Summer vacation is over and things are about to get very interesting in Europe. Most Americans don’t realize this, but much of Europe shuts down for the entire month of August. I wish we had something similar in the United States. But now millions of Europeans are returning from their extended family vacations and the fun is about to begin. During August economic conditions continued to degenerate in Europe, but I figured that it wouldn’t be until after August that the European debt crisis would take center stage once again. And as I wrote about last week, if there is going to be a financial panic, it typically happens in the fall. The stock market has seen quite a nice rally over the summer, and many investors are nervous that we could see a significant “correction” very soon. The month of September has been the absolute worst month for stock performanceover the past 50 years, and it has also been the absolute worst month for stock performance over the past 100 years as well. Of course that does not guarantee that anything is going to happen this year. But things in Europe continue to get worse. Unemployment rates are spiking, manufacturing activity is slowing down, housing prices are crashing and major financial institutions are failing. What is happening in Europe right now appears to be an even worse version of what happened to the United States back in 2008.
But most Americans aren’t too concerned about what is happening in Europe.
In fact, most Americans don’t believe that a European financial collapse would be much of a problem for us.
Well, just remember what happened back in 2008. When the U.S. financial system started coming apart at the seams it sparked a devastating worldwide recession which was felt in every corner of the globe.
If the European financial system implodes, the consequences could be even worse.
Europe has a larger population than the United States does.
Europe has a larger economy than the United States does.
Europe has a much, much larger banking system than the United States does.
If Europe experiences a financial collapse, the entire globe will feel the pain.
And considering how weak the U.S. economy already is, it would not take much to push us over the edge.
What is going on in Europe right now is a very, very big deal and people need to pay attention.
The following are 18 indications that Europe has become an economic black hole which is going to suck the life out of the global economy….
British people with homes in France were today warned that the property market is in ‘free fall’.
A combination of factors including the election of a tax-and-spend Socialist government means that prices are tumbling.
It means an end to the boom years, when thousands of Britons poured money into rental or retirement investments across the Channel.
#5 A slow-motion bank run is happening in Spain. The amount of money being pulled out of the Spanish banking system is absolutely unprecedented. The following is from a recent Zero Hedge article….
The central bank of Spain just released the net capital outflow numbers and they are disastrous. During the month of June alone $70.90 billion left the Spanish banks and in July it was worse at $92.88 billion which is 4.7% of total bank deposits in Spain. For the first seven months of the year the outflow adds up to $368.80 billion or 17.7% of the total bank deposits of Spain and the trajectory of the outflow is increasing dramatically. Reality is reality and Spain is experiencing a full-fledged run on its banks whether anyone in Europe wants to admit it or not.
If this pace keeps up, more than 600 billion dollars will be pulled out of Spanish banks by the end of the year.
Keep in mind that the GDP of Spain for all of 2011 was just 1.49 trillion dollars.
So by the end of this year we could see the equivalent of more than 40 percent of Spanish GDP pulled out of Spanish banks and sent out of the country.
In case you were wondering, yes, that is a nightmare scenario.
#7 The yield on 10 year Spanish bonds is up to 6.85 percent. This is an unsustainable level, and if rates don’t come down on Spanish debt soon it is inevitable that Spain will end up just like Greece.
#8 On Monday it was announced that Spanish banking giant Bankia will be getting an emergency “cash injection” of between 4 and 5 billion euros. Apparently “cash injection” sounds better to the politicians than “a bailout” does.
#9 The housing crash in Spain just continues to get worse. It is being reported that some homes in Spain are being sold at a 70% discountfrom where they were at the peak of the market back in 2006. At this point there are approximately 2 million unsold homes in Spain.
#10 There are persistent rumors that the government of Spain will soon be forced to officially ask for a bailout from the rest of Europe. But who is going to bail them out? Most of the other governments of the eurozone are on the verge of bankruptcy themselves.
#11 Manufacturing activity in Europe has contracted for 13 months in a row. The following is from a recent Reuters report….
