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European Economy in Dire Straits, and the US Too. How So, Why So?

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One theme of the European financial crisis is governments going ever further into debt just in order to get by for a little longer, with the plan seeming to be to face the music later (riiiight), while keeping one's fingers crossed that the economy will have somehow sorted itself out by then.

Spain is suffering from a truly crushing housing bust that is still playing out (and which will continue to do so for a long time).   It is also suffering from very high unemployment and a stalled economy, and has compounded all these problems by piling up an astounding amount of new debt over the past year:   Spain regional debt is up 22% to $176 billion.   Debt levels for Spain's cash-strapped 17 semiautonomous regions have soared 22% over the past year, the country's central bank said Friday.

A near two-year recession after a real estate bubble collapse has left Spain with swollen regional and national deficits, a stalled economy and 22% unemployment.   In addition, many regions are facing severe cash-flow problems and are having to delay payments to suppliers.

The European Central Bank (ECB) has been heavily involved in buying Spanish bonds.   The interest rates that Spain would otherwise have to pay on its bonds would undoubtedly be a lot higher given the grim state of its finances.   But for how long can and will the ECB continue to buy Spanish bonds?

Portugal is still in trouble, and the government has (quite worryingly for the precedent it sets) raided private pension funds to help balance the books:   Portugal's deficit falls were helped by a one-off measure:   Portugal's budget deficit will likely fall to below 5% this year from 9.8% in 2010.   The problem here is that this sharp drop is largely due to the transfer to the Treasury of 6 billion euros ($7.8 billion) in private banks' pension funds!   Portugal is being leaned on heavily by the international banking community and has decided to raid the pensions of --get this! -- four of the largest private banks in Portugal.  

Portuguese bond yields are down from their crisis highs of 20% (2-year) and 14% (10-year), but again not enough to count, as they are sitting at 15.6% (2-year) and 13.1% (10-year), levels that are unsustainably well above the current (and falling) rate of GDP growth.

Our poster child for the entire Eurozone mess is of course Greece.   And quite predictably, a trickle of bank withdrawals has turned into a flood.   From The Guardian: "Greeks fearing collapse of eurozone bailout pulled record sums from bank" (Dec. 16, 2011)

An unprecedented exodus of capital from Greece (a record number of withdrawals from banks in recent months) has exacerbated the liquidity crisis now wracking the recession-plagued country.   The latest figures released by the Bank of Greece reveal that in September and October alone investors pulled 12.3 billion euros from domestic banks, spurred by fears of political uncertainty and economic collapse.   Overall, outflows have reached a record 25% since September 2009 -- when household and corporate deposits stood at a peak of 237 billion euros.

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Theodore Pelagidis, an economics professor at the University of Piraeus, put it this way:   "This is part of the death spiral of the recession as a result of austerity measures.   People realize that contagion has come to banks and they are very afraid of losing their deposits.   On average around 4bn-5bn euros in capital flees the banking system every month."   It's not just the super-rich behind the flight of funds.

It's now "game over" for Greece.   The market is "predicting' a nearly 100% chance of default on Greek bonds even as the bankers and Eurocrats squabble over the prospect of raising the haircut on Greek debt from 20% to 50% (i.e. reducing the value of Greek bonds by up to 50%).  

The ECB is interfering heavily in the bond markets of various countries in their attempts to keep things going.   But they've apparently tossed in the towel on Greece, as evidenced by the Greek bond yields above.

However, when we note the ways in which the Spanish, Irish, and Italian debts have come down off their highs, can we make sense of why the ECB focused their efforts there?   Sure, that's easy, and the BBC has put together an extraordinarily helpful interactive chart to make it all crystal clear.   That interactive chart can be found here.  (Scroll down.)

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To begin with, what the chart is showing by the width of the arrows is how much money each country owes to the banks of other countries -- the larger the width of the arrow, the greater the amount.

Of particular interest are the charts for the UK and the US, which make clear why these two countries could never be allowed to fail, for fear of the worldwide economic catastrophe it would cause.

The main point that these charts graphically and beautifully demonstrate is that every country owes hundreds of billions to banks in every other country.    And like the leeches they are, the banksters will continue to bleed us for as long as they can, collecting interest due them, until the entire system comes down.   And when our house-of-cards economy finally collapses (assuming we let that happen), they will snatch up its pieces at bargain prices, and build a new economy, leading to a world in which their wealth and power is even greater than before, while all the rest of us in the 99% will be every so much poorer and desperate.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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