The Long Crisis

Archive for the ‘Financial Meltdown’ Category

A sovereign debt panic appears to be just over the horizon and is likely to tank stock markets around the world. While the current crises is centered on Greece and the Euro zone nations, especially the PIGS (Portugal, Ireland, Italy, Greece, Spain) the issue of excessive debt extends to first tier nations such as the United Kingdom and the United States.

Very likely, in the coming week or two a major leg down in the stock market will commence as the fear of financial contagion from the ongoing Greek tragedy of mismanagement, deceit, corruption, and incompetence, spreads from the euro zone to disrupt stock markets worldwide.

“Questions continue to mount about the near-term fate of Greece and the other PIGS nations,” wrote Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, in a note to clients yesterday. “The latest worries are the lack of specificity about the true nature of the ‘determined and coordinated action’ pledged.”

Then there is Dubai, probably the greatest financial boondoggle that the world has ever experienced, except for perhaps China which is yet another bubble that will eventually pop as over building and wild speculation continues until it doesn’t. But China is a story worth writing about in a separate article so I’ll pass on it today. When the China bubble does pop it will be a hundred times, maybe a thousand times, the size of little Dubai so remain alert.

It would appear that an implosion of Dubai has only been delayed, not avoided. This past Friday the cost to protect against a default by Dubai increased to the highest level since state-controlled holding company Dubai World said last year it wanted to delay debt repayments. Credit- default swaps linked to Dubai debt jumped yesterday to 638 basis points, the highest since Nov. 27, according to CMA Datavision.

The sovereign debt issue is actually quite deflationary in nature. As nations such as Greece struggle to reduce their public debt to GDP ratio, they will be forced to drastically cut expenses and to reduce government services. These actions, while necessary, will reduce economic activity at a time when the world economy has still not fully recovered from recession. A feedback loop will inadvertently be created that will lead to further reductions in economic activity, thereby increasing deflationary forces.

Of course, Greece, euro zone countries, and Dubai, are small potatoes compared to the increasing excessive debt issues being experienced by the United Kingdom and the United States. The public debt levels of the UK and US are increasing exponentially and cannot be sustained. The greatest financial boom that the world has ever experienced began to unravel with the toxic waste home mortgage debacle beginning in 2006. We seem to be only in the early stages of the bust cycle.

Almost unbelievably, public sector debt levels have continued to increase as nations worldwide have continued to pile on additional debt in an effort to reverse deflationary forces. While it only stands to reason that the cure for an excessive debt problem cannot be realized by the addition of debt that hasn’t stopped the politicians of the world from creating additional debt as if it would never matter.

Great booms always end in great busts. Since we have recently experienced the greatest boom in the history of finance it is highly likely that we are entering a time when we must cope with the greatest bust. Sovereign debt issues may well be the triggering event that tanks the stock market and ushers in a long crisis of deflationary forces.

We will probably not have to wait very long to find out.

Tweet This Post

So called expert Professor Joseph Stiglitz and Spanish Ambassador to the UK Carles Casajuana argue with hedge fund manager Hugh Hendry of Electica Asset Management about what needs to be done about the Euro and the Greek debt crisis.

Talk about a one-sided argument. Hedge fund manager Hugh Hendry makes Joseph Stiglitz and Charles Casajuana appear to be idiots not at all familiar with the real world as they discuss the Greek debt crisis and the role that the Euro zone countries will have to play in alleviating the crisis.

In my opinion, Mr. Hendry makes the entirely valid argument that an accelerating crisis caused by excessive debt can not be solved by the issuance of additional debt. While their discussion centers on Greece the same principle applies to the remainder of the euro zone countries as well as to Japan and the United States. Many countries in the developed world have created a mountain of debt that can no longer be supported by the economic growth that can be generated by their economies or by the level of economic growth that can be reasonally expected in the future.

Prof. Joseph Stiglitz appears especially flustered and foolish as he talks about how the Greek debt problem is easily managed by Euro zone members making additional loans available to Greece. The difference in viewpoints between the hedge fund manager and the Prof. and Amb. is the difference between the real world and the make-believe world of politicians and academics.

When Hugh Hendry states that it is just a matter of time before Greece and other sovereign countries default on their debt obligations, Prof. Stiglitz and Amb. Casajuana go berserk. The video is well worth watching just to see their reactions.

Unfortunately, the video reminds me of the disconnect between Obama and his team and the reality of what is taking place in the US economy. Clearly, the level of debt that is being created by the federal government is unsustainable and at some point in the future cannot be properly serviced. The United States will be forced to monetize vast amounts of debt, thereby guaranteeing hyperinflation, or default on its obligations. When Sec. of the Treasury Timothy Giether recently stated in a Bloomberg interview that United States would never default I took that as a confirmation that the financial future of the United States is terribly grim.

The unraveling of Greece and the euro zone is very likely a preview of our own future. When sovereign debts becomes so large that they cannot be serviced bad things are bound to occur. We are most likely at the beginning of a worldwide financial crisis that will dwarf anything that any human being has ever taken part in. Ever.

Tweet This Post

Ben Bernanke was recently confirmed by the United States Senate for a second term as chairman of the Federal Reserve Board. While 30 senators opposed the Bernanke nomination the fact that he was reappointed indicates that in Ben Bernanke we trust. After all, the man has the second most powerful job in the world at a time when the US and the global economy are suffering the worst economic downturn since the Great Depression. The decisions that he and the Federal Reserve Bank makes will be crucial to restoring economic growth for the US economy.

However, when one looks at the Bernanke track record prior to and during the crises that occurred during his first term in office one has to wonder why in the world the man’s judgment could still be trusted? While he seems to be a sincere enough and nice enough guy, as shown in the video, he has consistently been wrong in his judgment as to the status of the US economy.

While considered to be an expert as to why the United States entered into a Great Depression and in how the nation was restored to economic growth Bernanke seems to have a simplistic view as to how the economy works. He seems to think that the economy works as some kind of mechanical machine. All one has to do to keep it running smoothly is to pull a few levers here and push a few levers there. Apparently he thinks that market forces can be overcome by fine tuning the machine. He shows no signs of realizing just how much human emotions enter into the mix.

While Bernanke acted aggressively and quickly once the economy began to fall apart during the latter part of 2007, as you will see in the video, he had absolutely no clue that bubbles were being formed in the real estate market as well as in equities that would soon pop with devastating results. Unfortunately, I fear that we will soon see that the actions of the Federal Reserve Bank, as led by helicopter Ben, may have helped early on to stabilize the economy the actions will have disastrous long-term effects.

For one thing under his leadership the Federal Reserve Bank engaged in a “cash for trash” program that extended credit to favored banks and institutions, such as AIG, in exchange for toxic assets of questionable value. The strength of the Federal Reserve’s balance sheet had to be seriously impaired due to this and other actions initiated by Bernanke.

All one has to do is to watch the video to see how truly clueless Ben Bernanke was during his first term as chairman. However, the President and the Senate seem to still be confident that he is a man that we can trust to help guide the nation out of the economic wilderness. Based upon his track record so far, the question is why?

Tweet This Post