Wednesday, February 17, 2010

How To 'Greece' A Credit Crisis

I love the parable offered by David Kotok at Cumberland Advisors in a recent market commentary, a link to which you will find below.

“My Big, Fat, Never on Sundays Story.”

It is the month of February, on the shores of the Adriatic Sea. It is gray and raining. The little Greek town looks totally deserted.

It has been many months of tough times; everybody is in debt and everybody lives on credit. The government has run out of money and the unions are constantly striking but getting nothing because there is nothing left to be gotten.

Suddenly, a rich German tourist comes to the village. He enters the town’s only hotel, lays a 100 euro note on the reception counter, and goes upstairs to inspect the rooms in order to pick one.

The hotel proprietor takes the 100 euro note and runs to pay his debt to the butcher.

The butcher takes the 100 euro note and runs to pay his debt to the pig grower.

The pig grower takes the 100 euro note and runs to pay his debt to the supplier of his feed and fuel.

The supplier of feed and fuel takes the 100 euro note and runs to pay his debt to the town's prostitute, who, in these hard times, provided her services on credit.

She runs to the hotel to pay for the rooms she rented on credit when she brought her clients there. She hands the proprietor the 100 euro note.

He lays the note back on the reception counter so that the rich tourist will not suspect anything.

A minute later, the wealthy German comes down the stairs, announces he did not like any of the rooms, puts the 100 in his pocket, gets into his Mercedes, and drives away.

There were six financial transactions. No one earned anything. Nothing was added to GDP. However, the whole town’s debt-GDP ratio changed dramatically. The village folks are now out of debt and look to the future with a lot of optimism.

Oh, if it were only so easy?

You can see more context to this in the commentary piece, and also other fantastic coverage of the sovereign debt issues, and whatever else may be going on in the market at the given moment at the Cumberland Advisors website.

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