Tuesday, August 09, 2011

Global Debt Crisis Reaching Moment of Truth

As many readers are aware, for years I've been saying that the world is awash in unsustainable, and clearly un-repayable, debt.

Europe is battling through a very public, and very troubling, debt crisis. Japan has the largest debt of any developed nation and an economy that's been stagnant for two decades. Moreover, the U.S. has just suffered the first-ever debt-downgrade in its history.

Some economists and analysts already count Japan among the walking dead, as it seem to have entered the terminal phase of its debt crisis.

That said, the biggest risk at the moment is Europe. This recent article from the Wall St. Journal spells it out quite clearly:

AUGUST 6, 2011

The European Central Bank indicated it was open to purchasing the government bonds of Italy and Spain as a way to ease mounting market pressure on two of the euro-zone's largest economies.

For months, European leaders have been working in fits and starts to convince financial markets that they had the tools to help Spain if that country tumbled into a sovereign-debt crisis. But now, it is the larger Italy that appears at the center of the maelstrom, and there is no plan in place to help it.

The joint sovereign bailout fund created to rescue ailing member states is too small to lend Italy money to cover its bills. Endowing the fund with enough firepower would impose a huge burden on Germany, France and other stronger countries, and could well imperil their own credit ratings.

If Italy falls to the same fate as other failed peripheral economies, Spain will probably go too, setting off a chain reaction across the global financial markets, said Uri Dadush, a former senior World Bank economist and now director of the economics program at the Carnegie Endowment for International Peace.

If contagion spreads to Italy, "it would generate a financial earthquake," said Domenico Lombardi, a former representative for Italy to the IMF and now an economist at the Brookings Institution. The ramifications are so potentially large, "it would be close to impossible to manage that crisis," he said.

The world is now confronted by a mega-debt crisis and the cracks have turned into fissures. A series of fiscal earthquake faults are now at risk of triggering, or being triggered by, the others.

What first revealed itself as a Greek debt crisis has evolved into a global debt crisis. Greece was just the spark that lit the fuse.

Europe can mange the failures of the Greek, Irish and Portuguese economies, but it has no means for handling a Spanish or Italian default — much less all the bad debts of both nations. The reality is, both are too big to let fail, yet simultaneously too big to save.

The consequences of the still unfolding crisis in Greece alone, which is a relatively small economy, could even affect the U.S.

I've previously written about how interconnected and how fragile the global economy is, and how the debt crisis would continue to evolve. The ripple effects from the trouble in Europe, and even the U.S., will continue being felt far and wide around the globe.

Many of the world's leading economies have entered a debt trap, from which there is no escape.

The warnings have been loud, and they have been repeated regularly. We have now reached the 11th hour, the moment or truth, and are on the eve of a massive global financial storm.

Even the Director of National Intelligence has warned that economic instability is a major threat to the U.S. and wider world.

From the beginning, Greece mattered and it had implications for the rest of the world. The trouble in Athens served as a cautionary tale. Ignoring that crisis would be to the peril of the larger world.

This global debt drama has been years in the making and has been continually gathering steam. It has now reached a critical mass.

Political leaders and central bankers around the world decided that the cure for the crisis was to add more disease. But, as we're painfully learning, you cannot cure a debt crisis with even more debt.

For many years, the U.S. has been sitting on its own enormous debt bomb, and it has been steadily ticking away all along.

The European debt crisis should have been been, and remains, a warning to the U.S.

There is no reason to trust, or have faith in, our political establishment. Though the president did offer his "grand bargain" — $4 trillion in budget cuts, including Social Security and Medicare — in exchange for revamping the corporate and individual tax codes, he was rebuffed by the GOP.

Such a deal may have been enough to keep S&P from downgrading the U.S. credit-rating. But we are now left with an epic mess that could portend outright disaster for our nation and the broader world.

Perhaps it would only have slowed our decline: The U.S. manufacturing base has been decimated. Our trade deficit is absolutely gaping; it is shrinking our GDP and sucking more than $1 billion out of the country every single day. Rampant, and unyielding, unemployment has lead to a shrunken tax base. And a massive — and soon-to-be retiring — Baby Boomer population doesn't have enough younger workers to support it.

Get this; our government's unfunded obligations now total $62 trillion. Yes, that's a "T".

It's reasonable to ask; Will the government be able to pay future Social Security benefits?

For nearly a century, politicians let bankers run our country and loot its riches by inflating away our currency. As the fiscal and monetary troubles mounted, the politicians continually kicked the can down the road for future generations to deal with. We have finally run out of road.

Under normal circumstances, the politicians would just borrow more money to pave some new road.

Those days appear to be over. The U.S. may have at long last run out of lenders.


  1. Anonymous2:29 PM

    The dead only know one thing...it is better to be alive.

  2. Global Debt Crisis

    The greatest private fraud of human history.
    Who are the great fraudsters who are becoming the murderers of the human kind? How does the economy "illness" threaten Democracy and the freedom of people?

    By knowing what happened in indebted Greece, where loan sharks created “bubbles” and the current inhuman debt, one can understand the inhuman plan in total ...understand where this plan started just to bring all states at the same end ...understand how this type of plans are established...