What about the deficit?

Natl-Debt-Cagle-Cartoons

One casualty of the upcoming election in America, is the Republican’s obsession with “the deficit, which is apparently all Obama’s fault (not of course Bush, who spent $4 trillion, about $1.09 billion a day, on a pointless series of wars, sat on his ass while another $22 trillion went up in smoke during the financial crisis….).

Either way, both parties seem to have gone awfully quiet about this issue lately. Given the promises Hillary has had to make to placate the Sanders camp, its likely she will have to borrow to pay for it all (of course whether she will get that through Congress is another thing). However, even Hillary at her worst would pale in comparison to what Trump proposes. He even boasts about spending double what she will, promising to borrow most of it. And he’s shown a distinct lack of understanding for the problem of debt (hardly surprising for a guy whose gone bankrupt 4 times!), going so far as to suggest he’d just run the printing presses and print money or even just up and default on it altogether.

So given that the Republican’s nominee is now suggesting he will do the very things they spent the last election trying to claim Obama would do (which of course he didn’t, actually the deficit has dropped under Obama), the GOP appear to have abandoned any talk of deficit reduction. And of course across the Atlantic here in the UK, post-Brexit, the Tories aren’t even pretending to care any more about the deficit.

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While the US remained in deficit throughout Obama’s term, he has managed to reduce it

So it raises the question, should we be worried about national debts? Or is it just all political smoke to serve one party or another. Well the answer is a bit of both.

Firstly there is nothing wrong or new about government’s borrowing money, no more than its wrong for you or I to borrow to buy a house or start up a business. Governments have been borrowing money off one another, or their citizens, throughout history. Consider that the average person in the UK will be spending anything from 10-40% of their income servicing and paying down debts (mortgages, personal loans, student loans, etc.). Debts to earnings are typically in a range from 2-5 times annual income (i.e. debt levels 200-1000% of earnings) for most people.

Now consider that the UK government spends about 8% of its earnings on servicing its debts and has a debt to GDP ratio of 85%. America spends 6.5% of its budget on interest payments and has a debt to GDP ratio of 76%. If most of us ran our finances the way that governments do, we’d be accused of being downright frugal. And keep in mind that the bulk of most nations debt is private debt (mortgages, company loans, etc.) rather than public debt.

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And there are some who argue that given the low interest rates right now and the fact that the bond markets are practically throwing money the way of finance minsters, we should borrow more and quit worrying about deficits until some other time. However in much the same way as during the financial crisis unemployed people were being issued NINJA loans, just because someone is prepared to lend you money, doesn’t mean you should take it.

One could argue that interest rates are artificially low at the moment. Brexit and global economic jitters means the markets see government bonds as a safe haven. Once they’ve had a chance to recover, borrowing costs could well rise. And for a government its usually when times are tough that they really get squeezed. In a recession government expenditure goes up at the same time as tax revenue falls and borrowing costs tend to go up as well. So its all to easy to see how a state who has borrowed recklessly (e.g. Greece) can get in way over its head very quickly.

Brexit and Trump’s loose talk of defaults also raises the risk of further market jitters. If Trump makes it into the White house, bond markets will have to price his recent comments into future lending costs. Interest rates will go up, meaning he’ll have to spend more just servicing the debts he already has. And given that all loans will rise (such as mortgage rates) at the same time many will see a sudden jump in mortgage costs, rents and inflation. Its all too easy to see how even the US could get into trouble very quickly in such a scenario.

But can’t we just renege on all this debt, give two fingers to the Chinese and not pay it back, just like Trump suggests? Well that depends….on how much you fancy living in a dumpster and hunting down mice and rats for food!

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A little dated, but demonstrates that only about 1/3 of US debt is owed to foreign countries, 2/3’s is internal

There’s a common misconception that most of US debt is owed to China. In truth its closer to 8%, although it was as high as 30% a few years ago (before the tea party came along and the Chinese realised that Americans were no longer responsible adults). About 65% of US debt is domestic, in other words owed to other Americans, with the rest owned to people abroad. Some of the biggest holders of US debt are in fact pension plans, both public and private schemes, as well as financial institutions (insurance companies, banks, hedge funds, etc.). If you have a savings account, a pension plan or any sort of insurance policy, you are likely to be a creditor to Uncle Sam.

