07:38 – Benchmark Spanish ten-year bond yields closed the day yesterday at about 6.5% and are now at about 6.7% and climbing. Apparently, that $125 billion EU bailout promise bought Spain only literally a couple hours of respite. Investors aren’t stupid. And Italian benchmark yields are now above 6% and climbing.
Note that the EU is carefully not saying whether this alleged bailout will be provided by the current EFSF or by the ESM, which is supposed to come into effect in July. If it’s to be the EFSF, the problem is that the individual legislatures of the other eurozone nations have to approve unanimously any payments to Spain. That’s not likely to happen. Finland has already said it will want collateral, and it’s not even certain that Germany can approve such payments without a change to its constitution. If it’s to be the ESM, there’s an even bigger problem. Loans from the EFSF aren’t senior; loans from the ESM will subordinate current debt. Having seen what happened in Greece, private lenders are likely to react very badly to having their current Spanish debt holdings subordinated to an EU entity. There’s likely to be a massive sell-off of private debt, which will increase yields dramatically. And no private entity is likely to be willing to buy any more Spanish debt. Or Italian debt. Given that Spain is already essentially cut-off from private loan sources and Italy nearly so, an ESM-funded bailout is likely to be the final straw, putting both Spain and Italy in the position of having no private alternatives at all for refinancing their current debt or issuing new debt. Not that I believe this latest bailout will actually materialize.
11:08 – Benchmark Spanish ten-year bond yields have now reached a euro-era record. No one seems to know what to do, so I’ll offer some free advice that will solve the problem, not just for Spain but for the rest of the world’s governments: start living within your means.
Now. Today. Spend only money that you actually have, and in that spending make allowance for paying back what you already owe, quickly. If you owe a lot of money, as do nearly all governments, plan to spend no more than 50% of what you’re currently taking in. And 25% would be better. Use the excess to pay off what you owe, and under no circumstances borrow more. Period.
Take a meat axe to public spending. Cut everything by very large percentages. Fire 90% of government employees at all levels. Eliminate or drastically cut back on social welfare programs, unemployment compensation, public health care spending, the military, everything. Put all government land and other properties up for sale to the highest bidder. Cut government pensions retroactively to 10% of what’s currently promised. Increase the social security retirement age by one year per year until it gets to 75. String up the politicians and elected officials who’ve taken us down this ruinous road.
Ridiculous, you say? Can’t happen, you say? Well, ridiculous it may be, but it’s going to happen one way or another. Something that can’t go on, doesn’t. The only question is how much longer it can go on. The optimists I know think the collapse may be 20 or 30 years in the future. I don’t think it’ll be that long.
Brignell has EU commentary (art of mis-direction). Macro-Econ perspective.
@Chuck: You write “austerity is an unmitigated failure”. But I still don’t get it – what austerity are we talking about? Look at the data in that article, and tell me just how deeply government spending has been slashed in Europe! The only reductions are of the wishful-thinking kind, i.e., cuts compared to what the progressives and socialists really would dream of spending. Greece has made some reductions; spending in Italy, Portugal and Spain is essentially flat from 2009 through 2011. Every other European country (including many he doesn’t show) has increased spending.
Personally, I think Merkel is the only one with a brain: borrowing even *more* money is no way to solve the problem of overindebtedness. If one had forced Greek bankruptcy a couple of years ago, Greek recovery might already be underway.. Stringing it out with more money (that no European country can really afford) is only going to make the situation even worse.
I also have to take issue with your claim that 3% of your GDP is ok. Think about it: 3% per year, and in 30 years a country is 100% of its GDP in debt. That’s why this was set as the upper limit by Maastricht. Yet, in 2007 (before the crisis) Greece was already at 6.8%; by 2009, this had shot up to 15.9%. Here’s the source data; scroll down for a table of data.
Finally, I just came across the site Economy Watch”, which has really nice financial data from 1980 onwards on lots of countries. See, for example, the Greek government expansion.
