Scotland wants to Keep the Pound in a (somewhat) Independent Scotland

Posted by PITHOCRATES - March 8th, 2014

Week in Review

The Greek crisis happened because there was a currency union without a political union.  The Eurozone set some pretty strict limits on deficits and debt to join.  Why?  Because people in the Eurozone would all be using the same Euro.  So they didn’t want one country running up deficits or their debt.  Because if they did they wouldn’t just be messing with their economy.  They would be messing with the entire Eurozone economy.

Well, that’s what Greece did.  They were spending so much money that they had large deficits that added to a large debt.  A euro-denominated debt.  Which meant a default would raise borrowing costs for other euro-denominated debt.  Raising the borrowing costs for the Eurozone.  So to avoid that required other Eurozone nations to help Greece with their debt.  Requiring higher taxes in the more responsible countries of the Eurozone to pay for the irresponsible spending of Greece.  Neither option (default or rescue package) being a popular option.  Especially for the Greek people.  For the rescue package came with strings.  And the big one was austerity.  They had to stop spending so much.  Which meant a lot of people lost some of their government benefits.  Making them very unhappy.  Leading to some rioting in the streets.

Had there been a political union this would not have happened.  For there would have been only one entity borrowing and spending Euros.  One entity taxing the Eurozone nations.  And one entity printing money.  Much like the federal government in the United States.  And London in the United Kingdom (see Scotland’s referendum: Salmond says independence will benefit whole UK posted 3/4/2014 on BBC News Scotland Politics).

An independent Scotland with a strong economy would benefit the whole of the UK, First Minister Alex Salmond has told a gathering in London…

“I believe George Osborne’s speech on sterling three weeks ago – his ‘sermon on the pound’ – will come to be seen as a monumental error.

“It encapsulates the diktats from on high which are not the strength of the Westminster elite, but rather their fundamental weakness.

“In contrast, we will seek to engage with the people of England on the case for progressive reform.”

But Tory MP Mr Mundell said that Mr Salmond was saying that a choice to leave the UK and become independent “means staying exactly the same as we are now”.

He added: “By definition, that simply cannot happen.

“No one should be under any illusion that voting for independence means getting independence, which means becoming a new country outside the UK.

If the Eurozone sovereign debt crisis has taught us anything it’s that a currency union without a political union is not a good thing.  An independent Scotland would eliminate the political union there is now.  And the reason why England does not want a currency union with an independent Scotland is because of what happened in the Eurozone.  It doesn’t work.  At least, it doesn’t work well.  Which begs the question why do they want independence but not complete independence (keeping the pound)?

One can only surmise so they can have more autonomy over their taxing, borrowing and, of course, spending.  Perhaps to spend more.  Creating larger deficits.  And a greater pound-denominated debt.  Which would be of great concern to other holders of pound-denominated debt.  The rest of the United Kingdom.

It is unlikely that independence would lead to a stronger Scottish economy.  Or a stronger UK economy.  If it did then the whole point of the Eurozone would be a lie.  To create a larger economic zone to compete with the large economic zone that is the United States.  Because bigger is better.  At least in terms of GDP.  The British Empire was bigger than the United Kingdom is now.  And the United Kingdom is bigger than a United Kingdom without Scotland.  And an independent Scotland would be smaller than all of the above.  So if you want to maximize GDP you would want to maximize the size of your economy.  Not shrink it.  Which leads one to believe that the reason for independence is something other than economic.  Because the UK is too English?  Perhaps.  Whatever the reason let’s just hope everything works out for the best.  For the United Kingdom did make the world a better place.  With great people like Adam Smith from Scotland.  And John Locke from England.  To name only two of the greats to come from the United Kingdom.

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The Federal Government’s entry into the Student Loan Market eliminates Market Forces

Posted by PITHOCRATES - September 7th, 2013

Week in Review

A sound banking system is a requirement for any advanced economy.  Because you need capital to make an advanced economy.  And how do you do that?  By people responsibly saving for their retirement.  Putting away a few dollars of every paycheck.  A small amount of money that can’t buy much of anything.  But when hundreds of thousands of people save a few dollars from every paycheck those small amounts become capital.  Large sums of money banks can lend out to investors who want to build factories.  Responsible bankers loaned their customers’ deposits to investors.  Investors paid the bankers interest on these loans.  And the bankers paid interest to their depositors.  The economy grew.  And people saved for their retirement.  The system worked well.  And grew the US economy into the world’s number one economy.  But now we’re in danger of dropping from that number one spot.  Because the government destroyed our banking system (see Exclusive – JPMorgan to stop making student loans by Reuters posted 9/5/2013 on Yahoo! Finance).

