A Warning Sign for the World

A Warning Sign for the World

 

           

The Economic Collapse Blog, February 2012

           

Any financial system that is based on debt is doomed to fail. Today, we are living in the greatest debt bubble that the world has ever seen, and if all of a sudden people could not use credit to buy things our economy would immediately ground to a halt. Unfortunately, no debt bubble can last forever. When this current debt bubble finally bursts, faith in the financial system is going to disappear, credit is going to freeze up and there is going to be a massive wave of bank failures.
Right now, Greece is a warning sign for the world.  Nobody wants to lend money to Greece, the Greek banking system is dying, one out of every four businesses has already shut down, unemployment is soaring and the Greek economy has now been in recession for five years in a row. Sadly, the economic implosion in Greece is rapidly accelerating. The Greek economy shrunk at a 7 percent annual rate during the 4th quarter of 2011. That wasn't supposed to happen. Things were supposed to be getting better in Greece by now.  But instead the Greek depression is getting even worse, and very soon the rest of the world is going to be going through what Greece is currently experiencing.

The World again is falling apart


Unfortunately, most in the mainstream media are treating what is happening in Greece as an "isolated incident" rather than as a very serious warning sign for the world.  Thankfully, there are at least a few reporters out there that are realizing the gravity of
the situation.  The following is how one reporter from the New York Times recently described what life is like in Greece now....



Greece is experiencing a full-blown economic collapse and nobody can see a light at the end of the tunnel at this point.  As I have written about previously, the overall rate of unemployment in Greece has now risen above 20 percent and the youth unemployment rate in Greece has soared to an astounding 48 percent.



By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, "Who would trust a Greek bank?" 



Deleveraging can be an extremely painful process.  Greece has been forced to try to reduce the size of its budget deficit, but every time it cuts government spending that causes economic activity (and thus government revenues) to slow down as well. Now the EU and the IMF are demanding that even more very painful austerity measures be implemented in Greece even though Greece is already experiencing a full-blown depression.



The EU and the IMF are demanding that Greece fire 15,000 more government workers immediately and a total of 150,000 government workers by 2015.
The EU and the IMF are demanding that wages for government workers be cut by another 20 percent.
The EU and the IMF are demanding that the minimum wage be slashed by more than 20 percent.
The EU and the IMF are also demanding significant reductions in unemployment benefits and pension benefits.



Of course all of those cuts are going to make the short-term economic conditions in Greece even worse.  The rioting, looting and burning of buildings that we are witnessing right now in Greece is likely to continue for quite some time as exasperated citizens attempt to express their frustrations to politicians that simply do not seem to care.  According to the National Confederation of Greek Commerce, recent rioting resulted in damage to 153 businesses in Athens; 45 of those businesses were totally destroyed.



Despite all of the austerity measures that have already been implemented, the truth is that Greece is very likely to default soon anyway... So there are all kinds of things that could go wrong with the "deals" that are currently being discussed.  The truth is that a Greek default in the coming months seems to become more likely by the day... But a disorderly Greek default would not be a pleasant thing for the global economy at all.  A recent article in the Guardian detailed what some of the consequences of a Greek default and exit from the euro zone might be....



But default and "re-drachmatisation" would be a costly and chaotic process. In the long term the euro might be strengthened if some of its weaker members headed for the door. But in the short term banks across the euro zone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt. Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim.



And the financial crisis in Europe is going to continue to spread well beyond Greece.  Moody's Investors Service just downgraded the credit ratings of six European nations. 
The following is how Bloomberg described the downgrades.... Countries such as Italy, Spain, Portugal, Ireland and Hungary are heading down the exact same road that Greece has gone.  Greece was the first one to experience a full-blown depression, but soon Greece will have a lot of company.  Greece is most definitely a warning sign for the world.  If you keep recklessly piling up debt, eventually a day of reckoning comes.   It is inevitable...