Regardless of who the President is after this close election, the equity markets and the U.S. economy are in trouble. Debt has spread throughout the Western world. The fallout is political dissonance, growing economic hardship and, in some places, mob violence.
Ground zero for the spreading fear and panic is Greece, which was once the world’s greatest civilization and the birthplace of democracy, poetry and philosophy.
There is violent evidence of the contradiction from what the ancients taught and what is unraveling in Greece. It would all just be another boring story at the end of the news day, except there is brewing tragedy that Homer would find worthy of telling: The greatest Nation on Earth, the United States, may be a few short years or months from the economic debt collapse that wreaked havoc from Athens, Greece, to Akron, Ohio.
The onset of the crises began in 2008 after there was a worldwide flood of cheap money that investment bankers leveraged. In eight years, worldwide private and public debts rose from $84 trillion to $195 trillion. To put that number into perspective, the gross domestic product in the United States (the value of all goods and services sold or rendered) will be well below $16 trillion this year, while the total market capitalization of every U.S. stock that is publicly traded is less than $25 trillion.
According to Kyle Bass, the manager of the hedge fund Hayman Capital and one of the few to correctly predict the stock market crash of 2008: “It has been the largest peacetime accumulation of debt in history.”
It was a decade long drunkfest, and the tab is due. With the too-big-to-fail banks already bailed out, the bill for the biggest party ever has fallen on Western governments. To sustain any hope of borrowing another nickel, these democracies have had to make unprecedented spending cuts.
No nation went on a bigger bender than Greece over the past decade. The spending spree happened after Greece was accepted into the European Union. The promises that Greece made to achieve that status were never kept. Now, Germany is faced with the lose/lose prospect of bailing out what German newspaper headlines describe as “Lazy Greeks” or accepting the consequences along with the rest of Europe (and most likely America) if the Greek government defaults on its $400 billion in government debt.
The situation is bleak. Last year, of the 126 countries whose debt was rated, Greece ranked 126th. The acrimony that resulted from deep cuts in government spending just to stave off insolvency has led to political demonstrations, violent protests and murder.
Sowing The Seeds Of Violence
In Greece this autumn, more violence is being harvested. Last month, the nation’s two largest unions went on strike. The strike turned violent after protesters hurled firebombs at police in Athens. As many as 50,000 Greeks gathered to condemn new austerity measures. Still, Greece’s new government rolled forward with $15 billion in further spending cuts that have been imposed on the nation by its creditors, the most notable being Germany.
In May 2010, there were demonstrations that drew tens of thousands of people near the central square in front of Parliament in Athens as part of a general strike that paralyzed airlines, ferries, schools and hospitals.
When some protesters saw 20 employees still working at Marfin Egnatia Bank, they began throwing Molotov cocktails inside the building and then added gasoline to the fire. Most of the bank employees escaped through the roof with the help of the fire department, but the fire killed three workers — including a young woman who was three weeks pregnant. As the bodies were being removed, the crowd screamed that it served them right for going to work. The police stood by, and no arrests were made.
It sounds like a scene from the French Revolution, but it is going on in Greece even as you read this. And while one government has already been toppled, the new one is indecisive. It wants to get a free ride from the Germans and keep lending costs at least somewhat affordable by staying with the euro. However, millions of Greeks are unwilling to live within their means, which would include paying taxes and postponing a retirement age with pensions beginning at age 55 for men and 50 for women.
In his bestseller Boomerang: Travels in the New Third World, Michael Lewis wrote:
As anyone with a brain must have known, the Greeks would be able to disguise their true financial state for only as long as (a) lenders assumed that a loan to Greece was as good as guaranteed by the European Union (read Germany), and (b) no one outside of Greece paid very much attention. Inside Greece there was no market for whistle-blowing, as basically everyone was in on the racket.
A Funny Thing Happened On The Way To The Treasury
On Aug. 5, 2011, for the first time in history, a credit service (Standard & Poor’s) downgraded U.S. federal government debt from AAA (outstanding) to AA+ (excellent).
In normal times this would cause U.S. interest rates to increase, making it even more expensive for the Nation to finance its daily borrowing requirements. Instead, the crisis that was brought about because of Congress’ opposition to an increase in the debt ceiling actually made government rates fall. A few days later, rates paid on 10-year Treasury bonds dropped to just above 2 percent, the lowest return ever.
It was part and parcel of the investment insanity that is controlling the bond market. Stocks are a different matter. After the downgrade, stock markets around the world underwent a serious correction, which sent investors flocking to safety. That sent billions of dollars into gold (which made sense) and U.S. Treasuries (which made no sense).
All of this was accomplished, of course, because the U.S. dollar is the reserve currency of the world. Because of that, it is free to manufacture as many dollars as it needs to pay off its creditors. As a result, the fear that the United States will someday default is still not considered, according to Lewis.
The stock market crash of 2008 demonstrated investor thinking can change on a dime. That is America’s problem for anyone who holds U.S. stocks or bonds.
Twelve years ago this month, I began writing Outstanding Investments for Agora. That fledgling newsletter, which is the company’s flagship publication, has stayed on course with my original recommendations: that investors should buy gold and other hard assets because the United States was drowning in debt. Since that time, the price of gold has risen from well below $300 per ounce and is currently trading above $1,700 per ounce. Even more telling may be what the greenback has done versus the Canadian dollar. A decade ago, you needed 1.5 Canadian dollars to buy one U.S. dollar. Today, 97 cents of Canadian money will buy you a greenback.
The fact that U.S. interest rates have fallen to all-time lows is an anomaly that historians will look back at with wonder. They will ask themselves why someone with a brain didn’t see it coming.
Meanwhile, if there were an anger index for the United States, it would be at an all-time high. Both Barack Obama and Mitt Romney are campaigning hard these last few weeks for the Presidency, yet neither has laid America’s true cards on the table. Neither wants to precipitate a stock and bond market collapse. Yet it is out there… waiting.
Yours in good times and bad,
Editor, Myers’ Energy and Gold Report