There was a remarkable graph on Bloomberg today. It just “flashed” by as background to a “Talking Head” statement.
I’ve not found that particular graph (yet…) online, but did run into another graph about as good.
The difference? The one on Bloomberg was about a decade long. It showed Greek bank deposits slowly rising, then dropping, having a “bob up” and then the last couple of years just being a hard drop. This one is shorter term, mostly showing the drop (but not the context).
There is also a very well done report with many more data points on all of Europe here:
There is a lot in that link, and well worth the look / read. I’m going to link to a couple of the graphs here, but realize this is just a ‘taster’ and not the whole meal…
What is the core problem?
What is the Keynesian Fix?
What is the effect in the Markets?
As investors globally vote with their wallets…
Can you say “Run On The Banks”?
It looks like Spain is starting it’s ‘roll down’ so I’d put it as ‘next up to bat’ after Greece.
So what happens when these graphs are extended forward? Since there is very little in the graphs to indicate that the policies in use have had any effect in changing the trend lines, what happens when they are extended to their logical end?
The Central Banks own all the debt as the commercial banks end up with no deposits. Euro debt rises until the lenders will give no more. The borrowers are repudiating “austerity” and any action that will result in repayment of the debt.
When that point is reached, Greece pretty much must exit the Euro. Folks are “voting with their wallet” that any Greek deposits are not “safe”, even in Euros. Banks with no deposits can not make loans. They are insolvent and collapse. This can be propped up for a while by the Central Banks, but pretty much only if that bank can expand the balance sheet to cover ALL national debt. Government can continue to spend as long as it can print (even if the economy is in the dumper and tax revenues are down) but the Euro Monetary Union rules limit the ability to print…
So there is only one way out of this that I can see.
Greece must leave the EMU zone. That, then, lets the government print drachma and it lets the Central Bank expand the balance sheet at will. The only other path, economic growth from limited government consumption of the net national wealth (i.e. “austerity”) has been taken off the table by the voters; and depositors have seen the writing on the wall and “The Money has left the building”…
Also of interest is that a lot of that money looks to have wandered off to France. One can only wonder what will happen to those deposits now that France has elected a Socialist who wishes to do more of the same policies in France that caused issues in Greece, Italy, and Spain.
One bright note:
Despite an ugly looking Central Bank loans line, Ireland has stabilized due to aggressive addressing of the problem. The private deposits leaving Ireland has stabilized “lately” but still does not look so good. One would like to see an upturn in that line.
Play it forward
What happens AFTER Greece leaves the Euro?
Well, looking at those graphs, and considering the NINI problem in Spain is getting worse, not better: Once Greece gets relief by blowing off their lenders, Spain and Italy can’t be far behind. That, IMHO, will so stress France and Germany that the Euro Zone will need to have a breakup into North, where some small countries will “hang on” around Germany in a Euro; and a South, where each country will return to their own currency and the “Inflate to forget” solution to excess debt. Less clear to me is what France will do. I could see it sticking in the Euro until things get much worse, possibly several years.
That kind of instability will ripple around the world, but will benefit the US Dollar. How much will depend on our next election. If Obama wins, we take a hard core turn to unfettered Socialism as he will have no more elections to face (and has stated he intends to act with a freer hand after the election). If the Republican wins “it will depend” but we will likely get a more austere “government spending” play ourselves and a stronger dollar. (It depends on which Republican wins – the convention isn’t over yet – and on what happens in congress…)
As Germany is the only engine of growth in Europe to speak of (and enjoys advantages from the Euro structure) it would likely cease that function in a Euro Zone reduction. A destabilized German economy is “not good” either.
All in all, it looks to me like a worse “mess” is baked in the cake and there is no way out (other than ways that neither the people nor their governments will even think about; and may be psychologically unable to recognize. Perhaps they can be talked into a vacation in Austria…)
It really is amazing to me how much power a consensus in ‘broken beliefs’ can have. Destruction of entire economies and destabilizing of the world. All it really takes to “fix it” is to limit debt to less than long established safe levels.
Government debt less than 80% of GDP (and preferably as close to zero as possible) and with a long term trend around zero; rising in recessions AND falling in time of surplus.
Annual Deficits average of zero over 5 years.
Tax take under 18% of GDP.
Mortgages with 20% down.
Markets allocating capital.
Why that is so hard for the world to learn is beyond me…