Today was another day that was not exactly dull for the world financial markets. Stocks tumbled again today after news that there may be a public vote held in Greece on the “deal” that was recently reached. It looks like the market has its doubts that the welfare statists of Greece will accept it. These people have had a near free lunch for too long and they don’t intend to go down without a fight for one last free lunch.
Meanwhile, I am having second thoughts on my second thoughts. On Saturday, I stated that I began to change my mind about an imminent recession and was wondering if we weren’t in for some major price inflation instead. That was after a big week for the American stock market. Since then, the market has plummeted for two days straight.
This continues to be a fight between the market trying to liquidate all of the malinvestment and the Fed trying to prevent it through inflation. I believe this is why we are seeing these roller coaster swings. We can expect more of this.
I thought it was kind of a joke that the market reacted so positively last week on the news of a deal reached to cut the Greek bonds by 50%. That is why I am wondering if stock market investors are just looking for any old excuse to buy stocks. There is a lot of excess money out there somewhere and it is not with the average Joe who, not only doesn’t trade stocks, but barely has two nickels to rub together.
As for Greece, it doesn’t really matter whether there is a public vote. The only thing it affects is timing. It is a matter of when investors realize that the Greek government is going to default on a full scale. They can give bondholders a 50% haircut now, but the other 50% will not be far behind.
As I explained the other day, cutting the Greek government’s interest payments in half does little to solve its problem. You could relieve the Greek government of all of its interest payments, but it will still be in the hole.
Think of the United States as an example. The government is running a deficit close to $1.5 trillion per year right now. The actual interest payments on the debt are “only” a couple of hundred billion dollars. Even if you relieved the U.S. government of all of its interest payments on bonds, it would still be running a deficit of $1 trillion or more due to the vast spending and all of the previous promises that were made (think Medicare and Social Security).
The Greek government is in the same position with all of its government employees and all of its pensions that have been promised. The “problem” for the Greek government is that it does not control its own currency. In the U.S., there is the Federal Reserve, which can always buy government debt. In Greece, they have to depend on the European Central Bank to create money (which it isn’t supposed to do) or they have to rely on investors to buy their debt.
If and when Greece fully defaults, who is going to buy their bonds? Nobody is. Then they will be forced to balance their budget, which will mean a massive lifestyle change for many of the Greek people. This may mean a major revolution (and not in a good way).
I think the only solution they will find in Greece is to withdraw from the European Union and to stop using the euro. Greece can go back to having its own central bank, which can be used to buy the Greek government debt.
The big question after that is, will Italy, Portugal, and others follow? It would not surprise me to see a total breakdown of the European Union in the next couple of years.