Sometimes you have to marvel at the absurdity of the financial universe in which we live.
On one side of the Atlantic, we have the United States of America, which triggered yet another debt ceiling disaster last Thursday when the US government’s maximum allowable debt reset to just over $20 trillion.
Of course, the US national debt is pretty much already at $20 trillion.
(That’s roughly $166,000 per taxpayer in the Land of the Free.)
This means that Uncle Sam is legally prohibited from ‘officially’ borrowing any more money.
But far be it from the US government to start living within its means. Sacrilege!
These guys have zero chance of making ends meet without going into debt.
Just last year, according to the government’s own financial report, their annual net loss totaled $1 TRILLION, and the national debt increased by $1.4 trillion.
And that was in a relatively stable year. There was no major war or financial crisis to fight. It was just business as usual.
This year isn’t going to be any different.
So, cut off from their normal debt supply (the bond market), the Treasury Department is resorting to what they call “extraordinary measures.”
They’re basically pillaging government employee retirement funds, and will continue to do so until Congress raises the debt ceiling.
It’s a repeat of what happened in 2015. And 2013. And 2011.
Pretty amazing to consider that the “richest” country in the world has to plunder retirement funds in order to keep the lights on.
Former US Treasury Secretary Larry Summers said it perfectly when he quipped “How long can the world’s biggest borrower remain the world’s biggest power?”
Then, of course, on the other side of the Atlantic, we have Greece, which is now in its NINTH YEAR of a major debt crisis.
Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss.
Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS.
Right now, in fact, Greece is careening towards another major chapter in its never-ending debt drama.
Just like the United States, the Greek government is set to run out of money (yet again) in a few months and is in need of a fresh bailout from the IMF and EU.
(The EU is code for “Germany”…)
Without another bailout, Greece will go bust in July– this is basic arithmetic, not some wild theory.
And this matters.
If Greece defaults, everyone dumb enough to have loaned them money will take a BIG hit.
This includes a multitude of banks across Germany, Austria, France, and the rest of Europe.
Many of those banks already have extremely low levels of capital and simply cannot afford a major loss.
(Last year, for example, the IMF specifically singled out Germany’s Deutsche Bank as being the top contributor to systemic risk in the global financial system.)
So a Greek default poses as major risk to a number of those banks.
More importantly, due to the interconnectedness of the financial system, a Greek default poses a major risk to anyone with exposure to those banks.
Think about it like this: if Greece defaults and Bank A goes down, then Bank A will no longer be able to meet its obligations to Bank B. Bank B will suffer a loss as well.
A single event can set off a chain reaction, what’s called ‘contagion’ in finance.
And it’s possible that Greece could be that event.
This is what European officials have been so desperate to prevent for the last nine years, and why they’ve always come to the rescue with a bailout.
It has nothing to do with community or generosity. They’re hopelessly trying to prevent another 2008-style meltdown of the financial system.
But their measures have limits.
How much longer do Greek citizens accept being vassals of Germany, suffering through debilitating capital controls and austerity measures?
How much longer do German taxpayers continue forking over their hard-earned wages to bail out Greek retirees?
After all, they’ve spent nine years trying to ‘fix’ Greece, and the situation has only become worse.
For a continent that has been at war with itself for 10 centuries and only managed to play nice for the last 30 or so years, it’s foolish to expect these bailouts to last forever.
And whether it’s this July or some date in the future, Greece could end up being the catalyst which sets off a chain reaction on both sides of the Atlantic.