Why Greece Matters & The Greatest Depression Still Awaits

I'm sure that many of you could care less about what is happening 5000 miles away, and might find my updates and warnings over the last year or so about Greece boring and insignificant. But what if I told you that your tax dollars are now going to bail Greece out, and that in the coming days and weeks, it will not just be Greece, but that your tax dollars will also go towards bailing out Portugal and Spain, and ultimately the entire Eurozone as well?

I probably have your attention now....because this is exactly what just happening. Whether you live in the US, Canada, Norway, Australia, or another country that contributes to the IMF (International Monetary Fund) you just contributed to the $144 billion bailout of Greece. This deal should be called "Fleece" because markets around the world woke up to the fact that not only will $144 billion not be enough, but that the European Union (EU) just used all of the borrowing capacity that they had on a single country with just 11 million people.

Here is the only fact that you need to know, when it comes to the problem that Greece faces today. After the bailout was announced over the weekend, interest rates on 2 year Greek debt dropped from 14% to under 10%. This was a somewhat encouraging sign that the bailout might just work to restore the confidence of the many lenders that will be needed to continue to fund this tiny, but economically important and insolvent country. So, where are the rates on that same 2 year debt just 24 hours later? BACK TO 14% PLUS!

Thats right folks. 2 year debt is still at a 14% interest rate AFTER a $144 billion bailout!

And here's why. It did not take long for people to figure out that this incredibly huge sum of money would only paper over the problem in Greece for 12 months. Thats it....12 months. The EU was hoping that the bailout would work a miracle, but instead, they once again have to deal with pawn-shop like interest rates...and on short term government debt no less!      

This is why I have been saying that Greece is the canary in the coal mine. And it will soon become 2010's version of the Bear Stearns implosion, as well as the subprime crisis that started the worst global economic collapse since the 1930's. And, this is ultimately why bailouts never work. Sure, lots of supposedly smart people think that the worst is behind us. Soon, we will see what their answer will be to the implosion of the Euro, and along with it, the next stage of the Greatest Depression. 

I implore everyone reading this to remain as debt free as possible, and to sell all long term government, corporate and municipal debt that you own (as investments). Also, make sure and limit your exposure to real estate if it is heavily burdened down by debt. In addition, keep less than 10% of your assets in the "equity"  markets (in investments such as mutual funds and 401k's, etc). Instead, move those dollars to the "cash" or "short term money market options" in these types of investments. It is highly likely that we have reached the end of the bear market rally that began in March 2009, and that before its all over we will see the Dow Jones below 5000.  

And finally, make sure that you own precious metals....gold and silver. In 2003, when gold was under $300/ounce,  I wrote "when gold and silver really begin to explode in price, it will be because they are viewed as currencies instead of commodities". And while its anyones guess exactly when that might happen, the situation in Greece, and throughout the largest countries in Europe, tells me that 2010 is the most likely year. Gold might look expensive at $1160/ounce...but it's actually over $1000/ounce below it's inflation adjusted highs.       

Kip