Bussiness News
Europe's Problems Come Knockin' on America's Door
By
Leo Isaak
May 05, 2010 3:50 pm
To save our country, we must implement stark and serious changes.
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As I wrote a couple of weeks ago, in Greece's Role in the Economic Domino Theory, Greece was just the first domino. And really, this isn't about Greece per se, although its poor attitudes have a lot to do with it. It's about all debt, and this entire planet is replete with massive amounts of debt from one end to the other that will never be able to be repaid.
As we continue to see how this mess plays out, it's becoming more and more obvious to me that the debt bogeyman is going from closet to closet scaring the you-know-what out of everyone. Greece has effectively collapsed, Portugal and Spain are currently being taken out back and shot, and everyone's next target seems to be the UK. Oh yeah, Italy and Ireland are still out there.
This will be interesting, of course, as the UK has the ability to print money. As much as this is a positive, it's equally a negative as there's no ultimate benefit to debasing one's currency. Debasement has never been an effective long-term strategy.
I've often heard the argument that those who can print money are never in danger of default. While that may be technically true, the damage resultant from massive amounts of money printing is just as debilitating.
Let's just say the Treasury prints all of the money it needs to make debt payments, fund payroll and entitlements, etc. What is the end result of that? Obviously, the currency will fall and purchasing power will be destroyed. With a currency in decline, that in turn impacts the ability of the government to sell debt in the open market because buyers will demand either a higher coupon or a discount to par to make up for the depreciation in currency. Of course, there is also the chance that the offering is rejected. Then what? Then the printing presses really get cranked up and cries of Weimar begin to make their way around the audience.
Think it can't happen? Let's put a face with the name and go to England. The UK has a mountain of debt around 70% of GDP (not counting entitlements), massive deficits of more than 12% to GDP, huge unfunded entitlement liabilities, high taxes, and a floundering economy. (Sound familiar?) As with Greece and Spain, concerned investors and traders begin to buy up CDS's, which in turn spooks forex traders who sell the Pound Sterling. The falling Pound causes concerns about the UK and its economy, which erodes confidence both internally and externally. That erosion leads to citizens becoming concerned and spending less money. This leads back to the Exchequer cutting interest rates or leading a quantitative easing program to stimulate the economy, which creates more debt, which leads to more money printing, and on and on.
The point is that adding more debt never got anyone out of debt. It just delays the inevitable of having to make more than one spends, and once traders turn their sights on the US, we could see our problems here ratchet up rather quickly. This is exactly what successful traders/mangers like Bill Fleckenstein, Marc Faber, Jim Rogers, and many others are talking about when they talk about inflation being inevitable here.
"Ask not what your country can do for you, but what you can do for your country." -- JFK
No one likes austerity, but as the inimitable Margaret Thatcher was fond of saying, "The problem with socialism is that eventually you run out of other people's money." We are seeing this come to fruition before our very eyes. Reckless spending on the backs of a few can never last as Atlas will, at some point, shrug. Socialism's incredible failures throughout history make me wonder how anyone can continue to promote such ideals as they are nothing short of debilitating. In theory, it all sounds and feels good, but in practice it's an unmitigated disaster; not the utopia supporters proclaim it to be.
Unfortunately, socialism is now what we are seeing in America -- make no mistake about it. For some reason that I can't comprehend, our leaders (for some time now) have decided that being like France, and to a lesser extent Greece, is the right choice, while the people have remained relatively quiet. Exploding entitlements, higher taxes, more regulation, and socialized risk are a surefire recipe for disaster. These are the same ingredients that have led to the indigestion that we are now seeing erupt in Greece, Portugal, and Spain. They are also rampant in France, Japan, and England. All of these countries have similar problems to the US with the distinction that the US has liabilities that far outweigh these other countries.
"Pain is weakness leaving the body." -- Daniel R. Evans
Pain is inevitable -- we (citizens/voters/taxpayers) just have to decide what kind of pain we want to endure. By that I mean we have two primary choices. The first is to continue down our current path. We already know this is untenable. The second is that we make the difficult decisions that will negatively impact many Americans in an attempt to save the rest of the country. This includes major cuts in entitlement spending and promises, massive reductions, if not the complete elimination of all foreign aid, reductions in "defense" outlays around the world from Europe to Asia, selling off the massive amount of property owned by the federal government, removing government's influence in the student loan and housing markets so that prices in those industries correct appropriately, and changing our tax system to something far simpler like a flat tax or my preference, the Fair Tax (both will require the repeal of the 16th Amendment).
