The Threat of Default on the Debt is from the Left not the Right

Posted by PITHOCRATES - October 10th, 2013

Politics 101

We have a Debt and Spending Problem as we are Spending so much that we have to Raise the Debt Ceiling

Contrary to popular belief the government doesn’t just borrow money.  They also raise money by taxing us and charging us fees.  A lot of it.  In this past fiscal year (October 2012 to September 2013) they raised $2,450,200,000,000.  That’s $2.45 trillion dollars.  Sadly, they spent $3,537,100,000,000.  Or $3.5 trillion.  Giving us a deficit of $1,086,900,000,000.  Or $1.1 trillion.  Which is why we’re having a debt crisis.

Interestingly, the left does not believe that we have a debt problem.  Or a spending problem. For they see no problem with these numbers.  The only problem they have is with Republicans.  Who do believe we have a debt problem.  As well as a spending problem.  And they want to do something about it.  Before the debt grows so big that it threatens the full faith and credit of the United States.

Now the Democrats, who don’t think we have a debt or a spending problem, are saying the Republicans are threatening the full faith and credit of the United States.  With their shutting down of government.  And their demand for spending cuts before raising the debt ceiling.  Which proves the Republicans point.  We have a debt and a spending problem.  Because we are spending so much that we have to raise the debt limit.

The Interest on the Debt is only 11.75% of the Available Revenue so there is no Danger of Default

Of course, this explains the $1.1 trillion deficit.  Out of control spending.  That the government is funding with more and more borrowing.  Which threatens the full faith and credit of the United States.  Because the more debt we accumulate the less likely we’ll ever be able to pay it off.

But are we risking default on the debt now?  With this battle over the debt ceiling?  No.  Yes, the debt is huge.  Currently it is in excess of $16 trillion.  About six and a half times total federal revenue.  To get an idea what that means consider you have the median household income which is approximately $51,000.  If you carried the same amount of debt the federal government carries you would have approximately $331,500 in credit card debt.  Any household with a median income of $51,000 with credit card debt of $331,500 has a bleak future.  And unless they win the lottery they will not escape bankruptcy.

So $16 trillion in debt is recklessly high.  And impossible to pay off.  But as bad as that is the amount of revenue the federal government collects via taxes and fees greatly exceeds the interest on the debt.  The interest on the debt is $415.7 billion.  This is the amount the government has to pay to avoid defaulting on the debt.  Which is easy to do with $2.45 trillion in revenue.  The interest on the debt is only 11.75% of the available revenue.  So even if the Republicans refuse to raise the debt ceiling there is no way in hell the government will be unable to pay the interest on the debt.  Unless the government chooses NOT to pay the interest on the debt.  Even when they have the ability to pay the interest on the debt.

The Democrats become Chicken Little whenever anyone ever Threatens their Spending Authority

So why all the talk of defaulting on the debt?  And ruining the full faith and credit of the United States?  Simple.  Democrats are liars.  And what do liars do?  They lie.  The interest on the debt is in no danger of going unpaid.  It’s all that other government spending that is in danger of going unspent.  That spending that makes people dependent on government.  And buys votes.

The left tries to frighten the people so they can keep spending.  And keep buying votes.  They try to scare Social Security and Medicare recipients.  Telling them they will lose their benefits if the Republicans don’t stop what they’re doing.  Even though they won’t.  First of all we pay into our own retirement account. At least that’s what the government tells us.  And there is a Social Security Trust Fund.  Full of our money just waiting to pay our benefits.  Or so they say.  But the Trust Fund doesn’t have money in it.  It has government IOUs.  Because the government spent that money.

So that’s why Democrats lie.  So they can keep spending and buying votes.  Which they won’t be able to do if they can’t borrow more money to spend.  And they’re spending so much that they can’t afford to lose their charging privileges.  This is why they warned the sky would fall if the sequestration spending cuts went into effect.  But as we all witnessed the sky did NOT fall with those spending cuts.  There was some discomfort.  But nowhere near the calamity the Democrats warned would befall us if they didn’t get their way.  Bringing us to their greatest fear.  That life can go on with a large spending cut.  And telling us that the government can cut spending even more.  Far more.  Which is a threat to their ability to buy votes.  And to their power.  Which is why they become Chicken Little whenever anyone ever threatens their spending authority.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , ,

The Democrats have refused to Raise the Debt Ceiling for Republican Presidents

Posted by PITHOCRATES - October 8th, 2013

History 101

The Democrats opposed Raising the Debt Ceiling for Republican President Dwight Eisenhower

President Obama and the House Republicans are at a standoff.  At the center of the debate is Obamacare.  The House Republicans want to defund Obamacare.  They didn’t like it when it cost $1 trillion over ten years.  And they like it even less now that the CBO has revised its cost to $3 trillion.  It has frozen hiring.  And pushed people from full-time to part-time.  President Obama has also revised the law.  Taking on legislative powers that the Constitution gives only to Congress.  With the one year delay for the business mandate being especially galling to Republicans.  As well as the 75% subsidy members of Congress and their staff get.

