The EUR has been tanking this last few weeks due to the collapse of the Europe welfare state gig and the dollar has been going up and gold down. This seems like a relatively natural thing. Truth is there probably will be a restructuring of Greek debt at some point but I am not sure how it is going to work. There is a lot of talk in the media but the real players behind the scenes are working out some kind of deal. The tough part is figuring out who is going to get the haircut and who is going to get bailed out. They are not going to let the TBTF banks in Europe go down so there will be bailouts of one kind or another. The trick is being a bailout guy and not a haircut guy. In the big scheme however, Greek restructuring is small potatoes. The real trouble is the rest of Europe — Italy, Spain, etc.. The old so called East European countries are all in trouble. Basically the welfare state, no matter how wonderful it may seen, does not work unless there is GDP growth in 5% range or more or you have large energy reserves you can sell to finance it. Otherwise the debt catches up with you and you take a dive. The best plan is do not build a welfare state in the first place. It is just too tempting it seems because as soon as any country works hard and builds themselves a decent life the statists move into the government and start implementing a welfare state and then the society’s work ethic and expectations of self reliance are eroded and they end up taking a dive. It has happened over and over all down through history and we just can’t seem to learn.
The main event will be when everyone stops obsessing on Europe and starts looking at America. We are in terrible shape – it is scary bad. We have way to much debt. The class of dependance has grown to half the country. It is a disaster. There is no way we can pay back what we owe now and there is no way we are going to be able to pay for what we have promised people in the future. There is simply no way to do it and that is all there is to it – period. We are borrowing between 40 and 50 percent of the money the fed gov is spending now. There is no way to continue that and there is no way to pay for what we have already spent. The inbound revenue stream to the fed gov is about 2.4 trillion. We are over spending by 1.6 trillion this year and it is scheduled to increase dramatically over the next 20 years. There is no way the world is going to loan us that kind of money. And as it becomes more and more obvious that we can no longer control spending the world will get scared and the purchasing of our debt by foreign countries will be reduced – this process has already started. The fed res is holding down interest rates to basically zero right now and plans to continue this for the next few years. That is totally unprecedented and should give fair warning to everyone that a very serious situation has developed. I’m not sure they will be able to continue to do that forever. If interest rates go up there will be an unprecedented blood bath in the treasuries market.
The Fed Res will not let a treasury auction fail as that would create an instant emergency so they will print. Then they will print some more. If they stop buying the excess fed gov debt (a treasury auction failure) there will be an instant emergency. The politicians are terrified. It is believed that you can not get elected if you cut the welfare state – the class of dependency will vote and you will go down. I saw a study that showed that we can not even go back to 2008 spending levels without a serious emergency developing where we would have people rioting in our cities. That is just 3 years ago – 3 years. All the recent financial data points to another leg down in the great recession. ISM manufacturing, jobless claims, non-farm payroll, durable goods, case shiller, you name it (and most of them are cooked by the fed gov see shadowstats,com) – are all bad and trending down. The so called rich are out spending money and the rest of us are not. We exported untold millions of decent paying jobs to the third world and hollowed out the middle class. I see people on TV talking about how we get back to normal and when we get back to normal, normal, normal, blah blah blah. We have recovered. This is it. This is the new normal. Recession is the new normal. Get used to it. If things continue on as they are now it is going to get worse. What we have now will be considered the "good old days" back when the non-farm headline rate was 9.1 percent.
I work for a Wall Street company and on a daily basis groups of people stand around staring at the monitors in silence. There is not much to say. Very large amounts of money are moving in and out of various asset classes and moving around the world every day. Pretty amazing stuff. Sometimes things go on that simply can not be explained and look like government intervention. There are wild swings every week that are now taken as basically normal that would have scared the poop out of the entire world just a few years ago. Complex systems often oscillate wildly before they fail.
One thing is for sure. CM is dead on right. The next 20 years are not going to be very good for America and really large bad things are going to happen.