So if the US did default as Trump has suggested (be it a soft default of just printing money to render the debt worthless or a hard default of refusing to pay it back), the real losers would be on main street. Yes the Chinese, Japanese, Europeans etal would be hopping mad. But the impact on their finances would pale compared to the collateral damage inflicted on ordinary Americans, who would see their life savings and retirement income wiped out. Given that borrowing costs would then sky rocket, mortgage rates and rents would go up, inflation would spiral out of control and millions would find themselves unemployed and homeless pretty quickly.

And this assumes that the US government can actually still borrow money. If international credit markets stopped lending, as they did in the last financial crisis, Trump would not be able to borrow, he’d have to launch a massive program of austerity that would make Osborne look like Santa Claus. We’re talking millions of federal jobs going (at a time when the private sector is also shedding jobs), mostly in areas such as defence (i.e. areas where the government has discretionary spending powers), we are talking of a fire sale of state assets (federal buildings, fighter aircraft, aircraft carriers, federal land, etc.).

In short, Trump would have created an economic mess than would make the recent financial crisis seem pretty mild by comparison. Voting for him is only a good idea if you fancy seeing the USS Ronald Reagan becoming the CLN Zhang He or the USS Gerald Ford becoming the FN Richelieu.

So debt and a national default is potentially very scary and something we should be worried about. But under normal circumstances its pretty unlikely to happen….so long as you don’t elect a lunatic as President that is! The major threat posed by national debt is more long term.

For example, Ireland has a debt to GDP ratio of 110% and a budget deficit of 3.5%. That sounds scary next to the UK or US economy, particularly when you consider the sky high levels of private debts Irish people hold. However, Ireland’s economy has now recovered from the recent downturn, we’re expected to return to a budget surplus by 2017 (we’ve gone through one or two quarters with a surplus, something the US or UK haven’t done in a long time). The expectation then is we’ll start paying off this debt, as we’ve done before….until the next crisis….recover, pay a bit more off…..next crisis, more debt, so on!

Also one has to remember that Ireland is a growing economy, with a relatively young population that is still growing strongly (you know what Catholics are like!). Even if we made no effort to actually pay off this debt (obviously I’d argue we should try to pay it down), i.e. we assume the amount borrowed stayed static, its value increased only in line with inflation, then by 2050 it would have dropped to debt to GDP ratio of 50-60% (because the growth in population and the economy means Ireland’s GDP will have doubled by then).

Now by contrast lets look at the US. Obama has made some effort to bring down the US deficit (no thanks to the GOP!), but some would argue its not coming down quickly enough, he’s not going to return a single balanced budget, nor is such a thing likely in the next few years. The US has a lot of very expensive mandatory spending programs on its books. The US is an ageing country, once the baby boomer pension time bomb hits its peak, its expected that there will be just 2.2 people employed and paying into social security for every retiree (it was 5:1 in 1960 and 3:1 in 2009).

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Sometime between 2030 and 2040, without some sort of radical change in government policy, US government revenue will exceed mandatory spending. Or put another way, its all but a mathematically certainty that the US will go broke, unless the country does something to alter course. And the above does not account for the Trump factor. Obviously increasing spending, expelling migrants (i.e. potential tax payers and future citizens), ending free trade and free movement (no more foreign investment) would likely accelerate this collapse.

And the UK too is in a similar boat to the US. Population growth is slowing, the baby boomers are starting to retire, the country’s deficit isn’t under control. And Brexit alongside any talk of expelling migrants or discouraging inward migration is likely to make the worst of an already bad situation. If present trends continue and we follow through with Teresa May’s proposals post-Brexit, its all but a certainty that the UK will eventually go bankrupt. Something has to be done.

Now up until now, I’ve not really said a lot that many on the political right won’t disagree with. However, its now that we see their policies on debt and the deficit is a bit of a stopped clock. As Osborne’s reign of error has shown, not too mention the EU’s “bailout” of Greece, harsh austerity doesn’t cut a deficit. Indeed the speed at which Osborne’s policy was abandoned and he was thrown under the bus post-Brexit, does tend to suggest it was always just an excuse for class warfare, which allowed the Tories to justify a tax cut to the rich, while cutting public spending on things that didn’t benefit the wealthy.

