Greeks Opt for Order, and Chaos Reigns

06/18/2012 11:23 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The promise of more of the same after a victory for ruinous austerity is not the market blessing it might seem, writes senior editor Igor Greenwald.

Chaos lost in Greece yesterday. Order won out. And this is terrible news not just for Greece but for the entire world, as share prices should soon bear out.

The rerun of last month’s inconclusive parliamentary elections showed the traditional parties in favor of the European bailout winning enough votes to form a coalition government. Their prize for this triumph will be the task of immediately cutting the equivalent of 5.5% of the plummeting gross domestic product from public spending plans for the next two years.

That’s the price demanded by Greece’s European “saviors” for letting it pay pensions come August. To put that into perspective, a proportional cut in the US would require savings of $850 billion, equivalent to a year of Social Security payments or defense spending.

The people who will soon be fired to maintain the fiction that Greece can toil its way back to solvency will have almost no chance to find work in the shell-shocked private sector. The patients they used to treat and students they taught will also have to fend for themselves. And when the general economic collapse leaves tax collections far short of the target set in Brussels later this year the whole charade can start all over again.

But enough about how bad this is for Greece. The bailout’s opponents made this point loudly for months, and yet a majority of Greeks opted for slow strangulation by the euro and a continued capital and brain drain as bank deposits and capable young professionals flee abroad.

People hate chaos; they don’t wish to lie awake at night confronting a gaping void (the original meaning of Greek khaos) in place of today’s established order. They cling to the comforting verities of the day long past the point at which they’ve become dysfunctional and destructive, which is why history is replete with revolutions.

The Greek election results will prolong the clinging, so that when the internal imbalances at the root of Europe’s troubles resurface next, the established order will be that much shakier and less able to cope. The status quo won, and the status quo in Europe is that problems don’t get solved but are allowed to fester, while the will and capacity to solve them grow ever punier.

But Europeans aren’t the only people who prefer the devil they know. We’re all prone to extrapolating from the recent past, which is why most economists continue to forecast modest growth in the US.

Sure retail sales are sagging lately, consumers are abandoning a recent flirtation with optimism and corporations are stepping up planning for layoffs. Sure the paralyzed political system rolls toward the yearend fiscal cliff, when it might punish us for past profligacy at the worst possible moment out of sheer partisan spite. The exemption from federal income taxes for short sales might be allowed to expire, setting the housing recovery back years.

But we’ve all seen this disaster movie before, and someone always blinks in the end, right? And in the meantime, the Federal Reserve is sure to bail us out.

This is the same sort of wishcasting that prevailed in the markets between August and October 2007, and while the US economy is not nearly as unstable as it was back then, it’s also considerably weaker after five mostly lean years.

I’m starting to think investors’ revived faith in the healing powers of central banks, notably lacking in recent years, might be a leading indicator of a relatively mild recession. Because it’s hard to see how those central banks will pick up the slack from governments unwilling or unable to repeat the rescue measures of 2009.

And yet we cling to the old verities long after they’ve stopped being true, because the blank slate titled chaos is so much scarier.

In France, voters just gave the recently elected Socialist president an absolute majority in parliament to see if he can bring back the good old days by rolling back austerity. In Egypt, the electorate has opted for the cultural conservatism of the Muslim Brotherhood’s presidential candidate, causing the army to claim nearly absolute military dictatorship to keep its longtime grip on power. In China, housing sales have slowed sharply because developers are unwilling to accept the sharply lower prices needed to clear the inventory.

And yet the longer we refuse to accept fundamental change the greater the chaos when things finally break down. Egypt will have democracy eventually. The euro in its current form is doomed. China will crash sooner or later, like so many other fast-growing economies. The United States, a battleground of regional cultures that grow increasingly incompatible, will sail over a cliff one day—even if it’s not the fiscal one, this year.

Perhaps someone’s caught a whiff of some or all of this, and that’s why Dow futures have lost 140 points between the post-electoral bliss of Sunday evening and the reality check of rising Spanish and Italian bond yields early Monday morning. Or maybe it’s another fakeout and we’ll be banking on the Fed again after lunch.

In any case, it’s clear that established economic order remains highly dysfunctional. And that almost guarantees more than our fair share of chaos soon enough.

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