New Danger of a Systemic Collapse

Some stock investors  never seem to learn.

They hope and pray for a  new government rescue from Washington or Brussels.

They wait with bated  breath for each official sign of money printing, interest-rate cuts, or  financial bailouts.

Then, as soon as  something is finally announced, they breathe a sigh of relief, applaud with  enthusiasm, even buy a stock or two.

But it’s a fool’s game.  Because within a few months — or even just a few days — the government rescue crumbles,  investors run for cover, and, ironically, they begin a whole new cycle of hoping  and praying for the NEXT big rescue.

Just this year alone,  European authorities have held 19 high-level emergency meetings … proposed  dozens of rescue packages … and delivered an endless stream of promises.

Since the crisis began, we’ve  seen four PIIGS bailouts (Greece twice, Ireland and Portugal) … the creation  of two European bailout funds (ESFS and ESM) … plus countless central bank interventions  to buy sinking PIIGS bonds.

What have they gained  from all this? Nothing! In fact …

The Danger  of Systemic Collapse Is
Far Greater Today Than at Almost Any
Time Since the Debt Crisis Began

The European Union is the biggest economy  in the world — close to $15 trillion in GDP. When it sinks, so does the U.S.  and much of the world.

European banks are roughly THREE times  larger than U.S. banks. When they’re forced to cut their lending drastically,  global capital shortages hit hard.

Most frightening of all, the U.S. has  committed most of the same mistakes as Europe — the same kind of massive debts,  deficits, and failed bailouts.

And now the European  Union is crumbling, threatening a systemic collapse far larger than the near  meltdown witnessed in the wake of the Lehman Brothers collapse in 2008.

My Debt  Danger Index

How do I know a  dangerous new meltdown is so likely?

Because that’s what the  objective data proves. In fact, to measure and track this danger as accurately  as possible, I’ve created a new barometer — my Debt Danger Index for Europe.

This index is based on  the total cost of insuring against sovereign debt defaults in each of five key  countries — Belgium, France, Germany, Italy, and Spain.

So it directly reflects  the danger of European debt disasters, regardless of the sentiment in the stock  market.

Reason: Unlike stock  market investors, sellers of these specialized insurance contracts see through  the hype and hoopla of government bailouts and rescues.

If the danger of debt  default is rising, they charge a higher premium for the insurance and my index goes up.  If the danger of default is subsiding, they charge a lower premium and the index goes down.

Now, just look at how my  Debt Danger Index has surged:

Four years ago, before  the U.S. housing bust and the Greek debt crisis, the sovereign debts of large  European countries were considered beyond reproach.

Default was unthinkable.

And any talk of  wholesale collapse was considered science fiction.

So the cost of insuring against  default was a pittance:

To insure  a $50-million portfolio — allocated equally among sovereign bonds of Belgium,  France, Germany, Italy, and Spain — the total cost was a meager $28,649 per  year.

Care to venture a guess as  to how much it costs now?

The cost  of insuring the same $50-million portfolio today is a whopping $2,258,200 per year, or 78.8 times  more!

In other words, based on  the market for these insurance contracts, the danger of a wholesale European  debt disaster — with the potential to melt down the global banking system — is  now nearly 79 times greater today than it was four years ago.

Massive  Policy Failure

What about all the  trillions of dollars and euros committed to money printing, bailouts, and  guarantees?

What did they do to stem  the crisis?

Nothing, absolutely  nothing!

Quite the contrary, even  the most massive and dramatic government interventions only made the crisis  worse.

What proof?

Then take a look at my  timeline in the chart below. It’s the same Debt Danger Index I showed you in the previous chart, but this time zeroing in on just the last two years:

Here’s a timeline of the  four most important government actions:

  April 2010 — the first  Greek bailout. What did it do? Nothing! My Debt Danger Index was rising at a  steady pace before the bailout announcement  … and it continued to do so after the announcement.

  May 2010 — the $1 trillion European bailout fund (EFSF). Now, THIS was supposed  to be the be-all, end-all Mother of All Bailouts. Instead, it was the cue for a  whole new wave of the crisis … and my Debt Danger Index promptly resumed its  steep rise.

  July 2011 — the second Greek bailout. Finally a solution? Of  course not! Instead of reducing the Debt Danger Index, it merely helped drive  it sharply higher.

  This past Friday, December 9, 2011 — Europe’s “new fiscal pact.” The grand bargain that  markets were praying for? Far from it!

The European Central Bank will NOT provide  the money printing that investors were hoping for.

England will NOT sign on to the deal.

And even most of the countries that DO  join the pact — including big movers and shakers like France and Germany — are  merely making the same old promises that they’ve already broken repeatedly in  the past.

Bottom  line: The European  sovereign debt crisis is barely beginning. It will strike our shores directly  and massively in 2012. And you must do everything possible to prepare.

Good luck and God bless!

Martin Weiss Ph.D. – Money & Markets

Dr. Weiss founded Weiss Research in 1971 and has dedicated the past 40  years to helping millions of average investors find truly safe havens and  investments. He is president of Weiss Ratings, the nation’s leading independent  rating agency accepting no fees from rated companies. And he is the chairman of  the Sound Dollar Committee, originally founded by his father in 1959 to help President  Dwight D. Eisenhower balance the federal budget. His last three books have all  been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for  Bubbles, Busts, Recesssion and Depression.