Greece continues to dominate the news. Stock markets around the world are either up or down based on news flow out of the troubled country.
It’s now beyond absurdity. Officials continue to apply a band-aid to a gaping flesh wound expecting the flow of blood to stop. It won’t. Greece is bleeding heavily. The ‘troika’s’ austerity measures are not working. Recent data revealed that in the final quarter of 2011 the Greek economy contracted at 7 per cent annual rate. That makes the debt situation much worse.
Greece’s debt dynamics are intractable. Some countries are now realising this and are pushing for a full-scale default. Germany, the Netherlands and Finland (all in a position of relative financial strength) don’t want to pump more dollars into a bottomless pit. They think jettisoning Greece will not lead to dreaded contagion. I’m not so sure.
But others, such as the European Central Bank and France, want Greece to remain a part of the Eurozone at all costs. They’re terrified of contagion.
Europe, as it’s always done, is descending slowly into the politics of self-interest. It’s every ‘man’ for himself. Meanwhile global stock markets engage in a daily pavlovian ritual in response to the bailout rumours.
It doesn’t matter what anyone says or does. Greece has too much debt. It needs a full-scale default to have any chance of growing sustainably. Whether that happens now or later is up to the fools running Europe. In the meantime, the Greek people have been thrown to the banking wolves.
Although you’re probably getting news fatigue from Greece and Europe, it matters for Australia because it affects the cost of credit. It’s getting more expensive for Australian banks to raise funds on the international markets.
As we have seen, the Big Four banks increased interest rates despite the Reserve Bank of Australia (RBA) keeping the official rate on hold. More importantly, a higher cost of credit is bad for the rest of the Australian economy. The RBA’s is enthusiastic about how the economy is travelling in this post-bubble-bust world. The RBA is wrong.
It’s using the same economic forecasting model that saw the bank increase interest rates just before the credit bust hit Australian shores in 2008. It was wrong then and I’m convinced it is wrong now.
The Australian economy is much weaker than the RBA thinks. The chart below is from Steve Keen’s debt deflation blog. It compares the official unemployment rate, as measured by the Australian Bureau of Statistics (ABS), with data complied by Roy Morgan. The difference is huge.
Here’s the problem: the ABS’s definition of ‘unemployed’ is ridiculous.
Apparently if you work at least two hours a week, you are not unemployed. Roy Morgan on the other hand, reckons anyone who is not employed full or part-time and is looking for work is unemployed.
Using this definition puts unemployment in Australia up around 10 per cent.
That’s recessionary. It squares with poor consumer spending, a very weak stock market and near-zero credit growth.
It’s time the RBA come down from its ivory tower and realised that too. Although I’m not suggesting lower interest rates will fix anything. It hasn’t anywhere else in the world. The central bank and other ‘official’ institutions should just tell it like it is.
Greg Canavan
Editor, Sound Money. Sound Investments.
P.S. Europeans aren’t the only ones making mistakes. Aussie investors are, as well. I’ve recently written a free report on it. Click here to read my free report now to discover what these three bloopers are. And how you can avoid them.
From the Archives…
Iran Oil and the Disintegration of the Petrodollar Standard
2012-02-17 – Dan Denning
Global Oil Chokepoints and the New Silk Road for Energy
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Cash In As Yet Another Housing Bubble Bursts
2012-02-15 – David Stevenson
Uranium Stocks – The Restricted Aussie Export That Could Make You Money
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Health, Wealth and Stealth Inflation in the Great Food Swindle
2012-02-13 – Greg Canavan
Why the Australian Economy is Much Weaker than the RBA Thinks
