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Greece Fire Part 2Posted Thursday, June 23, 2011, at 5:11 PM
I really don't want to become Henny Penny crying that the sky is falling. However, I don't make up the news. I look at three different sites that compile economic news daily and three to six other sites that compile general news daily. U.S. Representative Paul Ryan said that we are facing the most predictable economic catastrophe in history. He described it as being like watching a slow motion train wreck. Here is the latest:
If news reports are to be believed (a dubious proposition) the Greek financial troubles may be coming to a climax. The financial media are saying that Greece's default on its debt is imminent. This week, Standard & Poor's cut Greece's credit rating to CCC, the lowest of any nation in the world.
It seems that the question is not whether Greece will default, but how to handle the inevitable default. Does Greece outright stop paying on their bonds? Do they "roll them over" for later payment? Do they call in the bonds and issue new ones with longer maturities? No one knows.
The European central banks continue to flush more money down the toilet that is the Greek government. Greece is "too big to fail" and they hope sending them more money will prevent the inevitable. However, the Germans, acutely aware of the risks, are insisting that at least a third of any future bailout money be paid directly to private creditors (read German banks).
Anyway you cut it, (1) Greece will run out of money in eight weeks and the financial system has not successfully been bailed out, and (2) Greece will default on its bonds (debt).
The Greek government is in debt up to its ears. The Greek national debt equals more than $42,888 per person. Too bad the Greeks are not as financially responsible as we in the United States. The United States has a national debt of more than $46,700 per person. (Oops, our financial situation is a bit worse than theirs.)
As mentioned in a previous article, China has already sold 97 percent of its U.S. bond (debt) holdings. They were our largest foreign lender. Japan, our second largest foreign lender, has been selling its U.S. bond (debt) holdings to pay for the tsunami disaster. Now Russia, our third largest foreign lender, has cut its holdings of U.S. bonds (debt) from $176 billion in October 2010 to $125 billion in April 2011. That is a 15 percent reduction in only six months. The Russians are saying they will continue to sell their U.S. holdings.
Only last week we learned that Greek unemployment is now 16 percent, having risen 40 percent over the past year. Once you remove the federal monkey business from the American unemployment numbers, our rate is about 17 percent. According to the International Monetary Fund, Greece is slipping into 1930s-style depression.
Now the big question: is Greece the first domino? Greece appears unlikely to stagger past January 2012. How will that effect Portugal, Ireland, Italy, and Spain who are also in financial trouble? Will that destroy the 1950 Treaty of Rome and end the European Union? Will that in turn lead to the destruction of the Bretton Woods Treaty and the collapse of the U.S. dollar? China and Russia are planning on exactly that happening.
Alan Greenspan, former Federal Reserve Chairman, recently said that a default by Greece is "almost certain" and could drive the U.S. economy into recession. (Did I miss something, or are we already struggling with a recession?) According to Greenspan, "The problem you have is that it's extremely unlikely the political system will work" in a way that solves Greece's crisis. The chances of Greece defaulting are "so high that you almost have to say there's no way out."
Referring to the U.S. economy, Greenspan said, The U.S. debt issue is becoming "horrendously dangerous." He doubts that American lawmakers have even one year to solve it.
Our current economic malaise is already being called "The Great Recession." U.S. home foreclosures have already surpassed that of the Great Depression of the 1930s. Some are predicting it will become "The Greatest Depression."
If all of this comes to pass, who winds up on top? The countries least effected will be Brazil, India, Russia, and China. None of these nations are particularly close friends. It is hard to imagine that they would defy all historical precedent and not press their advantages over Europe and North America. Hopefully, our lawmakers will put on their big boy pants and do something serious about our financial problems.