If you ask me, there's a growing sense that this time around it's different. There is an odd expectation that we've come to the end of our economic road. It's as though between Europe, Japan, and the USA that we've kicked the debt can as far as we can get away with.
Like the story of the Emperor's Cloths there's no denying that the obligations of so many nations are too large to think they can be met. There's no believable logical plan that squares away the liabilities using realistic revenue and growth projections. I think the experts know it and most ordinary people, without any economic or accounting knowledge and just plain common sense, know it too.
Recently Moody's stated publicly that schemes being considered to "modify" Greece's debt would constitute a "default." It reminded me of the expression, "putting lipstick on a pig." There's just no denying the pig.
The debt problems around the world are like a tinder box ready to be ignited by a spark - an event that causes the world to declare one debtor nation in default. The flames of default will be fanned from the PIIGS to Japan, burning a giant path of financial destruction. It would be an event for the record books. What shall we call this historic economic catastrophe? Surely the Great Recession is to weak, and besides, that was declared over. While it may technically be a "Double Dip" that hardly seems a sufficient or worthy monicker. There was WWI and WWII so maybe labeling it The Great Depression II is appropriate. I kinda like the idea of calling it what it will be, The Great Default.
The part that's confusing is that while everyone's insolvent, we have different mechanisms for forestalling the seemingly inevitable. In the USA, congress can spend money that it doesn't have by telling the Treasury, which is like America's banker, to just lend it the money (as long as congress let's them) and the Federal Reserve can print (I'd like to say "out of thin air") all the money it needs to buy the Treasury's debt and thus fund the government. Whereas, in the case of Greece and other insolvent Euro countries they have to borrow from responsible bankers who follow rigid guidelines and formulas to calculate and limit how much a country can afford to borrow. And, after they've effectively lent the country that amount the bankers then proceed to make up ways to let the countries borrow many fold more than the country can ever hope to repay. The mechanisms are different but in the end it is the same story of ridiculous unsustainable debt.
There is lies the $64 trillion dollar question. When does sustainable debt become unsustainable? We've gotten away with unsustainable debt for so long that the phrase is becoming an oxymoron. (Pause to think about that one.)
Maybe not. Maybe the reckoning I've blogged about (and emailed about before I discovered blogging) and that real economists and writers have written about is finally and inexorably at our doorstep. Gosh I hope not! Just because I write about it doesn't mean I want it to happen. Frankly it scares the heck out of me!
But back to the purpose of this post. I'm looking for a name. What will we all call this historic collapse of world debt? Again, I say call it what it is. After all, if our failure to face financial realities is largely what got us all in this mess, then it seems proper to begin to solve our problems by admitting to ourselves and everyone the insolvent entities we've become. As such, the most suitable name for the event that marks our coming awareness of this historic moment is The Great Default.
The thing about a default is that the debts go away, but the debtors and creditors do not. Portugal, Ireland, Italy, and Greece are not going away. Neither is Belgium, Sweden, Denmark, Spain, Japan, or the USA. Assets can be shifted around, but countries can't be. So what are Germany and France going to do when Greece defaults? Recently economist Andrew Lilico wrote an article that appeared in The Telegraph, and which I've linked to, entitled "What will happen when Greece Defaults." Andrew's article is a succinct blow-by-blow rundown of the way you'd think the dominoes should fall and while I agree with him we all know that things seldom go exactly according to plan.
I wonder if any self-respecting and reputable economist has conjectured in a readable white paper the way it might play out if what I've dubbed The Great Default where to happen, say next week or so? If one of my few but highly worldly and intelligent readers (brown nosing blog style) has come across such a document please direct me to it in a comment to this post..
It seems to me that the Great Default may play out a bit like a game of Monopoly that the players don't want to end. When I was a kid we used to play that game quite a bit at my friend Seth's house. In our little make believe world of high finance "The Banker" would just dole out more money. This would happen until the Bank was out of money because the one of us with all the money never wanted to give their money back to the bank. I'd have to agree that he analogy between a played out game of Monopoly and the world's debt crisis is an over simplification. By the same token, there is a natural yearning to find a simple way out of the mess we've gotten ourselves in.
Why the yearning? To answer this question I return the point I made above about why I hope I am wrong about the need to call this The Great Default or any other thing. The yearning for a simple solution is because the thought of it really happening it terribly frightening! If we look past the mechanics of the economics and consider the likely social and individual consequences, the realities that matter the most on a human scale are very hard to think about.
Ultimately, if you're an optimist like me, you have to believe that we'll work our way out of this and come out the other end stronger for it. So I am sure we'll find a way to kick the can over the wall and find ourselves on whole new open stretch of road to go down!
