Tuesday, March 2, 2010

The Greece Fiscal Crisis: Throwing Stones at Glass Houses?

When I look at the Greece fiscal crisis I have to ask myself: Are any of us in any better fiscal shape? My conclusion is we are nothing but a bunch of hypocrites!

Lets take a look at the Debt vs. GDP ratios of the world's larger economies according to the Wall Street Journal:

My Take:

Ummm....And we are all different from the Greeks how? Greece's debt versus GDP sits at a shade over 125% versus the USA's near 100% ratio.

Japan takes the cake at a 200% debt load versus GDP. Congrats to the Japanese!

My point here is the Greeks are not in that much worse shape than any other westernized economy.

The reason the Greek crisis is so rapidly intensifying is they don't have a currency that they can devalue in order to help inflate out of their debt. This as a result has increased the perception of the risk that Greece could possibly default. The result of this has made it very costly for Greece to sell bonds in order to fund itself.

Japan would be toast right now if they were in the same situation with a currency like the Euro that they couldn't manipulate.

In a nutshell, Greece is too small to fit into the "too big to fail camp" and is being held hostage by the uninflatable Euro. You could call them the Lehman Bothers of potential sovereign defaults.

What's amusing right now is watching the central banks in the UK and Japan scrambling to not become the next Greece. The British Pound was destroyed today as some speculators believe that England may be next as they continue to suffocate in their own debt.

Folks, let's face it, the sad reality here is we are all a bunch of "Greece's".

Claiming that you are in better fiscal shape here in the USA when your governent debt is 90% vs. GDP versus the 130% debt vs. GDP ratio in Greece is like saying your are at a lower risk of having a heart attack when you are 290lbs versus being 330lbs!

Any sensible doctor would tell you that as a result of being obese, both patients are at a much greater risk of dropping dead from an MI!

The Bottom Line

My big concern regarding the Greece crisis is that investors begin to panic over the sovereign debt worries of several countries all around the world. This could potentially trigger a wild fire as the world realizes that all of the modern economies minus China have the same problem.

The subprime crisis is a good example of watching how one tiny domino can make them all come tumbling down. If the debt spreads begin to blow out on the sovereign debt of several countries like the spreads blew out here in the US with MBS's back in 2008 then we are going to see one hell of a fiscal Tidal Wave!

The dollar continues to hold its gains versus the Euro as we continue to hold our "safe haven" status. My question is why? We are in no better shape then they are.

I mean just look at what we are doing here in the US as this crisis deepens: We continue to spend ourselves into oblivion! The government has shown no signs of slowing down. Just look at the re-emergence of national health care reform in the past few weeks.

This drives me absolutely crazy! Rome is burning and this is how Washington reacts.

Has anyone in Washington taken notice that tax receipts have fallen off a cliff? Some states are reporting a 30% dropoff! Obama's response? Let's spend a trillion more on health care(hand slap to my forehead).

Why don't these people in Washington get it? BTW, I blame the Republicans just as much as the Democrats when it comes to our Ponzi spending.

I am going to make a prediction here. Two years from now I believe the Greeks will have a better debt vs. GDP ratio than the US because Europe will force them to clean up their act.

If you are playing the markets be careful trading currencies right now. I still maintain that there will be a watershed moment where the world loses faith in all currencies. Notice that gold has started to rise again as the concerns around the world's fiscal status continue to rise.

Now does this mean I believe that all currencies are doomed? No. However, in order for investors to have faith in our currency down the road, we will be forced to dramatically cut spending and balance our budget which will then trigger an even more brutal depression than what are are seeing today.

As a result of all of the insanity in the markets, I believe that investment hedges to currencies will continue to emerge in energy, commodities, and cheap infrastructure in case TSHTF. If you question this belief, then ask yourself why Warren Buffet took the majority of his cash position and threw it all into a railroad.

Natural Gas

My alternative long term play to gold is natural gas. Keep in mind here folks that when I say long term I mean long term as in lock it up and throw away the key.

The way I see it, as financial desperation and a lack of jobs sets in as our fiscal crisis intensifies, Obama will eventually turn to natural gas.

