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The Daily Reckoning | Wednesday, February 15, 2012 The Greek crisis has been solved...again! Where to move if you’re short on time and money, Plus, Bill Bonner on the familiar arc of empire and plenty more... ------------------------------------------------------ External Advertisement Retirees Wanted to Test-Drive Life Overseas for a Month — FREE — in the World’s Top Retirement Haven. Must be willing to relax... explore a new place... shop the local farmers and craft markets... take walks... go to concerts... attend festivals... maybe try a Spanish class... enjoy local restaurants... make new friends. Ideal candidate is of (or close to) retirement age, hails from the U.S. or Canada, and believes that — in the right places overseas — it’s possible to live better, for less. Details here... With Grace or Shame The Various Faces of Declining Empires Bill Bonner Reckoning today from Rancho Santana, Nicaragua... Not much action on Wall Street. The Dow barely moved yesterday. Oil is right at $100 a barrel. The 10-year T-note yield is still below 2%. The Greeks are “toast,” says our colleague Chris Hunter. The Germans are fed up with them. It looks like they are going to push the Greeks into default...and out of the euro. But the threat of a Greek default casts a shadow over all of Europe. The New York Times is on the story: BRUSSELS — Moody’s Investors Service cut the debt ratings on Monday of six European countries, including Italy, Spain and Portugal, and became the first big ratings agency to switch Britain’s outlook to negative. The move came a month after similar downgrades by Standard & Poor’s and Fitch Ratings. All three agencies cited the debt crisis and its ramifications for the region’s economy. In a statement, Moody’s said the main reasons underpinning its decision were “the uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.” It also cited Europe’s increasingly weak macroeconomic prospects, which it said threaten the adoption of austerity programs and the structural reforms needed to promote competitiveness. Empires come and go. And in coming and going, they seem to be symmetrical. The way up takes about as long as the way down. The Roman Empire took hundreds of years to reach its peak and hundreds of years to go away. The Third Reich was supposed to last for 1,000 years, too. Instead, it lasted 12, with about 8 years of expansion and 4 years of contraction. The British Empire got underway with the conquest of Scotland and Ireland. One hundred years after the Battle of Culloden, which crushed the clans and sealed Scotland’s fate, the Brits ruled half the world. But 100 years later, their empire was mostly gone...with the US having taken away the imperial crown. America’s empire could be said to have begun with the defeat of the South in the War Between the States. Or, perhaps with the invasion of the Philippines in 1899. It peaked in the early ’70s...when US wages reached a top. Or, maybe in the ’80s, when China began to compete with it and the US shifted from a creditor nation to a debtor. Now it is on the downward slope. In a few years, China will have the world’s biggest economy. A few years later, it will probably have the world’s dominant military force. Will the decline be graceful and dignified? Or marked by bankruptcy, hyperinflation, war and shame? John Kagan, writing in The Wall Street Journal, doesn’t think he will like it. If and when American power declines, the institutions and norms that American power has supported will decline, too. Or more likely, if history is a guide, they may collapse altogether as we make a transition to another kind of world order, or to disorder. We may discover then that the US was essential to keeping the present world order together and that the alternative to American power was not peace and harmony but chaos and catastrophe — which is what the world looked like right before the American order came into being. We don’t know what will happen. But we doubt we will like it either. Still, we’re not silly enough to think that the path to imperial decay can be blocked by our own willpower. Here’s Kagan again, delusional: ...international order is not an evolution; it is an imposition. It is the domination of one vision over others — in America’s case, the domination of free-market and democratic principles, together with an international system that supports them. The present order will last only as long as those who favor it and benefit from it retain the will and capacity to defend it. He seems to think that if an imperial power spends more money on its military industry it will somehow resist the tides and the winds. All of imperial history argues that he’s wrong. When an empire’s time is up...it’s up. World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this