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Der Spiegel - The Disastrous Consequences of a Euro Crash


Link - Der Spiegel
 
Dummies guide to what went wrong in Europe.

Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.

Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).

Word gets around about Helga's "drink now, pay later" marketing strategy and as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar in town.

By providing her customers freedom from immediate payment demands Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer - the most consumed beverages.

Consequently, Helga's gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

He is rewarded with a six figure bonus.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" are then bundled and traded on international securities markets.

Naive investors don't really understand that the securities being sold to them as "AA Secured Bonds" are really debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

The traders all receive a six figure bonus.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga's bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and Helga's 11 employees lose their jobs.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Helga's bar had granted her generous payment extensions and had invested their firms' pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

They all receive a six figure bonus.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who've never been in Helga's bar.

 

Yep, thats where the problem is. Those who caused the issue are being bailed out instead of let to go broke like other capitalistic businesses.

If you look at some South American countries, they worked bottom up, giving the money directly to SMEs to keep people employed and expand, as opposed to bank execs bonuses, and that bottom up investment worked quite well, even in 2nd World countries
 
I'm reading a book about the same thing, only it happened in the US (the innovators)...Its called "Predator Nation" by Charles Ferguson...

Great analogy, i think i can use this to explain to my wife what the GFC was, is, or will continue to be.

Thanks for sharing that Mr.B.

CanOz
 

Interest in your views, CanOz (posted elsewhere) as to why you think we might be weeks/months from the bottom of GFC2

That implies that some meltdown event - Grexit, Spanic, Quitaly etc. - will occur. That also implies that we don't have to wait the decades it will take for all this debt to get paid back and some fiscal union and growth stimulation will do the job and turn it all around?
 

No, i mean the bottom of this decline in the equity markets...they tend to lead the economy.

I said days or weeks..but not more than 3 months, i reckon...only my opinion. My reasoning pretty simple, but it worked last time...most of the indexes have formed bearish wedges. Last time i expected these patterns to be resolved down, back to thier lows and beyond...in most cases they only tested the lows again. That fits with the seasonality, and what could be the bottom in China's business cycle, according to most on the Bloomy and oil is at the first target low already. Plus everyone is getting really bearish, that's a sure sign!!

Those are my indicators! On record!

CanOz
 

I admire your optimism
 
thanks Mr. B now I know what over the counter Drinks or OCD's means
 


It appears it isn't sustainable for very long at all...

http://www.news.com.au/business/spa...-ahead-of-summit/story-e6frfm1i-1226410637120

:bananasmi
 
And so it continues...

STOCKTON, Calif. (AP) ”” When Stockton becomes the largest U.S. city ever to file for bankruptcy, it will strike a hard blow to residents, especially city employees and retirees whose health benefits and pensions helped drive the city toward insolvency.

City Manager Bob Deis said late Tuesday that officials were left with little choice but to recommend bankruptcy after failing to hammer out deals with creditors to ease the city's $26 million budget shortfall.

Deis expects the city to file for Chapter 9 protection by Friday.

Stockton will join a number of other cities and counties across the nation that have plunged into financial crisis as the recession made it tough to cover rising costs involving current and former employees, bondholders and vendors.

"What's going on in Stockton is endemic to what's going on all over the state and the country," said Michael Sweet, a San Francisco bankruptcy attorney at Fox Rothschild LLP. "Local governments are hurting and strained under the current pension and compensation systems. These systems are not appropriate for the type of economy this country has evolved into."

At a standing room-only Stockton City Council meeting Tuesday, numerous former city employees talked about their life-threatening medical conditions and said cuts to their health benefits prompted by the city's financial straits meant they would, in effect, lose their insurance.

"Some people will be devastated. There are those who have such severe medical problems that they will not be taken up by any medical company," said Gary Gillis, a retired fire chief on the board of directors of the city retiree association. "This plan appears to be a sledgehammer or a machete."

Several retirees broke down in tears after the city approved changes to their medical benefits as part of a bankruptcy budget adopted by the City Council.

"For me, bankruptcy might as well be a life sentence," said Gary Jones, a retired police officer, who was diagnosed with a brain tumor 10 years ago. Jones said his medical insurance enabled him to undergo chemotherapy and other treatments, which he said will be unaffordable at the lower level of coverage.

