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The Daily Reckoning | Monday, May 17, 2010 Greece's default history and the hemorrhaging Eurocrat economies, There's plenty of oil out there...at $200 per barrel, Plus, Bill Bonner on the "Krugman relief" and the deep Do-Do horizon... No Cure for Sovereign Default A historical look at an incurable economic disease Eric Fry Reporting from Laguna Beach, California... What happens when the fix is in, but nothing gets fixed? This troubling question has vexed the financial markets for the last several days. One week ago the Eurocrats amassed a $1 trillion war chest (of borrowed money) to "fix" the Greek debt crisis and stabilize the euro. Seven days into the mission, the Greeks are as bankrupt as ever and the euro has tumbled to a new four-year low. The European Central Bank - like British Petroleum - can't seem to figure out how to contain the mess they made, much less how to clean it up for good. Just like the crude oil gushing out of BP's underground well, Europe's sovereign debt crisis continues to gush out of control and threatens to wash up on the shores of Italy, Spain and Portugal. One week is not enough time to judge the success of the ECB's $1 trillion "Euro Defense Plan," but one week is plenty of time to judge its failure. This $1 trillion fix did not fix anything. It merely annoyed short-sellers for a couple of days and inspired enthusiastic gold-buying. Rome wasn't built in a day, of course. So we should not expect Athens to be rescued in a week...or ever. The country's fiscal condition is beyond repair. Either Greece slips into the Mediterranean, figuratively speaking, or the euro does...or both. Borrowing $1 trillion to fight against the consequences of excess debt does not seem like a winning strategy. In a worst-case scenario, the ECB will exhaust its cash, credit and credibility trying to save Greece...and will destroy the euro in the process. Best case, the "fix" will persuade a few Wall Street strategists that the "worst of the euro crisis is over" and will suck a few more suckers into the European sovereign debt markets before the situation gets REALLY ugly. And it will get ugly...one way or another. Many investors behave as if sovereign defaults are like polio: eradicated forever. These investors are half right. Polio has been eradicated. Greece may not actually default, depending on the rescue measures that come its way. But Greece is already bankrupt. The creditors to Greece should understand that history is not on their side. In fact, the creditors to every sovereign borrower should understand that history is not on their side. "While a European sovereign default has appeared inconceivable in recent history," a recent Wall Street Journal article observes, "defaults and debt re-schedulings were actually a common feature of the European financial landscape throughout the nineteenth century and up until the end of World War II, according to the economists Carmen Reinhart and Kenneth Rogoff. "Greece has defaulted or rescheduled its debt five times since gaining independence in 1829, the economists wrote in their paper 'This Time Is Different,' published in 2008 and recently expanded into a book. Spain has the lead in Europe at 13 times since 1476. Germany and France have both done it 8 times, while the UK has never done it since William the Conqueror invaded in 1066. "Greece has existed in a 'perpetual state of default' since its independence," the Journal concludes, "having spent 50.6% of those years in default or rescheduling, easily tops in Europe. Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times." Governments default. That's what they do. They tax; they squander the tax revenues; they default. This is the established unnatural order of the governmental world. The Greek crisis may be the first sovereign debt debacle of recent times, but it won't be the last. The Daily Reckoning Presents Three Mile Island for US Oil David Galland Willie Shakespeare may have summed it up best when, borrowing the voice of King Richard III, he penned "A horse! A horse! My kingdom for a horse!" History is replete with examples of how, but for the proverbial horse, kingdoms have been lost. My reference point is an accident that will almost certainly lead to tragic miscalculations and havoc down the road. And, I might add, an exceptional opportunity for the patient and attentive investor. It has to do with an impending shortage of easily accessible (read: inexpensive) oil to quench the insatiable thirst of the United States. It's also connected to the inroads the cash-rich and geopolitically ambivalent Chinese - among others - have been making in building strategic relationships, and making direct investments, with the world's major energy providers. With only so much oil to go around, every new off-take agreement signed by the Chinese with the Saudis or Venezuelans, for example, is a net loss in supply to other bidders, notably the world's largest energy consumer, the United States. That the Chinese, and other countries, are aggressively securing long- term energy arrangements, coincidental with what appears to be an official US diplomatic initiative to actively offend all the major energy producers, makes the securing of US-controlled reserves and production