Italian bond yields are edging back up. And Greece is negotiating a default. They want to avoid a naked, noisy default…so they are dressing it up as “voluntary” or ‘soft.’ But they can’t disguise the fact that Greece has bills it can’t pay. On the 20th of March it needs to come up with 14.4 billion euros, followed by billions more in the months following. That is more than 6% of national GDP. It would be as though the US had to pay a trillion dollars.
Where’s the money to come from? The European Central Bank? The IMF? The Germans? Maybe. But little by little, even the fixers are beginning to realize that this is a problem than can’t be fixed with Band-Aids and bailouts. Greece has too much debt. About 100 billion euros worth of it will have to go away or the country will never be solvent.
In the German magazine Der Spiegel:
“When it comes to Greece, it’s clear that
it’s hopeless. It would be better for the country to finally leave the
euro and transform its foreign debts to drachma, than to constantly beg
for new aid and set itself up for lasting charity”.
The fixers and the fixees are meeting, trying to figure out who takes
the loss. It is a little like a divorce. If they can get everyone to
cooperate, the whole thing will go fairly smoothly. If not, it could be a
disaster. The resulting tussle could bring down not just Greek debt,
but the debt of Italy, Spain…and even France.Across all OECD countries, public debt-to-GDP ratios now average 100%. This leaves them all vulnerable. At 5% interest, they have to devote one 20th of their output to servicing old debt. If they have tax revenues of 20% of GDP, it means that a quarter of their revenues must be used to cover the debt. If interest rates don’t rise, they can hold on. But if they are still running deficits larger than their growth rates, the situation is hopeless.
In America, for example, the deficit — in terms of GDP — is increasing at three times the rate of the economy beneath it.
Already, most of the big banks in Europe and America are probably insolvent. Without artificial support from the authorities, they would probably be unable to survive a crisis. Trouble is, the authorities have no real support to give. Most of the nations of the developed world are insolvent too. They can shuffle along now…but could not survive a run on their bonds.
The great hope of the feds is that they can stave off a crisis — by supplying beaucoup cash to the banks…who use much of the money to buy the feds’ bonds. The longer they can prevent a day of reckoning, the more likely these debtors will be able to grow their way out of trouble.
But debt suppresses growth. When debt-to-GDP levels rise to over 90%, growth declines, sharply.
Wait, there is more… Even before debt became such a big problem, real growth had already begun to disappear from the developed world. There has been none in Japan for the last 20 years…and almost no real growth in the US private sector for the last 10 years. In Europe, grosso modo, the story is similar. And in America, all the glories of technology, capitalism, financial engineering and democracy have been unable to add a single penny to the average working man’s hourly wages over the last 40 years.
Why? Nobody knows for sure. We have a two-part hypothesis:
1) Zombification. The process of decline was described by professor Mansur Olson of the University of Maryland. Special interests and lobbyists manage to subvert the political system so as to get favors for themselves. These giveaways and privileges cost money and lower output. The economy gradually becomes less dynamic and less able to increase wealth.
Another professor, Meghnad Desai, from the London School of Economics, says western capitalism has gone “geriatric.” “Dynamic capitalism, with its energy, innovation and sheer greed for growth has moved east,” he says.
A geriatric, zombified economy cannot produce real growth.
2) Declining marginal utility of oil. A modern economy is the fruit of oil. But the oil-burning machines that make the economy so productive were almost all invented before we were born, and put into service, in the developed countries, after WWII. Since the ’70s, improvements in the machinery have been incremental…and insufficient to offset the rising costs of oil.
If these hypotheses are correct, there will be no significant growth in the developed world — not until the zombies are thrown out…and/or a new technological breakthrough dramatically increases productivity.
We were suspicious of the recent improvement in the unemployment numbers. And of the news that consumers were going into debt to shop, again. The data were inconsistent with the “Great Correction.”
Besides, US bond yields have kept going down, with the 10-year US note reaching a yield of only 1.87% last week. Bonds were confirming the Great Correction, in other words.