Remember, not only is government spending a direct drag on the economy,
spending confiscated, borrowed, or pulled-from-thin-air money on
salaries and programs that have no direct productive value, but all
those myriad regulators and paper-pushers have to do something to
justify their phoney-baloney jobs. That usually involves sticking their
nose in your business. It’s no coincidence that, for instance US states
with the highest cost of government are the worst places for business
and for personal freedom. I suppose there’s a question of which way the
causality flows.
Here’s an article to cheer you all up:
http://www.allgov.com/Top_Stories/ViewNews/Indiana_First_State_to_Allow_Citizens_to_Shoot_Law_Enforcement_Officers_120611
Lock and load one 20 round magazine!
Indiana wants me. Now I can go back there!
Sounds reasonable to me. I’d also add that it should protect anyone who reasonably believes the entry is unlawful, and that the assumption should be that the entry is unlawful unless the police use a loud-hailer from well outside the premises to announce that they have a warrant.
Actually, I think we should require search warrants and arrest warrants to be delivered by registered US mail, return receipt required, and not allow officers to take action on the warrant until the person and/or premises affected have been notified and had a chance to discuss the action with their attorneys.
Anyone who without proper notification breaks down someone’s door and comes armed into the premises deserves whatever happens, including a hail of armor-piercing bullets. And if those officers return fire and injure or kill someone who is protecting his property, those officers should be charged with first-degree murder. Do they ever even consider calling the guy on the phone and asking him to come out so that they can talk to him?
But… but… then they’d be able to flush their drugs down the drain
and there would be no evidence to justify grabbing their cash and
shooting their dogs! That way lies anarchy!
Of course a reasonable government, the kind that allows their citizens the right to defend themselves rogue cops, should also repeal any prohibitions on drugs.
There are few other crimes that the evidence can be disposed of that easily. I think the registered mail idea is silly, but the bullhorn announcement isn’t.
I also think that the police should have to post a bond in order to get a warrant. Don’t find any evidence, or enter the wrong domicile, and the cops lose the money from their budget, and the cops that pulled the boner lose their jobs.
Well shit, we’re all gonna be pushed to the top of the damn list now; what RBT said at 11:08 goes for me triple, and triple again for what youse guys said about cops, warrants, etc.
Optimists give us 25-30 years, I know, and think that things will just bumble along, not too many people get hurt, etc. I think that it will get a lot uglier than even RBT says, and within the next five to ten, tops. The house of cards just ain’t gonna stand up much longer and we ARE looking at eventual default here, one way or another. That, and the three-day supply of food goods on the market shelves, combined with power brownouts and blackouts, plus the ongoing wars, plus any kind of major problem or attack at all on our water supply and/or other infrastructure, or a dirty bomb lit off in a major city, and we can rocket right the hell back to circa 1900, at best. Urban and suburban areas will be no-go zones, and there will be mass die-offs. Order will be kept in some regions and only then by draconian use of mil-spec and cop force and militias will ride the land again, along with assorted brigands, ruffians, scalawags, reprobates, and other such flotsam and jetsam, much of it armed in some way.
And good for Indiana; I do not look for New England states to follow anytime soon, though. Probably some more Western states and western Canadian provinces eventually. There will be growing distance, not only physical and economic, but mental and cultural, between the rural states and provinces and such cesspools as Mordor, Babylon, SF, and Ottawa.
Fun times ahead, homies!
Bill wrote:
“I think the registered mail idea is silly, but the bullhorn announcement isn’t.”
I like the phone call idea best. fast and discreet.
