The debt is a real threat

Flick photo by Amanda M Hatfield.

The potential collapse of the euro currency, sinking stocks and a dead job market here have combined to push long-term rates down. Ten-year Treasurys are trading at 3.57 percent despite a huge new borrowing next week, and mortgage rates are at 5 percent flat.

Job losses appear to be bottoming, but the issue is new employment. The "V" recovery spinners are the same guys as all last year -- and someday they'll be right -- but new unemployment claims are back up to 480,000 weekly, 2009 job losses were revised up by a million, and the drop in unemployment to 9.7 percent is statistical wandering.

We have survived the Great Recession thus far because of "sovereign guarantees" all over the world. Bailouts and deficit spending are ultimately backed by national tax revenue to make good on promises and debts, and it has been a matter of some curiosity which nation or currency might fail the test of confidence: Europe it is.

The euro experiment rested on belief that participants -- let's call them the "Club Med" nations -- would behave like Germans, disciplined in annual borrowing and cumulative debt. They never had behaved so, pre-euro, and their lower-productivity economies allowed them to play Germany only in good times.

Now in hard times, the club's massive debt and deficits require massive sales of new bonds, and the soaring interest rates they must pay now have concluded the Ponzi scheme.

Dominoes, again. Big ones. A bunch of banks, no matter how big, was nothing compared to a row of sovereigns.

The G-7 ministers meet this weekend, and they will slap on some kind of shin plaster before Monday's market-opening. However, the Europeans have only two choices: the strong may bail out the "Club Med" nations, or the euro-zone will break up -- back to drachma, lira, peseta and a super-strong, remnant deutsche-euro.

A bailout may buy time, even years, but would weaken the strong (even Germany's fiscal/debt position is precarious) and still not change the club's behavior. A bust-up would collapse the value of its bonds, a great many held by gullible German-zone banks.

In the short term, euro lose-lose is U.S. win-win. We are suddenly a safer haven than the previous safe haven. Dollar up, commodities crashing, it is easy to float our own version of the euro club. ...CONTINUED

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