02/09/10 Baltimore, Maryland – Trichet to Greece: Drop Dead!
Obama to California: Uh…
Yesterday, stocks lost 103 points on the Dow. This looked like a confirmation to us. The stock market appears to have begun its next and final phase…
AP seemed to think so too:
“Stock investors see threats from all directions,” said the headline.
We didn’t bother to read the article. We already know the directions.
From the north, investors worry about falling consumer demand. Consumers are in a funk – they have more debt, less income, fewer jobs, and less access to credit. The only news on that front we have today is that even jumbo housing loans are going bad…delinquencies are up to 9.6%.
From the east, investors worry about the continued invasion of cheap consumer goods and cheap services. China’s economy is said to be growing at double-digit rates. How can US firms compete? And what if China is a bubble, as Jim Chanos believes? When it blows up, US stocks will come down too.
From the south comes the threat of higher interest rates. The poor dopes think the recovery might be for real. If so, inflation will rise and the feds will increase interest rates…possibly cutting off the new boom.
And from the west what do they have to fear? Well, there’s that business in Europe. You know, Greece and all. The PIIGS – Portugal, Italy, Ireland, Greece and Spain… Europe’s peripheral countries are in trouble. Lenders fret that they might be forced to default on their debt. So, they want higher interest rates. This, of course, just makes state finances worse…pushing the PIIGS closer to default.
The PIIGS owe $2 trillion, which might need to be restructured. Yes, dear reader, the sovereign debt problem is a big one – much bigger than Bear Stearns, Lehman Bros. and AIG. But the biggest porker of all – the USA – has fives times as much sovereign debt as all the PIIGS put together.
It won’t take investors long to figure out that there isn’t a whole lot of difference between Greece’s finances and those of the US. Each has about the same amount of debt and the same size deficit, relative to GDP. The big difference is that the US ultimately controls the currency in which its debt is calibrated. Greece does not. Neither does California.
Both California and Greece borrow long-term at about the same rate…around 6%. Lenders know that when their backs are to the wall, both governments will have only two choices, not three. They can cut spending. Or, they can default. What they can’t do is wiggle out of their obligations by inflating their currencies.
Jean Claude Trichet has already made that clear:
“…belonging to the euro area, you…have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency.”
He went on to say that Greece contributes only about 3% to the total output of the euro-zone. If push comes to shove, Greece will be pushed out rather than allowed to weaken the euro.
Then, Mr. Trichet made an odious comparison. California is a much bigger part of the US economy than Greece is of the euro economy. In fact, it is more than four times as large. Will the US come to California’s aid? Mr. Trichet didn’t say.
It is possible, of course, that Mr. Obama will say to the Golden State what Gerald Ford said to the Big Apple. In 1975, New York City’s back was to the wall. It appealed to Washington for help. “Ford to City: Drop Dead,” was the famous headline in the New York Daily News, reporting the president’s response.
New Yorkers were incensed. Later, they realized that by vowing to veto a bailout President Ford had done them a great favor; he forced New York to clean up its act. The city went on to its greatest years. Likewise, the feds would be doing all of us a favor by letting failure fail with dignity.
Will Obama help California mend its ways? Or will he turn it into a zombie state?
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. 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. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Recovery is on again! DOW is up $200! Some of the best minds figured out a plan for the PIGS nations.
Yes, Jason! It seems by the time the “gloom” articles hit here they are out of date. Greece is fine now. Actually the others aren’t in such bad shape after all.
Markets are flying once again. We should continue the rally in earnest now that the bogus Greek problem is not the headline and we can focus on our dramatic turnaround in this country.
Unemployment surprising way down and now we see inventories shrinking. Yes, people are buying stuff. Lots of it it seems. Feeling pretty good about the market and our country right now.
Greece is fine? What are you smoking?
Getting a loan doesn’t change anything. Without real reform, the debt still exists regardless of who is paying it.
manz–sure the debt exists but it never has to be paid back. Pay no attention to the debt behind the curtain.
Actually Greece didn’t even get a loan. Unemployment (really) is still above 16%.
The quants auto-traded their short covers to a miniscule gain on the DJIA which is still WAY down for 2010. BDIY still around 2,700.
If inventories are dropping, why is BDIY still not going up on restocking cargo moving around the globe?
Or are you a lying idiot?
Here goes Harry again…I wonder if he’s still smoking the same stuff…
Can someone explqain please:
Why are budget deficits compared relative the GDP?
Why not compare them to say, the actual income that the country has? (If my expenses are $110 and my income is $100, my deficit is 10%)
Andy,
what you are doing there, is micro-economics … the science of how all regular Joes, like you and me, have to survive …
if you look at the deficit in your example from a macro-economic point of view, you have to calculate it vs the income of all the families in your street, having a combined income of 1000$, following which you actually have a surplus … that is the science of how governments can (not have to) survive …
but where exactly, at what number of participants, it changes from micro to macro is not clearly defined … to the detriment of the one, and the joy of the other …
hope this helps …
Thanks Alex……I could have guessed the answer was something like that:-))