China makes plastic ducks, the rest of the world buys them until they run out of money, and when they do, China lends the rest of the world enough money to buy more plastic ducks.

Now consider the situation with Europe. Instead of plastic ducks, Germany makes tractors and sells them to Southern European countries, who pay them back with olive oil, Mattheus Rose, spaghetti hoops and Guiness. But they can’t sell enough olive oil et al so Germany has to lend them money to buy more tractors. Until the money runs out. But then Germany is worried about default because if they do, all the bonds they have sold them will be worthless.

So what do they do – the EC force Greece (the first ones to run out of money) to put together an austerity program for the sake of European unity, and then put together a framework to police Greece’s program. And it will be policed by a triple force from the European Comission, the ECB and the IMF. They will have the freedom to pore over the books, to tut tut tut, raise their eyebrows and to assess whether the program is being credibly, realistically and effectively implemented. And then if it isn’t working, they can insist on even deeper reforms.

They need to raise £225bn this year, but can only raise £144bn in taxes. Then next year it will need to raise a whole lot more. We’re talking a country that is already paying 11.6% of their GDP in interest payments. That’s one hell of a lot of olive oil they’ll need to sell. The crunch time will be in April and May when repayments of 16bn Euros are due on bonds. I reckon the EC will do just enough to enable them to roll over this debt.

In the meantime, people have taken to the streets. And understandably so. Their pride is hurt, and it’s employees who are bearing the brunt in the form of cuts in already very low salaries (I always marvelled at how people could get by), and higher fuel duties. I expect a lot of social unrest as people air their anger at perceived foreign interference,  and their loss of hope for the future.

Watch what happens here. There is a quote from the French film “La Haine” which says that when someone (and in this case think society) falls out of the top of a very tall building, at each floor he says, things are still ok. Until they finally hit the ground.

While all the focus is on Greece, and the other European PIGS (Portugal, Ireland, Greece and Spain),  it’s worth having a look just that bit closer to home.

1. Bill Gross in his investment outlook for Feb 2010 has described the UK as a must avoid and its bonds as “resting on a bed of nitro-glycerine” and “high debt with the potential to devalue its currency present high risk for bond investors”. Have a look at his graphic the ring of fire and see which other countries are in the danger zone – yes the PIGS are there, but so is the UK

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gross+Ring+of+Fire.htm

2. Don’t know if you noticed yesterday, but our trade defecit had unexpectedly widened again to a whopping $7.28bn in December despite the devaluation in sterling. That’s 250 million quid going out of the country every day – surely that’s not sustainable !

3. And the Bank of England Quarterly Inflation report came out today and it’s very downbeat, with few signs of any kind of prolonged recovery. See this excellent analysis from notayesmanseconomist

http://notayesmanseconomics.wordpress.com/2010/02/10/bank-of-england-quarterly-inflation-report/

There’s a lot of negative coverage out there in the media.

And this is where the problem is. Negative coverage brings about a negative mentality and a negative national mindset. When I was in Athens last year, I didn’t see much evidence of economic hardship, but what I did see was a population that was collectively broken and demoralised.

It takes courage to go against the grain and be optimistic for the future in these circumstances, I prefer the way the Irish are looking at it with good humour, and making light of the circumstances they find themselves in ……. “Yeah but we’re f*&^*d anyway – ha ha ha ha”

Keep you heads down, carry on surviving and enjoy the simple things in life – recession or no recession life is for living. I believe you can make money at all times, but the times when it will be a lot easier to make money will come again.