4/29/2010

Club Med and the Lessons of History (or, What am I talking, Greek?)

GREEK CRISIS: A serious debt crisis in Greece has rattled global financial markets and raised worries about whether other countries will be able to repay their debts.

LEHMAN REPLAY: Economists are worried that the Greek crisis, if not contained, could turn into a repeat of the cascading financial panic that occurred in the fall of 2008 after Lehman Brothers collapsed.

DEBT RESCUE: European countries and the International Monetary Fund are racing to assemble a package of loans for Greece that will be sufficient to convince markets that the country will not default on its debt obligations.

Concerns have already surfaced in Congress that the broad demands of the sovereign debt crisis will quickly exhaust the I.M.F.’s reserves and leave the United States, the fund’s largest shareholder, with the bill.

Professor Nouriel Roubini, the New York-based academic who was one of the few to anticipate the scale of the US financial crisis, told a panel in California that the buildup of debt is likely to lead to countries defaulting or resorting to inflation to ease the burden on their populations.

“While today markets are worried about Greece, Greece is just the tip of the iceberg,” he said., “ The thing I worry about is the buildup of sovereign debt.”

The whole idea that the financial crisis was over is being called into doubt. History shows us  that the Great Depression bottom was the sovereign debt default phase. And the EU's erratic responses (hesitancy followed by “lip service” rather than decisive responses) is going to prove even more detrimental as this "Club Med" crisis grinds on.

The Great Depression was composed of two separate panics.  In 1930 people thought they'd seen the worst of things. 

But the economic conditions created by the first panic were already eating away at the foundations of financial institutions and governments.   This is one of the reasons that we had a second banking crisis, which pushed America to the real bottom of the Great Depression, and brought FDR to power.

The euro is in crisis, and already-weak European banks appear to be massively exposed to Greece's huge debt load.  They're even more exposed to the debt of the other Eurozone countries – Spain, Portugal et. al., which is far too large for it all to be bailed out.  The size of the rescue package that Greece needs is already going to take a substantial chunk of the IMF's war chest. And the IMF is, basically, the United States.

It's not clear that Greece has the political will for the austerity measures it's going to have to make even if its debt yields come back down--and the higher they stay, the smaller the chance.  This is  the calculation its creditors are making, which is why yields are now in the 20% range.  And, perversely, this  makes it more likely that creditors are going to lose their money.

A friend of mine from California, who is a successful investment manager and a multi-year disciple of Warren Buffet, thinks the entire idea of the Euro is idiotic: a fiat currency held by all members of the club.

Robert says, “In the “old days”, Greece could simply have devalued the drachma. Now, of course, they can’t devalue and so the reality of a “social democracy” such as the European Union is now exposed. In fact, what you have is an entire European Union that has borrowed from the future.”

The demographics are such that the concept of “ Europe ” per se is completely moribund. There is no future for Europe under the present circumstances.

Just as Greece is unwilling to undertake “austerity measures” ( i.e., stop borrowing and living on credit) the culture of Europe (which includes Great Britain but excludes Russia) is unwilling to do what is necessary; which is:

1.Unplug the Euro and return to sovereign currencies.
2.Stop all forms of deficit spending  (as in “do not spend more than you take in”)
3.Start procreating so that the population replacement ratio is reached  (which may be impossible, as well as too late).


Robert continues, “Thus, the IMF (read,  “USA” ) will ultimately bail out Greece since the Germans see the obvious injustice of raising taxes in Germany to pay for the profligate Greeks. In the USA, we are too stupid to see this, so Obama and Company ( the Idiot Geithner, The Fool Summers, etc) will, for political reasons, continue to raise taxes until all of the expendable income of the upper 5% is attached to support causes like the IMF (internationally) and Big Government (Unions, healthcare, etc) domestically.'”

The same morbidity applies to us except that, for the moment we are still standing (albeit not very tall).

You know what? I think my friend is right. We’ve got a very big problem on our hands, and we are indeed headed for a real double-dip recession. We’ve built a global house of cards. If that house comes down, it’s going to be very painful for a long, long time. How about it, Keynesians? Don’t tell me you plan  to print even more money to solve the world’s economic problems, because IT DOESN’T WORK.