The House Republicans have reduced their demands to basically giving the president a continuing resolution to fund all of government if he would only give the American people what he gave to his friends in Big Business.  A one year waiver of the individual mandate.  Infuriating the president.  Saying he will not negotiate with terrorists taking the American people hostage.  However, he said he will negotiate with the Republicans.  After they give him everything he wants.  Including raising the debt limit.  For shutting down the government is one thing.  But messing with the full faith and credit of the United States is another.  With the Republicans having the gall to demand spending cuts before raising the debt ceiling.  This was just unprecedented.  Never before did anyone use the debt ceiling to bully a president before.  In the past Congresses always raised the debt ceiling whenever a president requested.  Whistling a happy tune in the process.  Except, of course, in 1953 (see Can Debt Ceiling Debates Be Useful? History Says Maybe. by Joseph J. Thorndike posted 8/28/2013 on the Huffington Post).

The idea of using the debt ceiling for leverage is not new. Indeed, the nation’s first debt limit crisis hinged on it. In the summer of 1953, President Dwight Eisenhower asked Congress for a modest boost in the debt ceiling. When austerity-minded lawmakers refused, it prompted a crisis that brought the nation to the brink of default – or to its fiscal senses, depending on your point of view…

Eisenhower didn’t believe that spending cuts would be sufficient to keep federal debt under the cap. “Despite our joint vigorous efforts to reduce expenditures,” he told Congress, “it is inevitable that the public debt will undergo some further increase.” On July 30, Eisenhower asked Congress for an increase in the debt ceiling from $275 billion to $290 billion…

Sen. Harry F. Byrd, D-Va., took the lead in fighting the increase. Raising the limit would be “an invitation to extravagance,” he declared. Keeping the present cap, moreover, would encourage much-needed economy. “It may be that the administration would be forced to operate on a very prudent and conservative budget in order to avoid an increase in the debt limit,” he predicted.

A host of senators joined Byrd’s campaign to reject the increase. The New York Times reported that Democratic opposition was “almost solid,” and many Republicans were also prepared to break with the president…

As a leverage goes, it was pretty effective. Almost immediately, Eisenhower told his department heads to cut their spending. “It is absolutely essential that you begin immediately to take every possible step progressively to reduce the expenditures of your department during the fiscal year 1954,” he told them.

So it started early.  And it started with the Democrats.  Holding the debt limit hostage to get what they want.  And in 1953, the Democrats got what they wanted.  They forced President Eisenhower to make spending cuts.  Just like the Republicans asked for in 2011.  And will ask again now.  But President Obama was not as reasonable in 2011 as President Eisenhower was.  And he is saying he will be even less reasonably now.

The Democrats opposed Raising the Debt Ceiling for Republican President Ronald Reagan

So was 1953 an isolated incident?  Were the Democrats more accommodating at other times when a president asked them to raise the debt ceiling?  As President Obama would have us believe?  Well, they weren’t very accommodating in 1984.  When President Ronald Reagan asked Congress to raise the debt ceiling (see In 1984, debt debate looked different to Biden, GOP by Stephen Dinan posted 7/19/2011 on The Washington Times).

With time running out on a looming debt crisis, the president and his allies in the Senate are fighting to win a raise in the government’s borrowing limit, only to be stymied by a minority insisting that a spending freeze be part of the deal.

Sounds like present day, but it was October 1984 — when the partisan roles were reversed. Republicans controlled the White House and the Senate, while Democrats controlled the House. Democrats also could sustain filibusters in the Senate and were balking at raising the debt ceiling unless it was attached to big spending cuts…

One of the leaders of that 1984 Democratic revolt — a man who tried to impose a spending freeze and fought for a smaller debt increase than President Reagan wanted — was none other than current Vice President Joseph R. Biden, then a senator from Delaware and now President Obama’s right-hand man in negotiations with Congress.

“I must express my protest against continually increasing the debt without taking positive steps to slow its growth. Therefore, I am voting against any further increase in the national debt,” Mr. Biden said in a floor speech just before helping fellow Democrats defeat an increase of $251 billion on a 46-14 vote.

Once again the Democrat-controlled House refused to raise the debt ceiling.  So 1953 was not an isolated incident.  But the beginning of a pattern of Democrat willingness to risk the full faith and credit of the United States for political reasons.  To get their way despite losing the election to President Reagan.  Apparently back then elections didn’t have consequences.

How embarrassing it must be for the vice president.  Being part of an administration trying to do what the Reagan administration did when he stood in opposition.  Imagine trying to argue for something you argued against previously?  Thankfully, it was only the vice president that had such a hypocritical past.  Imagine how embarrassing it would be if the president had such hypocrisy in his past.

The Democrats opposed Raising the Debt Ceiling for Republican President George W. Bush

Well, as it turns out, another young Democrat senator went toe-to-toe with another Republican president over the debt ceiling.  And he just didn’t vote against it.  He made a speech.  On the record.  For posterity.  To prove he was no spendthrift.  At least, not when a Republican was in the White House.  That president was George W. Bush.  And that senator was, of course, Barack Obama (see Obama Really Wishes He Never Gave This Speech About The Debt Ceiling by Walter Hickey posted 1/14/2013 on the Business Insider).

In 2006, then-Sen. Barack Obama gave a floor speech defending his decision to vote against an increase in the debt ceiling under President George W. Bush…

Here are some of the key parts of Obama’s speech:

Mr. President, I rise today to talk about America’s debt problem. The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

[…]

Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘‘the buck stops here.’’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.

In the midst of the first debt-ceiling standoff in 2011, Obama was asked about his flip by ABC’s George Stephanopoulos. He chalked it up as a “political vote” and said his mindset changed as President.

Hypocrisy, thy name is Barack Obama.

