Dominoes

Well it looks as if the Greek drama is moving into the final act. I imagine that shortly the next drama (Portugal?) will begin. Still it seems that no-one, especially not the bureaucrats, politicians and economists, understands what is really happening. Which is the collapse of the post-WWII socialist dream in which debt would fuel growth. Instead, it has fueled consumption and malinvestment. Central banks have responded with desperate measures to lower interest rates, sustaining the continued growth of credit a little longer, but that hiatus is rapidly coming to an end.

Events are still being seen entirely through the paradigm of the traditional nation-state, as if each country were an independent economic entity. But the reality is that trade barriers around the world have fallen to such an extent that the parochial view is all but useless and it is necessary to take a global view.

True debt loads have become invisible. The export booms of Germany and others, such as the BRIC countries, have been financed by credit creation in other countries. That debt doesn’t appear on the exporter’s national balance sheet, but when the importer’s economy collapses, as the Greek economy is doing, all of a sudden the export business is gone. It is pointless to look at any country in isolation because the trade and financial connections aren’t apparent.

Essentially all the major economies have credit bubbles. They cannot, and will not, fail in isolation, but as dominoes. People are saying, well Greece is simply not big enough to be economically important. True, but it is a domino. It will push over the next domino in Europe. China is a much bigger domino that is wobbling badly. It is almost certain to fall in the next few months. It is likely to take Australia and Japan with it.

Don’t be fooled. The end game of the Keynesian folly is underway.

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