I was originally going to title this article, “Shorting the Euro Zone”. But what the heck, there is little difference between them and us. Some states, like California, probably have spending programs for welfare, public services and other social programs at nearly the same levels as those in Greece. Even AFTER the first round of Greece’s recent austerity measures. While the markets dip and rise as sentiment on the latest round of bailouts are rammed through, the long-term outlook for Europe, and the U.S., is bleak at best. The Debt Contagion is not only spreading worldwide, it’s already here!
Last Friday, Governor Arnold Schwarzenegger ( R for RINO, CA) issued yet another austerity plan fro Sacramento to consider. One recent study now places the Golden State in the top five of government entities facing default, joined by Spain, Italy, Greece and Portugal. Ireland, the other member of the Euro PIIGS, has already begun to try to resolve it’s economic woes with the ‘Potato Plan’. A structure to create a national ‘bad bank’ which will take the bad debts off the books of ‘good banks’. Ireland has even starting jailing some bank executives who helped caused the situation. Not a bad idea at all!
Ireland is still in trouble, however, as are the rest of the Euro Zone nations. While countries like Germany and France have lower Debt/GDP ratios than the likes of Greece or the UK, their banks are sitting on top of a huge pile of bonds issued by the more perilous countries. The $1 Trillion dollar bailout program announced last week would be barely enough to cover the bonds of Spain, let alone the rest of the Euro-Turkeys. The Debt Contagion could create a serious, long-term credit crunch, stifling Europe’s economy enough to cause the EU to break up. Germany and France are already making noises along those lines. They do not want to go down with the rest.
Over here on this side of ‘The Pond’, the United States is in pretty much the same predicament. Most of our major banks have substantial holdings in troubled Euro Zone countries. Around $200 Billion in bonds just from Spain are held by U.S. banks. While the calamity in Europe caused an increase in the value of the U.S. Dollar, and encouraged Treasury sales, at best it’s temporary. Why, you ask?
The Congressional Budget Office (CBO) frequently issues long-term forecasts on government spending and expected revenues. Some of their reports extend out to as many as seventy years! Quite a feat given that they’ve already botched forecasts on the cost of Obama-Care signed into law mere weeks ago. CBO projections are not pretty, even with their rosy tinted view.
For example, one such forecast shows public debt in 2035 to range somewhere between about 75% to as high as nearly 200% of GDP. Key factors to consider in CBO long-term forecasts are that they expect historic averages to continue for unemployment, 4.8%, and GDP growth, 3.6%. Given what we have seen in the past 18 months, I would say that those expectations lie somewhere in between optimistic and science fiction!
As I wrote in an article few days ago, the past few weeks have seen a dramatic increase in the sale of credit default swaps, ‘short’ bets against the bonds of those troubled Euro Zone nations. Financial players are already lining up against the success of the European Bailout. They see the Debt Contagion spreading and trashing the EU. Even average European citizens are gearing up for more financial crisis as gold sale shot upwards. The latest polls in Greece show their citizens have lost faith with the current Socialist government, just elected last October. 70% to 80% of Greeks do not believe the Socialists can correct the problems of their socialist system. Duh! Kind of like hiring arsonists to build a fire-resistant home. The smart money now is to ‘short’ Big Government, on either side of the Atlantic.
May 17th, 2010 at 5:36 pm
George Soros must be in 7th heaven with all this. He made 3 billion on the Fanny Mae and Freddie Mac melt down. I wonder how much he will make when Europe and U.S crashes. He said this was his life’s work or goal. I do believe the plan is a global economy, anyway. It was imperative that Obama won this election so that the communist could obtain global dominance through chaos. That was Lenin’s goal.
May 17th, 2010 at 5:56 pm
“It was imperative that Obama won this election so that the communist could obtain global dominance through chaos. That was Lenin’s goal.’
I dont think hes that dynamic other than wanting power under any banner.
I doubt he’ll be happy once the existential communist country “China” owns all the debt of Europe and the US
May 17th, 2010 at 6:42 pm
China is buying less debt and more gold these days.
What happened in Greece will happen everywhere. If nothing else, merely because of our aging demographics. The Greek government knew 8 years or more ago that it could not sustain their social programs and spending levels. So, with the help of Goldman Sachs, they hid the actual debt burden.
We do the same thing. The Federal wonks only talk about public debt as the $13 Trillion National ‘on-budget’ Debt, while ignoring the some $109 Trillion of unfunded liabilities. Likewise, California claims it’s only $50 Billion in debt, while actually, the number is closer to $450 Billion!
May 17th, 2010 at 7:21 pm
The mistake I think the European nations made was caused by an overriding optimism following the successful merging of W and E Germany. They then believed they could expand into a bunch of southern European countries that didn’t have financial integrity. If Greece and its ilk were left on their own, all they’d have to do is devalue their plato (or whatever their money was called) and there wouldn’t have been much damage to europe.
As for Cali and other states with fiscal problems, they need to do something like Jersey. Shut down all of the universities until next spring; vastly reduce state aid to localities; maintain a skeletal budget, with only the minimum services needed to keep public safety.
May 17th, 2010 at 9:29 pm
The main problem with the Euro nations is that they have over-spent like everyone else, but, they are protectionist, which is fine, except more up-risings are on the horizon and what will each country do then? Call in the UN? Every seen how competent they are. They are observers but that is about it.
May 18th, 2010 at 1:42 am
Questions:
#1. Who is taking the other side of those credit default swap bets that the EU will fail and why?
