The Domino Theory

Charles Smith is a gem. Long term, analytic and correct, he explains economics in a precise and commonsense way as seen by his nation cycle chart seen at the top of this post. When his thought process is applied to the situation in Europe, one gets an alarmingly clear picture of just how dire the situation truly is.

Now an inescapable double-bind has emerged for Germany: If Germany lets its weaker neighbors default on their debts, the euro will be harmed, and German exports within Europe will slide. But if Germany becomes the "lender of last resort," then its taxpayers end up footing the bill.

If public and private debt in the troubled nations keeps rising at current rates, it's possible that even mighty Germany may be unable (or unwilling) to fund an essentially endless bailout. That would create pressure within both Germany and the debtor nations to jettison the single currency as a good idea in theory, but ultimately unworkable in a 16-nation bloc as diverse as the eurozone.

Despite endless assurances that the Greek debt crisis is contained, the reality is that the ragin' contagion of debt crises will spread not just to other deeply indebted nations but to the mercantilist economies that depend on selling goods to borrowers. Strip out the borrowing, and you strip out most of the customers for German, Dutch and Chinese goods.

Pucker up, the ride has just begun.