A Beginner’s Guide to the European Debt Crisis

For ordinary, non-specialist people just tuning in to the horror-show which is the European crisis, the whole mess can seem daunting and almost hermetic—almost like a secret language, or a really complicated code.

Euro-this and euro-that and euro-the-other—that’s all everyone seems to be talking about. That, and words like troika, haircuts, bailouts, yields, not to mention an alphabet-soup’s worth of acronyms like EC, ECB (they’re different), EFSF, PIIGS, IMF, EMU—

—OMFG!

For us dweebs neck deep in this stuff, it’s all mother’s milk. At my Strategic Planning Group, we’ve been game-playing what do when the eurozone breaks up since May—but for people who’ve just realized, “Hey! Something’s going on over there in Europe!”, it can be a bit much, like tuning in to a soap opera five minutes before the end of the episode: Everything seems terribly portentous and important and shocking . . . but basically incomprehensible.

Which wouldn’t matter if this was a soap-opera—but this is real life. This European crisis will affect your financial future, no matter if it’s happening on another continent. This is major—

—which is why so many ordinary people are confused and frightened: Because it seems terribly complicated.

But like all things which seem complicated at first glance, when you break it down, it’s simple.

This is what happened:

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Waiting for Lehman

This is an adapted version of a post which appeared in my Strategic Planning Group. Adapted how? Well, the full argument is reprinted below—but the ugly money-grubbing stuff about what to do and what investment opportunities are good have been cut. After all, readers of the free version of my blog aren’t interested in such base dealings, right? GL

In Samuel Beckett’s play Waiting for Godot, the four main characters wait in vain—Godot never arrives.

In the financial markets, the same thing is happening now—we are all waiting for Lehman: That sudden bankruptcy-crisis-calamity which sets off a whole series of credit events, which in turn causes massive sell-offs, plunging markets, collapsing confidence, and ultimately—just like the bankruptcy of Lehman Brothers did back in 2008—shoves the entire global financial edifice right up to the very edge of the cliff.

To the edge—and perhaps this time over it.

We have good reason to be waiting for Lehman—our current situation is simple and stark: Sovereign nations and individual citizens are over-indebted—to the point where they cannot pay back what they owe. We all know that this overindebtedness at the sovereign and individual level is going to end, and end badly: Worse than 2008.

So along with everyone else, I’ve been waiting for Lehman—and fruitlessly trying to guess which will be the Lehman-like event this time around. Will it be the bankruptcy of Dexia? BofA? UniCredit or SocGen or one of the Spanish banks? Will it be a war in the Middle East? Bad producer index numbers from China? A fart by a day-trader in Uzbekistan?

When will Lehman arrive!?!?

But lately, my thinking has changed: Like the characters in Godot, I think that we’re waiting in vain. The Lehman-like event will never arrive because it won’t be allowed to arrive. So this miserable slog we are going through will continue—indefinitely. (Yeah, I know: Sucks to be us.)

My thinking is based on two assumptions: One, that the central banks and government financial authorities and regulators around the globe are absolutely terrified of a repeat of a Lehman-type bankruptcy or trigger event. And two, that those self-same central banksters and government drones will do absolutely anything to prevent another Lehman-like credit event from setting off another cascade of consequences.

And when I say “absolutely anything”, I’m not using hyperbole: Fuck principles, fuck the law, fuck legal constraints, fuck even basic long-term economic and fiscal health—or sanity. The clowns running the circus were so freaked out by the effects of the 2008 Lehman bankruptcy and the domino-effect that it triggered, that they will not let it happen again—ever. Come what may.

Hence, this endless Waiting for Lehman: This endless slog of ad hoc solutions and fiscal half-measures that brings us only tension and misery—and erodes our economy even further.

But this certainty that the bureaucrats in Washington and the eurocrats in Brussels and Frankfurt will do absolutely anything to avoid a Lehman-like event adds something key to the equation:

Predictability.

Since we know how the central banks and economic leadership will react—that is, if we start from the assumption that the political/economic leadership will do absolutely anything to prevent a major credit event from taking place—then we can predict what they will do in the three main areas of weakness:

• Sovereign debt and the possibility of default.
• Financial sector weakness and the possibility of insolvency.
• Geopolitical crisis and the possibility of another Oil Shock.

What follows is a discussion of those three areas of weakness—and what the central banks and economic leadership will do about each of them.

