03/04/09 London, England Angela Merkel to Eastern Europe: Drop Dead!
You remember that famous cover story of the New York Daily News? New York was nearly bankrupt in 1975. The city asked the feds for a bailout. To his everlasting credit, Gerald Ford had the backbone to just say ‘no.’
Had he given the city a bailout, Ford might have won his race against Carter. He believes that that headline cost him the New York vote…and the election. Then again, had he given New York a bailout…the city might be more like Detroit.
The kindness of strangers is one of life’s delights, but once you begin to count on getting something for nothing you are on the road to Hell. At least, that is our view here at The Daily Reckoning.
Welfare ruined the lives of millions of people. (More on that…below…)
Easy credit – coming largely from the Fed and the kindness of strangers in Asia – ruined the American consumer.
Bailouts, handouts, bribes and giveaways threaten to sink whole industries.
And now the whole world economy will be ruined by printing press currency – something-for-nothing money coming from the central banks.
But that will take time…maybe years. For the moment, we are enjoying the show…
Europe is plagued by debt too – just like the United States. Individual households are generally in better shape than those in America, but governments tend to have more debt than the United States. And in the fringe countries of Europe – Ireland, Spain, Greece, Italy, Poland, and the Ukraine – consumers borrowed far too much money to buy houses. Unemployment is soaring to 15% of the workforce in Spain. Irish banks are going under. And in Eastern Europe, the problems are worse. Typically, a man who wanted to buy a house found that he got a better interest rate if he took out a mortgage in euros than in his home currency. In Poland, for example, many homeowners must now make their mortgage payments in euros, while they earn their money in zlotys. As the financial crisis developed, the zloty fell against the stronger euro, by half. This leaves the Polish householder paying twice as much on his mortgage.
Not surprisingly, consumers are in trouble…so are the banks than lent them money…and so are the countries where they live. Nine of these nations – an Eastern European bloc – got together and asked the European governing council for help. They said they needed $380 billion to get through this crisis. Angela Merkel, speaking for the French and Germans, said no. She might have mentioned, too, that they had already spent $380 billion recapitalizing Europe’s banks.
In America, the government is more accommodating. It is spending trillions to try to bailout the entire global economy. And by the look of things…it is failing.
O! Bama! Where is thy bounce? The whole world needs it.
The Dow did not bounce much yesterday. It was up only 31 points. A disappointing showing. Usually, you can count on a healthy bounce after a big drop, such as stocks got on Monday. But this market has been short on bounces. After Obama got elected, we expected a big bounce. Instead, there was a feeble ricochet of about 15%…and then, stocks headed down again. In the United States, they’ve lost 20% so far this year.
And the more the government tries to pump up the ball, the flatter it seems to get.
HSBC said it was cutting 6,100 jobs…closing offices all over America…and trying to earn back the $10 billion it lost in the US consumer finance business.
AIG is getting another $30+ billion – after burning through the last $133 billion. ‘Can’t let this insurance giant go under,’ say the pundits, “or the whole insurance business will go down.’
AIG was “irresponsible,” said Ben Bernanke in his little chat with Congress yesterday. He said they made speculative bets that they shouldn’t have made.
But what did he expect? The Fed – under the leadership of Alan Greenspan – threw the biggest financial party in world history. What did they expect the pros to do…stay home and watch TV?
And now the IMF says the global banking system needs another $500 billion. The real figure is probably two to three times that amount. But who knows? We’re still in a period of aggressive price discovery. Until we find out what’s in their vaults…and what it is worth…we won’t know how much it will cost to save them.
Ford and GM sales have been cut in half – sales fell to a 27-year low in February. Blockbuster is eyeing Chapter 11. And skilled immigrants are leaving the US.
*** Obama has, of course, announced his $3.6 trillion budget…and all that goes with it. Including a $1.7 trillion deficit. But his estimates were based on a recovery in the last part of this year. That seems increasingly unlikely. Our guess: the deficit will go over $2 trillion.
Congress has hunched over the numbers. The solemn chicanery of federal budgeting is underway, in other words, as politicians pretend to weigh the merits of the spending plan…
Of course, they are spending other peoples’ money…and none forgets it. The idea is not to reduce spending, and certainly not to return it to its rightful owners, but to make sure it goes to the groups most important for re-election. Besides so much of this money is borrowed from future generations…and foreigners…and who-knows-whom…it is like money from Heaven.
As any system of government matures, more and more people are able to get a purchase on it. It could be a tax break…a licensing requirement that keeps out competitors…a tariff…a subsidy…a job…free food or a welfare check. And as more and more people get something from the government, more and more have a stake in making sure the government stays in business. This phenomenon contributes to the stability of the institution in the short run…in the long run, it guarantees its failure. For each little hustle is a cost…like a leech on the back of a water buffalo. The animal may be strong and fit; but put enough leeches on him and he’ll wither like a dried up grape.
Of course, after a while, the beast begins to stagger and people notice something is wrong. Then, the reformers come out…promising change. But change is just what people don’t want and just what the system won’t permit. There are too many leeches – and the leeches vote.