During the past three years, the city has dealt with $90 million in deficits in part through drastic cuts in police and fire personnel, even as residents said they have to deal with recurring break-ins and robberies, a climbing murder rate, homelessness and plummeting property values.

Once a beneficiary of the housing boom, the city now has the second-highest foreclosure rate in the nation. Its unemployment rate has doubled in the past decade and now hovers around 16 percent while a fifth of residents live below the poverty line.

"The average citizen will not put up with this," said Gregory Pitsch, a 22-year-old unemployed resident who made an unsuccessful run for mayor. "Their home prices have plummeted, they have no jobs, a lot of people are getting fed up so that they have to resort to crime."

Betty Garcia, who co-owns a downtown jewelry store with her husband, said her community is starting a neighborhood watch group to respond to a rise in crime and lack of police response, which they expect will only get worse.

"We already hear gunshots every night," Garcia said. "It's becoming like listening to the train go by. People don't even call the cops anymore."

Experts say municipalities such as Stockton must find a way to lower their contractual obligations to current and former employees as the cost of health care skyrockets and people are living longer.

"When times were good, it was easier to expand benefits and pensions and not pay as much attention to the unfunded liabilities that were growing," said David Dubrow, a bankruptcy lawyer at Arent Fox LLP in New York City. "Now that times are not good and not good for prolonged periods, those costs are becoming severe."

Some states have passed legislation related to changing pensions and retirement benefits for new employees, Dubrow said. But it's difficult to change the rules for existing employees and even more complicated for retirees, because state constitutions and other legal issues may prevent such restructuring.

In Stockton, pensions will not be affected by a bankruptcy filing, but health benefits for employees and retirees will.

http://www.businessweek.com/ap/2012-06-27/stockton-official-mediation-with-creditors-fails
 
During the cold war the Yanks could not find enough Russian Subs so the experts decide Russia had developed a secret way to disguise their subs from being tracked, so the hunt was on to find out how the Russians did it so the Yanks spent a few bucks trying to work out how the Russian did it.
After awhile the penny dropped and the yanks decided the subs never existed in the first place this is just one example of wasting money and now we find out USA is going broke at $2.5 M a second ..and still spending ....DUH
 

That's a hell of a way for freedom loving, capitalist country with filthy rich congressman to treat its people....

I reckon they'd be better off in China!

CanOz
 
Maybe not Canoz:

3. Metals Manufacturers Turn from Pig Iron ... to Pigs! China’s steel production fell 2.5% in May compared to April. Iron ore spot import prices fell 8% through most of May. And output of copper fell 1.4% month-on-month, its second-consecutive month of decline.
How anemic is steel demand in China? It’s SO BAD ... Wuhan Iron & Steel is apparently venturing into pig farming, as the steel business is no longer profitable.
Hey, people always need to eat. They need pigs more than pig iron, Wuhan figures.
And it’s not the only one.
Shanxi Coking Coal Group, a leading coking coal producer, is venturing into the pig-slaughtering business with China’s biggest hog processor, Shuanghui Group. According to the report, the two companies will build a pig slaughterhouse with an annual output of 2 million pigs.
But will the slaughterhouse require as much energy as a steel plant? Probably not even close, which leads to our next sign that China’s economy is on the decline.

Recently, mainstream media sources including The New York Times called out China for massaging its economic data to make it look better than it really is:
“Officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.
“The executives and economists roughly estimated that the effect of the inaccurate statistics was to falsely inflate a variety of economic indicators by 1 or 2 percentage points. That may be enough to make very bad economic news look merely bad.”
​
So is China headed for a hard landing? The last time China faced real economic troubles was in 2009, when economic growth fell to just 6.6% in the first quarter.
Growth hasn’t dipped to that level yet. But anecdotal evidence suggests China’s job market is just as bad as, or worse than, it was in the last crisis. That’s because smaller and mid-sized private firms are increasingly struggling with slackening orders, rapid wage increases and higher raw material costs.
This time around, the vast majority of market analysts expect Chinese economic growth to bottom this quarter ”” in other words, right now ”” or early next quarter. If that doesn’t happen, the bottom could fall out of Chinese stocks.
 
I think a panicky market is a very good contrarian indicator.

But there's no panic; instead, low volumes and a depressed, sick looking market. That's medium to long term bearish, IMO.
 
Building Industry in trouble.

 
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