Eurozone: Hope for a World of No Guarantees?

Pinnacle Digest writes: Every nation is dealing with its own debt issues differently. In the Eurozone, most recently it has meant Long Term Refinancing Operations (LTROs) and lower interest rates; in the U.K., it means quantitative easing; in Japan, it means introducing an inflation target above the current rate of inflation; in the U.S., it means Operation Twist. Although every country is working to solve its debt issues, while attempting to initiate and maintain growth in their respective economies, one thing is obvious: This crisis will never end as long as debt continues to be simply 'shuffled around'.

Axel Merk clarifies the banking sector's role and why investors don't need guarantees, but to be properly compensated for risks that they do inevitably take on when investing. A real, credible strategy must be in place for investors to regain confidence and stimulate the economy.

Merk commented that, "Banks are in the business of managing risk and indeed lend to risky customers all the time by unbiasedly pricing in that risk, but when their own regulators indicate that something is risk free when it is not, risky assets are not properly priced and the banking system malfunctions."

What policy makers have failed to grasp in recent decades is that guarantees increase volatility as asset prices become more correlated. What that means is everything will be safe until the guarantor is deemed unsafe, thus crashing the entire system.  A case and point of this is Freddie Mac and Fannie Mae prior to the sub-prime melt down. They were government sponsored entities guaranteeing mortgages across America. When things changed and the banks (and citizens) realized they were not guaranteed, the banks failed and everyone lost.

Merk puts forward strategies for government policies and for investors looking for currency stability in an ever volatile time.


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