How’s this for a crazy idea: walk up to the front door during daytime or reasonable evening hours and knock or ring the doorbell. Have the warrant in hand, along with photo ID for the cop serving the warrant. If you get a middle-aged white man looking like he just got home from the office, rather than the scruffy, tattooed, twenty-ish black man you were expecting, you just might have the wrong address. (Almost exactly that happened in my old town, Schenectady, NY. The stupid pigs mixed up Nott St and Nott Terr and went to my neighbor’s well-kept house in one of the best sections of town rather than gangstaville a mile away. Except, instead of politely knocking on the door they had about ten stupid pigs bust the door down. So far as I recall, the man didn’t have a dog for them to shoot, nor a pregnant wife to slam down on the edge of the coffee table.)
I have seen testimony in several cases where a search warrant was provided and the doors were broken down to get in. In 2 cases, no one was home. In NONE of the cases, was any evidence obtained that would justify the warrant.
There should be some kind of punishment when a warrant to SWAT the premises leads to nothing.
I really like RBT’s suggestion of a large cash bond.
There are a couple ways the system could be gamed to collect the bond, but I think they all could be negated by good police work. For instance, anonymous tips can give the cops an idea of something to look into, but shouldn’t suffice for a pre-dawn raid.
koff That was my idea koff
But you’re right, good police work would negate any bonds being lost. Get your ducks in a row, and most people will applaud. Cheat or break the rules you’re supposed to uphold, and most people hate that.
Spending as a percent of GDP is not cumulative. If I buy a new car with a 3 year loan, and it costs me 20% of my salary (my own personal GDP) in year 1, it has not cost me 60% at the end of year 3, because each year brings in new income. Every year is 20% of THAT corresponding year’s income. Same with GDP. You don’t keep adding each year’s spending to year 1’s GDP and finally come up with 100%; you take it out of the appropriate year’s revenues, which in the EU case, remains at about 3% yearly of THAT year’s GDP.
Austerity in the EU case, is when, because GDP drops, it forces a decrease in spending that was not planned. Now it is too bad that no government I know of, actually saves in the fat years, like Joseph did in the Bible, so there was enough to draw on during the lean years, thus no one suffered. But in the EU case, GDP has dropped, and consequently so has spending, which still tracks 3% of a falling figure. That falling spending has caused joblessness and hardship in every country affected.
But yet, austerity to you is to additionally decrease spending below 3%, and that somehow will bring prosperity, more jobs, balance the budget, and fix everything? Hmm. I gotta see that work to believe it is possible.
Governments are NOT households, but virtually everyone on the planet thinks they are—including especially every so-called economist running the EU economy and, apparently, most people here.
Recent figures are difficult to come by, because—like in the US—they are revised several times in later quarters, so it is about a year before accurate figures appear, but I do not see where spending in the troubled countries (Greece excepted because accurate figures for them are completely unknown) has not generally decreased as GDP has. With Merkel and her Gestapo holding guns to everyone’s head as the figures come in, if there has been an increase, it is only because nobody really knows what the GDP really is until about a year past the point in question. And with the Gestapo ready to aim and fire, nobody appears to have been increasing spending on purpose.
Although that is likely to change. Infrastructure and government spending needs to be a constant,—especially during contractions,—consistent with the requirements of a civil society. Obviously, I am not in agreement with the majority here, who are anarchist enough to believe that society will have roads, utilities, property rights, banks and commercial trade, safety, law and order, justice,—and fairness in all of those—without government. If you think society can do without government, then watch Europe. We will see whether squeezing it dry, as opposed to what we did in the US with quantitative easing, produces better results. So far, the difference in results for essentially the same cause in downturn, is pretty stark. I may rag on the US, but we have done a pretty good job keeping the economy going, whereas the EU is killing itself.
Chuck, in no way do I think Bob’s anarchy would be anything but a fast road to feudal times, I also in no way believe that governments aren’t households. Whether it’s a house, a business or a country, the end result is the same when you spend more than you make.
WHO is spending more than they make? No Western country I know of is spending more than their GDP revenues. None.
