Blogger Bruce Krasting published a sobering article on the Greek situation, suggesting that Greeks are leaving the country in the face of economic dispair. He uses the term “diaspora“, meaning ”a dispersion of a people from their original homeland”. An extreme view, but clearly Greece is in a desparate situation.
Greece is just the tip of the proverbial iceberg. There is so much troubling economic news right now, that it is hard to have a positive outlook. As the saying goes, “if you can keep a calm head in these times, perhaps you just don’t understand the situation.”
With that anti-fanfare, here is my summary prognosis – we are witnession a slow motion train wreck:
Europe is in recession, with parts in depression.
The PIIGS are all set to melt down.
The Euro is doomed.
Once the Euro becomes unsustainable, Germany will lose its currency advantage and export prices will rise. Germany’s european market will evaporate because they are all broke. Higher German prices due to currency rise will hurt German competitiveness.
France is already in a recession, and the outlook does not improve. Things will be sloppy in 2012.
The US financial system is heavily exposed to a European meltdown, probably most directly and immediately through Greek default insurance instruments. I imagine Geithner/the Administration is very busy behind the scenes pumping billions in liquidity into the banks, and probably taking on or getting set to take on the banks’ toxic assets.
I find it hard to believe that there is enough liquidity in the global financial market to underwrite all the existing demands, let alone trillions in new demands, especially at prevailing interest rates. Global bond issuance in 2012 is expected to exceed $8 trillion. Suppose the IMF, ECB and the US Fed all want to add a few trillion more? Given the increased riskiness of most of the bond issues, interest rates will need to increase to compensate for risk, with damaging consequences. The US Fed might still be able to find a market, as the US is probably comparatively the world’s only safe-haven. Weird.
China’s economy is set to take a double hit - demand in export markets has declined and does not look to recover in the near term; the real-estate bubble is set to deflate. The Chinese government has a target of 8% annual growth. Estimates on a real-estate slowdown take GDP down at least a couple of percentage points. Suppose GDP growth drops to 5%, 3% or flat? The government will struggle with unemployment and dealing with the resulting social issues.
Oil demand is falling. Weakening demand and falling prices will cause problems for many suppliers. Russia needs $110 oil. Saudi Arabia needs $83 oil. Venezuela $90. Nigeria $90 … Producers are highly motivated to keep oil above $100, which will continue to hurt economic recovery. But supporting that price may be unsustainable, which leads to domestic problems in the producer countries, many of which are repressive, autocratic regimes, who have had to buy off their popoulations through increasing social spending. If the revenue side of the balance sheet takes a huge hit, they would no longer be able to afford the increasing spending on social welfare.
I think we may be on the verge of global civil unrest. Perhaps massive, violent demonstrations around the world. People are desparate.
What am I missing?
