The overall economic statistics emerging from Europe this week, coupled with what Paul Krugman calls a “jog on the banks in Greece” (not fast enough to be called a run on the banks) shows us that reality is starting to bite in Europe. We are now going to witness what a disorderly default and Euro exit looks like.
There may still be some interesting twists and turns – what odds on some form of unity government in Greece springing a Euro exit quickly? But Greece will leave the Euro and a massive hole in the balance sheets of a number of global lenders – both private and public.
Then we see the contagion set in. The only real limiting factor on all this will be the election situation in Greece, because someone needs to be in charge to handle all of this.
Of course Greece is small fry – but this will signal the end to the Eurozone’s efforts to keep the currency completely and resolutely intact. Just as surely as the economic data (showing that the Eurozone was flat in growth-terms last quarter) signals that Europe won’t be able to inflate its way out of the debt crisis it has built. Spain is now under pressure. Italy is still under pressure. Portugal and Ireland haven’t gone away, you know…
Just a note on the Greek bank run. It will be the rich and the well-connected who know how to get their Euros from the bank and put them somewhere safe overseas. Once again the average joe will find their savings cut in half, or worse, in the currency reset and devaluation that will have to happen.
Buckle up.
Let’s say it’s your own money. Would you lend it to France, or Greece, or Ireland, or the US for that matter?
Imagine the loan is for 10 years. What sort of interest rate would you expect on that loan, bearing in mind the risk of that country going bankrupt or devaluing their currency or having their parliament refuse to pay (as in the US congressional debt ceiling debate)?
What about the more insidious erosion of your money that you loaned to your government of choice? Inflation that makes your interest rate look like a terrible return. Do you think there is a risk that all the money printing and cash-for-trash schemes that central banks have put in place will slowly erode your money’s real value?
These are the real choices that “the markets” are making today. Of course, in the main, they ARE actually doing it with your money. Your investment plans, your pension fund, your structured savings.
The markets don’t particularly like the election results in France and Greece this past weekend.
But they didn’t particularly like the existing path that those countries were on before.
Greece struggling under the terms of a bailout that is mathematical fiction.
France engaging in “pretend austerity” – not enough to convince lenders that France would be able to contain the long-run deficit, but too much for French people to tolerate.
The EU and ECB continue to prop up the Eurozone with twigs and twine.
The people of Greece and France may have been judged to have voted against austerity, but in reality they are hastening the true austerity that will be coming to most western democracies soon.
It may take the form of deep cuts to services. Or higher tax levels across the board. Probably both.
In some countries it will come in the form of severe currency devaluation – making imports (food, white goods, energy, IT, raw materials, cars) more expensive. Think about living your life with everything you consume being 40% more expensive, but with your income unchanged. That is austerity.
Either way there is a reckoning to come. The waiter is on their way to our table with the bill, and we are going to have to pay it.
At the heart of the displeasure of voters in France and Greece is both a lack of acknowledgment that we have been dining in a restaurant beyond our means, as well as the feeling that the bill is not being shared equally.
In their view, the corporations and rich folks had the expensive dishes and fancy wines and now expect others to pick up the tab. This anger is particularly, and rightly,directed towards the financial services industry.
But this is the world that we have created with our own hands and with our own votes. We put the governments in place. We choose cheaper “big food” over local farmers. We live lifestyles that make us terribly unhealthy and expect someone else to pay all the health bills. We think that throwing money at education is a replacement for demanding that teachers and parents do their jobs well. We wage wars that were not needed or justified. We want an end to global warming but won’t tolerate what that means for prices at the pump.
If we really want to make changes we will have to pay the bill first. It will take sacrifice. Our countries can chose to change or the change will be forced upon us.
Not the “tinkering” change in France or Greece. Real change. It will come – ready or not.
At some point both the Euro and US debt situations will have to come to a head. As discussed in the last posting on this site, that correction can be rapid and catastrophic, or slow and brutally painful. Either way, the citizenry will have to pay a price for what is now decades of living beyond our means as societies. Make no mistake, corporations and financiers and the well off will not be the people who will bear the brunt of this. Sure, some large companies may go bankrupt and some banks may go bust. Indeed, some families or individuals who invested it all in Greek bonds, or pork bellies or bet that the euro will survive will find their fortunes destroyed – perhaps overnight. But the vast majority of companies and rich folks will have a host of advisers and experts and tax breaks and off-shore holdings and bailouts that will see them alright. If the US Tea Party and the Occupy Wall Street movement were to merge their narratives, we may see the real truth – not as a grand orchestrated conspiracy, but as an organic expression of the way things have just turned out to be.