JPMorgan Chase & Co (NYS:JPM) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business.

When the government runs a deficit they sell bonds to finance it.  Pulling capital out of the private sector.  Raising borrowing costs.  The government then tries to lower borrowing costs by printing money.  Expanding the money supply.  And by making more money available to lend interest rates fall.  But it also does something else.  It encourages bad investments.  Malinvestments.  People who look at those artificially low interest rates and think they should borrow money when the borrowing is good.  Even when they don’t have a good investment opportunity.

They may expand their business now because money is cheap now.  Even though they don’t really need the additional capacity now.  And then if the government raises interest rates to cool the overheated economy thanks to those artificially low interest rates these same investors see their revenues fall as they took on additional expenses by expanding their business.  Just because interest rates were low.  Now their costs are higher just when their revenues have fallen.  Pushing the business towards bankruptcy.  Which would never have happened if the government didn’t encourage them to borrow money they didn’t need by keeping interest rates artificially low.

But getting people to borrow money when they don’t need it is the government’s only economic policy.  Which they took to another level in the housing market.  With pressure from the Clinton Justice Department on lenders to qualify the unqualified for loans.  Exploding the use of risky subprime lending.  And then using Fannie Mae and Freddie Mac to buy these risky subprime loans from these lenders.  Removing all risks from these lenders and passing them on to the taxpayers.  To encourage these lenders to lower their lending standards.  So they would keep making risky loans.  Which they were more than willing to do if they incurred no risk in making these loans.  Which Fannie Mae and Freddie Mac did for them.  Thus further destroying the banking system.

And now the government has taken over student loans.  Where they will do to student loans what they did to home mortgages.  Where lending decisions will be made for political reasons instead of objective lending standards.  Guaranteeing more subprime mortgage crises in the future.  A further destruction of the banking system.  And the destruction of one of the pillars of an advanced economy.

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Government Bonds, Deficits, Debt, Interest and Inflation

Posted by PITHOCRATES - January 16th, 2012

Economics 101

Unlike Corporate Borrowing, Government Borrowing does not Translate into Consumer Goods and Services

When corporations need large sums of money to finance their businesses they issue stocks and bonds.  Investors respond by buying their stocks and bonds.  By loaning the business their money they are investing into these businesses.  Giving them capital to create more things to sell.  Thus stimulating the economy.  Because this investment translates into more consumer goods and services.  That consumers will ultimately buy.

When they offer these goods and services at prices consumers will pay the business does well.  As do the consumers.  Who are able to use their money to buy stuff they want.  So consumers do well.  Corporations do well.  And the investors do well.  For a corporation doing well maintains the value of their investments.  Everyone wins.  Unlike when the government enters the bond market.  For when they do there are some winners and, unfortunately, some losers.

Governments issue bonds when they spend more money than they collect in taxes.  They borrow instead of raising taxes because they know raising taxes reduces economic activity.  Which they want to avoid.  Because less economic activity means less tax revenue.  Which would make the original problem worse.  So like a corporation they have a financing need.  Unlike a corporation, though, the money they borrow will not translate into more consumer goods and services.  They will spend it inefficiently.  Reward political friends.  But mostly they will just pay for past spending.  In mature countries deficits and debt have grown so large that some governments are even borrowing to pay the interest on their debt.

Investors like Government Bonds because Government has the Power to Tax

When the government sells bonds it raises the borrowing costs for businesses.  Because their corporate bonds have to compete with these government bonds.  Corporations, then, pay a higher interest rate on their bonds to attract investors away from the government bonds.  Interest is a cost of business.  Which they add to the sales price of their goods and services.  Meaning the consumer ultimately pays these higher interest costs.  Worse, if a corporation can’t get financing at a reasonable interest rate they may not borrow.  Which means they won’t grow their business.  Or create new jobs.

As government debt grows they sell more and more bonds.  Normally not a problem for investors.  Because investors like government bonds.  (What we call sovereign debt.  Because it is the debt of sovereign states.)  Because government has the power to tax.  So investors feel confident that they will get their interest payments.  And that they will get back their principal.  Because the government can always raise taxes to service this debt.  And raise further funds to redeem their bonds.

