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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We are in a long slow decline that will accelerate.
At the end of this it will be the Middle-class that takes the haircut. If you elect to not pay your bills for borrowing your creditors will cut you off. Then what will you do?
Similar process is happening with housing. It is hard to get mortgages. Who benefits, the people who have cash.
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.
Hey "Someone (Clevus)", I've seen you before. How's things going there in the PRC "Information Bureau"?
In case your dad didn't tell you: Ethics are NOT about what someone else does, it's about what YOU do. Especially what you do when no one else is looking or listening. (Of course, there in the PRC, someone else is always listening, aren't they!).
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.
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.
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.
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.
Ahh... I have an investment idea for the short term... Invest in guns companies ammunition as well... Sales will skyrocket as Obama wins his 2nd term.
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.
One-time wealth tax? Does anyone seriously believe that, having used it once, it won't be used again and again?
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?
The plain fact is that our government continues to issue bonds to pay half its debts. The bwealthy profit from those bonds and the tax payers get the tax bill. The simple printing of dollars is a far more sensible way to pay for government. Print dollars and send out checks to evryone who earned too little to pay tax last year. Those poor fo;ks will spend those extra dollars right away.And that mopney will find its way throughout the economy. About 250 billion dollars a month sent out to poor people each month would do wonders.
I have asked economists why this is not a good solution. They all mumble someting about inflation but never make much sense.
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