Saturday, May 1, 2010

Greece is Circling the Bowl - Who Goes Down With Them?

The day of reckoning gets closer.  Greece's economy is in shambles, their government backed bonds have been reduced to "junk" status, and "the people are revolting" (to borrow a line).  The IMF has asked the Greek government to reduce its deficit: cut spending and raise taxes. 

HT to Denninger

Two problems:

  1. Raising taxes means that private spending decreases.  It must, because every dollar that comes from the taxpayer to fund government has to come out of private consumption or investment.  It cannot be otherwise.

  2. The Greek labor unions have made clear they will not accept the current austerity measures (read: cutbacks in pay and benefits), say much less more of them.  We've already seen riots, which in point of fact are never that far away from a general conflagration, otherwise known as "civil war" (which is anything but civil.)
There's a lesson in here in that the Greek deficit as a percentage of GDP is just over 10%. 
So is ours.
So is Britain's.
So is Spain's.
The destruction they are witnessing "over there" will come here eventually. 

 Go read it, it's short.   

This is a time like no other I've ever come across.  I'll be the first to admit, I'm relatively new at reading any history, but the whole civilized world is in a bad economic mess.  It really comes down to handful of common reasons.  

  1)  You can't spend money you don't have forever.  Yes, you can incur some debt.  It's not a problem if it's at healthy levels, but when you half of what you make is going to pay the interest on the debt (US in a year or two), you will never pay it off.  You will go bankrupt. 

  2)  No nation has a currency backed in any tangible commodity.  The world went off the gold standard for good in the early 1970s, with every nation's currency floating with respect to every other.  What's a dollar worth?  Whatever any two parties agree it's worth. It's fine while everyone's happy and times are good; but what happens when everyone is on the verge of collapse?  Do they pull each other down or prop each other up?  The lack of a commodity standard has led to bubble after bubble after bubble - here and around the world.  The dollar is down to a few percent of its value from the 1930s when we started getting off the gold standard.  

  3)  There is an appalling lack of understanding of basic math and economics in the world at large.  People that can vote, tend to vote in those who promise them money or who start unsustainable financial systems.  The rioting socialists in Greece are a shining example.  "A government that robs Peter to pay Paul, can always count on the support of Paul" -George Bernard Shaw    

4) With the great interconnectedness of our financial systems, troubles in one area can multiply across the world faster than ever.  In the old days, we really transferred money around; today the central banks can just increase balances on computers somewhere.  Billions of dollars can be created or destroyed in seconds.  

We could avoid financial collapse with sober spending, and intelligent regulations.  In other words, we're screwed.  A group of former sailors say they object to the phrase "spending like drunken sailors", because they stopped spending when they ran out of money, no matter how drunk they were.  The proposed financial regulation bill in congress is the usual Washington crap.  It addresses the wrong problems, ignores the real problems, and creates new problems to go with them.   

I think it looks increasingly likely that a second downturn will occur sometime soon.  I think the predictions of tax riots and civil unrest here in the US by 2011 from Gerald Celente seem right on. 

My advice is the timeless classic: beans, bullets and band-aids.  Precious metals, like lead, copper and brass:

and pray....


  1. I expect that we'll see the first country pull out of the Euro next year. The EU and IMF will try to paper it over this year, but the country involved won't risk the riots that cutting their budget will require, and the EU won't risk a financial meltdown.

    Greece or Spain pulling out, going to the old currency, and devaluing. This will make everyone in the country poorer, but is the only thing we've seen work in the past.

  2. Next year? My guess would be by the September/October time frame. OTOH, I'm not doing well predicting the economic shifts - they are way slower than I'm expecting. Watching how long they've been in the process of collapse gives me the impression if the IMF's main building was on fire, it would take them 6 months to get everyone out.

    Who's next? Denninger thinks the UK will pull themselves back from the brink, but I don't know. The next one to go could be Spain. Problem is that Spain will be "too big to bail", and Bad Things are going to happen.

    Right now, the dollar is doing well despite our troubles under the "least unattractive girl at the dance" theory. The dollar may be disgusting and scary, but is not as disgusting and scary as other currencies. Not exactly a ringing endorsement.

    The other thing that worked, at least once (1921) is the ruthless cutting of government spending and taxes, which would mean turning off the entitlements. Seems like that would end in riots.