March 4, 2010
Pattaya, Thailand
It wasn’t too long ago that there was a concrete dividing line down the center of Europe with large scale nukes pointed at both ends. It wasn’t long before that when two sides were battling it out in Normandy, or in the trenches before that.
Throughout the last thousand or so years, in fact, there are few and short-lived periods of peace among European countries. Just in the last 200 years, over 60 wars and armed conflicts were fought between at least two European powers.
This is why the whole idea of Europeans patching up their differences and playing nice under the auspices of a central bank-controlled fiat currency makes absolutely no sense at all.
I’m not trying to predict another armed conflict here… but these are sovereign nations who have a rich cultural history of going to war against each other to expand their sovereignty. For the past 10-years they’ve given up their sovereignty to the European Central Bank… and for what?
It worked for the better part of a decade because times were good. Now times are tough, and the alliance is frayed once again.
My friend Porter Stansberry (whom I believe to have one of the best common-sense investment approaches in the business) recently wrote, “next to corn-based ethanol, the euro might be the worst large-scale political/economic experiment I can think of…”
Agreed. Now, I discussed this all last week and don’t want to belabor the issue… but I would like to raise two important points:
1) As a rule of thumb, never base your economic analysis on anything that any government tells you. Yes, Greece is sounding the ‘all clear’ bell because it’s raising taxes to plug the budget gaps. But anyone who understands basic economics should be running away, despite the ECB’s encouragement.
2) Don’t be a contrarian for contrarian’s sake. Some people are constantly looking for an angle, and that angle is to do the exact opposite of what everyone else is doing.
That line of reasoning works if the fundamentals make sense. But occasionally, even the irrational market knows what it’s doing… just ask the people who bought Lehman stock as it was collapsing, thinking that the market had it all wrong.
There’s being a contrarian, and there’s bringing a toaster with you into the bathtub.
I’m telling you this because I recently read a contrarian blogger’s essay on the coming financial tsunami… originating not from European economic challenges, but from an imminent -Singapore- debt crisis.
Singapore?
The blogger described how the debt problems in Greece are nothing compared to the debt problems in Singapore, indicating that Singapore’s debt to GDP ratio is a ‘whopping 99.2 per cent.’
Let me pause for a moment and explain something about this number.
Debt to GDP ratio is one important measure of a country’s economic health– in a way, it’s sort of like a nation’s body fat percentage. You could be a skinny-mini with a really high body fat percentage (Seychelles), or you could be a 250 pound pro-athlete with a really low body fat percentage (China).
Decreasing a nation’s body fat percentage and thus promoting economic health requires going on a diet (paying down debt by cutting spending) and/or adding muscle mass (real GDP growth).
Greece is having its current problems because its body fat is too high, it doesn’t have the discipline to go on a diet, and it’s too old and broken to hit the gym anymore.
In fact, Greece has hit the tipping point where it has to borrow money just to pay the interest on the money that it’s already borrowed… these are nearly irreversible challenges despite any cheerleading you hear from the government (see point #1 above).
Regarding Singapore, the debt-to-GDP ratio of 99% is completely and totally overstated. Singapore’s actual debt is a small fraction of that– the government routinely runs a budget surplus and doesn’t have the terminal debt addiction that other developed nations are afflicted with.
The reason Singapore’s debt ratio is so overstated is because of the way that the IMF conducts its accounting:
With just a thousand dollars or a million dollars, people with spare cash simply hold it in a bank account. Large institutions with hundreds of billions of dollars, however, need safe, highly liquid debt markets to hold cash for the short-term.
Thus, in order to attract institutional capital flows, Singapore runs a high volume, robust sovereign debt market. It has to, otherwise institutional investors wouldn’t take it seriously as a global financial center.
Unlike US treasuries which are consumed and reissued in a dangerous and unsustainable ponzi scheme, Singapore’s bonds are investment securities that facilitate liquidity in the secondary market.
Because of IMF accounting rules, however, these bonds count ‘against’ Singapore and are included in the country’s debt.
The global economic crisis has certainly hit Singapore squarely on the chin, but to say that the next financial Tsunami will result from a Singapore debt crisis is just being a [misinformed] contrarian for contrarian’s sake.
