 | | The Daily Reckoning | Thursday, 14 July 2011 |
- Italy and Spain: the latest to square up to a Greek-style debt dilemma,
- Three weeks to crunch time: Can the USA avoid the unthinkable?
- Plus, Bill Bonner on degenerate democracy, the occasional kindness of kings and plenty more...
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|  | | | Gored by the Debt Bulls | | How Years of Overspending Has Ensured a Gruesome End for Several Economies | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
Much to this woman’s disgust...
..and, no doubt, to the exhilaration of those watching her and her furless activists parade the streets in PETA’s annual “running of the nudes,” the official Running of the Bulls again took place in Pamplona, Spain, this week. Actually, today was the last “run” in the eight-day event. And, as one might reasonably expect, the hemorrhaging did not issue solely from the bodies of the beasts. A few of our fellow bipeds also managed to spill a pint or two in the name of...ummm...“tradition”?
During Tuesday’s run, eight people sustained injuries, including two gorings. One man, described by AFP as a “daredevil,” was skewered through the right arm, an injury officials did not consider to be “serious.” Another fellow, an Aussie, went to the trouble of having his nose broken during the excitement. His mate dislocated an elbow, while others claimed “head injuries, broken bones, bruises and cuts” for their holiday photo collection.
Your editor has no particular opinion regarding what so-called “daredevils” choose to do with their own time, only that, so long as they are not harming anyone else, they be allowed to do it. Want to spend a Thursday afternoon waving your calzonsillos rojosinches away from the horns of an angry, half-tonne bull? Go right ahead...just don’t come crying when horn inevitably meets with flesh.
Returning to our usual beat...
A similarly ghastly fate now appears to be charging head-on toward Europe’s flailing peripheral governments, including Spain. Last week the Portuguese followed Greece into the financial thrill-seeker’s realm of “junk” sovereign credit status. Ireland this week joined them. That’s three of the five PIIGS down...leaving just two – Italy and Spain – still running for their lives.
Put simply, the Club-Med economies now find themselves facing a true Greek style dilemma, whereby impalement on either horn is sure to cause much pain and anguish.
On the one horn, governments may choose to impose “harsh” austerity plans in the vain hope their spending cuts will nourish confidence among foreign “investors” [Read: The ECB and IMF], leading them to believe the sun-drenched welfare states can keep their national balance sheets from bleeding any more red ink.
This plan of attack is not without its own inherent, immediate discomfort.
Greece got a taste of it when rioting welfare leeches and jilted public retirees took to the streets to protest “deep” cuts to their lavish benefits programs...programs the Spartans apparently thought their French and German cousins would be eager to sponsor forever and ever, amen. When Greek workers finally realized they weren’t going to get something for next-to-nothing, they ceased doing much of anything and immediately resumed doing slightly less than nothing. Consequently, the Greek economy has shrunk by almost 4% this year, though rising debt has continued to stain the national ledger. The IMF reckons this debt flow will reach 172% of GDP by next year. And, if jobless numbers are anything to go by, it looks as though the Olympians have little chance of “growing their way” out of their troubles. Currently, unemployment in Greece stands at 40.2%, an all time record. Youth unemployment, at 42.5%, is still worse.
On the other side of the Adriatic, facing a rampaging Bos taurus of its own, Italy’s upper house yesterday approved an austerity plan aimed at reining in that nation’s troublesome public debt, which, at approximately 120% of GDP, is already among the highest in the world (and the second highest, only to Greece, in Europe). A modern day fall of Rome would be of far graver consequence to the Euro- experiment than the demise of her historical nemesis. At around $2.11 trillion, Italy’s economy is more than six times the size of Greece’s ($330 billion). That’s a big bull.
