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Economic Reality: Nowhere to Run, Nowhere to Hide, Part 2


The onset of the Global Sovereign Crisis marks a new dangerous phase of the credit crisis.


The reality is that much of the debt in Greece wasn't used to finance productive enterprises but fueled consumption or was channeled into unproductive uses. There are no substantial assets or income from those investments that will help repay the debts. Many countries and businesses face identical problems and now must face and adjust to that painful reality.

As Tyler Cowen, Professor of Economics at George Mason University, observed in a May 21, 2010 opinion piece entitled "How Will Greece Get Off the Dole?" in the New York Times:

…it's a moot point whether Greece is a poor country masquerading as a wealthy country or vice versa. … If the old illusion was that Greece was a wealthy country, the new illusion is that Greece will, in short order, become wealthy enough to pay back ever-growing sums of debt.

The lack of viable policy options is increasingly evident in the panicked reactions of governments. In literature, they all quote Shakespeare in the end. When things go wrong in financial markets, it seems that everybody looking for a scapegoat blames speculators and short-sellers.

Nowhere to Run to, Nowhere to Hide

The onset of the GSC marks a new dangerous phase of the credit crisis. At best a withdrawal of government support (through lower spending and higher taxes) will reduce global demand and usher in a potentially prolonged period of stagnation. At worst, increasing difficulty in sovereigns raising money and a clutch of sovereign debt rescheduling may result in a sharp deterioration in financial and economic conditions. Recent difficulties by Germany to issue debt highlight the risks.

Financial institutions will continue to build up capital and reduce balances sheets, anticipating further losses and write-offs over time, including potential losses on exposures to sovereign loans. Lending growth will continue to be low, reducing growth. Consumption and investment will be below potential.

There's no political will to tackle deep-seated problems. The electorate is unwilling to accept the adjustments and lower living standards that will be necessary. As the credit crisis enters its third year, the scale of sovereign debts means that governments now have limited room to counter any new economic downturn, any new problems or crisis.

The liquidity and government spending-driven rally also caused "bubbles" in emerging markets. There's a risk that the GFC and GSC may morph into an EMC (Emerging Market Crisis).

Until early 2010, markets were "dancing in the streets." Increasingly, another Holland-Dozier-Holland standard also made famous by Martha and the Vandellas is relevant: "Nowhere to run to, baby/Nowhere to hide."

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