Ok just to get to the major issue, when 1 out of 4 people are unemployed for a long time, they have to rely on others to survive. Either housing with relatives (who often have limited patience or none) or from the government assistance. Effectively the governments end up being the last resort, and since government budget crises seem to accompany major economic depressions, people end up on the streets...
Europe right now
In the EU, first Greece, then Spain and eventually Italy and have started to reach this critical number of 25% unemployment. Evidently this critical level leads to depressions and catastrophe. The basic reason is probably that the average working family cannot sustain a budget deficit of 25% for long. This is not a surprise considering that during good times, the savings rate of 8% a year is not enough to cover this excess.
Mathematically you could look at economies like a big battery, where there is a certain drain on power, but if not enough power is charged each day that battery dies. Well, the battery of the world economy is just about dead.
Or, you could look at this from a long term budgetary standpoint, whether for an entire nation or a household. You might be able to charge your financial accounts with some savings when things are ok for a bit, but then if things go bad you have to rely on credit (another battery). That only lasts so long, and of course if you miss payments, your interest rates go up. In effect that battery is dead.
In the EU, both Spain and Greece are suffering 24% unemployment. In the US the real unemployment rate is not 8 percent, it's more like 15 to 20. But not to digress on how the US is underestimating these figures...
The EU is now facing a breakdown because both Greece and Spain are now at the critical level of 24% unemployment, and if you add Italy, which is headed there, and add youth unemployment (under 25) of 50% you realize their economies are in collapse.
Nowhere to go and Germany won't go there
If the US heads there the entire world will have nowhere to go. The US is probably headed to over 25% unemployment as well. Maybe you don't think so. Then you are lucky. In the US recent college grads in the last two years are either unemployed or underemployed working at a minimum wage job. That percent is 50%. Hmmmm.
We ARE in a depression here in the US as well. There is a depression in the S EU, in Greece, Spain and now Italy soon. Their numbers of unemployed are similar to the unemployment numbers there and in the US in the Great depression of the 1930s after the 1929 stock crash. Germany cannot bail out the EU alone either.
Another world stock crash on the horizon
Another 1929 style stock crash is on the horizon. Possibly this year or next. With the seriously disastrous US finances being the last bastion of credit worldwide, with the US credit card in danger of being maxed out (for example the US is buying hundreds of billions of just mortgage bonds alone each year) and the EU just about in tatters over their faltering economic union, the prospects of another major financial chaos like Lehman in 2008 are imminent.
The Euro is facing a possible crash because of this. The USD is rallying. Gold is staying flat, but holding, while most everything else is either dropping or about to crash.
The commodity countries are going to face pressures in their markets, and while the financial world tries to hold together, gold will be looked at to moderate the deterioration of the various national currencies. We forecast about 7 months ago the Euro was headed to 1.15 USD. Ultimately the Euro is headed for a major disaster and probably breakdown of the EU financial zone.
But the unemployment levels of 25% being a key measure, and the US is nearing that even though it's being understated.. and the US being one of the last real credit cards out there, means time is short. I would imagine that Germany in the EU will blink and offer a few more hundred billion Euros, but even so this appears to only buy us all a few more months. Central banks cannot carry entire economies when 1 out of 4 people are unemployed for the long term. A major catastrophe is just around the corner.
Chris Laird is a mathematician, Oracle systems engineer, and publisher of the PrudentSquirrel newsletter and the CurrenciesandMarkets newsletter.
Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and CurrenciesandMarkets newsletter, and alerts, are general market commentary only. They are not intended as specific advice.
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