So… what has happened in the wonderful world of international economics over the last week? Well, let’s see….
- Friday: Shares dropping, and the US credit rating took a hit after trading hours.
- Weekend: Lots of ‘statesmen’ phoning each other. No action…
- Monday: Massive share price drops. Panic!
- Tuesday: ECB starts buying Italian and Spanish bonds, US Fed says they’ll keep interest rates low for the next two year. Share prices rise/fall/rise, but mostly rise.
- Wednesday: Massive share price drops. PANIC!
I could have told you their ‘solutions’ wouldn’t work!
Why? Because they’re not addressing the problem, only trying to hide the symptoms!
The fundamental problem in the economy today is that a massive amount of countries, banks, companies and people are in debt… HUGE debt! Yet most of them try to live like they aren’t!
Europe is in the shitter because a number of counties have lived FAR beyond their means (and we’re not just taking about the PIIGS countries here), and have been allowed to do so because they’re members of the fairy-tale zone… excuse me, the Euro-zone.
Being Euro members have allowed these weak economies to borrow too much money at low interest rates, but now the debt-collector is here to demand his money… and they have borrowed so much they can’t pay!
What are the other members doing? Well, they’re BORROWING money to pay for the debt of the indebted countries. Now, that COULD work if the other countries hadn’t ALSO been indebted and in deficit, but essentially the problem is not being solved, but is just being spread around.
Exactly as happened in the 2008 crash, the fundamental problem is not being solved, but is just being moved around.
Essentially, we have a ‘pee in the pants to stay warm‘ situation. Great!
Now, let’s have a look at the other side of the pond, in the good old US of A… Here matters are no better, though different.
The US has been living beyond their means for the last 10 years. A total disregard of the fact that borrowed money has to be paid back, with interest. The situation could be managed, but the US political system is totally paralysed.
There are currently 3 political parties in the US, the Democrats, the Republicans and the Tea Party. That shouldn’t be a problem, but it is since the Republicans desperately want to pretend that the Tea Party and themselves are actually the same party! Add to that a healthy dose of religious fanaticism and a lot of ignorance from the politicians about how the world actually works, and you have the current situation.
So what is the US actually doing about the problem? Talking and making cosmetic changes. The problem needs solving now, so they’ll postpone any solution to the future. Good work guys!
What can be done?
In the real world, probably not a lot… The solutions required by the situation requires politicians to tell people that things are bad and they’ll have to start living within their means. This is probably beyond what politicians can do since it’ll risk that most precious of things, their seat!
Now, disregarding that, what COULD be done about the situation?
Let’s see… The problem is essentially huge debt… Now, how about we made that debt go away?
This could actually be done, but all the different solutions are going to hurt!
Solution 1: Pay off the debt!
This is probably the best solution of them all, and it is so simple. The big problem with it is of course that it requires the people who ran up the debt should actually pay for it. In general, they don’t want to do that…
Solution 2: Default on the debt!
Another solution, but one which will hurt a lot of other countries, banks and individuals. Those holding the debt will have to pay. A lot of people, companies and banks will go bust, and it’ll probably drag other countries down too. For example France might go bust since their banks hold a lot of debt from the worst countries.
In Europe there is the additional complication that the Eurocrats desperately wants to keep living in fairy-land and can’t imagine giving up the Euro.
Solution 3: Create massive inflation!
Another solution which in the end (after a lot of suffering) will probably be the one chosen at least by the US. It’ll hurt everyone, the people holding the debt and the people in debt. The people holding it will see their assets devalue, but so will the people in debt as any savings they got will become worth less. The main problem with this is of course that so MANY countries are in debt that they can’t all do it since it wouldn’t work then.
Now, I hope I’ll be wrong on this, but I don’t think I’ll be off by much. Maybe the details will not be exactly as I say, but I think the general trend will unfortunately be close to what happens…
We’ll continue for a year or two more with the ECB and the core Euro countries trying to keep things together. Eventually the bill will become too high, and Greece, Italy, Spain and Portugal will default on their debt. At this point, the Euro will either disintegrate, or split into smaller separate zones. Since there are no contingencies for doing this, it’ll be messy!
The problem is of course that as long as these countries are members of the Euro together with ‘strong’ countries, they can not use the usual tool to get out of a bad economic situation, which of course is devaluation.
Now, the Euro has a small chance of staying together, but this requires the ‘strong’ countries, particularly Germany to essentially ‘pick up the bill’. By my best estimate, the German population will not accept that, so neither will their politicians… It also requires the Euro countries to essentially become one country. This will not happen either.
My time-line of 1-2 years could also be MUCH faster…!
In the end, the US will most likely try to inflate their way out of the problem (i.e. start printing a LOT of money). This will of course make the Dollar worth much less, will drive their interest rates through the roof, destroy the savings of ordinary people, and will also mightily upset the Chinese.
It’ll ‘solve’ the debt problem, but the problem is that they’ll probably then just try to borrow more money to continue living beyond their means.
Until the next election nothing will get done. After it? Depends a bit on how the votes fall, but baring a Democrat super-majority in both houses (and Obama getting re-elected), I don’t think anything will be done. A Republican majority or super-majority (with a republican president) will not be able to fix things as they’ll be dependent on the Tea Party.
Stock up on food, water and ammo… Methinks this ride is going to get rough!
Disclaimer: This is my personal estimate of how things will go (and I still hope I’m wrong). Don’t use it as basis for buying/selling shares or other financial transactions