Bill Bonner

The Dow down 97 points yesterday.

And the Greek story nears its conclusion…

The Germans agree to bail out the country…at least for a while…

…and the Greeks agree to act more like Germans…at least while everyone is looking…

But now everybody agrees that the farce has gone on long enough.

Let’s recap:

The big banks lent the Greeks money. Then, the bankers paid themselves big bonuses, rewards for having booked so much business.

The Greeks spent it like they stole it…which they practically did. With the help of Goldman Sachs, they rigged their accounts so as to appear to be better credit risks than they really were.

Then, of course, the Greeks could not repay. Since they gained independence from the Ottoman Turks in 1828, the Greeks never, ever repaid a loan as promised. Instead, they were in default about half the time.

But rather than let Mr. Market sort it out…as he had every other time, Mr. Government Fixer stepped in. He promised to manage the situation so that the careless lenders wouldn’t have to take the losses they deserved. How? By lending the borrower more money!

So, the Greeks were given more money…and told to straighten up.

And the Greeks made an effort. Rather than spend money as freely as before, they cut back. Thousands of government employees were laid off, budgets trimmed…belts tightened.

This, naturally, led to an economic slump. GDP fell at a 5% rate in the 3rd quarter of last year. In the 4th quarter it was falling even faster, at a 7% annual rate. The New York Times reports:

By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. …

The situation at the macro level is, if anything, even more transformational. The Chinese have largely taken over Piraeus, Greece’s main port, with an eye to make it a conduit for shipping goods into Europe. …

The latest austerity plan meant to satisfy Greece’s creditors and allow for new infusions of financial aid may have averted involuntary default — and a global economic downturn — but will nonetheless make life for ordinary Greeks even more difficult. The plan reduces the minimum wage by more than 20 percent, mandates thousands of layoffs and reduces some pensions, probably ensuring that strikes and demonstrations will continue to be a feature of the Greek landscape.

As in Argentina 10 years ago, the Greek middle class is being hit hard. The upper classes are protected. They own stocks. They have bank accounts in foreign countries. And the lower classes had nothing before the crisis. They haven’t lost a penny.

But the middle classes lose jobs, income…and benefits.

That is what is happening in America too. Middle class wealth, built up between 1980 and 2007, was largely an illusion. It was money borrowed from the future… Now, it must be paid back.

And there’s not much Mr. Government Fixer can do about it. The problem is too much debt. Adding more debt doesn’t help.

“But Bill, aren’t you being a little simplistic,” asks a Dear Reader. “The idea is not to add debt for its own sake. The idea is just to try to mediate the social consequences of private sector de-leveraging while giving the economy time to get back on its feet. Why won’t that work?”

Why won’t it work? We repeat the question to give us time to think…

…oh yes…it won’t work because it ignores the reason the economy was knocked on its derriere in the first place. If the cause of the setback had been interest rates that were too high…or a natural disaster…the strategy might work. Just as an ancient Pharaoh made Bible fame by saving grain in the fat years and then releasing it when the harvests failed, so might a sage government today draw on its own surpluses to help soften the blow of a bad winter or an earthquake.

But the government has no surpluses. Only deficits. And you can’t mitigate the damage of an earthquake by setting off a nuclear explosion. Neither can you solve the problem of too much debt by adding to it.

When an economy has too much debt, there’s only one solution. Debt delenda est. Debt must be eliminated. It can be done in the old fashioned way — by Mr. Market. Or it can be done by Mr. Government Fixer.

Mr. Market will do it quickly…efficiently…and brutally.

Mr. Government Fixer will hesitate…equivocate…vacillate…prevaricate…and generally fornicate everything up. He will protect the guilty insiders…at the expense of the innocent taxpayers and general public. And in the end, he will let the debtor default, too, for he will have no other choice.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • The Historian

    It all sounds like something Karl Marx predicted back in the 1850’s. A few rich people on top. Everyone else flat broke.

  • Bob

    Great post today Bill! You’re on FIRE!

  • Tee

    Mr Marx was capable of presenting some brilliant analysis of the absurdities in the established order. Human evolution takes millennia, which is why the time from 1850’s to 2010’s is no time and Marx makes good reading any rainy day. Be warned, though: the man was an absolute disaster in giving advice what to do about it. His medicine kills.

  • Groucho Marx

    That’s why I keep a bedside copy of Das Kapital. Works better than all liquid cures for insomnia.

  • Deft

    I would have thought both reducing minimum wage and laying off government workers would have been a big boost for the economy. Even one with phony euro-money.

  • Little Black Duck

    Much of the bad debt liability has already been transferred from the banks, thanks to their magic pudding (the Fed).

  • gman

    “The big banks lent the Greeks money. Then, the bankers paid themselves big bonuses, rewards for having booked so much business.”

    of course. the bankers needed to pay their own debts. they lent debt money, at almost no cost or risk to themselves, in order to get the greeks to pay the bankers’ debts for them. and the bankers got paid for making the arrangement.

    what’s not to like?

  • gman

    “I would have thought both reducing minimum wage and laying off government workers would have been a big boost for the economy.”

    it would be – if they still had money to spend hiring anyone or buying anything. but they don’t now and even less in the future.

    ah – but if you can keep them working, working harder (for you!) for less while paying more (to you!) for less – that’s the holy grail of infestment! not easy to pull off, though.

  • Benson


    You never seem to address the very root of the problem. That would be …
    who owns the central banks and what are their activities and agenda.

    Why is the Fed unaudited?
    Why is the BIS beyond any counties reach?

    How did this come to be and who/what is behind this.

    I’d have far more respect and admiration for you (and make no mistake, there’s plenty already) … if you’d address this.

  • Muhammed Alam

    I am not sure about other countries, but the US Federal Reserve is NOT a goverment organisation – it was an organisation “by the bankers, for the bankers and of the bankers”.

    It is an extra-constitutional body, unanswerable to Congress or the Executive, hence unaudited.

  • No Country For Constitutional Men

    Would $6 Trillion help Greece in any way? LOL! Brings back memories of a few years ago.

    Italy Police Say They Seized $6 Trillion of Fake U.S. Bonds in Switzerland – Bloomberg
    February 17th, 2012

  • The InvestorsPal

    What do defaults look like? Look at Argentina. The Argentines pulled off the biggest default on sovereign debt in history. In 2001, they defaulted on $132 billion in loans. Later, they negotiated a settlement that left lenders with their worst haircut ever.

    But at least the lenders must have had fun. They came down to Buenos Aires on rich expense accounts. They stayed at the Four Seasons. They ate steaks that were thicker than glaciers…and washed them down with a whole rio of malbec. They probably went to a few tango shows too. The visit may have cost them billions…but heck…

    …it wasn’t their money. LOL!

  • No Country For Constitutional Men

    $6 Trillion In US Bonds Seized In Zurich, Said To Pose “Severe Threats To International Financial Stability”

    And now this from the $6 Trillion in US Bonds story:

    Why Were The Trillions In Fake Bonds Held In Chicago Fed Crates?

  • The Historian

    No doubt about it, Karl Marx is a tedious read. Especially that Communist Manifesto.

    But his predictions are still right on.

  • Wildrumors

    March 23rd 2012 is the day that has allegedly been set for the Greek default.

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