Thoughts from the Frontline

The End of Europe?

By John Mauldin

January 14, 2012

Choose your language

Solving the Mayan Code
To Solve the Crisis You Must Solve Three Problems
Getting Simple About Europe
How Much Risk Do You Want in a Government Bond?
Do You Have a Spare €1.5 Trillion?
Singapore, Cape Town, and Thoughts on Hong Kong

One of the interesting things about being in Hong Kong is that I get to see the weekend edition of the Financial Times 12 hours early. And the headlines were not all that pleasant. As I promised last week, we will cast our eyes to Europe and ponder what is in store for Europe for the year and the next five years. And what do we read on page 2? The "ECB raps revisions to draft a fiscal pact." Seems they feel there are too many loopholes, which will make the document meaningless … somewhat like the treaty they have now. And we further learn that "Greek default threat grows as talks falter." Seems there is a lack of agreement on how much of a haircut the investors ought to take, and the Greeks don't want to guarantee any future debt, just in case they need to default some more in the future. But they do want the €15 billion they need to keep the debt machine running for a few more months.

And on page 1, in big type, we are surprised (but not very) by the headline, "France and Austria face debt blow." Seems those sharp-eyed accountants over at S&P have decided to downgrade French debt from AAA. Which of course leads to another headline on page 2, suggesting "Firepower of bail-out fund cast into doubt." The currency markets were shocked – shocked I tell you – that S&P would do such a thing and…

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Ronald Nimmo

Jan. 17, 2012, 1:10 a.m.

but government expenditures grow at the same rate as the country grows, and the debt keeps growing at an average of 5% of GDP per year
Now, if the country is growing at 3% a year, after 24 years the economy will have doubled to $2,000 GDP. That means the debt has grown (roughly) to a total of $1,800,

If government expenditures grow at the same rate the economy grows and revenues remain at the same % of GDP, then debt will not increase by 5% a year. It will increase by 3% a year. After 23 years GDP will be $2032.79 per year, expenditures will be $609.84 per year, and revenue will be $508.20 per year. Yearly interest payments will be $4.07 per year. This assumes that the interest is paid every year in full and is not added to the total debt. If the interest is not paid in full every year but added to the debt, I estimate that it might add about 82.00 to the total debt.

Thus we would have$609.84 - $508.20 + $82 = $183.64 in increased debt, which would be 9.03% of GDP. If the interest is paid in full every year, the total debt would be 5% of GDP. I think John must have been assuming that the interest each year was not paid, but added to the debt. This is similar to my numbers except that it is 10 times as large.

John Tutt

Jan. 16, 2012, 8:18 p.m.

the markets hate uncertainty.  We need to take decisive action.  The old mantra “no pain, no gain” has never been more appropriate.  www.simplewealth.com.au

Jim Summers

Jan. 16, 2012, 7:03 p.m.

What is happening is like a run on a bank.  In a bank run, depositors panic about the safety of their deposits and try to withdraw their funds.  The bank can’t repay all its depositors right away, since it has lent out most of the money.  Without access to emergency cash to pay to depositors, the bank will be forced into bankruptcy by repaying depositors, whether it was solvent or not.

The same happens with a country’s bonds.  If investors won’t roll over what they have borrowed, they are in effect demanding that the country pay back their deposit.  Whether the country is solvent or not, it can’t repay all its depositors without access to emergency cash.  We prevent a run by giving a country money to repay bondholders.

So far, all the world’s central banks have been treating the credit crisis like a run on banks.  This is a bad idea if countries are insolvent, but it is a good idea if they are not.  The problem is that they are only half way through the procedure.  The early depositors have been paid off and are no longer at risk; but everyone who has left their deposits is at risk if the bail-outs stop.

If central banks stop bailing out countries now, the remaining bond holders will take the losses while those who refused to roll over their debt have been made whole.  If the bail-outs stop before the run has ended; the effect will be to enrich sophisticated investors at the expense of everyone else who didn’t react quickly when the run started or who helped to fund the bail-outs.  That can’t be the intended outcome, can it?

maurice Shahon

Jan. 16, 2012, 1:43 p.m.

I think the article is outstanding. However, too long and too thorough. I think you have great vision but come to your conclusions more quickly. Unfortunately, unlike myself, the average politico and voter has the reading concentration of a 10 to 12 year old. They were lost somewhere 1/2 way through the article.
M. Shahon

Ronald Nimmo

Jan. 16, 2012, 11:20 a.m.