I have done some research in this area and the amount of jobs this could create is stunning(I have seen the numbers). On top of that, it gives us the opportunity to get off of our expensive oil addiction with a much cheaper fuel alternative that we have huge abundances of.

The switch over to natural gas cars is not difficult. In fact its actually pretty easy. The one downside is the lack of infrastructure but this will eventually be worked out.

Natural Gas has run up a tad here so I would wait for warmer temperatures and a pullback before you jump in. I am still waiting for a lower entry.

This investment could take a long time to payoff but in my view its a no brainer within the next 5-10 years.

I will close with one last thought on natural gas. Exxon and its hundreds of billions in cash reserves has made only 1 aquisition since 1999. What did they buy? A natural gas company for $30 billion.

Disclosure: Long gold via GLD. No Natural Gas holdings at the time this article was published.


getyourselfconnected said...

Hey Jeff!

My major complaint about the whole "Greece sucks" line is the scale of the debt; Japan and the US dwarf Greece many fold and that is what the core issue is.

Great to read you!

Anonymous said...

big oil is not going to get cut out

Jeff said...



Nice to hear from you. I agree. I guess the bigger you are the harder it is to take you down.

Crazy times

Jeff said...


100% agree. The arabs are toast IMO. $10 per cubic foot of nat gs sure beats $80 a barrel for oil.

economessed said...

By my yardstick, we are as worse off as Greece if we add in the liabilities of Fannie and Freddie (which we are pretending we don't actually backstop).

I guess if we are going to fail, we might as well fail big, and give ourselves free health care, more road projects, more unfunded wars to secure cheap oil, own a few automobile manufacturers, and ensure bankers lifestyles are not encumbered by pay cuts.

As long as the credit card still gets accepted, there is no stopping this binge.

We're never going to pay it back, so who the hell cares -- gimme!

Anonymous said...

"My major complaint about the whole "Greece sucks" line is the scale of the debt; Japan and the US dwarf Greece many fold and that is what the core issue is."

Actually, the issue is a bit more complicated than that. There is an extra risk premium in dealing with Greece in that they have a tendency to go banana republic from time to time.

Up until the 1980s coup d etat were common. One group (with the support of the military) would go in, sweep everyone and their policies out the door and hit the reset button.

Its been a bit more stable recently, but even as late as 2001, a coup was avoided thanks to some drastic amendments to the nation's constitution.

Now, the sabre rattling of old has restarted once again. Thus, its hard to justify investing in a country when a new govt could get swept into power and decide "we arent paying this" or "we arent paying that". Clearly, the US & Japan dont have those sorts of problems.

Jeff said...



I agree

Many are saying the healthcare reform is not about health care.

It's all about bringing in tax revenue into the government in order to keep the game going.

The losses in tax revenue are stunning due to the recession. This is the easiest way for them to increase their revenue.

Watching this country get destroyed is very sad.

Jeff said...


Thanks for sharing the history of the Greeks.

I didn't realize how unstable their past was.

The news out today makes it sound like they are really trying to get their fiscal house in order by slashing their budget.

The dollar is getting crushed as a result.

Interesting times.

getyourselfconnected said...

I appreciate the greece stroll through memory lane and that is a factor but come on, banana republic or not Greece is in the hole for like 2 months worth of FED MBS buys for crying out loud.

Anonymous said...

Jeff - no problem. I was lucky enough to live there for a while & learned alot. Interestingly, the coups are peaceful its pretty much ingrained into their style of politics (hence the risk premium). Its quite strange.

Get - thats fine, and yes Greece is a drop in the bucket compared to the US, but thats not the issue with the risk premium now is it?

Look back at the premium charged on Greece even way back in 1999 (back when no one really cared that much about debt). Even then, the world markets were tacking a risk premium onto Greece far in excess of its relative debt to gdp ratio.

Thus, the whole "Greece sucks" line is coming primarily from those who are investing in it and pushing the spreads so high.

Think of it this way, if your firm personally had 10B to invest in Greek or US debt, which is more important to you in assigning a risk premium:

(a) the place that has a massive amout of debt, far far bigger than anywhere else in the world, but has (thus far) paid everyone back in full


(b) a place that has miniscule debt but has a history of not honoring it, and has already burned your firm say 2 or 3 times in the last 35 years?


