Keep your eye on Greece this weekend and next week

[AllentownJake]

The Greek situation will be interesting to watch this weekend and next week. The Euro zone has a problem. Greece may default on their sovereign debt sometime in the near future.

The reason this is such a danger can be summed up in two words. Interest rates.

Investors demand a return on their investment and to be compensated for taking the risk of lending. If Greece were to default, the interest at which other European nations pay on their debt will increase as they roll over past debt and they issue new debt because once one nation defaults, investors are going to demand more for their risk in handing over assets to European governments.

If the current situation exists, Greece will default on their debt. This will increase the interest rates on new debt for Italy, Portugal, Ireland, and Spain as they are experiencing similar troubles but are in better financial shape. The increase in their budgets that are spent on debt servicing will probably push these nations into default, which will than push the big players France and Germany to the brink. Another economic domino scenario.

This however creates an interesting Catch 22. The mere act of bailing out Greece will create a moral hazard, where Italy, Portugal, Ireland, and Spain act less responsibly or have less urgency to clean up their mess and possibly create another crisis. If Greece got bailed out, why not us? So you have a very expensive proposition. One has to determine which is more expensive either way, not good.

United States

What does that have to do with the US. Well, there are about 7 states that have 35% of the US population that are teetering on financial collapse.

California, New Jersey, New York, Michigan, Florida, Illinois, and Ohio

They are experiencing similar problems to Greece and the other PIIG nations and like the PIIG nations they have no access to the printing presses. Very similar problem, they are headed to default, they are politically unable to make the cuts or increase the revenue to stabilize their economies, their workforce is above the national average in unemployment, and their core industries have taken the biggest hits this recession.

The US government faces a similar problem, if they fail to bail out the one (My bets are on California or New Jersey) that blows up first, the others go down when they try to roll over their debt and issue new debt as the interest rates they are charged are obscene. If they bail out the one that blows up first, they have to bail out the rest of them.

Lastly the banks and hedge funds

Oh and add to that mix a financial system that will short the countries through Credit Default Swaps and that there will be players out there who will have a tremendous benefit in bankrupting a country/state. The one thing to remember, like the mortgage situation, are the CDS actually backed up by anything or are they a Ponzi scheme cooked up by some institutions making the bet there will be a bailout and pocketing as much money as they possibly can. Seeing that these are insurance products without reserves, I'm guessing on the Ponzi scheme, which unregulated insurance, tends to always be.

It is of course a lot more complex, but wanted to give the cliff notes version for everyone.

[FarCenter]

1. As a sovereign state, why can't Greece simply "extend the maturities" on its debt?

Of course, it would be unable to do more borrowing, so it would have to balance its budget through a severe cut in government spending.

And it would presumable trigger the default provisions on the CDS, depending on how they are written. But that wouldn't affect Greece as much as the buyers and sellers of CDS on Greek debt.

[AllentownJake]

2. Politically impossible

They are sitting at high unemployment, a gigantic budget deficit, striking civil service unions, and history of a rioting populace.

They did that, the current government would be violently overthrown and chaos would ensue.

[FarCenter]

9. A high level of political conflict seem inevitable -- a general strike has been called

Any course of action that restores the Greek national budget to the 3% deficit level would result in significant unrest.

[AllentownJake]

11. Catch 22

I'm pretty confident that Greece is about to experience significant rioting. Desperate people do desperate things. They aren't much different than us. If we cut off the unemployment extentions tomorrow, something very similar would happen in the US.

[FarCenter]

17. PM stands firm as strikes called

Cobwebs gather on the gates outside a tax office in Athens yesterday as workers launched a 48-hour strike in protest at the government’s austerity measures that will lead to their wages and benefits being frozen or cut. They, and employees from many other sectors, are expected to join a strike by the civil servants’ union ADEDY on February 10.

As tax collectors and customs officers launched a two-day walkout yesterday in protest at the government’s austerity measures and the General Confederation of Greek Labor (GSEE) confirmed that its members would strike on February 24, Prime Minister George Papandreou stressed that the planned reforms were unavoidable.

<SNIP>http://www.ekathimerini.com/4dcgi/_w_articles_politics_100013_05/02/2010_114657

[AllentownJake]

22. Silly PM

The last people you piss off are your tax collectors.

[FarCenter]

36. This is Greece -- it's not clear whether the tax collectors actually collect taxes

[AllentownJake]

37. Customs and tax collection

If I'm a government with a revenue problem, I treat those people very well.

[shondradawson]

3. What do you know about the nasty rumour floating around that

the global economy may have to be de-dollarized and that to pay its exorbitant debts, the United States may have to divide in order to preserve the states?

[AllentownJake]

4. Doubtful

The world depends on the US government to keep order. That happened WWIII would quickly follow.

