Friday, April 9, 2010

Sovereign Debt

I find the term "Sovereign Debt" to be a peculiar turn of phrase for the 21st century, bearing as it does a rather courtly, 17th century air. The gloom and doom economists watching the Greek debt drama play out are invoking impossible debt levels to warn the world of impending failure. Worse than that, is the Bank for International Settlements announcing a world debt crisis of such epic proportions There Is No Hope. The numbers are actually quite impressive.


The Greek drama is bad enough with assorted International Monetary Fund help mixed in with some European Union help being proffered after a fashion. It may cost 20 billion Euro to save Greece from itself, but there is a suspicion floating around the halls of power that the German Chancellor, in a Machiavellian move to help her own economy, may be allowing Greece to flounder to reduce the value of the Euro. When the Europeans created their unified currency they required all nations to start out with similar levels of debt and made no allowances for individual countries to essentially go bankrupt.

Greece mucked the system up first (to everyone's surprise!) when a new Government was elected and announced the previous administration had been operating a scheme through Goldman Sachs to hide the true levels of Greek debt. The subsequent public catastrophe has set Greeks to rioting and Germans to announce they have no interest in saving Greece from itself. This tactic has devalued the Euro -down from 1.60 to the dollar to less than 1.30- all of which makes it easier for Germany to try to pull in some income from exports. Unlike the US Germany has carefully protected it's unionized industry and has something to sell to the world that is proudly made in Germany.

That Chancellor Merkel might be capable of such maneuvering is hideous enough, and cold blooded, if sensible. The other thing to note is that she can continue to manipulate her currency in ways the US cannot hope to. In a competition for the export market in durable (ie: valuable) goods, Germany has a big leg up. And if in the end Greece is saved, the gloom and doom economists point out there are other candidates for failure down the road, candidates whose feeble economies can be used to lower the value of the Euro. Ireland springs to mind as do Spain and Portugal, the group of failing nations fondly referred to as PIGS.

On the other side of the coin we have the venerable BIS referred to earlier, pronouncing the death by a thousand cuts of most advanced economies. The bank says national debt around the world is so huge there is not much to be done to save or repair the economic system as a whole. The Bank for International Settlements makes the point that stimulus spending has added to the debt burden and the only way out is drastic spending cuts.

Spending cuts of the magnitude suggested by the bank don't seem likely to happen in Europe or North America. Not least because drastic spending cuts will kill off any possible hope for a recovery. Levels of national debt are horrendous and growing larger all the time. Japan and Great Britain lead the way in numbers but Japan's debt has been sold almost entirely to the internal population which may help a little, especially if Japan can figure out an export market, perhaops India or China. The prospect of interest rate increases suggests to the BIS that debt service will become such a burden that default will surely follow. And one relatively easy way to default (without admitting to defaulting!) is to let inflation loos eon a national economy. The other classic way to deal with impossible debt burdens, not mention by the BIS, is to go to war.

All I see is a future that in no way can be said to be leading towards economic recovery. Even if the Stock Market's Dow Jones average is hovering around an impossibly high 11,000. as an indicator of economic recovery it makes no sense. We are all Greeks now, it seems.

2 comments:

Danette said...

Apparently you haven't read Blomberg's Business Week this week which has a pic of our socialist pres. shootin' some hoops only the ball is really a coin. Headline reads, "Why the Obama plan is working" and the first line is "Polls say the economy is heading the wrong direction. Markets says it's back on track. This time, the markets are right." See you must be wrong! :P

But in the real world, an article featured by RSN had the headline "Living in economic downturn has become the new normal" I think they-- the 1% who run this country with ponzi schemes and money laundering- are just fine with where everything is. They make money (as you pointed out in past posts- we have more billionaires than ever!) off all of these financial crisis. It is labeled by Naomi Klein in "Shock Doctrine" as Disaster Capitalism- I couldn't tell you if she was the first to coin the phrase but she describes it quite well. She also describes another phenom which, at the time of writing, happened mostly in poor countries (like Greece), the loan swaps. Matt Taibbi has an article coming out in Rolling Stone (he does an interview on his blog) about the same behavior occurring in Jefferson County (South Carolina??)- the county needed to get financing for a new sewer system and went to wall street to get backing-- well, with the same time of loan swaps and interest rate hikes and bloddity, bloddity, at this point, the people of the county 300-400 times as much on their sewer system bills because of the debt accrued. Not to mention the county is so deeply in debt that they won't be able to pay their bills for the next 10 years, at least.

Congrats on the evaluation! I have my first year coming up and I am a bit stressed about it...

(and I have written a bit more on the problems of education...)

Danette said...

Correction: should read 300-400% more and I should have said "socialist" because I would barely call him democrat, let alone social. I am also reposting an article i found on Alternet on the resurgence of social darwinism. Good stuff!

peace,
Danette