Alan Moore Commentary 12-1-2011
What follows is my pontification of the daily emails I send out, which results in a much shorter monthly commentary. If you want on the email list, email me:
alanm@slavic.net. Ditto if you want off. I realize that some of my comments are hard to take.
The markets will go way up today, because our Federal Reserve Bank and the European Central Bank agreed to loan to each other, commonly called a swap arrangement, which will facilitate the ECB in buying PIIG bonds in the market place. Recently, private investors have been fleeing the European bond market. This just means the United States tax payer, along with Germany, will be on the hook for Greece, Spain and Italy’s deficit funding next year.
Italy needs to raise 340 billion Euros next year in the bond market, and the European Stability Fund only has 250B Euros left in it, with austerity strings attached. Spain will need E40 billion by summer and Greece will need about half that. Will the European Central Bank supply the cash to do this? Will the IMF? Will investors buy the PIIG bonds with guarantees attached? Here is the joke of the day: A Spaniard, an Italian and a Greek go into a bar. They drink until dawn. Who pays the tab? The German.
But it’s no joke to us: remember that thirty percent of the earnings from American companies listed on the S&P stock exchange come from Europe. If the Euro goes down, we won’t be selling them as much stuff. It is that simple. For example, General Motors sells more cars in China and Europe than it does in America; and Congress is planning to sanction China and impose a 15% duty on Chinese imports? Who do you think will win that trade war? Who is going to finance our deficit next year if we piss off the Chinese? Isn’t it obvious that France is headed for a downgrade? If Congress tries to thwart the automatic 3% cuts in 2013, we will also get another rate cut.
The hope in Europe that technocrats are now in charge of Italy, Greece and Spain is based on the expectation that their problem is a financial one; it is not. It is entirely political: the same goes for the United States. The financial solution is clear: reduce spending and balance the budget and pay the price, which is a severe recession; and there will be no “job creation” with either tax or spending cuts. Two bank tellers and a dogcatcher in a room for two hours could easily fix the deficit, but the voters are the real power and they believe the politicians are on the side of the banks; that the austerity they will bear will solely benefit big business and corrupt government bureaucracies, with their inflated pensions and pay, and their insider stock trades. The real problem is that the politicians have lied for years and now must confess the truth. In Italy’s case, it is not competitive and has spent too much because the bill has been financed by the bond market--- and from now on it won’t be. There can be orderly change, or there can be revolution, but it won’t alter the economic outcome. Politically, the leaders need to convince the people to go along with the strife required to balance a budget; that this will ultimately benefit them, not the banks, nor the unions, nor special interest groups. Sidestepping the issue, Congress will ride their indecision into the election next year, each party blaming the other for the mess; so we have a Kim Kardashian government—good for nothing but the butt of a joke. Like Kim, the butt keeps growing.
If the Republicans agreed to a tax rate hike next year, with the promise of spending cuts over the next ten years by the Democrats, for sure taxes will go up and Congress would find a way of revoking the spending cuts, leaving us with just higher taxes. The same thing happened to Ronald Reagan in 1982, 1983 and 1986; he raised taxes, but the promised cuts never came from Congress; he was duped. A deficit deal mandating that a tax hike would be in effect in the following year, of a real spending cut that happened in the current year, would work. Whether it is dollar for dollar, or one dollar in tax increase for every three dollars in spending cuts is not the critical issue; the timing is. As Reagan used to say about his disarmament treaty with the Russians: “Trust but verify”. I would trust Congress to make the cuts in the future, but I would verify that they actually happened before giving them more money to spend. No Republican or Democrat has proposed this, but it would be a credible deal the markets would like; it could even balance the budget eventually.
Instead of a deal we could trust we got a hung “Super-committee”, which turned out to be a contradiction of terms, like Kardashian-class. As stupid programs dealing with the shadow recession continue to emanate out of Congress, I have come to the conclusion that we should appoint a financial dictator for one year to assume absolute authority for fixing our economy and deficits: Paul Volcker comes to mind. There is precedent for this in Roman history, so Italy should try it first, by disbanding their corrupt Parliament and making the politicians tour guides to put them in touch with the rest of the people. In the old days, in times of war, the Roman Senate would appoint a dictator to take control of the government and national defense---- Endless squabbling over what to do is ineffective in a crisis, and democracy is breaking down everywhere leading to paralysis. All we get is empty promises, like a Kardashian wedding: Perry is so filled with conviction about reducing government spending that he can’t remember the departments he is going to cut. Newt Gingrich’s plan is to “Get America back to being America”; whatever that means----- Martini-eyed Newt would even fire all the janitors in public schools just to prove his ingenuity and resolve in cutting spending. Ron Paul wants to get rid of all government agencies and make the laws, state by state---although we had it that way before the civil war. He also wants to make friends with Iran not war: if that isn’t as un-republican as it gets. On the other front, the Democrats are rallying around Obama and Pelosi who never got a tax-dollar they didn’t want to leverage 100 to 1 into a subsidy or another government program, and they desperately need to raise taxes because they are only up to 80 to 1, and there is a lot of pork to go. Whether it is Republican or Democrat pork, I think the most overused pork-getting phrase today is “job creation”………. and neither party has a clue how to do that. Even those immortal words coaches utter when their players take the field----“Let’s play ball”------will never mean the same after Penn State; not to mention the advice Joe Paterno once gave to his star quarterback when he got 4 Fs and D: “Son, it sounds like you are spending too much time on one subject.” We deserve better leaders. We deserve better voters. We deserve a balanced budget; that is my American dream, but I don’t want to spend too much time on one subject.
Finally, I want to explain why the European Union is destined to fail. Imagine that America joined the European Union and gave up the dollar for the Euro. That would widden the Union but how would we finance our deficits? For the sake of trade with Europe, we would forsake the ability to print money. Our deficit is 9% of GDP which is the same as Greece, and Germany with a 4% deficit would never let us keep spending like a super power; but shouldn’t a super power be able to have super-high debt? Nein, the EU (Germany) would say and issue us an austerity budget mandate. Politically and economically, there is no way we could go from a 9% deficit to a 3% deficit in one year or two, neither can Greece, Italy, France and Spain---- so they all will say “ja” to austerity and take the money and hide their real deficits with creative accounting, at least until the market finds out. No matter what happens, world sovereign debt will continue to pile up for the next five years. At least we can print money and balance rising inflation with recession. Would you rather have 5% inflation and 1% growth or zero inflation and a 5% contraction, because those will be out choices when our national debt hits 140% of GDP in five years; the numbers could get worse if the debt grows faster. Every member of the EU is facing those choices now, as the Union continues to collapse. Politics control budgets, budgets don’t control politics: that is the fundamental problem with the European Union---it is only a financial agreement on paper and the voters will tear it up when they feel the cost, which is higher unemployment.
