http://www.spiegel.de/international/europe/0,1518,693317,00.html

The thesis of this article is that the economic crisis started with the banks being unable to repay their loans, and massive government expenditures to save the entire system from collapsing put governments themselves in similar, debt-ridden situations which they might not be able to get out of. Greece, which is already requiring economic aid because it overspent, is essentially already screwed, and the government will need to greatly hike taxes and decrease social spending in all areas. The other PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) are in similar situations, though not quite so dire yet; however, if Greece has to default on its debt, all the money loaned to it will simply disappear and that may cause similar situations in other countries that loaned to Greece. The article explains in some detail what Germany's situation is (It's a fantastic German newspaper), and how it has to save Greece because of the effect massive defaults can have on the world economy; how election year has forced Merkel to stall, portraying herself as one against rescuing those irresponsible Greeks. The article moves on to other countries, pointing out that most developed nations have been living far beyond their means while deficits and debts grew. Japan's economy is stagnating while its population is aging (which is bad); the US is 84% of it's GDP in debt, and rising; Britain is not quite so bad as the PIIGS, but the large debt and deficit are taking a toll on their economy, too. There are supposedly three ways out of a crisis for each country: Heavy taxation/lesser spending, firing up the printing presses (difficult in Europe, because of shared currency) to increase inflation and lower the value of money owed, or full or partial default.

It's a scary article, I think. It sounds fairly reasonable (admittedly, I'm not economist), and a worldwide crisis where no developed nation is able to repay their debts and the global economy crashes makes for... a rather poor environment to enter the workforce in.

What are your thoughts? Is it ridiculous fear-mongering? Do you agree with one aspect but not with another? What should be done?

Post has been edited 2 time(s), last time on May 7 2010, 3:39 am by Centreri.

A great deal of that article is true. It is also interesting to note that in America there is a startling move towards buying bonds/stocks in companies (typically graded lower than governments...typically). However let me demystify a "junk bond." All companies pretty much start at that level. What it means is that the investor has a high risk of receiving nothing in return. However, typically, when profit is turned, it has the ability to shoot returns much much higher than current treasury bond yields. For example, if you invested in Google when it first started, and sold your stocks in late 2007, you probably easily made back 200x your initial price. That being said, I don't really fear the idea of junk bonds, as long as a leader is competent. And if a leader isn't competent, the country will dissolve or restructure through a process known as bankruptcy.

The psychology behind bankruptcy is peculiar to say the least. America as a nation as been all but taught to fear bankruptcy: it throws your credit down the drain, not to mention not all debt is forgivable. The trade off is different for every company and individual. There are some large names that have declared bankruptcy several times within a short period of time and get away with it. Why? There are several reasons. Maybe you have really good wordsmiths, brand loyalty, or existing contracts you can use as leverage. However, there is also the chance that the company did not dissolve, just restructured (which is what we see many bailed out companies doing right now), so technically its a different entity. Restructuring usually carries with it a flip in board of directors and CEOs, and maybe this new Chairman of the board came from a prestigious company. I can guarantee that if Jack Welch stepped in to one of these failing companies that are having trouble turning around, that company's value would skyrocket, and it would make it easier to secure loans to restructure.

Bankruptcy is easy to manipulate, I will admit that. But it is nothing that we should fear. The USSR dissolved...which is another word for declare bankruptcy. What came of it? The world looked at them, forgiven some of their debt, and we - on a whole - have almost entirely moved on. I believe France tried to declare bankruptcy and demanded we forgive all of their debt, and the world wouldn't have them do it. The world is so interconnected now, that yes it would be problematic if one country demanded debt forgiveness. But if the entire world did it, I think China would be mad. That's really the only country I see being mad, and in my opinion they don't seem happy with any trade agreements.

extended metaphor time ftw!:

So the world declares bankruptcy. If you're worried about it on a personal level, it is time for you to become 100% sustainable: create your own energy to get off the grid, and start a farm. Consider it diversifying your portfolio. Meanwhile, the world is restructuring. A company restructures when they throw too many assets into a toxic project, a project that will not turn a profit from a long term, strategic point of view. For example, carriages. Ha, how that market has shrunk from necessity to luxury (ride around Central Park, anyone?). The company throws the project out and moves to something more profitable...gas drive cars. The world right now is still in the "gas driven cars" stage. We are throwing all of our resources into oil companies that are going to dry up in a long term strategic level. We are trying desperately to shift the market to electric, hybrid, hydrogen, solar, sugar cane etc cars, and we are coming up short. The world does not have the financial capacity to entirely shift markets. Even if a country did, would you go out tomorrow and buy a new car because it was affordable? My boyfriend has a 1997 civic, and I have a feeling I'm going to have to pry it from his cold, dead hands one day. The bottom line is that we are spiraling into recession, even as the market regains. All we are doing is perpetuating the problem: our world needs to move out of the current "market" and into greener pastures to make us all sustainable.

That is what reindexing is for. That is what restructuring is for. That is what bankruptcy is for.

tl, dr; don't fear bankruptcy. The entire world is on board for it.