Today, 1-30-12: The Greek finance minister is balking at the austerity measures that give Germany control of the Greek budget and the power to override their parliament. However, Merkel is losing support of the German people with talk of an enhanced 750 billion Euro package for Europe, so she is imposing harsh conditions on Greece to justify the expansion of credit. I don’t think the bailout will fly either way, in Greece or Germany; recessions will tank the plan.

     Wages in America went up last month which is shoring up consumer spending. That is a good thing, but I still fear that a European implosion will slow things down here.   

Alan Moore Monthly Commentary 2-1-2012  (the background)

I got Newt’s number

     Last Friday Gingrich visited my office on the donation trail. His speech to the in-house crowd covered the landscape but didn’t offer any details----he vowed to change Washington and save America from the liberals. A few days before, Obama, in his state of union address, vowed to save us from the conservatives. No matter who wins the election in November, we are going to get saved; that worries the hell out of me.

Laziness eventually does a country in. 

  When the European Monetary Union was formed in 2000, Germany figured that it could effectively colonize Europe economically by exporting to the rest of the EU members without worrying about devaluations. The Union has meant that a cup of coffee in Paris which was selling for 4 francs in 1998 (75cents), now costs 3 Euros ($4); but wages and salaries haven’t gone up nearly as much and everyone in France feels poorer and blames it on the Germans. What did the French expect, they only work 35 hours per week and get five weeks vacation; the Germans work longer and harder. The French companies also get taxed ten different ways from Sunday and have no incentive to expand and hire in France. Down south, the Greeks like to drink, play and dance, and they work half as hard as the French. In Spain, the employment laws are so skewed toward the unions that no company there has incentive to hire workers that can’t be fired without a government ok, which is hard to get since the government is pro union. The PIIGs + France have been borrowing to mask their lack of competiveness and unwillingness to work like the Germans. Therefore, Germany is the money and the power in Europe, and all the other countries resent the boss punishing them with austerity for their laziness.

    What will happen with a sovereign default?

   If the EU breaks up and Greece goes back to the Drachma for example, their currency will plummet and suddenly Greeks will not be able to afford to buy anything foreign; they will go back to living off of the fish they catch, olives and watermelons they grow, and showing tourists the glory of ancient Greece, now in ruins. As a consequence, German exports to Greece will fall. The same will happen to every country that reverts back to its own currency and repudiates debt………..in an Argentina moment. As the EU unravels, Germany will export less…………….and less, until it to is in recession. Twenty percent of Germany’s GDP is tied to exports as compared to only 8% for the United States. Germany exports more product to America than China does, but it is high-tech stuff and we don’t see the labels on it like the ones in t-shirts that say “Made in China”. “

What are their options?

   The PIIG members of the Union really have only two choices and it is important to know them because the stock market will be affected either way, in a different way. Greece could choose the same route as Latvia did. Latvia joined the EU in 2004 and used it to expand credit, which caused a huge real estate bubble that burst in 2008; and Latvia’s GDP dropped 25% in 2009 and the unemployment rate went to 20% in 2010 before dropping to 15% where it remains stuck. It also has the highest inflation in Europe and has taken on more IMF debt and accepted austerity measures that are attached.  As a result, Latvia is locked in a perpetual recession and has make no economic progress since joining the EU seven years ago; the debt and budget cutting is killing GDP. On the other hand, Argentina officially defaulted in 2001 and GDP dropped 20% within 6 months. They were put on a COD basis by countries exporting goods to them. Paying US dollars for everything forced the government to shrink dramatically and property values dropped 50% and unemployment went up to 20%. However, just two years later the economy had completely recovered and was growing at 10%. Today, they are one of the soundest economies in South America. Therefore, Greece can chose between the perpetual austerity-recession route imposed by Germany and the default route; but the quickest way to growth and recovery is the Argentina way because it forces governments to really reduce spending and live within their tax-revenue means. As Vince Lombardy once said: “No pain, no gain”.  In Latvia’s case, there is continuous pain without a gain to show for it; the only thing worse than default is adding more debt to an already insolvent situation.

