Global Economic Crisis

During a panel discussion conducted by the Milken Institute on the Greek debt crisis, as well as in comments to the media, Professor Nouriel Roubini relayed a stark assessment on the situation. His assessment of the planned bailout of Greece by the International Monetary Fund and the Eurozone nations, especially (if reluctantly) Germany, was damning. The bailout will not work, Roubini emphasized, as the problem confronting Greece was not one of illiquidity but rather the far more dire circumstance of insolvency.

Roubini made several references to Argentina’s fiscal crisis at the turn of the current century, which culminated in default on the national debt because of egregious errors made by policymakers. The failure of policymakers in the Eurozone to recognize that Greece is insolvent and requires debt restructuring, rather than a bailout in the hope of calming markets, will make a bad situation far worse, and waste an enormous amount of public money.

“Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,” said Roubini. The disorderly debt default of Greece would spread contagion throughout other highly leveraged economies in the Eurozone, he warned.

The Athenian financial tragedy continues on its inexorable path towards fiscal destruction. The ratings agency Standard & Poor’s has now officially downgraded Greek sovereign debt to junk status. Clearly, without a European Union and IMF bailout, Greece will default on its public debt. However, the terms of the potential saviours of Greece, namely reducing the deficit to GDP ratio of Greek government finances, are politically and socially unachievable without the collapse of the current government in Athens.

Even with a bailout, Greece will only survive on life support until its next fiscal crisis. In the meantime, Portugal is also on the brink, followed by Italy, Ireland and Spain, the so-called Eurozone PIIGS. Since it is mathematically impossible for Europe to bailout itself, it won’t be long before the collective European Union is reduced to junk bond status. In that eventuality, will the equally debt and deficit ridden UK and USA remain bystanders?

If you thought the revised Greek government fiscal deficit projection for 2009 was disastrous at 12.3% of GDP, fasten your seat belt and hold onto your hat. As awful as that  figure was when Prime Minster George Papandreou revealed that the previous government in Athens had deliberately lied about the deficit so that Greece would be admitted into the Eurozone, in retrospect the powers that be in Brussels, joined by the IMF, wish to God that 12.3% was the number. Now, we learn, the actual deficit figures are even worse, though nobody can be certain at this point how bad they really are.

Eurostat, the statistical department of the EU, has released its own evaluation of Greece’s fiscal reality, and has concluded that, at a minimum, the actual deficit to GDP accrued by Athens in 2009 was 13.6% and might even be as high as 14.1%. Due to deliberate bookkeeping chicanery by previous Greek governments, apparently facilitated at least in some measure by the unique financial engineering of Goldman Sachs, the true state of Greek fiscal reality is hidden by a thick layer of artfully contrived opacity.

In the light of this latest revelation, courtesy of Eurostat, yields on Greek government bonds continue their upward climb. For example, yields on ten year Greek bonds now exceed 9%, nearly six hundred basis points higher than the equivalent bonds being offered by Germany. Clearly, the sovereign debt market is far from reassured by the latest version of the ever-changing Greek bailout package, which in its latest manifestation was cobbled together by the Euzozone countries and the IMF.

In response to the ever-worsening truth now emerging about how dire the Greek debt crisis really is, the ratings agencies are again weighing in with a downgrade of Greek sovereign debt. Moody’s has lowered its rating on Greece by  another notch, and likely the other ratings agencies will soon weigh in. This will inevitably further expand the spread in bond yields, and only add to the complication of even a short-term bailout.

When Lehman Brothers collapsed in September of 2008, there was an immediate freeze in the global credit market, reflecting acute distrust by counterparties spooked by misleading financial representations by major investment firms, especially with regard to mortgage backed securities. The latest revelations concerning the Greek fiscal crisis point to a similar phenomenon that is increasingly likely. As the sovereign debt crisis currently afflicting Greece not only worsens but spreads to other countries with large deficit to GDP correlations, the risk of a Lehman Brothers type scenario with respect to the sovereign debt market becomes increasingly probable, with one important difference.

