8-11-2011 Read them very carefully !

Don’t Pity the Greeks
Understanding the Real Implications of a Greek Default
Eric Fry
Eric Fry

Papandreou to Merkel: “The keys are in the mailbox.”

Just like an “underwater” homeowner, the Greeks are simply walking away from their obligations and telling their creditors, “It’s yours.”

While it’s true that the Greeks haven’t actually walked away yet, Prime Minister George Papandreou walked away today…and that’s the first step.

“Wait a minute!” you may be saying. “Didn’t the Greeks strike a bailout-salvaging political deal over the weekend? Didn’t Papandreou agree to step down in order to enable an interim, power-sharing government to secure the EU’s 130 billion euro rescue package?”

Absolutely, if you believe American or Northern European press reports. Absolutely not, if you believe most Greek press reports…or listen to your common sense.

Papandreou did not step down to “make way for the rescue package.” He stepped down to get out of the middle of a firefight. As the Greek newspaper, Ekathimerini, put it yesterday, “Let’s not forget what prompted George Papandreou’s ill-fated and panic-stricken effort to unburden himself of the weight of government by calling a referendum: the need for radical reforms, the popular rage that this has provoked and the sporadic violence of small but persistent groups…”

No one wants to be the “austerity candidate.” Politics is about dispensing goodies, not about taking them away. Papandreou clearly understands this reality and wants nothing to do with it.

“It is no coincidence,” Ekathimerini continues, “that both times that Papandreou tried to throw away the burden of government were during widespread demonstrations and violence. Last June, during the parliamentary debate on harsh new austerity measures, which were accompanied by violence in Syntagma Square, Papandreou suddenly told New Democracy party leader Antonis Samaras that he would resign as prime minister in order to make way for a government of national unity; the second followed the demonstrations of October 28 and the cancellation of the annual military parade in Thessaloniki, just after a deal with our EU partners and the IMF to write down a large part of our debt.”

Not surprisingly, Papandreou would much rather hand over the keys and infuriate Greece’s creditors than pay the mortgage and infuriate his own people.

Publicly, most Greek politicians keep talking as if the country will continue paying its mortgage. But that’s an easy thing to talk about as long as their creditors are continuing to extend fresh credit. Just wait until the money runs out.

That’s when the Greeks will walk away and the keys will land in the mailbox.

But don’t pity the Greeks. The Germen “repo men” can’t evict them. And there’s nothing to repossess. The lenders should have asked for collateral, but they didn’t. Which means the Greek borrowers get to “keep their house,” even after defaulting, while the lenders will have to mark their bad loans down to zero…exactly like a defaulted mortgage.

So why shouldn’t Greece hand over the keys? That’s what millions of American mortgage-holders have done since the housing bubble burst. That’s what capitalism is all about: free exchanges of capital and/or services between consenting adults. Sometimes these exchanges produce wealth; sometimes they produce capital losses. That’s capitalism.

When a bank loans money to a homebuyer, the bank understands that it will receive either monthly interest payments…or the house itself. The borrower understands that he must either make monthly payments…or give the house to the bank. That’s the deal. It’s a contract. It’s not a moral obligation.

Sovereign finance is no different. When a bank loans money to a sovereign borrower, the bank understands it will receive interest payments for as long as the sovereign borrower remains solvent. After that, nothing. That’s the deal. It’s a contract. It’s not a moral obligation.

It is not the sovereign borrower’s fault that the banks demanded no collateral before extending the loan. It is the lender’s responsibility to collateralize his loans, not the borrowers.

Most of the Greeks on the street are hip to this reality, which is why they would prefer a default over austerity. Clearly, Papandreou is on the same page, which is why he asked for a national referendum on the bailouts. He knew the people wanted to hand over the keys and he had no interest in stopping them.

But the bankers in the north of Europe had every interest in stopping the Greeks from handing over the keys, which is why they pressured Papandreou into canceling the referendum. He did so, grudgingly…and then stepped aside.

This may be an event that “secures Greek’s rescue package,” just as the US press is reporting this morning, but it is also an event that moves Greece one step closer to its inevitable default.

All hope is not lost however. The Greeks did reaffirm their commitment to the gyro.

