The “little” guy’s solution to global crisis

Europe is about to save one more time the Greek government from defaulting on its debt. To understand the implications of this decision is good to look back at how similar ones have fared in the last three years.

From the get-go I have to say that talk about QE3 in US and European QE version worries. What is the point? The other two cash “floods” did not exactly solve the problem. But assuming that Europe goes ahead with own version of QE and that the US implements QE3, the only result I see out of this is more cash available to transfer the losses from the private sector to the public one, i.e. more of the same. We will continue like this until the private sector is free of “toxic assets”.

However as we have seen in the case of PIIGS there is a catch. In this process the private sector receives sovereign debt. And now the private sector owns a claim on governments with balance sheets full of “toxic assets”. What should the “market” do in this situation? What the “markets” do best: punish governments for bad investments and force them to pay more and more for the cash needed to finance their investments in “toxic assets”. In some cases even “demanding” default. Of course default should be one solution but now governments are playing the ” too big to fail card”.

I hope you saw that I referred to markets in quotation marks. To me there are no markets at play in that transaction. It is a “deal” between governments and the banking sector and now the banking sector is hiding behind the “markets” concept. The talk is always about “markets” demanding higher yield or “markets” demanding cheaper funding. But there are no markets involved here. Only primary dealers of big commercial banks funding debt of countries that they know are in big trouble. Afterwards they turn around and ask for cheaper funding from central banks to increase their profit margin on those bonds.
When things do not go their way they tighten the screw a little bit by increasing the CDS of those troubled countries. In the meantime the real private sector has to struggle in an environment where banks blame the global crisis for not lending and governments blame big deficits for higher taxes. Ironic isn’t it?

In 2008 governments made a decision and saved the “big guy” instead of the little guy. Today both governments and “big guy” (banking sector) are in trouble and look to be saved by the little guy.  This solution comes in the form of high taxes and soon high inflation.

There is another way. Both governments and banking sector should own up to their part of the deal. They are always asking the consumer/tax payer/borrower to do it and when it does not, there are clear repercussions. What I mean here is a debt restructuring/reduction for Greece. Once the loss is accepted and accounted for Mr. Market can move in and do what it does best: allocate resources efficiently throughout the global economy.

In the first group are the S&P 500, FTSE 100, DAX and NIKKEI 225 1 yr charts. There are two interesting things to point:

1) QE2 had no effect (started in Nov 2010)

2) the drop in Aug 2011 triggered by the Greek crisis will not be reverted even if that is solved. The recession talk will take first stage.

Finally, below are the 3 yr charts for S&P500, FTSE 100 and DAX. To me it is obvious that money thrown at the global markets since April 2009 had little effect. In fact I expect the last remaining effects to be lost in the months coming up as we are entering the second recessionary period in this crisis.

Sources: Bloomberg and Market Watch


2 thoughts on “The “little” guy’s solution to global crisis

  1. I see the “market”, bondholders, and CDS payers, like a sort of circus. Because as far as i know most of the CDS payers are not bondholders, they just make a bet, and as I’ve seen on the BIS statistic the biggest increase in the amounts insured outstanding in the last 2-3 years came from the hedge funds, which usually aren’t bondholders. And they were made mostly against the states, and not against the companies :). So … it’s a little bit freak this situation we got into. For me is like at some point in the past a selling machinery convinced some guyz that betting against high debt-to-GDP ratio by paying the CDS can be a deal, you have a small downside with a big upside potential.

    This doesn’t mean the Greeks don’t need to change everything they are, it’s just funny how the media talks about the market, the CDSs, and how much the bondholders ask to buy their debt, in the same context.

    The state and the banks were always hand-in-hand. It’s been like this ever since the ancient age, and I have no hope that something will change during my lifetime, in this respect :))).

    As far as I know they wanna restructure the debt, they have a plan to exchange some of it, to increase the maturities, in 2013, something alike. They didn’t accept, in the end, or what happened?

    And, yes, I hate higher taxes too, this is how all the empires collapsed: high debt => higher taxes. Seams to be the right track :))).

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