“Extend and pretend” has had its day, and it has not worked. The idea is that by doing whatever is necessary to keep an economy going, and avoiding a correction/crash/depression, you buy time to let normal economic growth sweep away (or at least diminish) the sins of the past. That can work when a recession or crisis is a simple and normal economic correction. But it cannot work when we have already burned all the matches available to us. Sure we can pretend to make more by manufacturing money, but in the end, unless a growth spurt intervenes, that still renders a price on the general public.
In Europe, the long-awaited and much predicted Spanish crisis is now centre-stage. This is a banking and debt crisis that is eerily similar to Ireland, but has just taken longer to mature. In these days of millisecond financial trades and breathless minute-by-minute accounts of news on our TVs it is easy to miss the longer-run forces that are at play. Like tectonic plates shifting slowly and nearly imperceptively until a huge transition occurs and everyone finally takes note.
Spain, like Ireland and Greece and Portugal and France cannot afford to borrow more to work through the crisis. The UK is now technically back in recession with two consecutive quarters of GDP shrinkage – the much talked about “double-dip” – and this is pointed to as evidence that austerity won’t really work either. In Europe there is now only devil and deep blue sea. All the while the strong player, Germany, continues to make advances and benefits from an artificially weak currency that it will do all it can to preserve except, it seems, pay the real bill for all its recent economic success.
Meanwhile, here in Disneyland (the United States), we will all now spend 6 months in the circus that is the Presidential Election. Sure we will talk about debt, as well as Iran and North Korea and contraception and gay marriage. But nothing will get done, and the US Debt/GDP ratio will continue its inexorable rise. Then Americans will make a choice between two politicians who are actually so similar at heart in terms of policy that it is laughable. Both believe that the visible hand of government does better than individuals. But worse than this, neither has the gumption or the leadership qualities to persuade all Americans of the sacrifices that they will need to make so that the country can live within its means. The richer people will need to pay more in taxes (their tax rates being at the lowest levels in generations) and the poorer folk may be asked to work for their welfare. Healthcare will have to be rationed to deliver maximal outcomes for least money. International military adventure and defense spending will need to be slashed. Retirement ages will have to rise fast and far and benefits to government employees will need to be slashed. People will just have to get used to a lower standard of living and will have to, like their forefathers, return to pulling themselves up by their own bootstraps. It will be ugly. It will hurt people in ways unimaginable. But it is better than any alternative – especially if done quickly before the debt levels are too insurmountable to deal with. Somehow, corporations will have to pay their fair share, having made spectacular amounts of cash (that they are now hoarding) on the backs of decades of taxpayer funded research, infrastructure and education.
This recipe holds true for most Western democracies now. Why does Ireland have a military at all? How can public servants earn so much more than their private sector counterparts, on average, with much greater retirement benefits, given that holding down a private sector job is a much riskier proposition? How can we allow our medical and healthcare systems (socialised or otherwise) to spend massively more on each and every drug and operation and cure whilst people continue to get fatter and more unhealthy through their own personal choices?
Our safety nets will increasingly have to be only for those who have fallen – not those who willfully jump. In the Netherlands or France or Ireland, or even with the appointed Technocrats in Greece or Italy, no-one is able to lead people to these alternatives. Why would the turkeys want to vote for Christmas, after all?
These changes won’t be because we WANT to live in that sort of society – but it will be because eventually that is all we will be able to afford. And even that is true ONLY if we start to deal with the debt problem we face NOW. We are living beyond our means as countries and societies – printing more Euros, Pounds and Dollars does not fix that truth, but makes it worse and only serves to further enrichen the financial sector and the wealthy on the backs of the common man.
The next phase of this evolution in our society will start with the next big triggering event. I would not bet so much on an Iranian conflict or further issues with North Korea. It is more likely one of those slowly shifting tectonic plates. A slow-down in Chinese growth and consumption – removing one of the few positives in the global economy. Certainly, the collapse of the Euro – but I honestly feel that is more likely to help over the long run rather than hurt because it will lance that ever-growing boil, remove uncertainty, and allow a host of countries to “find their own level” quickly.
