May, 2010

Watch What Is Happening In Greece And Other European Countries. The United States Is Next!

Opening Thoughts

This month's commentary is going to address the severe economic and financial problems currently affecting the country of Greece, as well as many other countries in the European Union (EU). You are probably wondering what the economic and financial problems in countries thousands of miles away have to do with the economic and financial problems that we are experiencing in the United States. However, if you follow the train of thought in this month's commentary, I believe that you will come to the following conclusions:

1. while the press (newspaper, TV, radio and the internet) are focusing on the problems in Greece and other European countries, the problems in the various states of the United States are substantially greater;
   
   
2. over the next several months, if we watch the reactions of the Greek and other European people to the solutions being offered to their economic and financial problems, we will have a pretty good idea of what the reactions of the American people will be to their economic and financial problems;
   
   
3. as the fate of the Euro (the official currency of the European Union [EU]) unfolds over the next several months, we, as Americans, will have a pretty good idea of the fate awaiting our currency, the U.S. dollar.
   
   

Description of Greece's Economic and Financial Problems

Greece's economic and financial problems began to surface in a meaningful way in February, 2010. In simple terms, the Greek government found itself in a position where it was unable to make payments on the loans it had taken out (by selling bonds). Why? Again, in simple terms, its income from taxes, etc. was down while its expenses for various government programs was up, leaving the country in a substantial deficit position with a growing debt burden.

What has complicated the situation in Greece is the discovery that the Wall Street investment bank, Goldman Sachs, has used currency swaps (a type of DERIVATIVE) to help Greece massage its public finances. By doing so, the seriousness of the Greek debt situation was hidden from other countries in the EU, enabled Greece to borrow beyond its means and deferred the necessity of tough fiscal decisions being made by the Greek government.

Other European Countries Facing Problems Similar to Greece

There are numerous other countries in Europe facing economic and financial problems similar to Greece - i.e. dwindling tax revenues, escalating expenses associated with government spending programs, excessive borrowing, and debt hidden from public view as a result of the machinations of Wall Street investment banks such as Goldman Sachs.

The European countries with the most severe problems include, but are not limited to, the following:

• United Kingdom (Great Britain)
  
• Portugal
  
• Italy
  
• Ireland
  
• Spain
  
• France
  

Proposed Solutions for Economic and Financial Problems in Greece and Other European Countries

At first, members of the EU, led by Germany, were reluctant to assist fellow EU member, Greece, with its economic and financial problems. Finally, after a few months of negotiations, in early May, 2010, the eurozone countries (the EU consists of 27 countries of which 16, the so-called eurozone countries, use the Euro currency as their sole legal tender) and the International Monetary Fund agreed to a $145 billion loan to Greece, conditional on Greece's implementation of harsh austerity measures including increased taxes, pay cuts and other reduced government spending.

Approximately one week later, Europe's Finance Ministers approved an extensive rescue package worth almost one TRILLION dollars in an effort to assure financial stability across Europe.

My Thoughts About the $145 Billion Loan to Greece and the One Trillion Dollar European Rescue Package

My thoughts are as follows:

1. a large chunk of this money will be going to Greece and other European countries so that they can repay their loans to the banks, including American banks, who lent the money to Greece and other European countries in the first place. Does saving the banks sound familiar to you?;
   
   
2. very little of this money will ever find its way into the hands of the working men and women of Europe who are in need of help. On the contrary, the people in Greece and other European countries can fully expect increased taxes of all sorts, pay cuts and reductions in spending on government programs designed to assist the people;
   
   
3. reliable sources have estimated that anywhere from $100 billion to $300 billion of the one trillion dollar rescue plan will come from the United States central bank, the FED (refer to my September, 2009 commentary on the FED). Apparently, we have so much excess money that we can help bail out European countries and European banks. Or, is the real story that we are actually bailing out American banks that made ill-advised loans to Greece and other European countries?;
   
   
4. it never ceases to amaze me that our esteemed financial leaders think that more borrowing and more debt can solve problems that resulted from too much borrowing and too much debt in the first place;
   
   
5. the $145 billion loan to Greece and the one trillion dollar European rescue package will buy a little time but, in the end, will fail to achieve real long-lasting results.
   
   

Reactions of the Greek People to Proposed Austerity Measures

The Greek people, like many other European people, have a lengthy history of protesting, sometimes violently, actions of their government. As a result of the proposed austerity measures (pay cuts, tax hikes, etc.), as many as 50,000 Greek striking workers and public servants took to the streets in early May, 2010 in protest. Three people were killed, a bank was set on fire and petrol bombs, stones and sticks were hurled at riot police. Expect more of the same, as an increasingly frustrated and impoverished populace seeks redemption for the injustices that they believe have been heaped on them by their governments and banks.

What is the Future of the Euro Currency?

The Euro is the second largest reserve currency and the second most traded currency in the world after the U.S. dollar. As such, it has tremendous importance in terms of conducting the world's business.

In late 2009, the Euro was worth approximately 1.50 U.S. dollars. By mid-May, 2010 it was worth only 1.23 U.S. dollars, a reduction of 18%, due to the deficit and debt problems in various European countries.

There are rumblings that the Euro could fall to parity with the U.S. dollar which could lead to the following humongous problems:

1. a disintegration of the EU and the Euro with member countries, currently using the Euro, deciding to return to their own national currencies;
   
   
2. a renewed focus on the weakness of the U.S. dollar as the various states of the United States face problems of a much greater magnitude than those faced by the countries comprising the EU.
   