But there is a downside for investors.  Too much government debt makes them nervous.  Because there is something governments can do that businesses can’t.  Governments can print money.  And there is the fear that if a government’s debt is so great and they have to pay higher and higher interest rates on their sovereign debt to attract investors that they may just start printing money.  Inflate the money supply.  By printing money to pay investors.  Sounds good if you don’t understand the consequences of printing money.  But ‘inflating the money supply’ is another way of saying inflation.  Where you have more dollars chasing the same amount of goods and services.

When Corporations Fail and go Bankrupt they don’t Increase Consumer Prices or Cause Inflation

Think of it this way.  The existing value of all available goods and services equals the amount of money in circulation.  When you increase the money supply it doesn’t change the amount of goods and services in the economy.  But it still must equal the amount of money in circulation.  So the dollar must now be worth less.  Because more of them still add up to the same value of goods and services.  That is, by printing more money they depreciate the dollar.  Make it worth less.  And if the dollar is worth less it will take more of them to buy the same things.  Causing consumer prices to rise.

Worse, inflation reduces the value of bonds.  When they depreciate the dollar the money locked into these long-term investments shrink in value.  And when people get their money back they can’t buy as much with it as they could before they bought these long-term investments.  Meaning they lost purchasing power while the government had their money.  Which gives investors a negative return on their investment.  And if a person invested their retirement into these bonds they will have less purchasing power in their retirement.  Because a depreciated dollar shrinks their savings.  And increases consumer prices.  So retirees are especially hard hit by inflation.

So excessive government borrowing raises consumer prices.  By making corporations compete for investment capital.  And by causing inflation.  Whereas excessive corporate borrowing does not.  They either provide goods and services at prices consumers willingly pay.  Or they fail and go bankrupt.  Hurting no one but their private investors.  And their employees who lose their jobs.  Sad, but at least their failure does not increase consumer prices.  Or cause inflation.

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Big Trouble for the Euro as Massive Greek Debt may be too much for the German People to Endure

Posted by PITHOCRATES - September 11th, 2011

Loans aren’t Gifts, you have to Pay them Back

Tax. Borrow. Print. And spend. The social democracies of Europe have been doing it for years. Thanks to central banking. And fiat money. And a little of John Maynard Keynes. You can keep interest rates artificially low. Deficit spend at will. Sell bonds forever and ever. And even print money. That’s Keynesian economics. Liberal Democrats in America were so enamored with the Europeans that they followed their example. And with government having the power to monetize debt, what could go wrong?

Apparently, a lot. Standard and Poor’s just downgraded U.S. sovereign debt. Citing high debt. And growing deficits. Leading them to believe that the U.S. may have trouble paying back what they’ve borrowed. Saying the U.S. government was living beyond their means. Just because they were spending more money than they had.

You mean we can’t do whatever we want? That’s right. You can’t. Because debt has consequences. You can’t keep borrowing more every year. Because people loan money (i.e., buy bonds) expecting you to pay back that loan. Yeah, I know. Crazy talk. But true nevertheless. Loans aren’t gifts. You have to pay them back.

The Root Problem within the Eurozone is Excessive Government Spending, Deficits and Debt

The U.S. has some financial problems. Record deficits. And record debt. Used to finance ever growing government spending. Yes, things may be bad in America, but they pale in comparison to the problems they have in the Eurozone (see German Dissent Magnifies Uncertainty in Europe by Liz Alderman posted 9/11/2011 on The New York Times).

Despite repeated pledges by Chancellor Angela Merkel to keep Europe together, the cacophony of dissent within her country is becoming almost deafening. That is casting fresh doubt — whether justified or not — over the nation’s commitment to the euro.

“The German electorate is not in the mind-set to undertake actions it sees as subsidizing less worthy nations,” said Carl Weinberg, the chief economist of High Frequency Economics in Valhalla, N.Y. “As a result, the government is moving in a very isolationist way to try to establish a fortress Germany that’s economically secure despite the risks in its European Union partners.”

This weekend, Der Spiegel reported that the German government was starting to prepare for a Greek insolvency and was devising various responses to handle a potential default, including allowing Greece to abandon the euro and return to the drachma. The government in Berlin would not comment, but such reports only add to the doubts bedeviling the euro monetary union.

The root problem within the Eurozone is excessive government spending, deficits and debt. Especially in Greece. Where they’ve borrowed heavily to pay for a very generous public sector. And state benefits.

