shekel versus dollar 521.
(photo credit: REUTERS)
The essence of the global financial crisis, which has been ongoing since 2007
and is now entering another critical phase, is that the world is drowning in
debt. Once you understand and accept that, many other things become clearer –
notably, why it is that the enormous and unprecedented efforts on the part of
the developed nations to resolve the crisis have failed.
Since the crisis
stems from too much debt, adding more debt cannot resolve anything. It can only
defer the necessary deleveraging – which involves large-scale bankruptcies and
social and economic disruption – but at the expense of making things ultimately
worse. Calling it “stimulus” just makes it part of the game of “extend and
pretend” that the politicians and most central bankers are intent on playing,
but when it turns out that the economy has not been stimulated, the credibility
of the effort and those responsible for it is severely eroded.
nutshell, that is the story of Greece, of the wider European Union crisis, and
of the US. Only by keeping the big picture clearly in mind is it possible to
make any sense at all of the extraordinary gyrations seen over the last week or
two – not just in the financial markets, where gyrations are normal, although
these were exceptional – but also in the political arenas on both sides of “the
In Europe, the headlines have largely focused on Greece,
but from the markets’ perspective, Greece has long been viewed as dead meat. No
one doubts that there will be a default, under whatever name the politicians
invent to sweeten it, which will result in bondholders taking hefty losses.
Since those bond-holders are mostly banks and pension funds, it will be
necessary to provide them support – at taxpayer’s expense – to prevent the
entire economy seizing up. Given the surly mood of taxpayers, that is tantamount
to political suicide, hence the determination of incumbent politicians to extend
and pretend, for as long as possible, irrespective of the cost.
and Ireland are in the same class as Greece, although the specifics of their
problems are different.
That’s why “news” of additional downgrades of
Greece and Ireland by one or other of the ratings agencies in the course of this
week were not viewed as significant developments.
Instead, the focus of
attention in the financial markets moved to Italy – the third-largest economy in
the European Union, home to the third-largest bond market in the world (after
the US and Japan) and a nation in chronic deficit.
The sharp falls in the
Italian bond and equity markets that began in the middle of last week and
climaxed on Tuesday of this week, were the response of the “bond market
vigilantes” to the politicians. The collapse in prices and dramatic jump in the
yields on Italian government bonds signaled that the endless dithering and
squabbling among European decision-makers over how to deal with Greece were
making things worse rather than better. The sovereign debt crisis was moving
from the periphery to the heart of the eurozone – as the realists had predicted
all along would happen. Almost laughably, the Italian political system, headed
by the lecherous crook Berlusconi, suddenly sobered up under this assault and is
engaged in passing new laws that will deliver budget cuts, increased efficiency,
less corruption and all good things. Unfortunately for Italy, its record of
cheating its partners in the EU – not to mention Berlusconi’s own abysmal record
on almost everything – is now coming home to roost. No one, especially not in
Germany, attaches credence to Italian parliamentarians and their laws, let alone
their protestations of future good behavior.
The ongoing slow-motion
crumbling of Europe would normally result in a flight to the safe haven of the
United States and its dollar. But normality of that sort is no longer available.
As discussed here last week, the US itself is now a candidate for default – a
concept that until quite recently would have seemed patently
However, the asinine behavior of all the top politicians in
the American system has made that possibility less remote with every passing
day, so that by the time Moody’s fired off another public warning to the US
government on Wednesday, what had once been unthinkable was now an imminent
prospect. True, the presumption remained that the “leadership” would draw back
from the brink at the last minute – but the degree of confidence underlying this
presumption was ebbing by the hour.
In this theater of the absurd, the
other major developed economy – that’s Japan – becomes the pillar of strength
and its currency climbs to record levels. The fact that it is even more deeply
in debt than either Europe or the US, that its economy has malfunctioned for 20
years and that its prospects are dismal – indeed, that the very earth keeps
rumbling under it – is conveniently forgotten.
That Japan is now the
paragon of stability in the developed world is the measure of the extent of the
encroaching disaster.[email protected]