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by Stephen Lendman
Email: lendmanstephen (nospam) sbcglobal.net
18 Oct 2011
Economic Tremors - by Stephen Lendman
Sovereign default threatens Greece. Progressive Radio News Hour contributor Bob Chapman warns when it goes, all troubled Eurozone countries will follow.
Is it imminent? Likely not. More likely is winter or next spring. But given its troubled state, it's just a matter of time.
Most disturbing, says Chapman, is that central banks, "governments and financial communities have no idea how to end the ongoing" crisis. "All they can come up with is to throw more money at" it.
Nothing tried so far worked. Hoping later resolution will solve things made conditions worse. Demonstrations in Greece and across the continent express public rage. Strikes compound street protests. Anger portends much greater amounts because policy measures exacerbates conditions instead of alleviating them.
Chapman expects eventual Eurozone dissolution. He estimates troubled economies need up to $6 trillion infused. About one-fourth of that at best may be forthcoming, he believes.
"The bottom line is anything above $1.5 trillion can't be done. Thus collapse for six (troubled) countries has to come." It's just a matter of when.
The longer resolution is delayed, the worse conditions get. Kicking the can down the road solves nothing. It's why today's crisis looks worse than 2008. "The big hitters in this game (Germany, France) cannot forgive debt of the insolvent and they cannot bail them out.
On October 17, financial expert Martin Weiss again warned of impending trouble, saying:
"(D)on't be fooled" about talk of an orderly bailout. "Any new European rescue plan, no matter how big and bold, is bound to cause an even greater debt catastrophe."
Four years into the crisis, time is running out. Greek bond prices reflect default. "Spain and Italy are in death spiral." Eurozone banks have incurred "massive damage."
Healthier countries haven't enough funds to bail out troubled ones. PIIGS countries Portugal, Ireland, Italy, Greece and Spain have over $4 trillion in sovereign debt. Chapman thinks up to $6 trillion, and daily the total rises.
Moreover, Eurozone troubled banks have far greater debt problems. Only nationalizing or shutting them down can work, preferably the latter. Many are too troubled to save.
"European leaders are desperately trying to figure out" how to raise money amounts needed. Emerging market countries have been asked to help.
However, conditions are so badly eroded, there's "no way to stop a vicious cycle already in motion!" On top of major austerity cuts, PIIGS countries must promise more cuts. Street rage greets each new proposal.
Each new budget cut reduces government spending. Revenue falls. Deficits rise. Further economic weakness follows. Deep holes get deeper.
"This is why Greece is sinking so fast. And this is why, despite its draconian austerity measures, Greece's deficit for the first nine months (this year) actually GREW to 19.2 billion euros, compared to 16.65 billion euros" in 2010.
The same vicious cycle plagues other troubled Eurozone countries, including Eastern European ones in dire condition. More sovereign and bank downgrades will follow, pushing up borrowing costs.
In fact, downgraded countries and financial institutions have $7.3 trillion in outstanding debt. Yet coming downgrades will elevate numbers higher.
Spanish and Italian bond prices reflect lower ratings. Insuring those bonds surged to troubling levels. Sovereigns and major Eurozone banks are in death spirals.
Danger signs abound across Europe. Even economic powerhouse Germany will be affected. It's export-driven economy needs markets. If demand weakens, so does business.
On October 23, Eurozone leaders will announce their latest master plan to save Europe. And then they'll pray in vain, said Weiss.
The bigger their rescue plan, "the bigger the damage to their finances (and credit ratings)."
"And the more their credit ratings fall, the more expensive it will be" to raise more money for more needed bailouts when this one fails.
In fact, eventually the rescuers will need bailing out with no one left standing to do it. It's why German and French default insurance now indicates far higher risk than during 2008-09.
It's why Eurozone bonds are plunging. It's why even the "mother of all bailouts" can't save Europe or the euro.
Politicians may announce success. Media touts may regurgitate it. The same song's been sung for four years. Today's crisis looms greater than ever because solutions exacerbated trouble.