critical. The problem with cheap oil can be seen in the chart here. And it has been confirmed in a recent report issued by the US military, conveniently summarized by DailyFinance: "A recent Joint Operating Environment report issued by the US Joint Forces Command suggests that the US could face oil shortages much sooner than many have anticipated. "The report speculates that by 2012, surplus oil production capacity will dry up; by 2015, the world could face shortages of nearly 10 million barrels per day; and by 2030, the world will require production of 118 million barrels of oil per day, but will produce only 100 million barrels a day." The US needs secure oil sources, and "on the double," as a military type might say. And so the pressure has increased for the US government to remove its actual and effective regulatory bans on offshore drilling. While it's more smoke than fire, the Obama administration recently made a tentative step in that direction - because even though its most ardent supporters may hate the extractive industries, Team Obama is not stupid enough to think that the energy gap is going to be closed by solar or wind power anytime soon. Which brings us to the lost horse in this drama - the messy sinking of an oil rig off the coast of Louisiana, resulting in a spill of about 5,000 barrels, or 210,000 gallons, a day into the Gulf. It is estimated that it could take a month or more to cap the well. The damage caused by this untimely sinking will extend far beyond wreaking havoc on the wildlife - the real importance is that it hands the luddites and enviro-fanatics just the ammunition they need to thwart the expansion of offshore oil drilling. It is the equivalent of the accident at Three Mile Island, which set the nuclear power industry back for decades. And that means precious time lost, and a near certainty that America will find itself hostage to the oil-producing nations in the years just ahead. That, in turn, means higher and higher prices, and hundreds of billions of dollars flowing overseas. Which, in turn, means a persistently high current account deficit, adding yet more weight to the pressure building on top of the US dollar. Even if the US were to adopt the equivalent of a war footing in its quest for new offshore discoveries, the size of our steady demand assures that any new finds would still be insufficient over the medium to long term. If the military's assessment is even close to being on target - with global shortages appearing in four short years - then even the most urgent action taken today would prove woefully inadequate. But the US is not adopting anything remotely close to urgent action in the quest for new oil supplies. Quite the opposite. The administration and its well-meaning but ill-advised allies are advancing legislation to hinder and penalize virtually all the base-load power providers. And thanks to the poorly timed sinking of the Deepwater Horizon rig, the opponents of "dirty" energy have been provided with a powerful weapon to be used in challenging all new offshore drilling initiatives. How to play it? First and foremost, you'll need to be patient. Oil prices aren't going to skyrocket overnight, and the base-load power industries - oil, coal, gas, and nuclear - will still have to struggle through the coming onslaught of politically motivated regulatory hamstringing. Between now and the time that the depth of the nation's energy problem becomes apparent to all, the energy sector will remain volatile. The time to begin buying is when new legislation, coupled with a next leg down in the broader economy and markets, results in an across-the- board sell-off in the energy sector. That will be the time to get serious about building your energy portfolio. Between now and then, your goal should be to learn as much as you can about this critical sector. And don't forget to include the oil services sector in your studies. That sector could be the poster child for "feast or famine." While the sector has bounced off its 2009 bottom, as the inevitable scramble for new offshore discoveries begins, the better-run companies will reward patient investors. Dave Galland, for The Daily Reckoning P.S. A good way to stay in touch with energy and the many opportunities to profit available is with a subscription to Casey's Energy Report, headed up by the hard-charging Marin Katusa in close collaboration with Dr. Marc Bustin, arguably one of North America's top unconventional oil and gas experts. Click here for more. Bill Bonner Path to Economic Recovery Filled With  Lethal Obstacles Bill Bonner Reckoning from Beijing, China... We just stepped off the plane... We'll have to catch our breath and open our eyes before we have anything to say about China... In the meantime, let's look back at what is happening in Europe and America. And we will begin by thanking Paul Krugman, economiste ordinaire at The New York Times. Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we're alone. And far from home. Maybe we're wrong. Maybe we're leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn't what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt. What a relief it was to find Krugman in today's International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we'd have to re-think our position. "America is not Greece," he says. So far, so good. His geography is correct. It is all downhill from there. Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee. The US is running about the same size deficit as Greece; but don't focus on that, says Krugman. The two places are not the same, he insists. Because the US has a "much lower debt level." He's wrong about that. If you add to the US national debt the debts of Fannie Mae, GM, and all the other financial holes, which the government will ultimately have to fill, the crater is about 120% of GDP - the same as Greece's debt. "Even more important," he writes, "is that we have a clear path to economic recovery." Oh. Where's that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles. There are now nearly as many people relying on the US government for food as the entire population of Spain. There are about as many people unemployed in the US as the entire populations of Greece, Portugal and Ireland...combined. And there are as many people who have gotten negligible income gains as...well...the entire population of America. Without more income, how can Americans increase spending? Without more spending, how can the economy really grow? The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend. And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can't tell the difference. But government spending generally produces negative real growth. Nevertheless, Krugman explains that IF the economy improves...and IF the administration cuts deficits...and IF the new health care program doesn't cost more than the Obama team says it will - heck...everything will work out just fine! With a few tax increases, of course. Then, he tells us that, yes, over the long run we're going to hell in a handcart. But that problem can be solved by a "combination of health care reform and other measures." Finally, he's right about something. Enough 'other measures' and you've got the problem licked. What other measures? Well, the deficit is now at about 10% of GDP. So, all you've got to do is to cut spending by 11% of GDP and you've got a surplus. Let's see, where are we going to cut $1.4 trillion dollars? That's cutting out 100% of the defense budget. And 100% of Social Security too. And if you don't do that...you get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you're Greece. What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They'll think that the US can borrow as much as it wants for as long as it wants... In The Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is "zero." He says deficits don't lead to trouble. The US has been running deficits since the '70s, he points out. And look at the Japanese, he adds. They've been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they're still able to borrow at practically zero interest. Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn't. A man jumped off the 65th floor of a skyscraper. As he went by the 11th floor, the secretaries heard him remark: "All right so far." The US is all right so far. So is Japan. And more thoughts... - Deep Do-Do Horizon "Following the Gulf disaster...it will be a long time before any new permits are issued for drilling for oil in the Gulf..." said Rick Rule, at the Family Office get-together this weekend. And this from Bloomberg: Senators from California, Oregon and Washington introduced legislation to ban oil drilling off the West Coast amid mounting concern about the spill in the Gulf of Mexico. "We believe that offshore oil drilling is simply not worth the risk," Senator Dianne Feinstein, a Democrat of California, told reporters today in Washington. The measure would amend the Outer Continental Shelf Lands Act to impose a permanent ban on drilling off the three states. Offshore drilling was banned for decades after a 1969 spill about five miles off the Santa Barbara coast soaked California beaches in a 35- mile long oil slick. In July 2008, then-President George W. Bush lifted the presidential moratorium. Congress allowed its own drilling ban to expire three months later. "This oil spill could destroy the future of offshore drilling," adds our Family Office researcher, Charles Delvalle. "More states will be allowed to decide whether they want drilling offshore or not. And Senators are trying to allow neighboring states to have a 'veto' over any one state's offshore drilling decision. "So let's say Florida wanted to put some offshore rigs up close to Georgia. If Georgia doesn't want that rig up, it can 'veto' Florida's decision." Daily Reckoning readers can see where this is going. Even if the oil were available beneath the sea, the oil industry is going to have more and more trouble bringing it to market. Rick notes that even on dry land, the oil industry is facing disasters. A number of major exporters - Mexico, Iran, Venezuela and Peru - could take themselves out of the export business in the next few years, he says, thanks to their habit of using oil revenues for social/political purposes and failing to invest in additional capacity. This is occurring as the number of cars - and the demand for energy - is exploding. Implication: a higher oil price. "There's plenty of $200 oil," said Rick. Trouble is, there isn't that much $70 oil. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com