Bitcoin and European Bonds Have a Lot in Common

Economically, sovereign debt yields make no sense and the reckoning may soon be at hand.

The ECB is suppressing bond yields.


With all of the hoopla surrounding bitcoin, it may as well be the new game at the local casino -- craps, blackjack and bitcoin. There are three types of activities that take place on Wall Street: gambling, speculating and investing.

Bitcoin, though, is not "The Big Short." The really giant play is something else entirely and all dependent upon the European Central Bank. Timing is everything and the timing here is when the printing presses are about to stop. ECB officials figured that a temporary way out of their economic mess: create “pixie dust" money and budgets could be financed, pensions could be funded and their form of socialism would plow forward. It has been a neat trick that was born from the U.S. financial crisis and exploited to the nines. 

Think of it, Belgium’s 10-year yields 1.90 percentage points less than the U.S., and for Italy it is 0.71 percentage point. Economically, it makes no sense. If someone said 10 years ago that this would be the case they would have been placed in the corner with a dunce cap affixed to their heads. Yet, it happened.

So, in the words of Alice in her Wonderland, “what will make it unhappen?” After all, the pixie dust could roll on forever and the ECB would never stop purchasing bonds. There are two ways this little manufacturing enterprise could grind to a halt. One is economic and the other is political.

Even at these low rates, it's conceivable that certain countries in the European Union will not be able to afford their social programs. What to do then? Keep printing until Italy’s 10-year notes yields negative 10 percent, people get less than nothing on their investments and the retirement accounts and the pension funds run dry? Social upheaval will be at hand.

Politically, pick any European country that wants to follow Britain out of the trough. Italy, in my opinion, is the most likely now with their mandated elections in March. Former Premier Silvio Berlusconi and Beppe Grillo’s anti-establishment Five Start Movement are demanding, once again, that Italy should governed by the Roman Senate and not by the Berliners of Brussels. Note that German Chancellor Angela Merkel is losing sway in her homeland and that the German scriptwriters of today may not be the scriptwriters of tomorrow.

As these developments play out, money will scurry to the U.S. in search of a haven regardless of ECB President Mario Draghi’s promises. Leverage has a funny way of calling your bluff and it can exert itself in a wide variety of manners. Then, toss in the banking systems in Spain and Italy and the proximity of some sort of end game gets closer still. The euro zone's Target2 financial- settlement system is fragile enough and I doubt if it could take a major hit and still be on its feet.

The bonds of the European Union are "The Next Big Short." It is only a question of when. “People hate to think about bad things happening so they always underestimate their likelihood.” -- "The Big Short"

    To contact the author of this story:
    Mark Grant at

    To contact the editor responsible for this story:
    Robert Burgess at

    Before it's here, it's on the Bloomberg Terminal.