They haven't alleviated it and won't now. At best, they'll buy time, delaying greater crisis conditions for a later time when they'll be too grave to fix.
Europe and America are caught in debt traps. Raising levels makes them worse. "(A)ll the evidence indicates that the fanfare and hoopla are nothing more than a set-up for the next major collapse." It's coming in the fullness of time.
Another Grim Economic Assessment
Economist David Rosenberg wonders how Eurozone banks can be recapitalized without being nationalized. They're too insolvent to do it on their own. "They can't dispose of assets without taking (big) haircuts."
The European Central Bank (ECB) can provide liquidity but can't boost capital adequacy. The October 23 announced bailout may be leveraged up as markets expect, but it's "a double-edge sword if losses pile up" as expected. It will head a dire situation toward eventual collapse.
Rosenberg thinks the plan will "be a farce." If Italy has trouble rolling over its 400 billion euros of debt maturity next year, big trouble follows.
In the end, governments may be forced to recapitalize themselves and their banks. Current Eurozone policy has "zero credibility." Investors live on hopes and prayers. Nothing tried so far worked. Bluff time soon will end.
In his 1990 book titled, "A Short History of Financial Euphoria," John Kenneth Galbraith said:
"All crises have involved debt that, in one fashion or other, has become dangerously out of scale in relation to the underlying means of payment."
His analysis is truer than ever today with out-of-control debt levels.
In 1933, economist Irving Fisher said:
"The very effort of individuals to lessen the burden of their debts increases it, because of the mass effect to liquidate. The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not righting itself, but is capsizing."
Troubled global economies today are sinking. Rosenberg sees years more troubled times before today's economic problems are resolved. Already, we've had 12 years of stagnant employment and capital market capital appreciation, and nothing ahead looks promising.
Key economic indicators are rolling over. Weakness abounds. Consumer spending focuses on necessities, not unaffordable discretionary items bought more readily in better times.
Families struggle with debt. Mortgage and utility payments are delayed. Too often they're not paid. Foreclosures follow as well as power shutoffs or warnings.
September consumer expectations surpassed the 2008 low, and lowest reading since May 1980 when the economy was seriously troubled. Other data also forecast weakness.
Long Beach and Los Angeles ports represent 40% of inbound US cargo. Volume usually peaks now ahead of holiday buying. This year it fell, in September at a double-digit annual rate. Year-over-year, the trend is negative. It virtually never happens this time of year.
Burlington Northern reported no typical peak in rail traffic. Surveys show consumers intend cutting back. Credit supply and demand are shrinking. In 2008, Bear Stearns and Lehman Bros. signaled trouble. Today, it's troubled Eurozone economies and banks.
Financial trouble leads the real economy by four to six months. Even market touts may see trouble between yearend and early winter. As Europe goes, so goes America and other global economies. In a globalized world, trouble spreads everywhere to a greater or lesser extent.
Estimates even say China off balance sheet debt is 173% of GDP. It suggests fragile bubble conditions in weak economic times. The Wall Street Journal said over 40% of its lending activity occurred through "shadow financing." It's similar to US loan repackaging in America's bubble economy.
Elsewhere, Brazil's economic index contracted in September. HSBC's Emerging Market industrial index fell to 51.9 last month from 54.2. It's the lowest reading in over two years when economic weakness was severe.
Rosenberg said today's climate has "much more global flair to it" than 2008-09. US GDP numbers dropped in four of the past seven months. Home-buying intentions are down, auto purchase plans stagnant. America's greatest ever housing Depression shows no signs of bottoming.
Analysts reporting conditions through rose-colored glasses are wearing blinders. Reality should reflect trouble, not confidence about everything coming up roses.
Contagion is the operative word. Trouble portends much greater amounts coming. Forewarned is forearmed.
Stephen Lendman lives in Chicago and can be reached at lendmanstephen (at) sbcglobal.net.
Also visit his blog site at sjlendman.blogspot.com and listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network Thursdays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.
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