Greek and European Insolvency

Haven’t commented much on this, but let’s cut to the chase.  Greece is going to default.  Period.  The only question is when.  The Europeans can hold it off a year or two if they get their act together.  All of the PIGS (Portugal, Italy, Greece, Spain and arguably Ireland) are probably going to default eventually unless the rules by which the Eurozone, which state you can’t run too high deficits, are overturned.  All of the countries in the Eurozone, all of them, have been playing shady financial games to hide the real state of their budgets.  Every single one.

Oh, and Germany needs to put a cork in it.  Trade and balance of payments are ZERO SUM.  Every nation cannot run surpluses, it is mathematically impossible.  The more countries that do, the less Germany’s surpluses will be.  Germany’s surpluses are only possible because other countries run deficits.

When the Greeks get crammed down, hard, either through readjustment packages or because they go off the Euro and default (what I would do, but my by European friends inform me this is unthinkable to all good Eurocrats), when Spain, Ireland, Italy and Portugal get crammed down, that’ll lead to a nice demand collapse, which means less imports and worse balance of payments.  Which will make things worse for everyone else—because while balance of payments and trade are zero sum games in the sense that it has to come out to zero, prosperity is not.  If overall demand drops or grows very slowly, everyone is hurt.  Refusing to deal properly with these problems by putting Europeans and American to work by using deficit financing properly (as opposed to wasting it on tax cuts, bank bail outs and badly designed “stimulus” measures) would help everyone and pay itself back, as long as it was done in a way which also dealt with the oil bottleneck at the same time.

But that ain’t happening.  So at best we get a lousy few years economic cycle where over 80% of productivity gains go to corporate profits, wages stagnate and unemployment doesn’t recover anywhere near pre-crisis levels—or we get a second downleg of this financial crisis when China and Europe both crash out.  (It ain’t about America, babes.)  I’m waiting till the end of the summer to see where I’ll put my money (literally).  In the meantime, hold on tight.  I’d tell you to pray, but I’m not sure if crashing out or stumbling around with a bloody bandage on the stump is preferable.  I suppose the bandage.  I doubt even a second crash would be enough to make the powers that be understand they need to make fundamental changes.

Meanwhile, in the US, the strongest part of the recovery comes in medical, insurance, finance and construction.  As I said long ago, the fundamental Obama play was to try and reboot the bubbles.  Yay.