International Forecaster Weekly

The Greek Tragedy Could Engulf Many More European States

European countries scramble for solutions to the Greek default crisis, the Euro's future is in jeapordy, other European countries in line to fail after Greece, China also adopts first world problems like unemployment, caution in today's markets, muted effects from quantitative easing.

Bob Chapman | June 29, 2011

Greece and Europe are still in crisis as the European countries scramble for a solution. The fact is that ultimately Greece has to default. The banks and other nations of the euro zone should have never allowed the situation to progress to its current stage. As we have said over and over again for 13 years, one interest rate can never fit all, because each country is at a different stage of development. The very creation of the European Union and the euro zone flies in the face of anthropological and cultural history reaching back thousands of years. That said, the leaders of the EU cannot possibly save Greece and the other five nations in serious financial trouble and save the euro and the European Union simultaneously. It is simply impossible if for no other reason, which is the cost, which is $4 to $6 trillion. Eventually all six will have to be cut loose reducing the euro zone from 17 to 11 members, all of which will have to face eventually more trouble among the remaining weak members. Thus, it is only a matter of time before the euro is history. At least for now there will not be a euro as the basis for a one-world currency and the EU as the cornerstone for world government.

If a short-term solution is not found by European bankers and nations Greece will simply default, leave the euro, return to the drachma and put its own house in order. If a short-term solution was found it might last a year and it would be back to the same underlying problem – bankruptcy and the path we have described.

The problem is not only Greece, but also Ireland, Portugal, Spain, Italy and Belgium. They are all in financial situations similar to Greece. Once Greece goes they will all follow. They will leave the euro and leave behind a long string of insolvent banks and countries, which will negatively effect England, the US and the world. Greece and the others probably will take down the world’s financial system.

Spain will probably be the next failure, a country on the edge of revolution. Then will come Italy and Belgium. If you remember last May 2010 we predicted these events for the second half of 2011, and they are about to descend upon us. All you have to do is look at the video links from Spain from last week and you know where this is all going and how it is going to end up. Deliberate police brutality at its worst. They attacked and injured women and children for no reason and without provocation. Spain’s unemployment, among the young is 43%. That is explosive and it is going to get much worse.

Even China is not without its problems as world trade slows and unemployment rises. Those problems will affect all of Asia including Australia and New Zealand. As we have often said no nation on earth is going to escape this worldwide deflationary depression. We do believe though that some nations will fare much better than others.

On the short to intermediate term we expect these problems to produce a temporarily stronger dollar. The dollar for the moment being the best of the worst. In spite of this abnormal dollar strength we expect gold and silver to hit new highs and to outperform all other asset classes, as investors realize gold is the only real currency and that it will reflect the ravages of inflation and perhaps hyperinflation. The euro will fail and again the new world order crowd will have been defeated.

Any corporations involved in finance worldwide are going to go through perilous times and most will not survive. This next episode will make the last three years of credit crisis look like child’s play.

One of the issues, which today lurks in every financial historians’ mind is will Greece be the catalyst that brings about the next credit crisis. We think it could very well be. From our perspective we believe the only thing that can bring about an exit from the Greek problem is a reasonable deal offered by the bankers, sovereigns and the IMF, otherwise there will be default. This is the first time in more than 50 years that an entire nation has faced off against the banking community. The world public is discovering how the criminal banking system works and how it is impossible to deal with them. Austerity brings about weakness and inhibits the ability to grow. Growth is needed to increase revenues to pay down debt. This is the IMF formula used since 1948 to control and loot countries that stay perpetually in debt. As you have seen secondary rated debt yields have been moving higher and in time will cause quality debt yields to move higher as well. Do not forget waiting in the wings we have Spain and Belgium. Italy the strongest of the group already has public debt in excess of 120% of GDP. Do not forget if they all go the losses will range from $4 to $6 trillion, which means just that collective debt is unpayable, never mind what is owed in Europe, the UK and the US. The damage that will be caused by such default will most certainly take down the world banking system. In addition, short-term debt has been the mainstay for sovereigns for the past 15 years. In the US alone it makes up more than 60% of borrowing. That means the US Treasury will have to replace trillions of dollars in borrowings. That means the Fed will have to buy the Treasury’s debt and if they do not the US financial system will collapse. At best the Fed’s purchases are only a short-term solution. There has to be a major meeting of all nations to devalue and revalue all currencies against one another and a multilateral debt default. That would be followed by the appointment of a new world reserve currency backed 25% by gold. It could be an index of currencies, all gold backed, or it could remain the dollar.

