Daily Hip Shots: Greek Anger; Rushing for Exits; & Inevitable Government Bankruptcies

The Ol’ Hipshooter
[courtesy Google Images]

Daily Hip Shots are occasional articles that I haven’t considered for long or proofread as much as I’d like, but still contain the germ of an observation, idea or insight that you might find interesting.

Greek Anger

CNBC posted an article entitled “It’s treason!  Greek anger at government u-turn”:

“European equity markets might be cheering a deal to extend Greece’s aid by four months, but many ordinary Greeks feel their government has backtracked from its grand promises to strike out the bailout.

“Greece is now scrambling to present a list of reform proposals in order to secure the financial lifeline. “

The significance of these “reform proposals” is this:  Last Friday’s celebrated agreement to extend the Greek’s loans for another 4 months is not yet final.

Greece must present a list of proposed economic reforms to four different European institutions.  I’m not sure what each of those four institutions is, but I assume they include the so-called “troika” of the European Central Bank, International Monetary Fund and European Commission.

Each of the four institutions must vote on whether the proposed Greek reforms are sufficient to warrant four more months of “extend and pretend” to Greece.  I don’t know if all four of those entities must agree that the proposed Greek changes are sufficient, or if only three or even two of those entities must agree for Greece to receive another four months of “extend and pretend”.

My points, however, are these:

1) The Greek problem was not solved or even postponed last Friday.  The Greek 4-month “stay of execution” is not yet a done deal, and will not be a done deal until some or all of the four institutions agree that Greece deserves another 4 months of financial support.

2) If Greece’s proposed economic reforms are deemed insufficient by one or more of those four entities, Greece may not receive a 4-month stay of execution and could be forced into default, national bankruptcy, and leaving the EU within the next two weeks.

3) Even if further agreements are reached this week, they will only postpone the Greek execution until the end of June. No matter what anyone does, the fact remains that Greece cannot pay its $300 billion debts now, and there’s no reason to believe they’ll be able to by June.  One way or another, sooner or later, Greece will default on its debts and probably be driven out of the EU.

4) While we wait for governments and creditors to act in this matter, we might also wonder how the Greek people will react to the most recent “stay of execution”. They might understand, they might grudgingly go along, or they might riot and set government buildings ablaze because their newly elected government promised to terminate Greek debts and then broke that promise within a month of their election.

While the new Greek government and its creditor institutions debate whatever should or can be done, the Greek people may take matters into their own hands and start filling glass bottles with gasoline.  If the Greek people riot, the entire problem may spin out of control and beyond any hope of some sort of rational solution.

Greek debts will be repudiated.  The new Greek government may be terminated.  Greece may exit from the EU.  God only knows what might happen after that.

__________

“Greek Prime Minister Tsipras attracted criticism for trying to present the deal as a win for the country. He has also been accused of merely overseeing a change of names for the bailout. For example, the ‘troika’ is now referred to as ‘institutions,’ and the ‘memorandum of understanding’ is now referred to as the ‘agreement.’

“To say that we finished off the ‘Memorandum’ and the ‘troika’, just because they changed their names makes me incredibly angry,” Athens-based Giannis Loverdos said on Facebook. “It’s as if Tsipras, [Finance Minister Yanis] Varoufakis and the others are telling me: ‘We believe that you are stupid…and you will believe whatever lie we tell you.'”

The US government is also famous for changing names and definitions of legal and political terms to bamboozle the public.  For example, “illegal aliens” have become “undocumented workers”.  Changing the names and definitions is a strategy used by government around the world to do whatever they want to do while still keeping their people blissfully ignorant.

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“Kostas Karampas went further, calling the signing of a new deal ‘treason’ on Facebook. He argued that whoever signs the new bailout agreement and new reform measures were ‘collaborators and will be judged by the Greek people for ultimate treason.'”

