Juggling Dynamite

One of the most encouraging signs I see right now is a worldwide push back from real working people against the assumption of more debt by tax payers. After 30 years of ballooning debt to toxic portions, individuals are finally waking up and revolting. Rallies all over the UK, Europe and the US are shouting out the mantra “debt is death.” No truer words were ever spoken and it is a great relief to hear people finally grasp this fundamental concept. Debt sucks the life blood out of families, businesses and economies as debt service payments funnel more and more resources away from current and future investment, consumption and savings.

At the same time, public confidence in politicians and central bankers has fallen to a fresh low. For very good reasons. The political and financial leaders have made horrendous decisions over the past 30 years to boost their own power and profits at the expense of prudent limits, long-standing regulation, and wisdom. We have earned our present strife the hard way: through years of foolish, self-destructive actions. See: Americans see Debt Threat.

The lenders and the borrowers are equally at fault here. It took willing fools on both sides to weave this insolvent web around the world. Now we will all pay for the clean up which will take years of diligent effort. This means fewer entitlements, less government services, and higher taxes which must be directed not to spending but to debt reduction.

The debt ceiling stand off in the US today is an embarrassment. Both sides must concede trillions in spending cuts and this includes restructuring social security and Medicare as well as cutting the ridiculous scope of the current war budget. But taxes also have to increase. The Bush tax cuts must be finally allowed to expire. They were brought in as a temporary measure so to insist that they remain permanent now is a fraud of false pretences. If both sides do the right thing, the budget will move trillions of dollars toward the black. This is the size of the remedy needed. Self-serving warnings of doom from banksters who were the primary architects of this mess, must be over-ruled. They do not want to admit they were fools and frauds, they want to keep the game going to retain their undeserved status and wealth.

Valuable leaders today must understand that the ways of unfettered spending and falling tax rates can be no more. History will judge us all by whether we led on changes needed or resisted sanity ‘til the end. The math back to a sustainable economy has no politics. The numbers are self-evident.

This Bloomberg clip with David Stockman is worthwhile:

Over the past several weeks, much ink has been spent on the insolvency of Greece and how it’s inevitable default will impact the rest of the Euro zone, banks and the global economy. Euro bank balance sheets are full of Greek bonds as well as bonds of the other fiscally dilapidated countries like Italy, Ireland, Portugal and Spain. German banks are the most chocked full of this bad paper as shown in this chart.

“From the creation of the euro zone in 1999 up until late 2007, lending between European central banks was modest — but then, when the financial crisis hit, the German Bundesbank in particular went on a lending spree, while the PIGS central banks all started a borrowing spree. Since then, the Bundesbank has essentially been singlehandedly financing the PIGS central banks: it’s now owed a whopping €325 billion, and rising. Government insolvencies would now also threaten the solvency of debtor country central banks. This would then impose large losses on creditor country central banks, which national taxpayers would have to make good.”

See: FT’s Martin Wolf today: Sovereign debt crisis: Time for Common Sense on Greece

In fact Germany and China have a lot in common. Both used their artificially low currency exchange rates the past 10 years to sell boat loads of exports to debtor nations. Both provided excessive credit to their foreign customers by recycling export proceeds into bonds issued by these same customers so that the customers could keep on buying goods. It seemed like a perfect and infinite line of credit, until the realization hit that their customers are now so indebted, they will never be able to pay them back.

This reminds us of the age old warning, “neither a borrower nor a lender be”: when defaults hit, both sides lose heavily. And this pain crosses the Atlantic too: US banks greedily gobbled fees for underwriting the lion’s share of credit default swaps on European debts the past few years. As the default tsunami finally crests in Europe, American banks, already hopelessly undercapitalized, are the insurers of the European debt implosion. As I have said many times, there is not enough money on planet earth to make good on all of these claims. Zeros must be written off on all sides.

And while the risk trade rallied yesterday on more hopes for miracles in Greece, it is crucial to keep our sights on the real story: the global economy is in a major cyclical slowdown today heading into the second half of 2011. Meanwhile, stock and commodity prices are still jubilantly juiced from government and Central Bank stimulus injections all around the globe.

The onset of this major contraction or recession in the economy is not dependent on the fate of Greece. The default of Greece and its knock off effects on the global banking system will be an extenuating factor, but it is one of many coincident irritants; not the cause of the slowdown underway. Greece is the market word this week; but make no mistake, it is not the main story.

Ms. Park was recently interviewed by Metals News, you can read the article here: Juggling Dynamite is no circus act: is the global economy blowing up again?