A Greek or world tragedy?

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This article is a guest contribution by By Paul Sandison*.

I do think it is possible to use the recent post-August 2011 pullback to re-enter the markets to trade, if one has no illusions about the long-term cycle. Presently it does look as if the market has absorbed so much bad news that the good news is making itself felt. So I think it is possible we may see a rally, but for how long? A day or two, a few weeks or months, only to fall back severely? Why do I think there must ultimately be a grave shakedown? Many people seem to have concluded that 2008 was the equivalent of the 1929 crash and all we have to do now is crawl slowly upwards.

I disagree. At the start of the Great Depression the downward steps in the stock market from 1929 to 1932 were in the absence of monetary stimulation. This time around the quantitative easing QE, numbers QE1 and QE2 have masked the underlying problem of a lack of competitiveness and output in the U.S. and ‘lifted all boats’. However, I believe a continued liquidity surge is unsustainable in the long run, not least because the United States is not starting from scratch with its injections of liquidity. Furthermore, the liquidity has to a considerable extent been used to prop up banks rather than stimulate production and employment, with the result that the economic recovery has been weak.

In my humble opinion I believe 2008 was the equivalent of the 1925 Florida housing bubble bursting, 2011 was the equivalent of the 1928 stock market rumblings, and the year end of 2012 plus early 2013 will be our equivalent of what happened in 1929.  Only this time the trigger of the entire crisis was far greater than any housing bubble in the state of Florida. This time it was and still is countrywide. The aggregate effect of the various nefarious mortgage schemes such as sub-prime, Alt-A, etc. was the $56 trillion of imploded housing wealth in the U.S. It is this black hole that is still creating poverty and a fall in aggregate demand in the economy, which is why there is such sluggish growth despite the payout of food stamps to keep demand for essentials up and prevent deflation.

However, there are limits to how long the food stamps can continue. The first limit is called politics. The second limit is the financial markets, which at some point, perhaps quite soon, are going to call the bluff of whoever is in the White House, Congress and the Senate because of the sheer unsustainability of the present U.S. creation of debt. Plus there is a mountain of sovereign debt in Europe, and when the national and international rows of dominoes fall the effects will reverberate across the globe. Unlike in the 1930s, the financial system is now global and so interconnected that everyone on the planet will be affected at each successive collapse.

Today the creditors of the Greek banks are baulking at taking the haircut of 50% demanded of them by the technocrat Greek government, headed by Lucas Papademos who formerly worked in the European Central Bank. This demand comes in turn from the agreement between the ECB and the IMF as a condition if Greece is to be able to receive the next tranche of loans to survive the next few months. That the creditors should baulk should not surprise anyone. They are being invited to take a 50% cut in the value of their investments. The Greek banks will be offered loans from the IMF to make up for their nominal loss of liquidity.

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Paul Sandison, 64, is a social critic of contemporary society. Although born in South Africa, he has lived in Europe for nearly 40 years. His forebears include an ancient ancestor to King Niall of Ireland and Charlemagne. Paul is currently promoting American and European arrangements of contemporary Irish music. His hobbies are reading, development economics and jogging.

Source: Paul Sandison, January 17, 2012.

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