Economic Cans Being Kicked Down the Road - Q3 Dip?

Germany and France seem to have solved their voter marketing problem on Greece by simply guaranteeing the new Greek debt that their home banks take on. This makes an end run around the fact that their voters are absolutely deadset against actually giving any direct aid to Greece. The real beauty is that the actual exposure of Germany and France is not greatly increased as they will have to rescue their home banks if Greece defaults.

Now all we need is a solution to the other half of the problem: Greek citizens are not willing to undertake the austerity measures that are required to repay the existing debt, much less future debt.

If Greece had debt denominated in their own currency then they would simply devalue and solve the problem.

Instead, Greece debt is in Euros, so they need a different solution. In a functioning capitalist world economy Greece would default, banks and investors would be wiped out, but Greece would be able to finance new debt. This is actually the best solution for Greece, Greeks and the world economy as it would minimize the economic depression from the default. As you economics junkies know, it is the solution that most conservative and liberal economic theories advocate.

Unfortunately, we are in something other than a functioning world economy. We are in an evolving economic system, which is another way of saying nobody is sure what is going to happen.

My guess is that Europe is going to practice the childish game of "Kick the Can Down the Road" and hope that they can spread the crisis out enough that time will heal it, just like the Fed and Paulson did in the USA crisis.

Looking at all the Cans being kicked (the rest of the PIIGS, the U.S. residential and commercial real estate market effect on the bank lending, the lack of consumer income growth, rolling over of leading indicators pointing to a slowdown or actual dip in the 3rd quarter, etc.), it looks like they might be forming a pile that we are going to hit at the end of the 2nd Quarter. The solution is not likely to be favorable for banks or bank bondholders as the world's voters are not tolerant of any more of today's "lemon capitalism."

The third quarter looks like it will be time for a new game. I wonder if it will be more regression to economic feudalism (and the slower growth this represents for the world's developed nations) or the beginning of a new, functional world financial system that helps developed nations takes advantage of the growth in modern technology that so far has only helped the investors in the lesser developed countries.

Disclosure: No Positions