Sovereign Debt Default: No Time Like the Present

While the markets are hot, the economy is cool.

Nearly 7,000 people go bankrupt every day – a record number. And in March, M3, the broadest measure of the money supply, recorded its biggest drop ever.

And get this. Peak to trough, December ’07 to February ’10, 8.3 million jobs were lost. As we reported yesterday, take away the statistical tricks and the number of people with real jobs actually fell last month – despite reports of an additional 163,000 new jobs in March.

Consumer credit fell again in February – down $11 billion. To put this number in perspective, the US government has run about $2.5 trillion in deficits since the correction began. So, in spite of pumping monthly deficits on the order of $120 billion…consumer credit still sank by $11 billion.

What can we say? It’s a Great Correction, after all.

Greece is going broke after all. Yields on Greek debt rose over 7% yesterday. So let’s look at how this works. Investors worry about a default. They push up yields (they need higher interest payments to justify the risk). This causes Greece to go further into debt (the cost of paying the extra interest), which causes even more worry among lenders.

Why doesn’t Greece just cut expenses?

Ah…glad you asked. This just goes to show what a dead-end debt can be. The government has already proposed substantial cuts. But it has to answer to the voters – who are on the verge of rioting in the street. And its own cabinet ministers are calling the Germans ‘racist’ because they refuse to give the Greeks money.

It’s hard for a popular democracy to cut spending. And then when it does, it discovers that it is in another trap. So much of the private sector depends on government spending that, take it away, and the whole economy shrinks. This causes tax revenues to fall by more than the budget cuts. In other words, a multiplier works in the other direction – causing the budget deficit to widen when cuts are made!

And guess what? Greece is not the only government that is falling into this hole. Latvia. Iceland. Maybe Ireland, England, California…and even the US…

Where, exactly, the point of no return lies, we don’t know. But it’s out there somewhere…

What’s the solution? Well, just to bite the bullet. Make the cuts. Default. Be happy.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning