Americas Biggest Threat is EU Sovereign Debt Crisis not AQAP

Okay, let’s get this straight. The injudicious assertions promulgated by political charlatans on both side of the aisle from Obama to Congressman Pete King that America’s biggest threat is Al-Qaeda in the Arabian Peninsula (AQAP) is feculent and even dangerous. In fact it is one of the more laughable jactitations proffered in recent years and ranks up there with the suggestion that America is post racial or even that Wall Street and bankers can police themselves.
In all honesty as things stand, our truest and greatest threat is the European sovereign debt crisis and not AQAP. For if the chickens come home to roost, with the chickens in this sense being the massive preponderance of complex financial papers and derivatives which remain without a true valuation and inundate the global markets, and then we have seen nothing yet in terms of an economic disaster. I means, what is on the horizon given what is occurring in Europe will eventually demonstrate that what we just observed with regards to JP Morgan-Chase and Jamie Dimon will be just a drop in the bucket.

But instead of giving these events the attention they require and other signals, we ignore them and continue with the small thinking myopia that would advance a HR 1838 (SWAP Bailout prevention act) on behalf of Republicans or an HR 3784 (Gas Price Spike Act of 2012) on behalf of democrats. The later under whom oil companies would be taxed at 50 to 100 percent of profits considered to be “higher than reasonable.” Notwithstanding other distractions whether they concern Mayor Cory Booker’s honest remarks on private equity or the President’s personal opinion on Gay marriage, we never seem to be able to be proactive and address real issues that will impact us more than any of the aforementioned in aggregate. Fact is gay marriage has nothing to do with the US economy.

Bush, followed by the Obama administration implemented massive stimulus that were supposed to grow the economy. Unfortunately, such has not manifested as promised by the Keynesian heavy Obama administration (Bernanke, Krugman and Geithner). By their logic the stimulus was supposed to produce fifty cents of GDP growth for each stimulus dollar spent. But instead of increasing demand, what they did was discourage consumption and investment by the private sector who based on all this talk, rightly expect tax hikes to finance the stimulus somewhere in the near future. Meaning that the stimulus actually squashed the private sector spending it desired to stimulate.

This may be why the CBO recently reported the strong chance of another US recession soon. They predict that the US Gross National Product (GNP) will go negative for at least two quarters, given the eventually ending of the Bush-era tax cuts, the extended unemployment benefits and the reinstating of the payroll tax rates back up to 6.2 percent from the current 4.2 percent. Not to mention that currently as a nation, we spend $454 billion a year just on servicing the interest on the national debt alone. Then there is the $642 billion spent on the Afghan war (this includes this year’s spending). And let us not forget the 11 million homeowners in the US with in excess of $800 billion in negative home equity and you can see we have a big mess on our hands without the problems in Europe.

Starting with the UK, Britain's economy contracted by 0.3% in the first three months of the year, faster than previously thought and pushing the country back into another recession and equal to the contraction in the final quarter of 2011. There has been no growth in manufacturing after last year the sector exhibited a decline of 0.7% at the end of last year. The banking sector also contracted, by 0.3%.

Then there is Spain. Spanish banks’ total loan losses could range between 218 billion and 260 billion Euros, more than currently expected according to estimates by the Institute of International Finance. Spain’s economy is in critical condition with 23 percent unemployment of which 50% percent of those under 24 are unemployed (the highest in the Euro zone) and they are in their second recession in three years. Spain like all the European countries that, are uncompetitive, have high debt levels, and suffer from low savings rates that have been forced down in over the past years - one reason why 16 Spanish banks were downgraded last week.

The picture is no different in Italy which saw Moody‘s Investors Service downgraded 26 Italian banks, where investors are needing higher risk premiums for Italian government bonds on fears that Greece may exit from the euro zone and Italy's double-dip recession . Italy is estimated to have around a debt burden of €1.9 trillion (about 120% the size of its gross domestic product), or about $2.6 trillion).

The reality is all the talking and meeting the G-8 just did wasn’t anything and empty, especially without Russia, China and India in attendance. The realty remains that a Greek euro exit is very likely and soon. If it happens, it will lead to runs on Spanish and Italian banks, resulting in the need for the ECB to give out more credit to keep the banks from collapsing. Although the problem isn’t Greece, but rather that Greek banks are undercapitalized. Greece cannot crash the euro zone alone. But what it may lead to can. If they are allowed to leave, the same will be true for other nations.

Ben Bernanke and the politicians in Washington DC speak of recovery while the facts do not support their contention. Not to forget that it was in the 1970s when Nixon enabled bankers and politicians to print and spend at liberty without a gold standard and a Central Bank owned by Wall Street, has resulted in a country where the cost of things we need to live have risen at twice the rate of our income. The truth is that real inflation has been running 5% higher than government is telling us in spite of what is being told to us by Paul Krugman (that there are very few Americans living on a fixed income being impacted by Bernanke’s zero interest rate policy). Maybe this is why Krugman is so bent on another $4 trillion of debt and a debt to GDP ratio of 130% to get our economy back on track.

Yes we cannot see the big picture. The real US deficit is over $5 trillion. Our policy appears to ignore Greece, which after several years of austerity are in the midst of a full-blown economic depression and they still do not have a balanced budget. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent, is already experiencing a depression that will only get worse. If or when they leave, investor confidence in the euro zone will be damaged forever. Already as a nation America has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.

Europe is our largest trading partner, especially as it pertains to exports. Yet our efforts are all over the place. Paul Ryan supposed spending cuts really only slow spending to 3 percent annually while Obama increases spending 4.5 percent a year in his budget. No to mention that like the EU zone banks who are undercapitalized and heavily burden with the uncertainty of how much banks actually hold in bad assets, and the potential need for the government to bail them out at the expense of a bigger debt burden, the same is true for US banks.

Economic growth is stalled both in Europe and in America plus there seems to be a lack of concern here and little if any coordination between the EU and US. None of the nations including the US are recalibrating either fiscal or monetary policy which is a must. Reform not stimulus is the answer if we look at the real world examples here and abroad. Both the ECB and Federal Reserve seem to focus on the nations and not the banks and the Obama administration has only tackled the issue from a short term perspective. So what there is a newly revealed Al Qaeda video that calls on followers to launch cyber attacks on Western targets that has Sens. Susan Collins and Joe Lieberman, chairman of the Senate Homeland Security Committee, scared, it aint got nothing on what’s going on across the pond and is nowhere as big a threat to America as the European sovereign debt crisis. Take note you heard it here first.