In terms of the macro picture for the global economy, one thing is clear: the levels of sovereign debt are unsustainable, and the banking system around the world is under severe stress as a result. Bank runs are already occurring in Greece, and I consider it a reasonable expectation for a contagion effect to emerge in which this problem spreads throughout the eurozone. I agree with Wharton professor Jeremy Siegel in his view that the eurozone must ultimately insure bank deposits in order to prevent a run on banks and an ensuing run on the euro itself. I suspect that this is exactly what will occur; that the ECB will expand the money supply and socialize the losses of banks so as to ensure banks have deposits on hand for their customers.
Of course, as money and debt are inextricably linked under our current monetary system, in which all money is loaned into existence, expansion of the money supply requires expansion of debt levels. And so, we are at a point where calls for euro bonds are being voiced: witness theEuropean Redemption Pact, a plan under which countries in the EU would give their excess debt – which is currently being defined as the amount of debt above 60% of their GDP – to a fund managed by Germany that would issue Eurobonds to raise capital for them. Countries participating in the fund would need to put up 20% collateral of their excess debt, and this 20% could be payable in gold.
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