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A Twist on Greek Elections
You could compare it to Greece exchanging its lifeboat, exposed to the elements and the dangers of being in a very small boat on a very big and rough ocean in the dark…
To the relative and temporary comfort of a steerage bunk…on the Titanic.
Yes, the Greek election over the weekend means that the Greeks will stay in the Eurozone---for the moment—but Citibank still puts the odds of a Greek euro exit of 50% or higher.
But for the moment, Greece is still in “Europe.”
It is important to realize, however, that that “fact” doesn’t mean that Greece will be able to endure the harsh realities of austerity…
It’s much more likely that Greece will not be able to abide by the current tough measures put upon them by their German paymasters. And the Germans realize this. And so do the markets and investors.
So what’s the real impact of the Greek elections on the Eurozone and why should investors care?
A closer look Greek elections
A closer look at the Greek crisis tells us that Greece is no closer to resolution of its huge economic meltdown than it was before.
Here’s the reality: On the one hand, Greece cannot do what is required of it without falling into chaos and an economic death spiral. To remain in the Eurozone, Greece must abide by some sort of austerity plan and avoid imploding altogether. Austerity means massive public cuts in salaries, jobs, pensions, and programs. It is, be definition, recessionary.
On the other hand, if Greece leaves the Eurozone, it will endure a similar fate, but with the cold comfort of not having Germany’s boot on its neck for the next couple of generations. That is why Germany is now signaling that some adjustments need to be made for Greece.
But in or out of the Eurozone, the near term future for Greece is very unpleasant.
So the Greek elections were a win for the Eurozone, right?
Greece wasn’t even the biggest deal for the Eurozone this weekend--not even close. In fact, a closer look at the Eurozone tells us that the euro is really closer to failure today than it was a month ago.
The bigger deal for the Eurozone was the spike in borrowing costs for Spain and Italy—above 7%--an event that effectively moved those two along the Eurozone board game to bailout status because borrowing costs above 7% is considered unsustainable for a nation.
Investors flee Eurozone
In a word, with or without the Greek election results, investors are fleeing the Eurozone. The bump that the markets got from Sunday’s Greek election was small and short-lived as reality set in. Commodity prices from copper, to oil, to wheat are all falling as recessionary forces and expectations drive caution and fear into investors.
Fear is not only pervasive among investors regarding Europe, but in China, too.
To underscore this point, China announced at the G-20 summit in Mexico that it would not be providing any additional liquidity to world markets to prop up demand. China’s own economy is slowing down considerably as it is dealing with its own real estate bubble as real estate prices fall in major areas of the country.
As a result of the ongoing horror spectacle in the Eurozone and a possible sequel in China, demand for US debt has reached record highs. But before we start congratulating ourselves, it is worth bearing in mind that our own economy is so bad even the President isn’t running his re-election campaign on it.
So where does that leave investors? Where else but in the capable and crafty hands of the banks, of course.
What will happen next?
Nothing that hasn’t happened before in the past 4 years. Fed Chairman Ben Bernanke will do all that he can to stem deflation, and all that he can do is throw more money out the window to re-inflate the economies of the world.
China is doing the same thing right now, though not from a quantity angle, but from an interest rate angle. China has lowered the cost of money—they don’t need to print it since they have trillions in liquidity—as an attempt to keep their own economy afloat.
Twisting in the wind
Bernanke will most likely offer us “Operation Twist Part II” where he restructures short-term debt into longer-term debt as a way to free up capital and drive long-term interest rates lower (if that’s possible)…
And he may also simply press the “print” key on his magic money machine and create another universe of nearly meaningless dollars at the same time…
I say “nearly meaningless” because the money that he does create benefits mainly the stock market and the price of gold and oil. It doesn’t create new or sustainable demand in the economy at large, as has been noted here in The Gorrie Details many times before.
Sure, corporate America will get more money via the stock market, as will the banks, who will simply turn around an buy T-bills with it. The economy at large will see few, if any long-term benefits. The Fed’s actions will look good on paper, but the results will be a lot less desirable than the news itself. After all, more borrowing bring greater interest payments in the future, does it not? How is that a good thing?
And yes, it will feel good to be doing “something” about it, and send the markets a message that help is on the way. Gold will rise against an even less plausible US dollar, and perhaps oil will, too. Those are where investors will make best of a bad situation.
But in the end, the 2012 version of “Bernanke Care” will have the net positive effect on our economic recovery as, say, a Greek election.
And those are…The Gorrie Details.