Or maybe the way the question should be asked is, “What is happening in the world?”
The Republicans and Democrats had their shoot-out at the Not So OK Corral last week and then went home to rest from their labors, confident that they had given the markets assurance that a $900 billion spending reduction – spread over ten years (that’s $90 billion annually for those of you from Palm Beach County, FL) – could somehow equate to increasing federal spending by $7 trillion over 10 years. Since the Congressional fat cats had planned to increase, yes increase, spending by $8 trillion, they thought the reduction to $7 trillion should count as a cut. Why not then plan to increase spending by $10 trillion, cut it to $7 trillion, and then Congress could have gone home to the voters claiming they had saved us tax-paying troglodytes $3 trillion? In fact you could pick any set of numbers and have all kinds of savings. Wow! This Washington math is great!
“Honey, I bought this $750 thingamajig that I really didn’t need and couldn’t afford, but it was on sale and marked down from $1,000 … I saved us $250!”
This kind of fiscal silliness caused the US stock market to respond by shedding 2,000 points (16%) over the last two weeks.
Then, alas, Standard & Poor’s downgraded its credit rating on long term US government debt for the first time in history. Yep, from AAA to AA+ saying the deal reached by lawmakers to cut the federal deficit by an estimated $2.1 trillion over a decade didn’t go far enough, and “America’s governance and policymaking [is] becoming less stable, less effective, and less predictable than what we previously believed.” Ouch!
His High and Mightiness felt compelled to provide his own risk analysis: “No matter what some agency may say, we’ve always been and always will be a triple-A country.” Yeah, well tell that to American investors who are afraid (rightfully so) that we are headed into the second dip of a double-dip recession. They know the Federal Reserve, with interest rates essentially at zero, has limited ability to pull another rabbit out of the hat. Two rounds of quantitative easing (called money-printing for you monetary tyros) pumped $2.3 trillion into the financial markets but failed to get the economy so it could stand on its own.
Then last week, trying to cajole a swooning stock market to stop swooning, Fed Chairman Bernanke, over the objections of three other Fed members, promised to keep interest rates where they are for two years. Assuming he means to keep this promise, it was stupid to make it, since Bernanke can’t see the future and doesn’t know what will happen that may compel interest rates to rise.
Rather than pander to the stock market as an election approaches, I hope Bernanke is paying attention to the Vesuvian eruption that may be building in the European Union. Americans don’t pay much attention to what is going on across the big pond, but if the European Union or the euro collapse, our economy can be dragged into their financial cesspool.
Quick background …
The European Union (EU) was created in the early 1990s to challenge the efficiency of the US domestic market and to challenge the US standing as a superpower. It is an economic and political integration of 27 member (primarily European) states with a combined population and GDP that approximately equals that of the US. The major EU countries ranked in terms of their population are Germany, France, UK, Italy, and Spain, which represent a substantial majority of the EU population.
The EU has a European Central Bank (ECB) that functions like a poor imitation of the US Federal Reserve, and there are other governmental institutions that try to operate independently of member countries but can’t because members have not given up their sovereign identities.
The eurozone is a monetary union of 15 countries which have traded their sovereign currencies for the euro. This eliminated the shifting exchange rates that hampered trade between these 15 countries. The UK, Sweden, and Denmark have remained in their sovereign currencies but are members of the EU. A common currency allows (in theory) the euro to compete with the dollar as a world reserve currency.
Both US and Europe are currently in economic turmoil. Why? Because the underlying structural problems in the US and global economies that caused the financial and economic crisis in 2008 have not been fixed.
Specifically, the US and other industrialized economies were and continue to live and spend beyond their means – consuming more than they produce. Moreover, the Asian (largely Chinese) economic boom has been fueled by intentionally undervalued currencies that imported a massive dollar reserve and caused the credit bubble in the US that burst three years ago. Finally, the eurozone system may have a single currency and a single monetary policy, but it doesn’t have a single economy running along side of it. A single economy, while essential, can’t be created simply by converting to a single currency.
