Wall Street WARZONE

Niall Ferguson Warns “Europe’s Original Sin” — Ignoring Massive, Rising Debt for Too Long — Will Trigger “Big-Fat Greek” Collapse … Here in America!

by Paul B Farrell, JD, PhD
| | 5/13/2010

The Journal calls it “Europe’s Original Sin,” a Faustian tale about the EU selling its soul to the Devil, a coverup about how Europe’s “National Leaders Ignored Greece’s Soaring Debt for Years.” But wait, no, Europe did not get the idea of massive deficit-financing from America, looks like they thought it up all by themselves, with no prompting:

Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country’s finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules. Though the European Commission and the U.S. Federal Reserve are examining a controversial 2001 swap arranged with Goldman Sachs, Greece’s own budget moves, in clear breach of European Union rules, dwarfed the effect of such deals. … years of overspending, leaving bond investors worried the country can’t pay back its debts—weren’t supposed to happen in the euro zone. 

Well, it did happen, as if willed by Greek Gods on Mt. Olympus. So America and Goldman are off the hook: The “controversial derivative transactions Greece used to help mask the size of its debt and deficit numbers” were small compared to Greece’s failure, for example, “to book €1.6 billion ($2.2 billion) of military expenses in 2001—10 times what was saved with the swap.” 

Not so fast, says Niall Ferguson, a leading financial historian whose works include the recent “Ascent of Money: A Financial History of the World,” “The Cash Nexus: Money and Power in the Modern World,” “Colossus: The Rise and Fall of The American Empire.” Writing in the Financial Times, Ferguson warns that a “Greek crisis is coming to America,” like America started the trend of going deep into debt to finance domestic economic expansion, then the idea gets picked up all over European nations, and now it’s going to backfire on America:

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym ["PIIGS," an for Portugal, Italy, Ireland, Greece, Spain]. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate. … The idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. 

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. … For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008. …

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter. Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”  

As in all Greek dramas, from Sophocles to the Goldman derivatives, the audience sees self-defeating chararacter flaws and psychological traits revealed. National heroes and leaders act like the Gods, then fall from the heavens. But they can’t see what we see. Call it original sin, fate, destiny or just plain arrogance, Greece, Europe and America all share this same trait, and the endgame is closer than you think: As Ferguson summarized it in an LATimes column, “America, a Fragile Empire: Here Today, Gone Tomorrow, Could the United States Fall That Fast?” His answer is clear and emphatic:

“For centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms … we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted.” We are deceiving ourselves, convinced “the challenges that face the United States are often represented as slow-burning … threats seem very remote.”

No, the threats are not remote: “One of the disturbing facts of history is that so many civilizations collapse,” warns anthropologist Jared Diamond in Collapse: How Societies Choose to Fail or Succeed. Many “civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” Maybe Ferguson does see the future … the “Greek crisis is coming to America.”

1 Response to Niall Ferguson Warns “Europe’s Original Sin” — Ignoring Massive, Rising Debt for Too Long — Will Trigger “Big-Fat Greek” Collapse … Here in America!
  • istt says:

    But if, in fact, the US goes into a tailspin with the dollar collapsing, wouldn’t the equity markets scream higher, as they did in Zimbabwe? Seems counterintuitive but if your currency fails then won’t tangible assets rise accordingly? This seems to be what the commodity markets have been telling us over the past year.

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