You don't have to outrun the bear, but you do have to outrun your friends

One former student asks me "when will foreign investors begin to doubt the US government's ability to repay its loans?" When that happens, the dollar will plunge, long term rates will rise, and our current problems will begin to look tiny.

But it doesn't look like the day of reckoning will occur anytime soon because European banks still look worse than their US counterparts. With leverage ratios approaching 50-to-1, and much less transparency than US banks, investors still prefer the relatively safety of US Treasuries.

Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars!

...The euro is going to get a lot weaker if bank problems are even half of what the report says they are. The British pound sterling is already off almost 30% and, depending on what the real damage is to their banking system, it could get worse.

Waterfield reports, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors – particularly those who lend money to European governments – have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.