Italy Will Be Worse Than Greece

My biggest bone to pick with the mainstream media with regard to the European and American debt crises is that almost no one actually does their homework.

I mean: if any journalist, talking head, columnist, editor or news producer actually took out a calculator and looked at the pure numbers of, say, the Italian debt situation, they would immediately and strongly come to the conclusion that Italy will not be able to be "fixed" in a normal or easy fashion.

For one small example:

Italy's debt load is expected to hit 120% of GDP by the end of the year.

That number right there: 120% – that number should be a screaming warning siren for anyone with any sense of historical memory. No country has ever been able to climb out of that kind of debt hole without encountering a major default or hyperinflationary event.

I'm not going to play favorites with which even will occur, because it really doesn't matter. Italy is "too big to fail" for the Euro-zone to survive.

Greece was nothing (not that the Greek drama has concluded yet either.)

Today on National Public Radio, I heard a flippant news report about Italy's 10 year bond yields climbing to all-time highs of 6.5%.

If rates hit 7% – the news reporter said – Italy will be UNABLE to afford its interest payments.

Now… the fact that Italy will be unable to afford it's interest payments with just a 0.5% increase in yield should tell you everything you need to know about the Italian debt crisis and the likelihood of a Euro-zone success story.

These countries, including Portugal and Spain in addition to Italy and Greece – are so far beyond the kind of marginal band-aid solutions are being proposed. They're broke.

These countries are beyond the point where making payments on the principle is a realistic expectation. They can't even afford the interest. Think about your own situation. If you've ever had the misfortune of being up to your ears in debt, when you can't even afford the minimum balance payment on your credit card – you know what happens next: default.

And default, rather than hyperinflation, is the likely scenario in Europe. That's because the Italians can't print more Euros to finance debts. Only the European Central Bank can print Euros. And they're more or less unwilling to do so in a degree that would be helpful at all.

The only answer in Europe then is excruciating austerity (which is unlikely) or default. I think we'll see default sooner rather than later.

On the other hand, the United States can print its way out of debt. That's because the Federal Reserve is not beholden to 17 member states. There's just one member state, and only one bond-market to bailout: the U.S. Treasury market.

For that reason, I believe we'll see high inflation in the United States as the "way out" of debt.

Make no mistake: the Unites States' debt problem is at least as bad as Italy's. The ease with which the U.S. can print its way out of debt simply makes it too tempting to resist.

So watch for this Euro-drama to come to a venue near you in the next year or so. And be prepared. The first two acts will be the same, but the ending will differ greatly.

Good investing,

Kevin McElroy
Resource Prospector

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