Governments that have actually been successful at pulling down the deficit, be they Ireland, the Scandinavian countries, Germany or the US under Bill Clinton, have generally done so through a combination of raising taxes and cuts, but cuts in areas where they could implement them without causing massive hardship. e.g. cutting back on things like military expenditure or wasteful government spending.

Crucially however it is important to recognise that debt is a long term problem which requires a long term solution. This means any plan needs cross party support that will survive multiple parliaments. One party (e.g. the Tories) getting in a huddle and forcing through a policy (motivated more by ideology that necessity) that they know the other parties will reverse once they take over, is not going to work.

I’d argue Clinton’s big mistake, involved nothing to do with cigars and interns (although the GOP using this scandal to play political cricket hardly helped). It was his failure to get buy-in from the Republicans regarding his deficit reduction plans. Hence when G.W. Bush came along, he began cutting taxes, started wars and generally spending money like a sailor on shore leave. And if republicans are serious about paying down the deficit, they should be using what’s left of Obama’s term to set the tone for Hillary’s term, not sitting in a corner sulking, refusing to even confirm his supreme court nominee. And I don’t see how they can endorse a nominee (Trump) who seems committed to taking a wrecking ball to America’s public finances.

So in summary, borrowing is normal in any capitalist economy, whether you are Chancellor of the exchequer or a small business setting up a tab for a regular customer. Everyone needs to borrow at some point. Arguing that debt is bad and we shouldn’t borrow, is like trying to argue that food is bad and we shouldn’t eat, just because some people overeat and get fat. Its all about only borrowing what you can afford to pay back.

Long term there are issues with national debt that many nations need to address. For some countries, its a problem that will basically take care of itself (growing economy, growing population, a tiny deficit or a budget surplus). Others need to get control of the problem sooner rather than later. And if we’re realistic some countries are in the sink by themselves class. The global economy needs to come up with a debt forgiveness plan, or face uncontrolled defaults at some point in the future.

But in nearly all cases, its a long term problem that requires long term solutions. A panicky policy of harsh austerity almost never works, indeed it will likely make the situation worse. And crucially as far as Novembers election is concerned, electing a lunatic who will behave recklessly with the public finances will mean we do have to start worrying about debt.

How republican hypocrisy undermines US security

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There is evidence that suggests that a recent mass shooting in California might have been carried out by supporters of IS. Naturally this has sent the right wing media state side into full fanatic freak mode. Even before these attacks various Republican candidates (i.e. not just Donald Trump) were calling for all sorts of intrusive measures to be taken against US Muslims. Naturally, this can only add fuel to the fire of such rhetoric and bigotry.

All I can say is that, given America’s lax gun laws, an attack like this was simply an inevitably. Its more a surprise that there haven’t been more such shootings. There have been 353 mass shootings in the US this year, yet it would seem only one of those so far has been carried out by Islamic terrorists (possibly). Which should serve as a bench mark for how rare such views are amongst American Muslims. Also, one has to point out that the easiest way to stop such shootings, be they by Muslims or as is more usual white Christians, is by implementing some regulations and checks on guns.

Of course Republicans will invoke the best way to stop a “bad guy” with a gun is a “good guy” with a gun. Ya, and how are the police or those fleeing a “bad guy” supposed to tell the difference? Also FBI studies have shown very little evidence to support this notion, indeed it suggests that increased gun ownership and carry laws increases gun related crimes.

Keep in mind, that I’m not necessarily arguing that America should adopt UK style guns controls (I think they should, but I release that’s not going to happen ,so let’s be realistic). Several nations around the world allow gun ownership, but they often apply tough regulations. All gun owners must be licensed, their guns are on a register (tied to an address and licensee) with all purchases tracked and logged on a database, which the police have access too. Needless to say a sudden surge in gun or ammunition purchases will be flagged up and likely followed up with a police visit. Such measures would have not only prevented last week’s tragedy, but also several other recent US shootings.