The downturn that began in the smaller periphery members of the 17-nation bloc is now sweeping through Germany and France and the situation remained dire in the region’s third and fourth biggest economies of Italy and Spain.
“Larger nations like France and Germany remain in reverse gear… the (manufacturing) sector is on course to act as a drag on gross domestic product in the third quarter,” said Rob Dobson, senior economist at data collator Markit.
Markit’s final Purchasing Managers’ Index (PMI) for the manufacturing sector fell from an earlier flash reading of 45.3 to 45.1, above July’s three-year low of 44.0, but notching its 13th month below the 50 mark separating growth from contraction.
#12 Chinese exports to the EU declined by 16.2 percent in July. U.S. exports to Europe have been steadily falling as well.
#13 Slovenia and Cyprus are two other eurozone members that are in desperate need of bailout money. The dominoes just keep falling and nobody seems to be able to come up with a plan to “fix” Europe.
#14 Even the “strong” economies in Europe are being dragged down now. For example, unemployment in Germany has risen for five months in a row.
#15 According to one recent poll, only about one-fourth of all Germans want Greece to remain a part of the eurozone. The odds of a breakup of the euro seem to rise with each passing day.
#16 It is now estimated that bad loans make up approximately 20 percent of all domestic loans in the Greek banking system at this point.
#17 The suicide rate in Greece is more than 30 percent higher than it was last year. People are becoming very desperate in Greece and there is no end in sight to the economic depression that they are going through.
#18 Large U.S. companies have been rapidly getting prepared for a Greek exit from the eurozone. The following is from a recent New York Times article….
Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.
Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.
Every time European leaders get together they declare that they have “a plan” that will solve the problems that Europe is experiencing, but as we have seen things in Europe just continue to get worse with no end in sight.
A key date is coming up in the middle of this month. On September 12th, Germany’s Constitutional Court will determine the fate of the recent fiscal pact and the ESM. According to UniCredit global chief economist Erik Nielsen, if the court rules against the fiscal pact and the ESM the fallout will be catastrophic….
“If they were to surprise us by striking down Germany’s participation, I would think it’d be an utter bloodbath in markets”
But that is not the only thing that could set off a full-blown panic in the financial markets.
The truth is that Europe is teetering on the edge.
One wrong move and it is going to be 1929 all over again.
As I have maintained all along, the next wave of the economic collapse is rapidly approaching, and this time the epicenter for the crisis is going to be in Europe.
But that does not mean that things are going to be easier for the United States than last time. We have never even come close to recovering from the last recession. Most Americans families are just barely getting by. In fact, 77 percent of them are living paycheck to paycheck at least part of the time.
Right now there are millions of Americans that have lost their jobs and their homes in recent years and that feel forsaken by society.
After this next wave hits us there will be tens of millions of Americans feeling the pain of economic desperation.
The last wave of the economic collapse hurt us.
This next wave is going to absolutely devastate us.
Watch what is happening in Europe very carefully. What Greece, Spain, Italy and France are experiencing right now is going to hit us soon enough.