As for the Spaniards, they are facing a fate not so dissimilar to those that fell before them. According to the IESE Business School, property prices in Spain have fallen 26% since their 2007 peak and, as yet, show no signs of stabilizing. All in, the housing bust has left Spanish banks holding about 614 billion euros ($868 billion) of outstanding residential mortgages, much of which is expected to turn sour. Currently 170 homes are foreclosed there every single day and rising unemployment may, according to some calculations, lead to 300,000 more this year and next. Banks, like Banco Santander SA and CaixaBank SA, now find themselves dealing with a five-fold increase (since 2007) in residential mortgage payments currently in arrears.
Unsurprisingly, pressure is mounting on the government to “do something”...to protect those who cannot afford the houses in which they live. National elections are nine months away. How will the politicians solve this dilemma?
Again, debt is a big, angry, charging bull.
In the end, a welfare state without welfare is not much of a welfare state at all. And their undoing might indeed be a good thing, were their political structures not still filled with hopeful, welfare recipients used to receiving their daily bread...gratis. Politically, austerity is a sharp horn to choose.
Alternatively, the beleaguered European states may opt to raise taxes in an effort to fill the gaping chasm between their mythical election-cycle promises and the reality of their underwhelming budgetary capabilities. This too proves a difficult, ultimately uncomfortable choice. Stealing from those at home may at first appear to be a superior alternative to borrowing from those abroad, but the consequences are, invariably, more or less the same. The problem with socialism – be it intra- or inter-national – is, as one former English prime minister remarked, that you eventually run out of other people’s money. [As for the diminishing “returns” on stolen money, Bill offers some thoughts on the Laffer curve below.]
Each year, before the Spanish bulls are released into the winding cobblestone streets of Pamplona, groups of bull runners gather at the foot of the statue of San Fermin, patron saint of the Navarra region, to beg her protection during the event. Many of the runners manage to navigate the course with nary a graze upon their backside. Others are not so fortunate.
The astute reader may wonder here whether the best protection against impalement is to simply sit the run out, to watch it from the sidelines. For Europe’s PIIGS, non-participation in this deadly run is no longer a viable option. The bulls are out, Fellow Reckoner, and after years of taunting them, of over-spending and under-producing, these horns are bound to find their flesh...one way or the other.
For many Americans, the eurozone crisis is little more than a foreign curiosity to watch from the comfort and safety of their own home. And that would be great...if said home was not in the path of the same charging Bos taurus. Addison has the details of America’s own, home grown dilemma in today’s essay, below...
*** By the way, if you happen to be in attendance at this year’s FreedomFest, you might want to wander over to the Anthem Film Festival, in Bally’s Las Vegas, tomorrow morning around 9:30am. Addison will be there hosting an exclusive breakfast screening of his new documentary, RISK!, and conducting a Q&A afterwards. See here for all the info.
| | | | How Will YOUR LIFE Change If The U.S. Government Can’t Borrow Anymore Money...? |
One bestselling author believes that the US Gov’t is on the brink of no longer being able to cheaply and easily borrow money...
“If this happens,” he says, “it would rock our nation to its core...and change the way you live, forever...”
“You won’t be able to count on the government to keep you safe...to send you retirement checks...or to pay for your cholesterol medication...”
WARNING: The rest of what he predicts is too controversial to publish in this space. To check out the full, uncensored presentation, click here.
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| | The Daily Reckoning Presents | | We, “The Public” | |  | | AddisonWiggin |
“Let me distinguish between professional politicians and the public at large,” opined the president during a press conference earlier this week.
“The public is not paying close attention to the ins and outs of how a Treasury auction goes,” he supposed before adding, we guess for reassurance, “We’re paid to worry about it.”
Never mind professional politicians are the reason we have a debt problem in the first place.
And so you have a choice, dear reader: Follow the president’s advice and don’t worry about the backdoor debt ceiling deal they’re cooking up inside the Beltway... or read on and prepare yourself for the consequences of what the “professional politicians” have wrought.
“I’d love to see the size of the US bubble,” a reader wrote to us recently, “and where it would fit on the debt-to-GDP chart.”
