Thursday, July 2, 2015

Shaky Economies From East to West

Greece shook the US markets this Tuesday.  For a day, anyway, after which they seem to have shaken it back off.  In my mind, the 300 point drop can hard be called a "correction" (<2%), so the smallness of the drop is interesting.  I suppose they were worrying that the zombie apocalypse was going to start the next day and when it didn't they went back to - SQUIRREL!!! - their normal mode, which is that as long as Janet keeps sticking money in their pockets, they'll keep cranking up the market.  Even with that, the DJIA closed well under 18,000  (17,730 today) which is down from the first of the year. 

But don't think of Greece as an isolated case of a really badly run economy.  In fact, Greece is the rule, not the exception.  According to Credit Suisse, Greece has total debt – including households, businesses, and government – equal to 353% of GDP.   But U.S. debt is even higher at 370%.  Germany, that supposed paragon of the European Unions highest financial virtue, has 302%. China, with its state-controlled economy, is at 250%.  Did you notice that China's Shanghai stock market is down over 20% in the last 30 days?  The Shenzhen stock market has dropped over 30% as well. 

On the other hand,  a debt to GDP ratio of either Greece's 353% or our 370% is great compared to Britain. It has total debt equal to 546% of GDP.   Japan is in an even worse state. Its total-debt-to-GDP is 646%.  And if the Credit Suisse numbers are correct, Ireland is off the charts with total debt equal to more than 1,000 times GDP.

Will there be a "Grexit" after all of this plays out?  I don't know.  It seems most Greeks want to stay in EU and prefer the Euro over their old currency, the Drachma.  I've read the same about the other countries; notably Ireland, Italy, and Spain, all of them larger economies than Greece.  It's said that the European Union is more a political union than an economic one, and people want to stay in the EU for those reasons. 

But the takeaway is that these problems are not unique to Greece or the EU.  The entire world is awash in debt, addicted to the transient high of growth being pulled in from the future and accelerated.  Greece is the focal point this week, but it will be somewhere else soon enough.  It can be anywhere.  At some point, the money creation will stop and interest rates will have to go up.  The sense of today's jobs reports is that the often talked-about September rate hike is less likely than it had been.  Interest rates simply have to go up at some point.  That storm will unavoidably rage.  


  1. In 1987 worked with a lady at a bank who was going through a difficult period. Her husband hadn't worked for over a year and her income barely paid the mortgage on a home they owned. With four children I asked how she was able to keep going. She was using credit cards to pay bills and buy necessities. Every time she ran out of credit and maxed out a card she would find yet another credit card that was willing to have her transfer her credit card debt to their card and extend her credit. I lost track of her but she did this for a few years that I knew her. Working at the bank helped in that she had access to sources and information. This isn't really different from what entire countries are doing. Borrowing to keep it all from collapsing around their heads. They have a special incentive too that most people don't think about; that is no politician wants it all to collapse on their watch so everyone of them have an incentive to keep kicking the can down the road. But the piper must be paid. Sooner or later the piper will be paid. This is like musical chairs and you want to make sure you have a seat when the music stops. Pay off your debts if you can, store food, buy some silver and gold, etc. Be prepared because like gravity or time or tide sooner or later the inevitable will happen.

  2. Really good analogy, Anon. That's exactly what they're doing, and there really can be only one outcome. It ain't going to be pretty.