[shondradawson]

7. I do not know how the US will continue to maintain global order

with a military stretched to capacity and no budget to finance it. I am almost certain the international community is aware of this...

They are also aware that it is our nation that is anchoring many countries from shoring their own accounts, so to speak. They will soon be left with no choice but to cut the US away from their respective economic systems, if we continue to overplay our hand as an Empire...

[AllentownJake]

10. There is nobody to replace our Navy

Which protects their oil deliveries and other trade shipments. China and Europe actually need the United States more than we need them. It would be rather easy for us to become self sustaining energy wise with our coal, natural gas, and uranium deposits, with nothing to speak of our potential to build wind farms in the mid and south west.

Translation, No US Navy, lots of piracy.

[Bigmack]

48. Jake.... I have a problem....

with your view that the US is the savior of the world.

In the first place, nobody died and made us god. We are a deeply flawed country that doesn't seem to be able to take care of its own citizens. What gives us the right to rule the world? The definition of terms like "pirates" and "rogue states" changes over time, and we have been both of those in our history... some of it recent history.

Secondly, what happens if we simply cannot afford to be the moral arbiter/cop of the world? We have spent ourselves into an untenable financial situation... primarily for wars of choice, including the Cold War.

We better get our shit together and plan for the time when we cannot control the world. That time will come.

No Empire last forever.

[AllentownJake]

50. I never said we are the savior of the world

However, like previous empires, we do provide certain benefits to being out there in the sea with big boats shooting pirates and preventing anyone else from getting bigger than us. Just as the British did and the Romans did.

Pax Brittanica, Pax Romana, and Pax Americana

All led to an increase in the spread of technology, knowledge, and social development in the world. All had some pretty brutal parts of their history.

We've also provided a medium for trade for 50 years.

That being said, generally, the prosperity brings about laziness. The laziness leads to stagnation, the stagnation leads to decline, the decline leads to the fall, and a new power emerges.

[Bigmack]

52. You left out arrogance... we got a lot of that! nt

[AllentownJake]

53. Don't all empires nt

[FarCenter]

12. I've heard suggestions that we ask China what they would pay for California

[AllentownJake]

15. We'll sell them Taiwan first nt

[FarCenter]

19. We won't get anything for Taiwan

The claim to own it already.

[AllentownJake]

21. Than they should try to take it

which will result in the death of the planet.

We move our Military out and negotiate re-unification with the mainland.

[FarCenter]

28. They will be patient; there is no need for the Middle Kingdom to hurry

[MUAD_DIB]

18. So you work in the nut house do you?

[FarCenter]

23. For the right price, I'm certain that a national referendum on selling California would pass

[AllentownJake]

24. I'll give them Texas for free

Have fun occupying that bunch.

[Subdivisions]

30. Ahem...Texas in da house. And, no,

they would not have an easy go of occupying us, much less turn us into a communist state.

[AllentownJake]

33. that was my reason for the suggestion

I can see every lad in Texas screaming Wolverine.

[MUAD_DIB]

31. The problem with that is the Chinese would lose any sleep in

executing any uppity Texans.

If they will do it to their own people then why do you think Texas would fare any better?

[AllentownJake]

35. It is the most armed state in the union

They would be shot out from every open window from every human being from the age of 3 to 105.

[MUAD_DIB]

57. Like China would care.

[MUAD_DIB]

29. Too bad that it is not up to a national referendum to decide such things.

[FarCenter]

34. Too bad the US doesn't have a California style "Initiative and Referendum" system

It is working so well in California. Voters pass referendums mandating both higher spending and lower taxes. They are so screwed.

[amandabeech]

49. Actually, selling any of those states except Florida might pass.

Too many people want to go to Disney World, even those who don't live in the debtor states.

I'm speaking as a Michigan native.

[mdmc]

5. thanks for the OP

[whyverne]

6. The world is bankrupt.

Put a sign on it. Closed-For Sale

The world has more debt than can be paid off in any reasonable amount of time. It may be smarter to default sooner rather than later.

Jubilee! Jubilee! Jubilee!

[Mari333]

8. yay Michigan we are Number One

http://www.cnn.com/SPECIALS/map.economy/index.html?hpt=C2

[G_j]

13. I think there are other countries

in a similar situation. This may be just the beginning.

[AllentownJake]

14. Well the world is flat theory is definetley under strain

I expect a lot of protectionism and self interest taking shape in the next 5 years

[G_j]

27. yes, I suppose you could call it a "correction"

too bad the poor are always slated to "tighten their belts" during such occurrences.

[AllentownJake]

39. I also expect a lot of civil disturbances

and quite a bit of populism.

[laughingliberal]

16. I'm shocked to not see my state on that list. I'm in Nevada and we seem to be on the brink to me

Then again, I'm not sure how bad it has to get before collapse is imminent.

