Friday, June 24, 2011

Debt Fault Lines Going Critical

As the next leg down in the larger bear market trend continues to unfold, we are seeing hints in both Europe and the United States that some debt fault lines are about to go critical, sending shockwaves through the global economy and setting off a chain reaction of defaults.

The latest developments continue on the theme that we are in a period comparable to the "Crisis of the Roman Republic". The period that we are in, identified as Grand Supercycle wave [IV], is a magnitude more severe than the Great Depression, is still in its early stages in spite of starting back in 2000.

In the last few days, Greece has been flaring up with massive social unrest as the nation goes on the brink of a default in spite of receiving a bailout last year. After surviving a confidence vote a couple of days ago, the nation's parliament is in the midst of passing a second round of austerity measures in order to get the bailout money. Earlier today, Germany walked out of the bailout deal, making a Greek bailout more problematic. There are already a number of analysts that realize that a Greek default is inevitable.

There are a number of nations in Europe that are facing a debt crisis of their own. Greece is in the worst shape, but Portugal, Ireland, Spain, Italy, and even Britain are riddled full of debt fault lines.

Not only is Europe riddled full of fault lines, but the United States is riddled full of fault lines as well. A number of states are on the verge of defaulting on their debts with Illinois, California, New Jersey, Pennsylvania, and Texas in the worst shape. A default by any one of the states will have a ripple effect that reverberates throughout the entire nation in the form of a chain reaction of defaults. The latest news on this front is from New Jersey as Gov. Chris Christie is poised to sign the union busting bill into law. As with Greece, the austerity measures that are poised to become law in New Jersey has resulted in mass protests as people take to the streets.

At the federal level, the debt ceiling has been turned into a political football. As predicted back in early May 2011, the game of chicken involving the debt ceiling has indeed unfolded like a hardcore suspense movie that has even made people in high places very nervous as evidenced by frantic lobbying by the US Chamber of Commerce and by virtually all of the banks. Just today, Rep. Eric Cantor walked out of the "Gang of Six" debt ceiling talks. So far, both President Obama and House Speaker Boehner have drawn a line in the sand in terms of what wont get cut from federal spending, and neither is willing to give ground.

In the near term, expect the game of chicken on the debt ceiling to continue for at least several more weeks, possibly until we get very close to the Aug 2, 2011 deadline, before the GOP and the Democrats finally reach a compromise (very reluctantly, I would add) and raise the debt ceiling.

On the longer term, expect the fault lines in both Europe and the United States to eventually go critical. In Europe, the nations to keep an eye on are Greece, Portugal, Ireland, Spain, Italy, and Britain. In the United States, the states to keep an eye on are Illinois, California, New Jersey, Pennsylvania, and Texas. One of those fault lines is close to going critical.

A debt crisis on both sides of the Atlantic underscores one of the reasons why I refer to the current bear market period as the "Crisis of the Western World". Deflation is already beginning to unfold in full force.

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