Anonymous said...

Or think of it this way. Say the US suddenly got fiscal religion. Started paying down its debt at a furious pace, pushing debt to gdp down to say 50 or even 25%.

Lets say too that the US got so manic about debt, it came out and said "yeah, um, were just not going to pay this debt or that debt because its too hard and will take too long under our new get tough on debt position".

In that case, despite its very healthy looking balance sheet, I can guarantee you the risk spreads on the US would shoot up so high it would make Greece look like a saint!

jeff said...


The bottom line here is we all are a bunch of Greeks.

The markets will eventually get it. When does this happen? Who knows.

We all know the market can be irrational longer then you can stay solvent.

Anyone buying this market at this point is just asking to get slaughtered.

The jobs number will tell us a lot. Blaming the "weather" on a bad number is just another form of denial for the bulls.

Interesting times!

Anonymous said...

Anon - its a disappointing answer isnt it?

What you have very effectively shown, and what you are trying to get the doomers to admit is that this one single solitary data point, this one tiny speck does not point toward doom in the US. Instead, all you get is "youre wrong", or at best, "it doesnt matter, were all going to hell anyway"

What you are trying to do does not sit well on this blog you see. The rule here is Jeff trots out post after post, and we are supposed to say. Right again Jeff, this too is another sign of doom, another home run!

It doesnt matter that 90-95% of his posts are good...You just showed Jeff struck out on this one. The score is now 99-1 in favor of doom. This cannot stand - it must be 100-0 at all times.

If you are looking for an honest discussion, where SOMETIMES everyone comes around to the answer "this single point of data does not suggest doom"...if you are waiting for someone to give you an unqualified "perhaps you are right on this one", you are wasting your time. This is a blog filled with creationists, and you are trying to point out an evolutionist answer - they will never ever agree with you.

Just FYI

Anonymous said...

"Anon - its a disappointing answer isnt it?"

Well, I dont know if I would put it the way you did in your response, but yeah it is a bit irritating.

I am no economics whiz, but I knew this was the one time when I actually had the answer and could contribute what I knew was the case.

I havent been here that long, but I have perhaps noticed a bit of what you are talking about. Perhaps I should look elsewhere for a more intellectually open discussion as to the outcomes of this whole debacle.


getyourselfconnected said...

twin anons,
plenty of time I have disagreed with Jeff and plenty of time he has made counterpoints to idea on my site; certainly not group think.

The US has never defaulted, but then neither has Russia (they renegotiated). The US has "renegotiated" two times this century via currency devaluation.

I will have a post on this later but what I was trying to point out is the massive scale of US debt makes any chance of a default a major event where a Greek issue, as you noted they have had a few pre-1980 or so, is not much to make waves. The US now has a compressed risk pyramid due to the FED taking very risky assets onto their balance sheet.

Anyways, enjoy the homerun and thanks for the info.

Jeff said...

"You just showed Jeff struck out on this one. The score is now 99-1 in favor of doom. This cannot stand - it must be 100-0 at all times."


Just to make it clear I am always open to all viewpoints.

I can't help what people comment on.

Also, yes I am going to swing and miss with some of my posts(very badly at times) although I am not sure how I was proven wrong here :)

I enjoy all feedback positive and negative.

The goal of this blog is to find solutions to this didaster.

I know many view this place as gloom and doom but I really just try to tell it like it is and be realistic.

I also understand that I cannot change the "gloom and doom" perception of this place.

Since starting THTB in 2008 my supposed "doom and gloom" stance has saved me a lot of money. I was completely in cash or short when the crash hit.

Go back and read the posts. They are there to review.

On the flip side this view hurt if you took this approach in 2009.

The way I see it I am still way ahead of the game because I cashed out when the DOW was near 14,000.

If I see better policies coming out of DC my sentiment will change.

Right now I just don't see it.

Either way, I hope everyone gets something out of my posts.



getyourselfconnected said...

My post on "Compressing the Risk Pyramid" is up and open to all non gloomers.

Web said...

Thanks for sharing the history of the Greeks.