One of the consequences of a QE3 type of event and the pressure put on the world bond markets by near insolvencies or insolvencies is higher interest rates accompanied by higher inflation. The US Treasury yields may be among the lowest ever due to manipulation by the Fed, but the rest of the world is not as fortunate. Over the next few years the Treasury will have to sell as much as $2.5 trillion in debt annually. If the Fed continues to purchase 80% that would mean they’d have to buy about $2 trillion worth a year from funds they created out of thin air. If you look back at QE1 and 2 they have already created $2.6 trillion, part of which is being recycled, so it is safe to say they will have to increase participation if domestic and foreign off take stays about the same. Somewhere along the way the US credit rating will have to be lowered. That could cut back in participation from sources other than the Fed. Such a scenario with QE2 and stimulus in the pipeline to hit next year, 2 to 3 years from now inflation could turn into hyperinflation near 50%.

One has to ask themselves, why would the Fed do what it is doing? Very simply the only other alternative is deflationary depression. Worse yet, they know what they are doing does not work. In QE1 and 2 they temporarily bailed out the financial sector and the Treasury. The additional legislative assistance of more than $1.7 trillion gave transitory GDP growth and relief. In that space of time real inflation grew from 5% to more than 10%. Wall Street, banking and the Fed either do not know what they are doing or they are deliberately trying to destroy the present financial system.

The large issuance of Treasuries has not affected bond prices too badly. The yields have fallen and the bond prices have risen due to the overwhelming presence of the Fed in the market. The Treasury market may be strong, but upward pressure is being seen in other bond yields. That typical crowding out is to be expected and as a result of Treasury action liquidity is starting to dry up. We should add that about half of buyers have been buying foreign bonds, removing liquidity from the US market. In some portfolios we have seen about half has been invested in the bonds of the six European nations, which have financial problems. We learned 50 years ago that you never ever reach for a yield.

How the debt market reacts remains to be seen. Its performance hinges on Fed performance. The question is how long will it take the Fed, QE3 or its equivalent to be implemented? All the usual excuses are appearing, so we would guess it is not far away, or it is already being implemented.

Again, we repeat that you have to be extremely cautious in today’s markets. There is Treasury funding, municipal and state problems yet to be assessed, Europe’s six problem countries, Greece is still not settled, Japan is partially disabled, England has serious problems and China does as well. Asia is doing fairly well as is Russia and India. Down south it is Chile, Brazil and Argentina. The last two we have serious misgivings about. The other two pleasant surprises are Mexico and Canada, both of which are doing very well. They both have not used any stimulus, which makes their low unemployment and inflation impressive along with 4.5% GDP growth rates. As you can see there are some bright spots in the world of black and gray. When all is said and done corporatist fascism will destroy America and themselves in the process.

