THE WORST IS YET TO COME
2008 was a practice run, or a warning shot across the bow, compared to what is coming over the next few years.
2008 did not demonstrate what a liquidity crunch really means, but this time we are going to find out. As with many aspects of financial crisis, Greece is the canary in the coalmine, demonstrating what happens when liquidity disappears and it ceases to be possible to connect buyers and sellers or producers and consumers.
Money is the lubricant in the engine of the economy in the way that motor oil is the lubricant in the engine of your car, and you know what will happen to your car if you drive it with the oil warning light on.
Greece stands on the verge of an energy crisis caused not by lack of energy, but lack of money within the energy sector. This will become a common refrain throughout Europe and beyond in the coming months and years. Loss of liquidity has a cascading effect on supply chains, causing them to seize up.
For a long time, money will be the limiting factor, and finance will be the key driver to the downside, just as was the case in the Great Depression of the 1930s. Resources will remain available, at least initially, but no one will have the means to pay for them during a period of economic seizure. BANKS AREN'T LENDING!
The drawn-out, yet inevitable, Greek exit from the eurozone is prolonging the agony, while leaving the country open to being asset stripped. The same process has played out many times before, but humans are resistant to learning the lessons of history and applying them to their own situation.
What is beginning now, or more accurately resuming now, is already familiar to the citizens of Russia or Argentina. We can expect payments to dry up, notably public sector obligations. In Russia people went to work anyway, despite being paid months late, if at all, because they had much less dependence on liquidity for rent and utilities.
In Greece (and later elsewhere in Europe and the West in general) this dependence is far greater, and the impact of the loss of liquidity will be far worse as a result.
Europe is at the epicentre at the moment, but contagion will ensure that the dynamic will spread. In the European context, we are likely to see the liquidity crunch currently focused on the periphery spread to the centre. Initially the centre appears to be perceived as a safe haven, but probably not for long as the systemic risk associated with the single currency becomes increasingly apparent.
DENIAL, MISPLACED HOPE, FEIGNED OPTIMISM AND OUTRIGHT DELUSION WON'T HELP!