Tiny Tim’s Big Fantasy

Markets were mostly flat on Friday.

Then, this weekend, US Treasury Secretary Geithner proposed to the world’s finance ministers that they cap their current account surpluses at a fixed percentage of GDP.

How would that work? Why do it at all?

What’s the point?

Oh…we were going to answer those questions. But then, we said to ourself,
‘why bother?’

The whole thing is a fantasy. A hallucination. And a scam. It doesn’t deserve a serious discussion.

Geithner is the secretary of the treasury of the world’s largest economy. There is no evidence — none — that he has ever actually understood what is going on. If he had understood he certainly never bothered to say anything…

…that is, about the credit crisis…about de-leveraging…about the threat of too much debt…and everything else that has happened over the last three years.

Instead, all he has done is REACT to the crisis as it developed…always in the same way, by attempting to avoid any big change or any big losses to the people who most deserve them. Of course, the markets were clearly signaling the need for a major change of direction. The biggest, and formerly most profitable, financial corporations in America were faced with bankruptcy…and millions and millions individuals were in big trouble too….

…but Geithner didn’t understand any of this…

Still, he’s the guy who’s now suggesting HUGE new rules that the whole world will have to live by. Countries capping their surpluses? It is equivalent to individuals putting a limit on how much they save.

What’s the point of it? It would force the savers to spend…and thereby, presumably, reduce the value of whatever currency they spend (by increasing the demand side of the equation). What currency will they be spending? Easy, they’ll spend the currency they are saving — dollars!

Oh that Tim Geithner! What a clever guy. Put a cap on savings and you force people to spend dollars…driving down the value of the dollar and thereby simultaneously decreasing the real value of US external debt…and making US products and services more attractive to foreign buyers.

Well, our hat’s off to Mr. Geithner. The man has come up with an unworkable plan that no foreign nation will actually implement in any serious way. Actually, it is a nutty plan. Forcing people to spend money? Are you kidding? It just shows how little he really understands. A real economy cannot be ordered around or organized in such a heavy handed way. Price controls, central planning, government management of business and investment — they all always fail.

Still, he’s … at least he’s trying, right? Give the man credit for that…the numbskull.

And more thoughts…

“The French are crazy. What do they think they are doing?”

The comment and question came up at a cocktail party. Our youngest son is in the French school in Washington. Occasionally, we are invited to meet other parents.

“My wife is French,” continued a new friend, a former banker with the IMF. “We live there part of the year and have a house near the Swiss border. But I’m thinking of selling everything in France and moving all my assets out of the country.

“There is no way that this is going to end well. I mean, they’re shutting down the country because Sarkozy is proposing to increase the retirement age from 60 to 62. They must be dreaming. Sarkozy is not increasing the retirement age because he is a mean fellow. He’s doing it because he knows the country can’t afford not to do it.

“It’s such a modest little reform. They actually need to do much more. Like they’re doing in England. But the French are so funny. At the smallest provocation they take to the streets. They set cars afire. They think that if they are politically active and powerful enough, the money to finance these things will magically appear. But it won’t. And they’ll have to come to grips with reality sooner or later.

“The real problem is that the promises made by the welfare state are just too ambitious. As long as the economy is on the up and up people think they can afford to expand these benefits. Each generation thinks it deserves more than its parents, because it is richer. But the trouble is that the politicians can expand the claims on wealth faster than wealth itself can expand.

“And then, when it becomes clear that wealth is not expanding as fast as people had hoped, all the forecasts and the projections are shown to be nonsense. The people have been promised things that they can’t possibly afford. And sooner or later some government has to come to terms with it. Sarkozy is just the beginning of the story. He’s just barely tackling the real problem. He’ll have to make much more dramatic cuts in order to make the budget work.

“You know, Europe agreed to limit deficits to 3% of GDP. The idea was the countries would lose their voting rights in the European Union if they went over that limit. France is now at 8%. There is no question that they’re going to take away France’s votes. It just isn’t going to happen.

“But France is in trouble. And if it can’t deal with its problems in a reasonable way, the problems will just get worse and worse…until they finally explode. How? When? I certainly don’t know. But I do know that there is no way France can continue spending money the way it is now.

“And I also know that the US is not that different. It actually has more debt than France. The average Frenchman doesn’t have nearly as much debt as the average American. And at least the average Frenchman knows there is a problem. He just doesn’t understand it well enough to do anything serious or smart about it.

“But the average American doesn’t even know he has a problem. And while Sarkozy is at least beginning to trying to bring government spending into line with likely revenues, in America that conversation really has not even begun.

“In some ways, the US is much worse off than France. Neither its leaders nor its voters seem to have any idea of the problem that awaits them.

“Maybe I should sell all my assets in the US too.”

Regards,

Bill Bonner,
for The Daily Reckoning