We spoke on Friday about the possibility of sovereign default in Europe. There is the possibility that the European Central Bank (ECB) will print enough money to bail out all the problem countries. However, this would surely lead to hyperinflation and since Germany is still the main power in Europe, this seems unlikely to us in the end. (They have certainly started down this road, we’re just betting they pull up short).
So we’re thinking that the problems of Europe will come to a head in 2012 and cause a country to default. And it’s likely that once one of them defaults, several of them will take this easier road out. Ironically, it will probably go best for the one who makes this choice first, but no one wants to face the reality that this is the only real choice and by far the best choice for the people of these countries.
You see, if each country (whether Greece, Spain, or one of the others with a massive debt overhang) were to disengage from the Euro and readopt its own currency (such as the Greek Drachma), then the value of it’s currency would drop precipitously. The government would declare by fiat that the debt it owes is in that currency and thus worth far less than it had been. Salaries would go up because the new currencies would be worth less. And everything would equalize for everyone. The bond lenders would take a big loss, but there’s no way around that at this point. They should have seen what a foolish bet lending money to these countries was in the first place. And yes, the major banks are the major lenders, so that would hurt northern Europe, but they were the ones that allowed this problem to progress to where it is. The northern European countries would probably bail out their own banks, but this would be better than this continual farse of bailout loan after bailout loan that only exacerbate the problems.
Greece, Spain, Portugal, & Italy will never be able to pay back their debts in currency worth what it is today. France and Belgium probably also belong in this category. Ireland probably does as well, but at least Ireland has a strong work ethic and a free market. Ireland’s problems are because of the stupid decision by Irish government officials to submit to European authorities and bailout the banks in that country instead of allowing them to go under. (Spain’s about to go down this same road.) All of these countries have major problems. Germany can not bail them all out.
It’s difficult to predict the timing, but it appears to us that this has to come to a head this year. There is the possibility that the Federal Reserve will decide to step in and bailout all of Europe. If this happens, the US will blow up in unbelievable ways soon after because the US cannot afford to do this. That much money printing would surely finally grab the world’s lending arms attention and cause problems at US Treasury auctions.
This is the 23rd post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, & 25) US Recession.