Cutting Expenses to Borrow More Money
It is very cold in London. “This is the coldest it’s been in 25 years,” said a colleague.
People are bundled up in scarves and hats. There are patches of ice on the sidewalk. Heck, it could be Baltimore or New York.
London is usually milder. It snows occasionally, here. But rarely do you get such a severe cold snap.
Still, we take the world as we find it.
So, let’s see… What do we find in the financial world this morning…
Ah…
The prime minister of Spain gave speculators a little advice. Don’t sell short Spanish debt, he said.
As far as we know, government officials give investment advice that is at least as unreliable as the advice you get from anyone else. But that doesn’t mean Jose Zapatero will be right.
As we go to press, investors are not paying much attention. They seem to think they can find a better place for their money than Spanish bonds.
But how cometh the elected chief of a major European government to be giving financial commentary? That’s our job. Here at The Daily Reckoning nobody pays us for it. But we do it anyway.
The other night, we had a dream…that we had been elected to Congress. It was a nightmare really. We wanted to demand a recount. We arrived in Washington to take our seat and we couldn’t figure out how the voting machine worked. The other members were voting on expensive, preposterous bills. We wanted to vote “no.” But we couldn’t make the voting machine work. We’ve never been very good with gadgets, but this was maddening. Hour by hour, they were proposing and disposing…while we couldn’t do anything about it. They were running up trillions in new financial obligations…more wars…more health care benefits…more farm subsides… More meddling. More world improvement. More intervening.
The US was already broke. Still, they kept on spending.
Hey, wait a minute… This was no dream. This was no nightmare. This was real life!
The difference between Europe and the US is that the Europeans have begun to get their voting machines to work properly. The latest news is that the Irish have committed themselves to lop another 20% off of state spending. The Greeks, Portuguese and Spanish are all headed in the same direction. They’re acting like responsible citizens. In order to convince investors that they’re good for the money, they’ve got to cut spending.
If investors lose confidence, they won’t be able to borrow money at low interest rates.
Hold on… Let’s get this straight. They’re cutting expenses so they can borrow money?
Yep.
If they don’t cut expenses, they won’t be able to borrow at decent rates, right?
And then what? Then they’ll have to cut expenses even more.
So why not just balance their budgets now, so they don’t have to borrow at all?
What, are you some kind of nut, dear reader? Balance the budget? Spend only what they can raise in taxes? Don’t make us laugh.
In America, federal deficits are projected from here to eternity. There is no plan to balance the budget ever again.
At least the Europeans are trying to get their budget deficits down – to 3% of GDP. Ireland pledged to do so as part of its rescue deal. And to cut 25,00 jobs from the payroll – 10% of its entire workforce.
That was enough to bring out the protestors – even in this bitter cold.
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