Austerity Bites Again

Christine LaGuarde, current head of the IMF is having second thoughts about austerity. Maybe we’re going to fast, she’s said recently. Is that because unemployment in Spain has just hit 27%, with about 60% unemployment among youth? Every time unemployment goes up, balanced budgets, the ostensible reason behind cutting back, become less likely since joblessness means higher costs and less income for government.

The IMF caught a lot of flack way back in the past for lending to governments which were so inept and/or corrupt the money was totally squandered. Thus they decided it was necessary to impose rules on receiving countries, and, at least in theory, that makes sense. Unfortunately, their rules are based more on ideology than practicality or benefit to the people at large. Naomi Wolf wrote a book called the Shock Doctrine which describes how need for international help places countries in a position where they’re required to adhere to a conservative bankers’ worldview of how to fix their economies. For instance, that was behind the insistence that Greece lower its minimum wage in order to qualify for help. The connection between a country’s minimum wage and its ability to service its sovereign debt to the banks, the wealthy and other countries is tenuous at best. It’s just another way to stick it to the people at the very bottom who’s lives are already on the edge.

If /when your country needs international help to prop up a corrupt, sleazoid banking system, you’ll need to impose crushing tax burdens on the poor and heavy job and program cuts on essential public services while you lower taxes on the wealthy and corporations.

The elite don’t really need the money, but they ‘create jobs’ so if we throw enough money at them, they might deign to put some people to work. Except… after all the austerity cuts amidst high unemployment the masses don’t have the money to buy things, or they save because they’re frightened of losing their jobs, so there’s no reason for corporations or banks to create new businesses. Instead they use the cash bestowed upon them to speculate on securities, commodities and property, all of which is detrimental to the needs of the 99%.

The money referred to in the above paragraph is being created out of thin air and given to the biggest banks at near zero interest rates. In America that amounts to $85b per month. In Europe it’s about $50b. That new money has served the 1% well by sending the stock markets to record highs at the same time that wages are going down. Maybe you heard that the US is growing at 2.5% per year. In aggregate that’s true, but when broken down it turns out that the bottom 80% has lost ground so when tallied up we see that more than 100% of the gains have gone to the very top.    

Europe is different than the states in the sense that they have relatively strong social safety nets. In America there are no advocates for the commoners. Aside from a few fringe legislators, nobody in politics cares. Thus in some ways it baffles me how completely obsessed European leaders are with austerity. And how tardy they are with creating jobs programs, which is Europe’s most pressing need. If they can feed their banks with $50b per month with free printed money, it can’t be that much of a stretch to use it to create public service or infrastructure jobs.

There needs to be a Europe-wide jobs program financed by the European Central Bank that would be available to all EU youth and long term unemployed. Applicants could apply to work anywhere in Europe, though the greater needs would be in countries having difficulties, so most of the jobs would be there. These jobs would have a limited duration and wouldn’t pay much but they’d keep people busy doing useful things and keep them from getting too discouraged by unemployment. They’d also get the chance to live in and experience other countries. Since financing would come from the EU as a whole, it would only improve the bottom line of struggling countries. The EU owes it to those countries in the Eurozone experiencing difficulties since it’s membership in the Euro which is causing many of their problems. But other EU countries outside the Eurozone are also going through financial upheavals so to be fair it needs to be for all EU countries. 

The southern European countries have archaic and ossified labor laws that preclude flexibility and efficiency. Some also have bloated bureaucracies. Economic shock will probably force wrenching changes in society, but regardless people need jobs now, so there’s no reason to punish the unemployed for the inadequacies of their governments. Or force them wait until austerity magically begins to work, a dubious proposition at best.

The other thing Europe needs to do is rethink its currency regime. Part of the problem of countries experiencing difficulties is being tied to the Euro. The common currency is very important for Europe, but it has overreached and made several countries’ problems more difficult to tackle.

In regards to Greece and Cyprus I’ve advocated they adopt a dual currency system similar to Cambodia’s where the US Dollar is used alongside the riel, the local currency. Actually, between 80% and 90% of all transactions here are in dollars. They’ve kept the value of the riel within 5% of 4000 to a dollar for as long as I’ve lived here, about 11 years, so it’s very stable. However, if need be in a fiscal emergency they could print more riel, thus having a little flexibility. The Cambodian government periodically talks about stopping use of the dollar as its main currency, but they receive big benefits in stability and convertibility so they’re very reluctant to give up that advantage. As for Greece and Cyprus and any other Eurozone country that gets into trouble, they have no choice, they’re stuck with the Euro.