When Lehman Bothers collapsed and credit markets froze, sovereigns borrowed massively and bailed out their financial systems. However, if this time sovereigns  are the actors frozen out of the credit market, who bails them out? Answer than one, Ben Bernanke and Timothy Geithner.

He is a Goldman Sachs trader based  in London, of French extraction, who until the Securities and Exchange Commission filed fraud charges against his employer, was unknown to the general public. Now, however, his notoriety has been sealed forever. He is Fabrice Tourre, but will forever be known by the moniker he employed to self-describe himself in a bilingual e-mail he sent in 2007, which has emerged since the SEC allegations were made public.

I can do no better than to quote from the Fabulous Fab himself, in the following from his 2007 e-mail:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fabrice Tourre…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!! [sic]”

Read this output from the mind of one of Goldman Sach’s esteemed “masters of the universe,” and ask yourself if people like this are running the global financial system, what are the odds that we will avoid Great Depression2?

The most powerful investment firm on planet Earth, Goldman Sachs, has been hit with civil charges by the Securities and Exchange Commission, involving allegations of serious fraud. The SEC alleges specifically that Goldman Sachs deliberately withheld information regarding subprime mortgage investments that it sold to clients, involving  hedge fund and client Paulson & Co in selecting the makeup of those securitized investments. As it transpired, Paulson & Co and Goldman Sachs stood to profit in the event these subprime CDO investments tanked, which they did.

Up till now, Goldman Sachs has appeared untouchable. Its vast power is not only tabulated financially; it is a political behemoth in Washington DC and in other power centers across the globe. As the global economy disintegrated with the onset of the worldwide financial crisis, Goldman Sachs took in massive profits. To keep it afloat, the U.S. government infused the corpse of bankrupt insurance giant AIG with taxpayer money, of which nearly $13 billion was funnelled from AIG into the coffers of Goldman Sachs. Incidentally, the taxpayer money paid to Goldman Sachs through AIG almost matches the recent bonuses that Goldman Sachs senior executives decided to pay to themselves.

Lloyd Craig Blankfein, the current CEO of Goldman Sachs, claims his firm “does God’s work.” Perhaps the world will soon discover if fraud, chicanery and defrauding investors forms part of  Blankfein’s definition of divine work.

In his historic contribution to America’s fiscal imbalance, current Federal Reserve chairman Ben Bernanke has even surpassed the corrosive reputation of his predecessor, Alan Greenspan. It has been on Bernanke’s watch that the previous structural deficits of the U.S. federal government have been transformed into even more alarming structural mega-deficits. Bernanke knows that a fiscal firestorm is brewing. So how do you continue with policies that encourage annual deficits measured in trillions of dollars while looking responsible on the deficit issue? Why, just testify before Congress and speak eloquently of your serious concern about the deficit.

This is what the most powerful man in America, an individual who can make fiscal and monetary decisions that will bankrupt your children and grandchildren without interference from legislative or executive or judicial branches of government, had to say to the august members of Congress:

“Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance.”

Trajectory toward sustainable fiscal balance? The only clear trajectory I see is an irreversible rendezvous with national insolvency, sparking a catastrophic global economic depression.

For the first time since 2004, China incurred a net trade deficit totalling more than $7 billion in March. China’s Statistics Department maintains that the primary drivers of the deficit were surging imports of industrial commodities, including oil and minerals. In addition, certain consumer durables, including automobiles, also encountered increased demand from China’s domestic market.

The authorities in Beijing believe that the March trade deficit was an anomaly, and that China will return to a net surplus in its international trade.  However, the March trade deficit does strengthen the case of those in the Chinese leadership who believe their country should take an inflexible stand in negotiations with Washington on the exchange rate of the national currency, the yuan or renminbi. It is likely that China will be even more determined to resist U.S. pressure to allow the value of the renminbi to appreciate. This sets the stage for increased tension between Washington and Beijing over fundamental issues that will determine the trajectory of the ongoing global economic crisis.

With Greek long term bonds generating a spread in excess of 400 basis points above German sovereign debt, it is no surprise that  ratings agency Fitch has again downgraded Athens, posting a miserable BBB minus. This comes after weeks of verbal gymnastics by the European Union, attempting to fool the markets into believing in its ambiguous, meaningless assurance of a bailout for Greece.

