Courtesy of Keith Dicker of IceCap Aset Management
Well, if you’re not Greeked-out by now you should be. After all, the Greek debt crisis has been spinning in and out of control for 5 years and counting.
Why should it be any different this time?
Everyone knows there is no way on this earth that Greece will ever be able to repay these debts. Unless the Greek economy can grow faster and longer than it has ever grown before, AND it can avoid the political temptation to never again spend more money than it collects in taxes – then just maybe it stands a chance of paying off some of the over $400 Billion it owes.
In today’s age of money printing, negative interest rates, and bank bailouts, many have become somewhat desensitized to “billions” and “trillions”. Yet, we assure you $400 billion for Greece is a lot of money.
For perspective, Australia owes about $1.3 trillion in various loans. If Australia suddenly entered a debt crisis on the same scale as Greece, its debt owing would skyrocket to nearly $2.5 trillion, or put another way – about $106,000 for every man, woman and child.
For Greece, it’s mathematically impossible to repay its debt. If anyone else tells you otherwise, it means they have no understanding whatsoever of how real economies actually work.
The sharpest and brightest minds at the IMF, the EU and the ECB (collectively referred to as the TROIKA) all agree that the solution to the Greek crisis is for Greece to pay more in taxes, for the Greek government to spend less money, and to continue to pay off its debt.
Let’s think about this for a very quick second:
- Greeks have to pay more taxes, which means less money is available for spending
- the Greek Government has to spend less money, which means less money is available for spending
- and of the money that the Greek government does spend, more of it has to be used to repay its debt, which means less of it is available for real spending;
And considering that economic growth is a function of aggregate spending, how on earth can any sane person expect the Greek economy to recover and grow?
The answer: they can’t. For further proof why it doesn’t work and it will never work, you just have to look at Iceland.
Iceland was the very first country wiped out by the 2008 global debt crisis. The Icelandic government and the Icelandic banks completely mismanaged everything for which they were financially responsible.
And when everything hit the fan – no one come running to save them, in fact, the complete opposite happened. Both Britain and the Netherlands threatened to completely wipe Iceland off the global financial map.
At the time, Icelandic banks offered regular banking accounts in Britain and the Netherlands that paid 6% interest. Considering other global banks offered 3% and less, and also considering that the vast majority of people in the world have no idea how a bank is structured; thousands of British and Dutch savers blindly ploughed their savings into these Icelandic bank accounts.
After all, it was a bank deposit, it was guaranteed by the bank and 6% is greater than 3%. Where was the risk with this?
Next, when the crisis hit Iceland – all bank accounts were frozen, and the savings of many British and Dutch investors melted away.
Suddenly, the risk with 6% was crystal clear. Naturally, the British and Dutch governments both demanded their citizens be repaid for making stupid investment decisions.
The Icelandic government meanwhile, finally woke from their frozen state and assessed the situation. Not only did the government not have enough money to repay bank depositors, it didn’t have enough money to pay themselves.
And since no one would lend Iceland any money – the country was officially broke. The rivers would stop running, the glaciers would stop flowing, and the thermal baths would stop steaming – or so we were told.
Instead, Iceland allowed its banks to collapse, allowed its currency to drop by over 70%, decided not to pay back all of the money it owed, and finally – it actually imprisoned certain bank executives for putting the country into such a financially toxic position.
A comparison between the Icelandic approach and the European approach forced upon Greece is as follows:
And as for the outcome, the chart below clearly shows the economic recovery experienced by both countries, over the exact same time frame, and using completely opposite solutions.
Iceland’s economy has recovered from the depths of the crisis and is now only -3% less than where it was in 2008.
Greece’s economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.
The Icelandic recovery has not been perfect. Locals and foreign investors have been unable to get money out of the country. Originally, capital controls were expected to last 6 months. 7 years later they are finally being relaxed. That’s a long time not being able to access your money.
In addition, prices for all things soared with inflation hitting 20% at one point. Job losses also soared with unemployment tripling.
Yes, bad times were had – yet the country and economy survived. Greece meanwhile, continues to be subjected to a 100% guaranteed doomed strategy.
Greece: Brussels bureaufascists’ plans go well
http://bit.ly/1fbWRIL
Soon to become Greeceistan.
Greece decided socialism was a good idea and borrowed other people money to finance it.