Interesting.  It was okay for him to do what the House Republicans are doing now when he was in Congress.  When there was less debt.  And less of a debt crisis.  But it’s not okay for the House Republicans to do so now.  When there is more debt.  And a greater debt crisis.

So what is the right thing to do?  Well, if you’re President Obama the right thing to do is what he wants to do.  Not what is best for the country.  For if you argue both sides of the same issue at different times it means you’re more interested in what’s best for yourself.  Not the country.  Unless he evolved on this issue, too.  If so, perhaps we should ask for President Obama’s resignation.  For if he keeps evolving on issues he must be too ill-informed or naïve to be president.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , ,

The Problems in the Eurozone may Influence Scottish Voters in their Independence Referendum

Posted by PITHOCRATES - April 27th, 2013

Week in Review

During the Roaring Twenties the American economy was giving the economies of Europe a run for their money.  The Europeans, accustomed to running the world for so long, looked at the economic prowess of America with concern.  And began to talk about a United States of Europe to compete with the economic juggernaut across the pond.  But when Calvin Coolidge chose not to run for a second term the progressives got back into power.  And Herbert Hoover put an end to that surging economy.  Causing a stock market crash.  And throwing the country into recession.  Which FDR turned into the Great Depression.

So there was no United States of Europe.  But there would be a European Union one day.  And after that, a currency union.  The Eurozone.  To compete against the economic prowess of the United States.  But a currency union without a political union.  Without a single fiscal and monetary policy to support that currency union.  Which turned out to be a problem.  For without that political union the currency union was only as strong as its weakest state.  In the Eurozone that state was Greece.  Whose unrestrained government spending caused a debt crisis that threatened to bring down the entire Eurozone.  Unless the other members stepped in to bail out Greece.  Which they have.  But the crisis hasn’t gone away.  For the central governing authorities can only ask Greece to cut their spending.  Which there is a lot of opposition to in Greece.  Putting a lot of pressure on the Euro.

Greece isn’t the only problem.  There was Ireland.  Spain.  Portugal.  And Cyprus.  All sovereign nations.  Sharing a common currency.  Making it all but impossible to maintain a uniform fiscal policy throughout the Eurozone.  Like they can in the United States.  Because the United States of America is a political union.  With one central government.  One central fiscal authority.  And one central monetary authority.  Making it hard for any one state to undermine the currency.  (Though California is making a valiant effort.)  Which is the problem they’re having in the Eurozone.  Many of the states are threatening to undermine the common currency.  Making a very strong case against future currency unions without a political union.  Which is something they are considering with an upcoming referendum on Scottish independence (see UK says “no clear reason” to let independent Scotland use the pound by David Milliken posted 4/23/2013 on Reuters UK).

The euro zone’s experience of countries sharing a currency but not a government shows there is no clear case for an independent Scotland to use the pound, the Treasury said on Tuesday.

The nation of 5 million will hold a referendum on September 18 next year to decide whether to split from the United Kingdom, at the instigation of the Scottish National Party that runs the country’s devolved government.

Pro-independence campaigners want Scotland to keep sterling, at least in the early years of independence, and then to decide later whether to switch to its own currency.

But in a report on Tuesday, the Treasury said there was no clear case for the United Kingdom to agree to a formal currency union with an independent Scotland, which would have an economy of a similar size to New Zealand’s…

“The recent experience of the euro area has shown that it is extremely challenging to sustain a successful formal currency union without close fiscal integration and common arrangements for the resolution of banking sector difficulties,” it added.

Scotland and England have a long history.  Not all of it good.  But if we’ve learned anything from history it is that large economic blocs do better than smaller counties.  As the United States demonstrated.  And as the Eurozone tried to duplicate with their currency union.  But as that experiment showed us a currency union without a political union is a recipe for disaster.  If Scotland breaks from the United Kingdom they will have to go all of the way.  And leave sterling.  Which will make independence more difficult.  Having to set up a new currency with everything else they will have to do.  (Such as dealing with separating their military forces from the UK’s.  And providing for their own defense.  Or forming a military union with the UK.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.)

Of course if they do and they devalue their new currency it would make their exports cheaper to those nations with a stronger currency.  But that weak currency will make anything they import more expensive.  As Scotland exports and imports a lot of stuff they won’t get a clear advantage in devaluing their new currency.  So they may peg their new currency to sterling.  The next best thing to keeping sterling.  Which will tie them closely to the UK.  Something many Scots no doubt will consider before voting in the referendum.  Perhaps choosing to stay in the UK.  As Quebec chose to stay in Canada in their past referendum.  Who had less in common with the rest of Canada than the Scots have with the UK.  For they don’t even speak the same language.

They could join the Eurozone.  But recent events in the Eurozone does not make that option as appealing as setting up a new currency.  Or staying a part of the UK.  It would probably be best for the rest of the world if Scotland remained part of the UK.  For the world will need at least one strong reserve currency.  As the Euro is making itself less attractive by the day.  The U.S. dollar may hit the wall soon with the amount of debt the Americans are racking up.  And the Chinese are likely to go the way of Japan before the decade is out.  And have their own Lost Decade with all their malinvestments.  The ultimate cause in the fall of state-capitalism.