What happened to capitalism in America?

     It didn’t fall into socialism, it got re-capitalized into cronyism. The tax laws have been skewed to allow the rich to get richer and the middle class to stagnate. The top 1% have gained 340% in wealth in the last 30 years, while the 50%-middle class have gained only 40%; during a time in which GDP grew 240%----that information comes from David Stockman(see footnote), budget director under Ronald Reagan. Clearly, capitalism has turned into a crony-controlled economy and this condition will only lead to social unrest and a voter revolt. There is a big difference between the crony-republican tax code and the crony-democrat spending budget; that difference is a huge deficit.

      Capitalism dictates that individuals can keep the fruits of their labor; but that doesn’t mean more fruit than they can possibly eat, or that they can pass vast amounts of residual wealth to their children. There should be limits on how much money can be made in America because society cannot prosper in a winner-take-all system. It is a social decision as to where the limits should be set, which does not conflict with capitalism if the limits do not thwart investment in a free market. For example, there is no evidence that limiting bank and Wall Street bonuses would lessen capital investment: and CEOs should not be allowed to make tens of millions a year-----it rubs everyone the wrong way, even the shareholders don’t approve.  The rich (the ones that actually earned the wealth) are smarter, luckier and work harder than the rest; eventually they would end up with all the money if you let them, especially with only a 15% dividend and capital gains tax. Even Romney, worth $200M, only paid a 15% tax rate in 2010, and Obama paid 25% of his 1.8 million in income in taxes utilizing legal deductions. The published rates of 35% for individuals and 35% for corporations are a mirage because practically nobody pays them.

      On the other hand, Ron Paul is right, government spending is out of control and we now have 45 million people on food stamps with less incentive to work, even if the opportunity presented itself. The Democrats are spending tax dollars very inefficiently and promoting social cronyism, which is breeding laziness and class warfare. Isn’t it obvious where we are headed? If the Republicans don’t give up protecting millionaires and allow them to be taxed more, they will never come to power again, because the middle and lower classes are 90% of the voting-population and they have lost faith in the word capitalism. It is time for the Republicans to get pragmatic, because the Democrats have them by the balls.

  The final Analysis

     Crony capitalism has nothing to do with free markets and unions have little to do with protecting the middle class. Unions protect union members who only represent 7% of the workforce. In every industry dominated by union labor, employment has shrunk. On the other hand, 80% of the profits on Wall Street have gone into the pockets of the rich, even as employment has declined there. In both bastions of unionism and crony capitalism, jobs have been consistently destroyed. In contrast, the two biggest job creators in recent years have been Apple and Google; that should tell you that innovation and an educated work force drives success in a global economy.  The only thing that will force real change in America is a Standard & Poor’s downgrade of the national debt to junk status, which could be just 5 to 10 years away. Hamstrung by the tax code and bad politics, we are running out of time. When two boxers step into the ring, before the bell rings, the referee always warns: “Protect yourself at all times”. As the Republicans and Democrats fight for control of the government, I say: protect your portfolio at all times. The best way to do that is to keep a healthy slug of cash on hand.

Footnote on David Stockman:

  Stockman became one of the most controversial budget directors ever during a tenure that lasted until his resignation during August 1985. Stockman was quoted as saying “It's kind of hard to sell 'trickle down’ economics; and the supply-side formula was the only way to get a tax policy passed that was really 'trickle down’ theory”.

  Of the budget process during his first year on the job, Mr. Stockman is quoted as saying: "None of us really understands what's going on with all these numbers". After Stockman's first year at OMB and after "being taken to the woodshed by the president" due to his candor with the press, Stockman became inspired with the projected trend of increasingly large federal deficits and the rapidly expanding national debt. On 1 August 1985, he resigned OMB and later wrote a memoir of his experience in the Reagan Administration in which he specifically criticized the failure of congressional Republicans to endorse a reduction of government spending as a necessary offsets to the large tax decreases, in order to avoid the creation of large deficits and an increasing national debt.