We are witnessing the collapse of Europe's grand socialist experiment right before our eyes. First Greece, then Ireland, then Portugal and now Italy and soon Spain. Even France, a core European economy is starting to show strains with a record spread versus the German bund, the European safe haven risk equivalent to the United States.
You see, all the peripheral European countries are on fire. They have hundreds of billions of dollars in sovereign debt coming due every year. It used to be that these countries took on more debt to pay off current debt. The math can work, as long as the interest on that debt remains low and countries continue to grow. But that doesn't happen in socialism. The end game is here: default and debase.
Every economic shock reduces growth and raises the debt to GDP ratio. If countries can't grow faster than the rate of debt accumulation, their debt:GDP ratio rises. Greece is at 160%. Italy sits at 120%. The United States passed 100% in the last year. Japan sits at over 200% with two decades of deflation, but their own people are their greatest lenders.
Why is the debt:GDP ratio important? Because countries cannot continue to service their debt (pay interest on debt coming due to take on more debt) as the ratios expand. Why? Because those buying the debt (banks) will demand higher interest rates as the risk of not getting paid back rises as the total debt:GDP of a country expands.
Thus begins a viscous cycle of higher debt demanding higher interest rates creating higher debt, which creates higher interest rates. What is the magic interest rate before default appears inevitable? In every European country where the bond kings demanded seven percent or higher, the sovereign nations declared default and required a bailout by international parties. Italy hit seven percent last week. They have over 2.5 trillion dollars in debt, bigger than Ireland, Portugal and Greece combined. Where is that money going to come from?
The official position of these PIIGS politicians was to deny a problem right up to the day a bailout for big banks and pension funds was announced. It was only a matter of time before the bond vigilantes declared them liars. All of them.
Why? Why is this happening? Here is a great video explaining the details of why Europe is crashing and burning and why you should care.
If you're more of a picture person, The New York Times published a graphic May, 2010 describing Europe's intricate web of debt. Fascinating.
You wonder why Germany doesn't want these peripheral countries to fail and why the burden of cost is being shifted on to the backs of the taxpaying German people, a country who's growth prospects are also rapidly deteriorating? As these PIIGS countries banks collapse so do the German banks. If Italian banks can't pay back the German banks, the German banks won't have the capital to lend to other banks and other Germans. Fractional banking would collapse. Don't know how banks create money debt out of thin air and why banks that can't pay back banks cause sovereign nations to collapse? Watch this video on creating money debt out of thin air.
When you hear about bank "stress tests", banks are being tested under different economic scenarios to make sure they have enough capital to survive if other banks or customers can't pay them back. If they fail their stress test, officials may decide they need to be recapitalized, meaning they need more money in their vaults to provide an adequate buffer in the fractional banking system. It used to be gold, until the gold standard was abolished decades ago.
Where does that money come from? Either it comes from private investors, which will dilute the equity of other private investors and cause bank stock values to fall, or it will come from taxpayers via a government bailout. Or sovereign nations will print money and dilute the value of their currency. Greece can't print money, unless it leaves the European Union and goes back to its drachma. Portugal can't print money. Neither can Ireland, Italy or Spain.
The people have spoken. The social mood has changed. Decades of free money have lead to this people's revolt. What are they revolting against? They are mad FREE=MORE is dead. All the money they've received in benefits over the years was being debted to them by banks who want to get paid back. Shocking. The banks want what the people do. Unfortunately, a government that promises everything will eventually deliver on nothing.
The people have spoken. The social mood has changed. Decades of free money have lead to this people's revolt. What are they revolting against? They are mad FREE=MORE is dead. All the money they've received in benefits over the years was being debted to them by banks who want to get paid back. Shocking. The banks want what the people do. Unfortunately, a government that promises everything will eventually deliver on nothing.
I predict these countries will exit the grand failed EU experiment and return to their own sovereign currency. There is no free ride. The end game is here.
So what does this have to do with doctors demanding cash for care? Because that's exactly what is happening in Greece, the land of equality and socialism and free health care where the government promised to take care of its citizens from craddle to grave, but ended up delivering on nothing but heartache and despair. This is our future in America where we falsely believe these world events could never happen here. We are well on our way to being the next Greece. Think of Medicare and Medicaid as the country of Greece. A giant unfunded FREE=MORE social experiment who's end game is doctors demanding cash for care.
Unfortunately, Greece simply couldn't deliver on their promises. Ultimately, as their debt to GDP ratio expanded, so did their interest rate on their debt. Once the bond vigilantes demanded more than seven percent return for loaning the government money, the math simply didn't allow taking on more debt to pay off previous debt.
America is moving full steam ahead into the next Greece. Think it can't happen here? Think again. At over 15 trillion dollars in debt, the interest alone is hundreds of billions of dollars a year to pay off our current debt to take on more debt. What happens when our artificially low interest rates rise to levels consistent with market risk, and they will, because they always will, we will have no money left to pay the doctors and hospitals.
The current mandate of America's super committee is to find 1.2 trillion dollars to cut from our debt over the net ten years. Did you know that our debt is expected to rise almost 10 trillion dollars over the next decade. The math doesn't add up. Add in sluggish economic growth at under 2% and a high probability of one or two recessions before then and our debt:GDP ratio risks expanding to levels that caused the PIIGS of Europe to collapse.
There aren't enough people making $250,000 a year to survive that shock. Our only solution will be to either default on our obligations or print money by the trillions, debase our currency and inflate our way out of this mess.
It really is about the debt. The preOccupy Wall Street folks are rallying against the greedy corporations when in fact, the greatest risk to their welfare is not wall street but Washington. Someday, doctors and hospitals in America will be demanding cash for care. It will happen if we don't act now.
