Tag: economics

How to Ruin a Debt Crisis

Yesterday afternoon, money folks around the world exhaled.  American lawmakers, through no fault of their own, came to their senses and voted to extend the American debt ceiling to a number beyond the comprehension of mortal man.  The crisis was averted, and now we can all go about our business again.  Crap!  This is only a temporary truce.  The real war is still going on.

For the last couple of months, there’s been a media laser beam zeroed in on the House, the Senate and Barack Obama, as each one, in turn, demonstrated their inability to grasp simple economics.  As in, if Johnny has 14 trillion apples and he eats every single one of them, his kids are basically screwed on the apple front.  There have been any number of talking head solutions: stop spending my money; tax that guy over there; blame the Chinese; sell the Grand Canyon — and the etceteras just get stranger after that.  It’s hard to imagine that anybody (politicos or pundits) within limousine distance of Capital Hill has the foggiest idea of what’s going on.  Perhaps they should ask the servants – who would probably tell them you can’t borrow yourself out of debt.

Everybody knows that once money gets a nickel past a billion, it’s no longer real.  It’s figures on a page, triangles on a pie chart or bars on a graph – that’s all.  There is no real connection between Sangee’s Daycare money in Lincoln Nebraska and firing off million dollar missiles in war-torn Katphoodistan.  Try as they might, even the brainiest of America’s elected representatives can’t conceive of how much money they’re playing with.  Nor can they understand the simple dollars and cents or it.  The concept that it’s Sangee’s money they’re spending is overwhelmed by the magnitude of the mortgage.  So let’s quit with the rhetoric, folks, and get on with it.

Outside the media glare, there’s a whole different round of battles going on between the House, the White House and the Senate. (What I like to call The Axis of Feeble)  It’s these battles that are dictating the course of events in Washington, not any lawmaker’s inherent concern for Sangee, her money or her well-being.  (FYI, Senators Johanns and Nelson, I’m not picking on you.  I just think Lincoln represents America more than Miami does.)

One of these is the never-ending war between the Executive and Legislative branches of government.  This firefight has flared and died throughout US history, depending on how tough the president is.  These latest skirmishes started when Richard Nixon and Rose Mary Woods destroyed 18.5 minutes’ worth of audiotape — and 184 years of White House prestige — one afternoon in 1973.  Currently, President Obama’s hands-off approach to leadership, has opened the door for crybabies like Boehner to stride around as if they’re on their way to the OK Corral.  Unfortunately, none of them could win an audition on Buffalo Bill’s Mild West Show.  This is where ineffective governance comes from: half a dozen wannabes, whine-slapping each other across the media.  Like it or not, at least Pelosi had the cojones to tell Obama what Obamacare was going to look like.  This crew is scared of their own shadows, and America is whispering because of it.  There’s enough naked power in Washington at this moment to light the entire world — and not three people in town willing to reach for the switch.  Expect more of the same until somebody quits signing pledges to do good and actual does it.  Or until somebody in the White House hotwires the podium to the teleprompter and Obama has to come up with a policy beyond, “We hope to change.”

Furthermore, for the last year or so, the only issue American lawmakers seem interested in fighting for is infighting.  The two-party system is rapidly dissolving into a four, six or eight party fiasco, bent on emulating a 1920s Balkan republic.  The beauty of the two-party system is consensus has to be reached within the party before it ever goes to the electorate.  Whether it was Republicans, Democrats, Whigs or Free Soilers, historically, parties have always fought it out among themselves, long before election time.  They came up with a coherent plan, presented it to the people and let them decide.  This allows for some pretty big umbrellas; different constituents can gather together in general agreement to advance a common purpose.  These days, every Tom, Ron and Michele has their own agenda.  Every issue is a consensus-building minefield.   Every petty opinion demands a voice in a St. Vitus Dance of disagreement.  And every time you turn around, nothing is getting done because every cockeyed notion available needs to be considered.  Propelled by deluded self-importance and an ever-present phalanx of self-serving lobbyists, lawmakers have abandoned ideals in favour of narrow topical ideas which have no connection to the common good (beyond the next election.)  They disdain compromise, in favour of self-proclaimed principles whose shelf life is tied to FOX, CNN and MSNBC.  How can I make these statements?  Easy!  I’ve witnessed the last six months of Washington tomfoolery.

Yesterday, American lawmakers raised the debt ceiling because they had to.  They had no choice.  The very best, well-informed, educated, supported, principled government on the planet ran out of time — like a sophomore with a term paper.  Why?  It’s not like they didn’t know the deadline was coming.  There are several versions of what just happened in Washington, depending on which side of the aisle your sympathies lie.  However, it was John Adams who said, “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.”  The facts are those in America charged with maintaining and enhancing the common good have turned their considerable skills, resources and attention away from that task to fight the uncivil wars of petty politics.  They haven’t abandoned Sangee in Nebraska so much as ignored her.  Honestly, if I were
she, come November 2012, I’d shake their buttons off.

