A bit of sage advice from Charles Hugh Smith over at Zero Hedge:
…The Eurozone debt “crisis” is nothing but another credit cycle, in which debt expands beyond the carrying capacity of consumers and economies. Debt then contracts as uncollectable debt is written down; borrowers go bankrupt and their remaining assets are auctioned off (if they put up collateral; if not, then tough luck, lenders, you blew it and will have to suck the entire loss). Insolvent lenders are also declared bankrupt and dissolved.
There is absolutely nothing unusual about this cycle. Impaired debt is renounced and the system is purged of bad debt. Once the economy has been cleared of garbage, so to speak, then everyone can stop pretending and start dealing with reality. Businesses will be able to start up in a transparent and open market…
I agree with how that will work, but I disagree that we’ll be able to start fresh right away. In addition to clearing out the bad debts and letting the insolvent go belly up, we also need to engage in some genuine reform in order to better protect ourselves against the excesses which brought on the current crisis. But the main thing is: be not afraid.
This is not to say it won’t be lousy for a while. It will. Very much so. In fact, it’ll hurt a great deal. No illusion ever collapses without causing someone some pain. The illusion that we could borrow and spend our way to wealth will die hard, and it’ll hurt a lot as it dies. But die it must – first off because it is immoral, but also because we can’t start to rebuild until the illusion is gone. Only when we’re at rock bottom and as broke as we can be will there come the will to do the right thing – to build an economy based on hard work, savings and careful investment.
Right now we’ve got about a half dozen triggers around the world just waiting to set off the crash. If they manage to cobble together a deal for Greece then we still have to worry about Portugal. If something is figured out for Portugal then we have to worry about Japan’s deepening economic crisis. If Japan dodges the bullet then we have to be deeply concerned about runaway inflation in China. If China manages to put a lid on that, then our own debt crisis remains a gigantic risk. And if we get around our debt crunch then it will be time to turn back to Greece because no matter what is done, it won’t make it possible for the Greeks to ever repay their debt; or it will be Spain, or Italy, or Ireland, or the entire EU, etc, etc, etc…the problem of the world, too much debt, is intractable. It cannot be solved in the sense of everyone gets paid. There isn’t enough money in the world to pay everyone back. Someone has to take it in the shorts, eventually…and when it is so taken, it will trigger a global financial crash. The question is not if, but when.
But it won’t be the end of the world. At least, not for most of us. For some bankers and bureaucrats, it will be…but it will also be a chance for them to rethink their priorities and perhaps find a useful trade. So, even for them, it won’t be the end of the world. It’ll just hurt a bit – but it will also be over fairly swiftly if we just let it happen…no more attempts to backstop a failed system or bail out an insolvent bank. It doesn’t work. It can’t work. Better to just let the chips fall where they may and then get on with it.
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