— In an interview with Bloomberg last Friday, Greenspan warned of ‘almost certain’ Greek default and hinted that ‘Greece’s debt crisis has the potential to push the U.S. into another recession’.
— It sounds illogical how small and remote Greece could trigger another wave of recession in the U.S. economy, when direct exposure of U.S. banks and brokers is negligible at just $32.7 billion!
— Greek default could actually be used by U.S. lawmakers and Fed as an excuse for U.S. going into technical default itself.
— This kind of behavior is not new, it mirrors the tactics that Bank of England used in 1931 to leave gold standard. Then bankruptcy of Austria’s leading bank Creditanstalt in May 1931 induced a series of banking panics in continental Europe. Using these events as a pretext Bank of England left gold standard 4 months later thus undermining world’s existing monetary system. Shockwaves of British default swept over the world, automatically making central and commercial banks with pound-denominated assets insolvent. Long period of deflationary contraction followed in the U.S. (ended only by 1933) and continental Europe (ended by 1936), while British economy was hurt only moderately.
— With this analogy in mind, I would not be surprised to see U.S. default as inadequate answer to Greek debt crisis. U.S. bondholders, both public and private, would be severely hurt initiating a deflationary domino effect on commodity and stock markets
— And finally, Greenspan’s ridiculous “Greek scare” looks like an attempt to prepare the public to such a scenario in advance.
