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The Daily Reckoning | Tuesday, October 18, 2011 Global stock markets: back to their old, bi-polar self again, “Rich club” nations pile on the debt...a look at where the US stands, Plus, Bill Bonner on misunderstanding revolution and plenty more... ------------------------------------------------------ External Advertisement Retire Overseas! Learn about the world's 6 best places to live or retire. Live well on $30 a Day Own an exotic beachfront getaway for $35,000. Or romantic pied-a- terre for under $60,000. Enjoy fine restaurant dining for $7 per person. Employ a maid or gardener for $6 a day. Buy comprehensive health insurance for $20 per month. Get the details in your FREE report now. The Tip of the Iceberg Looking Ahead as Greece Prepares for the “Mother of All Strikes” Joel Bowman Reporting from Buenos Aires, Argentina... After a spectacular showing last week, stock markets have once more succumbed to spasmodic bouts of deluded optimism punctuated by frightful moments of self-loathing. It’s good to see them back to their old, bi-polar self again. Almost half of last week’s 541-point gain was wiped out in yesterday’s session alone when investors recalled, suddenly, that Europe is still broke; a cold, hard reality that had apparently slipped their minds. “Stocks worldwide were up big time yesterday,” we wrote after one particularly showy single-day rally last week, “mostly buoyed by news that the politicos in Europe had ‘renewed their commitment to talk about trying to eventually come to an agreement’ about how to fix a problem they themselves caused and did not see coming. Or something like that. Bravo.” Don’t buy it, we cautioned, remembering Eric Fry’s words of wisdom: “Bankrupt entities tend to go bankrupt,” said he. “Greece will default...eventually.” “And with it,” your editor added, “will follow a few other chain- linked lemmings. Maybe that list will ‘only’ include an assortment of other PIIGS’ rinds. Maybe it will include the euro itself. Time will tell.” Well, what a difference a week can make. Time is telling, indeed. This morning we woke to learn of the predictably worsening situation in Greece, Europe’s poster child for hopeless insolvency. Reported one newswire: “Greek ships were harbored and garbage rotted in the streets of Athens on Tuesday as angry workers built momentum for ‘the mother of all strikes’ expected to bring the country to a halt in protest against a new package of tax hikes and wage cuts.” The “mother of all strikes” is due to begin, at the behest of unions representing roughly half of the country’s 4 million workers, on Wednesday. It is scheduled to last just 48 hours, although we can hardly imagine protesters punching the time clock on Friday, right in the middle of what would otherwise be a sweet, 5-day weekend. Always keen to get on with the job of getting off the job, some workers have already begun downing tools; rubbish collectors, journalists and port hands among them. And can you believe this, Fellow Reckoner? Tax officials (tax officials!) are getting in on the inaction too. Some have even been spotted in recent days not stealing from people! Of course, without access to tax “revenue,” there’s no way the Greek government can make good on the many and varied welfare promises it made to all those people pretending to work. How can a state redistribute stolen property when the thieves themselves go on strike? Short answer: It can’t. Ahh...Poor Prime Minister George Papandreou. He’s caught between the rock of demands from international lenders on one side and the hard place of social unrest at home on the other. Tough luck, Georgie Boy. That’s what politics is all about; promising more than you can deliver, breaking most or all of those promises and then dealing inadequately and inefficiently with the consequences. It was right there on the job application. It’s part and parcel of the whole scheme, a scheme that leaves Greece — presently — and the rest of the welfare states — eventually — out of pocket and out of luck. It’s easy to make fun of Greece, of course. That’s why we do it. Plus, we’re looking forward to seeing the market there collapse. We haven’t had a cheap vacation to the islands in years. Too many cashed-up flashpackers from the other PIIGS pushing up prices. Thankfully, they’ll get theirs too. Back when the euro was introduced, everybody thought they could skim a little off the top. Spanish shopkeepers larded their prices. Italian politicians promised their workers more benefits than they were worth. The Irish bought bigger houses then their budgets allowed for and the Portuguese...well, they were in on it too, spending their way to a combined debt (government plus corporate plus household) equal to 363% of GDP and quietly hoping their stronger euro cousins to the northeast wouldn’t notice. The whole thing got out of hand, in other words. Now, the Mediterranean markets are begging for a correction...and we’ll be happy to see it come to pass. For its part, Greece will likely be the tip of the iceberg. With a GDP of approximately $320 billion, the Greek economy is less than one quarter the size of Spain’s ($1.4 trillion) which, in turn, is only about two-thirds the size of Italy’s ($2.1 trillion). France weighs in at $2.65 trillion. Germany stands at $3.3 trillion. All are in trouble. Just this morning Standard & Poor’s downgraded 25 major Italian banks and financial institutions, citing renewed “market tensions” and lower economic growth prospects. Meanwhile, Moody’s yesterday warned it may “slap a negative outlook on France’s Aaa credit rating in the next three months if the costs for helping to bail out banks and other euro zone members stretch its budget too much,” according