Tuesday, May 13, 2014

Bond Bubble in Europe's Periphery?

Re: A Bond Bubble in Peripheral Europe?

Open Europe's Raoul Ruparel asks an important question and hints that the answer is YES.  To much self-congratulations the nations of peripheral Europe have been selling their sovereign bonds at very low interest rates.  Let's all party hearty, right?  No need to reform dysfunctional economies, because those sticky credit gates have been flung wide open again.  Not so fast.  Ludwig von Mises explained that there are many components to the interest rate and one of the most important is plain, old-fashioned credit risk.  In a sound money environment, I doubt that anyone would buy sovereign bonds from nations on Europe's periphery without taking collateral in assets upon which a creditor could lay his hands without a prolonged and expensive legal battle.  Mr. Ruparel's first of three key factors explains it all, in my opinion.  ECB president Mario Draghi has promised to print as many euros as necessary to prevent any  member of the Eurozone from defaulting.  So, these otherwise worthless or near worthless pieces of paper come as close as one can get to a risk-free investment.  Did anyone notice that these bonds were quickly sold as soon as Germany's constitutional court ruled against those out-of-date old fogies in Germany's who honor the rule of law and hard money?  The clear-as-day prohibitions against ECB money printing and sovereign bond buying have been erased from the Maastricht Treaty in much the same way as have the U.S. Constitution's enumerated powers in Article I, section 8, proving that treaties and constitutions are only as effective as the people to whom they are entrusted.

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