People need to beat this drum of “living within our means” and “fairer society” without coming off as left or right-wing nut jobs. We need leaders who can persuade people of the need for self-sacrifice in all strata of society who can actually get elected. Otherwise, country-by-country, we will hit the buffers at 100 miles per hour – the consequences of that will be much, much worse than anything I have described above.
Call it “end of the beginning”. The mainstream has forgotten about Greece and the Euro debt crisis. The mainstream takes each new piece of (thankfully) positive US economic data and adds to the recovery narrative. The US stock markets are toying with multi-year highs that mirror where they were before the financial collapse in 2008. And Ireland’s admittedly welcome deal to defer a €3.1bn debt repayment (probably in order to turn it into a different form of borrowing) has released pressure from the system there.
But, despite the myriad of symptoms and crises that have already manifested themselves across the world, the rest is yet to come. Remember, these symptoms and crises have a common root case – and that is debt. Debt is like water – once released it flows into all the nooks and crannies of economic life. From government borrowing to banking collapses. From people underwater on their mortgages to companies who cannot afford to hire workers. Local government that can no longer afford to operate basic services to the individual who cannot pay their credit card.
Each one of the these events represent terrible changes and consequences for people. At worst they lead to terrible and inescapable poverty for individuals and families. In all cases they usually lead to lives and lifestyles never being the same again. We can’t retire when we thought. We cannot take the holidays we wanted. We cannot send the kids to the school we wanted. Neighbourhoods fall into decline. People continue to lose their houses.
Beneath the headline news, all this is still playing out. The USA is enduring poverty levels not seen since the Great Depression. European unemployment continues to climb to over 10%, whilst in the USA the unemployment rate is still DOUBLE what it was before the financial crisis. In Ireland the continued challenges of house price collapse and underwater mortgages continues to haunt homeowners and the banking system.
The fix from the Fed, the ECB and the other Central Banks (like the Bank of England) has been to inject “liquidity” into the system. In essence, printing/creating/borrowing more money to mask the over-borrowing that people, companies and counties engaged in.
But you don’t fix a debt crisis with more debt. You may be able to help a country get over a temporary “normal” recession with further borrowing – a classical Keynsian stimulus effort where governments create demand to fill the gap left by people and companies who won’t spend.
A structural debt recession is a different beast. The extra debt we are piling on at this point will have even more dire consequences.
This can play out in two ways….
In some countries the extra debt will lead to simple default. Candidates include Greece, Ireland, Spain, Italy, Portugal and even France. Simply put, at some point the soveriegn finances cannot add up any more as with a company that is bankrupt.
In other scenarios (perhaps the UK and the USA most notably) the long run effect of all this “liquidity” will be an eventual inflationary surge. To counter this the central banks will have to wrench their gearsticks into reverse. They do this by raising interest rates hard and fast. When they do, citizens companies and local governments already close to the edge financially will teeter over the brink and eventually collapse. There will be a spike in foreclosures and bad debts. There will be another round of banking collapses and company closures. Those laid off will add to the list of folks in trouble with mortgages and other debt. Social safety nets will be further overwhelmed (as they currently are in Ireland, Greece and Spain for example).
This is a nasty spiral. It comes from not acknowledging the root cause of our problem in the first place, and looking for the quick and painless fix that just doesn’t exist.
I hope to be terribly and spectacularly wrong. But I fear that I am not. Commentators will always tell you that people have called “the end of an era” or the “end of the empire” at many junctures in history but that they are normally wrong and this time is no different.
I believe that our countries have been making promises to citizens (pensions, healthcare, education, infrastructure, tax rates, safety nets) that they cannot keep. They have borrowed to mask the problem rather than face us with the truth – in some ways it is hard to blame them for that.
The rest of this mess is yet to hit us folks.
Around the time of St Patrick’s Day it is good for Irish people everywhere to reflect on their identity and on the long-run destiny of the land we love.
I love Yeats – truly one of the great poets and this video celebrates the creation of an art installation placed at the to-be HQ of Anglo-Irish bank – now a half-built shell like many other construction and banking projects in Ireland.
It uses Yeats’ poem as a call to thought and uses the Anglo HQ as a reminder of what happens when we are thoughtless.
“Was it for this the wild geese spread
The grey wing upon every tide;
For this that all that blood was shed,
For this Edward Fitzgerald died,
And Robert Emmet and Wolfe Tone,
All that delirium of the brave?
Romantic Ireland’s dead and gone,
It’s with O’Leary in the grave.”