MAY! The Daily Reckoning Presents Default Therapy Eric Fry The Greek crisis has been solved...again. Let’s see...that’s probably about 24 “solutions” during the last 24 months. But since these solutions never seem to solve anything, Europe’s central bankers, technocrats and politicians get to huddle together every few weeks and solve the crisis over and over again. It’s kind of like Disneyland for euro-meddlers. They get to keep going on their favorite ride over and over again. Sure, they have to wait in line for a while each time, but the ride is so worth it! Lots of meddling, lots of intervening, lots of “tough negotiations,” lots of prescribing what’s best for others, while spending lots of money that belongs to someone else. If that’s not an “E-Ticket,” what is? The newest Greek solution — approved Monday by the fully employed politicians in the Greek Parliament — will hack 150,000 workers from the government payroll, while also slashing the minimum wage in the private sector by a whopping 22%! Thus, after days of “tense negotiations,” the ECB and the Greek leadership finally hammered out a deal to save the troubled nation from default. The folks on Wall Street were riotously happy; the Greeks were merely rioting...and it is not difficult to see why. The newest austerity deal is not a rescue plan; it is a captivity plan. It provides the same kind of “rescue” that a circus provides an elephant: Dance on a stool under the Big Top twice a day and we won’t forget to toss some hay into your cage. To change metaphors, the newest austerity plan is an imprisonment pan: It straps leg-irons onto a nation that is already shackled to a monstrous debt load and a deeply depressed economy. The country’s GDP is tumbling faster than Icarus into the Aegean Sea. “Anyone who thinks austerity is a way to fix a debt crisis should consider how this ‘medicine’ has worked on the Greek patient,” observes Chris Hunter, our colleague over at the Bonner Family Office. “Athens adopted strict budget targets in May 2010 in return for a €110 billion rescue. Last year the Greek economy shrank by 6% and the country’s budget deficit is still close to 10% of GDP. Meanwhile, unemployment has risen to a depression-level 18%. And over half of young Greeks are out of work. Hence the riots against austerity — against more-of-what-has-failed- miserably-several-times-already. And these are real rioters — not like those touchy-feely, iPad-toting Occupy Wall Street folks — with real grievances. Their main gripe: Why should I pay someone else’s debts? Why should I suffer because a prior generation spent much more than it earned, while also awarding itself retirement benefits the country cannot afford? Good questions. And yet, the solution to Greece’s fiscal squeeze may not be as elusive as the euro-meddlers and rescue-package architects make it seem. In lieu of extreme austerity measures, bond-restructuring deals and tranches of billion-dollar bailouts, the answer may simply be one little word: Default. It’s so simple the Greeks could do it all by themselves, without any help at all from the ECB, the Federal Reserve or any of their friends in Germany. Even so, most financial pundits use words like “unthinkable” or “disastrous” to describe the prospect of a Greek default. But history testifies to the contrary. Default is actually quite “thinkable” and rarely as disastrous as the “solution” the Greeks are now receiving. As the nearby chart shows, default is hardly a foreign concept on the European continent. Greece, itself, has defaulted or restructured its debt five different times since the country declared its independence in 1821. Over those 193 years, the country has spent about half of its time in default or restructuring. And yet, Greece still managed to scrape together enough cash along the way to build a few train lines, repair a few roads and host the 2004 Olympic Games. So why change tactics now? Why not let an insolvent debtor default and invite capitalism to do its work? That’s the process an Austro-Hungarian economist by the name of Joseph Schumpeter used to call “creative destruction”...and it has worked pretty well over the years, believe it or not. When nations let failing ventures fail, viable ventures usually rise up to take their place. Over the long term, this process nurtures economic growth. Remember, not every venture fails, only the failing ones. The Europeans have forgotten the ideas that their favorite son, Schumpeter, promoted. But then, so have we Americans. And so have most of the other Developed Nations of the world — the so-called Welfare States. Consider the divergent fates of two countries that came face-to-face with a financial crisis in 1990. One of these countries is still merely muddling along...20 years later! The other country is flourishing. That’s