European Economic Reality: It’s Not Sexy

One of these days, the Germans are going to get fed up and quit forking over Euros to every Juan, Liam and Spiros who comes wandering by with a sob story.  Lately, Angie Merkel has been shovelling money off the prosperity truck like it’s Weihnachten; unfortunately, the German taxpayers haven’t been told they’re Santa Claus.  When they find out, there’s going to be hell to pay.  Meanwhile, across the Rhine, Sarkozy is robbing Peter to pay Papandreou by convincing the French private financial sector to bankroll his vision of stability in the European Union.  This isn’t very smart.  Remember, up until recently, Les Trois Grands (Credit Agricole, BNP Paribas and Societe Generale) were all government institutions, so if things start to go bad for the banks it’s going to be the Palais Bourbon who gets to bail them out – on the backs of les taxpayers francais, I might add.  I’m not pointing fingers, but something is rotten in Europe and this time it isn’t in Denmark.

The problem with economics is it’s not sexy.  A bunch of old men sitting around a conference table dividing up the spoils, just doesn’t make headlines the way a good riot does.  Bombs make better copy than balance sheets because, in general, people think economics is dull, complicated and just a little bit icky.  The stereotypical international banker is not somebody you want to spend an isolated weekend in the country with.  The result is most people don’t know how money works.  They believe it’s some magical thing that rich people use to get richer.  Not so!  International billions work the same way as your lunch money.

All economics is based on faith.  Here’s the beer league version.  You don’t have to push a wheelbarrow full of money around because you’ve got a credit card.  It’s a wallet-sized, unsecured short-term loan.  (By the way, despite rumours to the contrary, that’s all it is.)  McDonald’s gives you a Big Mac and fries because they believe the credit card company is going to give them money.  The company, in turn, pays McDonald’s because they believe you’re eventually going to repay the loan.  You get your lunch, McDonald’s get its money and you pay the accumulated bill at the end of the month.  Everybody’s happy.  The whole system is based on everybody’s rock solid faith in your ability to pay.  It’s that simple.

Chopped down to its core, international finance works the same way.  The world monetary system is based on everybody’s faith in the local taxpayers’ ability to pay.  Countries borrow money.  They repay it back over several years from the taxes they collect.  (That’s the only income they have.)  Again, everybody’s happy – as long as the system works.  When it doesn’t, things go bad — real fast.

The situation in Europe these days is several countries have been basically buying too many Big Macs.  They’ve been using their national credit cards promiscuously — way beyond the ability of their citizens to pay.  For example, this current crisis in Greece stems from the fact that they owe nearly half a trillion dollars — with no foreseeable way to pay it back.  The banks have lost faith in the Greeks.  They want their money — yesterday.  This is where things get complicated because — if Greece goes bust — nobody’s going to repossess the Acropolis and call it square.  No, the money disappears: along with several huge banks, the financial structure of Europe and possibly the Euro itself.  The sub-prime mortgage crisis in America will be a surfer’s wave compared to that tsunami.

Enter Merkel and Sarkozy, who have a vested interest in keeping Europe afloat.  They’ve told the banks, “Okay, you don’t have faith in the Greeks anymore, but you still trust us.  We’ll guarantee the loans and we’re backing that up with our taxpayers.”  This is great – problem solved — except for one small flaw.  The EU has already done this twice.  In November, 2010 Ireland went bust (to the tune of 100 billion) and in May, 2011, Portugal did the same (with a 78 billion debt.)  Both times, the EU, led by Merkel and Sarkozy, stepped up and bailed them out with guaranteed loans.  French and German taxpayers woke up this morning on the hook for over 50 billion dollars in other people’s debts.  Not only that, but their banks have guaranteed the same amount again.  And that’s just in the short term.  There’s more to come later.  Trust is not an infinity commodity.  Even the stupidest of the profit-and-loss boys are getting gun shy about throwing more Euros at this mess.  But here’s the real kick in the ribs.  Waiting in the wings is Italy, up to their Armani suits in unsecured loans, and Spain (Europe’s fourth largesteconomy) equally in hock, with a 27% unemployment rate.  Their taxpayers couldn’t pay even if they wanted to.

Bluntly, the ship is about to hit the sand in Europe.  At some point, financial institutions are going to lose faith in even the Germans’ ability to pay.  Long before that happens, the Europeans are going to have to tighten their belts — buckles to the backbone.  The quaint idea that you can eat Big Macs all day on somebody else’s Euro is over.  The Europeans have been out to lunch for a long time, and now the bills are coming due.  They need to become financially responsible first thing tomorrow morning because one of these days the German taxpayers are going to wake up and say, “Was ist los?  I didn’t sign on for this.” And that will be the end of everything.