In the post-crash years after 2008, the economic wizards in the industrialized economies resorted to what all good little Keynesians do – they flooded their economies with taxpayer-funded stimulus gimmicks in the form of deficit spending and money printing, which may have prevented a few people from leaping off of tall buildings, but it did nothing to create the virtuous cycle that only the private sector can create: i.e. growing sales and profits and employment that reinforce each as a self-sustaining growth engine. “Shovel ready” is what you expect to find in a pile of horse or cow manure and a politician, not in a sputtering economy. How’s the “hope and change” workin’ for ya’?
Since few politicians have ever held a real job, they fail to understand that only markets can right-size companies and industries, find the market-clearing price for houses and shopping centers, or bring wages in line with global competitive realities. Only markets can wring the speculative premium out of the price of stocks and commodities. And only markets can move workers from where they live to where they are needed, and create a match between the skills workers offer and the skills that companies require. These market corrections have to be allowed to happen not only in the US, but also Europe, China, Japan, and most of the rest of the world in order to bring an end to the current world economic mess. Right now, the EU is the ticking time bomb.
To put in perspective its importance to the US, the EU represents about 20% of the world economy and buys about 25% of American exports.
In 2010, Greek, Irish and Portuguese government debt totaled about $910 billion, a relatively small fraction of the debt of all members of the European Union – less than 7%. But even then it was well over the debt and deficits allowed for eurozone members. Deficits aren't supposed to rise above 3% of GDP for eurozone members, and debt should be no more than 60%. But these guys didn’t play by the rules. With a little book-cooking help from Goldman Sachs, which showed Greece how Enron accounting works, Greece had a deficit of 15% of GDP, Ireland 14%, and Portugal 12%.
In the short space that I have, let me just pick on the profligacy of Greece.
The wage bill of the Greek public sector has doubled in the last decade in real terms – and that number doesn’t take into account the bribes collected by public officials. (We call them campaign contributions in this country.) The average government job pays almost three times the average private-sector job. Sound familiar?
The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year ($92,600).
The Greek public-school system is a study in breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked school system: Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.
There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses.
The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.
The Greek public healthcare system spends far more on supplies than the European average, and it is not uncommon to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.
You get the picture.
Greece, like the US, borrows a good deal of its current spending. Unlike the US, Greece is a terrible credit risk so its bond interest rates were going through the roof. Facing default, the International Monetary Fund and EU remonetized the Greek debt at lower interest, but even that interest has proved too high for Greece to carry. An independent nation could print more money and inflate its debt away, but because Greece is an EU member only the ECB can print money.
Therefore, the Greek government tried to impose austerity – good sense reductions in social spending, reductions in entitlements … the things the US ought to be doing. Austerity, however, is a relative term. When you and I have to bring our spending in line with our incomes, we don’t call it austerity, it’s just a fact of life. But when people have become so dependent on government largess, in fact addicted to it, asking them to retire at 55 instead of 50 is like sentencing them to five years at hard labor. The Greeks therefore took to the streets and rioted and burned and stamped their feet and held their breath like children until they turned blue. (Welfare-related riots are going on in London, and short of extreme violence, we saw similar civil unrest in the recent Wisconsin thuggery protesting Scott Walker’s attempt to bring budget sanity to a union-owned state. Expect to see more of this bed-wetting if the US Congress tries to cap entitlement spending.)
The Greek fiscal virus has now spread to Portugal, Italy and Spain, which along with Greece, are unflatteringly referred to by the acronym PIGS. These countries are realizing – as the US must also realize – that the much vaunted "European model" of generous welfare benefits is unsustainable and must renege on its promises. Predictably, this is highly unpopular among its entitlement addicts, and strains are beginning to show between the PIGS and non-PIGS in a real-world demonstration of Orwell’s Animal Farm dystopia.