Not that I advocate it, because I don’t, but it is certainly obvious from the experience of other countries, that the US can survive higher taxes (at least 2 to 4%), AND more spending. The Scandinavian countries have had much more social welfare than the US for decades, and they not only can afford that, they live longer lives and have much better healthcare—all while maintaining their middle-class. Again, I do not advocate increasing taxes or spending, but we would not be hurt by either.
My concern is more that we are making choices that are ultimate dead-ends. Running wild for decades with no energy policy whatsoever, when gasoline alone is now double what it was when I returned from Germany less than 3 short years ago. And even if we could afford the road infrastructure—which it is obvious everywhere I have been, including S. California which once had the best roads in the country, that we cannot,—we are totally unprepared to make a switch to FAR more cost-effective rail, which we once had throughout the country in spades but did not preserve and threw away instead, because macho Americans would rather waste productive time pushing pedals and turning a wheel for hours a day, rather than let someone else do the driving while paying a teeny-tiny fraction of the yearly cost to maintain an automobile.
Healthcare costs are out of control, as are both doctor, lawyer, and CEO salaries, but nothing is even being contemplated as Congress simultaneously tells us our Social Security payout rates are too high,—even though that will be the sole retirement income for most Americans while Congress lies and contradicts the government accounting and budget office which shows SS fully funded until most of us baby boomers will be extinct.
I am really staggered that there is so little general understanding of economics and the truth of what is actually going on.
“I think we should require search warrants and arrest warrants to be delivered by registered US mail, return receipt required, and not allow officers to take action on the warrant until the person and/or premises affected have been notified and had a chance to discuss the action with their attorneys.”
I have often wondered about this. Sure, there are situations where evidence might be destroyed, but in too many cases the warrant itself is unjustified.
Worse: How do you know that it is even real? Some guy (in uniform or out) comes to you door, hands you an official-looking piece of paper, and demands to come in. How long do you have to inspect the paper? What does a real warrant look like? Is that really the judge’s signature? How do you know?
Don’t even get me started on “no knock” raids. In that case, any and all acts of self-defense are entirely justified. There are already numerous cases of criminals shouting “police” as they break in. “No knock” raids should only be considered in hostage situations, or other situations where innocent lives are in immediate danger.
– – – – –
@Chuck wrt GDP. Spending as a percentage of GDP is not cumulative, but borrowing is. In 2009, the Greek government spent 55% of the national GDP. It collected 40% of the national GDP in taxes. That means that Greece borrowed 15% of the national GDP. Suppose you borrow 10% of your salary this year, and next year, and the year after that. After those three years, unless you got a raise, you owe 30% of your personal GDP to your credit-card. Plus interest.
You are right that GDP is a changing figure, and if it goes down, it can make government spending look worse. The thing is: 2009 is the only year where GDP went down in the Euro-zone. Look at that statistics site I referenced. In every other year, GDP has risen at a fairly steady rate. Hence, even “flat” government spending, as a percentage of GDP, represents a de facto increase. Again, where is the “austerity”?
The difference in our viewpoints comes down to the Keynesian question: can increased public-sector spending improve private-sector performance? My firm belief is “no”. The government can provide essential infrastructure, and a short-term safety net (unemployment payments and/or welfare). Any government spending for “shovel ready jobs”, industry subsidies (poster child Solyndra), etc. is money that would have better been left in private pockets. Government bureaucrats make lousy venture capitalists.
“I do not see where spending in the troubled countries has not generally decreased as GDP has”
Huh? Spanish government expenditures in real currency (not as a percentage of GDP) increased in every year through 2009. There was a decrease of about 1% in 2010. 2011 and later years are forecasts, and therefore inaccurate. Italy, exactly the same thing: increases in every single year except 2010, which showed a drop of 0.5%. Austerity?
“No Western country I know of is spending more than their GDP revenues. None.”
I don’t understand what you are saying here. You do know that private people need some portion of their earnings to buy things? The only way the government could sustainably spend 100% of GDP is in a 100% socialist system where everything belongs to the government.
