As we have been noting throughout 2015 thus far:
There is no recovery. There is only the bond bubble. And everything has been done to prop it up because when it bursts (as all bubbles do), entire countries (including the US) will go bust.
Greece is just the first domino to fall.
Indeed the front pages of the financial media today show an interesting tale: both China and Greece are experiencing debt implosions, the former being a margin debt fueled stock market bubble crashing while the latter is on the verge of defaulting on its sovereign debt.
China is long held to be the engine
As we wrote in April:
China is thought to be the great growth story of the post-2008 era. China’s economy not only bottomed before the developed world, but by most accounts, China was thought to be the engine that pulled the world out of recession, thanks to its near-clocklike hitting of 7%+ in GDP growth per year.
Today, China remains central to the notion that the world is in recovery. As Japan’s Abenomics gamble sputters out economically while Europe continues to deteriorate and seems at risk of even breaking apart, it is China and the US that are held up to be the last remaining sources of economic growth for global economy.
At that we noted that China’s “real” economy was imploding with rail traffic and electricity consumption suggesting real GDP growth of 3.5% at best and negative at worst.
Today, we find that all China really did was engage in arguably the single largest credit expansion in monetary history. The China credit bubble dwarfs even Japan’s bubble of the 1980s (a period of such excess that the land under the Japanese Imperial Palace was valued greater than the entire State of Caifornia!).
When the Real Estate bubble burst, China pushed for a stock market bubble. Now that bubble is bursting. The implications will be significant throughout the globe.
As for Greece… the EU has been desperately trying to prop up this house of cards since 2012. AS we noted in February 2015:
The European banking system as a whole is leveraged at over 26 to 1. That’s the ENTIRE European Banking system leveraged at near Lehman levels (Lehman was 30 to 1 when it collapsed).
To put this into perspective, with a leverage level of 26 to 1, you only need a 4% drop in asset prices to wipe out ALL capital. What are the odds that European bank assets have fallen 4% in value in the last two years?
The European crisis is not over. And when the next round really hits, whether it be from Greece leaving the Euro or some other issue, both capital and border controls will be implemented.
Fast forward to today and the EU banking system is indeed imploding and capital controls are already underway with border controls to follow (once people start trying to smuggle physical cash across the border).
The real issue is just how much collateral will disappear when Greece goes bust. Because whatever happens in Greece will be used as a template for much larger problems AKA Spain and Italy.
Spain and Italy, by comparison, have €1.78 trillion and €1.87 trillion in external debt respectively.
That is a heck of a lot of collateral that would be in BIG trouble in the event of a bond crash for either country.
The next round of the great crisis is approaching. 2008 was A Crisis… what’s begun is THE Crisis.
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