Give disaster a chance to show its stuff

Jun 17, 2011

Baltimore, Maryland

The financial press is enjoying itself.

With words!

One headline says the atmosphere is "toxic." Another warns of "contagion."

"Politicians fiddle while Athens burns," says the Wall Street Journal.

They all agree: Europe is going to Hell...just as soon as it can find a handcart!

But you remember our comments yesterday? Got a catastrophe? Great!

The authorities have tried to avoid disaster. They've done a good job of it. That is, they've avoided small disasters. And they've laid the foundation for a big one. So, bring it on!

According to one press report, "Europe is waiting for its Lehman moment." Get it? It's that moment when all Hell seems to break loose in the financial markets - like September '08, after Lehman Bros went broke. Bloomberg:

The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won't pay its debts. Equities declined around the world, while a measure of fear in fixed-income markets jumped the most since November.
On the streets of Athens, riot police armed with clubs swing at protesters, also armed with clubs. "Greece was plunged into political turmoil..." began the report in the Financial Times.

But what is really going on?

Greece, a small country with a small GDP and no oil...whose strategic export is olives...and whose last real military victory was the Battle of Jhelum in 326 BC, in which Alexander the Great defeated an Indian Rajah named Porus. But Greece is also as deep in debt as the US. But unlike the US, lenders don't want to lend Greece money. They've read the history books. They know what happens when you lend Greeks money. You don't get it back.

On the other hand, they also know that the European Central Bank and the financial authorities worldwide are afraid of a "Lehman moment." They fear disaster. They hate catastrophes. They think their job descriptions include avoiding calamities of all sorts.

Investors don't know quite what to think. The danger is high. But there are rewards too. Greek debt with a 3-year maturity is yielding 28%. If the authorities pull off another bailout speculators stand to make a lot of money on the long side of Greek debt.

But as we said earlier, it is because officials are so good at avoiding calamities that we find ourselves confronted with so many of them now. If they'd let Greece go broke 3 years ago, the problem would be behind us instead of in front of us.

Avoiding disasters hasn't worked. At least, not avoiding debt disasters. No matter what tricks the authorities do - monetary, fiscal, or unconventional - the debt is still there. And since all those tricks cost gets bigger and bigger.

So how about this: Give disaster a chance to show its stuff. Let calamity have a go at the problem. Let's all put our hands together and welcome catastrophe.

It's coming, whether we like it or not.

So why not like it? Look, who really cares if a few big banks go broke? Who cares if Greece, Portugal and Spain - if it comes to that -- are forced out of the EU? Who cares if the bankers don't get their bonuses...or the speculators don't get their pay-offs...or pompous officials don't get to claim they 'saved the world economy?'

Not us.

Of course, we don't really know what would happen if disaster were allowed to settle up things on its own. If the EU doesn't come through with another bailout, Greek banks - including its central bank - will be insolvent. And the European Central Bank may be insolvent too. It has an outstanding loan for $49 billion to Greece. It has a lot of other debt on its books too - from Spain, Portugal and Ireland. What that debt is worth today, you can find out by looking in the financial pages. What it will be worth after Greece defaults is unknown...but surely a lot less. And when the losses are toted up, they are likely to be more than the ECB's capital.

Then, the scheisse will really hit the fan.

What will happen? No one does. But we want to find out.

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*** Here's the report from The Telegraph in London:

EU commissioners have a "profound sense of foreboding" about Greece and the future of the eurozone, a leaked account of a meeting has suggested.

The account, seen by BBC News, said this was in reaction to the "damning failure" of eurozone ministers to agree a new bail-out for Greece last night.

It was written by an official who attended Wednesday's gathering of commissioners in Brussels.

The author warned that the markets would now "smell blood".

*** Remember what a bad bet mortgage debt was? But in 2005, the more mortgage debt you had the smarter you thought you were. Mortgage debt meant you were making a leveraged bet on the housing market. As house prices rose, you multiplied your money.

The New York Times reports that another group of dumb-dumbs is making a similar mistake:

Debt has become a way of life for American college students. The average student loan debt among graduating college seniors was more than $23,000 in 2008, according to . In addition, the student lender Sallie Mae says the average graduating senior with at least one credit card had $4,138 in debt on the card.

Yet, instead of feeling stressed about owing all that money, many students actually feel "empowered," says a new study from Ohio State University, based on data collected for the federal Bureau of Labor Statistics. The study, published in the journal Social Science Research, surveyed 3,079 students, the majority of whom were in their early- to mid-20s.

That's right. The more college loans and credit card debt that young adults age 18 to 27 have, the higher their self esteem - and the more control they feel they have over their lives. They tend to view debt positively, rather than as a burden.

Come again?

Rachel Dwyer, an assistant professor of sociology at Ohio State and the study's lead author, says it's not entirely clear why debt seems to have that effect. But the finding is consistent with earlier research suggesting that student loans, in particular, represent the cost of opportunity for some students, and so can be seen in a positive light. "Educational debt can represent an investment in the future," she said.

There are signs, though, that the glow wears off as the students put more distance between themselves and their college days - perhaps because they are starting to make payments on the loans and may be beginning to realize that their salary doesn't go as far as they may have thought. The oldest of those studied - ages 28 to 34 - began showing signs of stress about the money they owed.

"They're experiencing the burden of repayment," Professor Dwyer said, "versus the pleasure of going to college.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "Give disaster a chance to show its stuff"


Jun 17, 2011

great response. i fully endorse your view. here in this valid point u will find many higher income group indians always save personally as stats show that approximately 36% of indians save by undergoing normal simple way of living.




Jun 17, 2011

Dear Editor,

just to clear the smoke. Young adults are always confident about everything and that is why their exposure to "wrong" should be reduced. Young adults are happy with everything from drugs to women to smuggling to terrorism. Which is why young adults should not be exposed to debt. Debt is like a drug. It makes you lose the sense of reality. Debt and drugs both can get a beggar feel like a millonaire. But alas both are temporary. When the effect bears of the simple reality becomes unbearable trauma.
I would like to share that the most bad habits are developed during young adult period.
On the other hand saving helps you suffer more and more while being worser than relality. For eg when you learn to live in 100 usd when your earning is 200 usd. You have a buffer of 100 USD to maintain your position.
Unfortunately your words of wisdom are not able to reach even the fully grown adults like the central bank chairmen.


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