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Government Debt: The Not-So-Silent Economy Killer

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  • Government Debt: The Not-So-Silent Economy Killer

    05/11/10 Paris, France – Europe has lost its head!

    First, the weather is completely out-of-sync with the calendar. Perhaps it’s because of the volcano in Iceland… The dust is blotting out the sun. There’s no sun here today. Instead, the sky is pale grey. And it’s raining. The calendar say’s May 11th, but it could easily pass for February.

    The euro markets lost their heads too. Yesterday, Europe exploded to the upside. Stocks went up. Bonds went up even more. Especially Greek bonds.

    Why the good time? Because Europe decided to follow the US into full-scale combat with the future. Yes, the Europeans are as eager to prevent real change from happening as their American counterparts.

    The change they most don’t want is what we’re calling ‘the Great Correction.’ It’s a combination of several corrections at once – including a correction of the welfare state.

    Europeans live well. And thanks to so many transfer payments and so many government-provided services, they live well without really having much money to spend. Their incomes go to pay taxes and social charges.

    Trouble is, they enjoy a standard of living that they can’t really afford.

    This will sound familiar to Daily Reckoning readers. For many years, we pointed the finger at Americans, claiming that they spent too much money. Americans lived beyond their means. Individual households overspent and went into debt. That over-leveraging in the private sector in the US is now being corrected. At least, we think it is being corrected. (Recent figures are mixed…with some indications that private households are up to their old habits, trying to increase their standards of living by going into debt.)

    In Europe, the phenomenon is a little different. It’s the public sector that is living beyond its means. Military budgets are small. Most government spending is focused on services and transfer payments. This social spending is responsible for a big part of the GDP and a big part of living standards. But as in the US, living standards are higher than people can afford. Governments provide more employment, more transfer payments and more ‘services’ than they have tax revenue to pay for. The result is public debt, which is getting worse every year.
    Europe, generally – excluding England – does not have high levels of private debt. The debt is in the public sector. That said, government debt in Europe, on average, is no worse than it is in the US. The Eurozone, altogether, has government debt to GDP of 88%.

    In terms of deficits, Europe is actually in better shape than the US. US deficits are running around 10% of GDP – or more. In Europe, the average deficit this year is expected to be 6.6%.

    In Europe, the center is solid. But like the edges of a carpet, the periphery states tend to get a little worn. Greek public debt is expected to reach 150% of GDP next year. Its budget deficit is as large as that of the US.

    You can’t sustain a debt of 150% of GDP – not unless you are Japanese. So, a correction was inevitable. Greece had to change course.

    This is what caused a crisis last week, a ‘rescue’ over the weekend, and a sharp rally yesterday. America rescued its private sector. Europe is rescuing its public sector. Both are actually making the situation worse…but that subject is for a different day.

    Rather than permit problems to correct themselves, the euro feds stepped in to aggravate them. That is, the euro feds are following the same program as the Americans. If people get into trouble because they have too much debt, the feds come to their aid with more debt!
    In the event, EU financial officials worried that the Greek illness could be catchy. They were afraid that Portugal, Spain and maybe Italy would get whatever the Greeks had. So, they decided to inoculate the whole Eurozone with a $1 trillion program.

    Where will the money come from? Just as in the US, it will come from people who don’t have any. All the Euro states are borrowing money already. Now they will have to borrow more to pay for people who borrowed too much.

    The plan calls for loan guarantees and money from the IMF too. Plus, the European Central Bank will do its part. It will go into public and private debt markets to buy troubled debt, the equivalent of the Fed’s ‘quantitative easing’ program.

    Yes, dear reader, the Europeans threw in everything they had. Under no circumstances did they want anyone to say it was ‘too little, too late.’

    It was a “historic” occasion for the European Union, said French finance minister Christine Lagarde.

    On that point, she was surely right. Up until now, Europe had shown some dignity…some skepticism…and some good sense. It had intervened to protect speculators from their mistakes, but reluctantly. Now, it has thrown in the kitchen sink, the oven, the refrigerator…and everything else.

    But what’s this?

    Asian markets seemed to slough off the Euro miracle this morning. And even the euro seems to be wondering if this rescue effort will be as smooth and effective as people thought. Markets are quite likely to continue second-guessing today…and then third-guessing tomorrow… The gains could prove very short-lived.

    Why? Is it too little, too late?

    No, it is not. It is too much…much too early.

    Bill Bonner
    for The Daily Reckoning

    http://dailyreckoning.com/government...conomy-killer/
    Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. -Groucho

  • #2
    Re: Government Debt: The Not-So-Silent Economy Killer

    Yet they laughed at Ross Perot, with his charts and graphs on the national debt.

    Comment


    • #3
      Re: Government Debt: The Not-So-Silent Economy Killer

      Originally posted by flintlock View Post
      Yet they laughed at Ross Perot, with his charts and graphs on the national debt.
      They (we) laughed at Perot because he's a nutjob.

      Comment


      • #4
        Re: Government Debt: The Not-So-Silent Economy Killer

        Originally posted by flintlock View Post
        Yet they laughed at Ross Perot, with his charts and graphs on the national debt.
        Oh yeah, the guy who warned us 20 years ago.

