l'Histoire se répeteOh yes, everyone and their dead uncle has been commenting on Greece’s socio-economic dilemma this week, from the omni-intelligent economist Paul Kruger to billionaire Wilbur Ross and everyone in between. Since I was on vacation in beautiful downtown Charleston, I had time between morning coffee in the lobby and my beautiful wife awakening to face the day, to read up on Greece’s conundrum and the world’s follies in general.

More than 5 years ago Greece was in the news with the same topic – Being kicked out of the Eurozone for non-payment of debts. Politicians, as they always do until violence becomes unavoidable, rigged some idiotic financial constructions, put up a warning and went on their merry way.  On April 8, 2010 I made the suggestion to buy Greece with the money that came back from bailing out AIG, Freddy Mac and Fannie Mae, just about $380 billion. Of course nobody listened and the Government Zombies started kicking the cans down the street. A month later Wall Street was still riding the wave by pretending that an economy about the size of the economy of the City of Atlanta could really create an impact that would result in chaos.

A year later I wrote about a Trojan Horse called “Forlorn Hope” while European bankers and the IMF continued to hand out money to Greek banks to keep liquidity afloat for the Greek government to pay its employees and service some ridiculously entitling pension plans.

And so time turns to 2015 and once again Greece is on everyone’s lips. Failing a miserable $1.7 billion debt service payment is picked up by the media as a canary in the coal mine and blown out of proportion as if the world has reached doomsday. Pundits come up with a new word “Grexit” to portray horrible death scenarios for the Euro and the Eurozone. In the aftermath of this whirlwind idiocy, Eurozone members such as Italy, Portugal, Spain, even Ireland would probably create another acronym such as Gipsi, and attract a ton of experts to write opinions on why and how all these countries and their historic heritage will effect a Eurozone downfall.

Of course all the saber rattling from last week was just another attempt to confuse the people of Greece and possibly the rest of Europe and the world. Greek citizens did not realize what they were voting for or even recognize the short term consequences of being thrown out of the Euro, such as not having access to emergency funding to pay government workers and pensions. This is not a big deal in my book, but the country would also have to start printing its own currency again, a currency that would not have a lot of confidence initially. As a consequence they would face runaway inflation as a result of high import prices, yet ultimately they would start balancing their budgets on tremendous export opportunities and shaking off the chains of Eurozone imposed regulations. However the Greeks like the idea of the Euro as it attaches them to the modern principles of democracy. It gives them more clout for their money and it is an important political power tool.

So when they voted No last Sunday, they thought they were standing up against Germany’s demand for more austerity if they wanted to get another bail out. But here already is the first problem, Mainstreet Greece never gets the money that the IMF and other European banks have put into Greece. This money goes to overblown government structures, pension plan promises, banks and politicians. Greek businesses have not been able to borrow at favorable rates since all this crap began 7 years ago. Private individuals have not been able to attract affordable mortgages or start up capital. Yet on top of that they have been burdened financially and otherwise by the mountain of rules and regulations that come with a Eurozone membership.

Athens’ new socialist government knows it cannot move away from the rock and the hard place, so they will…. and did…. blink first, knowing that neither Germany’s Merkel nor France’s Hollande could. So Greece submitted a new austerity plan and a thousand promises and as a grateful consequence, the Eurozone will open its 2012 vault of bailout funds and kick the Greek Bankruptcy another year or two down the road.

International Fallout

It did however strike me as funny that in anticipation of the Greek induced renewed global chaos, (USA Today reports: Feds wary of Greece!) the Federal Reserve already indicated last month, that previously published interest rate hikes would possibly end up on the back burner for another cycle or two. Why getting investors and bankers nervous in America as long as the Gravy Train has a printing press in the Caboose? Especially since it also started to rumble on the other side of the globe , with China putting Shanghai’s stock market under Beijing’s control as it closed down trading on 51% of the companies in the Shanghai Composite after it lost $3.5 trillion in paper value over the past 2 months.

It was only a few weeks before that Chinese brokers were opening new accounts in record numbers. From farmers to hairdressers, everyone was itching to get a piece of the action, as the stock market soared. But the Chinese are not sophisticated stock market investors. They have only been at it for a few decades at best. So, they tend to get over-excited in both directions. Lots of moms and pops rush in, hoping to make their fortunes as speculators.

In China, there are more stock market gamblers than there are in the U.S. They often buy too high and sell too low.
So Bejing’s interference in the past week would be “normal” in the eyes of the seasoned investor, yet appalling in the eyes of about everyone else, as it fleeces the ignorants and transfers great amounts of wealth to the rich. In the 12 months leading up to the peak of the recent rally, Shanghai stocks gained about 150% and on June 12 started overheating because the real economy nowhere near reflects this rise. Result? A third drop totalling $3.5 trillion in paper wealth in a very short period of time.

Now to stop this “bleeding” the government unveiled a set of market interventions bigger than Washington’s TARP bank bailout package in the depths of the global financial crisis. Speculator/Investors tend to do dumb things in China or anywhere else in the world for that matter; and so do regulators.

In addition to cutting interest rates and reserve requirements for banks, regulators have suspended trading in a little over half of Chinese shares… eased margin requirements… ordered state-owned companies to buy back their own shares… and ordered state-owned banks to fund those buybacks.

If you do this type of heavy-handed manipulation in the private sector you may end up in jail, but as a government you can do everything you like and get away with it. N’est-ce pas? Beijing even promised investors that the Shanghai Composite will soon hit about 20% higher than where it stands today. Guaranteed, cross their heart, hope to die.

It’s the Economy Stupid

However, the trouble in China has little to do with the stock market. The trouble is in the economy. It is managed, controlled, and centrally planned. The authorities there are under increasing pressure to hold onto their power, their money, and their status.

The result: too much debt and shockingly bad investments.

And China’s feds are using every trick in the book to try to prevent an economic slump – just like in the U.S., Japan, and Europe. This has wide-ranging repercussions as China is the world’s biggest consumer of commodities and close to the world’s largest economy.
Global mining stocks have lost $143 billion – nearly 20% of their value – in the last 10 days. Crude oil prices have fallen, too. Some analysts now say oil will drop as low as $20 a barrel, acknowledging that this is also based on a nuclear deal in the making in Iran, which would open that country’s export opportunities to an already grossly over-supplied commodity.

Fact remains in this connected world, that if China goes into a recession/depression, we should expect, unlike Greece, huge effects on the rest of the world. Greece is only the selected front-line story in a global economy looking for answers on how to deal with debt. Extending annuities and lowering interest rates to the point where money has no intrinsic value, maybe a short term bandaid, but as populations age and smaller workforces need to pay for expanding numbers of retirees, economic growth as an answer to debt becomes impossible. That’s when true chaos will rear its ugly head and politicians are shackled and lined up at the guillotine.