4/25/2012 5:54 PM ET|
Welcome to political chaos
With leaders in Europe and elsewhere offering only austerity and pain for the foreseeable future, they're inviting political upheaval. Now that it has begun, drastic action will be needed to stop it.
In the thousands of years of human history, law by popular consent has been the exception, not the rule. Domination of unruly populations by strongmen, warlords, tribal leaders and monarchs is much more common than democracy.
Why? For one, it's easier to get big things done. But also because democracy and humanity's innate selfishness don't mix -- especially when it comes to money. It's easy to lose our way, voting for low taxes and higher benefits, while allowing things like the housing bubble or the deficit problem to build unchecked.
But people power can also be a catalyst for good, which I think is happening now.
Late last year, in "Why all signs point to chaos," I warned that strict austerity from governments, especially in Europe, was making harsh economic realities even worse. Higher fuel and food prices only add to the toxic mix. When this has happened historically, people get angry. Social disorder follows. But positive change can come out of it.
Economists see this phenomenon, too. In fact, what inspired that column was a study that found protests, labor strikes, political upheaval and even riots and assassinations increase as people are faced with higher taxes and fewer benefits, along with joblessness and stagnant wages. This kind of chaos was in decline for most of the past 20 years.
It's on the rise now, with last year's Arab Spring being answered by political upheaval in Europe and the rising popularity of fringe parties -- just a preview of the turbulence to come. (As I wrote last week, the United States isn't immune, as it faces its own fiscal cliff in just eight months.)
The stage is set for socioeconomic turmoil on a scale not seen since the 1970s and 1980s -- turmoil that rich-world countries won't be able to avoid unless leaders take drastic action to lighten the load on the many at the expense of the few. Otherwise, the people will elect someone who will. And if they can't, they'll take to the streets.
Long term, this turmoil could be a positive. But, for the moment, welcome to chaos.
Where there's smoke
The first act started in March in Europe and accelerated this week, sending shudders through global markets. I'll spare you the long and tortuous history of the eurozone debt crisis, which started more than two years ago, but here are the highlights:
- Many eurozone countries, particularly Greece, Italy, Portugal, Spain and Ireland, are suffering from uncompetitive economies, bloated governments, rising debt levels and deep budget deficits.
- These are caused by lax enforcement of European Union limits on national deficits, Germany's trade mercantilism, lax banking regulation and the fallout from excess credit creation during the 2002-2007 boom. The European Central Bank, worried about slow growth and high unemployment in Germany, kept interest rates low. But that was too low for fast-growing countries like Spain and Portugal, leading to housing and credit bubbles.
- Three nations have already required bailouts from the eurozone to stay afloat, and the worry is that Italy and Spain will need help, too.
- In response, Germany and other AAA-rated members of the eurozone, along with France, are pushing for harsh budget austerity in a bid to restore market confidence and keep Italian and Spanish borrowing costs down.
- But this austerity -- read: cuts in government spending and payrolls -- is deepening a new eurozone recession and causing the weaker countries to rebel against the central authority's mandate.
In early March, new Spanish Prime Minister Mariano Rajoy, under pressure with youth unemployment north of 50% as the country sinks into recession, announced that his government would go a little easier on the economy. He set a deficit target of 5.8% of gross domestic product for 2012, rather than the 4.4% target Spain had agreed on with European Union leaders in Brussels. This still translates to a massive 2.7% cut to economic growth this year in an economy that's already in recession.
The EU and the paymasters in Berlin balked, though, and the target was pushed back to 5.3%. This was the catalyst that sent Spanish and Italian borrowing costs climbing again and helped slam the brakes on the multimonth stock rally here at home.
The problem isn't just in the weaker EU nations. This week, the Dutch government -- one of the five AAA-rated eurozone countries and a fervent supporter of the austerity-led approach to Europe's woes -- collapsed after members balked over domestic budget cuts.
In France, the results of the first round of voting suggest the left will capture the presidency for the first time in 24 years. Polling suggests Socialist candidate François Hollande will win and force a renegotiation of the EU's strict budget agreement. He would balance the French budget one year later than current President Nicolas Sarkozy, and he favors steep tax hikes on the rich rather than deep cuts to state spending.
Meanwhile, in Greece, officials have taken a knife to 2012 growth forecasts, as protests and labor strikes continue. It's becoming increasingly clear that the country has no future in the eurozone. The head of German economics institute Ifo said in New York this week that there's "no chance for Greece to become competitive" unless it exits the eurozone and restores the drachma.
"If Greece is kept in the eurozone, there will be ongoing mass unemployment. But if they exit, they will see a very sudden recovery," he said, as lower prices boost competitiveness. Something similar happened in Iceland after that country devalued its currency, the króna.
Both Greece and France will hold elections May 6. The Dutch are expected to vote in September. Democracy is reasserting itself in Italy and Greece after unelected technocrats favored by Brussels and Berlin were installed in Rome and Athens. Elections have already swept away governments in Slovakia, Ireland, Portugal and Spain.
The threat is that the conservative Franco-German alliance that has been steering Europe through this crisis with maxims of "austerity before bailouts" and "bankers before taxpayers" will collapse. A breakdown increases the risk that a country such as Greece will exit the eurozone due to a lack of rescue funding.
And it increases the risk that Germany, realizing that it's milked all it can from the euro (via massive trade surplus with the weaker peripheral countries) packs up and leaves rather than providing more rescue funding. Without Germany -- the eurozone country with the deepest pockets -- there is no orderly resolution to the debt crisis.