Yes, it’s big bubble indeed. In fact, it dwarfs the size of the problems currently threatening to tear the European economy asunder. Here, for ease of comparison, we’ve superimposed a yellow circle representing the United States:
The US national debt is 5.5 times that of Italy – the largest debt in the eurozone and the cause of so much consternation in the markets this week. But the real story lies in the center of the yellow circle on this chart.
First, check out the bottom scale, plotting each nation’s debt-to- GDP ratio: With a $14.3 trillion national debt and a $14.7 trillion economy, the US debt-to-GDP ratio is just shy of 100% – near Portugal-Italy territory, though not as bad as Greece.
Then there’s the left scale: credit default swaps – the “insurance policies” paid by the buyers of these nations’ government debt to cover themselves in the event of a default.
The total amount of US credit default swaps outstanding is low, relative to many European countries. But at $4.58 billion, it’s nearly the same amount of credit default swaps outstanding on Lehman Bros. in 2008.
As you might recall, roughly $4.5 billion in default swaps was enough to wipe out AIG, then the world’s largest global insurance firm... with the requisite unassailable record.
Perhaps those memories are weighing on the minds of credit default swap traders. The higher the cost of a credit default swap, the higher the implied risk.
The cost of insuring against US government debt, while still low, has grown significantly since mid-May.
As of Monday, it had moved to 50 basis points - one-half of 1%:
By this reckoning, Uncle Sam is now a worse bet than Germany.
The rise in the price of US CDS coincides with the drama in Washington over raising the Aug. 2 debt ceiling deadline. According to the Bipartisan Policy Center, tax revenue for the 29 days of August after the 2nd will total roughly $172.4 billion. That compares to $306.7 billion in spending.
Ordinarily, the Treasury would cover that $134.3 billion gap by issuing new Treasury debt. But after Aug. 2, it won’t be able to do so. That means Uncle Sam would have to immediately balance his books.
What would that look like?
Well, he’d have to choose his priorities. The Bipartisan Policy Center report breaks down the government’s Aug. 3-31 expenses in a way that shows what the $172.4 billion in revenue can cover... and what it can’t.
The Social Security checks would still be cut... but not income tax refunds. Medicare and Medicaid would be kept going... but not food stamps. Military contractors would still be paid... but not the troops.
They can move certain items above the $172.4 billion line and others below it... but something has to give. And, believe it or not, matters are even worse than that list of priorities reveals.
About $507.4 billion in existing Treasury securities come due between Aug. 3-31. To “roll over” that debt, the Treasury must issue new securities. If the unthinkable happens, and the government isn’t able to “roll over” the debt?
$100 billion of that debt matures on Aug. 4. Another $100 billion matures a week later, on Aug. 11. That eats up the entire $172.4 billion in revenue expected for the month right there... before the government spends a penny on anything.
Unless the Treasury Department is sitting on some slush fund we don’t know about, it’s game over. The United States defaults... triggering those credit default swaps.
“Let’s imagine,” said a Newsweek piece by Daniel Gross last spring, “a world in which the US government, lacking the will to tax or cut spending, can’t scrape up the cash to stay current on interest payments and can’t roll over debt as it matures.
“That would trigger a huge decline in the value of Treasuries and mortgage-backed securities. The balance sheet of every US financial institution – JPMorgan, Goldman, Citi, your neighborhood bank, the Federal Reserve, money-market funds – would be decimated. There wouldn’t be a single solvent bank, insurer, or company in the United States.
“The large multinational banks, which have significant US operations and plenty of this stuff on their books, would likewise be wiped out. Oh, and foreign holders of US debt...would be toast, too.
“In this dystopia,” continued Gross, “who, precisely, would be able to make good on the insurance sold on US government debt? The last time we had a set of events that were supposed to trigger large- scale payment of credit-default swaps, the system basically shut down. All the investors who bought insurance on financial instruments from AIG got paid off in full only because the US government bailed the company out.