However to the Republicans the one right that trumps all others is the right to bare arms. Even the right to life is secondary. They are quite happy to see hundreds of shootings like this a year, as well as jeopardise America’s security, just so some hillbillies don’t have to fill in a form or two. Or so that they can fool themselves that they need their guns to protect them from “the government”….although exactly how they reckon they can stop an Abram’s tank….or a hellfire missile (or a smart bomb!), with an AR-15 has never been explained.

And since we are talking about domestic terrorism, we have the marked contrast with another mass shooting launched by a anti-abortion terrorist against a planned parenthood clinic in Colorado just a few days ago. The response from the right-wing media? Silence.

As the lawyers for the California killers have pointed out there is a glaring hypocrisy that when Muslims kill people its terrorism (again the Jury is still out on this one), but when white Christians do so its “aggressive protest”. And let’s not even start with the irony of someone who is “pro-life” trying to kill people in defence of the unborn.

And what about those who inspired this attack? Why is Carly “harvest their brains” Fiorina not currently in an orange jumpsuit in gitmo helping the FBI with their enquiries. If her name started with Al and the victims of this shooting were republicans, they’d be either smart bombing or waterboarding her about now for inspiring and provoking an act of terror.

And this is by no means a one off. A few years ago similar republican party attacks against Acorn (a group seeking to encourage those from disadvantaged communities to vote) were launched in the lead up to an election. As with Planned Parenthood, the allegations made against them were later found to have been falsified, something that the right wing media either ignored or were very slow to report. And as now, Acorn activists were ultimately attacked as a result by right-wing extremists, which again the media tended to ignore.

There is a glaring hypocrisy with the Republican movement, whereby they can ignore acts of terrorism and violence committed with guns thanks to lax laws they have enacted, as well as acts that they themselves have inspired. Yet any act by a Muslim, despicable thought the events of last week were, is immediately reason to undo the US constitution….except the bit about guns anyway!

The Economic Hitmen are circling Greece

Saw an interesting pair of Greek films recently about the awful situation their country is in, but more importantly, about the ridiculous “solution” proposed by the IMF.
http://topdocumentaryfilms.com/debtocracy/
http://topdocumentaryfilms.com/catastroika/
 
At its core, the IMF demands of Greece two things – austerity (which generally benefits the rich who don’t depend on public services as the rest of us) and privatisation (putting the juiciest of state assets up for sale to the highest bidder). Much attention has been focused on austerity, and I think everyone in the world other than “no taxes” Lagarde , Merkel and Ron Paul accepts that austerity in a time of economic crisis just makes things worse.

But its the privatisation issue I’m more interested in discussing here, as it equally doesn’t work and will in the long run just hand a lot of money over to corporations while ultimately costing the Greek government lots of money in the long run (and thus ultimately making Greek’s debt problems much worse).

A parable for Privatisation

Let me use the following analogy to explain why privatisation is a bad idea
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Suppose that I made and offer to anyone reading this that I would buy you’re car off you. I’ll only pay a fraction of its current market value, but in return for you selling it to me at a discount I will then provide you with (for a substantial annual fee of course) a “transportation solution” that will look suspiciously like you’re old car (I’ll have painted it a different colour and stuck my logo on it!). You will still be responsible for fuel costs, road tax, etc. While strictly speaking I’ll be responsible for maintenance and replacement of the car, there’s nothing legally you can do if I decide to take my time getting the thing fixed (forcing you to take a cab for sufficient long that you then realise it would be cheaper just to pay for the repairs yourself) and my ultimate plan is to never replace the car, I’ll either expect you to cough up for that also, or else I’ll just fold the company when the car finally gives up the ghost. So how many want to take me up on the offer?

As the privatisation of public services around the world has shown, most notably in the UK under Thatcher (aka the wicked witch of Finchley), privatised public services are rarely if ever run better in private hands than in public hands. It cost the UK around a billion to subsidise the railways in the last year before privatisation and it now costs 5 times more post privatisation. You have to go back to the 1970’s to recall a time when the UK water systems had to bring in drought measures . Yet they seem to happen every year or so now, since privatisation. Now while there are many causes for the UK’s present drought, ranging from climate change and increased urbanisation (higher water demand and more run off). But clearly the private water companies failure to maintain pipes and reservoirs is a big part of the problem. Indeed its has been pointed out that they have every financial incentive NOT to fix the problems in the system, as this creates an artificial shortage, leading to higher water rates (and more profit to them).

