By Government Design

Yesterday was not pretty. Dow down 150. Gold whacked for $40. Oil off 3%.

And would you look at that, Fellow Reckoner. Optimism in the euro-zone is disappearing faster than a snow bunny in an avalanche. Even the newspapers say it’s so…

“Doubts over euro-zone deal weigh on euro,” says The Financial Times. The Wall Street Journal complains of “anxiety” over on the woebegone continent. And The Washington Post cites “further signs of weakness” in Europe as the key factor motivating today’s slump in US markets.

The Esperanto currency fell below $1.30 this morning to register its lowest level against the greenback since January. Hopes of a fix are fading. Slowly but surely, folks are coming to realize that there is no meeting, no summit, no treaty or handshake that can rescue the world’s largest economy from its own hard-won fate. And what fate is that, you ask?

Put simply, the European governments borrowed and spent more than they could afford. The Greeks borrowed like Germans…but they still spent like Greeks. Worse still, they produced like Greeks too. Ditto for half a dozen or so other Club Med economies.

Not that we necessarily blame the Greeks. No. That would be like getting angry with a shark for eating a fish…or an avalanche for covering a snow bunny. It’s in the nature of things to do what they do. The government of Athens was simply doing what all governments do. In many ways, it was doing what it was designed to do. And what is that?

“Government,” explains Bill, “is just a way for the insiders to take advantage of the outsiders.”

Don’t be fooled, Fellow Reckoner. Don’t be taken in by the fanciful treatises and bombastic declarations. Don’t fall for the pomp and ceremony, the debates on television, the speeches from bully pulpits and rally cries in the halls of Congress. Government, as it is witnessed today, is little more than a codified process of rape and pillage. It’s a means, as Bill observes, by which the insiders may loot the outsiders. Nothing more. Nothing less.

Sound cynical? Don’t believe us? Take a look for yourself.

The Merkels and Sarkozys of the world would have us believe that waste and profligacy are PIIGS-specific ailments. They propagate the mistruth that, while the peripheral states were lounging in the sun, their own, superior federal institutions were diligently toiling for the good of their respective citizens…pinching pennies and deftly allocating resources only and exactly where needed. The spendthrift PIIGS have threatened the integrity of the union, they claim, thereby undermining France and Germany’s efforts at prudent governance and faultless political stewardship.

But lo! It wasn’t only the Greeks running amok on the continent. The Maastricht Treaty, to which both nations are signatories, was supposed to bind countries to manageable debt levels. Buried right there at the very top of the treaty reads a stipulation that the ratio of gross government debt to GDP must not exceed 60%. It’s a prerequisite for joining the European Monetary and Economic Union (EMU) and for using the beleaguered euro as currency. As of the close of business for the year 2010, only two countries satisfied that requirement. (Bravo Poland and Czech Republic!)

Today, Germany’s debt to GDP ratio is closer to 90%. France’s sits just shy of 100%. And these are the two nations leading the hard-nosed summit talks.

Also in the Maastricht criteria, a stipulation that annual government deficits not exceed 3% of GDP. Both Germany and France have, on numerous occasions, broken that “rule.” As of this writing, today, France’s budget deficit is almost double the tolerable amount. And still she points her finger toward the PIIGS.

So what’s the verdict for Europe, Fellow Reckoner? Allow us to repeat an observation made in these pages by Eric Fry not three months ago.

“Bankrupt entities tend to go bankrupt,” wrote Eric. “Greece will default…eventually.”

“And with it,” your editor added at the time, “will follow a few other chain-linked lemmings. Maybe that list will ‘only’ include an assortment of other PIIGS’ rinds. Maybe it will include the euro itself. Time will tell.”

And maybe, we add today, will follow all governments that insist on acting like…well, like governments.

Joel Bowman
for The Daily Reckoning