[AllentownJake]

20. You are a smaller state

A Nevada collapse would be devastating, however, it would be very easy for the Federal Government to covertly take care of your problems.

They really can't covertly take care of those 7 states problems.

[cilla4progress]

25. Time for a do-over?

Can that be done? :)

[AllentownJake]

32. People are making bets on failure

When there are people out there taking bets on your state or country defaulting on your debt, they will do everything they can to ensure such a default happens...oh and the Supreme Court just made the ability to do that very cheap.

[laughingliberal]

38. I see. Had to wonder about that as I notice we appear to be going down in flames

But it makes sense that it would not take much to cover us.

[bertman]

26. Interesting OP, Jake. I'm hoping that some genius is going to figure out how to resolve

this without the bottom falling out.

[girl gone mad]

40. My Greek clients are expecting and planning for default.

Just a personal observation.

[AllentownJake]

41. What business are you in?

Are they moving investments to dollars, selling greek assets?

[Behind the Aegis]

42. This may explain the recent spate of anti-Semitic attacks.

I wasn't aware of this situation.

[AllentownJake]

43. Economic troubles always create ethnic tension

As people look for someone to blame the economic trouble on and generally look for a scape goat "other" instead of the leaders of the past and present in business and government that created them.

[Behind the Aegis]

44. Seems two groups are always the target for economic woes...

...immigrants and Jews. Immigrants because "they are taking jobs away from the good, hard-working folk," and Jews because "they control the financial markets, banks, and are rich." Of course, Jews always make a good target, one only need to read the current headlines, see the past trends, and view some select posts from political websites, including this one.

[AllentownJake]

46. In Europe more so than the United States

Historically the Jewish population was heavily involved in the banking industry, because it was a way for the nobility and the Catholic church to circumvent Usury teachings in the Bible. They were also convenient target of the aristocracy because it was very easy to justify taking things from them in economic down turns. The banking industry in Europe was thrust upon the Jewish people in the middle ages to late Renaissance because it was one of the few ways they could make a living, they were banned from other professions.

In the United States, banking has mostly been a WASP profession and there are about as many Jewish people in banking as there are in other industries.

African Americans take a larger hit than Jews in America as Americans tend to blame their government more than business, and the small amount of transfer payments that are made to poorer people (mostly poorer whites I must also say) is blamed as part of the problem. The fact that it is a small fraction of the state and federal budge in comparison to other items, is never really rationally discussed.

It is natural to question a nations immigration policies during an economic downturn, when you are having trouble supporting your own population economically, bringing in more people is questionable.

Immigration is a moot point politically in America. Neither the democratic party nor the republican party want to have an honest discussion about it for different reasons. However, the poor immigrant who comes here for another country looking simply to make a living is often irrationally attacked, and has been since the day after we became a nation.

The thing to remember is that the people in charge economically are stoking such flames, as it is their way to distract a population for their greed, or their fuck-up.

[tomm2thumbs]

45. thanks for the cliff notes version

keeping eye out - Dylan had a big mention on his Friday show as well for the PIIG nations

[Vidar]

47. K&R.

[Odin2005]

51. here comes the second dip.

This is going to be our equivalent of the early 30s bank failure crisis.

[Hannah Bell]

54. Since the entire world seems to be in debt, we might ask to whom all the money is owed.

and who, exactly, ran up all the debt.

[AllentownJake]

55. Some computer server in an undisclosed location in South Dakota

In reality, most of this debt and money exist in binary language on servers.

People talk about printing presses, in reality it is entries into a database.

Take a look at computing power than take a look at the explosion of debt and money supply.

3% of the world's currency exist in physical form. I'm guessing there is more Gold on computers than there is actual Gold in the world.

At least the Germans could eat their money when it went bad :rofl:

[Odin2005]

56. Vapor wealth?

:scared:

[Kalun D]

58. Resolution

""In reality, most of this debt and money exist in binary language on servers.""

so then someone needs to write an unstoppable virus, that goes in and erases all the 1's and 0's.

Cuz most of this "debt" is contrived, through things similar in ideal to derivatives.

Some corrupt politician sells a corrupt war and some corrupt arms maker supplies a corrupt weapon to fight the corrupt war. Then a corrupt banker steps in and makes a corrupt loan, in your name, to "pay" for all the corruption. The "debt" is wracked up to unimaginable and unmanageable proportions, then from that point forward the corrupt banker only allows you to pay on the interest.

All of your federal income tax goes to pay just the interest on the national debt. It's a transfer of wealth plain and simple, and that's all it is. You didn't request, need, or buy the war or the bomb, or get any benefit from it, you aren't even allowed to pay off the debt in your name that purchased it. All you are allowed to do is pay interest on the "loan" from the filthy rich. A system intentionally designed (and it really is) could not be any more corrupt. How long are we going to put up with it?