But then again, it should be obvious to anyone who knows the first thing about capitalism why this is the case. The critical ingredient in any capitalist system is “competition”. A private company in a monopoly situation is as just as likely to become as bloated and inefficient as a publicly owned company is. Indeed, the only real difference is that the private company creams off 25% for “profit” and has little if any incentive to make long term investments (such as building new railway lines, reservoirs, power stations, etc.) as the benefits of such infrastructure will appear many decades from now, while the cost will appear today (which for a typical corporate shark out to make a quick buck is unacceptable).

Economic Hitmen

So why are the IMF trying to impose such ridiculous measures onto the Greeks if they’ve been proven repeatedly not to work? In part its ideological. Much like the mediaeval doctors who believed that they had to bleed a patient (or drill holes in his head to let the evil spirits out) to cure him of his ills, but when he died rather than accepting the obvious fact that the bleeding killed him, they instead insist that he wasn’t bled enough. So they proceed to bleed the next patient even more (who also dies due to “a lack of bleeding”). For the neo-liberals to back down as regards these strategies would be the equivalent of them running up the white flag and declaring that their extreme brand of capitalism has failed, and there’s about as much chance of that happening as there is of the pope suddenly saying “sure’s its all a load of hokey poky mumbo jumbo!”

But its also part of a well established formula that the corporations have been applying for years , as detailed in the book “confessions of an economic hitman” by John Perkins .

Firstly, the corporations send in economic advisor’s to a developing country, who advise that they should take out large loans to build infrastructure. The corp’s then arrange for Western states to lend the developing nation lots of money (way more than they can reasonably be paid back). Of course most of this money finds its way back into the pockets of western businessmen in the form of generous construction contacts, or into Swiss bank accounts through corrupt practices. Inevitably, the developing country soon runs into debt problems, Western governments hold the indebted country’s feet to the flames and send in more economic advisor’s from the IMF. They, unsurprisingly advise that those same state assets the government was advised to build should now be sold to private business interests at a fraction of their value.

The only difference now is, they are applying the same script to western states rather than developing countries. Well I suppose what goes around comes around! But let us not pretend that the IMF or right-wingers such as those in charge in Germany, don’t have an agenda here, and rescuing Greece, the euro or dealing with the sovereign debt crisis is certainly not part of that agenda.

Another Greek Tragedy?

Merkel invited the new French president over today to play a round of what is her and the rest of the EU leadership’s favourite game, kicking the Greek can a little further down the road. There seems to be an unwillingness of many in her administration to accept reality – the European people have rejected this policy of austerity. In elections in Greece and France, as well as local elections in Italy and Germany, anti-austerity candidates have triumphed. Clearly even if the Greeks can be bullied or scared, in the now imminent second election in their country, to vote for pro-austerity parties, it doesn’t really matter as there is no way that the further public sector cuts that the German/IMF want will ever get implemented. It’s simply not a realistic political possibility, in Greece or anywhere else in Europe. Some alternative strategy, as seems to be Hollande plan, must be tried instead, but unfortunately the window of opportunity is rapidly closing.

Austernity doesn’t work, it just makes things worse
It is with good reason that the Greeks have rejected austerity – It simply does not work and has in all likelihood made the deficit problem worse, not better, while plunging millions into grinding Dickensian poverty. It, like so many other supply side economic ideas, is fatally flawed. The economies worldwide that went for austerity (Greece, Ireland, Italy and the UK) are all struggling, while those that followed the more traditional Keynesian approach (the US, Iceland) are showing signs of recovery.

The reason for this failure is not really surprising, economists, in particular those who support supply-sided economics, simply don’t understand human nature. Of course this may have something to do with the fact that many of them are psychopaths (studies suggest the many of the top business leaders worldwide are psychopaths). The belief of neo-liberal economists is that if you shrink the government down everyone will be better off and people will be “incentivised” to go off and get jobs or start a business.

Of course in reality if there’s no jobs available, then sacking a load of public sector workers simply depresses the economy. A shrunken public service hurts the very poorest in society. And, as shown by many of the UK’s privatised utilities (such as the water companies or railways), there is no guarantee a private company will run a better service.