“Who would bail out the Treasury Department and the Federal Reserve?”
Who, indeed?
This is at the heart of the scenario we lay out here, the one in which Washington’s credit card is cut up. We urge you to give it a look. After all, Aug. 2 is only three weeks away.
Then again, what do we know? We’re not “professional politicians” ..we’re just part of “the public.”
Regards,
Addison Wiggin,
for The Daily Reckoning
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| | | | Bill Bonner | | Makers, Takers and the Transfer of Wealth | |  | | Bill Bonner |
Reckoning from Paris, France...
Bastille Day
Paris is silent this morning. We were practically alone on the metro.
It is the day the French celebrate the founding of their republic.
“What are you doing for the 14th,” we asked a colleague yesterday.
“Nothing. I don’t celebrate it. It’s nothing to celebrate. I only recognize religious holidays. France would have been better off without the revolution. Besides, there are more religious holidays.”
The 14th of July marks the day when the French got fed up with their Louis’s. Harvests were poor. People were hungry. The spirit of the Enlightenment was in the air.
“Yes,” we replied. “You shouldn’t have killed the king...and his entire family. Now, you can’t have a royal wedding.”
The French must have looked on enviously when William married Kate.
“Well, we’ve got Carla and Nicholas,” came the reply. “And Carla is having a baby... I don’t know who the father is, but I hope it’s not Sarkozy.”
There is still some reverence for ‘the royals’ in England. When people feel they are worthy of it. A good king or queen is a treasure. With no election to face, a good monarch can focus the nation’s attention on longer-term goals...and on matters that go way beyond politics. He can connect God and man, both by example and rhetoric, helping to protect the nation’s dignity and shepherd its soul.
What do we mean, exactly? We’ll get to that in a moment. First, let’s look at what happened yesterday.
Ben Bernanke went to Washington and talked to lawmakers. AP reports:
Underscoring how fragile the economy remains two years after the Great Recession, Bernanke laid out three new steps the Fed could take, including a fresh round of government bond purchases designed to stimulate economic growth.
“We have to keep all the options on the table. We don’t know where the economy is going to go,” Bernanke told the House Financial Services Committee. The Fed chairman stopped short of promising anything, but Wall Street appeared comforted that the central bank was poised to act. The Dow soared in anticipation. But then, Fed governor Richard Fisher rained on the parade. He said the Fed had already “pressed the limits of monetary policy.” This brought the Dow down again. It closed up 44 points. Big deal.
Gold, however, rose strongly, ending the day at a new record high in dollars, pounds and euros.
So, back to our thoughts...
Democratic politics is a sordid, mob-driven business. The great mass of mankind is neither smart nor dumb, good nor bad. But, as we say at The Daily Reckoning, it is subject to influence. And when it thinks it can vote itself someone else’s money it rushes to the ballot box as though to an over-turned beer truck.
Over the century and a half since the invention of modern, social welfare democracy, politicians have learned how to game the system. They promise voters more and more ‘benefits.’ If they only promised to give voters as much in benefits as they paid in taxes, they would be liars. It costs money to administer a government – lots of it. At best, they can only return a portion of what the government receives in tax revenues. But as the welfare states have matured, more and more people found ways to get more and more out of it. From special parking places to tax credits to military contracts... ‘benefits’ have expanded far beyond what the public can afford.
Bill Buckler, The Privateer, reckons:
Today, the US government ‘GOVERNS’ 310 million people with an annual budget of nearly $4,000 billion and TOTAL (funded and unfunded) debt approaching US$100,000 billion. It takes about 5,400 times as many dollars and about 37,000 times more debt to ‘govern’ about 3.35 times as many people as it did a century ago. Why? The answer is equally simple. Today, the US government ‘governs’ everything. It is all pervasive. It has taken over the economy from its people. You, dear reader, know better than anyone what is really going on. As a modern democracy matures, it shifts from being a nation of makers to becoming a nation of takers. Wealth and power are gradually transferred from those who earn it to those who use the system to commandeer it. The zombies take over, in other words.
