Maybe you didn't see the story that Italy is slipping into a financial crisis, but you might have seen the US stock market dropped about 400 points on the Dow. Italy is why the Dow dropped. Tokyo's NIKKEI and Australia's ASX200 were also hit by Italy's troubles yesterday.
At root is the same problem, the same rot affecting every country from US to China; Germany to Greece.
Italy risks careening into a new financial crisis after the Bank of Italy said the country’s leaders could not “disregard” financial constraints and its commitments to Brussels.In October of '16, I posted an introduction to some of the players in the mess today, as well as a "keep your eyes out" for things going on Italy. It centers on the 5S Movement, which began as joke and turned into a populist, "Brexit-like" party movement. iExit? The latest issues appear to stem from a need to form a "coalition government" between differing parties and their inability to do so.
Escalating worries that Italians may be poised to take a tougher stand against the euro prompted a round of accusations and finger-pointing among EU officials, including a rare admonishment by Donald Tusk, the European council president, who said EU institutions needed to show “respect to voters” in Italy.
The crisis was set off late last week when the Five Star Movement (M5S) and Lega, which had been attempting to form a government, insisted that the president, Sergio Mattarella, approve their choice for finance minister, Paolo Savona, a fierce critic of the euro. Mattarella vetoed the nomination and the incoming populist government collapsed before it had taken power.Add in that the European Central Bank is struggling to keep control in the country, and you get quite a mess. Ignazio Visco, chairman of the Bank of Italy, said the country was at risk of losing the “asset of trust” with investors. On Tuesday the Italian bond spread, a leading indicator of investor concern, rose to its highest level in four years.
The president appointed a new prime minister, Carlo Cottarelli, a former director at the International Monetary Fund, who was expected to present a list of ministers to Mattarella on Tuesday. The president’s spokesman said after a meeting that the two officials would meet again on Wednesday morning.
Italy is the third largest economy in the European Union, behind Germany and France (and I'm leaving out the UK due to the ongoing Brexit). If Italy were to collapse or go into a deep economic crash, it threatens the entire EU. Italy has one of the largest national debts in the world and an unemployment rate over 11%. It's economy is now worse off than it was before 2007. The Italians tried, like everyone else, to borrow and spend their way out of the financial crisis, but they never recovered.
The fundamental problem, as I must have said at least five hundred times in the 2800+ posts of this blog, is that the world is awash in debt. The total debt in the world now is $164 trillion. Annual world GDP is in the vicinity of $70 trillion so this is well over two years worth of "all the money in the world" to pay off that debt. That figure ($164 trillion) is not counting the unfunded liabilities in the world's economies, which currently add about $115 trillion in the US alone, as can be found on the Debt Clock. Unfunded liabilities shouldn't be counted as debt; we haven't spent that money yet. They're more like a promise to spend in the future, however if we can't meet our liabilities now and can't live with a balanced budget it's reasonable to question where that money will come from.
In the wake of the "great recession" of 2008, the world's central banks went on a stimulus binge like the world has never seen. Not just the trillions of dollars created out of thin air here in Quantitative Easings; think of China's bridges to nowhere and ghost cities. If anything, China has worse economic problems than we do. All the central banks: the Bank of Japan, the European Central Bank, the Central Bank of China: all of them have created money from nothing.
The US economy has shown some positive reactions to Trump's tax cuts and the news has been mostly good. The labor participation rate hasn't improved to any noticeable extent since the middle of Obama's second term, though, still on par with the rate in 1978, and I honestly don't know what's up with that since we keep hearing about record low unemployment and other good news. I note that some aspects of the Dodd-Frank banking regulation bill have been cancelled. I personally never heard anything good about Dodd-Frank from any financial writer who seems to know the industry, so I view that as good.
The world, I believe is in a precarious position economically. Am I just a "too small thinker" to live with a world that measures debt in the hundreds of trillions pf dollars? Could be. On the other hand, I don't believe we're immune to any form of economic problems, and I still believe what can't go on forever won't go on forever, because I still believe that infinity is a very handy concept in math and science, but a rotten way to run an economy.
As for when this may happen, I've given up on guessing. I've posted so many "real soon now" warnings in the life of the blog that I think decorum tells me I should say no one can predict it.
Italian actor and comedian Beppe Grillo; originator of V-Day and the M5S party. Getty Images.