I’ve seen items from John Muldin and George Friedman this week analyzing the Greek debt/deficit debacle. Greece is one of the PIIGS of Club Med, the European nations who cannot afford their welfare systems. Greece cannot borrow to fund its largess; its credit rating is junk according to S&P. It is seeking European and IMF bailout aid, the amount of which is dependent on uncovering the accounting tricks it has heretofore used. Normally the IMF would use devaluation as one tool but that is not possible here because of the Euro. Greece will fail.
Sovereign debt problems are forecast for Spain and Portugal also, as they have suffered downgrades. Causes of their problems are similar but the significance is greater as the Spanish economy along with Italy which may follow soon is simply too big for Germany to bail out. Fiscal contagion is a serious problem.
So, let a few PIIGS fail, so what? Problem here is with the European banks. They hold the PIIGS bonds. Without regard to those underwater assets, the European banks were already in trouble since they did not clean up their bad real estate related assets. Think the Japanese banks of the 1990s. Friedman says the even at the peak of the U.S. subprime crisis European banks were in worse shape. How much worse shape now with the PIIGS crisis?
A Euro devaluation? A break-up of the European Union? At least, a significant period of de-stability for a major consumer in the world economy and a significant producer in that economy. Germany will survive in better shape than the rest. The PIIGS are likely to exist outside a re-formed European Union.
Add the fact that the U.S. is not the consumer that it once was. Thankfully, it is de-leveraging more, saving more, and consuming less. It hopes to expand its exports but who will pay the desired price? China? The rest of Asia? Thus the world economy will really be upside-down with a lot of areas trying to be producers but none trying to be consumers!
But the real concern is that the U.S. is a budding Greece bubble waiting to pop. In ten short years 93 cents of every dollar of government revenue will go to pay entitlements and interest on the debt. Obama has put us on the path to become a Europe on steroids just when Europe is exploding! Before Obama took office our entitlements thanks to Roosevelt, Johnson and Bush were on an unsustainable path. Rather than correct this Obama added another major entitlement, Obamacare, which will bankrupt our nation.
Several questions present themselves in this scenario: What of defense? Iran, North Korea, Russia and China are all real and potential problems. We spend so much on butter that we con’t afford guns. What of our assets and businesses? In a declining economy how will be work, live and invest? And, from a personal survival standpoint if the economy declines toward the subsistance level, is it guns and gold to survive? I know my farming skills aren’t all that good!
But there is hope if we recognize that big government must be drastically cut, public employee pensions and compensation reduced to the level of private compensation, entitlements including social security, medicare and medicaid cut in half, and Obamacare repealed and replaced by consumer-based, non-tax advantaged health care. We have a very short window in which to accomplish this dramatic turnaround. Let’s educate the voters and elect people who will get the job done.