11/08/11 Paris, France – What’s in the news today? More of Europe’s attempts to ignore its own breakdown.
Now Papandreou is gone and the Greeks are trying to put together a new coalition government with more credibility. At least, that’s what the newspapers tell us. For our part, we don’t believe the new government will have any more credibility than the old one. Why would it? Papandreou was not a bad egg. He was just in an impossible situation. And that situation hasn’t changed.
“In Greece, the developments are cataclysmic,” said Wolfgang Schauble, German Finance Minister. “Every day it’s a new problem.”
Right. And Greece was yesterday’s problem.
Today, Italy is the problem du jour. Or, perhaps we should say the problem di giorno. Analysts make comparisons and contrasts. Both Italy and Greece have olive trees. Both produce wine. Both have sunny weather and nice beaches. And both have a credibility problem. But only Greece has a real “point of no return” debt problem.
Italy’s debts really aren’t so bad. Yes, it has government debt-to-GDP of 120%. But its household sector has little debt, only 40% of GDP compared to 75% across the Eurozone. This is attributed to the fact that so much of the economy is ‘off-the-books’…cash and carry. When you cash and carry you don’t have much debt. At least, not in Italy. The Italians know how to operate an off-the-books economy…and how to collect debts.
But they don’t collect taxes very well. Cheating on one’s taxes is a point of honor among Italians. After all, they are a very civilized people. They care about their pasta and their bunga-bunga parties. As for taxes, they know tax money is squandered. They prefer to squander it themselves.
Many Italians earn money in ways that never appear on the nation’s accounts. That’s why Italy is probably a much richer country than the numbers suggest. Much of the output is never recorded…and never taxed. You have to admire a people who can do that.
The problem in Italy, say the papers, is that investors have lost faith in the government. It’s not surprising to us. What is amazing to us that they ever had any faith in the government in the first place. Governments are not to be trusted; every thinking person knows that.
Italy has a deficit only half the size of the US deficit. Its problem is that it needs to roll over a quarter of its debt in the next couple of years. That would be no problem — because Italy can afford it — as long as interest rates remain low. But when investors lose faith in the government’s ability or willingness to squeeze taxpayers on their behalf…things begin to fall apart. Last time we looked, Italian 10-year bonds were yielding 6.66%. That has a sinister sound to it. And it has a deadly look about it.
The Financial Times says Italy is in the “danger zone.” Silvio Berlusconi vows to “fight on”…but it looks like the war may be already lost.
But who knows? Every day is a new problem. And exactly the same old problem. The world has too much debt. All the sturm and drang in Europe…as in America…is really about who pays it, how, and when.
Bill Bonner
for The Daily Reckoning
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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Papandreou is gone.
I guess the banksters didn’t cotton too well to him putting “Austerity” up for a vote?
“But when investors lose faith in the government’s ability or willingness to squeeze taxpayers on their behalf…”
they squeeze the government!
yes, certain italians know how to collect on debts. they also know how to generate them. “I’ma gonna do a little favor for youse. You do a little favor me later on, ok? Just a little investment.”
the only difference between the banks and “investors” is the size of the operation.
“All the sturm and drang in Europe…as in America…is really about who pays it, how, and when.”
oh good grief. you left out the most important part. the part about “who GETS paid”! who GETS more than they put in! who GETS all that free money and free labor! and who doesn’t. that is what all the sturm und drang is about.
ISSUE SHARES!
Next time, Italy, be sure to issue perpetual bonds. These have no roll-over risk. Britain has some, the Consol (for Consolidated fund) bonds that were issued hundreds of years ago.
Hey, and why not issue some equity in the Country too? That’s what corporations do, issue both equity and debt. Why should citizens not be able to own shares in their country? Think outside the box!
quiet – listen, do you hear the ticking? tick-tick-tick. that’s the timer on the debt bomb ticking away the moments before everyone finally sees that it simply cannot be paid with the money floating around europe today. when that bomb goes off, the euro printing presses kick off with 24/7 printing of euros and presto-chango all debts are covered. my advice then is to put your head down and listen for the hyperinflation bomb that starts ticking once the presses cool off. there are other bombs waiting for our entertainment after that – but that’s enough (to wipe out your life savings) for now.
“ISSUE SHARES!”
Are you off your meds again, Shawn?
Uh, management stinks, they have no earnings (except what they confiscate through taxes), and there’s a horrible debt to equity ratio.
Go back in your box.
ISSUE SHARES
And once countries issue shares, the share owners will get the vote and we can stop this nonsense of one one vote per person and go to a proper capitalist system of one vote per dollar.
Shawn, please send me a copy of your resume. I like your ideas.
But Warren, what about the restraining order?
Shawn, could you email me a copy, too? We can arrange a 3-way with Warren. Thanks!
“that’s the timer on the debt bomb ticking away the moments before everyone finally sees that it simply cannot be paid with the money floating around europe today.”
is there anyone left who does NOT see it at this point?
Just wondering: could not everyone swap their debts like they were assets? For example the FED could buy boatloads of european junk and the ECB the same amount of treasuries, until interest rates drop to zero. That may keep the party going for a while.
gman, there are a ton of people who don’t see a debt bomb, or even a debt problem. Believe it or not there are economists on the cable networks telling the viewers everything is fine and this debt thing is just Repub propaganda. Maybe their right. We’ll find out.
@Tom
That would be like taking a $10 bill out of one pocket and putting it into other pocket and calling it new money.
@phelps
yeah, I guess you’re right. though I’m pretty sure all of the economists do in spite of what they profer. how could they not?
but I think calling it a debt bomb hides what it really is. it’s a debt currency bomb. what is happening now is not some freak occurance. it is intentional. it is deliberate. this is not a disaster. it is a demolition.