to Reuters. To where does this debt-sodden path lead us, Fellow Reckoner? “No man is an island, entire of itself,” wrote the English poet, John Donne, “Each is a piece of the continent, a part of the main. If a clod be washed away by the sea, Europe is the less.” The passage, of course, is taken from Donne’s “For Whom The Bell Tolls”...and as we recall, it tolls for thee. And that leads us to our guest column for today, penned by David Galland of Casey Research. In his essay, below, Mr. Galland takes a look at how the United States stacks up against the PIIGS. Please enjoy... Why the warning behind this image could... “Forever change the way you think about the stock market... Open your eyes to what you can and can’t expect from the United States government... And even change the ease at which you’re able to buy and sell things... Click the image play button to first learn the warning...and some simple ways to prepare for the uncertain times ahead. The Daily Reckoning Presents Monetary Madness — Is the US Monetary System on the Verge of Collapse? David Galland The US monetary system — and by extension, that of much of the developed world — may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast. Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable! Think again. Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.” That’s because for the last 40 years — since Nixon canceled the dollar’s gold convertibility in 1971 — the global monetary system has been based on nothing more tangible than politicians’ promises not to print too much. Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability. Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.” Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.” Of course, Greenspan and Summers were referring to an overt default — of just not paying — and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too- big tailings pile and taking the monetary system down with it. Importantly, the debt shown in this chart whistles past the government’s unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would quintuple the US government’s acknowledged obligations — to over $60 trillion. Given the role the US dollar plays as the world’s de facto reserve currency — with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks — the dismal shape of the US monetary system spells trouble for the global monetary system. Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS. In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms. Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit. “The debt problems facing advanced economies are even worse than we thought.” The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc. “Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.” Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy. It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system. “Preposterous!” say the lords of finance and masters of all. Is it? Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis — a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system. Regards, David Galland, for The Daily Reckoning P.S. Fortunately for those now paying attention, the collapse of a monetary system doesn’t happen in a flash. It is a progression, like the spiral of water down a drain. Thus, while no one can predict exactly when the downward spiral will accelerate out of control, there is still time to prepare. Dark though the lens may be, this is the lens through which we here at Casey Research view all our investments. Simply, being right or wrong about your investment decisions in the years just ahead will be insignificant if the currencies underpinning those investments shrivel to just a fraction of their current values. The dismal state of the US economy and out-of-control government spending affects every American’s life and wealth. In our free online event, The American Debt Crisis — How Big? How Bad? How to Protect Yourself, five Casey Research experts were joined by guests John Mauldin, Mike Maloney and Lew Rockwell to discuss the potential for a breakdown in the monetary system, and specific ways to protect and build your assets. Watch the video here. Make “Big Oil” pay for your retirement Oil fat cats got rich on $4 gas. Now how’d you like to make them pay you back? This little-known “loophole” let’s you collect up to triple the retirement income most stocks or bonds pay... without touching the stock market... and all while “Big Oil” gets stuck with the bill. Click here now for all the details. Bill Bonner Making Sense of Revolution Bill Bonner Reckoning from Paris, France... Last week, the economy seemed to be looking up after all. No recession. No bear market. No muss. No fuss. But this week started out on the wrong foot. All of a sudden, there was muss and fuss again. Stocks sold off yesterday...with the Dow down 246 points. Oil slipped a little. Gold too. No surprise to us, is it dear reader? After all, we’re in a Great Correction that could be tipping into a worldwide depression. Here’s David Rosenberg with more explanation: The reality is that the United States is still grappling with the excesses created by each of the last two bubbles of 1999-2000 and 2005-06. This is why employment is no higher today than it was at the height of the tech mania 12-years ago. Only 2.1 million jobs of the 8.75 million that were lost in the 2007-09 recession have been recouped. There are more than 20 million people in the total pool of available labor competing for three million job openings — a seven- to-one ratio, which is more than double the historical norm, and far above what would be considered normal even in a garden-variety recession and supposedly we are (were?) in some sort of expansion. A report published by two former Census