Unemployment is again reasserting itself now standing at 22.6% and that certainly affects consumer spending. It is not surprising that the long-term unemployed are dipping into their retirement savings. Even with Medicaid, food stamps and long-term unemployment benefits American workers are running out of money. That will accelerate as the Medicaid and food stamp budgets are cut and as we observe one by one states are reducing the time people can remain on extended unemployment benefits. These workers as well owe a huge amount of debt, and that will lead to bad debt for bankers. That is why the BIS, the Bank for International Settlements, is demanding banks sequester more reserves and cut down on loans and market speculation. Yes, there is excessive regulation and outrageous deficit spending by government, but the real problem is governmental, state, municipal, corporate and individual debt. Under these circumstances spending cannot grow especially with inflation hovering above 10.2%, which we believe will be 14% by the end of 2011. First quarter GDP was 1.8%. If you subtract QE and stimulus 2 you get less than zero growth. The bad news is it will be officially zero to 1% for the second half of the year putting the economy at a GDP loss of zero to 2%. If the Fed doesn’t find a way to inject an additional $850 billion into the economy shortly and over the next year we could see a real minus 4% to 5%. In addition, lenders are in the process of making a deal on past and future mortgage foreclosures. The banks wanted to pay $5 billion but in reality it could be more like $25 billion. That should finally move the banks to foreclose on more than a million additional homes. How many people can the streets and overpasses hold? The State Attorneys’ Generals’ settlement will buy the states a few additional months. As we predicted eight years ago this staggering inventory of homes will eventually be nationalized and renters will be paying the rest to the federal government via something resembling Fannie Mae and Freddie Mac. Yes, household debt has fallen from 130% of GDP to 114%, but it still is almost 40 percentage points above where it should be. Even at 90% to 100% it is unsustainable. Incidentally, we have not included commercial real estate, which the Fed is currently subsidizing.

Debt and its deflationary aspects have been neutralized for 11-1/2 years by inflation deliberately caused by the Fed to offset the deflationary drag. Trillions have been spent in the form of debt and very little has been accomplished, except for keeping the country out of deflationary depression, at the cost of rampant inflation. It now looks almost certain that the Federal Government can offer little additional help. That means the Fed has to bail out the government, the bankers and the people. If that help is not forthcoming you must prepare for a deflationary depression. Of course such a policy if implemented will cause hyperinflation. Where is the exit? Where do you go? Interest rates are already zero and have been for a few years. That, of course, was to give the financial sector free money to speculate with, as loans fell 25 to 30 percent.

There will be no success from QE3 or any additional stimulus for the general economy. The decision to cross the Rubicon is history and the troops are in the city. There now can only be one eventual outcome.

The criminal syndicate that runs banking, Wall Street and government has generated plenty of adverse publicity in the recent past. There was Madoff and his Ponzi scheme, but he was not connected with the elitists. He was a wannabe. We now have a 635-page report with almost 1,000 attachments from the US Senate that the Senate believes is cause for criminal action against Goldman Sachs. There has to be an elitist sacrifice and Goldman may be it. They created and sold structured finance products that foisted billion of dollar of losses on investors, while the banks then went short the bonds knowing they were toxic waste. At best Goldman and its executives will avoid prosecution, but whatever the outcome their business will never be the same again. If you remember they not long ago, in not admitting or denying, paid about a $770 million fine, pertaining to toxic mortgages, but they got to keep about $4 billion. Sixty percent of those bonds were placed in Europe and since then there has not been a civil or criminal action against these and other crooks involved in mis-rating the bonds. That tells us somehow the Fed has guaranteed those losses. We originally recommended a short on GS stock at about $190.00. The stock is currently $140.00. If this scenario plays out it could retest $67.00 and perhaps break that support level. Crime marches on: on Wall Street and the people who really run your country.

The government lies and the controlled media swears to it. The latest proclamation and cover-up was spun in as many ways and directions as the media dared to take it, and still retain some semblance of propriety. The latest on the CPI front is that increases were reduced on gas prices, when in fact gas prices rose. We always say if you are going to be a liar, be a good one. May inflation officially was up 3.6%, up from 3.16% in April year-on-year. It supposedly was up 1.15 last November, so you can see it is progressively growing. That elevates real inflation to 10.6%. It is very obvious that the general media is being instructed as to what to say and how to say it. In addition the Keynesian economists, acting as trained seals, find every illicit excuse to raise the spectre of falling inflation or deflation. That is the kind of world we live in. Lying is socially and politically acceptable. Calling the deception misleading certainly begs the question. Most readers do not realize it but core inflation is some 40 years old, so this canard has been around for a long time in various guises. The bottom line is that it is misdirection and subterfuge.

The propaganda continues and, of course, omits that US inflation is the highest in three years when it reached 14.5% unofficially. That is when interest rates will really have to start rising. At the same time the Fed balance sheet is reaching for $3 trillion. Disguising the problem won’t change it or the ultimate outcome.