September 4, 2012 – EUROPE - A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession. “No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives,” Richard Colwill, of the British mental health charity Sane, told CNBC. “There does appear to be a connection between unemployment rates and suicide for example,” he said, referring to a recent study in the British Medical Journal that stated that more than 1,000 people in the U.K. may have killed themselves because of the impacts of the recession. “This research reflects other work showing similar rises in suicides across Europe.” According to Josée Van Remoortel, advisor to the European organization Mental Health Europe (MHE), the financial crisis is affecting “all areas of life,” not just economies, and its impact on mental health is creating a “deep chasm in our society.” “The credit crunch [has] had one unexpected consequence and one that reflects a deep chasm in our society – a sharp rise in mental health problems, largely caused by uncertainty and fear for the future,” he writes in a paper entitled “The Sane Approach.” A recent survey of general practitioners (family doctors) in Britain by the Insight Research Group seems to support Van Remoortel’s view. The data showed that out of 300 family doctors surveyed, the majority reported that austerity was damaging their patients’ health. Seventy six percent said their patients were unhealthier due to the economic climate and 77 percent said more patients were seeking treatment for anxiety. The doctors surveyed relayed an increase in the incidence of alcohol abuse, anxiety, depression and requests for abortions due to economic reasons, anecdotal evidence borne out by statistics for anti-depressant requests in the U.K., which have risen 28 percent from 34 million prescriptions in 2007 to 43.4 million in 2011. Wolfgang Münchau told the Financial Times in July, the debt crisis in the Eurozone could likely last 20 years. -CNBC
The financial chess game in Europe is still being played out, but in the end it is going to boil down to one very fundamental decision. Is Germany going to allow the ECB to print up trillions of euros and use those euros to buy up the sovereign debt of troubled eurozone members such as Spain and Italy or not? Nothing short of this is going to solve the problems in Europe. You can forget the ESM and the EFSF. Anyone that thinks they are going to solve the problems in Europe is someone that would also take a water pistol to fight a raging wildfire. No, the only thing that is going to keep Spain and Italy from collapsing under the weight of a mountain of debt is a financial nuke. The ECB needs to have the power to print up trillions of euros and use that money to buy up massive amounts of sovereign debt in order to guarantee that Spain and Italy will be able to borrow lots more money at very low interest rates. In fact, this is probably what European Central Bank President Mario Draghi has in mind when he says that he is going to “do whatever it takes to preserve the euro”. However, there is one giant problem. The ECB is not going to be able to do this unless Germany allows them to. And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy. If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together. That doesn’t sound like a very good deal for Germany.
Those are unsustainable levels.
The only thing that is going to bring those bond yields down permanently to where they need to be is unlimited ECB intervention.
But that is not going to happen without German permission.
Meanwhile, the situation in Spain gets worse by the day.
An article in Der Spiegel recently described the slow motion bank run that is systematically ripping the Spanish banking system to shreds….
Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released on Tuesday by the Spanish central bank.
In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.
If those numbers sound really bad to you, that is because they are really bad.
At this point, authorities in Spain are starting to panic. According to Graham Summers, Spain has imposed the following new capital restrictions during the last month alone….
- A minimum fine of €10,000 for taxpayers who do not report their foreign accounts.
- Secondary fines of €5,000 for each additional account
- No cash transactions greater than €2,500
- Cash transaction restrictions apply to individuals and businesses
How would you feel if the U.S. government permanently banned all cash transactions greater than $2,500?
That is how crazy things have already become in Spain.
We should see the government of Spain formally ask for a bailout pretty soon here.
Italy should follow fairly quickly thereafter.
But right now there is not enough money to completely bail either one of them out.
In the end, either the ECB is going to do it or it is not going to get done.
A moment of truth is rapidly approaching for Europe, and nobody is quite sure what is going to happen next. According to the Wall Street Journal, the central banks of the world are on “red alert” at this point….
Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy.
Expectations are now high that Mr. Bernanke’s Federal Reserve and Mr. Draghi’s European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow.
So what happens if Germany does not allow the ECB to print up trillions of new euros?
Financial journalist Ambrose Evans-Pritchard recently described what is at stake in all of this….
Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture – with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits – would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.
As I have written about so frequently, time is running out for the global financial system.
Even Germany is starting to feel the pain. This week we learned that unemployment in Germany has risen for four months in a row.
So what comes next?
There is actually a key date that is coming up in September. The Federal Constitutional Court in Germany will rule on the legality of German participation in the European Stability Mechanism on September 12th.
If it is ruled that Germany cannot participate in the European Stability Mechanism then that is going to create all sorts of chaos. At that point all future European bailouts would be called into question and many would start counting down the days to the break up of the entire eurozone.
If Germany did end up leaving the eurozone, the transition would not be as difficult as many may think.
For example, most Americans may not realize this but Deutsche Marks are currently accepted at many retail stores throughout Germany. The following comes from a recent Wall Street Journal article….
Shopping for pain reliever here on a recent sunny morning, Ulrike Berger giddily counted her coins and approached the pharmacy counter. She had just enough to make the purchase: 31.09 deutsche marks.