I doubt that many politicians like hearing the public talk about “treason” and being “judged by the Greek people” rather than being judged by the courts.  Both comments clearly imply that the natives aren’t merely restless, but may be contemplating a shooting revolution.

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“Far left members of the leftist Syriza Party have also accused their party of abandoning previous election pledges to scrap the country’s bailout.”

Ordinary Greek citizens as well as members of the Syriza party are criticizing and even attacking the Syriza parties elected officials.  This internal dissent may be evidence of desperation and even national disintegration.

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Manolis Glezos, a Syriza member of the European Parliament and veteran left-wing politician, apologized for his party’s move to placate its lenders.

“I apologize to the Greek people because I took part in this illusion,” he wrote in a blog. “Syriza’s members, friends and supporters … should decide if they accept this situation.”

That’s an extraordinary apology for any politician.  By suggesting that that the “Greek people decide if they accept” the current bailout talks, Mr. Glezos implicitly admits that there is no effective leadership or control in Greece.  His admission is an invitation to anarchy.  He admits governmental failure and leaves it up to the Greek people to do whatever feels good.

Mr. Glezos’ admission that government is not god and able to solve all of our problems  (the ultimate blasphemy for any politician) will probably guarantee that Mr. Glezos’ political career is ended.  Nobody gets elected to serious public office who doesn’t believe that “government” is the universal solution to all problems.

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“Wolfango Piccoli, managing director of risk consultancy at Teneo Intelligence, warned that,

“The Friday agreement allows both sides to save face but also sets the stage for even tenser negotiations over the country’s financial future and for a possible backlash in Greece.  The list of reforms to be presented on Monday will be an important factor determining whether Syriza is able to convince its own MPs and voters.”

In other words, all that Greece and EU really did last Friday was agree to mutually “save face” by postponing the preliminary decision until sometime this week, and possibly postponing the final battle for 4 more months.

Nothing has yet been substantially resolved.   The big battles remain to be fought.

What we see so far in the Greece/EU controversy is all PR.

Chaos beckons.

Rushing for the Exit

Business Insider published an article entitled “The Fed is worried about what happens when everyone rushes for the exit”:

“The Fed is sounding the alarm on liquidity risks.

“In the Minutes from the January FOMC meeting, the Federal Reserve addressed the financial situation, and noted that the increasing role of bond and loan mutual funds to pose a liquidity risk if everyone tries to get out of the market at the same time.”

That’s just common sense.  There could also be a “liquidity risk” if everyone tried to get out of gold, stocks, homes or Cadillacs at the same time.

The question is, Why has the Fed chosen to discuss the liquidity risk in relation to bond and mutual funds at this time.

It’s like warning the people of the dangers of living in houses whose roofs can’t deflect falling meteors.  Unless someone is anticipating a meteor shower, the warning doesn’t make much sense.

Similarly, the Fed’s warning about bond and mutual fund markets doesn’t make much sense unless someone in the Fed anticipates that everyone may soon try to get out of bonds and mutual funds at the same time.

According to the Fed’s “Minutes from the January FOMC Board meeting”:

“Finally, the increased role of bond and loan mutual funds, in conjunction with other factors, may have increased the risk that liquidity pressures could emerge in related markets if investor appetite for such assets wanes.

“What the Fed is basically saying here is that because investors are using mutual funds to invest in bonds, instead of owning the bonds, there could be a problem if investors all want to leave at the same time.” 

The Fed is clearly warning that mutual funds for bonds may be an unusually risky investment.

More, the Fed implicitly warns that they foresee possible economic circumstances in the future that could trigger some sort of panic selling of mutual funds that invest in bonds.

What might those circumstances be?  Well, the most obvious answer might be that people who invest in mutual funds for bonds would be among the first to realize that the value of bonds—and therefore of their mutual fund investments—was falling or about to do so.

The Fed implies that the mutual funds for bonds may be a “canary” in the economic coal mine.  If and when those mutual funds suddenly go south, you can bet that more carnage will follow.