There were strict requirements to join the monetary union. To change their currency to the Euro. The Euro Convergence Criteria required an annual government deficit of 3% of GDP. Or less. And total debt of 60% of GDP. Or less. Deficit and debt above these limits endangered a nation’s financial stability. And the common currency. The Euro. Which would spread one country’s irresponsible ways to the other countries in the Eurozone.

And that’s exactly what happened. Greece ‘fudged’ their numbers. So while they passed themselves off as fiscally responsible they were anything but. Their deficit and debt far exceeded the Euro Convergence Criteria. And when the global financial crisis of 2008 hit, it hit Greece hard. A couple of years later, with their economy depressed, S&P downgraded their sovereign debt. Increasing their borrowing costs. Which they couldn’t afford. So they had to turn to the international community for help. And it came. With a price. Austerity. Which the Greek people didn’t like.

Because of the common currency, Greece’s problems were now Germany’s problems. Because they were the strongest economy in the union. And the German people are growing tired of picking up the tab for Greece. And they’re not alone.

Finland, the Netherlands and Austria have all spoken with dissonant voices on the Greek bailout, revealing deep divisions among Europe’s strongest countries about how far they should go to save their weaker neighbors.

Continued fears over the state of European banks, and French ones in particular, have also roiled financial markets, especially after Christine Lagarde, the managing director of the International Monetary Fund, warned that European banks needed substantial additional capital.

Meanwhile, fears over Greece are only likely to intensify this week, after Mrs. Merkel’s finance minister, Wolfgang Schäuble, warned that Germany, for one, would not approve new financial assistance to help Athens continue to pay its bills through Christmas unless the Greek government fulfilled the conditions of its first bailout.

Can you blame them? Would you want to loan more money to a family member that continues to spend beyond their means? People want to help others. But they don’t want to finance the irresponsible ways that caused their problems in the first place. Austerity isn’t fun. But others are doing it. As they try to adjust their budgets to live within their means.

Outside of Greece, some things have improved, if only haltingly. Italy’s lower house of Parliament is expected to approve a tough new fiscal package in coming days.

France, Portugal and Spain are adopting measures to make it easier to balance budgets, moves intended to reassure investors about their commitments to fiscal prudence.

Which is not helping Mrs. Merkel. For if she continues to try and save the Euro her party may lose power.

Still, Mrs. Merkel must contend with a stark divide between her support for European unity and a German public that sees no reason, in the majority’s view, to pour good money after bad into the indebted countries of southern Europe. Her Christian Democrat Party has now lost five local elections this year. Yet even as many Germans complain bitterly about their southern neighbors, few in business and politics are ready to let the euro zone fall apart.

After all, if the weakest countries were to revert to their original currencies, a German-dominated euro would soar as investors flocked to it as a haven, devastating the business of exporters who have relied on its stability and relatively affordable level against other major currencies.

Then again, if she doesn’t save the Euro, her export economy may tank. A weak Greece is helping to keep the Euro undervalued. And you know what an undervalued currency does. It makes your exports cheap.

Any American who vacationed in Canada understands this well. Back when the U.S. dollar was strong, it was nice crossing into Canada. When you exchanged your strong American dollars for Canadian dollars, you got a lot more Canadian dollars back. In other words, the American dollar bought more in Canada than in the U.S. So people took their vacations in Canada. Which made the Canadian tourism industry boom.

This is the value of a weak currency. When your currency is weak, goods and services in your country, or goods exported out of your country, are cheaper. And the weaker nations in the Eurozone are keeping the Euro undervalued. And German exports strong. But it comes with a price. The taxpayers are basically subsidizing the export industry. By subsidizing the Greece bailout.

In other words, the Germans are damned if they do. And damned if they don’t.

The More the Debt the More the Crisis, the Less the Debt the Less the Crisis

Governments embrace Keynesian economics because it gives them power. It facilities their deficit spending. Legitimizes it. They and their Keynesian economists will dismiss growing debts. Because they’re no big deal. You see, their policy of continuous inflation shrinks that debt in real terms. In other words, as you devalue the currency, old debts are worth less. And easier to repay years later.

But there’s a catch. You need a growing GDP for this to work. When the economy stagnates, tax revenues fall. And if those debts are too big you just may not be able to service those debts. And you know what can happen? Greece. So too much debt can be a bad thing.

And it’s a dangerous game to play. Because as that debt grows so must taxes to service that debt. So they increase tax rates. But higher tax rates work against growing GDP. Flat or falling GDP means less tax dollars. Which leads to more borrowing. So the solution to the problem is more of what caused the problem. Which makes the original problem bigger. It’s a vicious cycle. Until the cycle ends in a credit downgrade. And financial crisis.