Despite the pontificating of reassurance being offered by a legion of European politicos, it is becoming increasingly evident that Greece is heading towards sovereign debt default at warp speed.  In my view, either sooner or later (and much more likely sooner) Greece is fiscally doomed…and that is only the beginning of an irreversible sovereign debt chain reaction that will strike virtually all advanced and major economies, and plunge our planet into a synchronized global depression.

The die is now cast; as expected, British Prime Minister Gordon Brown has seen the Queen, following political tradition, and announced with Her Majesty’s blessing the dissolution of Parliament and the holding of a general election on May 6. Brown, the incumbent Labour Party leader of a nation that has been among the worst afflicted by the global financial and economic crisis, faces an uphill fight against the challenger and likely winner, Conservative Party leader David Cameron. What may be the wild card in the election is the possibility of a hung Parliament, with neither leading party able to garner a majority of seats, leaving the  Liberal Democrats of Nick Clegg as the improbable power brokers.

There is one overriding issue in the UK’s 2010 general election: the economy. It is a basket case, buried in public debt. Everyone in the British establishment, albeit political or financial, knows that the massive British government deficits, currently running at 13% of GDP (a higher figure than that currently afflicting Greece), are unsustainable. Despite the rhetoric from all sides of the UK political spectrum, however, no one really has a realistic solution.

The UK is in a fiscal paradox. If it raises taxes or cuts public spending to reduce the deficit, that will probably be the kiss of death for a weak and artificially induced economic recovery. Unfortunately, continuing the massive deficits are not an option; the bond market will see to that. Gordon Brown assures the British taxpayers that if they trust Labour once again after 13 years in power, his team will magically cut the deficit as a proportion of GDP by 50% within four years, while restoring economic growth and national prosperity. This is clearly an absurd campaign promise, but David Cameron’s ambiguous assurances that “improved efficiencies” can reduce spending without cutting public services are equally disingenuous.

The UK confronts a fiscal trap, as I point out in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.”  The risk of a double dip recession, unsustainable public debt and deficits as a proportion to national GDP, and an aging demographic requiring increased levels of funding for pensions and benefits that the UK cannot afford, point to a fiscal collapse by 2012. The only question I believe the 2010 UK general election will really decide is on whose watch does the United Kingdom of Great Britain and Northern Ireland achieve national insolvency.

Ben Bernanke, Larry Summers and Timothy Geithner, the Obama administration’s economic triad, are predicting a steady recovery from the Great Recession. The March employment numbers, suitably manipulated by PR spin masters, are being heralded as proof that the recession is over. Should we believe them? Well, let’s look back at recent history.

Just a few weeks ago, Bernanke’s predecessor as chairman of the Federal Reserve, Alan Greenspan, stated that “nobody” predicted that the subprime housing situation in the United States would lead to a financial and economic implosion. Greenspan said, “Everybody missed it, academia, the Federal Reserve, all regulators.”

Not everybody. Actually, a number of observers predicted what would ensue, well in advance of the financial disasters of 2008, which culminated in the downfall of Lehman Brothers. I include myself in that list which the former Fed chairman wished everyone would ignore. In a book published in 2006, two years before all hell broke loose on Wall Street, I wrote the following:

“The American economy will almost certainly, in the next presidential administration, come to a very hard landing. The decline in housing prices, which while ascendant created the illusion of national prosperity, is a clear and foreboding marker to a dark and austere future for the American people.”

Now that Bernanke, Geithner and Summers are preaching the gospel of economic green shoots, I published my own prediction in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.”  The essence of my prediction is that massive U.S. government deficits, replicated in other major economies, will precipitate a devastating sovereign debt crisis by 2012, plunging the world into a synchronized global depression. If I am proven right, however, don’t expect the potentates of the Federal Reserve and U.S. Treasury to utter any mea culpa. If an economic depression does afflict us,  Ben Bernanke will likely mimic Alan Greenspan’s lame protestation that “nobody” could have seen such a disaster coming.