I’ve changed my thinking about the Eurozone’s problems to the point where I now feel that a two tier system needs to be adopted with the core countries of France, Germany and maybe Netherlands and Belgium using the Euro exclusively and all the other countries, or rather any one that wanted, would have its own currency alongside the Euro. That way the Euro would remain rock solid and available for all the countries of the EU (both inside and outside the Eurozone) to use, while individual countries gain some flexibility by having their own currencies alongside the Euro. Whether or not an EU country is officially part of the Eurozone, there will be large amounts of Euro in circulation.

The problem with governments and large institutions is a built-in inertia that resists any kind of change, especially when it looks like a retraction or reversal, but if they don’t come up with innovative changes they’ll only sink deeper into the abyss. Investors took a big hit in the recent Greek rescue plan, but the country is still left with extreme debt levels which they are never likely to be able to service. They’ll just flail along indefinitely from one crisis to the next while the people suffer. The only realistic solution would be a total default and reversion to the Drachma in a dual currency regime. They also need a wholesale restructuring of their society and economy. Default and absence of international help would force those desperately important changes.

Meanwhile is it possible the IMF, etcetera are waking up to the folly of austerity after ‘only’ 5 years of abject failure? Seems hard to believe but you never know.

Elite Cluelessness - Cyprus & Singapore

 

Cyprus

The recent economic turmoil in Cyprus once again displays how clueless and disconnected the ruling elite are from the reality of people’s lives; once again provides a striking example of their desire, nay obsession, to minimize impacts on the wealthy by taking from the poor.

Cyprus has gained a lot economically by being a haven for offshore banking – their banks’ assets are several times the economy - and so it was easy for the Troika – IMF, European Central Bank and European Commission – to look for bailout money from account holders. A large percentage are owned by Russians and a good percentage of that is shady money being laundered, so to penalize the country they devised a scheme that would levy a one-time tax of 6.7% on accounts of less than €100,000 and 9.9% on accounts over €100,000.

That was a bald-faced attempt to steal from the poor, while concurrently minimizing losses for the rich. Before that proposal was made, it was believed by all depositors in all European banks that all accounts under €100,000 were insured, guaranteed, rock solid. Up until that point, all felt safe that nothing less than a total breakdown of society would jeopardize their savings.

Instead, people with €1000 in the bank were expected to do their share, to the tune of  €67, to save their incompetent banksters. After all, if the little people weren’t taxed than the rich would have to pay a lot more. That made it an easy step to propose reneging on their previous hard-wired guarantee. Not only did all hell break loose in Cyprus, and all legislators in parliament either voted against the proposal or abstained, but now, regardless of the Troika’s insistence that that was a one-off and only applied to Cyprus and no other average people would be forced to assist in bailing out banks in the other Eurozone countries experiencing financial difficulties, nobody will be able to trust that €100,000 guarantee. It’s finished, nobody with money in the bank will feel completely safe again.

They then tried to float basically the same idea but exempt the first €20,000, but that was only marginally more acceptable than the first rip-off plan. The latest proposal is that only deposits above €100,000 would get hit, which is they way it should’ve been from the start.
A guarantee is a guarantee. If you had €100,001 in the bank, you knew the first €100,000 was protected, but that you were taking a chance on the last €1. Especially if you were putting your money in a notorious offshore banking center, unless you are a complete idiot, you had to know there was a good chance, however remote, that you could lose out. That’s what capitalism is supposed to be all about; You invest, you speculate, you take your chances; you win some, you lose some. Instead the elite seek to protect banksters and their investors and wealthy depositors at all costs and the little people are left to foot the bill and then fend for themselves.

The elite have gotten so isolated from masses they live in their own personal bubble and can no longer relate to the real world of the 99%. Like when Romney was asked what a person could do when they couldn’t find a job in a very tough market for job-seekers, he said, Ask your parents for money to start a business. Yes, very simple, ask your parents.

Personally, I prefer in all the chaos afoot that Cyprus is ‘forced out of the Eurozone’. As mentioned in a previous post, leaving the Euro and having their own currency will not stop most transactions in the country being in Euro. Having their own currency used alongside the Euro, as happens in Cambodia where about 80 to 90% of all transactions are in US Dollars, will give them some flexibility. What Cyprus ‘leaving’ the Euro would do is begin a two-tiered currency system in many European countries in which Euro and local money are used side-by-side. It would also be two-tiered in the sense that the Euro would be a master currency backed by and used exclusively in the strongest northern countries – Germany, France, Netherlands, Belgium, Austria - with the remainder of individual states issuing their own currencies for local transactions; for instance, all government salaries and payments to government offices would be in local money. Once the local money finds its proper value - it would be volatile at first - the individual states would try to maintain it within a narrow range compared to the Euro. Cambodia, for instance, has kept its currency within a 5% range of value compared to the USD for the 11 years I’ve lived in the country, so it’s accepted along with dollars with little or no discounting and there’s no need to recalculate every day.

