Tuesday, November 08, 2011

Re Greece, Europe & Global Economic Conditions

There's so much political turbulence in Greece this week that it's challenging to write anything at a point in time which purports to be current.

So, rather than focus on that, let me opine on what has already transpired.

I thought Papandreou's call for a referendum was a breath of fresh air, and real sensibility, amidst all the political maneuvering among other European national leaders and bankers. As CNBC's Rick Santelli opined, let the Greek people speak out once and for all to either suffer and stay in the Eurozone, or return to the Drachma and experience the consequences of that move. Pain either way, but, in the latter, perhaps a bit more controllable.

What was, I think, as important about Papandreou's call, even though it was subsequently rescinded, is that it reminds everyone who is affected by the European debt crisis, which is pretty much the global economy, that the entire mess among all the free-spending European countries depends on the people of those countries.

I have heard, even after Papandreou's referendum announcement, several pundits recite, for the umpteenth time, how leaving  the Euro would be so costly for Greece. How, if the ECB will just print money or buy bonds, which is another variant of printing money, the major French banks can probably squeak by. One of those pundits was, I believe, CNBC's wild man, Jim Cramer.

What pundits of that belief miss, yet Papandreou demonstrated, is that this isn't about a few large European banks, the ECB, the ESFS, or just Germany's economy's ability to cover Europe's debts.

On a much deeper level, it's about, now, Europe's populace's and, later, that of the US, tradeoff between significant economic pain now to fund benefits promises that aren't otherwise affordable, or less pain now and probably fewer benefits later, too. The various banks' and nations' debts are simply the circulated, legal instantiations of those promises, and, thus, subject to the vagaries of actual funding over time.

Post-WWII societal structures and benefit schemes were always going to be unaffordable, since they were, for the major European nations and the United States, inappropriately designed as communal defined benefit plans, rather than more sensible and affordable individual defined contribution plans. As such, now, Greece is the proverbial canary in the coal mine, signaling that one nation has reached the point at which its spending can no longer be continued on affordable terms. Other nations aren't far behind, as we know from credit downgrades or problems in Spain and Italy, to name two largish EU members.

I find it not accidental that August saw the 40th anniversary of Nixon taking the US off the gold standard. Similarly, at least one pundit on either CNBC or Bloomberg this week pronounced the Euro the least-credible, purest fiat currency of all. In a post I wrote on the occasion of Lew Lehrman's Wall Street Journal editorial commemorating Nixon's act, I referred to his chart that showed how inflation galloped out of control after that severing of gold and the dollar's value.

Recently, the Vatican has picked up the same theme. Few people are doing an adequate job of seeing the larger global finance and economic picture at work now.

When money supply was related to gold, money supplies had some countervailing pressures which reined in excessive printing or borrowing of a currency.

Fiat currencies have only confidence in a nation's economic capability to fund the government's debts. When that confidence is shaken, as it has been now with a handful of European nations and, imminently, the US, the lack of any real basis for valuation becomes clear.

Beginning with offshore Eurodollar liabilities in the 1960s, in reaction to a tax on Treasury interest, and accelerating with the closing of the gold window, US dollar liability creation has outpaced what anyone can reasonably forecast as the nation's ability to generate wealth to repay such obligations. When US corporations were able to sell dollar-denominated bonds in Europe, dollar obligation creation left the province of just the Fed or Treasury.

But, ultimately, the total claims against a nation's currency lead back to its citizens. Honoring or defaulting upon those obligations, whether by the sitting government, or a change in government, is a decision the citizenry ultimately makes.

In Greece, Papandreou stepped down after surviving a no confidence vote. The referendum will not take place, but it is, again, an open question what Greece will do. Rumors continue that the new coalition will seek better terms from the EU.

I continue to believe that the dry, economic arguments by some pundits focusing just on rational, economic costs and implications of whether this or that country leaves the Euro are misplaced.

We are seeing a rare spectacle of many large countries simultaneously coming to terms with their swollen, unsustainable obligations, whether held by private parties, the nation's banks, or other governments. As I conjectured several years ago, during the 2008 financial crisis, it would seem reasonable that a long term outcome is a global deleveraging. I think we're seeing that now. But when too much money has been created relative to the value being forecast to support it, eventually, some parties will have to take losses for the gap between what was created/borrowed, and what actually can be counted on to support the monetary bases outstanding.

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