With everyone (businesses and individuals) scared that they are next, they put off all major spending decisions, start hoarding cash, which pushes down tax receipts, which worsens the deficit and creates a dangerous debt spiral. I mean who in their right mind would set up a business in the middle of the worse recession in living memory? Further, you’d need to arrange a line of credit from a bank, which any unemployed Greek civil servant will currently find impossible. A cafe owner in Athens who guesses that maybe 10-20% of his customers are public sector workers is not, under the present climate, going to hire a builder to do up or expand his shop, nor is he going to hire new staff. In fact, fearing that revenue will fall in future, he’s going to put off any such spending decisions, maybe even get rid of a few staff members, and more than likely move his money into a foreign bank.

Capital flight
Indeed this last point is significant, there has been a considerable and quiet capital flight out of countries like Greece and other troubled eurozone countries. Anecdotally I’ve heard from many Greeks and Irish who’ve been moving their savings abroad where they can. Naturally this leaves Greek (and other) EU banks in a precarious position.

Alternatives
So clearly, other tactics have to be tried to solve the current crisis. Options, which I’ve discussed in prior post include, stimulating growth by increasing government spending, raising tax revenue by taxing the wealthy or alternatively a carbon tax. If such measures prove insufficient we could look at the ECB simply buying European debt, a moderate level of Quantitative Easing (read print more money), the issuing of Euro bonds or as a last resort devaluation of the euro. Of course many of these options have been ruled out due to the sensitivities of German taxpayers. Unfortunately those German taxpayers need to wake up and smell the coffee! They are in the same boat as the Greeks and will go down with the ship if the eurozone implodes. Now while, as a saver, I’m not exactly happy with the idea of some of these options (I described in a prior post). But its important to get this crisis solved. Given the choice between two scenarios (collapse of the euro and a deep recession with the spiv’s profiting from it all or savers loosing a tiny portion of their savings) I know which of these two I’d prefer to see happening, so I guess we’ll have to just take one for the team.

Indeed its worth remembering that it was the German’s who were the first country to break the previous set of Eurozone rules on deficits back in the 2000’s, and they got away without any punishment…yet now they seem to want to drag Greece over the hot coals….anyone know the German for “Hypocrite”.

But I worry given events in Greece it might be too late. There seems to be an assumption, one reinforced by statements from Berlin and the IMF that if the Greeks reject the austerity measures or default on their debts that they have to leave the Euro. This is a very dangerous myth that needs to be debunked and ruled out as a possibility.

Mythbusters
Firstly for Greece to leave the Euro, it would have to leave the EU. That would take months or years of negotiating. And what if they refuse to leave? How will the rest of the EU force them out? While the effects on Greece will be bad, anyone with savings or investments left in the country will see them wiped out, the effects on the rest of the EU of a likely messy Greek exit will be catastrophic.

It will be the euro’s “Lehman Brothers Moment”. After this, everyone will be looking out for who is next….likely Ireland, Portugal or Spain. What little co-operation exists between EU nations will evaporate, as many nations will adopt an everyman for himself view (as the banks did post-Lehman brothers). International lenders will go running for cover, citizens will withdraw their savings, making it impossible for some EU countries, even stable ones without debt problems (such as Germany, France and Belgium) to raise credit. A messy collapse of the euro is thus very likely after a Greek exit….and the bulk of the bill for this collapse will probably arrive in Berlin and London!

As I’ve pointed out before, a messy Euro implosion would essentially wipe out many trillions of euros from various banks across the world, with German and British banks taking the worst of the hit. Once you start forcing countries out of the euro it’s no longer just a matter of a Sovereign debt crisis, but a national debt crisis.

