Many are under the impression that allowing the European Stability Mechanism to directly buy Spanish and Italian bonds will help the bring the crisis to an end.

But will it? I think not - for two reasons.

First, the ESM does not nearly have enough money to bail out Spain and Italy or the banks of those two beleaguered nations.

Secondly, Germany and France - the main source of funding for the ESM - are in no position to boost contributions. According to international ratings agency Standard and Poor's, both countries appear to be on a trajectory to national bankruptcy by themselves!

So how can Germany and France save others if they can not save themselves?

Unknown to most, it is very interesting to note that S&P back in March, 2005 projected that France, Germany as well as the US and the UK were heading towards junk status - simply based on their very own home- made financial problems.

Since 2005 however, we had the 2008 financial crisis followed by the ongoing euro zone debt crisis.

All this is likely to have worsened the balance sheet of many developed countries - beyond S&P projections.

Although Standard & Poor's does not update its original projections anymore (may be because it may look too scary) - it should be noted that France's recent loss of the triple A rating was basically in line with the original 2005 projections.

What is more intriguingly is that the United States lost its triple A rating five years before S&P forecast.

For this reason, investors should be less worried about Greece and be concerned more about the possible demise of the current safe havens of French, German, UK and US government bonds as well as their currencies.

This is because if those countries cannot provide more bailout funds for others, nor rescue themselves, then only the printing presses can provide the necessary ammunition to prevent a full- blown financial armageddon.

This means immense inflation risk may be on the horizon.

If history is any guide, such severe inflation risk could even transform the traditional safe havens of cash and bonds - as they do not have inflation protection - into high risk assets.

Traditionally high risks assets of precious metals, commodities and equities - which can all float on inflation - may become the next safe havens.

Certainly China - the country set to overtake the US as the world's largest economy in about five years time - according to The Economist - seems to be developing a taste for inflation proof productive or tangible assets.

Rather than buy euro zone bonds, mainland firms are out shopping for good value corporate assets around the globe such as Brazilian electricity infrastructure, natural gas fields in the United States or German cement-pump makers.

Likewise, as far as gold is concerned, Western hedge funds have been dumping the metal lately regardless of its price to meet redemptions or technical trading calls.

But the physical metal is increasingly being shipped to and accumulated in the East, with China's gold imports through Hong Kong continuing to surge.

So, should investors do likewise. That is, follow the indiscriminate dumping of good assets at low prices just because they have fallen and go for the perceived safe haven of the strongest bonds, deposits, and cash of Western countries?

Or should we try to minimize our exposure to inflationary risks and accumulate productive and tangible assets on the cheap like Chinese companies are doing?

One should anticipate that politicians and central bankers are prone to driving up inflation as the only way to prevent uncontrollable liabilities resulting in major national defaults.

Therefore, the latter strategy - doing what Chinese firms are doing - clearly appears to be a more sensible one.

But having said that, one should take care to invest in a wide variety of asset classes since another market rout is likely to proceed the next inflationary wave.

Also, we must stay cautious by avoiding short-term speculation and the use of leverage - noting that mortgages are a form of leverage and therefore they should be avoided too - as much as possible.

Martin W. Hennecke is associate director, Tyche Group Ltd

E-mail: mhennecke@tyche- group.com