because one of these countries, Japan, responded to its crisis by coddling its crippled corporations and by throwing monumental sums of taxpayer dollars at failing financial institutions. The other country, Brazil, responded to its crisis with relatively savage measures. It defaulted on its debts, devalued its currency (more than once) and did not stand in the way of corporate failure. Brazil’s responses were far from perfect, but they were much less imperfect than were Japan’s. The origins and structures of their respective crises were very different from one another. But those differences were not as significant as their differing responses. Japan has spent 20 years coddling its insolvent banks and corporations. Brazil has spent 20 years moving in the opposite direction...more or less. Brazil tolerated a dose of creative destruction. Japan did not. It still doesn’t. Brazil’s central planners abandoned much of their central planning, not because the planners wanted to, but because they lacked the resources to do otherwise. Japan, on the other hand, possessed the national wealth and resources to continue rescuing and meddling. Too bad for Japan. Its economy has muddled along for two decades, while its stock market has produced a loss of 2% per year across that entire 20-year timeframe. By contrast, the Brazilian economy and stock market have both boomed during the last two decades, despite some very serious bumps along the way. Brazil’s resurgence is typical of countries that allow some measure of creative destruction to operate within their borders. Economies are able to endure a crisis and then resume growing, as long as governments are willing to “rip off the Band-Aid” rather than dosing themselves with morphine. During the last 20 years, many countries have defaulted and/or devalued, then resumed growing rapidly. Russia, Chile, and Indonesia are a few prominent examples. More recently, Iceland’s default and devaluation provides a textbook example of “default therapy”... or what Nobel laureate, Paul Krugman, termed “bankrupting yourself to recovery.” In late 2008, Iceland’s economy hit an iceberg. Although the country never reneged on any sovereign debt, its banks defaulted on $85 billion of foreign debt — more than double the $40 billion Russia defaulted on in 1998. Not surprisingly, the Icelandic krona collapsed and the economy plunged into a deep recession. Icelanders suffered an 18 percent slump in their disposable incomes and unemployment approached 10 percent, compared with one percent before the crisis. But the country’s pain and suffering did not last very long. The krona’s 80 percent slump against the euro and the US dollar sent the trade deficit into surplus within months. Today, the Icelandic economy is growing once again and the country is already able to borrow money again from the international capital markets. “Iceland didn’t have the ability to save the banks,” Finance Minister, Steingrimur Sigfusson, explained recently, when discussing Iceland’s decision to let its banks default. “This wasn’t our free choice.” Hmmm...Sounds like a recurring theme... Just maybe, a country with “no choice” is better off than a country with access to hundred-billion-dollar “rescue plans.” Just maybe, defaulting is less disastrous than borrowing money to defer a default. Certainly, the divergent paths of the Icelandic and Greek economies testify to the generative powers of “default therapy.” Iceland’s GDP is on the upswing already, while Greece’s GDP is sliding ever lower. Reflecting these trends, the Icelandic stock market is up 60% over the last three years, while the Greek stock market is down 60%. Apparently, economies function best when failure actually fails — clearing the way for new successes. So just maybe, default is a better course of action for Greece than indentured servitude to the ECB. A couple of Icelandic tourists told us exactly that in Zermatt, Switzerland last fall when we were conducting our Farewell Euro Tour. A few European politicians are beginning to express a similar point of view. The Dutch representative of the European Commission, Neelie Kroes, suggested that one man overboard would not sink the ship. “It’s always said,” Kroes remarked, “that if you let one country get out, or ask it to get out, then the whole structure collapses. But that’s simply not true.” Godfrey Bloom, a British Member of the European Parliament from the UK Independence Party, applauded Kroes’ remark. “Finally reality is beginning to dawn in Brussels and across Europe,” said Bloom. “One of the most senior European Commissioners has announced that ‘it is simply not true’ that if Greece were to leave the euro there would be disaster across the European financial system. This is what we in the UKIP have been saying for months, years even. “The best way to