officials found that given this grotesque amount of excess capacity in the labor market, real median income since December 2007 [has] contracted by nearly 10%. Is it any wonder that confidence surveys are so depressed? And it’s not just the University of Michigan or the Conference Board measures, either. A just-released WSJ/NBC News poll found that more than 70% of the nation believes the US is “on the wrong track” (74% to be exact, versus 17% who think otherwise). In October 2008, at the height of the crisis, that number was 78%. Nice to see we’ve made progress (and remember that the bear market then still had five months to go and the recession lasted another eight months for those who may be lulled into thinking that this is some sort of great contrary indicator). And is it any wonder that the revolt of the popolo minuto continues? As we explained yesterday, the masses are getting restless. They know something is very wrong. Of course, they don’t know what. Or what to do about it. But they know they don’t like it. Bloomberg is on the story: New Yorkers Back Occupy Wall Street Protesters, Poll Shows Occupy Wall Street, the protest that has spread from Lower Manhattan to as far as Rome and Hong Kong, is supported by most New Yorkers, according to a Quinnipiac University survey. Sixty-seven percent of New York City voters said they agree with the protesters’ views, while 23 percent don’t, the school’s Polling Institute said today. Support ranged from 81 percent among registered Democrats to 58 percent among independents and 35 percent from Republicans. By 72 percent to 24 percent, voters said law- abiding demonstrators can stay as long as they want. The protests that began on Sept. 17 have inspired thousands to take to the streets in 100 US cities and on four continents worldwide, according to organizers. Participants say they represent “the 99 percent,” a reference to Nobel Prize-winning economist Joseph Stiglitz’s study showing the richest 1 percent of Americans control 40 percent of US wealth. “Critics complain that no one can figure out what the protesters are protesting,” said Maurice Carroll, director of the Hamden, Connecticut-based institute. “But seven out of 10 New Yorkers say they understand and most agree with the anti- Wall Street views...” The nice thing about revolution is that you don’t have to understand it. It doesn’t have to “make sense.” People don’t need reasonable goals or realistic proposals. Revolutions are like tech stocks. They allow people to believe whatever they want. They can imagine that the revolution will make them all rich...and powerful, too. They imagine themselves retired in Florida...or as the ambassador to the Court of St. James in London. They can imagine that the revolution will make their hair grow and add inches to their most private part. They can believe whatever they want. But beneath the fantasies is a hard truth: the current system no longer works for them. “In France, before the revolution, everybody was trying to get some special privilege,” explained our historian wife. “The rich and powerful always found some way to get ahead. I guess they always do. One had a monopoly on selling tobacco. Another had the right to collect taxes from some area in France. Still another got to sell fine fabrics or import china. Almost the entire aristocracy had been turned into zombies. “The government was broke. It desperately needed money. So it began to squeeze everyone it could. This just made the situation worse.” Meanwhile, the underlying economy was changing fast. While the zombies still controlled most of the land and the government, a new class of merchants and entrepreneurs was creating real wealth. This new dynamic bourgeoisie needed to get the zombies off its back. And more thoughts... The French Revolution began sensibly, with petitions and peaceful movements. The Estates General was convened. Grievances were heard. Change was promised. A great reform was proposed. And for a while, it looked as though France was on its way to becoming a constitutional democracy, like England, with its monarch and aristocracy still with heads on their shoulders, but with reduced powers. It looked like it might work...a peaceful revolution...an evolution towards a better system, one better suited to the needs of the new capitalistic era, with fewer zombies. But it was not to be...the zombies dug in their heels. They resisted change...just like the elite always does. They could no more agree to give up their privileges than the elite in Washington today can agree to give up its revenues. But the show must go on. Entrenched elites do no readily evolve; but history cannot be stopped. The unstoppable force of the Industrial Revolution and the Enlightenment ran right into the immoveable object of the monarchy and the privileged classes. The result? A huge, violent crash. The Committee of Public Safety...the Reign of Terror...and the Napoleonic Wars. *** What’s ahead for the US and other developed countries? We don’t know. But the tax-spend-and-borrow model no longer works. Because these economies aren’t growing fast enough to keep up with the rising debt. Soon, they will be overwhelmed. What then? Will they be able to reform themselves? Will “change” be more than a campaign slogan? What Bastille will be stormed by the mobs? Whose head will roll? We will have to wait to find out. *** Finally, we include a special word of support for Baltimore radio host Ron Smith, who has been a long-suffering reader of these Daily Reckonings for many years. The other day, Ron announced on the air that he is suffering from pancreatic cancer. We wish him well in his fight; we hope to have him as a Dear Reader for many more years. Regards, Bill Bonner, for The Daily Reckoning