The mysteries of global finance !

Most people have a good basic understanding of how finance works.   They know that if their spending is greater than their income they start amassing debt - and eventually that debt has to be repaid.   What is happening on the world stage seems to fly in the face of that logic.

Europe decided to create a block of countries which would trade with one another in preference to the other parts of the world.   The citizens of those countries would not need passports and visas to travel within the group - and they decided that a common currency would remove the hassle of changing currencies at every border - and so the Euro was born.

There was a minor problem with that arrangement.  Some of the countries within the group were richer than others - and some had little spending discipline - and soon began to run up huge debts.  You can not have a common currency where the value of that currency changes from country to country - so the group had no option other than to bail out the weaker member with a loan to keep them solvent.

The ordinary layman here in Australia wonders just where this loan money comes from - and it is in huge proportions.   We are talking about hundreds of billions of Euros.

And now this group of countries is conceding that their weakest of the weak is about to fold.   They are not talking about a possible future default.   They are talking about an inevitable default - and even timing that to happen within the next few months.

So - what happens next ?

In our own little domestic world, a personal bankruptcy sees the bailiffs move in.   They grab the car and the big screen TV and put them up for sale to recover some money and pay out those to whom we owe the debt.

Do bailiffs move in to that defaulting little country and grab state owned office blocks, the railway system and all and any other publicly owned assets ?      It seems not.    All that is likely to happen is that they will no longer be allowed to use the Euro as their currency.   They will need to print their own money and commerce will return to changing currencies at the border.

So why waste all those billions trying to prop them up in the first place ?

It's called " the fear factor " - or some may call it " the domino effect ".    The wise knew that default was inevitable - but nobody was sure just how world markets would react - and the spectre of 1929 made national treasurers keen to prolong the status quo in the hope that some miracle would save the world from a repitition.

Wise men and women who are said to understand finance now have the job of reassuring a worried world that things are under control and we are all heading for a soft landing.

What a pity our own finances are not subject to such beneficial treatment if we slip a little and let our spending drift out of control !