As Greece denigrates into murderous rioting and the rest of Europe braces for an ever-widening bailout, the day of reckoning is finally at hand.  Governments around the world are finally starting to realize what American consumers discovered a couple of years ago; there is no long-term solution for spending more than your income.  Creative financing will only get you so far.  At some point, you have to pay the piper.

Financial Collapse in Europe

As I watched news footage of Greek protesters burning their cities and holding communist signs near the Acropolis, I was surprised at the angry response to the austerity program.  With the Greek deficit approaching 120% of GDP, something has to change.  The public pensions and holiday bonuses have to be cut and taxes have to be raised.  Casting stones and firebombing buildings isn’t going to change the reality of deficit spending.  It has to end.

In my opinion, Greece is very lucky they are tied to the Euro.  If they were still trading drachmas, I believe they would have slim hopes of receiving a bailout from France and Germany.  Their riotous behavior hasn’t helped their cause, nor have the high profile antics of the Greek Communist Party.  I doubt they would receive much help from their comrades in North Korea, who just re-denominated their currency or from Cuba, who is facing a shortage of rice.  Communism has failed for a reason.

More ominous, are the precarious financial conditions of Spain, Portugal and Ireland.  Although their economies are in slightly better shape than Greece, these countries have a much larger GDP.  And, a financial bailout would have a much bigger price tag, for the rest of Europe.  At what point are the EU and IMF unable to rescue member nations?  What will happen if countries have to rescue themselves?  Europe is headed into uncharted waters.

Political Turmoil in the USA

Here in the good old USA, we tend to be pretty arrogant.  Our success has reinforced our feelings of superiority and we always seem to know what is best for the rest of the world.  But, how far are we from becoming the next country in crisis?  The last time America was a solvent nation, Andrew Jackson was president.  We have expanded our government, increased our spending and piled onto our deficit at an alarming rate.  Foreigner investors hold most of our sovreign debt.  And, Americans feel entitled to services our government can’t afford to provide.

Is this a recipe for disaster?  I think so.  And, so do many Americans.  There is a rift between those who want a wider range of social programs and those want a return to smaller government.  Although there are credible arguments on both sides, I am on the side of smaller government.  I have never seen a government program run as efficiently as it would be in the private sector.  And, I have never seen a government agency that hasn’t quickly become a target of special interests.   I believe we need to initiate our own austerity program, before we end up in the same boat as the Greeks.  Do we really want to be forced into solvency by the Chinese and other treasury bond holders?  This is not as unlikely as it sounds.  Global financial malaise spreads quickly.

Bankers Face the Music

Meanwhile, bankers face their own day of reckoning.  Congress has been busy crafting the latest financial reform bill.  And, it doesn’t look as though reform will be too watered down by the special interests.  The Republicans have abandoned their stall tactics and the Democrats have stripped their bailout clause from the bill.  It appears that we will finally have real financial reform that will shift the cost of bank failures from taxpayers to shareholders.  And, the days of bankers fleecing their customers and floating unregulated derivatives, may be coming to an end. 

With Goldman Sachs appearing in front of Congress and SEC charges hanging over the investment banks, lobbyists have quietly begun using the back door.  The elections are going to be brutal this year and no politician can afford to be seen as banker-friendly.  Voters are still furious with the bailouts, bonuses and lack of reform.  It is undeniable that Wall Street has swindled Main Street.  And, our politicians were accomplices to this con.  The question of the year is what is going to be done about it?  Are we finally going to audit the Federal Reserve?  And, will this information become public?

The Bottom Line

The bottom line is that global finance will never be the same.  We are headed into dangerous territory, where countries will have to reduce their deficit spending, instead of refinancing.  The sovereign credit cards are all maxed out and now it’s time for each country to pay their bills.

“The budget should be balanced, the treasury should be refilled, the public debt should be reduced and the arrogance of public officials should be controlled.”

H. Ross Perot– Texas Billionaire & Entrepreneur

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