California: the Greece of the US financial crisis
Greece and California are reaching a teachable moment: You can't get out of debt by piling on more debt.
Oh my, oh my…this is getting interesting…Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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“How zombie consumers menace the world economy,” is a headline from Yale Professor Stephen Roach. Mr. Roach is misusing the word ‘zombie,’ but he’s coming closer to understanding what is really going on.
That is, he’s beginning to see things our way!
Greek 2-year debt was yielding over 30% on Friday. Everybody said the situation was dire. And everybody agreed that this time, the Greeks were not likely to get away without a default of some sort.
This is a great moment for the world’s intellectual and moral life. Suddenly, people are beginning to realize that you can’t make bad debt go away by piling more debt on top of it. And yes, when you make mistakes, you have to pay for them.
Perhaps this insight could be teased out into a broader, deeper understanding of how life actually works. Maybe it is true, after all, that you can’t create real wealth by printing up pieces of paper. And maybe it’s also true that economists working for central banks can’t do a better job of running an economy than they can of running an anthill. Maybe central planning doesn’t work after all?
And maybe there are some things you just should not do…such as spend too much money. Or murder people, even if you don’t like them. Or send photos of yourself in a ridiculous, obscene pose via the Internet.
Yes, dear reader, maybe there are some things that are right…and other things that are wrong – no matter how smart you are.
“When you are insolvent you do not solve things with new and larger loans.”
In Europe, the very smart financial authorities kicked the can down the road. And now they’re tripping over the can.
In America, they kicked the can so far you can barely see it. And it’s the size of a 55-gallon drum.
Europe’s problem is sovereign debt – government debt – and bank debt. America’s problem is private debt now, government debt later.
Europe could fairly easily solve its problem. Greece doesn’t really matter to anyone – not even to the Greeks. It could be cut loose. Abandoned. Allowed to go broke, as we predicted it would a couple years ago.
The problem is that there is an ankle bone connected to the leg-bone…and the foot-bone is connected to the ankle bone. And without feet or legs, Europe can’t walk. The big banks – especially French banks – hold Greek debt. If the loans go bad in a big way, the banks will probably go broke too. That’s why Moody’s downgraded the banks last week.
The press says authorities are worried that one thing will lead to another…and pretty soon it will get out of hand. They say they’re afraid of a “Lehman moment.” But what they’re really frightened by is something that happened closer to home. It’s a ‘Creditanstalt moment’ they fear most.
Creditanstalt was an Austrian bank that went broke in 1931. Before it went under, most people had never heard of it. But after it couldn’t pay its bills it became infamous. The bank owed a lot of money to a lot of other banks…and then they couldn’t pay their bills either…then, the whole banking system went bust. The Great Depression resulted – in which nearly half of America’s 25,000 banks failed.
So, the authorities want to avoid a Great Depression. Very understandable. But what’s the plan? To kick the can farther? What do they do when they catch up to it again?
In the US meanwhile, it is consumer debt that is the immediate problem. There too the authorities booted it down the road as best they could. But in the New World as in the Old, there’s always something that goes wrong. You refinance Ireland…and Portugal needs cash. You give the Portuguese some money…and then the Greeks threaten to go belly-up.
In the US, the authorities refinanced the banks. The bankers got their usual bonuses – and more. But they couldn’t do much about consumers. The poor working stiffs were losing jobs, income, and housing wealth – all at the same time.
And now, with their lack of purchasing power, US consumers have the whole world economy at gun-point. “One false move…and you’re all dead!” More below:
America’s Greece may be California.
“California nearing fiscal crisis,” reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn’t do the job. We didn’t see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can’t print its own.