Bill Bonner

“Masked youths…attacked the head of Greece’s largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes.”

The Daily Mail account put the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent.” At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu…and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks’ losses? The plan was so outrageous and so unpopular that Iceland’s normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the ’80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, “Nothing can be accomplished in Washington.”

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it’s not the principle of the thing, we conclude; it’s the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • John

    How long before the collapse, that is the question? GEAB Leap 2020 predicted a US default on obligations by June of 2009…. and still we wait!

  • Barter is future

    Rioters can do a lot to collapse this system but they never face the forces of repression of the State. The State legitimate its repression with a revolt, then rioters must be more intelligent.

    If you want to collapse this system you must do is create barter nets, then you will never pay taxes or the mistakes of greedy bankers.

  • Harry

    Another decade, another round of doomers telling us all how we’re going to collapse by, take your pick:

    -hyperinflation
    -default on obligations
    -increasing budget deficit

    Seems like I’ve been hearing this since the 70′s and yet here we sit pretty darn prosperous. Stocks at 16 month highs. Housing in a recovery, employment in a recovery and retail sales are doing very well.

    Keep this list handy, you’ll need it again in 2020 when the doomers will kick in high gear again and tell us all how collapse is imminent.

  • Daniel Miller

    The Greek bell is tolling for Harry….

    They’ll do things to scum like you that will make the Taliban puke!

    I can’t wait to see your (and other banker) innards exposed to daylight.

    Of course, you haven’t made a dime Harry, your a lying troll.

  • Daniel Miller

    No retail improvement- Prove it with retailer numbers, not the commie apparatchiks.

    No housing price recovery (in fact the Case-Schiller is down MoM)-Prove it with construction numbers or decrease in ratio of sold houses to shadow inventory, not numbers provided the commie apparatchiks.

    Unemployment (U6-the real one)still above 17%.

    You’re losing, Harry. The majority know the bankers and media and gooberment are lying as the people starve.

    And they’re about to go Joe Stack on your a$$es.

  • student

    Of course Bill doesn’t mention that the Glass-Steagall Act (which controlled speculation) was passed in the early 30′s and then repealed under Clinton with the Gramm-Leach-Bliley Act in 1999. Deregulation of banks was a major factor in the 2007 housing market collapse and subsequent global depression.

  • Ace

    “The rioters can go home, in other words. The system will collapse on its own.”

    While we appreciate the thought, we’d like to give it a shove on the way down, just in case.

  • http://centurylink motorhome

    no jobs no jncome no payments no problem banksters mark 2 make belive no one going 2 pay 4 upside down house even the village idiots r smart enough 2 walk away as far as jobs 15 billion dollar jobs bill is a slap n face 2 the workn people they gave hundreds billionssssssssss 2 banksters at o interest while theyr still shovn it up our rssssssssssssss

  • LAGirl

    Ace said “While we appreciate the thought, we’d like to give it a shove on the way down, just in case.”

    LOL, +1

  • Cameron

    Bill, this was a really great read.

    It was like being the future, reading a history lesson about today (err.. the past :-) )

  • Cameron of

    Barter is Future, I don’t think the forces of Govt will hold back the rioters. I saw the head of Athens police on TV at the riot complaining how the austerity measures have effectively left them 8000 eruos a year worse off!

  • Michael

    Very truthful article Mr. Bonner, thank you.

    Harry, never mind.

    You can’t fix stupid.

  • Sean

    Awesome summary of modern American (Western?) history.

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