It all seems so remote, not just in geography, but as a unique economic issue affecting only Greece and, perhaps, the rest of the EU.  But it isn’t.  The world is very interconnected.  Many Americans directly or indirectly (through their banks or money market funds) hold Greek debt instruments, which are probably never going to be repaid, or, in some cases, Americans may be invested in funds that hold debt instruments that are, in turn, insured by European banks that have sizeable exposure to a Greek default or restructuring.

A default, restructuring or further downgrading of Greek debt or of the banks that have Greek debt exposure can ricochet through American financial institutions.  European finance ministers and the European Central Bank (ECB) have been wrangling over whether or when to release the final installment of the $157 million bailout loan granted last year when certain austerity measures were imposed on Greece.  Keep in mind that this final disbursement will only carry Greece into mid‑September.  The bigger issue is a fresh bailout loan of $100+ billion Euros, almost the same as the first loan.  In other words, this, in gambling terms, is a double down bet.  Few financial analysts, if any, believe Greece is going to escape an eventual default. So what is going on here? This is Extend and Pretend writ large.

Last year’s package depended on Greece enacting major spending cuts, and cracking down on tax evaders.  Instead the public took to the streets.  Prime Minister Papandreou has based his political future on ramming through a new and more draconian austerity budget, but he has only a five seat parliamentary majority and some members of his party have been on the fence.  Greek debt is now at a staggering 150% of its GNP.

As The Wall Street Journal notes, this is not a liquidity problem but a solvency crisis and that is not a difference without a distinction. Greece isn’t merely having cash flow problems.  Greece is insolvent, i.e., it currently has no prospect of meeting its obligations.

(more…)

This week, the US federal debt surpassed the $12 Trillion threshold.

Congress will vote in December to extend America’s indebtedness above $12,100,000,000,000, necessitated because our national debt grew last year by more than $1,400,000,000,000 and will grow this year by $1,400,000,000,000. According to the Obama White House estimates, the national debt will continue to grow by more than $1 trillion for the next nine years.  Except it won’t…because it can’t. There just isn’t $9 Trillion to borrow.

For years we’ve heard about the immorality of putting this debt on our grandkids. Forget the grandkids, our economy is at grave risk of collapse right now!

The dollar is in free-fall. The Ponzi scheme Congress calls Social Security is about to collapse. Foreigners are beginning to balk at loaning the US government more money. That grave economic turmoil our debt and deficit will cause in the future? It’s here now.

(more…)