Thursday, May 27, 2010


When the Greek debt/deficit crisis first bubbled up at the beginning of the year it was said to be a problem for that country but wouldn’t extend to others of the Euro zone. Greece after all only makes up about 2% of the Euro zone economy and the mainstays of that area, Germany, France, in particular, were not in bad shape.

Just a few months later there’s talk of doom for the Euro and it’s lost about 20% of its value against the dollar… as if the US didn’t have its own serious fiscal problems with debt and deficit of huge proportions. Fear, however, is contagious and investors - banks, fat cats and institutions - are getting spooked and that is leading to demands for high interest to compensate for the very real possibility of default.

Greece is being forced to tighten its belt, but while that’s inevitable, frugality may also exacerbate its fiscal problem by slowing the economy and consequently reducing tax receipts. But the country was living beyond its means before the recent sharp downturn. Borrowing is just too easy as a means of paying bills and stimulating the economy. It’s a nearly painless way to make everyone happy; that is, until the payments come due.

Sovereign debt is addictive. It’s fed by the neighborhood pushers - the banks, etc. - who generally aren’t worried about your ability to pay it back because they expect you to get bailed out if you run into trouble. That, however, adds to the total debt, only stretching out the payment schedule. In the case of Greece, accepting the bailout will bring its national debt to 150% of GDP from the current 115% and still leave it in precarious financial straits. Ultimately, the choices are narrow and stark: pay it back with great difficulty or default with the resulting chaos.

Borrowing has also of late been made easier by the existence the vast amount of wealth held by the filthy rich who need to have something do with their oodles of cash. The politics of the past 30 years has had governments throwing money at the wealthy in the (absurd) belief that their having it will accrue to the benefit of all. As a result they have far more than they know what to do with.

The result is a situation where the top dogs are flush while governments are put through the ringer. Everything governments do for ordinary people gets squeezed so the wealthy can have more money to play with. But they can’t spend very much of it since they already have everything. According to the theory, they will use their money to start new businesses, but they hardly ever do that. In the event, they buy securities or real estate but that does nothing to put people to work unless it’s part of creating a bubble and that obviously is only temporary.

Today, it’s clear that America’s run up in real estate values was in large part the result of sub-prime lending. Without all that extra cash floating around looking for something to do, there would’ve been no bubble. Real estate values tend to go up in the long run but do not necessarily create bubbles.

Many commentators on the left have been and still are pushing for additional stimulus spending. This is fine. Maintenance and construction of infrastructure is needed and important, especially if it involves electric rail transportation or conversion to alternate energy. Supplementing state budgets so they don’t have to lay off so many teachers,, also is important. This however, does not require deficit spending. No borrowing is necessary to stimulate the economy, it can easily be done by taxing corporations and the wealthy. Furthermore, in contrast to taxing the lower classes which reduces disposable income and can bring the economy down, taxing the upper classes is a win-win situation, except for the wealthy, of course.

In addition to the needed revenue, curbing the wealthy also curbs speculation. If they have less money, they’ll have less ability to jack up prices of real estate and less of an impact on commodity prices. Until the recent real estate market crash, ordinary people were being priced out of the market by skyrocketing prices… tax the wealthy and prices will tend to stay more reasonable. In 2008 when oil prices hit $148 per barrel, 30% of that number was said to be attributed to speculation. Take away the fat cats’ money and you get a lot less speculation.

And I haven’t even touched on the moral imperative of correcting the great income disparity in America which is wider than at any time since 1929. It’s morally wrong, it’s economically wrong and yet Obama came into office promising tax breaks for everyone earning up to $250,000 per year. That may be politically astute, but it’s part of a blindness which will eventually have disastrous economic consequences. Those upper middle class people would be far better off in the long run paying extra taxes so that the US could balance its books rather than having the extra few thousand bucks to blow on totally unnecessary luxuries – they already have everything they truly need – or use the money to put in the bank or buy stocks.

Besides, considering the world is already using up its resources with abandon, it’s wacky and counterproductive to give people who are already comfortable more money to indulge in the superfluous.

People like to bring up the economic philosophy of John Maynard Keynes to justify deficit spending. He famously suggested back in the early 30’s that it was ok for countries to go into debt during hard times to keep the economy afloat. He was responding to President Hoover cutting the federal budget in response to declining revenues which only served to plunge the American economy further into depression. Those proponents of deficit spending conveniently forget, as noted in a previous post, that Keynes also said governments should put money away during good times to be prepared for bad times. Today it’s either high deficits during relatively good times or very high deficits during bad and not even a suggestion of getting the deficit down to a reasonable level, let alone balancing the budget for many years in the future.

However, the world is still owned by the banksters, thanks to generous government subsidies, and they will start to get freaked about huge deficits and begin to withhold their money or demand much higher interest rates… and that day is not far off, and the consequences will not be pretty.

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