help Greece, and by extension ourselves,” Bloom continued, “is if we give them a helping hand down and out from the eurozone, rather than spending billions of pounds of taxpayer’s money building a golden prison. Our Government has been playing along to the doomster dialogue in order to justify its throwing money at the lost cause... No more British money should be spent making a bad situation worse.” Amen...and no more European money either...or American money...or Swiss money...or Japanese money. Greece will never agree to stay put inside its “Golden prison.” It will break out eventually...but probably not before the wardens at the ECB and IMF waste another hundred billion dollars reinforcing the prison’s locks and walls. This latest Greek bailout will fail just as decisively as all the bailouts that have preceded it. Regards, Eric J. Fry for The Daily Reckoning Retirement Dream: Never Once Thinking about Money — Forget Empty Gov’t Promises If you’re in the right spot when the wealth curve goes “vertical”, you could quickly collect lasting wealth. Find out how to get in that right spot today. Just click here. And now back to Bill Bonner with more thoughts... Where to Wait Out the Great Correction Tired of running out of time and money? Scrimping and saving just to make ends meet? Try moving to Harlingen, Texas. The cost of living there is only about 40% of the cost of living in Manhattan. Here’s Real Time Economics with a report: Obama has spoken about having the rich pay their fair share, and $250,000 is a lot of money. But to characterize those households that earn that sum as “rich” depends very much on where they live. Thanks to regional differences on costs, $250,000 does not go so far in places like New York City and Honolulu, compared with cities in Texas or Tennessee. The Council for Community and Economic Research calculates cost of living indexes for US cities based on goods and services bought by households in the top-income quintile, which nationally covers incomes of about $100,000 and above according to US Census data. What the data show is that the cost of living in Manhattan is 118% higher than the national average. On the other hand, a household in towns like Harlingen, Texas, or Memphis, Tenn., has a cost of living 15% less than the US average. What the differences do mean is a New York household earning $250,000 is not nearly as “rich” or has nearly the buying power as a Memphis household bringing home, say, $150,000 a year. You can live more cheaply in a place like Harlingen. You’re almost guaranteed to lower your spending, because there’s not much there to spend money on. We’ve never been to Harlingen, so maybe we’re wrong, but we imagine it is a pretty slow place. Few fancy restaurants. Few theatres. Few luxury shops. Which makes it hard to part with money. Of course this improves your cash-flow. But it also allows you the glorious privilege of doing nothing. As our friend in Florida reminded us, most people can’t stop. Money in; money out. They have to work to pay the bills. No question of taking time off. No time to think. No time to sit still...and wait for the storm to pass. Back in the time of the Great Depression, millions of Americans were still not completely caught up in the money economy. Many still lived on the land. They kept pigs and chickens. They tended their own gardens and “put up” their own canned goods. They cut their own wood to heat their houses. They pumped water from their own wells. Many still made their own clothes. When the Depression came, they could hunker down and wait it out. But today, the developed world is in a Great Correction. And it shows no sign of coming to an end. Japan is already in a slump that has lasted — off and on — longer than most marriages. Europe is headed into a slump — with half of all young people jobless in many countries. And in the US, at this stage in a typical recession/recovery cycle, the economy should be growing at an 8% rate. Instead, growth is below 2%. Why? This is no typical recession/recovery cycle. Instead, the private sector is cutting back on debt. At the present, household debt is going down (mostly via mortgage foreclosures) at about 5% of GDP per year. At this rate, it could take 10 years or more to get household debt down to more comfortable levels, say, around 70% of disposable income. But the average household can’t wait 10 years for de-leveraging to do its work. Heck, it can’t even wait 2 months. Both parents work. They’ve got two cars. And two mortgages. Money in; money out. 24/7... No garden. No firewood. No chickens. No time to wait. No time to sit still. Just bills...bills...bills... They’ve got to work...they’ve got to earn money...they’ve got to spend... They can’t do nothing. They should move to Harlingen. Regards, Bill Bonner, for The Daily Reckoning