David Rosenberg explains:
Everyone focuses so much on the
“headline” data points that they miss what is happening beneath the
surface. In actuality, the jobs market in the US remains in horrible
shape. It has now been 30 months since the recession officially ended,
and the labour force has contracted by nearly 1 million — 170,000 in
just the past two months! This is unprecedented and is not about aging
boomers dropping out of the workforce since they are being forced to try
to extend their careers because they so desperately need the income as
an antidote to the lost wealth endured by two bubbles that burst barely
eight years apart.
This phenomenon speaks to throngs of
discouraged people withdrawing from the work force. What is normal — the
average of the past nine recoveries — is that by now, 3.5 million folks
have entered the labour force to find a job because opportunity
abounds. That is missing this time around, and now we see the Challenger
data suggesting a drop in hirings, the JOLTS data showing a pickup in
firings and the NFIB survey pointing to a renewed decline in job
openings. The labour force participation rate was 65.7% when the
recession ended, and today it is 64% — this is totally weird and
explains why the unemployment rate is now a meaningless statistic — it
is really closer to 12% than the posted 8.5%.
And it is this weak labour market that
explains why it is that during this recovery, real median incomes are
down 5.1% which, by the way, is even more profound than the 3.2% drop
during the recession itself (according to a new Sentier Research
report).
At The Washington Post, Jonathan Turley, gives us:
10 reasons the US is no longer the land of the free
Every year, the State Department issues
reports on individual rights in other countries, monitoring the passage
of restrictive laws and regulations around the world. Iran, for example,
has been criticized for denying fair public trials and limiting
privacy, while Russia has been taken to task for undermining due
process. Other countries have been condemned for the use of secret
evidence and torture.
Even as we pass judgment on countries we
consider unfree, Americans remain confident that any definition of a
free nation must include their own — the land of free. Yet, the laws and
practices of the land should shake that confidence. In the decade since
Sept. 11, 2001, this country has comprehensively reduced civil
liberties in the name of an expanded security state. The most recent
example of this was the National Defense Authorization Act, signed Dec.
31, which allows for the indefinite detention of citizens. At what point
does the reduction of individual rights in our country change how we
define ourselves?
The list of powers acquired by the US government since 9/11 puts us in rather troubling company.
Assassination of US citizens
President Obama has claimed, as President
George W. Bush did before him, the right to order the killing of any
citizen considered a terrorist or an abettor of terrorism. Last year, he
approved the killing of US citizen Anwar al-Awlaqi and another citizen
under this claimed inherent authority. Last month, administration
officials affirmed that power, stating that the president can order the
assassination of any citizen whom he considers allied with terrorists.
(Nations such as Nigeria, Iran and Syria have been routinely criticized
for extrajudicial killings of enemies of the state.)
Indefinite detention
Under the law signed last month,
terrorism suspects are to be held by the military; the president also
has the authority to indefinitely detain citizens accused of terrorism.
While the administration claims that this provision only codified
existing law, experts widely contest this view, and the administration
has opposed efforts to challenge such authority in federal courts. The
government continues to claim the right to strip citizens of legal
protections based on its sole discretion. (China recently codified a
more limited detention law for its citizens, while countries such as
Cambodia have been singled out by the United States for “prolonged
detention.”)
Arbitrary justice
The president now decides whether a
person will receive a trial in the federal courts or in a military
tribunal, a system that has been ridiculed around the world for lacking
basic due process protections. Bush claimed this authority in 2001, and
Obama has continued the practice. (Egypt and China have been denounced
for maintaining separate military justice systems for selected
defendants, including civilians.)
Warrantless searches
The president may now order warrantless
surveillance, including a new capability to force companies and
organizations to turn over information on citizens’ finances,
communications and associations. Bush acquired this sweeping power under
the Patriot Act in 2001, and in 2011, Obama extended the power,
including searches of everything from business documents to library
records. The government can use “national security letters” to demand,
without probable cause, that organizations turn over information on
citizens — and order them not to reveal the disclosure to the affected
party. (Saudi Arabia and Pakistan operate under laws that allow the
government to engage in widespread discretionary surveillance.)