Obama’s new budget is the biggest bag of leeches to come along since the Roosevelt Administration. We have not seen it in detail. But from what we’ve gathered from the press reports, it has something in it for almost every bloodsucker.
The raw numbers are breathtaking. Whereas the feds have taken about 21% of the nation’s income in recent years, now they’re going to take 28%. The deficit alone will equal more than 12% of total GDP.
Put the feds together with state and local hacks, altogether they will consume 40% of the nation’s total output. Whoa…that’s put it close to the levels of such free-market bastions as Zimbabwe and Algeria, both with 43% of spending done by government…and Hugo Chavez’s Venezuela, where the government spends 41% of GDP.
By contrast, in France, that socialistic, bureaucrat-saturated country with the croissants, 53% of GDP is spent by the government. But wait…in France healthcare is a government industry and so is the passenger train system. In America, 17% of GDP is spent on healthcare. As for the passenger trains…forget it…in America, we scarcely have any. So, if you add the 17% spent on private healthcare to the 40% you actually get a total higher than that of France. Ooh la la…the age of big government is back!
Who pays?
Ah…that’s an interesting subject in itself. Obama says he’s going to soak the rich. But the rich are already pretty well marinated. Reagan’s tax cuts freed them to earn more money – and pay more taxes. Now, the top 5% pays 60% of the costs of government. The bottom 40% pay no taxes at all. They get all government ‘services’…which is to say their boondoggles…for free.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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The rich do not pay 60% of the cost of government. This is because of payroll taxes. I truly doubt if the rich pay the share that they actually earn and certainly nothing near the share that they actually own as the wealth in this country is concentrated in the hands of the very wealthy.
And the wealthy get the biggest handouts from government as they are the most politically connected. For example the mortgage interest deduction is a massive transfer of wealth from the poor to the wealthy.
I am of the opinion that is not the government spending that is destroying our economy but rather the bailouts. The market cannot put a true price on anything with the government changing the rules every other week.
Now I agree with much of what you say, but what about those that truly are too mentally incompetent to help themselves? Is it your contention that this is just too bad?
And also the blind and the lame and the guy that got shot in the head at the local 711 just minding his own business, does the government have no obligation to help those that just had some awful luck in life?
Woe to those elected, and unelected, officials who will have presided over the demise of America, especially those who don’t scramble quickly enough to whatever safe havens they have prepared in other countries, like, say, ranches in Paraguay.
In the not-too-distant future, when the Deficit Trials are held, those officials will rue the day they decided to “serve” their country.
It will make for entertaining television.
I’m sad to say it, but if I were to venture a guess, I would say that Obama will almost certainly be a one-term president. It’s unfortunate insofar as he represented the hopes of so many, and presented himself as an articulate, thoughtful, compassionate individual.
But his handling of this crisis has been misguided and amateurish at best. His selection of Administration members, like Geithner, leave one shaking their head. Having won the popular election by only 3 million votes (if memory serves), coming on the heels of the disastrous Bush administration and running against a generally pedestrian ticket in McCain and Palin, rumours of the Republican’s demise are greatly exaggerated.
The only cure for a depression is a depression, I once read.
How frightening that must be in the corridors of power in Washington nowadays.
C
very good article…this water buffalo is about to become a leech, i am gonna stop fighting it…fifty years ago debt was looked on as shamefull and sinfull…times are a changing…welfare don look so bad…the only way to fix it, is to break it…5% is a small number…why cant the five percenters get together and cash out of everything and stop working…the five percenters must have alot of cash already, i would think…or they wouldnt be the five percenters, right?…what is the time table on surviving a 60% reduction of revenue and what are the consequences?…would the remaining 55% have to make up the difference?…what if?…
The First Law of Human-Dynamics is the conservation of idiocy. If it is not commited by one politician, it will be committed by another.
The Second Law of Human-Dynamics is that atrophy in a society always increases with time.
I think these two laws explain pretty much the whole article.
just like handing dollars to the military and all its hanger oners — ever think that the domestic housing bubble was a cover for the “defense” industry thieft ..?
Good column Bill. I won’t pretend to agree with it all, but as always, you gave me quite a bit of food for thought.
One point though — I’m not sure you’ve fully explored the potential fallout if eastern Europe is left to its own devices. Unlike New York City, there are other political entities with interests in the region and not aiding them may drive them into their arms.
By this, of course, I mean Russia. Putin et al would love nothing more, I suspect, than to see central and eastern Europe rejected in the same way they were, following the fall of the Soviet Union.
People fear change and hard times and if you give them any alternative whatsoever, in tough times they’ll take it.
Best to you. Keep up the great work on the column.
Attitudes among the regular folks in my part of flyover country is that Obama is doing just fine. They like the idea of soaking the rich and handouts for the rest. Very alarming and disappointing.
CA
Disagree on the wealth bit there Bill. Wealth inequality seems to be the highest in 80 years. Soaking the rich (after they get their bailouts, of course) is inevitable. Hmm, so who would that really be soaking?
Per Spud’s ending question: the middle guy gets the soaking. The guy who plays by the rules and lives within his means is the one that’s ripped off by both ends of the spectrum.
tag: google “da Message Board” and follow the first hit. You’ll find practically everyone who is anyone.