Now the UK has its problems.  But their decision to stay out of the Eurozone was clearly sound as a pound.  And pound sterling may grow even more attractive as a reserve currency as these other countries continue to rely on easy credit and debt to pay for their burgeoning welfare states.  And/or their malinvestments.  But one thing the UK is doing that none of these other bloated states are doing is making real cuts in spending.  Even in their venerated NHS.  Giving the UK the edge in responsible governing these days.  And really making a strong argument against Scottish independence at this time.  Even for those who hate England.  For it is better to deal with the devil you know than the devil you don’t.  Especially during uncertain times.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , ,

Tony Blair says it’s up to the Germans to Save the Eurozone and Pay Down that Excessive Debt of Others

Posted by PITHOCRATES - June 24th, 2012

Week in Review

Former British Prime Minister Tony Blair is asking the Germans to pick up the tab for the European sovereign debt crisis.  Even suggested that Britain may still join the currency union.  Once they fix the current problems they’re having (see Blair: To save eurozone, Germany must underwrite debts of struggling members by Associated Press posted 6/24/2012 on The Washington Post).

Former British Prime Minister Tony Blair said Saturday that the euro will only survive if Germany underwrites the debts of the eurozone’s financially struggling members.

He told BBC television that safeguarding the euro would need Berlin to “treat the debts of one as the debts of all,” and debt-wracked nations to carry out reforms which would help restore Europe to competitiveness…

Blair, who is currently envoy to the Quartet of Middle East peacemakers, also insisted that Britain could still choose to join the euro — despite the crisis…

Prime Minister David Cameron, of the rival Conservative Party, has vowed that Britain won’t join the euro during his tenure.

This is the compassionate thing to do.  Except for those getting stuck with the tax bill.  Who have played by the rules and have been responsible.  And their reward for being responsible?  They can now be responsible for other people’s debt.  Somehow that doesn’t sound fair.  Or compassionate.

This doesn’t address the underlying problem in these countries.  Their government spending.  All this will do will give them a reprieve and allow them to borrow more money.  And why wouldn’t they continue their ways?  When they can do just that.  For they have demonstrated they are no fans of austerity.  So it is unlikely that they will cut any spending.  Which means things will only get worse.  Pushing that day of reckoning further down the road.  Making it ever more painful when it finally arrives.  For all the countries instead of just the ones struggling now.

The European social democracies are just getting too costly.  This is the problem.  A lot of this excessive government spending is paying pensions, health care costs and other social benefits.  This is the source of government deficits.  Anything they do to make that debt more manageable won’t matter unless they shrink these deficits.  So they can lower their taxes.  And remove this great burden from the private sector so it can restore Europe to competiveness.

www.PITHOCRATES.com

Share

Tags: , , , , , ,

Greek Debt Crisis, Social Democracy, Welfare State, Keynesians, Inflation, Tax Evasion, Common Currency and the Eurozone

Posted by PITHOCRATES - June 19th, 2012

History 101

Higher Debt Balances accrue Higher Interest Costs that Reduce Income

The Greek debt crisis has been in the news for a long time.  Which has contributed to the Eurozone sovereign debt crisis.  Most people understand that it’s bad.  But they may not understand how bad.  Or understand what exactly happened.  What caused it.  And why they can’t fix it.  For it’s been a crisis since 2009.  And all we hear is that it’ll be apocalyptic if we don’t bail out Greece and save the Euro.  Which would be bad.  As most apocalypses tend to be.

To get a general understanding we’ll use an analogy.  Let’s say you just got a new job and are now earning $80,000 annually.  Your future is bright.  And you’re very happy.  You buy a big house.  And you run up your credit cards furnishing it with lots of nice stuff.  Because you’re earning $80,000 a year and can easily afford it.  Well, perhaps not easily.  But you can still put food on the table.  And take a nice vacation with your better half.  But then a recession sets in.  They cut your bonus.  And some of your benefits (taking a large health care deduction out of your check).  But that house payment remains the same.  As do your credit card bills.  So you cut out the vacation.  And eat more hamburger and less steak.  To adjust to the lost income.  Then worse comes. 

You lose your job.  Go on unemployment.  Which doesn’t pay your bills.  So you desperately look for a new job.  In the bad economy the best job you can get pays only $50,000.  Which is a lot more than unemployment.  But a far cry from $80,000.  You can keep making your house payment.  But you have to slash nonessential spending.  And cut up your credit cards.  Because those high credit card balances require a payment that’s almost as big as your house payment.  Almost your entire paycheck goes to your creditors.  All because you started spending money you didn’t have because you thought that $80,000 job would never go away.  In fact you spent based on what your income would grow to.  Beyond that $80,000.  This is the Greek debt crisis.  Only without the spending cuts.

A Policy of Constant Inflation Monetizes Old Debt and Bumps People up into Higher Tax Brackets

Like the rest of Europe Greece became a social democracy.  Which is socialism-light.  The people learned they had the keys to the treasury.  All they had to do was to vote for people who liked using that key.  And they did.  Government spending soared beginning in the Seventies.  The public sector grew.  Creating a lot of government jobs.  With some generous pay and benefits.  But the country was also a welfare state.  Which meant everyone got a state pension.  State health care.  And other state social benefits.  You didn’t have to work for the government to enjoy the generosity of the state.  And the state was generous.