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Germany Will NEVER Leave the Eurozone—Because It Can’t

There’s No Upside, Only Downside

Late last week, there was a spike in random speculation that the German government was preparing to exit the eurozone—and that in fact, the Germans had gone so far as to print new Deutsche mark bills and mint new Deutsche mark coins.

Several alternative news sites, including Zero Hedge and others, gave serious credence to this rumor—enough credence that the euro took a hit against the dollar and gold.

But at the end of the day, it was just random speculation from one Dr. Philippa Malmgren, who was interviewed by a Swedish newspaper as saying “My impression is that the German Government sent us a number of signals that, from their perspective there is no other solution [than for them to leave the euro].”

This random speculation—coupled with last year’s random speculation from Hartgeld.com, a German fringe site that claimed with absolute certainty that on May 12, 2010, the Germans would for sure go back to the Deutsche mark, having already printed and minted the new bills and coins—gave the Malmgren nonsense some legs.

The fact of the rumor is no big deal—there are always rumors.

The fact that the financial community took such nonsense so seriously points to the big deal in this situation—the underlying worry that a lot of market participants are fearing: What if the Germans all of a sudden cry, “Fuckit!”, and let slip the bonds of the eurozone?

Can they leave the eurozone?

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Our Affirmative Action President

If I wrote a piece arguing that Barack Obama is our first Affirmative Action President, would I be put down as a racist? Or a realist?

Most people under fifty who went to academically competitive universities in the United States saw what has come to be known as Affirmative Action babies: Minority students, mostly black, who simply could not cut the work at the competitive college level.

Forget bringing up some Herrnstein & Murray Bell Curve arguments about “racial differences in intelligence” or some such: A lot of the minority students simply did not have the cultural and educational background to cut it.

In my own case in the early ’90’s, I remember quite clearly talking to an African American student who had no idea who Napoleon III was. The first Napoleon—Napoleon Bonaparte? Sure, he’d seen the movie. But Napoleon III? President of the Second Republic, ruler of the Second Empire, the Revolution of 1848? Not a clue. In fact at first, I think he thought I was pulling his leg about there being a “Napoleon the Third”.

This young man was smart—smart enough to realize that he had been accepted to Dartmouth because he happened to be black. He struggled academically all the while—because he was simply unprepared for the exigencies of a place like Hanover. His high-school had not equipped him with the tools needed to succeed—

—which was of course the tragedy of Affirmative Action:
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Forget Gold—What Matters Is Copper

People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—

—but copper is what has me worried.

Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.

From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.

But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means.

What it means for monetary policy.

We all know the old saying: “Copper is the only commodity with a Ph.D. in economics”, or words to the effect.

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What I Learned At Dartmouth

Update below. 

“The more you understand, the less you forgive.”

—Terrorism Expert

In the Fall of 1991, shortly after the Clarence Thomas nomination and the Anita Hill hearings, the Class of ‘95 matriculated at Dartmouth College.

Dartmouth Hall, by Stephanie Gagnon.

One of the freshmen—or “first years”, as they were beginning to be known—was accused by another first year of sexual assault and harassment. In the hot-house political environment at the time—product of the Thomas/Hill hearings, which revolved around workplace sexual harassment—these were serious allegations.

The young woman making the claim against the freshman said that he had visited her in her dorm-room around lunchtime one day during Orientation Week, and had “forcibly tried to kiss” her. She had rebuffed him, told him he was being “selfish”, after which he had left, without further incident.

This was the sexual assault allegation.

The young woman also claimed that the freshman had then started to harass her via electronic mail, in the days and weeks after. She claimed he had sent her “obscene messages”, which she had purged from her e-mail account, as she hadn’t wanted any of that “filth” on her computer.

This was the sexual harassment allegation.

The young woman said she wanted to “protect” the Dartmouth campus—and the other women at Dartmouth College—from the danger that the freshman represented. This was why she was reporting this incident three weeks after it allegedly took place.

The accused freshman, being unsophisticated, went through the disciplinary channels of Dartmouth College without contacting attorneys or even his parents. He was confident that the allegations would be shown to be lies—because he knew they were lies.

More to the point, he could prove that they were lies.

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They Didn’t Win—We Lost

America will never be destroyed from the outside. If we falter, and lose our freedoms, it will be because we destroyed ourselves. 

—Abraham Lincoln