   

What does the Economic and Financial Landscape Currently Look Like in the United States?

Outlined below is a PARTIAL list of the difficulties that we, as Americans, are currently facing:

1. April, 2010 unemployment rates of 9.9% (U-3), 17.1% (U-6) and 22.0% (SGS) with the 22.0% rate being the most realistic;
   
   
2. the United States posted a budget deficit for the 19th consecutive month in April, 2010;
   
   
3. American bank JP Morgan Chase alone has a total derivatives exposure larger than the world GDP;
   
   
4. total federal, state and local government indebtedness in the United States is now over $120 TRILLION;
   
   
5. the 50 U.S. states have $5.17 TRILLION in pension obligations of which over half is unfunded;
   
   
6. 33 of the 50 U.S. states have drained their jobless benefit funds;
   
   
7. the FDIC insurance fund was in a deficit position of $21 billion at the end of 2009. With the 72 additional banks closed so far in 2010, it is conservatively estimated that this deficit is now around $40 billion;
   
   
8. nearly 40 million Americans are enrolled in the food stamps program;
   
   
9. food prices jumped by 2.4% in March, 2010 - the most since January, 1984;
   
   
10. the PBGC, the government entity which insures private pensions, is in a deficit position of as least $22 billion as of 9/30/09.
    
    

What do I Expect to Happen in the United States

What is now happening in Europe adds credence to my positions set out in my July, 2009, October, 2009 and February, 2010 commentaries. I am repeating these positions again in this commentary for ease of reference for all readers. They are as follows:

1. the U.S. dollar's loss of status as the world's sole reserve currency;
   
   
2. a reduced (perhaps dramatically reduced) standard of living for the citizens of the United States;
   
   
3. extremely high prices and/or shortages for the basic necessities of life such as food, medicines, medical care, gasoline, oil, natural gas, propane, etc.;
   
   
4. a dramatic collapse in the value of U.S. Dollar denominated paper assets such as savings accounts, U.S. Treasury debt (bonds, notes, bills), U.S. Agency debt (Fannie Mae, Freddie Mac, etc.), corporate bonds, state and local bonds, etc.;
   
   
5. much higher prices for "hard assets" such as commodities, precious metals, etc;
   
   
6. continued deterioration in the prices of residential real estate and a STUNNING COLLAPSE in the prices of commercial real estate;
   
   
7. uncertainty with respect to the pricing of common stocks. In a normal hyperinflation, common stocks should skyrocket in price. In this case, any escalation in common stock prices might only accrue to companies involved with precious metals and, possibly, other commodities and energy;
   
   
8. much higher interest rates, possibly reaching the teens or higher;
   
   
9. additional bankruptcies of both large and small companies;
   
   
10. unemployment rates that exceed the 25% - 30% seen in the 1930's Great Depression;
    
    
11. outright collapse or substantial impairment of public and private pension plans such that individuals will not be able to count on the pension payments that they had expected in their "golden years;"
    
    
12. significant alterations to all entitlement programs funded by the U.S. Federal Government, especially Social Security, Medicare and Medicaid. The bottom line will be a substantial reduction in benefits for almost everyone;
    
    
13. a disproportionate negative impact on the "middle class," which is the backbone of an economically sound country;
    
    
14. secession movements by states which will be somewhat similar to the breakup of the Soviet Union in 1989;
    
    
15. increased protests, crime and violence, possibly resulting in the institution of martial law, as U.S. citizens become more desperate due to loss of jobs, homes, investments, pensions, etc;
    
    
16. increased reliance on various barter systems whereby like-minded individuals trade needed goods and services with each other;
    
    
17. a possible war (there are numerous flashpoints throughout the world) and/or swine flu outbreak which would serve to distract Americans from their dire economic circumstances;
    
    
18. a possible "bank holiday" in which all banks are closed for an undetermined time so that new bank rules can be imposed, weak banks can be closed, etc.
    
    

Actions that You Can Take to Defend Yourself and Your Loved Ones

1. Don't believe the "spin" that things are getting better! This will only encourage you to overspend and/or spend on the wrong items at a time when you can least afford to do so;
   
   
2. make sure you secure fixed (not variable) rates of interest on any debt you have. This will protect you from the coming higher rates of interest;
   
   
3. try to locate additional part-time opportunities to earn income as your full-time job just might evaporate in the months to come. Especially focus on part-time opportunities that have the potential to become full-time opportunities;
   
   
4. if possible, have a few months of cash available in a safe place outside of the existing banking system in the event a "bank holiday" is declared;
   
   
5. if possible, have a few months of non-perishable food supplies, medicines, and other necessities available in the event of any significant disruption in our "just-in-time" distribution system;
   
   
6. if you have any discretionary investment funds available, consider purchasing a few gold and/or silver coins from a reputable dealer;
   
   
7. lock in prices, wherever you can, for items such as heating oil, propane, natural gas, etc.;
   
   
8. establish relationships with like-minded friends and relatives so that you have a strong support group to see you through the difficult times;
   
   
9. be prepared to defend yourself and your family. Desperate people will do desperate things during desperate times;
   
   
10. above all, THINK FOR YOURSELF! Don't let anybody else think for you.
    
    

Closing Thoughts

"The way to crush the bourgeois (middle class) is to grind them between the millstones of taxation and inflation."

- Vladimir I. Lenin (Russian revolutionary and communist politician)

"From that time on, the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."

- Alexander Fraser Tytler (18th century historian & jurist from Great Britain)