Thus, while the EU financial crisis dominates the headlines, the real news is the potential of the political crisis to disintegrate it. The EU street is suffering the economic consequences of integration and the non-elite are grumbling about lost nationalism. Political pressure could build in some member states to the point that they pull out, walk away from their debts and the euro, and start over as independent states. Let’s hope that saving the EU is as important to its leaders as saving the euro.
Here is a chart that shows how incestuous the PIGS and non-PIGS lending is. (It’s called PIIGS in the chart because Ireland is included.) Obviously, if even one of the PIGS fails, it will pull down the pigsty, the barn, maybe the surrounding farm and fields. It won’t be pretty.
And the US won’t escape the implosion.
US banks and investment funds will be severely stressed. While they have relatively little risk exposure in Greece, their direct exposure in Italy and Spain is close to $85 billion and their indirect exposure through derivatives and financial contracts are about $365 billion. Money market funds have $1.2 trillion invested in European banks.
What would we do if the EU crisis defaults its obligations to the US? Another US bank bailout? Where’s the money going to come from?
As surely as the Berlin Wall collapsed and along with it the Marxist economic experiment, the European welfare regime is crumbling. Yet during the US debt ceiling debate, the America Left was outraged that any rejiggering of entitlements would be a consideration in the reform calculus. Entitlements consume over 60% of federal spending and will consume all of the tax revenue in 2049 if they aren’t reformed. That doesn’t include the newest entitlement in the American welfare pantheon: ObamaCare.
On the heels of the debt ceiling compromise, which kicked the can down the road to a super committee whose members won’t be able to agree on bathroom breaks, the S&P downgrade decision assured that the debt crisis will not disappear from the American political consciousness until after the 2012 election as Obama had hoped. Far from it. The debt crises in Europe and the US are too interconnected. They will be fodder for front page punditry well into the 2012 election cycle. The evening TV news images of the EU crisis playing out in its streets will make the albatross of American entitlement spending impossible to ignore.
It’s the Left’s worst nightmare.
The Republicans and Democrats had their shoot-out at the Not So OK Corral last week and then went home to rest from their labors, confident that they had given the markets assurance that a $900 billion spending reduction – spread over ten years (that’s $90 billion annually for those of you from Palm Beach County, FL) – could somehow equate to increasing federal spending by $7 trillion over 10 years. Since the Congressional fat cats had planned to increase, yes increase, spending by $8 trillion, they thought the reduction to $7 trillion should count as a cut. Why not then plan to increase spending by $10 trillion, cut it to $7 trillion, and then Congress could have gone home to the voters claiming they had saved us tax-paying troglodytes $3 trillion? In fact you could pick any set of numbers and have all kinds of savings. Wow! This Washington math is great!
“Honey, I bought this $750 thingamajig that I really didn’t need and couldn’t afford, but it was on sale and marked down from $1,000 … I saved us $250!”
This kind of fiscal silliness caused the US stock market to respond by shedding 2,000 points (16%) over the last two weeks.
Then, alas, Standard & Poor’s downgraded its credit rating on long term US government debt for the first time in history. Yep, from AAA to AA+ saying the deal reached by lawmakers to cut the federal deficit by an estimated $2.1 trillion over a decade didn’t go far enough, and “America’s governance and policymaking [is] becoming less stable, less effective, and less predictable than what we previously believed.” Ouch!
His High and Mightiness felt compelled to provide his own risk analysis: “No matter what some agency may say, we’ve always been and always will be a triple-A country.” Yeah, well tell that to American investors who are afraid (rightfully so) that we are headed into the second dip of a double-dip recession. They know the Federal Reserve, with interest rates essentially at zero, has limited ability to pull another rabbit out of the hat. Two rounds of quantitative easing (called money-printing for you monetary tyros) pumped $2.3 trillion into the financial markets but failed to get the economy so it could stand on its own.