Government Bankruptcies Inevitable

Robert Fitzwilson of the Portola Group was recently interviewed.  Some his observations include:

1. The Japanese just passed a massive defense spending bill . . . . It makes no difference that the country is insolvent, at least for now. As long as the money can be conjured up out of thin air and people will accept it as payment, the show goes on.

Right on.  The monetary system will continue survive (no matter how irrational it becomes) so long as ordinary people continue to accept fiat currencies (promises to pay) as if they are money (actual payments).

On the other hand, if/when the ordinary people lose confidence in fiat currencies, the whole monetary system will go belly up.

1. “The Greeks are not alone. Italy and Spain are not far behind. . . .  Just about every major government and country around the world is broke.”

Right again (more or less).  While I don’t think that China, Russia and a few other countries are technically bankrupt, I have little doubt that the governments of the western (fiat currency) nations are broke beyond any capacity to repay all, or even most, of their debts.

1. “The governments of the world need to declare bankruptcy. It is the only way to create a fresh start from which to move forward.

Exactly.  That’s a very important observation.  If the only way the western world’s governments can escape their massive debt burden is to declare bankruptcy, then it follows that sooner or later, government will default on much of their debt and, one way or another, will declare/admit bankruptcy.  That declaration might be overt, or it might be covert by means of hyper-inflation.  But, sooner or later, your government will have to admit it’s bankrupt.  That seeming certainty should be a cornerstone in the foundation for whatever decisions you make about investing, protecting your wealth and protection your and your family’s future.

1. “A global bankruptcy is the only path to a sustainable resolution, the social disruption will be immense as a vast number of people are taken off of the dole and forced back into the real economy.  “Extend and pretend is the path for deferring the pain, but the future pain remains. It is just a matter of how much time.”

There’s no way for the governments to continue without declaring themselves bankrupt.  There’s no way for the world’s government to declare bankruptcy without causing economic and political chaos and widespread pain among their peoples.  It’s gonna hurt.  A lot.  You should be looking for ways to prepare for that pain and mitigate its effects.

1. As pensioners approach the time to draw on government promises, most will find those promises to be empty.

Retirees will probably be the single largest class of people who will be absolutely dependent on government support and absolutely vulnerable to government bankruptcy.  Retirees who rely on government to provide their Social Security and government pensions will probably suffer the most from a government bankruptcy and be least able to adjust to the resulting losses.

If you are already, or soon to become, a government supported retiree, you should be searching for alternative means of support.

1. Unfortunately, too many people and businesses rely upon government largesse to survive. Too many do not appreciate the importance and difficulty of generating a net income. For them, the money comes from government. Budgets are a thing of the past, and the austerity or abundance of the “bottom line” is a lost concept.

Retirees may be most vulnerable to a government bankruptcy, but welfare recipients and businesses that rely on government subsidies won’t be far behind.  When government goes bankrupt and can no longer spin more currency out of thin air, the seemingly wonderful world of government support will be seen for what it is:  an unsustainable fantasy.

These government dependents will have to quickly abandon their mindset that “money (simply) comes from government” like manna from God.  They’ll have learn how to work—and that won’t be easy for lifelong dependents.  Then, they’ll need find real jobs (or start new businesses) that produce something, anything, of value on the free market and thereby generate a “net income” sufficient to actually support them and their families.

None of this will be easy.  Most of the dependents and retirees will fail to make the necessary adjustment.  Many will be forced into a premature death.  Others will be forced into a life of crime.  Everyone’s survival for will be threatened.

This article’s salient is that the only way governments can escape the adverse consequences of their enormous national debts is to declare bankruptcy.  One way or another, sooner or later, the governments of the western (fiat currency) world are going to declare bankruptcy.

The date of such declarations remain to be seen.  But odds are, it’s not so far away and virtually everyone who reads this article will live to see a time of governmental bankruptcies around the world.

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