Greek debt crisis - root causes
The problem has been created and there will be a lot of pain for Greeks whatever happens.
All that can be down now is to try and mitigate that pain a bit (not what Germany, the banks or hedge funds want).
The root causes are twofold.
The Greek government and the banks.
1. Greek government
The Greek government lied - outright lied, about the state of their finances to gain entry into the Euro.
Goldman Sachs played a large part in facilitating this.
The Greek government promised more to the Greek people than could be afforded in order to get elected.
You cannot have policies where civil servants can retire at 38 on full pensions.
You cannot employ 5 times as many civil servants per capita as an average sort of Western country.
You cannot say that hairdressing or TV presenters have a dangerous job and can retire early.
You cannot have a retirement age of 58.
You cannot not collect taxes in an efficient manner.
You cannot still be employing 30 bureaucrats on a project that completed in 1957.
Loads of other examples of incompetent government.
The banks greatly facilitated Greek entry into the Eurozone by being complicit in fraud.
The banks then continued to lend to the Greek government at low interest rates, thereby giving the Greeks no incentive to reform.
The pressure builds up, the interest rates go up and the Greeks can no longer afford to pay their debts.
And we arrive at the current situation.
Greece is not alone in living beyond her means. She may be one of the more extreme.
But the following countries are also included :-
Portugal, Spain, Italy, US, UK, Belgium, France, Hungary, Austria, Japan, Ireland and about another 9 Western countries.
All of these countries will have their debt downgraded over the next year or so.
The US is misqouted in the above US debt to GDP is now just over 100% and the US should be 10th on the list.
Canada is also misquoted, but I haven't got the info on that.
Anyone want to move to Estonia or Gibraltar?
Greece, China and the risk to the USD's Reserve Status - updated 07/18
The US is currently on a path towards the Greek situation. On current path, the US dollar's reserve status will not last.
In 5 years time the US will be in such a financial mess it will be next to impossible to sort it out - just like the Greek situation.
The Greeks got into their mess because the government overspent and money was too cheap, so the government had no incentive to reform. Does that ring any bells?
It is no good waiting for 2016.
That is too LATE America.
LAST chance America - if you do not want to turn into Greece.
And it is no good saying that that will never happen because the US Dollar is the world's reserve currency and the Fed can print all that it likes.
Because other countries have different ideas.
The threat to the petrodollar system
US antagonism towards Iran has nothing to do with nuclear weapons.
It is about protecting the petrodollar system.
Just like the Iraq invasion.
Iran is proposing to sell oil in non USD, just like Iraq did in 1996.
But the antagonism towards Iran is having the opposite of it's intended affect.
It is accelerating moves away from the USD.
India basically thumbed it's nose at the US when it was asked to apply sanctions to Iran. It entered into wider trade deals with Iran avoiding the use of the USD.
China has significantly reduced US treasury holdings and is exploring non US dollar trade deals as per the one with Japan recently.
Russia has also reduced it's holding of US treasuries.
So we have China, Russia and Iran definitely exploring and activating non USD trade deals.
2nd string India, Brazil and Japan ae also exploring and activating.
That is a significant proportion of Global GDP in those countries.
And a couple of other tiny countries.
It is small time stuff so far, but you can see which way the wind is blowing.
These countries are testing the waters.
Anyone think USD might be at risk?
It seems to me that with the amount of US debt, the petrodollar system is like a house of cards - one tap and it will collapse. And China knows it.
The mountain of US debt is set to grow to circa $22tn+ in 4 years time, whether Romney or Obama is elected. ($22tn assumes GDP growth of circa 3%, the coming deep recession will see this figure go much higher.)
If you find any bilateral trade deals that avoid using USD, please let me know.
See if there are any more coming along.
Should the US Dollar lose it's reserve status :-
The consequences would be dire indeed.
The US runs a very significant trade deficit.
If other countries won't take USD as payment, how will the US pay for this deficit?
The answer is they won't be able to - the US has a relatively small amount of Gold - no one knows how much.
The US would be forced to export as much as it imports. A very sizeable economic adjustment.
And it does not matter one iota how many dollars the Fed prints. No other country will take them.
The US has to get it's budget deficits and the National Debt under control.
Otherwise it is a question of when, not if, the above scenario unfolds.
And Athens will come to the streets of New York and LA.
There have been a number of developments since this was written :-
Conference in New Delhi in March by the Brics where the possibility of setting up a sort of Brics bank was discussed. This would be a direct competitor to the Fed.
South Africa attended in New Delhi.
China has announced it will start issuing international Yuan loans.
A bunch of African countries are interested in setting up non USD trade deals with China.
Australia signed a currency swap deal with China to facilitate trade - bypassing USD.
The total holdings of UST's of foreign Central Banks has been going down - not up. US is still issuing debt to fund trillion plus deficits. Largest ever deficit in February - $200bn.
China and Japan dropping Dollar Cross Rate system. Japan now firmly in the China camp - not USA's.
Also news out today that Germany has given up on Greece (it was only a matter of time) and that Greece will leave the Euro and suffer around a 60% decline in the value of it's new currency when Greece leaves.
Also news out today that Obama is going to backstop the Derivatives market ($700 tn plus). US banks hold perhaps nearly half of that on their books.
There is no way any government can backstop the derivatives market, it is far too large.
Will China make the Yuan a gold backed currency?
The 11 International Agreements that spell the end of the petrodollar
No I am not referring to Iran or nuclear weapons, which are but a tiny footnote in the annals of history about an irrational non-existent threat.
