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John Mauldin's Outside the Box

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  • The Death of Capital

    Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 BILLION in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees. Not sure what that translates into for Britain or Canada or Australia.

    I can swallow the Fed dollar swaps to the ECB. Don't really like it, but I can deal with it, as I don't think it will ultimately put US tax-payers at risk, as long as the swaps are in dollar terms. But the IMF bailout is just wrong.

    Interestingly, the euro shot up on the announcement in what was now clearly short covering. As I write this, it is almost back down to where it started. That seems to me to be a vote of 'I don't believe you.' We will see. But if the ECB actually goes ahead and floods the market with liquidity, that will be very good for all types of risk assets....
  • Government Debt Spirals

    I have been writing about sovereign debt risk for some time. Japan, Spain, Italy and Portugal are all facing serious fiscal deficits and funding problems within a few years. But Greece may be the first country to hit the wall. In today's Outside the Box, we look at a short column by Ambrose Evans-Pritchard of the London Telegraph on the problems facing Greece. Greece will soon be faced with deciding which bad choice to make among a very small set of really bad, difficult choices.

    And then we turn to a piece by Edmund Andrews in the New York Times about the funding problem facing the US. The US is going to have to borrow at a minimum $3.5 trillion in the next three years according to Obama administration officials, and it is likely to be much higher. And rates are likely to be rising. As Andrews notes "Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury's average cost of borrowing would cost American taxpayers an extra $80 billion this year." If interest rates were at the same level as a few years ago, interest costs on the debt this year would be $221 billion more than they actually were.

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