“They just feel nice to hold again,” the 55-year-old preschool teacher marveled, cupping the grubby coins fished from the crevices of her castaway living room sofa. “And they’re still worth something.”
Behind the counter of Rolf-Dieter Schaetzle’s pharmacy in this southern German village lay a tray full of deutsche mark notes and coins—a month’s worth of sales.
I have a feeling that it would be much easier for Germany to leave the euro than it would be for most other eurozone members to.
The months ahead are certainly going to be very interesting, that is for sure.
Europe is heading for a date with destiny, and what transpires in Europe is going to shake the rest of the globe.
Sadly, most Americans still aren’t too concerned with what is going on in Europe right now.
Well, if you still don’t think that the problems in Europe are going to affect the United States, just check this news item from the Guardian….
General Motors’ profits fell 41% in the second quarter as troubles in Europe undercut strong sales in North America.
America’s largest automaker made $1.5bn in the second quarter of 2012, compared with $2.5bn for the same period last year. Revenue fell to $37.6bn from $39.4bn in the second quarter of 2011. The results exceeded analysts’ estimates, but further underlined Europe’s drag on the US economy.
Profits at General Motors are down 41 percent and Europe is being blamed.
The global economy is more tightly integrated than ever before, and there is no way that the financial system of Europe collapses without it taking down the United States as well.
And considering the fact that the U.S. economy has already been steadily collapsing, the last thing we need is for Europe to come along and take our legs out from underneath us.
So what do all of you think about the problems in Europe?
Do you see any possible solution?
Please feel free to post a comment with your thoughts below….
Over the past couple of years, Europe has muddled through a long series of crunch moments in its debt crisis, but this September is shaping up as a “make-or-break” month as policymakers run desperately short of options to save the common currency.
Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting.
“September will undoubtedly be the crunch time,” one senior euro zone policymaker said.
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.
On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy – or what do if one or both were to topple.
“In nearly 20 years of dealing with EU issues, I’ve never known a state of affairs like we are in now,” one euro zone diplomat said this week. “It really is a very, very difficult fix and it’s far from certain that we’ll be able to find the right way out of it.”
Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.
Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.
If Spain, the euro zone’s fourth biggest economy and the world’s 12th, loses affordable market financing the next domino at risk of falling is Italy – the euro zone’s third biggest economy and a member of the G7 group of big wealthy nations.
A bailout of Spain would probably be double those of Greece, Ireland and Portugal combined, while Italy’s economy is twice as large as Spain’s again.
The European Union has already agreed to lend up to 100 billion euros to rescue Spanish banks. One euro zone official said Madrid has now conceded that it might need a full bailout worth 300 billion euros from the EU and IMF if its borrowing costs remain unaffordable.
European officials have spent the past few days issuing a series of statements declaring they will act to halt the crisis.
In the latest, issued on Sunday, Chancellor Angela Merkel and Prime Minister Mario Monti “agreed that Germany and Italy would do everything to protect the euro zone”.
The wording was similar to remarks by European Central Bank chief Mario Draghi last week prompted buying in financial markets on the expectation that the bank would take steps to lower the cost of borrowing of Spain and Italy.
DEFLATING LIFE RAFT
The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.
“For two years we’ve been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak,” the diplomat said. “But now the leak has got so big that we can’t pump air into the raft quickly enough to keep it afloat.”
Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.
If Greek debt cannot be made sustainable, the country may have to leave the euro zone, sending a shockwave across financial markets and the European economy.
September 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.
A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.
On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.
Athens wants two more years than originally planned to cut its budget deficit to below 3 percent of GDP, so as not to impose yet more spending cuts on a country which is already in a depression.
This would mean Greece’s 130 billion euro second bailout package may need to be increased by 20-50 billion euros, according to estimates by some euro zone officials and economists, and there is no appetite in the euro zone to give Greece yet more extra money.
More importantly Greece needs to bring its debt, which is equal to 160 percent of its annual economic output, under control. This means euro zone governments, which own roughly two thirds of it, may need to write part of it off.