Then last week, trying to cajole a swooning stock market to stop swooning, Fed Chairman Bernanke, over the objections of three other Fed members, promised to keep interest rates where they are for two years. Assuming he means to keep this promise, it was stupid to make it, since Bernanke can’t see the future and doesn’t know what will happen that may compel interest rates to rise.
Rather than pander to the stock market as an election approaches, I hope Bernanke is paying attention to the Vesuvian eruption that may be building in the European Union. Americans don’t pay much attention to what is going on across the big pond, but if the European Union or the euro collapse, our economy can be dragged into their financial cesspool.
Quick background …
The European Union (EU) was created in the early 1990s to challenge the efficiency of the US domestic market and to challenge the US standing as a superpower. It is an economic and political integration of 27 member (primarily European) states with a combined population and GDP that approximately equals that of the US. The major EU countries ranked in terms of their population are Germany, France, UK, Italy, and Spain, which represent a substantial majority of the EU population.
The EU has a European Central Bank (ECB) that functions like a poor imitation of the US Federal Reserve, and there are other governmental institutions that try to operate independently of member countries but can’t because members have not given up their sovereign identities.
The eurozone is a monetary union of 15 countries which have traded their sovereign currencies for the euro. This eliminated the shifting exchange rates that hampered trade between these 15 countries. The UK, Sweden, and Denmark have remained in their sovereign currencies but are members of the EU. A common currency allows (in theory) the euro to compete with the dollar as a world reserve currency.
Both US and Europe are currently in economic turmoil. Why? Because the underlying structural problems in the US and global economies that caused the financial and economic crisis in 2008 have not been fixed.
Specifically, the US and other industrialized economies were and continue to live and spend beyond their means – consuming more than they produce. Moreover, the Asian (largely Chinese) economic boom has been fueled by intentionally undervalued currencies that imported a massive dollar reserve and caused the credit bubble in the US that burst three years ago. Finally, the eurozone system may have a single currency and a single monetary policy, but it doesn’t have a single economy running along side of it. A single economy, while essential, can’t be created simply by converting to a single currency.
In the post-crash years after 2008, the economic wizards in the industrialized economies resorted to what all good little Keynesians do – they flooded their economies with taxpayer-funded stimulus gimmicks in the form of deficit spending and money printing, which may have prevented a few people from leaping off of tall buildings, but it did nothing to create the virtuous cycle that only the private sector can create: i.e. growing sales and profits and employment that reinforce each as a self-sustaining growth engine. “Shovel ready” is what you expect to find in a pile of horse or cow manure and a politician, not in a sputtering economy. How’s the “hope and change” workin’ for ya’?
Since few politicians have ever held a real job, they fail to understand that only markets can right-size companies and industries, find the market-clearing price for houses and shopping centers, or bring wages in line with global competitive realities. Only markets can wring the speculative premium out of the price of stocks and commodities. And only markets can move workers from where they live to where they are needed, and create a match between the skills workers offer and the skills that companies require. These market corrections have to be allowed to happen not only in the US, but also Europe, China, Japan, and most of the rest of the world in order to bring an end to the current world economic mess. Right now, the EU is the ticking time bomb.
To put in perspective its importance to the US, the EU represents about 20% of the world economy and buys about 25% of American exports.
In 2010, Greek, Irish and Portuguese government debt totaled about $910 billion, a relatively small fraction of the debt of all members of the European Union – less than 7%. But even then it was well over the debt and deficits allowed for eurozone members. Deficits aren't supposed to rise above 3% of GDP for eurozone members, and debt should be no more than 60%. But these guys didn’t play by the rules. With a little book-cooking help from Goldman Sachs, which showed Greece how Enron accounting works, Greece had a deficit of 15% of GDP, Ireland 14%, and Portugal 12%.
In the short space that I have, let me just pick on the profligacy of Greece.
The wage bill of the Greek public sector has doubled in the last decade in real terms – and that number doesn’t take into account the bribes collected by public officials. (We call them campaign contributions in this country.) The average government job pays almost three times the average private-sector job. Sound familiar?
