6/22/12 4:30 PM – Bounce Today, Europe Running in Circles

US stocks bounced today after yesterday’s big decline but as is usual got back only a small portion of yesterday’s drop. The S&P 500 index was up 0.72% today, gold was up 0.4% while natural gas gained 1.9%. Oil was up 2%+ and bonds were slightly down.

European debt and European economic slowing continue to dominate stock market action. There was some public conversation this week among leaders and more is planned next week. Spanish government interest rates remain way too high and people are starting to figure out the circular nature of these bank and sovereign debt bailouts.

When you bring rates down on sovereign debt by loaning money to the banks to buy that debt but then the banks need help and you loan money to the country’s government to bail out the banks, what have you really done except run around in a circle and add more debt to both? The only way to solve this long term is for countries to grow their economies without constant government intervention financed by ever more debt.

There also has to be a reduction in the choking regulation in these countries with respect to getting permits of every conceivable kind, hiring and firing workers more easily, wiping out scads of government regulation of business and shrinking of tax burdens which means smaller government. These are by far the hardest things to do. They take several years at least and really none of this is making progress on a significant scale.

This is the pendulum of government care and regulation of its citizens and businesses at its extreme arc. Some of us can see that it is just completely unaffordable. The welfare state has reached its extreme and the cost is more than its citizens can bear on their own, hence all the borrowing from other countries as a stopgap. Sorry, that gap will never be filled.

The debt that has financed all this is just crushing and more is being added all the time. Unwinding all this may take a lot more time and pain than anyone imagines now. What bothers me is that the Obama Administration does not recognize the sea change and keeps hurtling us toward the same end game.