Private creditors have already suffered a huge writedown in the value of their Greek debt holdings but so far euro zone taxpayers have not lost a cent on any of the bailouts.
LAST CHANCE OPTIONS
Policymakers are working on “last chance” options to bring Greece’s debts down and keep it in the euro zone, with the ECB and national central banks looking at also taking significant losses on the value of their bond holdings, officials said.
If governments swallowed the bitter pill by also accepting a cut in the value of their contributions to loans already made to Greece, this would break a taboo and could provoke demands for similar treatment from Ireland or Portugal.
Peter Vanden Houte, chief economist at ING bank, said euro governments might be forced to accept a halving of the value of their Greek debt – known in the business as haircut.
“If Greece is to be saved, we must see some debt forgiveness from euro zone governments in the coming years because otherwise Greece is never going to come out of the situation it is in now,” he said. “We are talking about potentially a 50 percent haircut, which would still mean the Greek debt would be (proportionately) around the euro zone average.”
The euro zone would want concessions from Athens. “Most probably in exchange, euro zone partners will be more strict on Greek compliance with structural reforms and may ask Greece to give up some sovereignty,” said Vanden Houte.
While no official discussions are underway on another Greek debt restructuring, euro zone officials say privately it may be necessary if Greece is to have a fighting chance.
“The Greeks might say they are in such a mess that to survive they we need to ease up the austerity a bit, and to still regain debt sustainability they will have to default on 30-40 percent of the loans,” one euro zone official said.
“There would be a lot of people saying this is understandable, so maybe this makes sense and maybe we could have a reasonable discussion among the member states on how Greece can move forward,” the official said.
The official speculated that euro zone debt forgiveness for Greece could be made dependent on progress in structural reforms or that it could be reviewed once Athens has to start paying back the capital of the loans in 10 years.
“Maybe we could agree to give debt relief of, say, 25 percent to make possible some changes in the program. Then we implement that for six months or a year and maybe we find out that we need to give them another 25 percent and at the end of the day we might get to a stable situation,” the official said.
The situation will become clearer once international lenders produce a new debt sustainability analysis for Greece at the end of August.
THE BATTLE OF SPAIN
Preventing Spain and Italy from losing debt market access may require the crossing of another red line – ECB help in keeping down governments’ borrowing costs.
Draghi signaled last Thursday the bank was ready to act, indicating it may revive its program of buying bonds of troubled governments on the secondary market.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” Draghi said. “To the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate.”
However, Germany has always been hostile to the idea and the Bundesbank said on Friday that it continued to view it “in a critical fashion”.
German Finance Minister Wolfgang Schaeuble dismissed suggestions Spain will ask the bailout fund to try to lower its borrowing costs by purchasing its bonds.
Spain faces high borrowing costs because investors fear they will not get their money back. The Spanish economy is shrinking, many of its autonomous regions need bailouts from Madrid and banks need the recapitalization of up to 100 billion euros.
Madrid still has to raise about 50 billion euros on the market by the end of the year. This may be impossible if its funding costs stay well above 7 percent for 10-year bonds.
Draghi’s remarks knocked yields down by more than 40 basis points to below 7 percent on Thursday, but they could quickly climb back if the market does not see firm ECB buying soon.
The ECB also seems to be softening its stance on another taboo – giving the ESM a banking license so the fund can borrow from the ECB against euro zone government bonds.
If Spain or Italy applied for euro zone help in bringing down their borrowing costs, the temporary European Financial Stability Facility (EFSF) bailout fund or the ESM could help.
But with their combined firepower, under current agreements, of 459.5 billion euros until July 2013 and at 500 billion from July 2014, the funds do not have enough to impress markets.
If the ESM could refinance itself at the ECB, however, it would have virtually unlimited firepower for bond market intervention without causing inflationary pressure.
Discussions on the banking license for the ESM have been going on in the background for many months, officials said, with France openly calling for such a solution, but Germany, Finland and the Netherlands strongly against.
