Parity, parity, parity. That's all I hear about in Canada these days. The media is saying (Businessweek) that the strength in loonie is due to a higher than expected inflation data and so a possible rise in our interest rate by the Bank of Canada this year is in the cards. But that's just part of the story. As I was saying in my previous post, markets don't operate in a vacuum. The biggest news so far this year on the global economy is the Greece bailout. Or more specifically, is there a bailout (WSJ) and by whom? Greece is the 27th biggest economy according to Wikipedia. Their GDP is 24% of Canada's. They are by no means a small country. A default of this magnitude would have a domino effect on the weak PIGS (Portugal, Ireland/Italy, Greece and Spain) countries and beyond. Traders will lose confidence if Greece is not saved. Then everyone will unload their holdings in those PIGS countries and massive selling will drive their markets even further down. A vicious cycle of downward spiral is thus formed in the short term. Given that even a small time trader such as myself is aware of the grim consequence, it is likely that Greece will be saved. So the next question is, by whom? That is the big question which is still up in the air and fiercely debated this month. The two candidates are the European Central Bank (ECB) and the International Monetary Fund (IMF). As far as we know, the ECB doesn't seem to want to take the burden upon itself. The European Union isn't doing exactly well lately, in case you haven't noticed. Its best performing country, Germany, doesn't want to penalize their hardworking taxpayers for the mistakes of Greece (CIA World Factbook). So that leaves the IMF, the last line of defense for troubled economies. If the IMF bails out Greece, that means the United States is on the hook too as they are the biggest economy and backer of the IMF. Europe's problem will become an American problem too. More bailouts for the U.S. means more spending. Having spent trillions already pumping up the financial markets (U.S. debt clock) in the past couple of years, this would tank the U.S. dollar into the abyss. Likewise, if the ECB confirms that they will contain the problem and that IMF isn't involved. The Euros will tank and the dollar will rise. But that's just guess work for now. The one thing that's for sure is that a massive amount of money will be spent to save Greece. Excessive money means inflation and higher cost of commodities in the long run. Seeing that the Canadian market is heavily commodity-related and that our loonie is even known as a commodity currency, that is the reason behind why inflation is rising fast and our economy is being propped up. Not necessarily because we are doing terrific, but because we are sitting on a pile of gold and oil. Real, tangible wealth in any kind of economy.