'Relatively quiet?' I can almost hear you gasp, 'How can he say that?' Well, 2009 and 2010 (and 2011, so far) did not see any massive acute financial shocks. We have had three years of real depression though. Part-public-owned banks have been under government pressure not to be too hard on mortgagees who are getting behind in their payments, which is partly behind a surprisingly low level of foreclosures/repossessions (it would be much higher if the banks were applying their rules more stringently). The housing markets in North America and in Europe are still 'soft,' with some air in the still-deflating bubble apparently yet to escape and house prices still heading downwards ('They must be near the bottom by now,' we've all been saying for a couple of years, but prices just keep on falling). Demand for building materials (gypsum, cement, steel, glass, concrete and the rest) has plummeted, causing real hardship to our industry. At the same time, inflation has reduced the spending power of families and caused costs to go up for business.
Treasuries have resorted to printing money (or the modern equivalent, buying bonds) in order to create money to shore up the markets and have kept interest rates at astonishingly low levels for several years now (er... wasn't cheap money one of the causes of the last bubble?). Government make-work programmes do not seem to have made much work and instead governments are relying on the private sector to create jobs (but demand is so weak out there that the jobs just refuse to be made and stay made).
Added to this toxic mix of stagnation and inflation now comes the next crisis: Default season.
The Greek government has borrowed 139% of its annual GDP, in order to spend on things that - it transpires - it cannot afford. This is like a guy who's on $40,000/year borrowing $55,600 from the bank. It's going to take that guy a long time to pay off that debt. The problem is, the guy is still spending more than $40,000 each year, and the bank wants to charge him a punishing rate to continue borrowing. The less likely he looks to be able to pay off the debt, the more the bank wants to charge him. It currently costs 26% of the loan value for Greece to borrow money for two years. Jeepers!
The good news for Greece is that the EU is willing to bankroll its debt, but this is only putting off the moment when it finally says 'Enough is enough! Back to the Drachma!' Some say it is impossible for Greece to crash out of the Euro, but the UK chaotically dropped out of a Europe-wide currency agreement when it was booted out of the ERM in 1992. Never say 'Never.'
The debt dealers are already hiking the interest rates on money borrowed by Italy, Belgium, Ireland, Spain and Portugal. In fact, the cost of money is already spiralling upwards for all countries, as the countries in the maelstrom spiral downwards into the abyss under a hail of ratings downgrades. As George Osborne, UK Chancellor said only yesterday, 'We are not immune to the instability on our doorstep.' Nobody is.
What, we must ask, does this mean for the world's largest economy, the USA? Well, the US has its own debt problems: The country owes $14 trillion - about the same as its GDP (see usdebtclock.org for a jaw-dropping illustration of US debts). Political in-fighting means that the country could technically default on its debt in early-August (the government has to have permission from Congress to borrow more than a 'debt-ceiling' and it is very close to the ceiling right now). Even the prospect of a technical default would send the ratings agencies (which, when they work well, are just risk-rating machines) into a frenzy. A country doesn't have to default to be more likely than it was yesterday to default. Expect the ratings agencies to start to act as we get closer to the US default deadline. Paradoxically, those ratings downgrades will make it more likely that the US will default (since the interest that it pays on its debt will mount up even more quickly). Whatever the debt ceiling eventually agreed, there is no early prospect for US debt to start falling (or its growth to start to decelerate). This could be a long hot summer for us all.
