European Debt: Another Brief History

Standard and Poor’s are at it again.  For the last several months, they’ve been running around the world acting like everybody’s international told-ya-so auntie.  A couple of days ago, they landed in (or on) Italy.  The next thing you know, they’re having a five-star lunch on the Via Veneto and downgrading Italy’s debt rating to extra crispy.  What this basically means is Europe’s third largest economy now has less borrowing power than Slovakia, the agrarian little sister of the Czech Republic.  I’m sure Berlusconi shook himself out of his afternoon nap, give it a WTF and asked somebody (a la Barack Obama) “Who do these people think they are?”  The simple answer is S&P are the canary in the mineshaft and right now they’re gasping for air: pay attention!

Like it or not, the Post World War II European Slumber Party is over.  It was a great time, everybody had fun, but now it’s time to wake up, smell the espresso and go back to work.

In fact, the party’s been over for 20 years.  The alarm clock should have gone off in 1989, when the two different Germanys took turns dancing on the Berlin Wall.  At that time, after more than a decade of relative austerity, the prevailing wisdom was “Wunderbar!  Let’s spend the Peace Dividend.”  So instead of putting a couple of drachmas, liras, pesos or what-have-you aside for the eventual rainy day, Europeans actually started overspending again.  In their zeal to continue creating a second Mediterranean Eden of overlapping social programs, nobody bothered to remember the Peace Dividend was an illusion.  There was no significant amount of extra money available to Europe from cuts in defence spending simply because they’d never paid full price in the first place.  American taxpayers had been footing the bill for European defence ever since the days of Stalin.  Ironically, as Americans forgot about the Cold War and closed up shop on the Iron Curtain, Europeans had even less discretionary cash because they had to start buying their own tanks and helicopters again.  Nor was that the only dividend the Europeans were spending.

From the mid 50s until the Oil Embargo of 1973, there had been an economic miracle in Europe.  Called Wirtschaftswunder in Germany and Trente Glorieuses in France, the western continent from the Brandenburg Gate to the Bay of Biscay was doing business.  Believe it or not, during that time period, Greece’s average annual economic growth rate was 7% and Spain and Italy weren’t far behind.  Western Europe was awash with cash.  Once again, however, nobody bothered to stash a few coins in the cookie jar just in case one day the Saudis might start demanding full price for their oil.  But that’s not the real problem.

With mountains of money and American muscle to keep it safe, the Europeans could indulge every socialist fantasy their intelligentsia had ever imagined — from Karl Marx to Charles Fourier.  Social problems were bottomless pits, education and unemployment were subsidized career choices, government departments were bloated with employees, and wages and benefits everywhere went through the roof.  Money was no object and the Europeans threw it around like rice at a wedding.  This was all fine until King Faisal and his friends decided to cut off the goo that lubricated the wheels of European industry.  As oil prices shot up, European industry began to shrink.  This constricted the tax base and put an even greater strain on the social safety net.  In essence, OPEC outlawed miracles.  Unfortunately, the Europeans didn’t see the writing on the wall — or they chose to ignore it.  When revenues were no longer sufficient to cover their obligations, rather than halt some of their more ostentatious social projects, European governments turned to the banks.  To cover the shortfall they borrowed billions against future revenues.  By 1989 this vicious circle was spinning out of control.  That’s why the illusionary Peace Dividend looked so attractive.

Today, after three generations of entitlement programs, any mention of austerity is met with protests and riots.  The party might be over in Europe, but nobody’s leaving just yet.

So, as they say at the accounting firm of Dewey, Cheatem and Howe, “What’s the bottom line?”  It’s very simple.  If nothing changes, there is no way Greece can ever meet its financial obligations.  They either have to completely revamp their economic structure — or default.  There’s no third option.  Likewise, Portugal and Spain must either drastically curtail their social spending or face the same problem.  The IMF recently said that this is a very volatile time, and if everybody isn’t super careful, European debt could slide the entire world into recession.  That’s like saying Chris Rock and Russell Peters are a couple of funny guys and if you’re not careful you could end up laughing.  Recession is the given right now; the only questions are how deep and how long.  Guys like Berlusconi need to tear themselves away from politicking for a couple of minutes, listen to what the money boys like Standard and Poor’s have to say, and act accordingly.  If they do, the recession will be short, sharp and painful.

If they don’t, it’s going to be long, hard and ruinous.

