Monday, May 03, 2010

A Bubbular Web of Debtful Collapsification

The first domino is Greece. It owes nearly $10 billion to Portuguese banks, and with Portugal already falling two notches in S. & P.’s ratings and facing higher borrowing costs, a default by Greece would be a staggering blow. Portugal, in turn, owes $86 billion to banks in Spain; Spain’s debt was downgraded one notch last week.

The numbers quickly mount. Ireland is heavily indebted to Germany and Britain. The exposure of German banks to Spanish debt totals $238 billion, according to the Bank for International Settlements, while French banks hold another $220 billion. And Italy, whose finances are perennially shaky, is owed $31 billion by Spain and owes France $511 billion, or nearly 20 percent of the French gross domestic product. _NYT

The bubbleheads are all being bailed out, but they remain bubbleheads all the same. Which means the same problem will come back again more inflated -- only we will all be in a poorer position to do anything about it by that time. Meanwhile, back in the USA:
The banking system is financing the government deficit through leverage, which is how the US can handle a 12% deficit with a very low savings rate. Bloomberg has finally caught up with the story without, however, mentioning the most important source of financing for the Treasury: offshore banks.

...The PIIGS crisis no doubt helped, as European banks shifted towards safer American debt......To say this is unsustainable is a meaningless statement: nothing like this ever has been tried before in the United States of America. The banking system is in harness to the government, and in terror of federal prosecution for whatever past misbehavior the Justice Department chooses to define as a criminal offense after the fact. Not to excuse the banks’ depredations, but there is a frighteningly arbitrary element in the application of what passes for law here. At some point Americans must save, as the largest retirement wave in history begins–unless, of course, no-one retires until age 75. _SeekingAlpha
Things might just work themselves out -- in the US, and Europe -- if not for that dratted demographic deflation, the population implosion. Where the smarter people of the world voluntarily die off to make way for larger numbers of the populations that can not possibly run a high tech infrastructure on their own.
The 20th century Bismarckian welfare state has run out of people to stick it to. In America, the feckless insatiable boobs in Washington, Sacramento, Albany and elsewhere are screwing over our kids and grandkids. In Europe, they've reached the next stage in social democratic evolution: There are no kids or grandkids to screw over. The United States has a fertility rate of around 2.1 – or just over two kids per couple. Greece has a fertility rate of about 1.3: 10 grandparents have six kids have four grandkids – i.e., the family tree is upside down. Demographers call 1.3 "lowest-low" fertility – the point from which no society has ever recovered. And, compared with Spain and Italy, Greece has the least-worst fertility rate in Mediterranean Europe.

So you can't borrow against the future because, in the most basic sense, you don't have one. Greeks in the public sector retire at 58, which sounds great. But, when 10 grandparents have four grandchildren, who pays for you to spend the last third of your adult life loafing around?

...Over 30 percent of German women are childless; among German university graduates, it's over 40 percent. And for the ever-dwindling band of young Germans who make it out of the maternity ward there's precious little reason to stick around.....Germans, who retire at 67, are now expected to sustain the unsustainable 14 monthly payments per year of Greeks who retire at 58. _OCRegister

All of which sounds a lot like private sector workers who must work until 70 to pay for the luxurious retirements of public sector workers who retire at 50 or 55. Simply unsustainable.

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