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希臘:圖窮匕見: End of the Line July 6, 2015

Posted by hslu in Economics, Global Affair.
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It was a long drama playing out on the world stage for everyone in the world to see.

It was a text book case of failed western capitalism.

2001:Greece joined EU by cheating on its book and hiding its national debt, federal deficit and budget systemically for many years with the help of none other than Goldman Sach. Greece enjoyed many years of prosperity as Greeks became rich immediately as their Drachma was converted to Euro.

2009:Over the years after joining the EU, Greece failed several times to meet EU’s economic and fiscal benchmarks. Global financial crisis finally exposed Greek’s deep rooted trouble as the country unable to pay the interests on its national debts. A rescue plan was needed.

2010:IMF bailed out Greece with €20 billion emergency funding in exchange for Greece government’s economic and pension reforms. It was designed to keep Greece in the EU and to revive Greek economy. But, just like all previous cases when IMF was involved in rescuing other financial troubled countries, Greek economy promptly shrunk by a whopping 25%. Unemployment skyrocketed to 25+%. The mounting Greek national debt made Greece even less able to service the debt.

2011:   Creditors of Greek loans were forced to take a hair cut after Greek banks borrowed an additional €90 billion from ECB under Draghi’s Liquidity Assistance program. In essence, the IMF, ECB and EU, the so-called Troika, encouraged the Greek government to borrow more money as a way to solve a national debt that Greece already couldn’t pay in hundred years. What IMF, ECB and EC did was effectively asking EU members to suck up the loan losses in order to keep Greece in the EU. The tactic was doomed to fail because EU and IMF leaders tried to use a political solution to solve a financial problem.

2015:   Greek’s leftist Syriza Party won the election because Greeks were fed up with 6 years of recession and high unemployment. Syriza’s Alexis Tsipras was swept to power because of his uncompromising rebellion against the austerity programs imposed by EU, Germany and IMF. His uprising is a serious blow to one Europe which all European leaders wanted so desperately to preserve despite its serious and deadly flaws.  No the anti-EU referendum was passed by 61+% of the Greek citizens, the Troika has no other option but to come to the negotiation table and figure out a solution soon.

What’s going to happen next?

1.   Is the Troika going to take a collective  slap on their faces, swallow their pride and take a hair cut on loans to Greece? But in exchange for what; more austerity?

2.   Are the leaders of Troika going to stand their ground, dig their heels and yell out of their lungs to the majority of the Greek people: “Take your referendum and shove it?”

The first option is a no-no because other debtor countries such as Spain and Italy, will ask for the same thing. The second option isn’t practical because Greece will leave the EU which may be followed by other countries after Greece devalues its currency, weathers the storm but revive their economy in a few years. EU will then begin a long process of disintegration and cease to exist in a decade or two.

I think that in the end Greece will stay inside the EU. A hair cut of 30+% will be agreed upon. Greece still won’t be able to service the debt let alone paying off the principles of the loans.

In a few years, we will have the same drama again. By that time, it will be Spain or Italy

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Soro, German and Euro September 10, 2012

Posted by hslu in Economics, Euro, Global Affair, Politics.
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In an FT interview, Soro asked German to lead or leave Euro.

http://www.ft.com/intl/cms/s/0/7d4a9490-fa71-11e1-93da-00144feabdc0.html#axzz262XJALjL

I think Soro got it backwards.

German IS leading Euro to a long term solution by first bringing high debt and less productive countries; they know who they ate, in line with the rest of the European Union countries.

Soro asked German to leave because he didn’t like the way German, or shall we say the majority of the German people, is leading the European Union.

On the other hand, may I ask you, Mr. Soro: if Greece, Spain and Italy leave EU, will EU be even better off?

The answer is a unqualified “Yes.”

Beside, Mr. Soro, have you thought about this? If German leaves EU as you’ve suggested, the next paymaster “Is it France?” will ask the same thing from Greece, Spain or Italy, because no one wants to work his butt off supporting Greeks who get to retire at 55 with full medical benefit and most of their pre-retirement salaries.

What do you have to say? I don’t think you’ll like what I say here though.

Communism is dead. Socialism is in Turmoil. Is Capitalism next? December 3, 2010

Posted by hslu in Economics, Global Affair, jobs, Politics, Taxes.
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The root cause is human’s selfishness.

Communism is Dead.

Why should I work harder if guys next to me who don’t  don’t work as hard get paid the same as I do?

If you do not believe me, just ask anyone from China before capitalism was allowed to flourish starting in 1985.

Socialism in Turmoil.

Why should part of my hard earned money goes to some one who sits on his or her butt with hands out all the time?