        Comment


        • #5
          Re: Government Debt: The Not-So-Silent Economy Killer

          Originally posted by Chomsky View Post
          They (we) laughed at Perot because he's a nutjob.
          He was a bit quirky, but nutjob is a bit much. Of course the media painted him as a nutjob. That's easier than actually admitting he was right. God forbid we have people in charge who have actually created and run a multi billion dollar company. Not when we can have professional politicians with poly sci degrees instead. Because they care.

          Comment


          • #6
            Re: Government Debt: The Not-So-Silent Economy Killer

            Bill Bonner often writes good clear articles and this is one of them. The problem with the Greek crises is that it involves taking debt to 150% whilst at the same time demanding cuts and austerity packages to cut the debt. It is impossible for it to do so. Greece will go into depression and almost certainly default.

            From a positive angle a falling Euro will be good for exporters, especially Germany. As the Dollar rises it will make the oil price fall partially offsetting the fall in the Euro so limited affect there. What a falling Euro does do is blow a huge hole in the Obama admins plans to export the US out of recession. Obamas forecasts of GDP growth of over 4% for the next few years was always hot air, now it is even hotter.

            Comment


            • #7
              Re: Government Debt: The Not-So-Silent Economy Killer

              What does Perot Systems do? Anyone who gives me a straight answer wins on this one. Give me a pile of geeks and undergraduates and open-source software - I'll create efficiencies without creating billionaires (yes, it's more efficient). He is one of the great salesmen of our time no doubt, and his time with IBM served him very well, but what has the company done that proves his ability to handle national policy?

              Not to say he was not successful or that he was entirely wrong, but what does excelling selling overpriced IT services to the ignorant elite prove about governing?

              I never understood why bilking everyone out of a bunch of money made one a good candidate for office.

              P.S. - Besides Cheney and Rice, whose credentials rested on PoliSci degrees lately - maybe it's the JD you want to go after?

              • 168 Representatives and 57 Senators have a law degree. Of these, five (Representative and two Senators) also hold a Master of Laws (LL.M.) degree.
              • 83 Representatives and 16 Senators earned a master's degree -- often a Master of Business Administration (M.B.A.) - as their highest educational degree
              • 27 Representatives and one Senator (Mark Begich) have no educational degree beyond a high school diploma.
              • 23 Representatives (but no Senators) have a Ph.D
              • 17 Representatives and three Senators have a medical degree (this number includes one Senator with a veterinary medicine degree and one Representative with a dental degree).
              • Five Representatives but not Senators have an associate's degree as their highest degree. One House Member has an licensed practical nurse (L.P.N.) degree
              Originally posted by flintlock View Post
              He was a bit quirky, but nutjob is a bit much. Of course the media painted him as a nutjob. That's easier than actually admitting he was right. God forbid we have people in charge who have actually created and run a multi billion dollar company. Not when we can have professional politicians with poly sci degrees instead. Because they care.

              Comment


              • #8
                Re: Government Debt: The Not-So-Silent Economy Killer

                Originally posted by dcarrigg View Post
                What does Perot Systems do? Anyone who gives me a straight answer wins on this one. Give me a pile of geeks and undergraduates and open-source software - I'll create efficiencies without creating billionaires (yes, it's more efficient). He is one of the great salesmen of our time no doubt, and his time with IBM served him very well, but what has the company done that proves his ability to handle national policy?

                Not to say he was not successful or that he was entirely wrong, but what does excelling selling overpriced IT services to the ignorant elite prove about governing?

                I never understood why bilking everyone out of a bunch of money made one a good candidate for office.

                P.S. - Besides Cheney and Rice, whose credentials rested on PoliSci degrees lately - maybe it's the JD you want to go after?
                What does a "community organizer" do that proves his ability to handle national policy? As we are seeing, nothing.
                Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. -Groucho

                Comment


                • #9
                  Re: Government Debt: The Not-So-Silent Economy Killer

                  Originally posted by Chomsky View Post
                  They (we) laughed at Perot because he's a nutjob.
                  I'll admit I voted for the "nutjob". One reason - The fact that a self made, self sufficient candidate was on the ballot, I felt, surely had a good many dug-in politico's a might nervous. Hell, I thought it was worth a try, I was getting sort of put out with the normal routine of trojan horse jockeys who once in place, owed their soul to whomever it was that got them there.

                  How are we doing 20 years later? Just sayin.

                  Comment


                  • #10
                    Re: Government Debt: The Not-So-Silent Economy Killer

                    Originally Posted by dcarrigg
                    What does Perot Systems do? Anyone who gives me a straight answer wins on this one. Give me a pile of geeks and undergraduates and open-source software - I'll create efficiencies without creating billionaires (yes, it's more efficient). He is one of the great salesmen of our time no doubt, and his time with IBM served him very well, but what has the company done that proves his ability to handle national policy?Not to say he was not successful or that he was entirely wrong, but what does excelling selling overpriced IT services to the ignorant elite prove about governing?

                    I never understood why bilking everyone out of a bunch of money made one a good candidate for office.

                    P.S. - Besides Cheney and Rice, whose credentials rested on PoliSci degrees lately - maybe it's the JD you want to go after?
                    Originally posted by Master Shake View Post
                    What does a "community organizer" do that proves his ability to handle national policy?
                    You may be correct - these are all questions worth asking. What does make the proper leader? I tend to actually value political experience - although I may take heat for that as well. Trying to tell character from a resume or modern TV is like hiring someone without a proper interview.

                    Comment

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