Printing Money to Combat a Global Depression
Bill Bonner
Bill Bonner

Reckoning today from Paris, France…

Last week produced nothing but more disappointment. At the center of it was the Europeans’ inability to make their debt disappear. They had hoped that they could just announce a plan to take care of it…and that would be enough.

But then, the Greeks said they wanted to vote on it…and then, they didn’t. ‘Papandenomium,’ the papers called it. If the voters were allowed to give their opinions everybody knew what would happen; the whole fix would be unfixed quix. So, they all got together and twisted Papandreou’s arms…and his arms gave way.

And then, investors started getting nosey. They wanted details. They wanted to know how the French and the Germans could cover so many potential losses — from Spain, Portugal, Ireland, Greece, and Italy.

Italy is in the worst position. It has scarcely any more debt than the US, but it has an immediate problem. It has to turn over its debt…it has to borrow heavily just to keep the wheels turning. And it lacks America’s key advantage…it doesn’t have a printing press. It gave up the power to print money when it joined the EU. Only the European Central Bank can print money…and it’s controlled by the Germans!

What’s the matter with the Germans, anyway? Why don’t they get on- board with the Fed? Why don’t they want to print money? If they would just give the signal — ‘don’t worry, we’ll print the money’ — the whole crisis would be over. In Europe, as in America, bond investors would be reassured. They would know that they’d get their money. The ECB would buy Italy’s bonds, and Greece’s bonds, and Spain’s bonds… Heck, it would buy everyone’s bonds. Bond investors would get their money. They would stop hiking interest rates. Italy could cover its losses.

Everyone would be better off, no? Just like they are in the USA. Right?

It all seems so simple. Why don’t the Germans get it?

While US policy makers, official economists and jackdaw kibitzers are terrified of another Great Depression, Germany’s officialdom is afraid of hyperinflation. Hardly any Germans are still alive who remember it, but the experience of hyperinflation of the early ’20s is painted on the German character like graffiti on a national monument. They can’t ignore it. They can’t forget it. It will take generations for it to wear off. After the bitter experience of WWI, hyperinflation wiped out the German’s residual faith in their institutions. Working hard, saving your money, being a good citizen — none of it seemed to pay off. The ex-soldiers were bitterly disappointed. The ruling classes had let them down. The banks had betrayed them. The politicians had stabbed them in the back.

Even their money was worthless!

“How could 2,000 years of accumulated civilization have led to this…” (Or words to that effect) says the hero of Remarque’s famous All Quiet on the Western Front. Having no good answer, the Germans turned away from accumulated civilization, towards armed, mechanized zombieism.

In just a few years, Germany’s factories were working again — producing tanks and planes. It was a solution to the post-WWI unemployment and depression. Unfortunately, the solution was worse than the problem. The trains ran on time. But they were headed for disaster!

But that’s a long story.

Meanwhile, in the US, we have our race memories too. Few people alive today recall the Great Depression. But it still haunts economists’ sleep and troubles their vacations.

“Not on my watch,” says Ben Bernanke, or words to that effect.

And so, the Americans fight depression. The Europeans fight hyperinflation.

And what will they get? Depression AND hyperinflation!

Yes, dear reader, that was our forecast as few years ago. We stick with it. The world is entering a depression. Growth has stalled. Even the emerging markets are slowing down…suffering the consumer depression exported from Europe and America and trying to fight the inflation exported, by QE2, from the US.

This depression isn’t going away anytime soon. It will take years to work through, write off, default and foreclose on the mountain of household, business, and financial debt built up over the last 60 years. At first, we thought it would take 7-10 years. We’re in year 5 already…and, at the present rate, it looks like it might take another 15 years!

But the authorities aren’t going to take a depression sitting down. Even the Germans will probably decide that a little bit of printing press money is better than the defaults and bankruptcies that accompany a depression. They’ll all guarantee each other’s credits. The banks guarantee the debts of their big customers. The government guarantees the debt of its big banks. The central banks guarantee the debts of the governments…and all print money to cover them. What a great system.

Yes, that’s our prediction. Depression will lead to money- printing…which will eventually lead to hyperinflation.

But heck…the whole thing will take years to play out. By the time it finally comes to pass we’ll all probably have forgotten this forecast. We’ll be lucky if we can remember our names.

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