Greece runs a trade deficit of about 10% of GDP. Until they can stop that bleeding, they cannot get their government and private budgets under control. It is not simply a matter of cutting budgets or raising taxes. Indeed, their economy will continue to shrink, making it more difficult buy foreign goods without increasing their own production of goods and services. It is a vicious spiral. And that same spiral will spin up to take in all of Europe. Again, more on that later, as we consider what their choices are.
Source: JohnMauldin.com (http://s.tt/15egH)

It is also true that the US can not reduce its government and private debt without running a trade surplus. How can we do this if we contunue to participate in one-sided “free trade” agreements and our factories are dismantled and sent to 3rd World countries?  Multinational companies have made huge profits selling to the US consumer while drastically reducing the American worker’s opportunnity to earn money. All this has been occurring as the US worker has seen his pay reduced has even while his productivity has been increasing. Globalism has benefitted a small class of Americans while driving a huge number into poverty.

Harold Waldock

Jan. 15, 2012, 11:44 p.m.

“A day will come.”  Hilarie Belloc intimating a coming debt collapse more than 70 years ago.

John & friends,

Consider the arithmetic that you have worked us over the last two time.  It shows that the loans are neither payable and in most cases were for consumption not production.  That makes the loans Usurious. 

Here is one off the wall idea to think of: End the usury of the lenders by figuring out when or what part of the loans were for consumption not production and when the productive loans became unproductive because the business or growth had failed to yield more than the rate of interest.  Usury has never been about making gains but unjust gains. Furthermore, any system of fractional reserve banking creates institutional usury as it creates fiduciary media lent at no cost in production and a no loss to the banker - automatically usurious - they should not be paid back a dime on that money.  So all monies lent at a fractional reserve basis have no basis in reality and should not be paid back.  For a start on usury read Hillarie Belloc’s “On Usury” in ESSAYS OF A CATHOLIC.
http://www.catholicapologetics.info/morality/money/bellusry.htm For a more traditional deeper look see Bernard Dempsey’s “Interest and Usury” (which has an introduction by Joseph A. Schumpeter) and a nice outline on “Institutional Usury” but it is not easy reading.

Much of the trouble we are now in could have been avoided if we had all stuck to traditional Christian teachings and law.  “To Err is human…”

Harold Waldock

Macrena Sailor

Jan. 15, 2012, 4:38 p.m.

For those of you blaming the older generation, mine, I think, I will remind you that the young generation voted in droves for Obama who seems determined to make us Greece in 4 years or less.  Greece needs 1.5 trillion euros, but this man has spent close to that and wants to double it right now with another debt ceiling increase of 1.2 trillion dollars.  OK, so euros are worth more than the dollar, but look at how quickly we are turning into Greece. 

For the “oh, those poor, poor people, make the banks take the losses” crowd, then what does a nation do without a banking system, pray tell, and without anyone willing to loan them any money?  Those “poor, poor people, like our own Unions, esp. Public Service Unions suffer from extreme greed.  I have no sympathy for them.  We can’t sustain our Public Service union pensions, yet they want more and more.  The math is simple, but those benefiting here, as in the PIIGS, refuse and refused to do the math.

Finally, for the generational warfare warriors,  may I remind you that it is MY generation that started the Tea Party movement which is one to reduce Government spending, reduce the debt and reduce the size of Government?  For our efforts, we have been called racist and many other names and a lot of those who call names are of the younger generation. 

In the end, the world does not suffer fools and the fools of the Western World will soon realize the consequences of their very foolish and selfish behavior.  We have met the enemy and it is US.

sometimesbull sometimesbear

Jan. 15, 2012, 10:57 a.m.

Why not allow China to buy the Greece nation as a whole with all its assets debts and its people.

I mean if bankrupt corporations can be taken over by better managed corporations why not countries.

So may be other European nations who are bankrupt can be put on the block for an auction and maybe some gulf countries who have enough reserves can buy some nations.

Michael Gorback

Jan. 15, 2012, 10:27 a.m.

For Greece and some of the other PIIGS it’s time to work on saving the country instead of saving the creditors. Going through pain is one thing; going through agony is quite another. What I have been reading about Greece lately is absolutely heartbreaking.

What purpose does it serve to save banks and destroy people?

Alan Harris

Jan. 15, 2012, 10:18 a.m.

So you think sub-prime was bad…..that only happened in the US property market. Property in Europe is sooooo expensive and everyone is mortgaged to the hilt. Austerity will mean pay cuts and job losses….homes will be handed back by the shed load. Prices will collapse. The banks will fail. 2008 will look like a gentle set back.
I hate to say this, but we need a war to deflect attention a la ww2. If I was one of the generation who will be expected to pick up the bill Id go to war with the older generation who caused this mess and tax them till the pips squeaked. Regrettably Im 60+ so I’m thinking of moving to Greece where its gonna be v cheap to live and a US$ in cash will go a long way.OMG!!

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