How to Ruin a Debt Crisis: Part II

The problem is this just might stick to Obama.  The president may have finally run out of Teflon.  Unless Barack can figure out a way to pull some leadership out of that teleprompter, he’s going to be wearing this like last month’s pastrami when he has to face the people in 2012.  It’s going to hurt him.  I know this is a bold statement about the most adroit politician to come out of Chicago since Dick Daley, but think about this.  I haven’t even told you what I’m talking about yet.  You already know what it is, though.  It’s the American debt crisis and Standard and Poor’s downgrading of the US credit rating – and yes, it is a crisis.  The White House has gone to DEFCON 2 on damage control, but it ain’t going to help ‘cause, as Harry S Truman’s eloquent little sign pointed out, “The Buck stops here.”

For the last 48 hours, Obama apologists have been setting break fires wherever they can find a Blackberry or a microphone.  The first line of excuse is Standard and Poor’s made a mathematical mistake – a couple of trillion dollars, apparently.  This one is way too highschool lame to even deal with.  From there, they take a run at the Republicans, who just weren’t being reasonable about Obama’s plan for a “balanced approach” to the debt crisis.  Good point, except for one minor problem: there never was an Obama plan (at least not one that was written down anywhere.)  There was a lot of in-general talk about compromise, but the Commander-in-Chief never stood up and said “This is the problem, and this is what I’m going to do about it.  Okay, Broehner.  What’s your plan?  That’s stupid.  Now let’s hammer out a deal.”  The fact is most of Obama’s thoughts on the debt crisis (including “balanced approach”) were just more media platitudes that don’t actually mean anything but invoke some vague idea of reasonable behaviour.  Even the most ardent supporter can’t point to Obama’s chapter-and-verse solution to keep America out of debtors’ prison.

Finally, the Obamanista have been dragging all-purpose bogeyman George W. Bush out of retirement and kicking him around again.  After all, that worked in 2008.  “Bush was the one who spent all the money.  (Stage direction: point fingers accusingly)  He did it.”  Please!  Yeah, yeah, yeah!  We all know that Dubya is responsible for everything from 9/11 to Lebron losing Game 6 to the Mavericks, but there’s got to be a statute of limitations somewhere on the guy.  Even if he did spend all the money, it’s Obama’s job to fix it, and he’s had three years to do it – which he hasn’t.  Besides, everybody knows the bottom line is no matter what, where, who, when or why the debt got out of control, Barack Obama was the guy sitting in the Oval Office when the cash cows ran dry.  That’s what history and the electorate will remember, and if either one ever forgets, the Republicans are going to remind them.  And that’s the problem.

Americans are a mercantile people.  They’re willing to trade a lot if they think they’re getting something for their money.  In this case, they were willing to go with a next-to-useless president because he was interplanetary cool.  In 2008, the whole world loved the guy.  (He started his presidential campaign in Germany, for God’s sake.)  So, during the election, nobody bothered to notice that Barack Obama was a (less than one term) junior senator, with fewer credentials to be president than Millard Fillmore.  He expounded change and then cut a traditional backroom deal with Hillary to make her Secretary of State — but nobody cared.  The guy was Kennedy-sweet — with no downside.  He got the Nobel Peace Prize just for showing up.  All he had to do was hang out at the White House, pull an Eisenhower and don’t touch anything.  Most Americans would have been more than happy with that after eight years of George Bush.

However, Americans are also a proud people.  They don’t like it when they think they’re not getting their money’s worth.  And they get downright unreasonable if they think they’re being conned.  Herbert Hoover, Jimmy Carter and George Bush the Elder are just a few one-term presidents who tried to pull a fast one on the American people.  This is where the Tea Party comes from.  It doesn’t take Howard Beale to figure out there’s a boatload of folks across America who are “mad as hell and not going to take this anymore.”  Despite what The New York Times will tell you, these folks are not an isolated pack of snarling, white-haired, right-wing, Sarah Palin nut bars.  They’re ordinary folks who think they’re watching their prestige going over the falls along with their economic future.  This is just insult to injury to an electorate who trusted Barack Obama to change America’s position on this planet.

Right now there is an economic crisis in America.  So what?  That’s nothing serious!  Take a look around you.  There are more farmers raising livestock on Facebook than there are on real farms in Europe, and Facebook is less than a decade old.   More people are touching Google on their iPads every day than there are people in Malaysia.  Google is a teenager and iPads didn’t even exist when Obama was elected.  Last year Walmart customers made 7.2 billion purchases (the population of the world is approximately 6.5 billion) and most of them were made with a Visa or Mastercard.  Americans win more money on Jeapordy than most humans earn in a year.  Use your head, folks: American economic power is awesome (in the true sense of the word) I don’t care what Standard and Poor’s says.  However, if this thing really does stick to Obama and these economic problems turn into a political crisis, all bets are off.  The world is going to change radically and not in that cool, glamourous way Barack was singing about three years ago.  It’s going to get ugly, and it’s going to be mean.

Wednesday:  What happens to economics when American voters get angry?