Most western countries have government expenditures of around 50% of the GDP. This already means that fully half of the economy belongs to the government. Isn’t that a bit much?
Chuck wrote: “WHO is spending more than they make? No Western country I know of is spending more than their GDP revenues. None.”
Excuse me, Chuck, but every western country is. The GDP of a country is not a government’s earnings, but the total production of the population of the country. The taxes paid on that production is what a country gets to spend, and they’re spending far more than just that. Most countries don’t actually “do” anything other than look pretty on a political map. They completely disappear on a physical map, because they are imaginary.
I can’t think off hand a country that is spending less than it’s tax revenues. Switzerland, maybe?
Remember, Chuck is a Keynesian.
I didn’t actually believe that Keynesians really think that the GDP equals government revenues. If you had been listening very carefully, you may have heard the sound of my mind being blown.
“I can’t think off hand a country that is spending less than it’s tax revenues. Switzerland, maybe?”
There are more than you may expect! Among European countries, I believe there are four: Estonia, Norway, Sweden and Switzerland. Some few even have no debts, though it depends on how you count future liabilities such as pensions.
20 years ago we had Johnny Cash, Bob Hope and Steve Jobs. Now we have no Cash, no Hope and no Jobs.Please do not let Kevin Bacon die.
–Bill Murray, Twitter, 10 Jun 2012
Where did I say that GDP represents government income? More than once, I said that about 3% of GDP represented what the troubled countries are allowed to spend. I think you guys are purposely misrepresenting what I say, just to argue. Obviously it is impossible to take in 100% of GDP, but the country is not spending more than it is making, until it does that.
Clearly, Keynes was not 100% wrong. There is ample evidence since WWII that government spending in the right places, stimulates jobs and the economy, at the price of borrowing that must be repaid later in good times.
And most economies are repaying debt regularly by such things as redeeming bonds, thus not adding it to the previous year in cumulative fashion until the debt represents more than yearly GDP. And even if that is happening, then it is a failure in discipline, not a problem with the workings of economics. It is really hard to stomach when you guys take corruption like that in Greece, and bandy it about as if it is economic fact that it will always occur, so no one should be allowed the ability to escape starving to death on the occasion when corruption does occur.
What defines austerity? Only a decrease in government spending? The troubled EU countries have not reduced spending to your liking, so where’s the austerity? Well, unemployment in Greece tripled during the last 4 years and has nearly doubled in Spain. Salaries and pensions have been cut severely in Greece and more moderately so in Spain. Taxes have increased significantly in ALL of the troubled EU countries, at the exact time their economies are tanking and wages are being cut. And strangely, immigration has been a problem in all of the troubled countries except Ireland—especially in Greece, where people say it has literally changed the face of Athens. Some reports are that as many as 400,000 new immigrants now make up the population.
I don’t live in Europe anymore, so I have much less of a feel for what is going on. I KNOW that things were slowing quite noticeably in Berlin when I left in late 2009. 2009 was when the trouble started AND AGAIN, it was started by the housing bubble bursting. Nobody needed to be spending less prior to 2009, and the fact is that Spain and Ireland were improving their debt to GDP ratios with surpluses. My gawd, you want these countries to be kamikazes before the problem even developed! Going into 2009, I remember Europe proclaiming that it had hardly been affected by the US problems and slowdown.
Nevertheless, I seriously have to doubt that GDP was actually growing in 2010/11. And I just do not believe it is growing now–although I repeat that I have no way of confirming that through personal observation. However, I feel quite confident that there is plenty of austerity going around in Greece, Spain, Italy, Portugal, and Ireland, regardless of whether spending is slowing fast enough for you–and I, for one, am glad it is NOT slowing very fast, because it ain’t gonna revive the patient! it’s going to kill him.
