The Greek Crisis — A Euro-Splitting Headache or The Greek Depression?

We have seen it many times before in the last couple of years: dark weeks of gloomy economic news day after day — nothing actually fixed in the economy — yet suddenly the bulls explode into the marketplace over a mere glint of sunlight. We have particularly seen the running of the bulls with respect to the euro crisis. A hint emerges that the Greek debt problem will be solved, and the bulls bellow, “Ah, here it is. The economy is saved!” The stock market soars upward for a couple of days…. And then it plunges right back down, often lower than it was before.

Market players get real in a day or two, and a single glimpse of bad news brings the market back down. The hope that appeared for the Greek crisis this week didn’t amount to much — nothing concretely decided, just more words from politicians about what they intend to do. Yet, the market responded like dogs fighting for a scrap of meat under the table. Yes there was some real meat to it, so a feeding frenzy ensued.

The market loves bailout plans. More free money! Let’s party! So, the market goes up whenever the governments of this world offer free money. Europe has just proposed a 1.4 Trillion euro bailout plan. That’s a lot of meat thrown under the table! Or is it? No one has actually thrown it yet. So, the dogs or bulls — whatever they are — are in frenzy over the mere promise of meat.

Volatility of the Stock Market in response to the Greek Debt Crisis is symptomatic of a Depression

If you look at a graph for the Dow Jones Industrial Average during the Great Depression, you’ll see that it showed the same kind of volatility throughout the belly of the depression. The Great Depression did not have a fairly flat bottom but a bouncy one throughout. It had especially large spikes followed by drastic plunges during the months at the beginning of the Great Depression. Look at a graph of the DOW for the past few months, and you’ll see the Great Recession now looks like a mirror image to the start of the Great Depression.

Most of the rises we’ve seen are due to people speculating,  but not about what the economy will do. The market is not prophetic. Rather, they are speculating about what other traders will do in their own speculative positions. The speculators are speculating on the speculators. People are simply gaming the market from one day to the next: a single trader says, “The news out of Europe is good this morning. I know that will make others buy in a frenzy or could. So, I’ll buy today and then sell tomorrow or the next day and capture a quick profit.” There are so many day traders and so many algorythm-based high-frequency computer trades, that the market is more volatile now than it used to be. Most of what you see has nothing to do with long-term INVESTORS betting on the economy and buying into promising companies. The New York Stock Exchange (NYSE) has always been a casino, but is more so now than ever before.

Since the stock market is purely reactionary, it tells us nothing about where the economy is headed. The things I look at to gauge the economy are the overall trends and — even more than the trends — the economic fundamentals that are in place. Debt is still way, WAY too high. The housing market still has a slew of foreclosures to sell off with a high volume of new foreclosures still in the works. Unemployment is stagnant at a very high level. Those are the TRENDS. The FUNDAMENTALS are worse: the government is still practicing a debt-driven policy everywhere you look. All of its solutions are based on expanding debt about as far out as the eye can see. As good architects know, you can’t build a solid structure on a foundation that is not much better than rubble. No one has envisioned a better basis for our economy. No one is even talking about what that would be. Everything is an effort to restore the old economy — to get it going again.

The Greek Crisis Solution — The Darkness at the End of the Tunnel

At least, the changes being talked about now for the Greek debt crisis finally have actual potential to resolve the situation. The new solution is a structured bankruptcy in which the Greeks will, at last, be writing off 50% of their debt IF the plan is approved once the particulars are ironed out. Europe has said it will back this Greek bankruptcy, so it is finally getting realistic in accepting that the ONLY way the Greeks will get out of this mess is to write off much of their debt.

What you, I, and the stock market cannot determine (so this is the darkness at the end of the tunnel) is how writing down that debt will effect the banks and other institutions that hold the debt. The larger institutions, of course, are part of the talks. Still, what happens if they write down this debt and then face the same situation with Spain? Some will have already absorbed all they can with Greece. What about smaller banks that perhaps have not been invited into the talks? Are some already so close to insolvent that they’ll go under? Could a few banks that don’t make it, trigger a cascade that destroys other institutions? For now, things look a little steadier, but the whole structure is still as rickety as an old woman walking on marbles.

Nevertheless, the stock market is ecstatic like a drunken school girl. Those like myself who don’t game the market know that there is very little reality in any of this because it’s way too early to know how it will play out.

There could be a great backlash against this plan in the next few days. It has only been 24 hours since the Greek deal was laid out, and the central bank of Germany is already criticizing the plan. The central bank has noted that the plan “resembled the risky finance methods that triggered the crisis in 2008.” That’s comforting when the plan of salvation looks like the very thing that created this global crisis in the first place.

The Greek bankruptcy part (just insisting on calling it what it really is here) is more realistic than anything we’ve seen in the past, but there is a significant element of the plan that looks like the kind of thinking that created the Great Recession, which is the following: The euro plan leverages the actual money nations give to the eurozone bailout fund 3:1. In other words, the fund will distribute four times the money that is actually in the bank on the belief that the money will all be paid back once things stabilize. What if they don’t stabilize.

Once again, the world is seeking to get out of a debt-created crisis via an enormous expansion of debt. Who pays the debt at 3:1 if the plan fails? European governments will be stuck paying an additional three euros for every one that they’ve managed to cough into the fund, and that will fall back on European taxpayers. So, the portion of the plan that gives a 50% write-down of the debt is realistic (though could create a major problem for some institutions heavily invested in that debt), but the leveraged bailout side of the plan is just more of the same old expansion of debt as a way to try to create economic recovery in the hope that said recovery will make it possible to repay all the money.

What if the recovery just grinds along on the bottom for several years, picking up more and more debt problems like a glacier grinding the valley floor and picking up more and more boulders? There is a LOT of blue sky in this plan.

For further information on the Greek debt crisis:

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