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Yet when the biggest test of the merits of democracy and capitalism came, all of a sudden the will of the people was ignored, and we were told it was perfectly ok to ignore the foundations of capitalism- for the greater good. The politicians knew best, and who needed a pesky thing like consensus or agreement from the masses. Democracy, the pillar of our modern civilization was discarded and treated with contempt and distain. Foolish people didn't understand the devastation that would occur if we held to our supposed capitalist principles and Darwinian ideologies. The same ones the wealthy and the powerful have been cramming down our throats for decades. Now it wasn't convenient any more because they were the ones suddenly faced with losing everything.
The truth though is if we had just adhered to the principal of survival of the fittest we would have had a short and very painful crash followed by a very robust recovery as the strong and the fit would have risen up instead of being stifled. New faces, new fresh blood and new players would have emerged - wiser and more nimble, unburdened by debt, and hungry and eager for growth. Instead we decided to bet on the people who had already lost and we propped them up because we had no choice. They were the ones in charge and they voted to save their own hides and used the politicians to do their bidding as expected - like the bought and paid for puppets that they are.
This little failed experiment of saving the banks was simply an excuse to save the wealthy people of the world from finding out what it is to be poor - especially since they have spent the better part of a century vilifying the poor and trying to erase them. They didn't want to lose their fortunes and become that thing they so despise. A poor person. Well this is what happens when you build your house upon a foundation of sand. In this case the sand is credit and it has dried up. Everything else right now is just pretense. Pretense that everything is under control and will get better. We are in a downward spiral world wide and we are heading for a messy crash.
One-time wealth tax? Does anyone seriously believe that, having used it once, it won't be used again and again?
Protests, labor strikes, political upheaval and even riots increase as people are faced with higher taxes and fewer benefits, along with joblessness and stagnant wages. This kind of chaos is what we may face as the rich get richer, the poor get poorer and the middle continues to struggle with high debt, joblessness, loss of homes. The middle class is large in numbers and therefore should run this country. Instead it is run by the rich, well connected, politicians, many who shouldn't be there, and big business lobbies. If our country continues to follow a path of making the middle class poorer and the rich richer there will be riots. Paying nothing on saving will eventually increase homelessness and riots.
This is just more little-thought-out journalism. The facts are these about the European countries involved:
1. From this point, all roads lead to austerity. The writer thinks that reneging on their debt--politely called restructuring--is an answer. If they do this they won't be able to sell any new debt, so they'll have to balance their budget. This will require even more cutbacks than they are doing.
2. The longer they fail to cut back, the worse the austerity will have to be when it happens later.
3. Austerity is temporary, and leads to real restructuring of how things are done. This is the only real way out of this mess.
4. The austerity being instituted is very minor, and won't even clean up their deficit spending. Most of the protests are instigated by government employees and handout-addicted people who won't even accept a 10% cutback. They actually think they are entitled to other peoples' money.
Note that we in the US will be in the same fix soon, since there is no will to clean up our deficit act. And the same attitudes exist here as they do there.
So what ethic is this author proposing? Looks like this to me:
1. Run up as much debt as you can get people to loan you, buy whatever you want, then reneg on these debts. Doesn't matter who gets hurt--those old people like my grandma should have known better than to lend you money.
2. If someone else has more than you, or better stuff than you, just loot them. And it feels a lot nicer if you have the government do this for you, and give you the money for no value received. After all, you're entitled.
In the private sector, homeowners with negative equity would get a principal reduction on their mortgages.
Reward the reckless and ignore the productive. Fantastic plan. I'm sure this won't create enormous backlash and result in citizens leaving countries that choose this plan.
According to the Boston Consulting Group calculations, the required reboot of the financial system could be paid for with a one-time wealth tax -- which would address the rising income inequality problem that's beginning to worry even the International Monetary Fund.
Another fantastic idea! Steal from the wealthy and give to the lazy!
Socialism is the only system that leads to prosperity and happiness for all.You do realize this article about budget deficits, loss of confidence, and diminishing tax receipts is referring to Europe, right?
Yeah, that's right, just inflate the money supply. Screw the investors and savers. That's a great way to ensure no more investments will occur in anything other than real estate and precious metals
Is that you Ben?
Honestly, there's not much an individual can do about macroeconomics on this scale. All we can really do is make sure we try to keep our debt as low as possible, live within our means, work hard... really, focus on things at a personal, micro level.
The thought of reducing the amount of money owed for underwater homeowners is a real slap in the face to everyone who tries to live within their means. It seems the only reason to be financially responsible in today's world is strictly for personal pride.
According to a detailed study conducted at the University of Florida, some 6,000 families control a little better than half of the worlds leadership positions and wealth. Over the past 30 years of Neoliberal hegemony the rate of accumulation at the top has devoured the resources of the bottom third producing conditions that might be discribed as a system of free-market feudalism. If history is any guide we will see a struggle for control in the US at least, to oust the military state or crush the remaining taters of democratic consensus. The civilian government corrupt as it may be is no longer in power.
It's the spending, stupid, to paraphrase. We are spending our way to oblivion, Greece is us when we run out of other people's money.
On a happy note, Apple weekly call options are yielding 1.44% premiums, not bad for 8 days. Not easy to pony up for 100 shares, tho.
Lnc74--Guns are the new money. Ruger, S&W, other mfrs need to watch their stock prices. Don't overlook ammo. Business smokin' here in redneck flyover country.
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