Matt's Meditations, Rants and Reviews
Economic Storm Warning by Matt Holzmann
Today’s Telegraph informs us that the yields on Greek, Spanish, Irish, and Portuguese debt climbed to record levels today, and that Irish bank debt has been cut to junk status. In the meantime, Finland’s political tilt rightwards in yesterday’s elections portend a possible veto of any plans by the European Central Bank to bail out these economies on terms unfavorable to the EC member countries paying the bills.
Greece is now paying 19.7% on 2 year bonds and there is a real fear of government default. This will put even more pressure on the other PIIGS, who are either on or already over the edge. The question then becomes which economies are triaged. Greece, Iceland, and Ireland are all moribund. Portugal is in the middle of a political crisis, and Spain is teetering on the edge. We are seeing the slow motion destruction of the economic and social programs that helped these economies enter the 21st century. It is hard to believe where these countries ranked economically and demographically even 25 years ago.
The Standard & Poor’s downgrade of U.S. debt is, in my opinion, similar to their downgrade of subprime debt in 2007. Too late and out of touch.
Meanwhile, our government reported that inflation remained stable last month. Core inflation, rose only 0.1% to 1.2%, we are told. The gross inflation rate was 2.7% year over year. And yet anyone who has been to the market in the past 4 months has seen the steady rise of prices. While food and oil are not calculated in the core inflation rate because of their volatility, what then explains the rise in air fares, used car prices, imports, industrial goods, etc, etc, etc.? As Churchill once said “lies; damned lies, and statistics”. Our government is not being on the up and up with us.
China’s currency has risen 25% in the past 4 years and wages are skyrocketing. Commodities prices across the board have been rising for the past 3 years and many are at or near all time highs.
All of these numbers and trends have been well documented. It just doesn’t seem as if too many of the people in charge are paying close attention. Or perhaps they are and are simply waiting for the tidal wave to hit. The discussion in Washington dithers and is hijacked by petty political agendas. And yet the warnings cannot be more clear. When S&P warns you and the ICB warns you and the IMF warns you and the Chinese are getting together with the Russians and Brazilians and Venezuelans and Iranians to create alternative global financial structures, it doesn’t get clearer.
The crisis is by no means limited to the United States, but what happens here will have a massive impact worldwide. After all, we live in a truly global economy. Almost every country in the world will face serious repercussions from any of the potential negative financial scenarios outlined above. There is no such thing as a free lunch; a fact which has been forgotten by the economists and politicians. The options are not especially palatable, but just like with castor oil we must swallow our medicine now or face a dire future.
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