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The European Debt Game: Winners, Losers, and You

American debt woes have most of us focused on the drama within our own borders, but it pays to look overseas. Europe’s debt crisis is turning into a grand game of posturing leaders and symbolic gestures by central bankers. However, underneath all the showmanship are some nasty, nasty numbers that just won’t go away.

There’s no more “down the road” for many European countries. Within the next six to twelve months, most of them are going to have to put up some serious cash or shut up about some major changes. When it hits the fan, there will be winners, losers … and you.

Winners in Europe’s Debt Game

The winners of Europe’s debt game are going to be the bankers and financiers. Yes, this is the same group that is front-and-center expressing their concern about the consequences of the debt crisis. However, bankers and finance insiders rarely end up starving to death.

It all comes back to deal structure and bailout administration. Even in the U.S. financial crisis of 2007 and 2008, financial consultants and administrators made hefty salaries from fat fees for overseeing bailout distributions. The quality of the work they performed is still being sorted out in the courts, notably by Wall Street’s least favorite judge, New York Federal Court’s Jed Rakoff. However, even in cases where insider trading, cronyism, or incompetence is suspected, the banking and finance industry as a whole still collected a large fortune in management fees.

Europe won’t be any different. Regular people will feel the brunt of austerity measures and government service cutbacks while bankers and financial fat cats ply their trade as “austerity consultants” or “bankruptcy advisors” throughout the crisis.

Losers in Europe’s Debt Game

The losers in the European debt game are going to be European citizens and mainstream investors. European citizens have paid outrageous taxes for years in return for an ever-expanding array of services that are suddenly being threatened. Mainstream investors have their money in mutual funds and stocks that are highly sensitive to falling credit ratings and volatility in the European markets.

European citizens will probably get the rawest deal. For many, paying 50 percent or more of their income in taxes provided them with “free” health care, education, and public transportation. Pensions or annuities from the government were assured. There was no need to budget or plan for these things, since they were all provided. Suddenly, all those promises from their governments are shown to be hollow dreams …and the money is already gone. A dramatic shift in quality of life is on the horizon.

Mainstream investors are also going to take it in the shorts. When selected European banks are allowed to fail, the bankers who staff them will take other jobs. Investors will get a list of their losses with little potential recourse. This will be especially hard for U.S. investors who didn’t realize the extent of their European exposure. As an added “bonus,” all the bank uncertainty is going to make the global banking system extremely volatile and in need of hard capital most readily available from individual fees, account surcharges, and customer service assessments.

You, and What You Can Do About It

Where does this leave you? As a small fry in a big world based on fiat currency, your wealth is at risk. Europe’s debt game calls into question the core value of all paper currencies, making the dollar’s ongoing value unpredictable. Capital-hungry financial institutions will also be looking to get their hands on a few more of your hard-earned dollars to shore up their shaky balances sheets in order to avoid being selected as a sacrificial failure.

To hedge your dollar risk, move more of your money into tangible assets. Gold and silver are one choice, but tangible assets can be anything of long-term value, including household goods. A solar electric system for your house is a long-term cash savings plan that brings added security. The same goes for other tangible goods that would be useful to create safety, power, food, or barter items in the event that all world currencies join in the coming European crash. Even if the system is haywire for just a short time, having some dollar alternatives on hand would be wise.

On the banking system side, consider moving your money out of a big bank and into a smaller community bank or credit union. These institutions have fewer connections to international banking problems, and they often have better service and lower fees than the mega-bank groups. Since September 5th, the day Bank of America announced its soon-retracted $5 fees for debit cards, more than 650,000 Americans have opened credit union accounts. Consider your personal banking arrangements and see if a similar move would work for you.

While our own government’s debt problems are front-page news here, what’s going on overseas will affect us too. Why be caught by surprise?

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