Keynesians can say what they want. But one thing they can’t deny is this. If these countries had no debt then they would have no financial crisis. Some countries have less debt and are not in crisis. While the countries in crisis have excessive debt. See the pattern? The more the debt the more the crisis. The less the debt the less the crisis.

Even Keynesians can’t deny this. Then again, Keynesians could. For they do live in denial.

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Keynesian Governments play with Interest Rates giving us Asset Bubbles and Crises

Posted by PITHOCRATES - September 5th, 2011

Subprime Mortgage Lending – Qualifying the Unqualified

Housing has led the economy since World War II.  Home ownership.  The magical elixir.  So the government policy has been to put as many people into homes as possible.

They pushed mortgage lenders to approve mortgages.  And threatened them when they didn’t.  Especially to minorities in depressed inner cities.  Worse, activists were protesting.  Accusing them of redlining.  All this pressure forced the lenders to come up with ways to qualify the unqualified.  And the vehicle of choice was the subprime mortgage.

Adjustable Rate Mortgages (ARMs).  Interest only mortgagesNo-documentation mortgages.  Etc.  These were putting people into houses like never before.  Even if they couldn’t afford a house.  They got in at low interest rates.  Kept low by easy monetary policy.  To get as many people approved for these dirt-cheap mortgages as possible.

Bad Government Policy caused a Housing Boom, a Housing Bubble and a Crisis

But that’s not all the government did.  Via Fannie Mae and Freddie Mac, they guaranteed these subprime mortgages.  And bought them from the mortgage lenders.  Removing these highly risky mortgages from their balance sheets.  Removing all risk from the lender.  And passing it on to the taxpayer.  And as you would guess such a policy would do, the lenders approved more of these risky subprime mortgages.  And why not?  They made money.  And were insulated from all risk. 

Then Fannie and Freddie chopped and diced these risky subprime mortgages.  Created mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  And sold them on Wall Street.  They were high yield.  But super safe.  Because they were backed by historically the safest of all debt.  Mortgages.  Only these weren’t safe mortgages.  They were very risky subprime mortgages.  And why were they so risky?  Because when interest rates go up, so do their monthly payments.  Likely more than the home owner can pay.  And when those interest-only mortgages had to be refinanced, the new higher interest rates made the new mortgages more costly than the old.  More than a subprime borrower could afford.  Which meant one thing.  Default.

So all this bad government policy (to put as many people into homes as possible) caused a housing boom.  And a housing bubble.  The economy was overheating.  So the Federal Reserve tapped the monetary brakes.  By raising interest rates.  And all hell broke loose.

Government enabled Risky Subprime Mortgage Lending

The government’s housing policy gave us the subprime mortgage crisis.  And spread this contagion around the globe.  Thanks to Fannie and Freddie.  Enabling all that bad mortgage lending.  Giving us the Great Recession.  That appears more depression-like than recession.  Now the go-to government policy of boosting economic activity won’t work.  Because the housing market is in shambles.  And it will get worse before it gets better (see Uncle Sam is a reluctant landlord of foreclosed homes by Lorraine Woellert and Clea Benson, Bloomberg Businessweek, posted 9/5/2011 on MSNBC).

For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.

The U.S. taxpayer is the largest owner of foreclosed properties.  Because government enabled risky subprime mortgage lending.  They guaranteed or bought risky mortgages.  So risky that no mortgage lender would have approved them if they had to carry the risk on their own balance sheets.  Which makes the government incompetent.  Or devious.

The government caused this problem.  By putting as many people as possible into homes.  Whether they could afford it or not.  And now they have a big problem on their hands.  Or, rather, the taxpayers do.  For government’s problem is ultimately the taxpayers’ problem.  It is our money after all that they are playing with.

Since the 2008 financial collapse, the government has spent billions of dollars trying to extricate borrowers from high-cost loans, aid delinquent homeowners and stabilize neighborhoods. The results have been disappointing. The Obama Administration’s signature loan-modification program has helped about 657,000 homeowners — far short of its goal of 3 to 4 million. The program was a victim of its complexity and its inability to cope with overwhelming demand.

Yes, they’re good at creating BIG problems.  But not very good at fixing them.  To put it mildly.  And yet we keep turning to government for help.  Go figure.

