From the Eurozone, which they may start calling "The Twilight Zone," Hamish McRae from The Independent in London, writes:
There will be sovereign defaults in the eurozone, with a default by Greece now inevitable. Ultimately the thing that underpins any country's debts is its ability to raise enough tax to service and eventually repay them. Greece cannot hope to do that. Ireland will be pushed to do so but probably can. I would, however, worry about the long-term credit-worthiness of Portugal, Spain and Italy.
Hamish McRae is the principal economic commentator for The Independent newspaper, but he is also a visiting professor at Lancaster University and a council member of the Royal Economic Society (notice how there's no relation to Harvard University or Goldman Sachs).
McRae has been a financial and business editor for major national newspapers, and has won several awards for his journalistic work. His most recent award was Business and Finance Journalist of the Year in the 2006 British Press Awards.
I just mentioned McRae's biography to let you know this is a very credible source who just said that GREECE WILL GO INTO DEFAULT. That's not in question. Ireland will likely need to take a bailout and, if they do not, will have a problem increasing corporate taxes meaning multi-national corporations will exit and destroy their economy anyway. Portugal, Spain and Italy are all in trouble.
Some analysts say this is nothing new, but that's only because European financial ministers and U.S. leaders realize that everyone is more interested in Bristol Palin going to the finals in "Dancing with the Stars" than anything that has to do with a global economic crisis. For starters, they can understand a person who can't dance can go to the finals, whereas they can't understand that there are other countries in this world other than the U.S.
However, in today's global economy, we are all tied to together and a default in Greece for the U.S. may be analogous to a hangover the next morning. Some brain cells are dead, but we can still function. Only, a European contagion, which is likely to happen if one country goes into default and other PIIGS follow, becomes like a minor stroke. Even though part of the brain no longer functions because of all the dead brain cells, we can still go about our everyday lives with some medication.
The next and final step in a European contagion--London, France, Germany--once those countries have no backstop other than the United States, it's a major stroke and the U.S. cannot function. Finally, with all the Quantitative Easing and spending, we find no money left in our pockets to bail out the Eurozone. The U.S. either goes into default or raises yield on bonds to pay back creditors. Either scenario is bad--like a coma after a major stroke is bad. Like turning off the machines because the patient will have no brain function is bad. At best, interest rates go sky high, few people decide to buy homes, everybody saves money and we move into a recession at least as bad as this one if not worse.
That's how important the Eurozone is to the global financial equation. Let's get something straight--the Fed prints money by purchasing bonds and mortgages, not from the Treasury department but from Goldman Sachs. That money makes Goldman Sachs a profit because they and other banks can purchase mortgages and a lower price and sell them to the Fed at a higher price because THE FED IS BAILING OUT THE BANKS. It's not just TARP. If I could have a penny for every time I've heard "the banks paid back their TARP money," I'd be Goldman Sachs. No, not every bank has paid back TARP but, yes, most have.
Have banks paid back the Temporary Guarantee Liquidity Program that gives them free money? Will the Fed/U.S. ever have those mortgages they bought worth the same amount they paid for them. Probably not unless foreclosed assets can be worth the ridiculously overpriced amount they were worth from 2005 to 2007. Nevertheless, the Fed prints $600 billion after $1.25 trillion to help generate employment; low interest rates to spur the housing market; credit for creditworthy individuals to spend money and other economic events that are not happening.
My guess is that Quantitative Easing II developed when the Fed realized they would need about $600 billion channeled to Goldman Sachs to give to the IMF to bail out Ireland and the rest of the European countries that need bailing. It's in this manner that the Fed channels money to Goldman Sachs and other investment banks to push up stock prices; propel securities markets like the Commercial Mortgage-Backed Securities market and continue to help large banks hold enough capital reserves for all the crappy loans they have.
But, how long can one throw money at a problem and expect it to go away? And, how long can we live in a nation of "Haves" and "Have-Nots" before we funnel the money to create an equitable society based on a normally functioning economic process--not one based on financial engineering from the many graduates of Harvard Business School.
How long will the people of the world be able to cope with a system that calls for long-term unemployment and sluggish economic growth before the next panic sends the stock market plunging towards a proper price/earnings ratio.
The excuse for Ireland to take the bailout was that they may do it to curb panic in the market. Really? You're that confident in the fiscal soundness of your country, but you'll take the bailout just so the markets don't panic. Believe me. They have a reason to panic, and that excuse for taking a bailout is one of the main reasons for their panic.
It's time to come clean. It's not just about insolvency of U.S. banks or Irish banks or state governments or some European countries. This is global insolvency and the more money printed, the less valuable it becomes for all of us.
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