The essence of the global financial crisis is that the world is drowning in debt.
By PINCHAS LANDAUshekel versus dollar 521(photo credit: REUTERS)
The essence of the global financial crisis, which has been ongoing since 2007 and is now entering another critical phase, is that the world is drowning in debt. Once you understand and accept that, many other things become clearer – notably, why it is that the enormous and unprecedented efforts on the part of the developed nations to resolve the crisis have failed.Since the crisis stems from too much debt, adding more debt cannot resolve anything. It can only defer the necessary deleveraging – which involves large-scale bankruptcies and social and economic disruption – but at the expense of making things ultimately worse. Calling it “stimulus” just makes it part of the game of “extend and pretend” that the politicians and most central bankers are intent on playing, but when it turns out that the economy has not been stimulated, the credibility of the effort and those responsible for it is severely eroded.In a nutshell, that is the story of Greece, of the wider European Union crisis, and of the US. Only by keeping the big picture clearly in mind is it possible to make any sense at all of the extraordinary gyrations seen over the last week or two – not just in the financial markets, where gyrations are normal, although these were exceptional – but also in the political arenas on both sides of “the herring pond.”In Europe, the headlines have largely focused on Greece, but from the markets’ perspective, Greece has long been viewed as dead meat. No one doubts that there will be a default, under whatever name the politicians invent to sweeten it, which will result in bondholders taking hefty losses. Since those bond-holders are mostly banks and pension funds, it will be necessary to provide them support – at taxpayer’s expense – to prevent the entire economy seizing up. Given the surly mood of taxpayers, that is tantamount to political suicide, hence the determination of incumbent politicians to extend and pretend, for as long as possible, irrespective of the cost.Portugal and Ireland are in the same class as Greece, although the specifics of their problems are different.That’s why “news” of additional downgrades of Greece and Ireland by one or other of the ratings agencies in the course of this week were not viewed as significant developments.Instead, the focus of attention in the financial markets moved to Italy – the third-largest economy in the European Union, home to the third-largest bond market in the world (after the US and Japan) and a nation in chronic deficit.The sharp falls in the Italian bond and equity markets that began in the middle of last week and climaxed on Tuesday of this week, were the response of the “bond market vigilantes” to the politicians. The collapse in prices and dramatic jump in the yields on Italian government bonds signaled that the endless dithering and squabbling among European decision-makers over how to deal with Greece were making things worse rather than better. The sovereign debt crisis was moving from the periphery to the heart of the eurozone – as the realists had predicted all along would happen. Almost laughably, the Italian political system, headed by the lecherous crook Berlusconi, suddenly sobered up under this assault and is engaged in passing new laws that will deliver budget cuts, increased efficiency, less corruption and all good things. Unfortunately for Italy, its record of cheating its partners in the EU – not to mention Berlusconi’s own abysmal record on almost everything – is now coming home to roost. No one, especially not in Germany, attaches credence to Italian parliamentarians and their laws, let alone their protestations of future good behavior.The ongoing slow-motion crumbling of Europe would normally result in a flight to the safe haven of the United States and its dollar. But normality of that sort is no longer available. As discussed here last week, the US itself is now a candidate for default – a concept that until quite recently would have seemed patently ridiculous.However, the asinine behavior of all the top politicians in the American system has made that possibility less remote with every passing day, so that by the time Moody’s fired off another public warning to the US government on Wednesday, what had once been unthinkable was now an imminent prospect. True, the presumption remained that the “leadership” would draw back from the brink at the last minute – but the degree of confidence underlying this presumption was ebbing by the hour.
In this theater of the absurd, the other major developed economy – that’s Japan – becomes the pillar of strength and its currency climbs to record levels. The fact that it is even more deeply in debt than either Europe or the US, that its economy has malfunctioned for 20 years and that its prospects are dismal – indeed, that the very earth keeps rumbling under it – is conveniently forgotten.That Japan is now the paragon of stability in the developed world is the measure of the extent of the encroaching disaster.landaup@netvision.net.il