Selling High-Risk Securities Masquerading as Safe High-Yield Investments 

And it’s not only the U.S that made a mess of their mortgage market.  Europe has her own subprime problems.  On top of their sovereign debt crisis.  As if they didn’t have enough to worry about already (see Europe banks slide to 29-month low on multiple headwinds by Simon Jessop, Reuters, posted 9/5/2011 on Yahoo! Finance).

European bank shares slid to a 29-month low on Monday, leading the broader market down on fresh sub-prime mortgage woes, fears of recession and yet more evidence of political disunity that could hamper efforts to solve the region’s debt crisis…

“The chances of a near-term recovery remain slim as euro zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector,” Manoj Ladwa, senior trader at ETX Capital said.

Subprime mortgage woes.  And a debt crisis.  All caused by activist Keynesian governments.  Playing with interest rates.  To stimulate the economy with an artificial demand.  Which always ends the same way.  Asset bubbles.  And crises.  In Europe.  The U.S.  And everywhere where activist governments think they can outsmart the free market.

Royal Bank of Scotland…

… is among the worst-placed of European lenders facing a multi-billion-dollar U.S. regulatory lawsuit accusing them of misrepresenting the checks they made on mortgages before securitising them.

So Europe, too, has been dabbling in mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  Doesn’t look like things ended any better for the Europeans.  They sold high-risk securities masquerading as safe high-yield investments.  Because of those ‘safe’ mortgages underlying these investments.  That were anything but safe.

“The banks’ cost of funding goes up in tandem with the country’s cost of funding, and eventually they get denied access to the credit market.”

That relationship was once again thrown into focus on Monday as both Italian and Spanish 10-year yields rose to near 1-month highs. Peripheral euro zone sovereign CDS yields also rose, with French yields at a record high.

The financial crisis is not only hurting investors, it’s hurting countries.  By raising borrowing costs.  Which is a BIG problem for countries that like to spend beyond their means.  Because they have to borrow to pay today’s bills.  As well as borrow to pay yesterday’s bills. 

As bonds come due they have to borrow money to redeem them.  And all this new borrowing is at higher and higher interest rates.  So high that governments even have to borrow to pay the interest on the money they’ve borrowed.  And the interest on their debt becomes an ever growing line item on their budgets.  Which makes it harder to pay retirement benefits.  Health care benefits.  Education benefits (i.e., free college tuition).  Etc.  Eventually requiring budget cuts.  And austerity.  Which the people often respond to with riots.

Adding to growing concern over a return to recession in the developed world, data showed euro zone services sector growth eased for the fifth consecutive month in August.

Recent data showed a world economy growing at “near stall speed,” analysts at Societe Generale (Paris: FR0000130809 – news) said in a note, although they did not believe the world would return to recession as it needed a trigger, “which we believe will remain absent.”

“Taming burgeoning public debts on both sides of the Atlantic (Stuttgart: A0J3C9 – news) will take time and we forecast a prolonged period of low growth for both the US and Europe,” they add.

All this government spending is paid for (in part) with high taxes.  As the borrowing costs grow governments turn to raising tax rates.  Which puts the brakes on economic activity.  Which, in turn, reduces the amount of tax dollars collected by the government.  Making a bad problem worse.

You Never Want a Serious Crisis to go to Waste

This is Keynesian economics.  Keep interest rates low.  Depreciate your currency.  And keep on spending.  Their rationale is that governments can do anything they want.  For it’s their fiat money.  They can always print more.  And the resulting inflation will make yesterday’s debt easier to pay tomorrow.  We call it screwing our creditors.  I mean, monetizing the debt.

But debt has consequences.  The European sovereign debt crisis is a crisis because they can’t borrow any more money to continue their excessive government spending.  Standard and Poor’s just downgraded U.S. bonds because of excessive debt.  The tax and spend Keynesians say poppycock.  Keep spending.  And raise taxes.

But the responsible people say, “Wait a minute.”  For they see these crises as debt crises.  And they think ‘what if’ there wasn’t excessive debt.  Would there be a crisis then?  And the answer is, of course, no.  So they understand that too much debt is a bad thing.  And if it’s a bad thing, adding more of it will only make it more of a bad thing.  And unless you think a crisis is a good thing, you don’t want more of one.

But if you think a crisis is a good thing.  That “you never want a serious crisis to go to waste.”  Then you probably want more of a bad thing.  And you’re probably a Big Government Keynesian liberal Democrat.  Using that crisis to advance an agenda you couldn’t through the normal legislative process.

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