As America readies itself for the selection of the Republican presidential nominee (as we ponder who is the real conservative and whether Cain is being setup or whether he really did have inappropriate dealings with so many women) and the upcoming 2012 elections and as we concern ourselves with the lack of American jobs, Occupy Wall Street and the massive bailouts of American business and banking, we seem to be unaware of another financial crisis that threatens the survival of the entire world’s economy.
This real economic disaster looms in the very near future. In fact, as I write this, France is warning of revolutions, other European countries are talking about war and the European Union states that we have a mere six days to address the problem. The “problem” is that Greece, Italy, Ireland and Portugal face imminent financial collapse which would bring down the global economy like a house of cards. In a peaceful era in which we stopped worrying about European wars and concentrated on fighting a war on terrorism, we may just face another situation that may bring us to the brink of another world war and financial collapse, very similar to the precursors noted before World War II.
Most historians find the motivation for World War II in the huge war reparations that were placed on Germany as part of the treaty that ended World War I. Germany was never able to repay these debts and many of them had to be forgiven. This German financial crisis coupled with a worldwide economic depression fueled the dissatisfaction that allowed for the rise of Adolph Hitler who promised to restore Germany to its previous state of power, prestige, and military might. In the process, he promised to punish the world economic leaders (interpreted as banks and further delineated as the Jews). The need to forgive debt is where this all becomes much too familiar along with the current hatred of banks (one common theme in the Occupy Wall Street protests).
It is important to realize that there are dramatic similarities to the circumstances of today and those of the pre-World War II crisis, although the reasons for the crisis are somewhat different. Nevertheless, the parallels are enough to cause concern and warrant our full attention to finding a solution to our problems.
As noted above, this is the problem: Greece is on the brink of financial collapse along with the other countries. Greece and Italy are both near the same levels of debt –approximately 180% of their annual income. (Source: www.guardian.co.uk)
A proposal was made by creditors to forgive 50% of the debt which would bring these countries to approximately 120% debt to income ratio by 2020. So, with colossal debt forgiveness and another ten years of time, the country would not yet be solvent. This course of action, naturally, does not correct the problems of the other nations that face collapse.
Where will the help come from to help these countries? Many sources have been recommended and sought already, but the bill is staggering.
…the European Stabilization Mechanism (ESM) to replace the current European Financial Stability Facility (EFSF). This alphabet soup mainly had to do with how the EU manages its books. The practical result, though, will be a massive fund of $1.3 trillion (940 million euro) in lending power to throw at weak EU member financial troubles, far more than the $400 billion funds currently uncommitted in the EFSF (an additional $200 billion has already been doled out with decent results to Ireland and Portugal, and not so effectively to Greece). This likely will assure markets there is enough capital to contain the problems in the weaker euro countries, but it only adds to a greater problem all the Western economies are facing: the debt supercycle. (Source: www.aljazeera.com)
This kind of money is being sought from many sources, including China which says that it wants more details concerning the bailout before making a commitment. Germany also created (perhaps the most dangerous) situation. If Germany creates the bailout of the EU, they could very well take over controlling taxes, health care and various other aspects of sovereign governments in Italy, Greece and other European Countries. This scenario threatens to revive the long standing hatreds that have led to European wars for centuries and could lead to another war with Germany.
Now enter the International Monetary Fund which seems to be prepared to help with a bailout. The problem is that the United States is one of the largest contributors to this fund, currently underwriting about 17%. Should the IMF assist with a trillion dollar bailout, that would mean that American taxpayer money investment would amount to approximately $170 billion. This means direct taxpayer money, not additional printed funds. Either way, this is not a good plan for an already strapped America.
There are examples of worse debt to income ratios in the world at the present time. Japan, for example, has a more severe debt ratio at 226% debt to GDP. However, they owe the debt to themselves. This satisfies a long standing concept in economics (one that I find a little suspect) that it does not matter how much you owe as long as you owe it to yourself because ultimately, you end up with the money. (Source: CNN.com)
The fear in Europe regarding this kind of bailout and debt forgiveness is that it will have a huge domino effect. If Greece gets such debt forgiveness and monetary bailout, then why not continue it on to all of the other nations that face crisis. The cost could be much more staggering than we currently face and the debt forgiveness could present as many problems as it solves.
What is interesting about this entire crisis is that it has been brewing for forty years as the cost of Socialism that these countries practice catches up with them. It is also significant that America has been trying to fight the competitive effects of the EU since it was created by coming up such things as NAFTA to create our own competitive trade union. Now, we find ourselves on the brink of a possible bailout of the EU including many nations which practice Socialism – something we supposedly do not support, but may do so in conjunction with Communist China (a country we now find no concerns with in spite of our tremendous difference in ideology or, at least, we did in the past).
Americans were livid about the bailouts of businesses in our own country. I wonder how the bailout of the EU will set with Americans who still need jobs and have lost their homes.
John Wayne Tucker