The Finger in the Dike

Greece is unable to get its arms around its debt which is 195% of GDP, including government, public, and corporate. The government debt which is 115.1% of GDP has been downgraded to junk status, which adds impetus to the downward spiral. This country is part of a currency union and cannot print money like the U.S. can to inflate the currency. It can only default by not paying on its bonds, where the U.S. can default through inflation.

Portugal is now on the radar of public discussion with its debt 236% of GDP. Spain, Ireland, and Italy are behind them. As we look at these European countries, we can see that collectively they are in the same boat and the only way to stay afloat is for the creditors to accept a loss on their investments in these countries i.e. mainly the banks.

We saw what still continues from the aftermath of the housing bubble. Foreclosures are still healthy and prospering. Fannie and Freddie, the two government mortgage firms are now offering to help homeowners to do a 'short sale' or 'deed-in-lieu-of foreclosure.' In other words, by continuing to modify the mortgages and have these incur over a 50% default rate, the government has figured out that it's a waste of time and money to continue in this manner. Helping the homeowner in these other two ways saves money for the banks than going the foreclosure route.

Now being discussed, and I agree, the next bubble that is well underway is the 'government debt bubble.' We can see it easily by looking to Europe. Yet it is right under our nose here too. The ripple effect from Europe, once it gains momentum, will be a catalyst for us to act sooner rather than later in stopping our deficit spending. The longer we wait to act, the bigger the immediate impact on all of us.