#2. Since the US controls its currency (unlike Greece) why can’t the US inflate its way out of debt?
#3. Why do you think a strong dollar relative to the Euro is a good thing? Doesn’t this hurt our exports? Don’t we want a weak dollar?
#4. Do you think CBO numbers are reliable or not? Did you think their projects were valid from the years 2000-2008 with respect to the tax cuts?
#5. Wasn’t it the Socialist Greek government that exposed (and did not create) the fraudulant accounting and gross overspending by the previous government?
I know the answer to #5!
Kind of like hiring arsonists to build a fire-resistant home.
Kind of like hiring a new accountant who goes over your books and told you that the previous accountant embezzled your entire life savings and lit your house on fire… and then blaming the new guy.
May 18th, 2010 at 6:19 am
Andy: “Some states, like California, probably have spending programs for welfare, public services and other social programs at nearly the same levels as those in Greece.”
Not to nitpick, but you’re forgetting to mention that California’s economy dwarf’s that of Greece. I believe California has been cited as the eighth largest economy in the world by GDP. According to 2008 levels (and this might have changed by now), California’s gross state product was $1.85 trillion. Greece’s gross domestic product was around $340 billion. (From Wikipedia – I did check their sources and they were government sources.)
Anyway, my point is that California probably does spend more on social programs for the very obvious reason that they have a far larger economy. They are one of the world’s biggest economies – and their downfall would be catastrophic, not just for the state residents, either. It would be a disastrous domino effect.
May 18th, 2010 at 6:56 am
Correction: California has been cited as eighth largest economy in the world based on their GSP, not GDP.
May 18th, 2010 at 7:15 am
@ Me
Oh, ‘Me’, your absolute ignorance is showing again. The basic problem you have is that you are trapped in some neoclassical Keynesian view.
Who’s buying the credit default swaps? The simple answer is ‘The Market’. If you want specific names, I’d suggest asking your pal, George Soros. I’m sure he’s buying them and probably knows the rest of the players.
You still think in terms of governments having power, which is wrong. The Market has way more money, therefore more power. You ask why not just inflate our way out of debt? Now there’s a really solution! Inflation is theft, plain and simple. At least taxes have some semi-honest quality, as an elected representative actually has to go on the record and vote to raise taxes. Inflation is completely dishonest and immoral. It robs value from your savings, from your wealth. And it’s totally arbitrary in the hands of the central banks.
Which brings us back to your initial failing, that governments can compete and control markets. They can’t. Why? Because Goldman Sachs can print bonds and credit default swaps faster than a government can print money. There are no denominational limits to a derivative. We’re still stuck with $100 bills.
As long as we’re trapped in a fiat, debt-based monetary system, the situation will only get worse. It’s a negative sum gain, because the system is based on this formula:
P < P + I
You cannot pay the principle and the interest incurred if there is only enough cash for the principle.
May 18th, 2010 at 7:17 am
@ Me
As for your last two questions, no, I don’t believe the CBO at all, never have. My faith in honest government ended long ago in the early 1970s. As for the mess Greece, and us, are in, it wasn’t just the previous administration. It’s the whole culture of entitlements that has been around for decades.
May 18th, 2010 at 7:24 am
Andy: “As for your last two questions, no, I don’t believe the CBO at all, never have.”
They’ve always struck me as pretty by the book beancounters, actually. In numerous administrations, they’ve put out analysis that sometimes conflicts with Congressional budget and legislation claims, making the legislators have to go back and start again.
May 18th, 2010 at 1:11 pm
The basic problem you have is that you are trapped in some neoclassical Keynesian view.
Yup, esp. considering the Keynsian view saved the economy from Depression II. At least in the near-run.
Who’s buying the credit default swaps? The simple answer is ‘The Market’. If
I asked who’s taking the OTHER side of the CDSs? Who thinks the EU will NOT fail? And at what odds? Without this info, it’s not very helpful to mention that people are gambling/shorting anything– unless that’s your point, that there are lots of gamblers in general. Otherwise, people can and do bet on *anything*.
Now there’s a really solution! Inflation is theft, plain and simple. At least taxes have some semi-honest quality,
You’re missing my point. Whether or not inflation is “theft” I’m not going to get into, but all I was saying is that inflating out of debt is an option the US has that Greece does not. (Increasing taxes is also an option- the more responsible one- but is politically impossible for both parties– at least for now. Politicians have long memories and “read my lips” still hangs in the air. I wish there wasn’t such a stigma against taxes, but we can thank the Teabaggers for making the idea of taxes pure evil… dispite the reality that taxes in this country are the lowest since 1950, a fact which most “taxed enough already” nuts simply refuse to accept as true. They think their taxes are going up when the opposite has been true since GHWB.)
Because Goldman Sachs can print bonds and credit default swaps faster than a government can print money. There are no denominational limits to a derivative. We’re still stuck with $100 bills.
But the government can *regulate* the market, if it had the balls to do so, and had their not been a strongarming effort to do the opposite. Also, the government can print money pretty fast, as we saw last year. Whether that money gets out of the banks into the real economy is a different matter. That’s why we need government to assert its control. The control it has at its disposal, but at least for the last 8 years, did not use.
A weak, ineffectual government that does not serve its citizens is the overreaching problem in this country. Government is too small. We need the government to act in its role to help prevent and handle wide-scale emergencies like Katrina, the economic meltdown, the oil spill, environmental threats, and other areas where the common welfare can not be defended by any private individual, company, or industry.