Too bad they didn’t think about repaying it when they borrowed it.
The bills are now due, they have run out of other peoples money.
AND it can avoid the political temptation to never again spend more money than it collects in taxes
Coming soon to a theater near you. If the Greeks did not experience inflation it is because they couldn’t print their way out of the mess. Iceland refused to print their way out. But the USA is printing like crazy and handing out money to the FSA. Eventually, FSA will outnumber tax payers and the system will undergo hyperinflation and collapse.
It seems to me that as the US dollar is the reserve curency it is on a world standard. Such being if there is hyper inflation it will be world wide. And then so what except for those that hold cash. KISS.
A short term problem for short sighted under funded people.
The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…
IceCap’s Keith Dicker continues:
We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.
And to make matters worse – these very same governments and their central banks have implemented various plans that have only made matters worse.
Our view has not changed – the global debt crisis has escalated to a point where the government bond bubble has inflated itself to become the mother of all bubbles. It’s going to burst, and when it does it wont be pretty.
Further evidence to support our view is as follows:
Canada – the collapse in oil and commodity markets has pushed the country into recession and the Canadian Dollar to decline to levels lower than that reached during the 2008 crisis.
Oil dependent provinces Alberta and Newfoundland remain in deep denial. Since everyone in these provinces have only ever experienced a booming oil market, many naively believe things will bounce back – and quickly.
Meanwhile, both Toronto and Vancouver housing markets also remain in denial as they continue to go gangbusters. Buyers today are likely buying at all-time highs.
And as we predicted last year, the Bank of Canada has cut (not raised) interest rates twice in the last 6 months.
We fully expect the Bank of Canada to eventually cut interest rates to 0% and start a money printing program as well. And for the stunner – NEGATIVE interest rates will not be that far behind.
Australia – Over the last 20 years, China has been viewed as the growth engine of the world, and justifiably so. With annual growth rates between 8% to 15%, China’s economy was literally eating every rock, stalk and barrel of practically every commodity in the world.
And naturally, any country or company that produced these commodities made a tonne of money – including Australia.
Today, China’s growth rate has slowed to about 3% which is a dramatic slow down compared to what it achieved in the past. This slowdown and China’s effort to even maintain these rates, will have significant repercussions around the world.
And the first up to bear the brunt of this slowdown is its closest supplier of raw materials – Australia.
With dark clouds on the economic horizon, the Australian government and central bank is doing everything possible to prevent the unpreventable recession.
Interest rates have been reduced to all-time historical lows, meanwhile the Australian Dollar has plummeted -25% over the last year. Yet – the negative outlook has not improved.
Brazil – Like Australia, Brazil has benefitted immensely from China’s growth. And now, also like Australia, it too is feeling the affects of the dramatic Chinese slowdown.
The economy has now declined for 12 consecutive months making it both the longest and deepest recession in 25 years.
But wait – it gets worse. Despite declining growth, inflation continues to soar higher causing interest rates to rise as well.
And if that wasn’t bad, also know that the Brazilian currency has fell off the cliff at -53%.
Sweden – Unlike Australia and Brazil, Sweden relies very little on China as a buyer of last resort. Yet, the Swedish economy is also not very hot these days.
In fact, instead of spectacular and dramatic declines in anything, it is doing the exact opposite – it just isn’t moving.
While Sweden isn’t in the Eurozone, it is smack dab next to it and that in itself is reason enough for the lack of growth. We’ve written before how the debt crisis in the Eurozone is acting like a giant, slow moving tornado that is sucking the life out of the economy and everything near by. And unfortunately for Sweden, it is very near by.
While economic growth in the Nordic state hasn’t declined, it hasn’t accelerated either – and this is what has many worried.
So worried, that the central bank shocked everyone not once but twice, by first announcing that they would begin to print money, and then when they announced that interest rates would be NEGATIVE.
These actions are so severe, that we need to repeat them:
1) MONEY PRINTING
2) NEGATIVE INTEREST RATES
It is hoped that these actions will cause people and companies to loosen their wallets and start spending again. Yet, what the government and the central bank doesn’t understand is that these actions will actually make the problem worse.
As the global economy continues to move as we expect, there is nothing Sweden can do to change what is coming – a global recession and a significantly weaker Krona.
China, Australia, Brazil, Canada, Sweden – it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money.
But first, you have to recognize what is happening.