The catch-22 continues. First, the Euro under pressure:
Global Markets Overview: A sudden drop in the single currency reverses an early tentative advance for stocks as traders once again frett about the fragility of the eurozone economy
Second, the Pound under pressure:
Speculators extended their short positions in sterling to record levels after the recent UK election as worries escalated over the government's finances
Third, austerity in Britain:
Britain will be a "leading voice for fiscal responsibility" within Europe as it embarks on a sustained programme of cutting public spending, chancellor George Osborne said on Monday.
Announcing an initial £6.2bn of cuts for the current financial year, Mr Osborne said it was important to cut the deficit urgently so that debt repayments did not "spiral out of control."
Fourth, a bank in Spain goes under:
The euro came under renewed attack on Monday as concerns over Europe's fiscal problems intensified after Spain's central bank took control of a savings bank..
A 146-year-old lender owned by the Catholic Church, was taken over by the Bank of Spain in the latest move by the central bank to restructure the country's troubled mutually owned banks, or "cajas".
Here's the catch-22. Investors are worried about deficits, so they get out of bonds or demand higher bond rates and attack currencies. The response to that by governments is to slash spending: austerity. But austerity will crash out the economy, which will hurt the stock market and damage the ability of governments to pay their debts.
As long as governments feel they are at the mercy of the hot money, and as long as the hot money insists that governments both be fiscally austere and have good economies, there is no way out.
Notice, that while China has significant issues, it does not have this issue because it does not rely on hot money. No smart government should. Currency flows are far too fast, not only should there be a tax on all currency flows but every smart country should make it essentially impossible to move large amounts of money in and out of its economy quickly without taking a huge haircut. Flighty money is more trouble than it's worth. Money that wants to come, and stay, and really invest in the economy should be welcome, but fast money should be heavily discouraged. The harm done by such money is far larger than the good.
Likewise the hot money needs to be taught a lesson. Such "investors" seem to think that they deserve higher than market returns in exchange for lending money. The people borrowing money are expected to bear all the risk, and expected to get less than market returns (since they're giving the surplus to the hot money). Would you borrow money under such circumstances? Of course not, which is why no one who doesn't have a sure thing does, which is why the economy doesn't grow, because the idle money thinks it deserves most of the returns and none of the risk, and entrepreneurs aren't interested in that deal.