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

By   Follow Me on Twitter     Message Richard Clark     Permalink
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The bad news out of Europe continues unabated, including debt and ratings downgrades, sliding economic growth, and exploding red ink.   It is becoming apparent that many of the countries of Europe have borrowed so much money from the banks of the other countries in Europe, that almost none of it can or will ever be paid back -- not with the ever falling economic growth in these countries, which will worsen as austerity measures are imposed.   In other words, even though the buyers of the bonds of these countries don't yet realize it, the fact is that most of these bonds will never be fully redeemed.   In other words they are toxic junk;   the loans will never be repaid, at least not for anything like their nominal and originally stated value.  

  

 

Most alarming of all is the enormous amount of money that the US and UK have borrowed from banks in various countries around the world.   (See the beautifully illustrative graphs at the link provided both here and below, courtesy of the BBC.   Scroll down to see them.)  

  

 

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Why is this extreme and growing US indebtedness particularly alarming?   Because buyers for US Treasury bonds are steadily disappearing, and those who own them, like the Chinese central bank, are trying to sell what they have.  

 

So who is now the major buyer of US Treasury bonds?   Answer:   The U.S. Federal reserve, which simply creates the money out of thin air, with computer keystrokes, and uses this "funnymoney' to buy our nation's bonds.   But for how long can such an Alice-in-wonderland process continue?

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Much of the hope in Europe rests upon carefully crafted bailouts which in turn rest, precariously, upon assumed rates of economic recovery and growth in order for loans to be repaid, and everything related . . to work out.   However, without those assumed and anticipated rates of growth, such plans will fall apart, and more rescue funds -- or outright defaults -- are in store for us.

 

The Specific Situations of Some of Europe's Basket Cases   (Recommendation to the reader: Except for the "Concluding Paragraphs" at the end of it, skim this section on first reading)

 

Ireland is an instructive case because it entered its difficulties earlier, and it has already received a bailout, and implemented the austerity measures that were meant to balance the equation.

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Unfortunately, the plan is now in tatters with the recent revelation that the Irish economy is slumping more than expected under the twin weights of reduced lending and imposed austerity.   From the Irish Times:   "Ireland's debt rating under threat as economy contracts."

 

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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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