Secret evidence
The government now routinely uses secret
evidence to detain individuals and employs secret evidence in federal
and military courts. It also forces the dismissal of cases against the
United States by simply filing declarations that the cases would make
the government reveal classified information that would harm national
security — a claim made in a variety of privacy lawsuits and largely
accepted by federal judges without question. Even legal opinions, cited
as the basis for the government’s actions under the Bush and Obama
administrations, have been classified. This allows the government to
claim secret legal arguments to support secret proceedings using secret
evidence. In addition, some cases never make it to court at all. The
federal courts routinely deny constitutional challenges to policies and
programs under a narrow definition of standing to bring a case.
War crimes
The world clamored for prosecutions of
those responsible for waterboarding terrorism suspects during the Bush
administration, but the Obama administration said in 2009 that it would
not allow CIA employees to be investigated or prosecuted for such
actions. This gutted not just treaty obligations but the Nuremberg
principles of international law. When courts in countries such as Spain
moved to investigate Bush officials for war crimes, the Obama
administration reportedly urged foreign officials not to allow such
cases to proceed, despite the fact that the United States has long
claimed the same authority with regard to alleged war criminals in other
countries. (Various nations have resisted investigations of officials
accused of war crimes and torture. Some, such as Serbia and Chile,
eventually relented to comply with international law; countries that
have denied independent investigations include Iran, Syria and China.)
Secret court
The government has increased its use of
the secret Foreign Intelligence Surveillance Court, which has expanded
its secret warrants to include individuals deemed to be aiding or
abetting hostile foreign governments or organizations. In 2011, Obama
renewed these powers, including allowing secret searches of individuals
who are not part of an identifiable terrorist group. The administration
has asserted the right to ignore congressional limits on such
surveillance. (Pakistan places national security surveillance under the
unchecked powers of the military or intelligence services.)
Immunity from judicial review
Like the Bush administration, the Obama
administration has successfully pushed for immunity for companies that
assist in warrantless surveillance of citizens, blocking the ability of
citizens to challenge the violation of privacy. (Similarly, China has
maintained sweeping immunity claims both inside and outside the country
and routinely blocks lawsuits against private companies.)
Continual monitoring of citizens
The Obama administration has successfully
defended its claim that it can use GPS devices to monitor every move of
targeted citizens without securing any court order or review. (Saudi
Arabia has installed massive public surveillance systems, while Cuba is
notorious for active monitoring of selected citizens.)
Extraordinary renditions
The government now has the ability to
transfer both citizens and noncitizens to another country under a system
known as extraordinary rendition, which has been denounced as using
other countries, such as Syria, Saudi Arabia, Egypt and Pakistan, to
torture suspects. The Obama administration says it is not continuing the
abuses of this practice under Bush, but it insists on the unfettered
right to order such transfers — including the possible transfer of US
citizens.
These new laws have come with an infusion
of money into an expanded security system on the state and federal
levels, including more public surveillance cameras, tens of thousands of
security personnel and a massive expansion of a terrorist-chasing
bureaucracy.
The framers lived under autocratic rule
and understood this danger better than we do. James Madison famously
warned that we needed a system that did not depend on the good
intentions or motivations of our rulers: “If men were angels, no
government would be necessary.”
Benjamin Franklin was more direct. In
1787, a Mrs. Powel confronted Franklin after the signing of the
Constitution and asked, “Well, Doctor, what have we got — a republic or a
monarchy?” His response was a bit chilling: “A republic, Madam, if you
can keep it.”
Since 9/11, we have created the very
government the framers feared: a government with sweeping and largely
unchecked powers resting on the hope that they will be used wisely.
1 comment:
The insolvent debtor is therefore still subject to a second trial in both instances.
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