And the generous government spending just grew more generous.  Strong economic growth allowed more spending.  And more borrowing.  (From 2000 to 2007 Greece led the Eurozone in economic growth.  Which probably sealed their fate.  Because the increased spending during boom times they could never sustain during bad economic times.  And bad economic times were coming.)  Budget deficits became a part of the Greek government.  For they were also Keynesians.  Who believed in the value of running deficits.  And accruing debt.  They devalued their currency.  Which helped make their exports cheaper.  And it monetized their debt.  A policy of constant ‘but manageable’ inflation made old debt worth less.  And easier to pay off.  Just as inflation made people’s savings accounts worth less over time.  But running budget deficits year after year increased their outstanding debt.  Starting slowly at first.  Then growing greater.   Prior to 1984 Greek debt as a percentage of GDP was below 40%.  By 1998 it was above 60%.  By 1990 it was above 80%.  By 1994 it was above 100%.  By 2010 it was above 140%.  By 2011 it was above 160%. 

The Keynesians don’t see a problem with this.  Because they believe if you keep depreciating the currency the older debt just goes away.  It’s like redeeming a $100 savings bond from 1875.  Back then $100 was a lot of money to the government.  Today it’s the loose change they drop from their pockets that isn’t worth bending down to pick up.  Metaphorically, of course.  In time with steady inflation those old debts simply become chump change.  And there’s something else Keynesians love about inflation.  It’s a hidden tax.  Sometime it’s not possible politically to raise taxes.  So they can use inflation to bump people into higher tax brackets.  Making them pay a higher percentage of their income to the government.  Which brings us to another Greek problem.

At the Heart of the Greek Debt Crisis is the Welfare State

Greece is a welfare state.  Like other welfare states they have to fund that welfare with taxes.  So they have high tax rates.  Because it’s what the people want.  That welfare state.  Which requires those high tax rates.  But they have a problem.  People don’t like paying taxes.  Especially the Greeks.  Who have taken avoiding paying taxes to an art.  Which plays a big problem in the Greek debt crisis.  People demanding all of that government spending.  Yet refusing to pay the taxes to pay for it.  Causing great problems.  Especially when they joined the common currency.  The Euro.

The common currency changed things.  They could no longer depreciate their currency.  Because it wasn’t their currency anymore.  It was the Eurozone’s currency.  Joining the Euro was like giving a bunch of people credit cards and telling them they had to restrict their purchases so that their annual deficit and total debt fell below certain percentages of their income.  And those numbers to join the Euro were as follows.  Their deficit had to be below 3% of GDP.  And their debt had to be below 60% of GDP.  If all the members kept within these limits they would maintain their good credit rating.  And be able to use their ‘credit cards’ responsibly.  And not shock the European Central Bank when they opened the credit card statement at the end of the accounting period.

It appears that Greece massaged their numbers with some creative bookkeeping to meet the requirements to join the Euro.  And to stay within the currency union they may have misreported their economic numbers.  (When the crisis began the Greeks officially reported that their deficit was 5% of GDP.  Which exceeded the allowable 3% but was salvageable.  After some outside audits they revised their 2009 deficit up to 15.6% of GDP.  Making the crisis more of an apocalypse).  Why did they do this?  Because they wanted to keep spending.  But they couldn’t depreciate their currency anymore.  The economy was in recession which higher tax rates wouldn’t help.  Not to mention all of the tax evasion.  So that left borrowing as their only avenue to sustain that excessive government spending.  Sort of like trying to solve the problem of having your credit cards cancelled for nonpayment by getting new credit cards to use to accumulate even more debt that you can’t repay.  They’ve gotten one bailout package already.  And a second one is theirs if they commit to some austerity.  Which the people have rejected.  At least those rioting in the streets.  And considering how generous those benefits had been it’s hard to blame these people.  For life as they knew it is over for them.  Thanks to irresponsible government spending that made them dependent on the government.

So there are a lot of factors that caused the Greek debt crisis.  But at its heart is one thing.  The welfare state.  For if there was no excessive government spending they wouldn’t have had those large deficits.  Debt.  Or debt crisis.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , ,

Debt Crises in Ireland, Greece, Portugal and now Spain may Prove too much for the Euro to Survive

Posted by PITHOCRATES - June 3rd, 2012

Week in Review

The woods are lovely, dark and deep.  But I have promises to keep.  And miles to go before I sleep.  And miles to go before I sleep.  Lines from a poem by Robert Frost.  For some reason this came to me as I read about the never-ending crisis that is the sovereign debt crisis in Europe.  And the Eurozone.  For the Euro is lost in those dark and lovely woods.  Woods that are so deep that it will never find its way out.  And the only kind of sleep the Euro is going to get is the kind you don’t wake up from (see Britons face £5bn bill to help out Spanish as fears grow that Madrid will have to ask IMF for €300billion bailout by Hugo Duncan And James Salmon posted 6/1/2012 on the Daily Mail).

British taxpayers could be forced to stump up another £5billion to rescue Spain as the crisis in the eurozone spirals out of control.

Fears are mounting that Madrid will have to ask for an emergency bailout of up to £300billion as it struggles to prop up its basket-case banks.

A third of that money could come from the International Monetary Fund – including around £5billion from the UK, even though Britain is not in the eurozone.

UK taxpayers have already coughed up £12.5billion to rescue debt-ridden Greece, Ireland and Portugal…

But growing doubts over how the Spanish government will finance the £15billion needed to rescue Bankia, one of its biggest lenders, have raised fears that it will follow Ireland, Greece and Portugal in requiring a bailout from Europe and the IMF.

This week US investment bank JP Morgan warned a joint rescue of Spain could cost around £300billion.

