Greece's economy resembles the US

Jun 15, 2011

Baltimore, Maryland

After 6 straight weeks of losses, it looks like the US stock market is ready for a winning week. The Dow rose 123 points. Oil stayed below $100. But the yield on the 10-year T-note rose above 300 basis points.

And here's the latest from the Financial Times:

"S&P cuts Greece's rating on step closer to default."

Want to earn a nice yield on your money? Buy a Greek 10-year bond. It will pay you 17% interest. For awhile.

But wait. You say you can't trust the Greeks? You say they're not good for the money?

"The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery," writes John Sfakianakis, chief economist of Banque Saudi Fransi.

Unemployment is around 20%. People dodge taxes. Government workers don't show up for work. Households spend too much. And the government is going into debt so deeply and so rapidly it can't possibly get out.'s just like the US! No, the US is worse, says Bill Gross. CNBC:

When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC Monday. Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

How do you like that? He didn't even mention the fact that Americans can't sell their houses to Germans or turn their country into a retirement home for sun-deprived Scandinavians.

But wait, if the US debt situation is as bad as or worse than Greece's how come the yield on US 10-year notes isn't 17% too?

Therein may lay an even bigger opportunity. What if Mr. Market were making a mistake?

Everybody knows that Greece always defaults on its debt. It's been in default, on way or another, for about half of its life - ever since it gained independence in 1828.

But the USA? If you can't trust the US to pay up, who can you trust?

So, investors may feel secure lending money to the US...even though the fundamentals are little different from those of Greece. They may think:"the US never defaults."

And yet, if there's one thing we can learn from financial history it is that nobody is immune from financial errors. Everyone gets greedy and stupid from time to time. And no paper currency lives forever.

Right now, you can earn 17% on Greek debt or 3% or US debt. We'll make a prediction that you can take to the bank: that spread will narrow.

The inflation rate in America is a matter of debate. But even the US government's own number crunchers put it at about 5% for the first quarter of this year. That makes the real return on US 10-year notes a MINUS 2%.

How long will investors content themselves with a negative return? Maybe for a while. But not forever. They usually want a real return of about 3%, with no threat of default. A safe return, in other words.

And when they realize that the inflation rate in the US is really 5%...and that the return on US debt is NOT safe...they're going to want a higher interest yield.

Say 5%. Or 7%. Or 10%.

Then, all hell is going to break loose.

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*** TIME magazine has finally realized that the economy is not performing as advertised. "What Recovery?" asks its cover story.

Word's getting around. It's not a recovery. It's a Great Correction.

*** The government of Belarus wants the IMF to lend it some money.

We have a suggestion.

Your editor is actually a certified economic advisor to Belarus. He went there with a small group of economists in the early '90s, after being invited to give advice.

What a dreary and depressing country! We stayed at the best hotel in Minsk, a tattered high rise that looked like a welfare tenement in the Baltimore.

But there was no running water in our room. So the manager moved us to a lower floor.

"The water sometimes has trouble getting to the 6th floor," he explained.

In our meeting with Belarus officials we found a language barrier that no interpreter could get over. We sat around a huge table. We looked at each other.

And what could we say? They were just coming out of the Soviet era. They had no idea what to do or how to do it. They didn't understand us. We didn't understand them.

"Liberalize and privatize," was our only advice. And, oh yes, get yourself a real currency. And some decent pumps.

"Forget it," was their response. Led by Mr. Lukashenko, the ex-Soviets stole everything they could get their hands on, cheated on elections, and put their opponents in jail...or killed them.

Of course, this is not a smart way to run an economy. So, the country remains as much a disaster area as it was before we got there.

Belarus got a $3.5 billion loan in 2009-2010. Now, they're back for more.

Our advice? Tell them to 'drop dead.'

*** What's that? You say the US will never default? Sooner or later, everybody defaults. Here's another news item:

Federal Reserve Chairman Ben Bernanke on Tuesday urged Republicans to support raising the nation's borrowing limit. He said threatening to block the increase to gain deeper federal spending cuts could backfire and worsen the economy.

The nation reached its $14.3 trillion borrowing limit in May. Treasury Secretary Timothy Geithner has said that the U.S. could default on its debt if it doesn't raise the limit by Aug. 2. The debt limit is the amount the government can borrow to help finance its operations.

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

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