Look at the numbers: $ 2.6 Trillion national debt which amounts to 120 percent of GDP. Nearly 15 percent of that debt comes due within the next twelve months. Yields on 10 year bonds now north of 7 percent. That's Italy.
The Italian political leader Berlusconi has resigned, joining his pal Papandreou. It's over for Italy. All that is left to speculate about is when Italy will recognize the necessity to do a planned workout -- commonly known as a (partial) default.
Before this is over, the leadership in Germany, France, and Spain will also step down, either voluntarily or by action of the voters.
This game has only one end. Either these countries sit down with their bondholders and work out a partial default plan or total chaos will be the end result when they simply can no longer sell debt at all and can't pay their day to day bills.
The unreality of the approach of European leaders is almost comic, except for the tragic implications that their foolishness may lead to.
There is no harm in a partial default. The bondholders already know they are in deep, deep trouble. A partial default only recognizes what markets have already accomplished -- major losses for bondholders. The bondholders are already there -- time for a workout.
Of course, this means that the entitlement systems can no longer function as they have in the past. There are simply no funds available for these systems. No one is willing to lend money to support other people in a grand lifestyle -- not anymore.
The countries of Europe will be forced, after a debt workout, to dismantle the entitlement systems that have undermined the work ethic in Europe and saddled their countries and much of the rest of the world with bonds that cannot be repaid.
Next up on the docket is the US. It's just a matter of time, but it is basically the same scenario.
Wednesday, November 9, 2011
Saturday, November 5, 2011
Greek Political Turmoil
According to the news media, what Greek politicians do next will determine whether or not the current Euro crisis can be "resolved." Not really.
The main significance of the past week of Greek political back and forth is that political leaders throughout Europe are in trouble -- big trouble.
Countries forced into austerity measures will, in the end, replace their political leadership. That process is already under way in Greece and Spain and is surfacing in Italy as well.
Countries who are putting their taxpayers on the line to support the bailout of the profligate countries will also soon begin the process of replacing their political leaders -- Germany and France.
Neither side of this grand scheme, the bailors or the bailees, have the support of their voters. Why is this a surprise? The effort to bail out the sovereign debt problems of Greece, Spain, Italy (Portugal, Ireland) is a "lose-lose" policy and voters can see clearly that it is not in their interest, no matter what country they live in.
What works is a recognition that the debts are unsustainable and that it is time to sit down with creditors and do a workout -- a planned default.
It might take changing the political leadership in all major European countries, not just in Greece, to get the focus on the real solution to the European debt crisis.
The main significance of the past week of Greek political back and forth is that political leaders throughout Europe are in trouble -- big trouble.
Countries forced into austerity measures will, in the end, replace their political leadership. That process is already under way in Greece and Spain and is surfacing in Italy as well.
Countries who are putting their taxpayers on the line to support the bailout of the profligate countries will also soon begin the process of replacing their political leaders -- Germany and France.
Neither side of this grand scheme, the bailors or the bailees, have the support of their voters. Why is this a surprise? The effort to bail out the sovereign debt problems of Greece, Spain, Italy (Portugal, Ireland) is a "lose-lose" policy and voters can see clearly that it is not in their interest, no matter what country they live in.
What works is a recognition that the debts are unsustainable and that it is time to sit down with creditors and do a workout -- a planned default.
It might take changing the political leadership in all major European countries, not just in Greece, to get the focus on the real solution to the European debt crisis.
Friday, November 4, 2011
Corzine Bets and Loses
John Corzine, former Senator and Governor of New Jersey and former Chairman of Goldman Sachs, stepped down today as Chairman of MFGlobal, as MFGlobal remained in the headlines for its bankruptcy filing two days ago. Corzine presided over the firm as it made huge bets on European sovereign debt, thinking that the worst of that crisis had passed. Unfortunately for Corzine and MFGlobal, the worst of the crisis is yet to come and MFGlobal and its leader are no more.
To Corzine's credit, he has always espoused the view that sovereign debt problems are imaginary and not real problems. He never had much interest in measures that might tame the growth in US national debt or the debt problems in New Jersey. So, at least, Corzine is consistent.
The blind spot that poisoned Corzine's reign at MFGlobal is the same blindspot that pervades current attitudes on the US's national debt (and the obligations of a number of state governments). These huge debt loads are not sustainable, blind spots notwithstanding.
One good thing worth noting is that there was no rescue for MFGlobal, which is good. Second, Corzine took no severance as he fell on his sword today. That is also good.
There is a whiff in the air that there might be a problem in customer accounts, but I suspect that that is probably not the case, but we shall see. Assuming no mingling of customer accounts, this seems to be a case where markets worked properly and the outcome is the proper one. The company made a big bad bet and it didn't work. The result -- bankruptcy. That is as it should be. Firms will learn if we let them.