The Spanish banking system has been crippled by nearly £150billion in toxic property loans.

At the heart of the sovereign debt crisis in Europe is debt.  They have way too much of it.  So much that the odds are not good that they will ever be able to repay it.  Which makes people very reluctant to loan them any more money.  It’s like loaning a friend money who already owes you a lot of money.  Do you loan him more money?  It just may help him turn his life around.  Start anew with a new job.  Earning enough money to support himself and pay you back.  That’s one possibility.  Then there’s the possibility he may just blow the money on booze, drugs and women.  You know he’s just going to spend whatever else you loan him.  And not pay any of it back.  So it would be rather foolish to loan him more money.

This is the decision facing the people who could attempt to bail out those in the Eurozone.  They’ve already loaned them a lot of money.  So these in-trouble countries can sustain the government spending their current tax revenue can’t support.  But the deal was to cut back that spending so they can live on what their tax revenue CAN support.  But there’s only one problem.  The people of these countries reject calls for them to live within their means.  And have had enough of austerity.  And that’s a big problem.  Because if they don’t live within their means they will perpetuate the sovereign debt crisis.  As they will always need to borrow more money to pay for the things that their tax revenue can’t afford.  Until the day this house of cards collapses.  And the longer it goes on the more money people will lose in bad loans to these in-trouble countries.

The central problem in this crisis are bad loans.  Caused by the easy credit policies of central banks to loan money to anyone so they can buy a house.  All this easy credit caused housing booms in countries all around the world.  And housing bubbles.  Then the bubbles burst.  Leaving countries with debt crises as toxic mortgages weakened banking systems everywhere.  And still Keynesian economists are urging central banks to repeat this reckless lending behavior again to stimulate economies.  And to bail out the Eurozone.  The problem is that the central banks have so destroyed their economies no one is borrowing money.  Or spending money.  Because no one thinks the worst has passed.  And businesses and private citizens have learned the lesson from the great debt crisis we’re going through everywhere.  Too much debt is a bad thing.  And are refusing to take on new debt.  And using what income they have to pay down existing debt.  Contrary to all Keynesian doctrine.  For they want reckless and irresponsible spending.  Because they believe only spending is good.

Politicians and central bankers said the situation in the eurozone was unsustainable and drastic action was needed to prevent the ‘disintegration’ of the single currency.

They spoke out as European leaders scrambled to stop the financial crisis in Spain spiralling out of control and infecting other countries such as Italy…

Mario Draghi, president of the European Central Bank, said the eurozone was unsustainable in its current form.

In his sharpest criticism yet of eurozone leaders’ handling of the crisis, he said the European Central Bank could not ‘fill the vacuum’ left by governments in terms of economic growth or structural reforms.

So, no, more easy credit isn’t the solution.  Countries must live within their means.  Which means adopting austerity measures.  And find ways to achieve real economic growth.  Not the kind that leads to bubbles.  Or sovereign debt crises.  And the best way to generate real economic growth is with tax cuts.  Cutting spending as needed so they spend only what their tax revenue can afford.  They must stop running deficits.  And stop borrowing money.  (Good advice for the United States as well).  As the private sector economy picks up because of a more business-friendly tax structure they will create jobs.  So all of those government workers who lost their jobs in the public sector can get new jobs in the private sector.  Whose salaries and benefits will not have to be paid for by more government borrowing.  If they adopt pro-growth policies like this the international community may still be able to help them.  And save the Euro.  But will they?  With all of that public opinion against any more austerity?  Don’t know.  Probably not. 

It’s unlikely that the Euro will ever find its way out of the woods.  For these woods are scary, dark and deep. 

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , ,

Sweden goes Conservative and Deficit Free

Posted by PITHOCRATES - April 22nd, 2012

Week in Review

So far the Keynesian advice has been consistent to get us out of these financial difficult times.  And wrong.  If you want proof look at Sweden.  When the Keynesians said stimulus the Swedes did instead something wholly anathema to Keynesians.  They cut taxes.  And guess what?  They don’t have a debt crisis.  How about that?  But wait.  It gets better.  They no longer have a deficit (see Sweden’s Finance Minister Helped Cut The Deficit — By Cutting Taxes by Adam Taylor posted 4/20/2012 on Business Insider).

With the Swedish deficit wiped out last year (and Borg’s Conservatives voted back into power) the decision is now looking increase wise.

“Everybody was told “stimulus, stimulus, stimulus”,” he tells Fraser. “It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.” Non-economists, he says, “might have a tendency to fall for those kinds of messages”.

Instead, Borg cut taxes in a bid to lure entrepreneurs, and lowered benefits to make up the difference. Entrepreneurs “are the source of job creation,” says Borg.

The history is all there to see.  Keynesian economics failed in the Seventies.  Absolutely.  But those who thought like Anders Borg, Margaret Thatcher and Ronald Reagan, did what he did in the Eighties.  Thatcher turned the UK around.  And Reagan turned the U.S. around.  Pity no one remembers history these days.  Other than Sweden’s Finance Minister. 

A conservative in Sweden?  Who would of thunk it?  If only Europe and the United States would follow Sweden’s lead then they, too, could have smaller deficits.  And more prosperous economies.  But, alas, they simply can’t put their people before their politics.  Apparently.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

Some say the Germans should Remember that Austerity gave them Hitler and should therefore Forgive some Greek Debt

Posted by PITHOCRATES - February 19th, 2012

Week in Review

There are more Nazi comparisons in the continuing saga of the Greek debt crisis as people keep picking on Germany.  The strongest Eurozone state.  And the only one who can bail out the weaker ones (see Germany has forgotten the lessons of war reparations by Jeremy Warner posted 2/17/2012 on The Telegraph).

