This time is different, but it is not.

A crisis does not follow a rational timetable where conditions slowly worsen until an endgame is reached. A crisis ebbs and flows until one day a storm surge quickly wipes everything out, just as people believe the worst is over.

Market sentiment in Europe has turned since late July. It could have been hope of ECB bond buying, but no one knows why PIIGS bond yields turned a corner and the euro began strengthening.

The market is driven by mob psychology and technical factors, both of which we barely understand. To comprehend why the PIIGS will eventually begin defaulting on their debts, we must use the 2nd Iron Law of the Eurocrisis and focus on the numbers.

Essentially, for different reasons the PIIGS have run up spectacular deficits, but their economies are not productive enough to allow them to maintain these debt loads. The euro does not allow them to devalue the true cost of the debt over time, so it will occur in one fell swoop by a  default. That is, since eurozone countries are precluded from engineering a de facto default over a period of years by national currency devaluation, they will in the end need to resort to a de jure default.

No one can tell you when the countries will begin defaulting. In fact, the ECB’s money printing and threat of even more money printing have established a Nash equilibrium of a sort. Do not make the mistake of believing that this stable disequilibrium signals an end to the crisis or that it will soon reemerge. Remember the 3rd Iron Law, which tells us that it will persist far longer than anyone believes.

While we will not be able to time the endgame, we do know its nature and its inevitability. A precipitating event will occur. This will start a complex reaction among all market participants that will lead to the first default of a PIIGS country; Greece and Spain are your best bets. Once one country defaults, others will follow, and the eurozone will come apart.

In the meantime, look for politicians to trumpet their accomplishments in containing the crisis, and journalists writing articles praising them until the day it all comes crashing down.



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