Why the financial economy will collapse, sooner or later. Notice I said financial, its not the worse thing that can happen. War is the worst thing. If we have leadership that understands economic fundamentals of sound money, gold, silver, we can recover relatively quickly.
Greece, which is a time bomb set to ignite the nuclear system itself, but seems to have been “forgotten about” where market participants are concerned. Their short term debt is trading at interest rates between 300-400%. They are flat assed broke and the market has already deemed them so.
The problem is twofold, first the market IS paying attention to because it is Euro negative (betting against the European Union) which temporarily points the finger away from the U.S.
The fact that there is a crisis in Europe has postponed our troubles temporary, take advantage of this time, it will not last long.
If Greece really does “technically” default, the Eurozone is toast which it is anyway with Portugal, Italy, Ireland, Greece, and Spain, (PIIGS) they will all default. The Euro was clearly not well thought out politically or financially.
The first problem is one of moral hazard. Moral hazard happens when an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party (in this case the more fiscally responsible members of the European Union) to hold some responsibility for the consequences of those actions. Some countries politicians recognized that because the EU agreement backing up the debt of individual countries they could borrow much more money than previously. The PIIGS countries took full advantage, running up huge debt in the hopes that the European Central Bank (ECB) would be forced to print money and bail them out. Printing money by the ECB would essential spread the bail out over every single member of the EU in the form of inflation. Essentially everyone would be punished for the behavior of irresponsible politicians.
In the original inception countries were suppose to keep debt under 60% of GDP and no more than 3% per year. Greece-160%, Italy-121%, Germany-85%. The PIIGS simply could not control themselves and loaded up on debt. People need to understand that politicians are just as greedy as capitalist. When you put a pile of money in front of them they will consume the money to buy votes and pay off constituents.
Secondly and most importantly, which of course is not getting much press are all the Credit Default Swaps (CDS) insurance that has been sold. Greece CANNOT be allowed to technically default and trigger the “insurance” payouts. If this was happen, there could be 5, 10, 20 defaults by “insurers” just like AIG who could not pay.
If the CDS are not triggered …it should have already triggered at least 10 months ago during the first bailout… then the owners of CDS, many who have “hedged” their portfolios with this bogus insurance will not be paid. Many institutions will become insolvent …as if they are not already… by the simple fact that they own Greek debt that has dropped already 80+% in value with no compensation on the other side where they expected their CDS “insurance” to pay.
CDS CANNOT pay.
For that matter, how funny is it that the U.S. which is the reserve currency, has CDS in the $Trillions written against debt.
Greece alone will blow the system. Look at the U.S. … exponential overkill. The “writers” of Greek CDS do not have the capital to pay on a default and the suckers who relied on the CDS payments need them to be made whole. Without these payments they are bankrupt.
What this means is that everyone in this game has closed their eyes, taken a good long look into the abyss, and realize that in a few short weeks it will all be over for them. Bankruptcy, unemployment, ruin.
This is just one more black and white example as to why “mathematically” it is over and has been since late 2008 when central banks and treasuries decided to borrow, print and “save the world” for the time being.
How long is “the time being”?
All the central banks did was make the crash we will soon experience that much worse.
Why is it going to be worse?
Because our federal government have accumulated massive debt in that time. Our politicians have misallocated resources on unproductive government work scams like 19th century rail roads we do not need, corruption, bail out of bankrupt states, bail out of insolvent zombie banks that will go bankrupt again, artificially supported housing prices, not liquidating remaining housing stocks, fighting wars, and making the suffering much worse in the long run.
American corporations have approximately 20% market share exposure to the EU. It is not a small problem “over there.”
The only correct move for those playing the game today is not to play the game.