While on the subject of historical parallels, there’s another which has not yet been given sufficient an airing. This was the vexing question of German war reparations after the slaughter of the First World War, brilliantly identified by John Maynard Keynes at the time in his polemic, “Economic Consequences of the Peace”, as fundamentally unfair on the Germans. Keynes branded the Treaty of Versailles a “Carthaginian Peace”.

True.  The Treaty of Versailles did treat the Germans unfairly.  A word commonly bandied about at the time in Germany was humiliated.  And betrayed.  Even stabbed in the back.  Because the Germans didn’t start that war.  Everyone was eager to go to war.  And nearly everyone did thanks to those entangling alliances that George Washington warned us about.  And another thing.  The Germans didn’t lose the war.  No one did.  And no one won the war.  It ended in an armistice.  Much like the Korean War.  And yet during the treaty process they identified Germany as the sole culprit that caused the war.  And the allies all tried to recoup their losses and rebuild their empires by bleeding Germany dry.

Part of Germany’s purpose during interminable attempts to renegotiate these debts on less oppressive terms was to demonstrate that the German economy was in no position to pay – ergo, the creditor was at some stage going to have to take an almighty hit. Indeed, it is sometimes argued that the Weimar hyperinflation was deliberately engineered in order to demonstrate this fact beyond doubt. There can be no other explanation for the bizarrely ruinous policies of deficit financing pursued by the Bundesbank at that time. No sane central banker could possibly have sanctioned such a strategy…

Given its history, it is quite strange that Germany has such difficulty in grasping this reality. It is sometimes said that German attitudes to the economy and the current crisis are instructed by experience of Weimar inflation and its catastrophic consequences. Yet it wasn’t hyperinflation that brought Hitler to power, but rather the depression of the early 1930s, which in Germany’s case was greatly exaggerated by the pro-cyclical austerity the government of the time insisted on applying to the problem. Those who who [sic] don’t learn from the past are doomed to repeat it.

The Weimar hyperinflation played a part.  But what really motivated Hitler was the Versailles Treaty.  Hitler was a veteran of WWI.  He served bravely.  Was promoted to corporal.  Suffered temporary blindness from a gas attack.  And he knew the Germans weren’t beaten.  Exhausted?  Yes.  War weary?  Yes.  But militarily defeated?  No.  It was the humiliation of the Versailles Treaty that drove Hitler.  So much so that when his panzer armies conquered France he met the French in a special rail car to sign the instrument of surrender.  The same rail car the Germans signed the humiliating Versailles Treaty.

Many Germans rallied around Hitler because they felt the same way.  Germany had grown to be the dominating European power.  And that treaty did what Germany’s enemies couldn’t do.   Change the balance of power in Europe.  To reverse the German successes of the last century or so.  This is what brought Hitler to power.  Vengeance.  To right the wrongs done to Germany.  Had they not been so wronged it is unlikely that a gifted orator would have risen to inflame the masses.  For there may have been no hyperinflation without those punishing reparations in the first place.  And without that economic crisis the world wouldn’t even know the name Adolf Hitler.  (Probably.  Unless a prosperous Weimar Germany liked and bought his art.  Then instead of remembering him as a crazed mass murderer we would remember him as an artist.)

In contrast nobody wronged Greece.  They got into this mess on their own.  By irresponsible government spending.  And the cure for irresponsible spending is responsible spending.  Not forgiving debt so they can keep spending irresponsibly.  German hyperinflation resulted from unjust war reparations that destroyed the German economy.  The Greek crisis resulted from irresponsible spending that destroyed the Greek economy.  Spending is the problem.  It needs to be cut.  So they stop running deficits.  And stop growing their debt.  But cutting government spending is easier said than done.  For once the government makes the people dependent on government benefits the people tend to not want to give them up.  But they must.  It’s the only way to fix the underlying problem.  Irresponsible spending.  And forgiving debt not only misses this central point.  It encourages more of the same.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , ,

The Eurozone Debt Crisis gets Ugly as the Greeks call their German Benefactors Nazis

Posted by PITHOCRATES - February 18th, 2012

Week in Review

Germany is the strongest nation in the Eurozone.  While they retain their triple-A credit rating other countries face credit rating downgrades.  Or warnings about future downgrades.  Which puts the Germans in the Euro driver seat.  Because they’re shouldering the biggest share of this Eurozone financial burden.  One would almost say they are doing the other Eurozone members a favor.  But the Greeks sure don’t feel this way (see Greeks brand Germans ‘Nazis’ for driving through painful cuts and ‘taking control of their economy’ posted 2/15/2012 on the Daily Mail).

Greek anger with the way they believe Germany has taken over their economy is boiling over on the country’s streets.

In recent days, protesters have burned German flags and defaced the Bank of Greece’s headquarters to make it look like the Bank of Berlin.

German chancellor Angela Merkel has also been depicted in Nazi uniform on the front page of right-wing newspaper Democracy above a headline alluding to Auschwitz.

