why, on earth, would they want to support other people's currencies unless they had to? And why should they prefer these currencies to gold? The emerging world appreciates the value of gold in their reserves as a wealth-preserver too.

 

The Issue of Greece's 111 tonnes of Gold

In our next issue we discuss the subject of the 111 tonnes of Greek Gold in the debt bailout crisis. This should give the world guidance on where gold will fit into the evolving global monetary system.

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Greek Stock Market, the Moments Before Drowning

By: Barry_M_Ferguson

I sit. I watch. I contemplate. I observe. The stock market appears to have lost all sense of reality and logic. Maybe it never had any. Maybe it is just drowning and the current behavior is the moment before the drowning.

The Dow Jones Greek Index is a good barometer of investor behavior. When a person is perilously close to drowning, they will grab on to anything. There are a few seconds of desperate panic. The same holds true for investors. They will grab on to any story no matter how ridiculous it may be. The former nation of Greece is in the news almost every hour. They have debt obligations that they cannot repay and the ECB is going to throw them another $100 billion in bailout money to keep their debt off the default report. To be accurate, the ECB is going to give the $100 billion to the German, French, and American banks that hold the credit default swaps tied to the Greek debt in question. They just needed to figure out how to steal it from the Greeks.

Let me touch on one thing before we get to the chart. I referred to Greece as the ‘former nation’ of Greece. Since we are in a new era of government control and central bank intervention, we need new words to describe that which has no current description. The new word we need to commit to our vocabularies is ‘de-sovereigntized’. This is the result of a formerly sovereign nation surrendering to central banking mandates giving the central bank the authority to make laws in that country. The ECB, for instance, will now control Greece’s currency, taxation, debt repayment schedules, and business revenue collection. Greece has agreed to a ECB imposed austerity mandate in which the ECB will determine Greek tax rates, small business taxes, and monetary control. The Greek government no longer has control over key points that determine a nation’s real sovereignty. As a result, we can longer look upon Greece as a sovereign nation. They have ceded their autonomy to the ECB. They have been de-sovereigntized.

But stock investors don’t care about sovereignty. They rarely think about anything but making a buck. They rarely actually think! The chart below is the Dow Jones Greek Index. Why do I bring it up. Yes, it is down some 80% from its highs of a few years ago but I think it is a good example of a drowning market. Let us remember that Greece has a GDP of about $300 billion (US) and their economy is shrinking by better than a 4% annual clip. The government has already cut wages and benefits as the government controls more than 50% of the overall economy. The new austerity rules will increase the tax rate on the population by 1% to 5%. The threshold of income that begins taxation will drop from $12k per year to $8k per year. Even the poorest people will feel the oppression of higher taxes. Business owners will be accessed and extra $300 euro penalty for being stupid enough to own a business and hire workers. Like Americans to the American government, the Greek citizens are now enemies of the state. With that in mind, let’s look at the chart.

The long, clear candles from the last trading day of May, the third trading day of June, and those of the 16th and 21st were all four or five percent one-day gains. The all came on news that an austerity package had been agreed upon. The gold line on the chart is the S&P 500 so we can see that all indices basically move in the same direction these days. It is pathetic. It is mindless. It is thoughtless. It is a market in the last moments of the drowning process. Why would anyone buy Greece? They admit to be insolvent. Now taxes are going up. Wages are going down. Their economy is contracting. What kind of insanity drives people to put money in an investment like this? Are the last three trading days on the chart an indication of the trend to come? If so, the Greek index will resume its downward slide and most likely, so too with the S&P 500.

But wait! Here comes a life preserver. The IEA is going to release 60 million barrels of reserve oil. Of the 60 million barrels, the de-sovereigntized US will be responsible for 30 million barrels. The US no longer controls its currency or taxation. The currency is distributed through the Federal Reserve system and her taxes are deposited in Federal Reserve banks. 

Here comes a piece of drift wood. The Federal Reserve will continue to buy US debt and equity with maturing assets held on its balance sheet (now at $2.8 trillion). 

Here comes a piece of styrofoam. The government released some bogus data about economic recovery to excite us. 

Here comes a piece of plastic. The Plunge Protection Team is bloating up the indices in the last hour of trading. They popped up the Dow some 100 points in the five minutes that followed Greece’s surrender. 

Hey, we better grab something before we drown! Maybe the Greek index will float by...

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Graham Summers’ Weekly Market Forecast

by Graham Summers

This week we won’t be looking at charts, but instead discussing the most important macro issues that will determine the future trends of all asset classes.

Tomorrow Greece’s parliament votes on whether or not to implement more “austerity” measures, also known as cutting social programs and raising taxes. Greek citizens, enraged that they keep picking up the tab for banks (both domestic and international) that made poor bets on Greece, will be implementing a series of strikes and riots.

However, the facts remain the same. The world is awash in garbage debt. The only reason the banks and others haven’t taken the “hit” that they NEED to take is because they’ve bought out the politicians. Put another way, we are seeing clearly that the two primary principles of the West (capitalism and democracy) have both become jokes: alleged “capitalists” like the banks don’t ever actually see losses for mistakes and “democratically elected” leaders are in fact owned outright by the banks via donations/ bribes.

Greece, while ultimately a small player in the global debt game, will set the course of the rest of the financial world this week. If Greece implements more austerity measures, that the “extend and pretend” game will continue a little longer, the Euro, stocks and commodities will rise, and the US Dollar will fall.

However, if Greece doesn’t pass more austerity measures, indicating that the bailout/ stimulus nonsense has hit a wall, expect a serious “risk off” move in which stocks, commodities, and the Euro to take a hit, and investors rush into the US Dollar.

However, this will not be a simple one-way street. The EU, and now China are both committed to helping the failed experiment of the Euro continue its death march.

Yes, you read that correctly, China has committed to insuring that Eurozone debt holders don’t take a haircut. It’s even mentioned possibly buying European sovereign bonds outright.

The reasons for this a multiple… but ultimately they boil down to:

1) China wants to flex its “dump the Dollar” political muscles

2) China wants to support its primary export market.

China’s been warning about the US Dollar as an investment for years. They’ve lowered their Treasury holdings for five months straight and have even hinted they might cut their holdings by 2/3. So China’s move to support the Euro can be seen as a continuation of this “anti-Dollar trend.”

Regarding exports, the EU accounts for roughly $400 billion of China’s exports, making it China’s single largest export market. So if Europe collapses, China’s economy takes a BIG hit.

And all of these issues (China’s exports, the bailout madness, European bank debt holdings, Greece’s sovereign collapse, the future of the Euro, and stocks, commodities, and the Dollar’s trends) hang on Greece’s shoulders this week.

With that in mind, the Greece situation needs to be watched very, very carefully as all investments will trade based on this outcome and the subsequent interventions by the EU/ China. With that in mind, stay nimble and don’t over-commit to anyone outcome just yet.

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