European Crisis - 2011

The following was largetly excerpted from: GonzaloLira.blogspot.com

Most people are not aware of the importance of the current financial crisis in Europe. Please note: The current situation in Europe is over twice what 2008 was in the U.S.--and might end up being four times the 2008 price tag. The total sovereign debt of the PIIGS (i.e. Portugal, Ireland, Italy, Greece, and Spain) is about 3.1 trillion Euros. That's 20% of the eurozone's GDP-just the PIIGS, just those five, forget about France, Belgium and the UK, which if added up easily doubles that amount. Compare that to 2008, when the total toxic assets the Federal Reserve had to buy was about $1.5 trillion or 11.5% of the U.S.'s 2008 GDP.

We're structurally at the same place we were in 2008: Unpayable debts held by a fragile financial sector, with massive indirect exposure by way of derivatives that no one has bothered to tally up and regulate. Furthermore, like all good sequels, 2011 is going to have a bigger bang than 2008. What we've seen over the last couple of weeks is not the crisis. Rather, these last couple of weeks of market gyrations have been the forewarnings-the pre-tremors. The little tremors that precede The Big One, which is likely to happen over the months of September and October.

The Sequel will actually get going once Europe has its Lehman-like event. In 2008, the bankruptcy of Lehman Brothers triggered the crash but it was not the cause of the Global Financial Crisis of 2008. The structural weaknesses were already baked into the situation. The Lehman bankruptcy was just the shove the global financial system needed to fall off the proverbial cliff. Today, we are waiting for the Lehman-like event. More likely than not, the Lehman-like event of 2011 will catch us all by surprise. But just like the Lehman bankruptcy, it won't matter intrinsically. It'll only matter insofar as it triggers the cascade of panic-default-bankruptcies.

Unfortunately, the U.S. and European governments' and central banks' responses are severely curtailed and constrained, compared to 2008-we cannot expect the governments to save the day as they did in 2008.

Traditionally, Europeans have seen gold as their financial refuge, much like Americans consider U.S. Treasuries their financial refuge. It's not surprising then to see gold climb to record highs these last few weeks as Europeans seek their safe haven. When the Lehman-like event hits, gold should rocket past $2,000 on its way to $2,500 before the end of the year.