The bulk of any nation’s debt‘s are held, not by the government (public debt), but by the people (i.e. our credit cards, mortgages, loans, etc.). The public debts of Ireland and Spain for example were (per capita) much lower than that of the UK prior to this debt crisis, with them now slightly higher, but still lower than those of Germany or France. But the private debts held by Irish and Spanish citizens, is much higher, about 1000% of GDP for Ireland, about 1.2 trillion euros worth of it. If Ireland were, like Greece forced out of the euro, then one has to question how any of this trillion euro’s will get ever repayed. Further, the obvious solution to the problem would be for the Irish government to solve its public debt problems by simply printing so much money as to make its debts (and thus these private debts) effectively worthless, or drastically devalue the newly introduced Punt in the opening weeks of its introduction to achieve the same effect. This would leave banks, mostly British banks I might add, looking at many tens of billions (actually as I’ve pointed out before it would be about £104 billionand that’s just the impact from Ireland!) worth of losses. This is easily enough to trigger the collapse of a few UK banks, or a second round of bank bailouts.

And obviously if you think the exit of Greece or Ireland from the EU sounds scary, inevitably such a calamity could knock over the much larger Spanish or Italian domino. The consequences of that? the savings and pension plans of all Europeans (whether you’re in the euro or not) get pretty much wiped out. Most German banks and pension funds will go to the wall, indeed the survival of the Bundesbank is even at stake. As the Beeb point out here, the bill to the Bundesbank of a eurozone collapse could be as much as 644 billion euros….and that’s just accounting for public debts, private debts could greatly increase this figure! This is more than enough in losses, if it happened in a sufficiently short a time period, to bankrupt Germany, or force her into the self imposition of the very same “debt spiral” that Germany has forced on Greece (what goes around comes around!).

So there are lots of good reasons to keep Greece, come what may, in the euro and treat the Greek patient within the hospital…as opposed to the neo-liberal plan, which amounts to dragging the Greek patient outside to die on the kerbside. A managed default of Greek debt is better handled within the EU, not outside it. Indeed, least we forget such a plan has already been implemented in Greece and the sky did not fall on our heads (contrary to what the neo-liberal critics claimed). Clearly this is the way forward. The only obvious reason for anyone to call for Greece to leave the Euro is out of some sadistic desire for revenge.

Class warfare?
Of course socialists would argue that the whole reason why conservatives such as Merkel, or the IMF leadership or Osborne favour austerity is actually because they don’t really care about the deficits at all. They’re agenda is to essentially conduct class warfare against the working and middle classes by removing state benefits that the wealthy rarely need, while putting lots of juicy state assets up for sale, thus increasing the power of the wealthy. As I’ve mentioned before with the UK, the socialists might have a point here, as one cannot conceive of any other logical reason for backing austerity, other than fanatical stupidity.

Mythbusters part Deux
What’s that I here you say? Greeks work only two hours a day and retire when they are thirty? There are a number of vicious rumours running around about Greece, often put out by UK or German tabloids and they simply do not add up to rational scrutiny. The Beeb have been fact-checking a number of them (as they point out here the average Greek works longer hours than the average German) and the only one that comes close to being true, is the in-efficiency of the Greek railway system…course we in Britain are hardly in a position to snear on that point…and the beeb analysis is slightly flawed on that point as it neglects to consider the costs of maintaining the road network.

Putting the “unity” back in the EU
Its clear that something has to give. In the 4 weeks we have to the next Greek election, again with this Irish referendum due soon also, it gives a last chance to try something new. Clearly if François Hollande plans on changing things he’ll have to act fast. My advice to him is to state very clearly that a Greek exit from the euro, regardless of what happens in Athens, even if the Greeks tear up the IMF treaty, is simply off the table. He could (and should) bluntly tell the Germans that France will veto any such attempt to force or pressure Greece into leaving. Or he could make clear that France will no longer finance any bailout fund that relies on a policy of austerity (forcing Germany to go it alone, greatly increasing their exposure in the event of a eurozone collapse). That would I suspect force new ideas onto the agenda, but like I’ve said before when discussing such options, the window of opportunity to implement them is rapidly closing.

Either way, we are all in this together, even if you’re a brit! So a little bit of pan-European cooperation is what this situation needs. After all, that’s was the whole point of the EU to begin with!

Crisis management and the euro

It’s funny how the G20 we’re meeting in Cannes. It was sort of like a horror film plot, just when you thought it was safe to go into the equity markets, out comes that Greek sea monster Papandreou! >:-[ Beware of Greeks bearing…democracy! Personally I don’t see what the issue was. Its normal for European countries to have referendum’s over controversial issues and this latest bailout would have led to a loss of some sovereignty and a long period of economic austerity for Greece. It would also have resulted in yet further opportunities for the spiv’s and speculators in the markets to profit from Greek’s losses.

