Saturday, May 08, 2010

The natural progression of Greece

Greece is the canary in the coal mine for a lot of issues. First, we have the fiscal mess caused by unsustainable government entitlements and demographic decline. For most counties in this boat (especially the UK), it is offset by currency devaluation. However, since Greece is part of the Euro, this option is not possible and has now migrated to a sovereign debt issue. This is very similar to crises in Argentina, Mexico, and Asia over the past twenty years - where profiligate fiscal pocilies are exacerbated by arbitrary monetary systems (i.e. pegged to the U.S. Dollar). Now with the rest of Europe subsidizing Greece in order to maintain monetary union, the crisis will now impact Greek banks. Greek bank depositors are fleeing the banking system for other EU banks - on the fear of a banking collapse or a forced exchange of Greek deposits if/when Greece is kicked out of the Euro.

This is having a contagion effect - as it will move to other Euro countries with sketchy fiscal situations - primarily Italy, Portugal and Spain. Although some have said Ireland should be lumped in there, I have not on the basis that their government is actually doing something about the fiscal situation, unlike their Southern European compatriots.

We have gone through a prolonged period without any significant corporate or sovereign defaults due to the easy money policies pursued by central banks worldwide. We will be seeing a prolonged period of significant default rates as we revert to the mean - possibly rates beyond the teens.

The impact of this debt, fiscal, and banking contagion will be twofold. One - the idea of monetary systems based on fiat currencies run by enlightened civil servants also known as central bankers will be discredited. Whether we go back a gold backed currency or something else that cannot be tampered with by politicians is yet unknown, but I can see a future where the Federal Reserve, the Bank of England, and the European Central Bank will have roles considerably diminished from where they are now.
Second, actuaries have been discredited in terms of being able to run defined benefit plans. These plans are cancers on the economies of the developing world as more and more resources will be diverted into propping up excessively generous plans for retirees that are retired for more years of their lives than actually working. Defined benefit pension plans will need to be outlawed in all forms. Whether funded private sector plans, government employee plans, or ponzi schemes called Social Security. This is a drastic solution, but all plans were forced converted into defined benefit plans that must be fully funded at all times - a lot of the fiscal problems that governments and large companies have would go.