Solyndra, meanwhile, is not representative of where *I* think stimulus money should go. That has nothing to do with the infrastructure government is responsible for—which is where stimulus money should be going. The fact that Solyndra went bankrupt is unfortunate, but indeed, it never should have been the recipient of ‘stimulus’ money.
Somewhere recently, I read that over 40% of the debt of various EU countries rests in the German Bundesbank. I have maintained that Merkel is cutting the Germans’ own throats with her policies that are turning the EU tailspin into a direct dive into the ground to China, and Germany will pay one way or the other. German taxpayers are going to have to eat losses in Europe exactly the same way we US taxpayers ate the losses of Lehman Brothers, Goldman Sachs, and others, thereby setting our wealth back to the early ‘90’s. Germany always has been pretty poor in the dictator department. Guess they will never learn to stop wanting to be one.
I live in a little country shire. Our little local government balances the books, and the rates (taxes) are about as minimal as they can get. They own their plant and equipment (paid for in full), they have all their salaries and wages fully-funded. Even the off-the-books future liabilities (like pensions, sick pay) are fully-funded – they’ve got interest-bearing deposits to cover anything they might have to pay – deposits they make, and keep paid-up, as the liabilities accrue.
The only debts they might accrue are for new plant – principally road-building equipment. Mostly, they don’t need to do that, as the equipment wouldn’t be used full-time, and they hire it from local businesses instead. If they do need to buy, they declare the debt, they accept it over no more than three years, they always have more assets than the debt, and they pay it off and have done with it in three years, leaving them with an asset that will last for two decades.
Now if my second cousin the mayor and his mate the county clerk can do that,it’s not that hard to balance a budget. Spend no more than you make, go into debt rarely and only for good reason, accrue minimal debt and no more than you have assets to cover, and pay debts off ASAP. Not hard, is it?
Of course, there is a problem. They’re honest. The only people whose pockets are getting lined are the ratepayers, and none of them are making heaps off the local council. Even the local earthmoving contractors are only getting fair rates.
Tiny Town just had a change in mayor at the first of the year. The previous mayor was Republican. He faced a budget crisis, and made lots of changes. Bought one of those trash trucks with the robotic fork lift arm built onto it, just like we had in Germany (truck is made in Germany, in fact). Every resident in the city got one of those big green trash bins on wheels, that the truck could pick up. He reduced the trash crew from 3 to 1, and reduced the pickup schedule from 5 days to 3 with no Monday pickup, so there would be no Saturday overtime on weeks with a Monday holiday. He cut one job from every city department. He had trusty’s from the local jail mow the park and cemetery lawns. All this was in place for at least the last 3 years. The city saved over $50k/yr from workman’s comp claims alone by using the robot arm for the trash, instead of having manual labor do it.
Mayoral office returned to Democrat control. Have not seen the robot fork lift trash truck since he took office. Crews are back to 3 men using the old truck. Now even in the big city of Indianapolis, 1 guy mans the truck and gets in and out of the cab to put trash into the receptacle. But in Tiny Town, we have 2 guys walking emptying the bins by hand into the back of the truck, with 1 guy doing nothing but driving. Trash pickup expanded from 3 days to 4. Have not seen the jailbird trusty’s doing anything anymore (they wore striped pants to identify them). In several city offices, he has replaced every worker cut with 2 new hires. Those Democrats just can’t wait to get their patronage jobs back sucking from the city coffers.
So why was the Republican defeated? Do the residents of Tiny Town like paying higher rates?
We have the robotic garbage cans around here. They are very efficient. Too bad your town is regressive.
We’ve had robotic garbage/recycling collection for 20 years. I couldn’t imagine going back. The bins are much larger, it only takes one person driving the truck rather than an extra 3-6 guys running around, risking injury, RSI, etc.
Hi Chuck – I am not trying to misrepresent what you are saying, but perhaps you are not being as clear as you think you are. For example, you write “about 3% of GDP represented what the troubled countries are allowed to spend”. That’s just not true. Maastricht allows them to borrow 3% of GDP. They are spending about 50% of GDP. There’s a big difference!