Of course, the more the takers take the less the makers want to make. Arthur Laffer explained this to Ronald Reagan 30 years ago. It was called the Laffer Curve. It explained why you can sometimes reduce tax rates and actually increase tax revenues; and by contrast, you can sometimes also increase tax rates and reduce your tax take.
So, modern, enlightened leaders try to find the optimum tax rate. Trouble is, the vox populii screams for more and more – far beyond the optimum. It wants more regulations, more protections, more cushions to sit on, more bread...and more circuses. It also wants things that go far beyond money. It wants status, privileges, recognition and revenge. It wants to see its enemies punished, its arguments proven, and its fashions, prejudices, and gods imposed on everyone.
The number of government employees rises. But so does the number of private sector employees who do work either required by the governing class...or made profitable because of it. Tax lawyers, for example, would have no income were it not for the complications of the tax system. Naturally, tax lawyers support further complications.
Whole industries are perverted and corrupted. The Pentagon recently revealed a program in which bundles of $100 bills were shipped to Iraq – presumably to pay bribes and bills. A total of $12 billion was loaded on 21 flights, packed in huge C-130 Hercules aircraft. Where did the money go? No one knows. But a Special Inspector General for Iraq Reconstruction says $6.6 billion was probably stolen – the largest theft of funds in national history.
In the health care industry, which is supposed to be in the private sector, Healthcare Analytics estimates that as much as $840 billion was wasted in 2009, thanks to various frauds, canoodles and federally-imposed mandates. Chief among these was the unnecessary care delivered to patients, simply because they don’t pay their own costs...or because health care professionals fear being sued by government-protected tort lawyers.
In the education industry, also largely underwritten by state and federal subsidies, the number of ‘administrators’ has been growing at about twice as fast as the number of teachers – for at least the last 13 years. Students and their families pay more and more for a degree and get less and less out of it. And the poor student leaves school with a burden of debt that he will carry for many, many years.
Even greater than the growth of pure government spending is the growth of this kind of private enterprise parasitism, enabled, aided and abetted by the ruling classes. Nowhere is this corporate/government conniving more degenerate than in the heart of capitalism itself – the financial industry. The big banks have become public utilities – heavily regulated, petted and coddled by the feds. When the bankers make mistakes – even trillion dollar mistakes – the feds rush in with public cash to save them. When the bankers make money, they take it home...and send some back to Washington in political contributions.
And this year, for the first time ever, the US government and its subsidiaries are the biggest source of private sector credit.
Of course, it could be worse. Just read the history of the French Revolution...or the Bolshevik revolution...or Cromwell’s Revolution...
In each case, the king was killed. What came next was lurid and disgusting.
The advantage of a good monarch is that he can espouse goals and principles that go beyond the next election. That is what could make a monarch particularly valuable now.
As the 20th century progressed, modern welfare states found that they had reached a point where squeezing more blood out of their taxpayers depressed growth rates and reduced tax revenues. The harder they squeezed, the less blood the zombies got. So, they switched from squeezing existing taxpayers to draining those who hadn’t even been born yet. The obvious advantage: the future didn’t vote. After 1980, when Dick Cheney proclaimed that ‘deficits don’t matter,’ debt to GDP ratios rose steadily in almost all the developed nations. Then, in the last 10 years, they exploded.
Greece, Japan, Ireland, Italy, the US – all have now borrowed so much that they approach bankruptcy. They are on course for destruction. And yet, if they took the right measures now, some might save themselves. At least, America still could.
But how can elected politicians reverse course...when the mob howls for more money?
Maybe a smart king could help.
More to come...
Regards,
Bill Bonner
for The Daily Reckoning |
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