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Friday, February 12, 2010
Global Default
Niall Ferguson chimes in with an interesting look at the unfolding European Debt crisis:
It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.
He doesn’t seem to think the US will escape, either:
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.
The solution? He reports on an IMF estimate that most of the developed economies of the world need to shrink federal expenditures on the order of 10% in order to return to sustainable footing.
Not likely to happen. The government strains to keep the budget from growing from year to year. I think it is safe to say that a 10% cut is politically impossible. Markets can be tricky beasts with unpredictable behavior. However, this crisis was completely predictable. Default through inflation and/or some other form of debt repudiation is almost certain.
Be prepared.
Comments
One rule of financial panic says the first one out the door survives but in doing so he pulls down the house on the rest. Everybody involved at the higher levels seems to have their coat in one hand and their car keys in the other, furtively watching the others and the exits. It’s my unsupported opinion the final events of this collapse will unfold with stunning speed, not in months, maybe not even weeks, rather it shall be an event akin to Pearl Harbor, the JFK assassination or September 11.
Posted by Ol' Remus on 02/12/2010 at 11:20 PMI suspect you will be proven correct. Currency collapses tend to be fairly rapid affairs. Iceland’s krona was dead within a day or two.
When they die, better be out of the way.
Of course, the events leading up to the big event are many years in the making…
Posted by Scott Angell on 02/13/2010 at 05:56 PM
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