Similarly: “most economies are repaying debt regularly by such things as redeeming bonds, thus not adding it to the previous year in cumulative fashion” Again, not true. With the four exceptions I listed (Estonia, Norway, Sweden and Switzerland), all European countries have net borrowing every year. Sure they pay back bonds, but they issue more new bonds than they pay back. Debts are, in fact, accumulating.
Perhaps I have misunderstood what you said, but you said it quite clearly. If I have misunderstood, please explain???
I liked Daniel Hannan’s analysis of the bailout. Italy is kicking in 20 billion Euros to bail out the Spanish banks. They’re loaning this money at three percent. To get the money to loan, they have to borrow it at seven percent interest.
brad says
For example, you write “about 3% of GDP represented what the troubled countries are allowed to spend”. That’s just not true. Maastricht allows them to borrow 3% of GDP. They are spending about 50% of GDP. There’s a big difference!
I agree my comments on that one could be unclear. Both economists and news reports often use the terms “borrowing” and “spending” interchangeably; however, I DID point this synonymy out during the past week or so. Most of those using the terms assume that if it is borrowed, it will definitely be spent. Even the Financial Times occasionally misuses “spending” when they mean “borrowing”, and their reporting is now head-and-shoulders above Rupert Murdoch’s WSJ.
Similarly: “most economies are repaying debt regularly by such things as redeeming bonds, thus not adding it to the previous year in cumulative fashion[…]”
and the rest of the sentence: “[…] until the debt represents more than yearly GDP.” According to my logic, that sentence allows for them to add small increments, but not large ones, like adding last year’s borrowing to this year’s and not paying off anything of either. That was the gist of my whole paragraph—that none of them are in the position of not repaying any debt (yet), and that generally, countries pay off substantial portions of their debt each year, even if they may be accumulating a little each year.
Looking at the Germany figures, I do not really see a problem. They increased the total by 9% from 2008 to ’09, and by considerably less than 1% from ’09 to ’10, which is the last year of actual figures that are not projections. When inflation/cost of living factors are figured in, this is about the same as holding debt steady in value terms over that period—and if you take into account the euro’s slide against world currencies across that time, they deserve even more leeway.
There is no way I will ever agree with you that borrowing must be ever-decreasing for a country to function; that little or no debt is necessary for growth; or that over-borrowing or over-spending (either) is the root cause of Europe’s problems. Yeah, there probably is a point when borrowing eclipses a country’s ability to repay, especially if that country’s economy quits growing—forever. But that is a highly unlikely scenario in the developed world. Before that could happen, just as it is happening in Europe now, the costs of borrowing in the free market, would prevent them from borrowing up to the tipping point. Except in Africa under dictatorships, I do not believe we have yet seen that point—at least in the developed free world. Even though there have been collapses, like in Argentina, the root cause was other factors, perhaps exacerbated by debt, but not caused by it. Same with Europe now, and it is certainly not impossible for the EU to return to normal if Merkel gets out of the way.
Related to Europe, I agree with the handful of economists who insist that nothing but the ECB’s guarantee of member countries’ bonds is going to prevent a full-blown crisis. I hear the gasps now, because everyone here except me, believes “guaranteeing” has exactly the same meaning as “paying”. There is a difference in the definition of the 2 words. As I have said before, paying for all of Greece would be cheap, because if they act now, it would not likely be necessary to pay for any of the others. Continuing the same course insures that they will be paying for more than just Greece. There is no way for ANY of those countries to escape the costs of the inter-tangled web they created.
But I am not alarmed nor an alarmist. I lived through the ‘70’s, when my grandfather and father predicted we would be plunged back into primitive barbarism, and was given book after book to read, that described how it was all going to go down. No such thing ever happened. Not even close. I hope I learned from that: that it will not be debt that causes such a thing, as they insisted. According to them, civilization as we know it, should have ended before 1980. Whatever has led to civilizations lost, I think the possibility of that happening to Western civilization is about zero, except via an asteroid, nuke, or super-virus that kills us all. It is not going to come from countries having too much debt—even if Merkel tries her best to end European civilization by forcing the issue.