July 29, 2012 – EUROPE – German Chancellor Angela Merkel and Italian Prime Minister Mario Monti will do everything to protect the euro zone and swiftly implement measures agreed by European leaders in June, their governments said in a statement on Sunday. The wording of the statement, issued after the pair discussed the euro zone crisis in a phone call on Saturday, echoed a pledge made by Merkel and French President Francois Hollande on Friday and the European Central Bank (ECB) President Mario Draghi on Thursday. European leaders have gone on the offensive in recent days, underlining their commitment to tackling the euro zone’s crippling debt problems and seeking to restore calm after a week in which Spanish bond yields hit euro-era highs and Greece raised concern it would be unable to honor its bailout conditions and could exit the euro. Draghi’s comments were read by markets as an indication the ECB may revive its program of buying bonds of troubled governments on the secondary market. Near-bankrupt Greece is desperately struggling to make savings. Its creditors are currently in Athens to assess progress and decide whether to keep it hooked up to a 130-billion euro lifeline. Greek political leaders had agreed on most of the austerity measures demanded by creditors, a source close to talks said on Sunday, and politicians were now eyeing pension and wage cuts to find the final 1.5 billion euros of savings still needed. Greece must find savings worth 11.5 billion euros for 2013 and 2014 to satisfy its increasingly impatient lenders. German Finance Minister Wolfgang Schaeuble said there was no room for any more concessions for Greece, in an interview published in Welt am Sonntag newspaper on Sunday, a view echoed by German Economy Minister Philipp Roesler. Policymakers are working on “last chance” options to bring Greece’s debts down and keep it in the euro zone, with the ECB and national central banks looking at also taking significant losses on the value of their bond holdings, officials said. –Reuters
And now, for our next trick: These two countries have $4 trillion in debt between the two of them. If they have been unable to fix their own budget deficit problems, how can they possibly save the eurozone we ask? This is more politcal nonsense and stall tactics to buy time, while the ECB fires up the printing presses. If you haven’t found the exit signs yet; now would be good time to start looking. -The Extinction Protocol
The economic crisis that is sweeping Europe is starting to hit Britain really hard. Over the last couple of years economists have been warning that we can’t let the “contagion” spread from troubled nations such as Greece and Portugal to the rest of Europe. Well, it is too late for that now. Spain and Italy are coming apart at the seams at this point, and even “stronger” nations such as the UK and France appear to be deeply troubled. According to numbers that were released just this week, the UK economy has now contracted for three quarters in a row. During the second quarter of 2012, the UK economy shrunk by 0.7 percent. That was a much larger contraction than the 0.2 percent contraction that economists were forecasting. At this point we have got a definite trend going. During the fourth quarter of 2011, the UK economy shrunk by 0.4 percent. During the first quarter of 2012, the UK economy shrunk by 0.3 percent. And now in this latest quarter the contraction of the UK economy appears to be accelerating. This economic downturn in the UK is being called “the longest double-dip recession for more than 50 years“. So will Britain soon look like Greece and Spain and Italy or will it be able to pull out of this nosedive in time?
The UK construction sector was hit particularly hard during the second quarter. It contracted by 5.2 percent, which was the biggest decline since the first quarter of 2009. Consumer confidence has reached a historic low in Britain and economic gloom is seemingly everywhere.
So what does the future hold for Britain?
Unfortunately, things do not look promising at all right now.
At this point, the budget deficit of the UK government is still about 8 percent of GDP, and British politicians are promising to reduce that significantly.
That means that more austerity measures are coming for Britain and less government money will be flowing into the economy.
So the economic slowdown is very likely to get even worse.
But of course we have been seeing the same kind of thing happening all over Europe.
Economists are warning once again that Greece is on the verge of declaring bankruptcy.
On Tuesday, the Telegraph ran a story with the following startling headline: “Debt crisis: Greece to run out of money by August 20“.
Haven’t we heard this before?
Yes, we have.
And every time, European leaders have gotten together and “fixed” the problem.
But of course they didn’t really fix anything. They just kicked the can down the road a little while and things just kept getting worse.