To Corzine's credit, he has always espoused the view that sovereign debt problems are imaginary and not real problems. He never had much interest in measures that might tame the growth in US national debt or the debt problems in New Jersey. So, at least, Corzine is consistent.
The blind spot that poisoned Corzine's reign at MFGlobal is the same blindspot that pervades current attitudes on the US's national debt (and the obligations of a number of state governments). These huge debt loads are not sustainable, blind spots notwithstanding.
One good thing worth noting is that there was no rescue for MFGlobal, which is good. Second, Corzine took no severance as he fell on his sword today. That is also good.
There is a whiff in the air that there might be a problem in customer accounts, but I suspect that that is probably not the case, but we shall see. Assuming no mingling of customer accounts, this seems to be a case where markets worked properly and the outcome is the proper one. The company made a big bad bet and it didn't work. The result -- bankruptcy. That is as it should be. Firms will learn if we let them.
Thursday, November 3, 2011
The Unraveling of a Dumb Idea
The proposed "deal" that has been crafted by France and Germany for the EU to "save" the Euro is one of the most absurd plans that has ever been concocted. It should be obvious that neither the bailors nor the bailees are going to go along with this (even if their leaders continue to pursue such foolishness).
It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.
It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).
The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.
Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).
A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.
It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.
It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).
The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.
Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).
A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.
Tuesday, November 1, 2011
Greeks Should Vote No
Why should the Greeks agree to the bailout terms of the EU? If I were a Greek citizen, I would vote no. There is simply no way that generations of Greeks should buy in to austerity to support bad decisions by Greek bondholders. Default is the right answer -- for everyone -- not just for Greece.
If Greece defaults, and that doesn't necessarily mean leaving the Euro (any more than when Illinois defaults, which it will, that it means Illinois will leave the US dollar zone), then and only then can Greece, on its own, begin to correct the absurd government policies that have wrecked their economy. They have to reach this realization on their own. It cannot be forced from outside.
Greece is just the first gong in a series of bells that will ring of default through the Western world. No one, no one, can afford the economic policies that Europe has adopted over the past half century. Why the present US administration wants to emulate this disastrous course is not clear.
The idea that health care, retirement, education, housing, minimum wages, right to sue for virtually any absurd reason that one can dream up are all rights that must be provided to every citizen free of charge is so absurd as to hardly call for discussion. But these are the very policies that the Western world has adopted. Now, Europe and the US will have to live with the consequences and they are not pretty.
Again, Asia (ex-Japan), has not adopted the foolish policies of the West. Asia will achieve economic supremacy and fairly quickly as the West descends into the economic chaos that it has brought upon itself by the foolish view that government can provide all things to all people free of charge.
If Greece defaults, and that doesn't necessarily mean leaving the Euro (any more than when Illinois defaults, which it will, that it means Illinois will leave the US dollar zone), then and only then can Greece, on its own, begin to correct the absurd government policies that have wrecked their economy. They have to reach this realization on their own. It cannot be forced from outside.
Greece is just the first gong in a series of bells that will ring of default through the Western world. No one, no one, can afford the economic policies that Europe has adopted over the past half century. Why the present US administration wants to emulate this disastrous course is not clear.
The idea that health care, retirement, education, housing, minimum wages, right to sue for virtually any absurd reason that one can dream up are all rights that must be provided to every citizen free of charge is so absurd as to hardly call for discussion. But these are the very policies that the Western world has adopted. Now, Europe and the US will have to live with the consequences and they are not pretty.
Again, Asia (ex-Japan), has not adopted the foolish policies of the West. Asia will achieve economic supremacy and fairly quickly as the West descends into the economic chaos that it has brought upon itself by the foolish view that government can provide all things to all people free of charge.
Sunday, October 30, 2011
Back to Basics
The number one problem for the US and for Western Europe is job creation. There is no bigger problem. The politicians can focus on all sorts of other things: taxing rich people, subsidizing pet projects, bashing China, etc. But, anyone who thinks there is a bigger problem than unemployment is missing the forest for the trees.
How do we get more jobs? That is not a tough question. It is only tough because we are talking about labor. If we asked the identical question about anything else, the answer would be painfully obvious. For some reason, politicians and many economists become completely irrational when asked how to increase the demand for labor. If the same politicians and economists were asked about how to increase the demand for anything else the answer would be immediately forthcoming.
How do you increase the demand for something?
How about making that something more expensive? Would that help?
What about substantially increasing the taxes for people that use that something? Would that help?
What about passing new regulations that would apply to using that something? Would that help?
To increase the demand for apples, why not make apples more expensive, tax folks who eat apples, and make anyone who buys apples spend one month of every year filling out paperwork to satisfy the regulations required to consume apples. Would that increase the demand for apples?
Yet, politicians and economists (like Paul Krugman) think that this is exactly the prescription necessary to get to full employment of labor. They are wrong.