Regardless of how the bailout evolves, Cypriots are in for serious hard times with massive unemployment and punishing austerity for as much as a decade. They got rich off of being an offshore banking haven, now they will pay the price. Once again, the lure of big bucks casts aside all doubts, restraints and reason and it’s full speed ahead until the ship hits an iceberg.

Singapore

In February, Singapore experienced its largest ever demonstration; 4000 people turned up to protest against the government’s push for increased immigration. People tend not to protest there since they are wealthy and relatively content in the world’s number one nanny state, not to mention the government oppressively and forcefully frowns upon such activity.

The demonstration, along with the loss of a seat in the legislature to the opposition in a by-election, quite stunned the ruling elite. The Lee family, which has ruled the city-state since independence in the sixties, now has to contend with the largest opposition ever – they now have 7 seats in the 87 seat body. Until recently, the largest opposition contingent was four. That is not because 95% of the population has always solidly backed the government, rather the government has devised a painless (for them) and bloodless means of eliminating all official dissent.

The first time an opposition member of parliament makes a statement deemed to hurt the feelings of the ruling family, he/she is sued for defamation for everything they’ve got and is subsequently bankrupted – the government never looses such a case – and once bankrupt is no longer eligible to sit in the legislature.

But this is the 21^st century and people over the world are finding their voices and are less able to remain pliant and docile when they feel impacted by social changes that are not to their liking.

Singapore’s population of 5.2 million is now 40% foreign born, up from 22% about twenty years ago. The protest was in response to a government white paper which seeks to add another million and a half immigrants to the city by 2030. The government insists that the country needs more people to continue its industrial and economic growth, but their citizens, like wealthy populations everywhere, are not much interested in making babies. The birthrate there is even low by wealthy country standards. They’ve tried everything including special benefits for having kids and even a government dating service, to no avail.

As almost everywhere the government is locked into endless growth, growth as the be-all and end-all of society, as its guiding philosophy. Bhutan, which is promoting a Gross Happiness Index in place of Gross Domestic Product, is probably the world’s only exception. If Singapore has more people and more wealth, that must be a good thing, no?

However, while the government sees immigration as a  path to increased wealth, the protesters, as the majority of the people at large, see higher property prices, competition for jobs which lowers wages, more crowded public transportation and strains on public services.

The question is; Growth for who? It certainly isn’t the commoners who benefit, it’s strictly the elite who benefit from growth in a mature economy. Growth can be justifiable in a developing country which has large numbers of desperately poor people. In developed countries, small places can be improved by expansion if that growth adds intellectual and financial opportunity, but once a location reaches a certain size, it’s mostly downhill, at least in terms of livability. Sure there’s lots of money to be made in megalopolises, but if you’re in a place like LA and have to spend two to four hours a day commuting, the money no longer has the same value.

Some countries with large geographic areas but small populations, such as Canada and Australia, can benefit from immigration, but Singapore with an area the size of New York City and a projected 7 million people – about the same as NYC - will be just as crowded and difficult to live in, especially for the lower classes. The wealthy have no concerns about housing prices or overburdened public transportation. The country’s legislators earn more than a million dollars a year, so would have little concept for what their constituents deal with on a daily basis.

Singapore’s rulers have never had to consider the people’s wishes before and I’m sure they’ll continue to use their defamation magic to try to quash their token opposition, but the tide is turning and they will be forced to listen to the people.

Personally I’m a fan of immigration, at least in theory. I’m one myself, though few would refer to me that way, but after 11 years in Cambodia, what else could I be? One could even consider me an economic migrant, since I could not make it in my native land without abject penury and bemoaning my fate 24/7. Cambodia’s lax immigration policy has brought hundreds of thousands of relatively wealthy expats to live here. My lowly pension is still several times Cambodia’s per capita income so I’m making a positive contribution in spite of it all.  

Immigration would also be a good idea for countries like Korea, which has the world’s most homogeneous population and Japan with the second most, even though both countries are relatively crowded, because they desperately need lessons in and experience with relating to diverse peoples.

As a long time expat estranged from my own country, it’s unsurprising that I believe that one of the best movements for the world is immigration that mixes people up and gets us closer to understanding each other. That isn’t to say it isn’t extremely important that immigration happen at a slow measured pace otherwise backlashes that have destabilizing impacts are possible.

Welcome to the world.