In the third year of the worst recession since the 1930’s many States totter on the brink of catastrophe, after generations of imprudent management. Ahead lie even greater challenges, as employees cash in on their insanely generous pensions. A few charts tell the tale — showing America’s most profligate states — from “The State of California – the road ahead”, Barclays Capital, 17 February 2010:
A great speech, more powerful and truthful by far than anything said so far by President Obama. Truly the sight of the gallows focuses the mind. How soon until an American President says such things? Not long (and only if we’re lucky), unless we get smart and work together. Note this was a speech not to the nation, but to his political party.
“Greek Prime Minister says ready to fight off bankruptcy“, Reuters, 2 March 2009 — “Prime Minister George Papandreou on Tuesday told members of his ruling socialist PASOK party that the government was ready to pay the short-term political price of rescuing the country from bankruptcy. Here are highlights from his statement…”
- “This government has been fighting for five months now a daily battle everywhere, and even if it sounds dramatic, this battle is not for the future, it is for today, it is for now, it is to save the country.
- “We need to take tough decisions, decisions that can be unfair.”
- “We would like to have more time in order for the results of our big structural reforms to be evident … But we don’t have this time today, the international conditions will not give us the time.
- “Without brave decisions from us and from them (the EU) the whole of Europe and Europe’s economy is threatened.
- “We have the responsibility to do what we can to win back our country’s credibility.”
- “Our debt has reached the 300 billion euros, well above our country’s 240 billion euros GDP.”
A brilliant and provocative but pessimistic analysis by Albert Edwards of Société Générale: “To cut or not to cut? Actually it doesn’t really matter. We’re stuffed anyway!”, 12 February 2010. With links to even better analysis by Richard Koo. Must-reading for anyone seeking to understand this crisis. Excerpt:
My own view of developments, for what it is worth, is that any help given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficit and the solvency or otherwise of the governments in the PIGS (Portugal, Ireland, Greece and Spain we deliberately exclude Italy).
The problem for the PIGS is that years of inappropriately low interest rates resulted in overheating and rapid inflation, even though interest rates might well have been appropriate for the eurozone as a whole. Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth outlook.
In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political consensus within the PIGS to remain in the eurozone could falter in the face of another of Europe’s unfortunate tendencies: the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little help that can be offered by the other eurozone nations other than temporary confidence-giving sticking plasters before the ultimate denouement: the break-up of the eurozone.
About the economic crisis of the developed nations
Note: A copy of this graphic appears in this report (earlier, by different author but same firm).
One of the great similarities of our economic downcycle and Japan’s two decade long journey to oblivion: both are periods of economic stress caused by private sector deleveraging — in which the government mitigates the resulting pain by borrowing and spending. Japan’s government has run up terminally large debts, on a gross basis equivalent aprox to 2x its GDP. We’re on the same path.
The private sector has too much debt. The process of working the debt down — by a combination of increased savings and defaults — reduces spending, causing a long, deep recession. The government mitigates the pain by tax cuts and increased spending — generating massive deficits, which it borrows. Private debt goes down, public debt goes up. It’s like heroin — effective, but deadly if used too long.
Experts continue to proposed solutions, as they have for decades. To no avail. The public refuses to understand the problem, with no interest in any but delusional solutions.
- Look at the numbers
- The public has its eyes closed, lost in dreams
- Another sensible proposal, fated to rot away ignored like all the others
- For more information, and an afterword
(1) Look at the numbers
In Q1 of 1994 government debt was 36.3% of total credit market debt, a long-term peak.
- State/local debt was $1.15 trillion (9.2%).
- Federal debt was $3.39T (27.1%)
In Q4 of 2007 government debt was 23.1% of total credit market debt, a long-term trough.
- State/local debt was $2.19 trillion (6.9%).
- Federal debt was $5.12T (16.2%)
Now, as of Q3 2009, government debt is 28.5% and rising fast — far faster than private debt is falling.
Summary: A powerful metaphor, widely used, about this recession — the worst since the 1930’s — providing important insights.
Excerpt from “Financial Heroin”, Don Coxe, Coxe Advisors, 16 December 2009:
… my father was a doctor in the Canadian Army in WWII, and served in the Italian campaign. He became greatly respected for his anaesthesia and pain management under battlefield surgery and rehabilitation conditions. (He was cited after war’s end for perhaps having performed more anaesthetics under such conditions than any other Canadian doctor.)
In discussing his experiences, he told me that he swiftly learned that the best — and frequently the only — reliable drug for the critically wounded was heroin. Soldiers who writhed in agony under other medications almost always responded to heroin. The problem wasn’t deciding whether to administer it: if morphine didn’t work fast, you didn’t waste time, you injected heroin.
The problem for the doctor came when the patient had begun to recover from surgery, and was receiving heroin. How quickly could the dosage be reduced and when would it be terminated? Although few soldiers were freed of heroin without experiencing pain and distress, it was necessary to take the drug away as rapidly as possible. Otherwise they would become addicts and their lives would be ruined — for soldiering and everything else.
… Zero interest rates are Financial Heroin.
This goes to the vital points, mostly misunderstood, about the massive fiscal and monetary stimulus governments have applied in response to this global recession. Government stimulus has several characteristics similar to heroin.