If you do not believe just ask any tax payer from Germany who is asked to bail out people in Greece and Ireland. Unfortunately the United States is moving to become a socialist country.

Capitalism is Dying.

Capitalism is struggling to win supporters in the US if it is allowed to police itself like it did before the mortgage crisis. Capitalism also caused the bust of Internet bubble in 2000 and the subsequent recession that followed. In short, capitalism is the root cause of the boom and bust cycle that we have endured since the early 1920’s.

In the end, the rich got richer and the poor became even poorer before the cycle repeats itself.

If you do not believe me just ask anyone who has been on the unemployment line for the past 99 weeks.

 

 

 

 

 

PIGS and US National Debt May 10, 2010

Posted by hslu in Economics, Global Affair, Health Insurance, Obama, Politics.
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Everyone is talking about PIGS these days.

The PIGS countries got into trouble by borrowing too much to keep their socialist countries going. Greece’s situation is particularly worrisome and it needs an immediate financial bailout to avoid defaulting on their loans. Greece’s national deficit has soared to nearly 13% of its GDP; much higher than the 3% limit demanded by EU as a condition for Greece to join EU.

EU came up with a $146 billion rescue package in early May but the financial market got more nervous than before. Yields on these countries’ bonds soared and DJIA dropped nearly 1,000 point in a matter of minutes. Although it might be a technical glitch with respect to  circuit breakers on other exchanges in the world, it nonetheless showed the market was very nervous about the situation.

Now that EU has agreed to a $1 trillion rescue package over the weekend, it has bought some time for PIGS countries to resolve the near-term problem on a orderly fashion.

Well, the problem is not over because the debts are still there. But how much debt are we talking about? Let’s take a look, shall we?

Portugal     $286 billion                 86% of its GDP

Italy             $1.4 trillion                 118.6%

Ireland        $867 billion                78.8%

Greece          $236 billion                121.4%

Spain              $1.1 trillion                66.9%

Let me throw in the United States and see how big a hole Obama and Democrats have dug for Americans?

U.S.                 $14 trillion                  ~93%

Hmm, the United States isn’t much better than the PIGS countries because the level of debt will go up even more once national health insurance takes effect in a couple of years.

The only difference about the United States is that the US can print as much money as necessary to pay for its debts. PIGS countries can not.

The day of reckoning for the United States is coming.

Euro Zone Financial Crisis – Portugal, Italy, Greece and Spain May 10, 2010

Posted by hslu in Economics, Global Affair, Politics, Taxes.
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Euro Zone Financial Crisis – Portugal, Italy, Greece and Spain

Under US law, when a company declares bankruptcy, its common stock holders lose all their investments. The preferred stock holders have to wait until the bond holders get their shares of the bankrupted company. The losers are: company employees, the stock holders, the preferred stock holders and bond holders. The company restructures its loads, layoff some employees and becomes leaner and hopefully meaner. If the company’s CEO and officers are capable of running the company, watching its spending, emphasizing the quality of its products and stepping up customer services, the company most likely will come back a stronger company in the future.

Some companies in the same sector will suffer some setbacks on the stock market, the stock market as a whole will take a break, digest the information and moves on. The bond holders will take some write off and offset the lose. It company stocks will come down to reflect its loses. In time, the stock may recover if the loss turns out to be a minor one. If the company can make more money from other portfolio to offset its lose on their investment on the  bankrupted company, the stock will recover soon.

The countries are no different than companies.

Take a look of PIGS countries: Their combined GDP is about $3.6 trillion, about 1/4 of that of the United States. Their combined total debts are $3.9 trillion or about 110% of its combined GDP.

Portugal

GDP    $230 billion

Debt   $286 billion

Italy

GDP        $1.75 trillion

Debt       $1.4 trillion

Iceland

GDP     $12.5 Billion

Debt    $5.3 billion

Ireland

GDP     $229 billion

Debt   $286 billion

Greece

GDP     $350 Billion

Debt    $236 billion

Spain

GDP     1.47 Trillion

Debt   $1.1 trillion

These countries’ problems are high federal deficit, high national debt and lack of adequate revenue to pay for its loans and government programs. In other words, these countries are on the verge of risking bankruptcy. If they can borrow enough money to get over this time, the crisis can be avoided easily. But the problem is other countries do not want to lend them money unless they put their house in order. Other EU countries such as Germany and France do not like to lend money to Greece unless Greece reduces its annual deficit to a more manageable 3% limit of its GDP (currently at 13+% of its GDP.) These countries (and IMF if have to) have enough money to lend money to Greece then the crisis can be avoided.

