Tuesday, June 21, 2011

Are you watching the events in Greece?

What you are seeing in Greece you will see repeated often in the next few years. Other Eurozone countries who did not control their borrowing will also experience the same problems as Greece, Portugal, and Ireland. These were mainly Socialist governments that bought elections by promising what could not be delivered. Spain could be next, and Italy, then soon in France. The bigger countries will each have a larger impact on the world economy. Other Eurozone countries will be weakened significantly by the attempts to prop up the failing countries and then in the dissolution of the Eurozone. They will also be weakened by the decline of international trade, as countries cannot afford to buy internationally. We could see tariffs spring up again, as in the mid-1920s. If these countries default, you will see large bankruptcies in other countries and economic dislocations, that will be a recession and, perhaps, depression. Although US banks have made few loans directly to Greek banks or the government, they have insured many of the European loans. A default will touch us, hard. And we aren’t out of our own recession.

Notice that the endless rounds of intense discussion and bargaining, with actions that, if rationally based, would result in significant improvement in the situation, only that a few months later the same events occur again. And notice, no one is really surprised. In the blogs you find people just calling these intense efforts, “kicking the can down the road”. That is, everyone seems to know that these actions will not produce any legitimate results and that the future only holds more of the same, until bankruptcy or default occurs. These events, with the seriousness, intensity, pretend efficacy, and intellectual bankruptcy, are right out of Atlas Shrugged, complete with consistent failure.

In the next few years, as Europe spirals downward, we will see a similar failure occur in Japan, and ultimately in the U.S. The big difference for us will be that there won’t be anyone to pretend to bail us out. The IMF and other rich countries will have used up all of their resources by then (but then, most of the IMF resources came from us).

I always knew that these countries would suffer major economic disasters. I knew that they could not keep their welfare systems functioning in the long term. I was wrong, however, in the mechanism. I thought that the problem would be the aging of the population. The Ponzi scheme of taxing to pay current welfare state benefits would hit population problems (an application of Maltus that he didn’t foresee!). Okay. So I was wrong. It is the debt! Debt. We have seen several debt crises over the last decades. What is coming will make the earlier problems appear as minor ripples. Obama has really brought it all to a head for us. Our chance.

For those who are focusing solely on health care, what do you suppose it is like in Greece, or will be over the next few years, or will be when Greece defaults on its debt and has no money in the government till, or leaves the Eurozone and has to depend upon its own resources and inflates its currency? That will be our fate in a few years. Which will happen first, ObamaCare or our own depression? Even if you save us from ObamaCare, you will lose to the depression.

I did look at the Greek protesters as complete idiots, protesting the end of their gravy train paid for by others. But I have reconsidered. One commentator I read explained the reaction of the protesters by saying that the prospects offered by the government were very bad, and that default wasn’t significantly different, by comparison. They are protesting the dead-end view of the Greek economy. Unemployment was skyrocketing, production down, and government debt – what all the fuss is about – was way up. In fact, every account I have read of what is expected in the future for Greece, including those who are very critical of the Greek protesters, say that without the government spending, the economy will continue to spiral downward. No one that I have read expects the Greek economy (or the Irish or the Portuguese) to improve. Every commenter, even “conservative” ones, regard the government as a prime mover. Its reduced presence means continuously lower production and growth, they say. Now this is patent nonsense. Yet, it is also the case that these economies will die, not because the government is the prime mover, but because these countries have removed the prime mover from the economy by law and ideology. That is, the individual is forbidden to seek his own way and make his own decisions. Self-interest is not allowed to flourish. Laws restrict initiative, hiring, firing, and generally doing things – producing. By law and ideology, they have forced the atlas to shrug.

We can see the same thing happening today in our country. Businessmen continually say that in the current climate of uncertainty and forthcoming, vague regulations, they are not willing to hire or make plans. The decision makers are frozen. Major corporations are sitting on hoards of cash, but don’t know what to do. They are stopped in place by Obama and his willingness to arbitrarily assert control over men. Greece is an advanced example of our same system.

I am an admirer of Greece, Ancient Greece. One cannot forget, however, that the present inhabitants of Greece bear little resemblance physically and intellectually to the ancients. The ancient Greeks were heroic both physically and intellectually. The present Greeks are not. The ancient Greeks laid the foundation for Western Civilization, and all that it could be. The present Greeks have no knowledge or desire to know what the ancients learned. The ancient Greeks made possible the United States of America. Unfortunately, Greece is our future, but not like Greece was our past. Unless, of course, the descendants of the ancients stand forth and don’t let their world go.


  1. Fantastic post!
    The best chance I see is a quick collapse followed by a roll back of the state, since the latter, however, is not a default position but has to be ideologically driven you are right to paint such bleak picture.
    Thanks again for posting

  2. If you are a European, is there anything you can do hedge the risk of these events - in the financial sense?

  3. Your question, Anonymous, is an important one, and one that I didn’t want to answer glibly. Also, I was an advisor for many years, and I feel a certain responsibility for giving suggestions. In the context that I don’t know anything about the questioner, I am even more cautious. Nevertheless, I will put down some thoughts.

    First, please realize that hedging or self-protection is not simple or easy. You have got to research, study, and think it through. Have a definite plan, with economic triggers (i.e., events in the economy, society, politics, and value of your currency connected with different types of hedging or protection). Dealing with the events we face will take daring, courage, and preparation.

    When the entire economy is going crazy, it is difficult to find any kind of safe haven. Depending where you are, I might or might not expect the authorities to preempt ways of escaping the mess, which would have some influence on your choice. It is also the case that some of your alternatives, good ones, in the short-term, are themselves going to be very bad in the longer-run. For example, over the last couple years when things were uncertain, people all over the world turned to the dollar and US Treasury securities for safety. It confounded some of the US critics, who regard the dollar as very weak and corrupt. What has to be considered is that the dollar is still, by comparison to other currencies, a reasonable alternative, when there is chaos in the other currencies. If the dollar were to go into hyperinflation, there would probably be no safe currency. So, you could, for the next year or so consider dollar assets or futures or options to be good alternatives. I wouldn’t consider US equities. I think that they are at their high end.

    Commodity futures or options are also short-term hedges. In a sense, you don’t want to go into these investments as investments, but as hedges. That is, if you don’t make money, but the Euro stays strong and there is no disaster, then they weren’t needed, and a loss in the hedge is merely an insurance expense. If the Euro does dive, then the commodity hedge will do its job and keep your assets from being destroyed with the Euro. Precious metals provide a better hedge in that their benefit will be longer-term and better recognized. Even taking possession of some gold or silver coins or bars may be in order. Unlike some, I do not think that they would work as money in a collapse, since there are so few people who have any idea what gold or silver actually are, were, or could be. It will take a while for their monetary function is recognized and accepted.

    These are the ideas that I have at this time. I think that I am going to write something about this subject soon. Maybe I will have some more ideas then.