Concerns about Greece’s financial stability intensified yesterday, as the cost of credit default swaps for Greek debt rose sharply, indicating a 98 percent likelihood of default within the next five years. Sadly, the situation may deteriorate even sooner. Greece appears to be toying with its austerity obligations, and Germany is growing increasingly fed up with these antics.
“Greece is ‘on a knife’s edge,’” warned German Finance Minister Wolfgang Schaeuble during a confidential meeting with lawmakers in Berlin on September 7, as Bloomberg reported. He added that if Greece fails to meet the terms of its financial aid, it would be up to the country to find financing without support from the eurozone.
Without Germany’s backing for another bailout, a Greek default is increasingly likely. Such a scenario could quickly become catastrophic for Europe’s largest banks, which have extended credit to the Greek government.
One sign that Germany is likely to avoid another bailout for Greece is their preparation of contingency plans to safeguard German banks in case Greece fails to meet its austerity targets. Additionally, there are troubling rumors that Moody’s Investors Service may downgrade the credit ratings of major French banks such as BNP Paribas and Societe Generale due to their exposure to Greek debt.
European banks have deeply invested in Greek debt, and a default could trigger a financial crisis akin to the fallout from Lehman Brothers’ collapse in 2008, leading to a severe tightening of credit markets. Meanwhile, in the U.S., government debt remains in high demand, akin to a popular attraction, with investors eagerly seeking their share.
Failing to Think
Just when it seemed yields on Ten-Year Treasuries couldn’t fall any further, they did—setting a new low. After witnessing yields dip to 1.91 percent last Tuesday, we were astonished when they fell even further to 1.89 percent that Friday.
The turmoil in Europe undoubtedly contributed to these plummeting yields. As everyone knows, “U.S. Treasuries are the safest investment in the world.” In times of market uncertainty, investors flock to U.S. Treasuries. However, as we’ve highlighted before, widespread belief does not guarantee that reality supports it.
Many people remain unaware of critical developments until after they occur. Even then, their initial understanding often falls short. When they finally grasp the implications, they look back in surprise, questioning how they overlooked the signs.
This oversight frequently occurs because individuals focus too much on the past, using it to predict the future. They might say, “Yesterday was similar to today; tomorrow will likely resemble today.”
While this approach is usually accurate, it can lead to major missed insights as people fail to engage with their surroundings and think critically about emerging trends. Here’s what we mean…
The Revolt Against Absurdity
The U.S. government’s management of its finances over the past 50 years has been reckless. Politicians have funded current obligations by borrowing money, often extending debt far beyond what the economy and tax revenues can support. Now, the time has come to face the consequences, which often requires further borrowing.
For over half a century, the U.S. Treasury has squandered its unique position as the issuer of the world’s reserve currency. By flooding the market with cheap money, it has encouraged citizens to live beyond their means, resulting in a towering mountain of debt that stands precariously on a foundation of paper currency. If even one boulder dislodges, the entire structure could collapse in a disastrous avalanche.
The debt will continue to accumulate until credit markets react, ultimately revealing that U.S. Treasuries are no longer the world’s safest investment. As international demand diminishes, the Federal Reserve may become the sole backer, contributing to a downward spiral. Rising interest rates will consequently lead to a decline in living standards across America.
In his influential book, “Human Action,” economist Ludwig von Mises characterized the rise of socialism in the late 19th century as “the revolt against reason.” Today, a different yet less severe revolt is surfacing.
Last Tuesday, Ten-Year Treasury yields sunk to an astonishing 1.91 percent. Yet, by Friday, investors raised their “pitchforks” in defiance, pushing yields down even further to 1.89 percent—a clear demonstration of rebellion against this absurd trend. Soon, they might be paying the government for the privilege of holding its debt.
Sincerely,
MN Gordon
for Economic Prism