The Ultimate Greek Tragedy

The origin of so much or our most-respected and admired culture.

Greece. Home to visionaries in mathematics, philosophy, art, architecture, and even democracy. How could so much promise go so wrong? One could ask the same of the U.S.

I know, I know, we haven’t heard the name for at least a couple of weeks. So everything is finally resolved and hunky-dory over there right? Ummm, no.

Although two years have gone by, everything is most definitely NOT alright. Two weeks of talks in Davos-Klosters, Switzerland ended Friday, January 27th with no deal between the country, the European Union and private holders of Greek bonds. Boiled down, the Annual World Economic Forum, according to Michael Liebreich, contributor to Bloomberg News, is nothing more than a gathering of conservatives whose interest is in preserving the status quo, in much the same way as the conservative wing of politics in the U.S.

Leibierch asserts that despite the high-minded outward appearances, the annual meeting consists of three primary groups.

  1. The zeitgeist group of financial elites (Merkel, LaGarde, Draghi, etc.), a group which has yet to correctly forecast the big issues of the coming year, from the financial crash to the Arab Spring to the European crisis.
  2. The business group, comprised of various huge business interests looking to work a “deal”.
  3. The do-gooders, academicians and normally younger elite who actually want to make the world a better place in which to live.

What you won’t see seated around the big tables are women, Chinese, Indian, Southeast Asians, or Russian interests sitting in on clean energy or green global initiative meetings. In fact, the annual meeting is totally void of any progressive interests at all.  

 The End of the Experiment is a Virtual Lock

Admittedly, conditions rise and fall. Even after the crisis became such an international worry last year that the leaders of France and Germany were actually referred to as “Merkozy,” the European debt problem could still blow up and Greece would be the detonator. I think that it is a prudent move for investors to prepare for the inevitable explosion. It’s better to have protection and not need it than to not have it when and/if you do need it.

Leading economists and the majority of investors see a Greek default as the biggest test of the world financial system since the U.S. market crash of 2008.

Personally, I don’t see Germany or Holland making it to the end of the year as part of the EuroZone. Germans feel, perhaps rightly so, that they’ve been the recipients of the worst kind of deal. But it was the Germans who pushed the idea of a common currency without corresponding fiscal policies between disparate countries. According to Charles Dumas, chief economist at Lombard Research, the Germans are downright angry that they keep having to put up their currency to bail out the overspending and excesses of Greece and Italy .

Among the reasons Germans are putting so much pressure on German chancellor Angela Merkel:

  • Greece’s GDP is estimated at euro220 billion, according to the International Monetary Fund, which is headed by Christine LaGarde and who is staunchly against the austerity measures Germany demands so vehemently. That converts to roughly $285 billion U.S. dollars.
  • U.S. banks say Greece on its own poses no danger to them. American Banks, unlike their European counterparts, are not major lenders to Greek businesses and aren’t saddled with Greek government debt. JPMorgan Chase, the largest bank in the U.S., has only $4.5 billion at risk in Greece, Ireland and Portugal combined; or approximately what the bank makes in revenue in two and a half weeks.
  • The primary concern for U.S. banks would be to cover the insurance contracts they sold on Greece’s euro350 billion, or about $460 billion. But the amount of insurance taken out on that debt totals only $68 billion, according to Eurex Clearing, the clearinghouse for the contracts.  Moreover, the U.S. banks have offset all but $3.2 billion of those contracts with various other instruments.

“The direct impact of a Greek default is almost zero,” Jamie Dimon, CEO of JPMorgan Chase, told CNBC on Thursday.

So what’s the big deal with Greece as far as the U.S. is concerned?

For one, it could cause borrowing rates for Portugal and Italy to escalate exponentially, pushing those much larger countries closer to defaults of their own.

As with the collapse of Lehman Brothers, analysts saw it coming, but the extent of the fallout still caught them by surprise. Far from what U.S. politicians would have Americans believe, this is the uncertainty that keeps big money on the sideline, not the relatively minor spectre of tax increases.

If Greece goes belly-up, traders seeking safety would immediately sell euros and buy dollars. The dollar would soar and prices for commodities like oil and wheat, which are bought and sold in dollars around the world, would collapse. With the dollar soaring, U.S. exports would become price prohibitive because it would take an x-factor of other curencies to purchase U.S. goods and/or services. Less demand spells Trouble with a capital T for the U.S. recovery.

The U.S. is Walking a Tightrope While Mitt Sings America the Beautiful

 The confluences of these factors make it easy to understand why Germans just want out. One can understand Angela Merkel’s tepid reaction to calls for Germany to increase its contributions to the eurozone’s debt relief effort.

But regardless of the minimal direct damage to the U.S. banking system, the chaos in Europe would bring U.S. imports to a sudden and disastrous halt. This would very likely stall, if not reverse, the already fragile U.S. economic recovery. Should that happen and a Republican becomes President with an onslaught of American austerity we would once again have a perfect set up for Great Depression 2.0…an almost identical situation as the one that occured in the 1930s. I would detail the similarities, but I do not want to encourage free fall dives from 20 story buildings

The austerity events above are in stark contrast to calls from Christine Lagarde (IMF), Robert Zoellick(World Bank), Pascal Lamy(World Trade Organisation), and eight other multilateral and regional institutions calling for an end to austerity. All of the above authorities feel that the austerity measures are a failed tactic and will only serve to further tamp down demand and worsen the downward spiral to a deep and long recession. And the U.S., (particularly Republicans) in its typical myopic  view of, well, everything, is more concerned with Groupons, iPhones, rather than whether or not a zygote is a person, Or, god forbid,  if they should care that there are 250,000 veterans from “merely” homeless, to homeless and starving to death on big city streets after returning to the U.S. from unnecessay and horrid war zones.

Make no mistake. There are solutions that the U.S. could take immediately and with great effect. They are not harsh and they are not politically ideological in nature. I’ve offered eight very easily-implemented steps n previous articles that would accomplish all U.S. economic problems in the U.S. and Europe and restore confidence in the entire world economy (see: Time for Europe AND America to Implement the One Penny Economic Solution, and Financial Transaction Tax and the One Penny Solution)

But absent the U.S. electorate waking up to:

  1. The folly of failed supply-side economics.
  2. Forcing the U.S. Congress to promulgate the interests of the U.S. citizens rather than their own re-elections, and
  3.  Europe taking the necessary steps to walk back from the austerity measures on which they’ve bet their euro.

 it seems quite likely that Germany and Holland will simply call it a day and walk away from the chaos….whether sooner or later I certainly do not know.

When this happens, how the U.S. will fare depends upon whether the U.S. electorate can manage to come to its senses and reject the failed economic policies that have now doomed the Eurozone experiment to certain failure and imperiled the once-mighty U.S. economy. 

Harvey Gold


  2 comments for “The Ultimate Greek Tragedy

  1. jackarm
    February 1, 2012 at 12:01 pm

    What is interesting is many people who do not have to loan Greece money advocate giving them more loans.

    People and countries that are supposed to cough it up for Greece are opposed to it. What a surprise.

    I supposed they look at the current debt holders who are expected to lose 70 cents on the dollar.

    The progressives not at the table. They had the table for 30 to 40 years. They and their policies are now personna non grata.

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