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Generational Dynamics Web Log for 3-Mar-2010
3-Mar-10 News - Greece crisis continues, as opposition to bailout remains

Web Log - March, 2010

3-Mar-10 News - Greece crisis continues, as opposition to bailout remains

Japan begins its third 'lost decade.'

The Germans appear to be hardening their position against a bailout of Greece

Otmar Issing, an adviser to Chancellor Angela Merkel, and a former ECB economist, has laid out solid arguments rejecting aid to Greece from either Germany or the EU, according to Frankfurter Allgemeine (translation).

Criticism of Greece is widespread for having lied about its budget deficits to qualify to be part of the euro currency. Issing points out that Greece has already gotten enormous benefits out of the euro, and has drawn substantial monies from EU funds, and now, "Let me be very clear: You have to watch the Greeks' every move."

As for EU funding, that would violate the Lisbon Treaty on the European Union. "There is the so-called "no bail-out" clause of the Treaty. ... That is a ban, and I think that the contract must be respected."

Other German newspapers take a more cautious approach, talking about vague assurances to Greece, according to a summary by Reuters. Thus, Die Welt says, "The Germans will have to help the Greeks to stop their own country being hit -- even if hardly anyone wants to hear this (yet). The danger is too great that countries such as Spain will get into trouble. The euro zone faces a financial crisis at state level that it can barely manage alone."

It's difficult to know how to assess remarks like these. It's like saying, "We have to have health reform" or "We have to save the world from global warming" or "We have to save the people in Darfur," but nothing ever happens. That's because, in a generational crisis era like this one, there is little political consisus, and political discussion is almost always reduced to bickering.

To make matters worse, Der Spiegel reports that corruption is "booming" in Greece. According to the article, Greeks paid an average of $1,800 in bribes last year, up 23% from 2007. The bribes go for speeding up getting driver's licenses, getting admitted to public hospitals, or manipulating tax returns.

In my opinion, the only thing that can unite Europeans enough to talk seriously about a Greek bailout is a major financial crisis. Until that happens, there will be nothing but bickering, but after that happens, it will be too late.

Prime Minister Papandreou wants to 'avert disaster'

The Greeks are well aware of the attitudes of the Germans and others, and are working desperately to try to convince the Europeans that Greece will cut its budget deficit. The EU has set a March 16 deadline to show progress in reducing its deficit.

The NY Times quotes Prime Minister George A. Papandreou as saying, "We are in a race against time to keep our economy alive. "If we don’t ensure that we can borrow at the same rates [as other European Union countries' the consequences will be beyond catastrophic. We must avert such a disaster."

On Wednesday, Papandreou is expected to announce severe austerity measures on Wednesday, including reduced bonuses, a later retirement age, and numerous new fees and taxes. However, Greece's public sector unions have threatened a 24-hour strike for March 16, the date of the EU deadline.

As I've said many times before, there is no solution to this problem. Greece cannot solve its problems without a bailout, and a bailout is politically impossible. If we assume that somehow a bailout occurs, then the political backlash would be enormous, and it wouldn't be enough to solve Greece's problems, or to solve the same problems in the other European countries nearing default.

Japan begins its third 'lost decade'

It's always hard for me to believe the Pollyannish nonsense that I hear all the time on CNBC and Bloomberg TV, or read in the Wall Street Journal.

I doubt that many long-time readers of this web site could possibly still believe that nonsense, but for those that do, Michael "Mish" Shedlock has a blog entry entitled, "I'm Sure Glad The Recession Ended." In it, he has several interesting graphs and charts showing that the recession has definitely NOT ended.

He also has the following chart of the Nikkei index from the Tokyo Stock Exchange, from 1980 to the present:

Nikkei stock index, 1980-present <font face=Arial size=-2>(Source: Mish Shedlock)</font>

Nikkei stock index, 1980-present (Source: Mish Shedlock)

Japan had a huge stock market and real estate bubble in the 1980s, which burst at the beginning of 1990. People talk about Japan's "lost decade," but as this graph shows, Japan has had two "lost decades," and is about to start a third decade.

Notice that along the way there were several year-long rallies, and the rally from 2002 to 2007 lasted a full five years.

Those who cling to the belief that the Wall Street stock market is only going to go up should contemplate this chart. The Japanese financiers and bankers are fully as intelligent as American and European financiers and bankers. There is absolutely no reason to believe that a similar collapse long-term collapse won't occur in New York, London, or Frankfurt -- or Shanghai.

In fact, Japan has had some major advantages that America, Europe and China won't have. Japan was able to get through its lost decade by exporting products into the countries in the massive credit bubble. But America, Europe and China won't have any other countries in a credit bubble to export into.

As I've said many times, from the point of view of Generational Dynamics, the situation hasn't changed. The stock market has been historically overpriced by substantial amounts since 1995, and by the Law of Mean Reversion, will have to fall sharply and stay down there for a comparable length of time (15 years). This is a mathematical certainty. (See "How to compute the 'real value' of the stock market.")

Additional links

How does a young Pakistani, raised by proud parents who sent him to medical school, turn into a terrorist militant? The NY Times gives an interesting case history.

Richard Holbrooke is President Obama's special envoy to Afghanistan, but he's now expanding his portfolio to all of Central Asia, according to Asian Times. If Hillary Clinton steps down as Secretary of State, then Holbrooke is the likely candidate to replace her.

The British pound currency has been falling precipitously against the dollar in recent days, due to a budget deficit that is arguably much worse than Greece's. NY times.

(Comments: For reader comments, questions and discussion, see the 3-Mar-10 News - Greece crisis continues, Japan's 3rd lost decade thread of the Generational Dynamics forum. Comments may be posted anonymously.) (3-Mar-2010) Permanent Link
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