At this point the Greek economy has been in a depression for several years. In fact, the Prime Minister of Greece is now even openly using the word “depression” to describe the state of the Greek economy.
So just how bad are things in Greece right now?
It is being projected that the Greek economy will contract by a total of 7 percent during 2012.
But Greece is not alone.
Other southern European nations are on the exact same path that Greece is on.
For example, Italy is rapidly becoming a gigantic mess as well. The national government is drowning in debt, the economy is in recession and today came a warning that 10 major Italian cities are on the verge of bankruptcy….
The cities at risk of running out of money include Naples, Palermo in Sicily and Reggio Calabria, on the toe of the Italian boot, according to the Italian press.
“The situation is becoming worse by the day,” said Graziano Del Rio, the president of a national association of municipal councils.
The warning came just days after Mario Monti, the prime minister, expressed fears that Sicily, which has a high degree of fiscal autonomy, was on the brink of a default.
But the country making the biggest headlines this week has been Spain. Spanish bond yields have been soaring, the Spanish stock markethas been crashing, the Spanish banking system is on the verge of collapse and now regional governments all over Spain are coming forward and asking for bailouts.
As the national government attempts to impose even more austerity measures on the Spanish people, violent protests are erupting all over the country.
You can see footage of some of the recent violence in Spain right here.
So why is all of this happening?
Well, the truth is that this is not a liquidity crisis. If it was, the central banks could flood the system with money and solve the problem.
No, what Europe is facing is an insolvency crisis. There is way, way too much debt in the system and it is inevitable that an “adjustment” is going to happen.
A recent Marketwatch article detailed how the global debt bubble has continued to grow even in the midst of the economic problems of the past few years….
Balance sheets of major central banks have increased to $18 trillion from around $6 trillion, reflecting an unprecedented 30% of global gross domestic product.
Mr. Economy is now addicted to monetary heroin. Increasing doses are necessary for the patient to function at all.
Mr. Economy has not made the changes necessary for a return to full health. He seems to have taken rock star Steven Tyler’s advice: “Fake it until you make it.”
Borrowing levels remain unsustainable. Debt levels for 11 major nations have increased to 417% of GDP in 2012 from 381% of GDP in 2007. Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the U.K. and the U.S.
These debt levels are not sustainable.
A collapse is going to happen.
Hopefully the collapse will be at least somewhat orderly, but there is also a good chance that it could be completely chaotic.
Some that have analyzed the situation are very pessimistic at this point. For example, the following is from a recent article by Graham Summers….
In simple terms, today we are facing a Crisis that is far, far worse than 2008. Before it ends, it is quite possible that we will see the entire Western Financial System collapse and a new system put into place.
This will mean:
- Many major banks disappearing, as well as numerous potentially lengthy bank holidays (think Argentina in 2001)
- Multiple sovereign defaults as well as broad economic contractions and their commensurate unemployment/ civil unrest/ erasure of retirement accounts/ pensions (this process has already begun in some US municipals, e.g. San Bernandino and Stockton California as well as Harrisburg Pennsylvania).
- Possibly new currencies being introduced or new denominations of currencies (say one new unit being worth 1,000 of the old one)
- Massive wealth destruction to the tune of tens of trillions of Dollars (think MF Global i.e. the money is gone… only systemically… in fact we just had another such instance with PF)
- A global contraction that will result in new political/ power structures being implemented as well as the breakup of various countries/ unions.
- Very serious trade wars to begin (see Obama’s recent attack on China) and very possibly a real war.
Many Americans do not pay much attention to what is going on over in Europe because they do not believe that it will affect them much.
But the truth is that Europe has a bigger population than we do, a bigger economy than we do, and a much bigger banking system than we do.
The global financial system is more interconnected than ever, and what goes on over in Europe is going to have a dramatic impact on the United States.
In fact, already there are a whole host of signs that the U.S. economy is starting to tip into another recession.
So let us definitely hope for the best, but let us also get prepared for the worst.
A great storm is on the horizon, and it would be quite foolish to ignore it.