Everything is Not Okay

John Mauldin is a financial analyst whose new book Endgame is high on the Amazon bestseller list. He thinks that the developed world is at the end of a debt "super-cycle" and the house of cards is about to fall. Europe will probably be the catalyst of this collapse and here is why:

"If the ECB [European Central Bank] does not backstop the banks and Italian and Spanish debt, the Eurozone will fall into a deflationary debt spiral. The large majority of European banks (even in core countries) are basically insolvent. They simply hold too much sovereign debt of all types, at leverages approaching 40 to 1. They have this debt on their books at face value. Even a write-down of 10% wipes out most of their capital. It would be an unmitigated disaster. Look at Dexia. Only a few weeks before it was nationalized by the French and Belgians, the regulators were telling us the bank was well-financed. And then Bang! In a matter of a few weeks, it had to be taken over by the governments.

Note please that these are the same regulators that said European banks only needed about €3 billion this summer, and recently that has been raised to €100 billion. They have no clue what mark to market means, but the market does. Bank financing dries up quickly and there is a default moment. Maybe the only real purpose of European bank regulators is to make US regulators look conservative and prudent." (emphasis added)

Having seen how U.S. bank regulators missed virtually every major warning sign prior to the crash of 2008 gives you some idea of how bad the situation is in Europe. Essentially Mauldin is saying that the engines of the jet are cutting in and out for lack of fuel but they haven't quit altogether quite yet. When they do, the free fall begins.

Wars, incidentally, have often arisen historically from events like these. Let's say, for example, that Germany demands a European super government where it calls the shots since it's paying the bills. Fourth Reich anyone? Of course we're too civilized for that sort of thing anymore.

There is growing concern that the big banks here may also have been drinking at the same trough as the European banks by buying up government bonds from the likes of Greece and Italy. (I mean they have great yields and surely the Eurozone will back them. Won't they?) If so, the contagion will spread to this country. Then the pressure will again be on the U.S. government to again bail them (and maybe Europe too) out from this dire dilemma of their own making. But wait - the U.S. is broke too and getting "broker" every minute. Yup, let's be more like them Europeans - the ride down is such a rush!