Italy, Debt, and the Euro.

talan123

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Jun 16, 2011
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652
#1
Italy's borrowing costs have exceeded 7.0% has been making the news lately (7% means that a ten year bond that is ten million will require twenty million to repay). 7.0% is considered the point that it is too expensive to borrow money for a country for a country's survival. It immediately plunged down to 6.3% and has been there for a few days but spiked back up to 7% this morning. This isn't a good thing for Target or us. It means that those designers aren't going to get paid.

Italy's debit is around $2.2T dollars which is just too much money for anybody except the United States to save. Europe (Germany) has decided that there is no lender of last resort who is willing to actually to be the last guy to turn the lights off. The Fed in the United States is our last lender and it is a good one, without the Fed that 2008 crisis would have turned into a depression of epic proportions not seen since the collapse of Eastern Europe in the 1990's (think great depression going on 25+ years without any government spending).

Since Italy isn't going to be saved in case of an emergency, the banks that are holding it's debt are screwed. Holding debt is very different from holding stock in a company/country. That means you are to be paid before anybody else from earnings to bankruptcy. Debt is infinitely more important to an accountant because it is a revenue stream that you can depend on. Up until 2008 Italy's debt was considered sovereign debt by the European Union and automatically given a lower interest rate because who expects a country to go into bankruptcy? So the EU has told the banks that it is going to help the banks that bought that debt but only after they do everything in their power through private channels first.

Usually that is something to be applauded but not this time. In order to get help from the EU, those banks are deleveraging (selling everything but the furniture nailed down to raise money so they can pay bills off). One of the things they do as well is stop giving money to each other which is the lifeblood of the industry. The majority of the bank loans are from week to week and some even being hour to hour. Banks only have about 8% of the required deposits so this is crucial for all of their survival. If they can't get loans from each other, they stop giving loans to people to hoard their cash. The credit market is then considered "frozen," which is the worst possible outcome since that is what drove the great depression.

That market is now frozen in Europe. That means those designers we love can't get loans to pay their staff while a big order is waiting. Credit is the grease of the engine that is our economy. It lets things happen much quicker than without it. The Euro, the currency over there, is really controlled by one country which is Germany. Whoever thought to give the Germans this much power over Europe again wasn't thinking clearly. Germany is an entire country of angry savers. They are angry at everybody and saving their money and being frugal which is just horrible for the rest of Europe. Germany has all the cash there and isn't spending it. They control the currency so they are doing the one thing that is killing the rest of the continent, focusing on keeping inflation under control which is kind of like Target focusing on Guest Service scores when you have no sales floor.

Since Europe is going off a cliff to prevent Germany from having 4% inflation instead of 2%, this is going to hammer the US. Europe is biggest trading partner with 22% of our business going to them and vice-verca. So they are talking about a couple million jobs here in the US being gone if those countries, particularly Italy, defaults.

Why is this happening? People lost faith in Italy to repay its debts. In the last few decades, the US spent a large amount of money on Tax Cuts and the military, which weren't the greatest long term investments but at least we got some cool fire works. Europe, and Italy in particular, spent their money on the elderly and their care. Turns out that wasn't a great investment either because the one thing the elderly do is take up more and more financial resources with those who live the longest need the greatest care. So the people of Italy have been aging at an incredible rate, more so since they stopped having kids. So you take those two facts and combine them the fact that Italy has been run by the equivalent of Robert Murdoch but without competence then you get an idea of where they are going.

God help us all.
 

commiecorvus

Former Signing Ninja
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15,819
#3
I think that just about every country is going to see financial crisis of one sort or another as the world economies change and the populations get older.
We need to come up with different priorities and ways of handling the money.
The old ways will not work.
Capitalism does not provide a safety net while a government that spends more then it takes in (and destroys its income sources) obviously can't survive.
New ways of handling things have to be initiated.
The solutions of cut to the bone or spend like crazy just don't work.
 
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talan123

talan123

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Joined
Jun 16, 2011
Messages
652
#4
Meh.

Germany is an army of savers because they control the currency and the balance of trade within Europe. You do not get to have a monetary policy that allows their savings rate with an unemployment rate of 3% unless the books are crooked or they are screwing the other people of Europe. It's going to be fun when that one explodes.
 
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talan123

talan123

Team Member/Troll
Joined
Jun 16, 2011
Messages
652
#5
I think that just about every country is going to see financial crisis of one sort or another as the world economies change and the populations get older.
We need to come up with different priorities and ways of handling the money.
The old ways will not work.
Capitalism does not provide a safety net while a government that spends more then it takes in (and destroys its income sources) obviously can't survive.
New ways of handling things have to be initiated.
The solutions of cut to the bone or spend like crazy just don't work.
Actually the United States CAN spend like crazy but it just has to do the right way which is through infrastructure growth in new highways, roads, schools, and hospital building. It's now cheaper for the US to borrow money than to collect it in taxes, that is a first in history. People are literally begging us to give us their money. Since the late 2000's, the amount of treasuries in the private market has doubled (from around $4 trillion to $8 trillion) and interest rates haven't changed. That is extraordinary!
It means that the United States government is the best, last, and safest investment home and we can take advantage of that.

Will we? Probably not.
 

commiecorvus

Former Signing Ninja
Staff member
Moderator
Joined
Jun 10, 2011
Messages
15,819
#6
Actually the United States CAN spend like crazy but it just has to do the right way which is through infrastructure growth in new highways, roads, schools, and hospital building. It's now cheaper for the US to borrow money than to collect it in taxes, that is a first in history. People are literally begging us to give us their money. Since the late 2000's, the amount of treasuries in the private market has doubled (from around $4 trillion to $8 trillion) and interest rates haven't changed. That is extraordinary!
It means that the United States government is the best, last, and safest investment home and we can take advantage of that.

Will we? Probably not.
Targeted spending makes a great deal of sense.
Rebuilding this country is the only way we will climb out of the hole we've dug (or should I say the elephants have dug).
The crazy spending I was talking about was more like 2 wars, a prescription plan, and benefits plans with no thought as to how to pay for them.
 
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talan123

talan123

Team Member/Troll
Joined
Jun 16, 2011
Messages
652
#7
Targeted spending makes a great deal of sense.
Rebuilding this country is the only way we will climb out of the hole we've dug (or should I say the elephants have dug).
The crazy spending I was talking about was more like 2 wars, a prescription plan, and benefits plans with no thought as to how to pay for them.
Oh, well if you want to be specific...
 
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