Punchbowl Economics 101

Sometimes I like to break down some of the economic speak and look at it in layman terms. As a lawyer who manages a lot of lawyers it is a constant challenge to get lawyers to do the same with legalese, or what you might call lawyer speak. Recently I reviewed a settlement that released "known and unknown Known Claims." Now it is not as bad as it sounds as the capitalized words were defined but still I had to scratch my head. And so I try to approach this blog with more understandable lingo.

Thus, I venture into a discussion of what I will call Punchbowl Economics. Let me begin by explaining the players in this drama. First you have those partaking of the punch. That would be homeowners, consumers and countries living above their means. We bought homes we could not afford, ran up credit card debt we cannot pay down and feasted at the punchbowl like there was no tomorrow. Countries did the same with increasing debt loads at low rates all designed to spur more spending, the American dream of home ownership, entitlements and the like. The countries include the likes of the U.S., U.K., Greece, Spain, Ireland, Portugal and on and on. These are the drinkers of the punch. We may have been sold a story, may have been giddy off of the punch or may have chosen to ignore the mounting debt issues or future payments, but we drank the punch.

Then there are the makers of the punch. Those countries that made what the others consumed and gave them the money to consume it. You know, the Chinas and Germanys of the world. They made it, we bought it and paid for it with their money that we are paying back with interest. They were happy to loan us the money to buy their stuff.

Then there are the servers of the punch. This is a long list from Central Banks promoting home ownership through low rates, to mortgage brokers with cheap, no money down and no income validation loans, to financial institutions lending money like no tomorrow and securitizing it out the other end, to rating agencies rating crap AAA, to credit card companies pushing cards like candy in a jar. There were a host of folks dying to give us credit, money, at attractive rates. Yep, that was a nice punch.

And so the party for some has come to an end and I believe for all it should. For those drinking the punch, most have no ability to continue to drink. Sure, they would like to do so, but no one will give them the credit to do so and they are facing insurmountable problems in paying off the debt for the old punch. Now you may feel sorry for them or not. They chose to drink punch they could not afford and are now paying the price. Perhaps they were misled or naive, but few will debate these are the players in this drama suffering the most at the moment.

This group is starting to include countries, i.e. Iceland and Greece. More will join the ranks in time. Those cut off from the punch. Those put out to dry. Those now forced to face the pain - on a governmental and individual level - of the price of their party. To me, they are the lucky ones eventually as they now will face several years of pain for long term gain. They are putting their pain behind them. They are not allowed to kick the can down the road and must face reality head on. Mind you, they do not like it one bit right now, but at some point it is time to take your medicine and the sooner the better.

The servers of the punch are not doing much better. Their clients are largely gone, governments are cracking down on their traditional punch promotions and the suppliers of punch are a bit more stingy. Perhaps some are not suffering as much as the drinkers of the punch - though most deserve to suffer more - yet they are still stuck looking for another bowl to spike.

And now we come to the suppliers of the punch - and the credit with which to buy it. They are suffering too, but perhaps the least of the bunch. They lost their customer base but at least they are not needing to deal with an enormous debt burden. Sure they have employment problems as they are no longer needing all the employees to make the punch, but their governments are flush and able to pump their economies with funds to help ease the pain and promote domestic demand. Then again, some of these governments are smart enough that they are not going to pump their own economies too much. They know some prudence and pain now, relatively low compared to the pain of others, will pay off in spades in time, so countries like Germany and China are pulling in the reins a bit.

I have not focused yet on those governments like the U.S. who are in big debt but not tapped out, who are building new public debt to fully support their citizens and stimulate their way out of a recession. And it is on this group that I would like to focus a bit as I do not fully understand the math here. You have a highly indebted population who has for over a decade lived beyond their means, whose wages have gone down gradually for years, who are every year making less that they can sell to other countries and who have bought a bunch of homes under water that they cannot sell. And so I ask, to what benefit are the government stimulus dollars? It does not cure the underlying disease. It merely prolongs the pain in my book. The government is now supplying the punch. Yet this is not the answer. We need to get off the damn punch folks.


So all the folks at the party have to pay the price and we probably should take away the punch and sober up. Maybe it is boring for people to live within their means but it is necessary. Greece is being forced to do so and we are well advised to do so before it is as painful for us as it will be for them. Does it mean recession type conditions for perhaps a decade or more - yes. Believe me, however, the alternative in time will be much worse.

Just my opinion on the matter.

Disclosures: None.

EeeeeUuuuu, that smells!

There are a few major things of concern to markets at the moment. First is Greece and the other PIIGS as there is a serious question on what EU will or is willing to do. Sure the market rebounded a bit when there was news the EU was willing to give Greece support but is seems this support, if it comes, has many strings attached. We will see what comes out of the meetings among EU big boys and girls the next few days. I personally am not optimistic that they will come out with a support plan that the citizens and unions of Greece will be willing to accept. Social unrest there could undo any purported EU support. And then the question becomes, what next? Both for Greece and the other countries of concern.

There has been a bit of relief in the markets the last couple of days on the news that Greece will be saved by the EU. Well, as noted above, "saved" is relative. I predicted in January of 2009 that the EU was in risk of losing its U and this was probably the prediction that at the time got the most negative responses, but my prediction is getting a bit closer to reality, though not perhaps in the year I predicted it. The following link provides a lot of good insight on the EU problems and I recommend it. Let me emphasize, this is a good piece on this issue so if you are interested in the issue - which may drive the market movemants globally for the next few weeks or months - please read this. If Greece, Italy, Ireland, Spain and the other countries are not going to get what they need in terms of financial relief, the U in EU is in some trouble - in my opinion.

http://www.spiegel.de/international/business/0,1518,676507,00.html

Disclosures: None.

These PIIGS Ain't Flyin'

It has been a bit tough sorting through the hype and trying to determine how realistic the problems are with the PIIGS (Portugal, Italy, Ireland, Greece and Spain) but, unfortunately, hype itself is part of the problem. When you are perceived as being a problem, you tend to become one whether you like it - or deserve it. Part of Greece's problem is simply the fact that it is part of the EU and lacks a good bit of the flexibility it needs to deal with its issues, and the EU is not being a whole lot of help at the moment. I tend to think the problems in Greece and the other PIIGS is a bit overblown but it is not going to help them much if investors believe - or speculators try to create - that a more significant problem exists.



http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Oazi.lUlZU&pos=2



And while I think we will find a way to get over the PIIGS and their issues, there is a bit of a bubble building in China over which few outside of China have any say and which may prove quite problematic. The lending in China is escalating and bubbles thereby created are worsening. One of the key bubbles there is a real estate bubble and, guess what, the government there owns all the land. All these people are buying whatever is left on 100 year leases from the government and doing so like there is no tomorrow. This is in a country that is not used to dealing with bubbles. We will see.



http://www.bloomberg.com/apps/news?pid=20601087&sid=a.JuXwStmOLE&pos=4



Disclosures: None