Euro Crisis

Here we go again. Our own banks nearly destroyed our economy in 2007 with their unregulated greed and risk-taking. Now that we are just barely starting to recover the 10+ million jobs lost in the Great Recession, the Greeks are threatening to send us spinning back into a double-dip recession. Or is it the Italians?  Or the Germans?

Several times weekly, I get a newsletter from www.stratfor.com - mostly these are teasers to get me to sign up for their full newsletters for ~$360 per year, but one teaser brought a lot of things out in a succinct way - why Greece could upend the entire world (including the American) economy. 

From Strafor:
"Whichever actions Germany takes, three things are all but inevitable: an Italian bailout, a European banking crisis, and a Greek default. Any one outcome will likely trigger the other two. 


This may look like a "damned if I do, damned if I don't" type of situation, but how Berlin handles the crisis could be the difference between a weakened euro and nonexistent euro. "

As Stratfor views it, the Germans gave up their beloved Deutchmark in the last Century to join the Euro. In the heady days following the collapse of the Soviet Block, they bought into the dream of a United States of Europe that would be even bigger and more influential than the United States of America. Now they see their Germanic save-and-work-hard habits being destroyed by the relax-and-take-long-vacations culture of what they sometimes call "Southern Europe." Of course, it's much more complicated than this - a lot of the problem (and it's a real problem) is due to some countries adapting to the modern economic world slower than others.

And for this, Greece is the poster child.

Greece has basically been doing what the US has been doing: spending more than it takes in taxes.  However, it has managed to get even deeper into debt from a long tradition of evading taxes and hiring huge numbers of public sector workers with thick benefits. Italy and France are not far behind - and they are BIG economies - while Spain (now shuddering under 20% unemployment), Portugal, and Ireland are close behind, and lag only in relative size.

It's not just Europe. Here is a hint of the future of Venezuela if oil stays at $85/bbl: catastrophe, possibly even civil war. Venezuela is a classic example of the inevitable consequences of  nepotism and criminal mismanagement. Venezuela's public sector now represents about 30% of the population. For the United states this would mean bringing the ~2 million (and declining) Federal employees and the ~10 million (and declining) state and local government employee rolls up to ~100 million. How in the world could Venezuela possibly sustain this? With unlimited oil reserves. Do certain profligate countries in the Middle East immediately come to your mind?

Unfortunately for Venezuela - where we lived as a family for three years - the "unlimited" part of the equation is falling apart. Literally. Venezuela has huge sweet crude reserves (sweet crude = drill-shallow-and-it-just-flows) in the Lake Maracaibo region, and a far greater resource of heavy crude that absolutely dwarfs this in its central plains (Los Llanos). The reserves numbers would make just about anyone arrogant. The heavy crude, however, is solid at room temperature. Imagine pushing that through any pipeline. It can be economically extracted with great difficulty - and only if the price of oil rises to, and remains at something like $100/bbl.

However, Venezuela is now rapidly going tubular with an ill-maintained and therefore rapidly-collapsing infrastructure. Consider this proposition: imagine putting your uneducated drinking buddies and ne'er-do-well brothers in charge of a country. Hugo Chavez has actually done this, and the consequences already include rolling blackouts in Caracas, oil production that is steadily falling, and economic growth has been negative for several years now ( = loss of private sector jobs).  Real unemployment in Venezuela is now estimated to be 50%. Another consequence: the murder rate in Caracas is at *least* 10 times greater than Baghdad according to El Nacional, the Caracas newspaper that published full-page color photos of bloody corpses piled up on the floors of the city morgue. (The government in 2008 made it a crime to publish crime statistics).

Why is Venezuela important? Keep in mind that more oil powering the American economy comes from America-hating Venezuela than comes from the entire Middle East. Why? It's closer by 10,000 kilometers.

Back to Europe, which has an even bigger pending crisis. However this Euro crisis plays out, the Swiss won't be able to sell anything (because everyone is piling into Swiss Francs), and the potential impact on its economy is nearly incalculable. The French banks will be touch-and-go in the next few months due to their huge exposure to Greek debt. "Restructuring" the Greek debt is now actively being discussed. This means a haircut for investors. This means devastated pension funds. All of THAT will get back to Canada, the US, Asia, and eventually even Australia.

Consequences will propagate around the world.

Ah. Banks again. Corporate boards approving dodgy accounting that depletes their pension funds while granting huge golden parachutes to executives. Sound familiar? Everyone except "purchased" Republicans inside the Beltway see this. Everyone knows it's a rigged game, and the Supreme Court's 2009 Citizens United (classic Orwellian Duck-Speak: the case was brought by Goldman-Sachs and others like them) decision to give corporations and wealthy individuals unlimited "contribution" limits in political races cements the loaded-dice system in concrete.

As Mitt Romney famously said, "Corporations are people, too, my friend."

Not in a sane world. There is a reason the Occupy Wall Street protests are not stagnating, but instead expanding all around the United States, and now even the world. They've already gotten violent in Italy. A huge unknown is how long can China maintain its 9% annual economic growth? The Chinese Communist Party recognizes that there is a 100% correlation between high growth and political stability. THAT economy is now greater than the US, and a collapse there will drag everyone down with it.

Bottom line: as Mark Twain said, "history doesn't repeat itself - but it does rhyme."

My school-biased recall of history keeps coming back. In that recollection, the years 1932 and 1964 come to mind for different reasons, but both were characterized by huge historical transitions. There WILL be changes coming.

How do we prepare for these? We all need to make ourselves indispensable - and have a backup ready. A Years Supply means more than food. We must build our savings as much as possible - and plan for worst-case scenarios including unemployment and furloughs. A good start would be to avoid hidden-fee operations like Bank of America who pay their executives 10's of millions of dollars (and where does that money come from do you suppose?). We also need to become more active politically - that means badgering my local congresswoman, who apparently signed onto subservience to a policy-suite that doesn't help her district or the country (only the people who buy her vote). If we don't take our voting seriously, those who do will walk away with the bank. Literally.

~~~~~