The Tiresome Eurozone Soap Opera Has Entered Re-Runs
(June 18, 2012)
The Eurozone "drama" needs some fresh plot developments; it has become boring.
What's more tiresome than a hastily rehearsed soap opera that replays the same boring plots again and again? Re-Runs of that soap opera. The Eurozone "drama" is now in re-runs and I for one am switching channels. Nothing will change until some critical part of the worm-eaten, corrupt construct of artifice and denial collapses in a heap. Until then, all we have is replays of the same boring plot lines:
Put-upon Greece: We were just minding our business here in the sunny south, living happily on borrowed billions in a thoroughly corrupt Status Quo, and suddenly we're debt-serfs squeezed by rapacious Eurozone enforcers of the banking cartel. What did we do to deserve this? It's not fair.
Put-upon Germany: We were just minding the store here, racking up 40% of our GDP in exports and raking in bank profits loaning money to our Eurozone compatriots, when suddenly everyone who's lived beyond their means demands that we refinance their debts because we're rich. Excuse us, but did anyone look at how we got rich? Hard work, cuts in spending, high taxes and a tight lid on wages. What did we do to deserve this? It's not fair.
Married couple in counseling: France and Germany: It's all his/her fault. They never bothered to understand me, etc.
The lit-fuse terrorist: Either refinance our debt and bail out our Status Quo, or we're gonna blow up the Eurozone!
Is anyone else tired of the entire cast and threadbare plotlines? The "crisis" drama could be dispensed with in short order:
A. The bickering couple(s): get a divorce and quit blaming the other.
B. Insolvent banks: fire the management and liquidate the banks in an orderly fashion, following the well-established model: clear the books of impaired assets, and let the market price those assets. Any losses are passed through to the shareholders and bondholders. Once the losses have been taken, recapitalize the banks with new bonds and/or shares, and establish prudent lending guidelines. Prohibit backstopping or bailouts by central banks or Central States.
C. Unsustainable pensions, budgets, deficits, etc.: only spend what is collected in tax revenues, period. Stop living in the past and borrowing from future taxpayers.
On the macro scale, the Eurozone's systemic problems boil down to these realities:
1. No household or economy can sustainably spend more than it reaps in surplus. The net surplus (what's left after paying the expenses of producing goods and services) can either be spent on consumption, invested in productive assets or leveraged into debt. If it is leveraged into debt, then the interest eventually consumes the entire surplus and the entity enters a death spiral.
The only way to be able to spend more is to generate more surplus. It's that simple.
2. The demographics of a dwindling workforce and an expanding populace of State dependents cannot be gamed or disappeared by artifice. The entire developed world is facing the impossibility of one full-time worker supporting one State dependent. Here in the U.S., there are 115 million full-time private-sector jobs and over 110 million dependents on the State just in the Social Security, Medicare and Medicaid programs. Add in all the other State dependents and the ratio is perilously close to 1-to-1. (That Which is Unsustainable Will Go Away: Medicare May 16, 2012)
(Recall that all Federal spending is "pay as you go"--there are no vast pools of money laying around in trust accounts. If Social Security expenses exceed SSA tax revenues, the Treasury sells bonds to cover the shortfall.)
I don't have the figures on hand for Europe, but if all State dependents and only full-time jobs are counted, I am confident the ratio in most of the Eurozone is close to 1-to-1: one full-time worker for every State dependent.
3. "Growth" based on debt and the build-out of China is over. The "growth" story in Europe over the past decade was essentially debt-based: real estate bubbles in Ireland, Spain and elsewhere, and debt-based consumption everywhere. China is massively overbuilt and has gargantuan levels of overcapacity in virtually every industry. Selling luxury cars to China may appear to be a good business, but 500+ spontaneous citizen demonstrations a day portend game-changing blowback to corrupt officials buying Audis and Cayennes by the thousands.
4. Everything that is held away from market forces eventually snaps back and faces market pricing of risk, valuation and surplus, i.e. reality. Unrealistic pensions, unrealistic spending, unrealistic budget projections--all will increasingly be exposed to market forces, one way or another.
5. A nominally capitalistic economy without collateral is living on borrowed time (and borrowed money, needless to say). Correspondent David H. summed this up very succinctly:
What we are all living through today is the failed experiment of trying to run a capitalist economy on no REAL capital. This not only crimps wealth and the overall standard of living, but also elevates the perverse over the rational.
The entire Eurozone "drama" is the result of the perverse being elevated over the rational. As Yeats so aptly phrased it, "The best lack all conviction, while the worst are full of passionate intensity."
The Eurozone soap opera is truly a tale "full of sound and fury, signifying nothing,"
until the rubber band snaps and reality intrudes.
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