To get more jobs, you need to reduce the cost of labor, increase the economic incentives for those who employ labor and reduce the regulations that surround the employment of labor. That's how you would increase the demand for anything including labor.
How do we get more jobs? That is not a tough question. It is only tough because we are talking about labor. If we asked the identical question about anything else, the answer would be painfully obvious. For some reason, politicians and many economists become completely irrational when asked how to increase the demand for labor. If the same politicians and economists were asked about how to increase the demand for anything else the answer would be immediately forthcoming.
How do you increase the demand for something?
How about making that something more expensive? Would that help?
What about substantially increasing the taxes for people that use that something? Would that help?
What about passing new regulations that would apply to using that something? Would that help?
To increase the demand for apples, why not make apples more expensive, tax folks who eat apples, and make anyone who buys apples spend one month of every year filling out paperwork to satisfy the regulations required to consume apples. Would that increase the demand for apples?
Yet, politicians and economists (like Paul Krugman) think that this is exactly the prescription necessary to get to full employment of labor. They are wrong.
To get more jobs, you need to reduce the cost of labor, increase the economic incentives for those who employ labor and reduce the regulations that surround the employment of labor. That's how you would increase the demand for anything including labor.
Saturday, October 29, 2011
The Anger of the Entitled
Wherever you look these days, there are people demonstrating for their "rights." These "rights" are the right to take money from other people so that the demonstrators can have free this and free that. If education and health care are to be free, who pays? The demonstrators could care less.
Look at Greece. There are daily and massive demonstrations demanding that their failed welfare state continue to support the "entitled." It is always someone else that should pay for all of the things that the "entitled" want. Everything is a fundamental "right" without obligations on the part of the entitled to fund anything. There are no obligations to be imposed on the entitled. After all, they are the entitled.
What about Italy and Spain? Who pays? Their answer is the same as the OWS (Occupy Wall Street) crowd. They payers are "the rich." As if the rich had enough assets to keep all of these entitled folks going on indefinitely. The move to "get the rich" has historical precedents and none of them are very attractive for average people.
The Russian and Cuban experiments were long playing disasters for the average person living through those experiments. It's worth noting that even those "leveling" societies had their privileged. The Castro family lives in a style that America's rich would love to aspire to.
People with responsibilities, kids to take care of, old folks to support and the like don't have time to camp out in make-shift camps around the US and the world and make posters with four letter words describing their hatred for capitalism.
When winter comes, the OWS gang will retreat to the warmth of their comfortable homes or back to their "entitled" college community.
The truly disadvantaged don't have time for this stuff. But the truly "entitled" can camp out for years on end before retreating to a more comfortable lifestyle that they are "entitled" to.
The rest of us have to work for a living.
Milton Friedman noted long ago that the only societies that have ever produced for the average person were capitalist societies. Such societies also produced rich people as a by product of raising the standard of living of the average person. You can see the fruits of capitalism today in China raising the standard of living of hundreds of millions of Chinese. Capitalism is what is needed if the average person is going to have a fair shake.
But, the entitled are not interested in capitalism. They are mainly interested in getting their "rights" at the expense of others.
Look at Greece. There are daily and massive demonstrations demanding that their failed welfare state continue to support the "entitled." It is always someone else that should pay for all of the things that the "entitled" want. Everything is a fundamental "right" without obligations on the part of the entitled to fund anything. There are no obligations to be imposed on the entitled. After all, they are the entitled.
What about Italy and Spain? Who pays? Their answer is the same as the OWS (Occupy Wall Street) crowd. They payers are "the rich." As if the rich had enough assets to keep all of these entitled folks going on indefinitely. The move to "get the rich" has historical precedents and none of them are very attractive for average people.
The Russian and Cuban experiments were long playing disasters for the average person living through those experiments. It's worth noting that even those "leveling" societies had their privileged. The Castro family lives in a style that America's rich would love to aspire to.
People with responsibilities, kids to take care of, old folks to support and the like don't have time to camp out in make-shift camps around the US and the world and make posters with four letter words describing their hatred for capitalism.
When winter comes, the OWS gang will retreat to the warmth of their comfortable homes or back to their "entitled" college community.
The truly disadvantaged don't have time for this stuff. But the truly "entitled" can camp out for years on end before retreating to a more comfortable lifestyle that they are "entitled" to.
The rest of us have to work for a living.
Milton Friedman noted long ago that the only societies that have ever produced for the average person were capitalist societies. Such societies also produced rich people as a by product of raising the standard of living of the average person. You can see the fruits of capitalism today in China raising the standard of living of hundreds of millions of Chinese. Capitalism is what is needed if the average person is going to have a fair shake.
But, the entitled are not interested in capitalism. They are mainly interested in getting their "rights" at the expense of others.
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