Of course “the markets” saw things differently. One can imagine the reaction of the MotU (and their underlings, the leaders of the G8) to the news that the great unwashed of Greece we’re going to get a say in everything 88|. The people? What have they got to do with any of this? Indeed I recall a line in Judge Dredd (apocalypse war series) when East Meg One attacks Mega City one, the East meg judges realise that many millions of their citizens were about to be killed, one of them saws that this is alarming news and they should go on telly to explain to the citizens why this attack is necessary. But the other East Meg Judges, say no, the people (who are about to be on the receiving end of nukes) have nothing to do with this! Life intimidating art I think!

There is also an element of a clash of cultures here. As anyone who has ever been to Greece will know, the Greeks thrive on chaos. Nothing ever goes according to plan, there’s a lot of running around in a panic, frantic phone calls, but they always seem to muddle through in the end (look at the 2004 Olympics, that turned out great in the end, even thought they missed many construction deadlines). Of course the Germans are the complete polar opposite. They always do everything according to a strict schedule and plan. The Russians during WW2 claimed that you could set you’re watch by the Germans (at exactly 6am every morning the artillery started firing, 7am on the dot, the Luftwaffe showed up….). Tell a German friend to meet you somewhere at 18:05 and they will be there at exactly that time (to the second!)…of course you’re Greek buddy will come running in at sometime past seven, but that’s okay because the concert was late starting anyway so he only misses the opening act. So you can imagine the reaction of Merkel to the possibility that the deal struck a few weeks ago mightn’t be the “final solution” to the crisis (okay that was cruel of me! :no:).

Of course the terrible thing about this “Greek Tragedy” is that it is so easily solved, as I point out in prior post and the Beeb discusses here (comparing the Eurozone to a boat at risk of capsizing) this crisis could be easily solved if the eurozone countries chose to do so, by the ECB simply buying European debt, a moderate level of Quantitative Easing (read print more money) or the issuing of Euro bonds. But all of these issues have been ruled out due to the sensitivities of German taxpayers. Unfortunately those German taxpayers need to realise that they are in the same boat as the Greeks and will go down with the ship if the eurozone implodes. Already growth is slowing in Germany as a consequence of this crisis.

I should note that I’m not exactly happy with the idea of any of the options I mentioned above either (I believe I described QE in a prior post as effectively a Default on ones debts by the back door). They would erode some of my savings (in a euro bank account), but its important to get this crisis solved. Given the choice between two scenarios (collapse of the euro and a deep recession with the spiv’s profiting yet again at the expensive of governments or savers winding loosing a tiny portion of their savings) I know which of these two I’d prefer to see happening. The Beeb has a summary of the likely outcomes of a default, or Greek Eurozone exit here. If there’s one thing this crisis has proven it is that the Austrian/Underpants Gnomes school of economics is wrong. Cut public spending at a time of recession and, as we’ve seen in Greece and Ireland, you’ll wind up with an even deeper recession and a bigger deficit due to reduced tax receipts. While some austerity (Greek public sector workers retiring later for example) will inevitably be necessary, the key to solving this crisis is pushing money back into the economy to drive up growth (by governments increasing spending funded by higher taxes on the wealthy). Of course that doesn’t bode well for the UK as its likely that the Tory cuts will force Britain back into recession, although the Tory’s will now inevitably blame the Greeks for that of course!

If the euro fails, it will be a failure of leadership on the part of European governments, rather than anything fundamentally wrong with the economics, deficits or the European style welfare state. And speaking of that leadership, let’s be clear about why Italy is in trouble; one word starts with B, is over sexed, stuffed with brown envelopes, and goes bunga, bunga! One can understand the market scepticism of Italy with someone like that in charge of the country :**:. Berlusconi needs to go now. And if he refuses to go, maybe it might be necessary to do what they did to Caesar. But rather than senators with daggers, just get all his ex-wives and girlfriends to ambush him in parliament and batter him to death with their handbags (et tu Ruby :>> ), that should sort out this crisis!