American's are sleepwalking into disaster.
All that the Founders warned against has come to pass. A too powerful Federal Government owned by bankers, with an ignorant electorate voting for more of the same.
The media is complicit.
The crony capitalism in Washington seeks to perpetuate the status quo.
The education system seeks to perpetuate the status quo. The Federal Reserve has even launched a new propaganda campaign to pretend it is Constitutional despite the categorical evidence to the contrary in the Constitution and the Founders letters and thoughts.
I cannot see how a message is going to get out to the general public, so it looks like the following is inevitable.
Over the next four or five years :
1. The National Debt is set to rise to $22tn whether Obama or Romney becomes President. (It will no doubt be more see below.)
2. The European debt problem will explode and the dominoes will fall throughout Europe.
3. The European debt problem is 7 to 25 times the scale of the 2008 financial crisis.
The 2008 Financial crisis will seem like a ripple on a pond compared to what is coming up.
The maximum amount the Fed loaned out on any 1 day was $1.2tn in 2008.
Estimates vary for the size of the European debt problem from $8tn to $32tn. Taking into account Sovereign debt, bank debt, insurance company liabilities, derivatives, government off balance sheet liabilities etc.
4. China and non USD trade deals
China will accelerate the pace of setting up new non USD trade deals and an alternative reserve currency will de facto become apparent.
Once the USD loses it's reserve status America collapses.
To put it simply America imports goods and exports paper (US Treasuries and dollars) to pay for them.
If American paper is no longer acceptable, America becomes like Greece with the effective elimination of the middle classes.
The only way to avoid this scenario is to maintain confidence in the value of the dollar by getting government spending under control and to stop printing dollars.
The FED denies thatQE3 is underway, but the Fed has been printing since late November, no one knows how much it has printed so far.
Both Romney and Obama plan to run $1.1+ deficits even with rosy assumptions about GDP growth. (current projections are for US GDP growth of 2 to 3% in 2012, but they are being lowered all the time.)
There was a recent conference by the BRICS - China, Brazil, India and Russia which also included South Africa about pursuing non USD trade deals.
Japan signed a non USD trade deal with China last year.
Quite a few African countries have expressed interest in non USD trade deals with China (they have already signed natural resources deals).
Australia has signed a currency swap deal with China in the last month.
China has stated it will start Yuan international loans. In effect becoming the only direct competitor to the Fed.
Iran of course is part of these discussions.
China continues to expand relations with Saudi Arabia, e.g. the very large joint project for refineries and export facilities in Saudi Arabia.
If you add up the total GDP of all these countries moving away from the USD, it is far larger than the US itself.
Or you could say the US is outnumbered despite it's military might.
5. America's fiscal position
On any rational assessment America's fiscal position is somewhere between Greece and Italy/Spain.
In terms of government budget deficit, trade deficit and national debt/GDP.
Rumours abound and appear occasionally in mainstream media about Spain and Italy defaulting and this is reflected in the markets in terms of debt yields.
But none appear about the US due to the USD reserve status. We can always print some more.
But at some point the US (or the Fed) can print all that it likes and it will do no good, because no one else will want worthless US paper.
To some extent this has already started, the Federal Reserve is now buying 61% of new government debt. Foreign investors are steering clear.
China and Russia have already very significantly reduced their holdings of US Treasuries. I cannot see why they will not reduce further.
6. US deep recession
Europe will go into recession later this year, with further debt problems and austerity measures.
Even Holland, supposedly one of the strong 3 in the Eueo Zone (the others being Germany and Finland) is now having government deficit issues.
China is suffering a rapid slowdown from 9 to 10 % growth in 2011 to 6% in 2012. China has it's own problems with a deflating property bubble, bad bank debts, mismanaged state run enterprises, mismanaged government spending (especially at the provincial level), growing unemployment and growing social unrest.
China's middle class is not growing fast enough to supplant the slowdown in growth of export earnings.
The US will not be able to avoid these headwinds and will begin a deep recession within the next 12 months.
This will further weaken the US fiscal position and a spiral of decline will begin.
7. Debt ratings
As ever the ratings agencies are way behind the curve on downgrades.
Just about every European country will have it's sovereign debt downgraded by multiple notches over the next 12-18 months.
US debt will also be downgraded by multiple notches.
Several hundred banks will be downgraded (500+).
The above all adds up to disaster for ordinary American's.
One might say a financial apocalypse is on it's way.
The only way to mitigate and reduce the coming financial difficulties is to maintain confidence in the USD, which both Romney and Obama are quite clearly failing to do.
Obama is making contingency plans for massive civil unrest (~or worse).
Presumably due to the extreme economic deprivation and mass unemployment about to hit America's shores from Europe's mountainous debts.
China/India/Brazil are not doing well either.
The repeal of Posse Comitatus in NDAA allowing troops to operate on US streets.
The declaration of the whole world as a battlefield, including the US.
The dry run of troops operating on the streets in St Louis (July).
The E.O. for martial law
The E.O. to take control of all comms, landlines, mobiles and internet
Ordering up to 450 million hollow point bullets by DHS.
A tender by DHS for 35 million .323 rounds for each of 5 years.
The staffing of FEMA prison camps (from late 2011).
Letters to 14 Governors warning them not to change laws that allow the President to take control of the National Guard in an "emergency".
"In the end, more than they wanted freedom, they wanted security. They wanted a comfortable life, and they lost it all -- security, comfort, and freedom. When ... the freedom they wished for was freedom from responsibility, then Athens ceased to be free."
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