Trichet to Greece: Drop Dead!

Obama to California: Uh…

Yesterday, stocks lost 103 points on the Dow. This looked like a confirmation to us. The stock market appears to have begun its next and final phase…

AP seemed to think so too:

“Stock investors see threats from all directions,” said the headline.

We didn’t bother to read the article. We already know the directions.

From the north, investors worry about falling consumer demand. Consumers are in a funk – they have more debt, less income, fewer jobs, and less access to credit. The only news on that front we have today is that even jumbo housing loans are going bad…delinquencies are up to 9.6%.

From the east, investors worry about the continued invasion of cheap consumer goods and cheap services. China’s economy is said to be growing at double-digit rates. How can US firms compete? And what if China is a bubble, as Jim Chanos believes? When it blows up, US stocks will come down too.

From the south comes the threat of higher interest rates. The poor dopes think the recovery might be for real. If so, inflation will rise and the feds will increase interest rates…possibly cutting off the new boom.

And from the west what do they have to fear? Well, there’s that business in Europe. You know, Greece and all. The PIIGS – Portugal, Italy, Ireland, Greece and Spain… Europe’s peripheral countries are in trouble. Lenders fret that they might be forced to default on their debt. So, they want higher interest rates. This, of course, just makes state finances worse…pushing the PIIGS closer to default.

The PIIGS owe $2 trillion, which might need to be restructured. Yes, dear reader, the sovereign debt problem is a big one – much bigger than Bear Stearns, Lehman Bros. and AIG. But the biggest porker of all – the USA – has fives times as much sovereign debt as all the PIIGS put together.

It won’t take investors long to figure out that there isn’t a whole lot of difference between Greece’s finances and those of the US. Each has about the same amount of debt and the same size deficit, relative to GDP. The big difference is that the US ultimately controls the currency in which its debt is calibrated. Greece does not. Neither does California.

Both California and Greece borrow long-term at about the same rate…around 6%. Lenders know that when their backs are to the wall, both governments will have only two choices, not three. They can cut spending. Or, they can default. What they can’t do is wiggle out of their obligations by inflating their currencies.

Jean Claude Trichet has already made that clear:

“…belonging to the euro area, you…have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency.”

He went on to say that Greece contributes only about 3% to the total output of the euro-zone. If push comes to shove, Greece will be pushed out rather than allowed to weaken the euro.

Then, Mr. Trichet made an odious comparison. California is a much bigger part of the US economy than Greece is of the euro economy. In fact, it is more than four times as large. Will the US come to California’s aid? Mr. Trichet didn’t say.

It is possible, of course, that Mr. Obama will say to the Golden State what Gerald Ford said to the Big Apple. In 1975, New York City’s back was to the wall. It appealed to Washington for help. “Ford to City: Drop Dead,” was the famous headline in the New York Daily News, reporting the president’s response.

New Yorkers were incensed. Later, they realized that by vowing to veto a bailout President Ford had done them a great favor; he forced New York to clean up its act. The city went on to its greatest years. Likewise, the feds would be doing all of us a favor by letting failure fail with dignity.

Will Obama help California mend its ways? Or will he turn it into a zombie state?

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.