Now, let’s see what’s going to happen if Greece is allowed to default on its loans. The losers are European and American banks and financial institutions who have lent money to Greece. These companies will lose their investments in Greece but economies in other PIGS countries continue as usual. The damage can be contained. Stock market will suffer temporary setbacks then moves on. Citizens of Greece, of course, will suffer and they have to go on with fewer benefits and higher taxes so that Greece the country can pay the interests on its loans. I think Germany and France are using the emergency loan as a bargaining chip to force Greece into cutting its spending and bring its deficit to a lower level.

Iceland has already bankrupted and nothing really happened because the size of its GDP was too small to make any dent on the financial market. Portugal’s economy is smaller than Greece’s and if it defaults on its loans, the problem is not too big for the financial market to absolved its impact.

Spain’s unemployment rate is 20% and its unemployment rate for young workers is a staggering 40%. Their deficit is about 11% of its GDP. Their economy is in recession and is not diversified enough to recover from the crisis if it defaults on its debt. As such, Spain’s financial crisis is more problematic.

Italy is in the same boat but its condition isn’t as bad as Greece’s because its economy is more diversified. Once the world economy recovers, the financial crisis will ease too. Italy’s economy is more diversified than Spain’s which means that Italy has more ways to collect tax to pay for its debt and services. Their deficit is about 12% of its GDP, much higher than 3% required by E. U. If Italian politicians can reduce its deficit to a more manageable level, they should be able to get an emergency loan from Germany, France or Great Britain and the crisis can be avoided.

All these countries’ problems are rooted in socialism. When economy is booming, the onset of the financial crisis is pushed into the future and politicians will not tackle this problem (entitlement) unless they don’t want to be re-elected. When economy slows down and stays in recession, the government can not collect enough tax to pay for the entitlement programs and to pay for the interests of its debt.

Now let’s take a look of DJIA which has gone up almost 70% since March 2009 low; from ~6500 to ~10926. The market is looking for any excuse to take a breather and financial crisis at Greece is as good a reason as any. But I do not think the drop will be higher than 20% from its current level.

One thing we do have to worry about is this: what if all PIGS countries default at the same time? If this is allowed to happen, the impact could be too large to handle by the financial institutions. The stock market will suffer a bigger lose for sure. But, ask yourself this question: will E. U. countries sit on the sideline and let this happen at the same time? I think the answer is no.

Let’s consider the possibility of a big inflation in 2011. First of all, let’s stipulate that inflation will not be a big problem in 2010. The economy has just started to show some sign of live. Unemployment rate will stay at 8% and higher for the balance of 2010.

Many people have said that inflation will be a problem in 2011. This will happen if the Fed governors sit on its collective butt and keep the interest rate at current depressed level as economy recovers. We know the Fed will raise interest rate once the recovery gains solid footing in the coming months. The Fed will also withdraw liquidity from the economy to minimize the possibility of a high inflation.

Let’s take a look of gold which is a good proxy to inflation. Gold price has been hovering between $1,050 and $1,150 for the past 6 months. If inflation will be a problem soon, gold price will react to it and move to a higher level from this range.

Of course, I do not know how effective Fed’s action will be in its fight to rein in inflation. I certainly don’t know whether inflation will be a big problem a year from now. I will pay attention to the financial market, gold prices and Fed’s action as economy recovers. Unemployment rate will stay high for another year or nine months. In the mean time, inflation will not be a problem until companies starts hiring.

Greece is facing possible Default of its National Debt January 29, 2010

Posted by hslu in Economics, Politics.
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Greece is facing possible debt Default

Greece’s national deficit is 12.7% of its GDP. The government has been rumored of facing default of its debt and there are talks of possible bailout from its European neighbors. Walls Street took note and dropped 1.1% yesterday. Greece adopted Euro in 2001 and European Union requires its member to hold its deficits below 3% of its GDP. If Greece defaults, there may be serious consequences and other countries in Europe such as Spain, Italy and Portugal may face the same fate.

Greece’s national debt is 113% of its GDP. United State’s debt is not too far from that level currently about 85% of its GDP. While interest rate is low, interest payment is not a problem; currently at 8% of its revenue. When, not if, interest rate starts to climb as economy recovers, interest payment will eat up a bigger chuck of United State’s revenue: income taxes (45%,) social security taxes (26.6%,) Medicare taxes (9.4%,) corporate taxes (12%,) license fees (3%) and other sources (4%.) (Source: Fiscal year 2008.)

The trend of mandatory spending is sure to go up as a percent of US GDP. As interest payment increases, discretionary spending will have to come down.

I can’t image what this graph will look like in 3 years if inflation comes back with a vengeance.

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