Granted, Hitler did conquer Greece.  And he did so ruthlessly.  But not because he wanted to.  Mussolini attacked Greece.  And was humiliated.  This blunder threatened Barbarossa.  The Nazi invasion of the Soviet Union.  Hitler had to save Mussolini to keep the British (in and around the Mediterranean) off their southern flank.  While preparing the Greek invasion Yugoslavia threw a wrench into the plans with a military coup.  Shut down his free passage through Yugoslavia.  Threw Hitler in a rage.  So he was going to teach them a lesson.  And did.  He ruthlessly attacked Yugoslavia.  And kept his army rolling all the way through Greece.  But to do this he had to delay Barbarossa by about a month.  Which stalled his armies in the god-awful Russian winter at the gates of Moscow.  The same god-awful winter that destroyed Napoleon’s Grande Armée.  And sent the Nazis in retreat.  For the very first time.  Had it not been for the Greece ‘problem’ Hitler may have conquered the Soviet Union.  And won World War II.  So Hitler had little love for Greece.  Which may have made the Greece occupation a cruel one.

High levels of government spending in Greece to support a very comfortable and growing public sector created large deficits.  They had to finance these growing deficits with growing government debt.  Soon their debt grew so large they could no longer sell new debt to retire old debt.  Because few believed that they would be able to repay this new debt.  Which brought them to this crisis where they needed help from others to finance their debt.  Because they could no longer take care of themselves.

So there’s a bit of difference between the current debt crisis and 1941 Greece.  In 1941 the Greeks were victims of Nazi oppression.  In the current debt crisis Greece’s troubles are self-inflicted.  So comparing Merkel’s Germany to Nazi Germany is a bit unfair to say the least.  And unjust. 

The Eurozone was an ill-conceived plan to begin with.  A currency unity with no political unity?  What did they expect?  No nation wants to take orders from another nation.  Any who tries may be called, well, a Nazi.  And this is why the Eurozone was ill-conceived.  Because no nation wants to take orders from another nation.  They just want to keep on doing their own thing.  Like the Greeks did.  And now Greece’s problem is everyone’s problem in the Eurozone.  Because of that common currency.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , ,

The Greeks give their Answer to the Latest Bailout Package – Violent Protest

Posted by PITHOCRATES - February 12th, 2012

Week in Review

And the saga continues.  The ever elusive solution to the Greek debt crisis grows ever more elusive (see Greece reels after leaders agree to harsh spending cuts by Michael Birnbaum posted 2/10/2012 on The Washington Post).

Greeks clashed on the streets of Athens and in the halls of government Friday, as protesters grew violent and one after another cabinet minister resigned, a day after the nation’s leaders accepted foreign lenders’ demands for tough austerity cuts to try to stave off bankruptcy.

By late evening, six cabinet members had resigned and Prime Minister Lucas Papademos went on state television to threaten members of his shaky coalition government with expulsion if they opposed making sweeping spending cuts in exchange for a bailout that would keep Greece from defaulting on its debts by mid-March. A Greek bankruptcy could shake the euro zone and potentially wreak havoc throughout the global financial system…

But protests over the austerity plans were already paralyzing the capital, as thousands marched during a demonstration led by the country’s two largest unions. The new mandates will reduce the minimum wage to $780 a month from $1,000 a month, slash social entitlements, freeze salaries for years and cut 150,000 workers from government payrolls by the end of 2015. Greek unemployment already stands at 20.9 percent.

Some protesters threw gasoline bombs and stones at riot police, who responded with tear gas, the Associated Press reported. Police said that eight officers and two protesters were injured. The unions called for a 48-hour general strike, the second this week, and much of Athens was shut down…

“Of course we do not want to be outside the E.U., but we can get by without being under the German jackboot,” Karatzaferis [head of a junior partner in Greece’s coalition government] said at a news conference. “I would rather starve.”

This is the problem with the Eurozone.  There’s a currency union.  But no political union.  While the Germans were being responsible (for they have a history of hyperinflation they don’t want to repeat seeing that it gave the world Adolf Hitler) the Greeks were spending beyond their means.  And may have fudged their numbers to join the monetary union.  And now the Greeks are broke.  And they need someone to bail them out.  And guess who is the richest in the Eurozone?  That’s right.  Those responsible Germans.  And what do some Greeks call the only people who can bail them out?  Jackboots.  A not so veiled Nazi slur.  With love like that they’ll never be a political union in the Eurozone.  And perhaps no Eurozone when countries start going bankrupt.  Starting with Greece this March.

The Greeks are well on their way on the Road to Serfdom.  The public sector has grown so large that those left in the private sector can no longer pay for them.  Which gives them a very unfortunate choice.  Either shrink the public sector by slashing costs.  Or kill the private sector entirely.  And make all Greeks serfs in a new state economy of subsistence.  Where everyone will be equal in their suffering.  Except, of course, those in the ruling class.  Who will be more equal than others.  And will be able to enjoy their lives.  Much like in North Korea.  Where Kim Jong il carried a few extra pounds while his people suffered famines.  Of course, before that happens there will be a great exodus as Greeks flee their country.  Which will inundate other countries with refugees.  And cheap labor.  As refugees typically are.  Throwing their economies into turmoil.  Spreading the Greek contagion throughout Europe.

There is no easy way out for Greece.  And it’s going to get worse before it gets better.  This should be a lesson in the growth of state spending.  But will anyone learn?  Let’s hope so.  Because if Germany or the United Kingdom or the United States goes down this Road to Serfdom the Greek problem will pale in comparison.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , ,

« Previous Entries