A few days back the yearly Spring boondoggle meeting of the IMF took place. In it all kinds of alarms were sounded due to the exorbitant levels of debt in the world. That would be government debt, for those un-initiated. According to the IMF the debt in developed countries runs at about 105% of GDP. Of course, measuring against GDP assumes 100% taxation or communism because it implies that all goods and services created by all the citizens of a country belong to the state… but we digress.
Below is the current eye's view of global debt. The darker the red color the higher the debt. As you can see the most indebted countries are the usual suspects. Those are the ones that have achieved the glorious socialist Walhalla where money can be had for nothing and the state pays for everything.
But hold on because it is worse. The debt burden is growing at 2% per year (at compound interest). Not much, right? Allows us to give you a small preview of the next ten years to come.
As you can see, at this speed in only ten years we will be in the same situation as we were immediately after WWII (or about 125% debt in relation to GDP). Which begs the question, which war did we fight? Remind us please. Ah… yes… that's right… the war against your wealth… you know… "for the greater good".
Of course, the IMF heads (as prompted by their governments, no surprise here) have decided to get though with would-be defaulting countries, beginning with Greece. To this regard the heads of the IMF had sage advice for Greece. Mr Sapin said:
"A lot of time has been wasted, and patience is not eternal. The Greek have either not wanted to, or don't know how to, work seriously. We're getting to the moment when this could become difficult, and I think the Greeks need to get this this into their heads,"
To which Ms Lagarde asked how was it possible that a relatively rich nation can justify defaulting to an IMF family where many members are in a "direr situation"?
Easy. They Greek government is and has been communist! Oh…sorry…of the "extreme left". There. That's better. Their motto is spend, spend, spend and then spend some more. When taxes are insufficient then borrow and print! Oh… that's right. They can't print EUR. Nevermind. Will just prints bonds…that's better.
Now all this is really funny considering that the IMF loaned tons of money to Greece and was also instrumental for other countries and above-government institutions to loan them insane amounts of money. It's like a drug dealer who advanced a pot smoker a few kilograms of coke based on promises of pay back and now that the coke has been used the dealer demands repayment! Hold on buddy! You created the problem. You created the drug dependency! It's your fault!
Of course, they are all fretting because the Federal Reserve (in US) is threatening with rising interest rates and they are afraid the world will suffer a "cascade of disrupting adjustments". Yeah… sure… like the Fed will actually do so. Don't you worry. If it is a matter of liquidity, they are locked in. If the Fed will drop the ball (and we don't see how), somebody will pick it up. Today all the economies of the world are addicted to "high liquidity" and any decrease will turn them into mush. Game over. This is the common wisdom.
But then again, there is always the large pink mastodon in the room: government stupidity. You see dear reader, government are trapped. They must continue to print in order for the system not to collapse but one the other hand they can't continue to print because this will eventually destroy all economies. In US the situation is so ridiculously bad that the estimated capitalization of the Federal Reserve is in the order of 1.5%. This is, the Fed has assets valued about 1.5% of all the money it printed. In these circumstances, they may actually decide to do something incredibly stupid, such as stop printing. But that's OK because the US economy is in "recovery". Sure...yeah...whatever.
And what about other Central Banks? If the Fed decides to quit seeking a "soft landing" in banker's parlance, it will trigger the need for others to fill the gap. The ECB (European Central Bank) is already engaged in maddening QE and now they have to face the Greek debacle. They are tapped out. Japan? Forget it. They are indebted in the order of 250% GDP (give or take) and invested in Abe-nomics (i.e. printing). Japan cannot provide sufficient liquidity. Who else is there? India? Brazil? Not a chance. China? Nope. They are too busy preparing for their own internal debacle as they shift from a mercantilist policy to an internal consumption policy. And so it is entirely possible that this is it. The Big Crunch triggered by the US.
Meanwhile, Greece is growing desperate and desperate government always do the same; raid stashes of money regardless of where they may be. The latest victim of these efforts are the Greek public sector funds who were ordered to fork the money into the Central Bank or else. The Greek decree reads “Central government entities are obliged to deposit their cash reserves and transfer their term deposit funds to their accounts at the Bank of Greece”
Talks continue with the ECB and it is expected that a deal will be reached. Although we don't have a crystal ball, this is certainly a very plausible scenario considering that extending Greek debt payments through loans is only a tiny portion of the amount of money being generated by the ECB through their QE initiative. Should Greece default, the damage would be severe and most likely QE costs would skyrocket. But then again, governments got us into this mess, governments like to play with fire (or dynamite) but we all end up paying the price.
There are preparations in all EU as well as surrounding countries for a Greek departure from the EU. Is this a prelude to the catastrophe? Who knows. The only thing we know for sure is that if this is not it, the end is near indeed!
Have a wonderful week…if you can sleep.
Note: please see the Glossary if you are unfamiliar with certain words.
