Should The US Bail Out Europe?

| December 5, 2011 | 0 Comments

US/Eurozone flagsIf you’re investing in today’s markets, there’s a good chance you’re paying attention to what’s going on in Europe.  The European debt crisis is the main reason behind the market’s direction these days. 

Even penny stocks are moving on headline news from the other side of the Atlantic.  Who would’ve thought that possible?

And the latest buzz concerning Europe could have enormous, across the board impact on the financial markets.

You see, there are rumors the Fed could purchase European government debt.

Here’s the deal…

The more bonds European governments can sell, the lower the yields will be on that debt.  And lower yields mean lower interest payments for the government.  In other words, it becomes cheaper for the country to service its debt.

When a country is dealing with billions in debt, lower interest payments are vital.  For a country the size of Italy, lower bond yields can mean billions of dollars saved on interest payments.

The problem is, no one’s buying European debt… not even debt from AAA rated France.  It’s put the entire region on the verge of a meltdown.

What’s more, European leaders disagree on how to solve the problem.  The periphery countries have entirely different needs than the core countries.  And trying to get various Eurozone leaders to come to an agreement is more challenging than herding cats.

That’s where the US comes in.

In theory, the Fed could buy European debt. 

Here’s the idea…

If the Fed purchases European bonds, it will lower the yields and help stabilize the immediate crisis concerns.  Then, European companies can continue doing business without fear of a systemic meltdown.

And since many American companies do business in Europe, this move would also help the US economy.  That’s why the bond buying program would fall under the Fed’s mandate… ultimately it helps the US as well.

Not to mention, a financial system meltdown in Europe would destroy the US markets.  Many US banks are heavily exposed to the European banking system.

Of course, there are many opposed to the Fed intervening in European affairs.

For instance, some feel a move like this goes beyond the responsibilities of the Fed.  After all, Europe does have its own central bank.  And the US is still dealing with a fair share of economic and debt issues as well.

Moreover, there’s a group of people who don’t like the Fed printing money at all, much less on behalf of Europe.  They feel it will lead to hyper-inflation. 

Look, in reality, there’s very little chance the Fed buys Eurozone bonds.

Too many decision makers at the Fed don’t believe in this move for it to happen anytime soon.  And there could be serious political fallout from initiating the policy.

However, I think it’s a mistake to ignore the idea.

Have you seen how the market moves when good news comes out of Europe?  Anytime a rescue program is mentioned, the markets soar… even penny stocks.

The market should be the guide.  No one wants a meltdown in Europe.  There is absolutely no benefit to anyone if European banks fail.  In my opinion, if the Fed can keep the US economy from recession, they should do so by any means necessary.  Even if it means buying European debt. 

Yours in profit,

Gordon Lewis

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Category: Breaking News

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