The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year ($92,600).
The Greek public-school system is a study in breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked school system: Finland’s. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something.
There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses.
The retirement age for Greek jobs classified as “arduous” is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on.
The Greek public healthcare system spends far more on supplies than the European average, and it is not uncommon to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.
You get the picture.
Greece, like the US, borrows a good deal of its current spending. Unlike the US, Greece is a terrible credit risk so its bond interest rates were going through the roof. Facing default, the International Monetary Fund and EU remonetized the Greek debt at lower interest, but even that interest has proved too high for Greece to carry. An independent nation could print more money and inflate its debt away, but because Greece is an EU member only the ECB can print money.
Therefore, the Greek government tried to impose austerity – good sense reductions in social spending, reductions in entitlements … the things the US ought to be doing. Austerity, however, is a relative term. When you and I have to bring our spending in line with our incomes, we don’t call it austerity, it’s just a fact of life. But when people have become so dependent on government largess, in fact addicted to it, asking them to retire at 55 instead of 50 is like sentencing them to five years at hard labor. The Greeks therefore took to the streets and rioted and burned and stamped their feet and held their breath like children until they turned blue. (Welfare-related riots are going on in London, and short of extreme violence, we saw similar civil unrest in the recent Wisconsin thuggery protesting Scott Walker’s attempt to bring budget sanity to a union-owned state. Expect to see more of this bed-wetting if the US Congress tries to cap entitlement spending.)
The Greek fiscal virus has now spread to Portugal, Italy and Spain, which along with Greece, are unflatteringly referred to by the acronym PIGS. These countries are realizing – as the US must also realize – that the much vaunted "European model" of generous welfare benefits is unsustainable and must renege on its promises. Predictably, this is highly unpopular among its entitlement addicts, and strains are beginning to show between the PIGS and non-PIGS in a real-world demonstration of Orwell’s Animal Farm dystopia.
Thus, while the EU financial crisis dominates the headlines, the real news is the potential of the political crisis to disintegrate it. The EU street is suffering the economic consequences of integration and the non-elite are grumbling about lost nationalism. Political pressure could build in some member states to the point that they pull out, walk away from their debts and the euro, and start over as independent states. Let’s hope that saving the EU is as important to its leaders as saving the euro.
Here is a chart that shows how incestuous the PIGS and non-PIGS lending is. (It’s called PIIGS in the chart because Ireland is included.) Obviously, if even one of the PIGS fails, it will pull down the pigsty, the barn, maybe the surrounding farm and fields. It won’t be pretty.
And the US won’t escape the implosion.
US banks and investment funds will be severely stressed. While they have relatively little risk exposure in Greece, their direct exposure in Italy and Spain is close to $85 billion and their indirect exposure through derivatives and financial contracts are about $365 billion. Money market funds have $1.2 trillion invested in European banks.
What would we do if the EU crisis defaults its obligations to the US? Another US bank bailout? Where’s the money going to come from?
As surely as the Berlin Wall collapsed and along with it the Marxist economic experiment, the European welfare regime is crumbling. Yet during the US debt ceiling debate, the America Left was outraged that any rejiggering of entitlements would be a consideration in the reform calculus. Entitlements consume over 60% of federal spending and will consume all of the tax revenue in 2049 if they aren’t reformed. That doesn’t include the newest entitlement in the American welfare pantheon: ObamaCare.
On the heels of the debt ceiling compromise, which kicked the can down the road to a super committee whose members won’t be able to agree on bathroom breaks, the S&P downgrade decision assured that the debt crisis will not disappear from the American political consciousness until after the 2012 election as Obama had hoped. Far from it. The debt crises in Europe and the US are too interconnected. They will be fodder for front page punditry well into the 2012 election cycle. The evening TV news images of the EU crisis playing out in its streets will make the albatross of American entitlement spending impossible to ignore.
It’s the Left’s worst nightmare.
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