So, the choice is ours. Which path do we wish to take? Riots led by union groups who desire what no one else gets, ballooning debt and deficits that will lead to higher interest rates, and the eventual destruction of the dollar? Or do we take our medicine now by implementing stark and serious changes in this country in order to save it? Because, frankly, it really is that serious. The only path to redemption is through self-reliance.
As we continue to see how this mess plays out, it's becoming more and more obvious to me that the debt bogeyman is going from closet to closet scaring the you-know-what out of everyone. Greece has effectively collapsed, Portugal and Spain are currently being taken out back and shot, and everyone's next target seems to be the UK. Oh yeah, Italy and Ireland are still out there.
This will be interesting, of course, as the UK has the ability to print money. As much as this is a positive, it's equally a negative as there's no ultimate benefit to debasing one's currency. Debasement has never been an effective long-term strategy.
I've often heard the argument that those who can print money are never in danger of default. While that may be technically true, the damage resultant from massive amounts of money printing is just as debilitating.
Let's just say the Treasury prints all of the money it needs to make debt payments, fund payroll and entitlements, etc. What is the end result of that? Obviously, the currency will fall and purchasing power will be destroyed. With a currency in decline, that in turn impacts the ability of the government to sell debt in the open market because buyers will demand either a higher coupon or a discount to par to make up for the depreciation in currency. Of course, there is also the chance that the offering is rejected. Then what? Then the printing presses really get cranked up and cries of Weimar begin to make their way around the audience.
Think it can't happen? Let's put a face with the name and go to England. The UK has a mountain of debt around 70% of GDP (not counting entitlements), massive deficits of more than 12% to GDP, huge unfunded entitlement liabilities, high taxes, and a floundering economy. (Sound familiar?) As with Greece and Spain, concerned investors and traders begin to buy up CDS's, which in turn spooks forex traders who sell the Pound Sterling. The falling Pound causes concerns about the UK and its economy, which erodes confidence both internally and externally. That erosion leads to citizens becoming concerned and spending less money. This leads back to the Exchequer cutting interest rates or leading a quantitative easing program to stimulate the economy, which creates more debt, which leads to more money printing, and on and on.
The point is that adding more debt never got anyone out of debt. It just delays the inevitable of having to make more than one spends, and once traders turn their sights on the US, we could see our problems here ratchet up rather quickly. This is exactly what successful traders/mangers like Bill Fleckenstein, Marc Faber, Jim Rogers, and many others are talking about when they talk about inflation being inevitable here.
"Ask not what your country can do for you, but what you can do for your country." -- JFK
No one likes austerity, but as the inimitable Margaret Thatcher was fond of saying, "The problem with socialism is that eventually you run out of other people's money." We are seeing this come to fruition before our very eyes. Reckless spending on the backs of a few can never last as Atlas will, at some point, shrug. Socialism's incredible failures throughout history make me wonder how anyone can continue to promote such ideals as they are nothing short of debilitating. In theory, it all sounds and feels good, but in practice it's an unmitigated disaster; not the utopia supporters proclaim it to be.
Unfortunately, socialism is now what we are seeing in America -- make no mistake about it. For some reason that I can't comprehend, our leaders (for some time now) have decided that being like France, and to a lesser extent Greece, is the right choice, while the people have remained relatively quiet. Exploding entitlements, higher taxes, more regulation, and socialized risk are a surefire recipe for disaster. These are the same ingredients that have led to the indigestion that we are now seeing erupt in Greece, Portugal, and Spain. They are also rampant in France, Japan, and England. All of these countries have similar problems to the US with the distinction that the US has liabilities that far outweigh these other countries.
"Pain is weakness leaving the body." -- Daniel R. Evans
Pain is inevitable -- we (citizens/voters/taxpayers) just have to decide what kind of pain we want to endure. By that I mean we have two primary choices. The first is to continue down our current path. We already know this is untenable. The second is that we make the difficult decisions that will negatively impact many Americans in an attempt to save the rest of the country. This includes major cuts in entitlement spending and promises, massive reductions, if not the complete elimination of all foreign aid, reductions in "defense" outlays around the world from Europe to Asia, selling off the massive amount of property owned by the federal government, removing government's influence in the student loan and housing markets so that prices in those industries correct appropriately, and changing our tax system to something far simpler like a flat tax or my preference, the Fair Tax (both will require the repeal of the 16th Amendment).
So, the choice is ours. Which path do we wish to take? Riots led by union groups who desire what no one else gets, ballooning debt and deficits that will lead to higher interest rates, and the eventual destruction of the dollar? Or do we take our medicine now by implementing stark and serious changes in this country in order to save it? Because, frankly, it really is that serious. The only path to redemption is through self-reliance.
No positions in stocks mentioned.
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