A Felon and a Clown

Rodney Johnson | Wednesday, February 27, 2013 >>

According to Greek Mythology, Pandora was the first woman on earth.

She had a pretty good start in life, receiving gifts of beauty, clothing and speech from various gods.

Then Prometheus stole fire from the gods and things got dicey. Pandora was “given” to Prometheus’ brother and as a parting gift, Zeus sent with her a beautiful box with clear instructions to never open it!

Which of course, she did, unleashing all the evils into the world along with that poor sap at the bottom of the box, the spirit of hope.

Looking at the Italian election results, it appears the Italians have once again opened Pandora’s Box! How else do you explain results that favor a felon and a clown?

Silvio Berlesconi is not (yet) a felon, but Grille is most certainly a real life clown and comedian. Mario Monti, the outgoing appointed prime minister, is by all accounts a bureaucrat.

Berlesconi and Grille came out on top of the recent Italian elections, while Monti was a big loser.

How a comedian and a guy under indictment came to win the election is easy to understand. The population of Italy is at its wit’s end, and they don’t want to take it anymore.

Our response, “Finally!”

There have been protests.

There have been arguments.

There have even been bombings and death threats.

However, this is the first massive movement to “throw out the bums” that have continued to push austerity even though it clearly isn’t working in its current form.

Pay attention! This is not the end. This is the beginning.

Last summer Greeks considered throwing out the very people that created their mess, but then they stepped away from that decision, allowing another coalition of politicians to take the reins and continue the status quo.

That hasn’t worked out so well, as Greece continues to slide backward… posting bigger deficits than anticipated and requiring even longer delays in paying back their bailout funding.

In Spain, Rajoy is “enjoying” a sub 20% approval rating while he tells the people to keep earning less, working more (when they can find work) and trying hard to pay off debts that were not incurred by the common man.

These three countries – Italy, Greece, and Spain – are the slowly boiling cauldron of discontent that we expect will blow the top off of the euro zone and the markets of the world.

And why shouldn’t they?

The average citizens are being asked…no, told…to bail out the banks via their national governments. After years of benefit cuts, tax hikes, and layoffs, these same citizens are finally pushing back.

The interesting part of all of this is that it was not the governments in these countries that created their current fiscal woes. Instead, it was the private banks that became red hot lending machines.

As the loan portfolios turned toxic, the governments in each of these countries stepped in and bailed out the banks, taking on billions in debt. This debt is now the responsibility of the citizens.

So in a very tired story line, the bankers got rich, the governments were strong-armed by the Troika (the ECB, EU Commission and the IMF), and the citizens got the shaft.

This is not to say that everything was rosy in these economies before the crisis. Each of these countries suffered from overly restrictive work laws, overly generous benefit systems, and a ton of corruption that gums up the works long before the debt bubble. All of this slows any sort of restructuring that is the natural outcome of a debt-fueled boom.

The transfer of the debt responsibility, from the banks to the government (and ultimately the general taxpayer and worker) is simply icing on the cake.

Now that the Italians have opened Pandora’s Box, releasing all the potential evils associated with telling the Troika where they can stick their debt repayment and austerity measures, pundits around the world are calling for calamity and chaos.

Maybe.

Or perhaps we get a domino effect where Italian, Spanish and Greek citizens instruct their politicians to develop a better plan. Instead of paying back the debt incurred by their banks in the lending frenzy, there could be a plan to simply wipe the slate clean.

If such a dramatic move was made in conjunction with opening up employment markets and reforming benefit plans, there’s a chance these countries could finally get up off the mat and start making economic progress.

Until then, we expect their elections to get a lot more interesting. Maybe in the next go round the Italians could bring back the porn stars that previously ran for office. That always made for lively debate!

In the meantime, expect the populations of the other Club Med countries to take notice that the Italians have finally taken a stand for the little guy. This small pinhole in the dam of the Troika could eventually be what starts the flood, where consumers, tax payers and workers finally say, “Enough!” and demand a different approach.

This would upend the plans of the ECB, Germany and France, and send shockwaves through the markets of the world. The incredible change in the markets on the night of the Italian elections, from up by several percentage points to negative, shows just how volatile the reactions can be.

This is what we have warned about… be cautious, change is coming!

Rodney

 

 

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.