The precipitous if brief drop of last week which punctuated a drawling decline of several weeks duration has apparently inspired a radical and of course brilliant reaction that has lit a fire under equities; as I type the Dow is up 3.4% on the day. What is this miraculous policy? The collected central bankers of the EU have publicly declared that they will buy bonds from governments at terms they cannot get on the open market. To a tune of $960 billions.

As stated in the linked article, these central bankers will buy the “duff stuff”… don’t you love British locutions? In other words, they will buy that which no one is willing to buy with their own money. This is the central benefit of being a Central Banker; your money is functionally unlimited and not a bit of it your own.

What is the nature of the european debt crisis? It truly depends on one’s perspective. As a greek vintner or goatherd, one might think that the simple problem of the debt crisis is that there is too much debt. The solution? Less debt. Obviously such a view is pathetically ignorant. What would a goatherd know of the price of money? To understand the crisis and its remedy one must look at it from the perch of the national treasurer who knows that the problem with the debt, the one and only true problem, is that some unreasonable people are declining to invest in that debt at rates of return less than the APR on your Discover card. We might call these gub bonds sub-prime if it weren’t for the baggage; Grecian, Portugese, Spanish bonds all are sold on the open market competing with all other securities and gosh darn it, the image of bank tellers smoldering on the sidewalk has given global investors the crazy notion that something is seriously awry in Greece and as anyone breathing and blinking knows, the only difference between the Grecian Model and Portugal’s or Germany’s either is one of scope. The Greeks have wracked up debt larger than their entire annual produce, something like 112% of GDP, and that is before you have figured in the damage to GDP of the recent and ongoing unpleasantry. If Portugal currently has a mere 90% of GDP in bonds outstanding that is of no serious moment as they are on the same road just a few paces behind Greece and of course they all are just a block ahead of the giants of Europe; France, Germany and the UK.

So why do American markets cheer this news? In the markets, cheer equals buying in perfect proportion so we can’t say this is simple exuberance or good feeling as it is backed with real, earned money. The Squawking Heads of Left, Right and No persuasion sing as one on this issue. This program of “loans” that seem to hold no prospect of being repaid has “staunched the flow” of red ink. It has “quarantined” the Greek disease as if it were bubonic plague that requires a swift burning of bodies and strict isolation of peoples to be contained. With this gub-financed buying of gub-issued paper the rates on these troubled bonds will stay down which means of course that debt can continue to go up! The metaphorical disease, according to the Greek Ben Bernanke, is an unwillingness of investors to buy bonds or indeed whatever asset one could name. It is as much with mortgage debt, corporate debt or derivatives or equities or those irksome credit default swaps. From the position of the Central Banker there is only ever one problem; only ever one disease and that is that investors are too dumb to know a good investment when offered so if they will not purchase them on the open market at market rates WE will purchase them in your name, oh and at much worse terms, needless to say. But instead of belonging to Mr Investor in his account they will be held by Mr Gub who has a bottomless right, they seem to believe, to the contents of Mr Investor’s pockets.

What could go wrong?

If the resident genii are right and the problem is that the unrest and unsustainability of the Greek path is overblown in the mind of the investor then all is well. Except that the policies, basically unlimited spending, that got Greece here are not being improved. Certainly there is some tinkering with numbers here and there but the rise in gub spending, and therefore debt, is not curbed in the slightest. But let us presume that austerity actually MEANS austerity this time. It doesn’t matter in terms of quarrantine because it is already too late. The “contagion” is real but the disease communicated is not a lack of investor confidence it is the hallucination globally experienced that gub, by virtue of her taxing power, can borrow money right at the rate of inflation infinitely. For a time they believed they could do this indefinitely, and they were right, but the day they cannot sell bonds at rates that they can possibly pay out reality wins, as she always does. That day has come for the eurozone. It has come for California. It has come for municipalities across this nation and across the world. While the central bankers are applying tourniquets to Greece plague rats are already nesting in our cupboards. As usual the self-declared genii are treating leukemia with leeches. The disease is not investors’lack of confidence; in large measure that is the cure but at most it is a mere symptom. The disease is the spending. The disease is the bailing. The disease, and it is progressive and terminal, is denial; a refusal for us at the bottom of the food chain to apply the simple facts of life as we meet them in our mundane world to larger, even international matters. And why? Because the movers and shakers, those we know to have deeply vested interests, are telling us not to believe our ignorant eyes and to trust them. Just trust us, they say. We know these matters and understand them and…. here is the best bit…. we are looking out for your interest.

And apparently the disease is already endemic. The Dow is up 3.75%

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