What is clear to me is that the world is facing equalization. I heard an interview recently with some guy who wrote a book about his belief that all the world’s problems are because of imbalances, which governments need to step in, alter, and correct. I say he has it partly right. Imbalances are rampant, but they are being naturally corrected, because the world is every day becoming inexorably closer. Nothing can stop that. Nothing. No one can exempt themselves from it. The equalizations WILL occur, just like water seeking one level. Countries can no longer live without each other. Any who tries will die an horrible death, as the African dictator experiments have proven.
As part of the inexorable coming together, the US opened its unskilled labor markets to the world, and the result is that US unskilled labor has equalized in worth to very close what it is in China, and not what it used to be in the US. At this point the healthcare system has been shielded from being an open market. But that cannot last. Neither can CEO jobs that pay 411 times the average wage of their employees, while Japan pays only 12x and Germany only 11x. That will be equalized by unstoppable world competition.
This increasing connectedness is also going to balance standards of living, too. I am not familiar with any but the US and Europe, and hope that we are not so far above Asia, the Latins, and Africa that we will be taking much of a hit—but there will be equalization. It will happen in politics, too. Universal healthcare WILL become a fact in the US. It may be delayed, but not permanently prevented.
Right now, we do not have smart people making the economics decisions of the major countries. What we have are the exact same people in charge, who were so incompetent that they completely failed to see the housing bubble in either the US or Europe, nor did they see the banking and derivatives crisis in the US—nor have they put in place effective protective measures to prevent another banking crisis, as the JP Morgan/Jeffrey Dimon affair clearly demonstrates. These same idiots are still in charge of economic policy and continue to be surprised time after time, at every step along the way. Kind of hard for them to escape their stupidity in Europe, because it now only takes hours for their latest foible to fail.
The overwhelming force of world equalization will—IMO—insure that failure of the EU will be a near zero possibility. If the EU comes apart at the seams, a new one will be sewn together in lightning speed. And there will be less nationalistic latitude in the new one than in the current union.
Unfortunately, Merkel has driven up the cost of solving the problem, and has ensured that Germany will be paying a major part of it. Escape is impossible. The spider web was created, and leaving the euro will not absolve Germany of those costs, but will increase them.
There is no escape but the American Way: to shift the housing and wealth losses of the EU to the taxpayers, exactly like Bernanke and the Fed did. The sooner they get on with that, the cheaper it will be for all to dig themselves out. Otherwise, they are executing a perfect kamikaze dive with Merkel at the controls.
Hi Chuck – whatever our difference in philosophy, I agree 200% with what you write here:
“Right now, we do not have smart people making the economics decisions of the major countries. What we have are the exact same people in charge, who were so incompetent that they completely failed to see the housing bubble in either the US or Europe, nor did they see the banking and derivatives crisis in the US—nor have they put in place effective protective measures to prevent another banking crisis, as the JP Morgan/Jeffrey Dimon affair clearly demonstrates.”
It’s not just their lack of foresight. It’s the idiotic things that they’ve done in response to those disasters.
I’ve always believed in the death penalty for sufficiently serious crimes. I’d include in that people who destroy a lot of people’s or countries wealth. By that measure about half or so of the US Congress and Australian Parliament should be lined up against the wall. Not at all a bad idea IMHO.
half or so of the US Congress and Australian Parliament should be lined up against the wall
And to show just how far gone we are: After the Congresswoman in Arizona was shot, the blogger TJIC said “only 534 more to go”. Perhaps a comment in bad taste, perhaps not – but the MA police promptly arrested him and confiscated his firearms.
You may be getting visitors soon…