Thursday, November 24, 2011

A False Choice

It's President Obama's favorite expression -- "a false choice" -- but it seems like the right expression for what pundits are describing as the Eurozone's only alternatives at this point: issue eurobonds or face chaotic default. But, are these really the only choices?

What about a workout -- Argentina style? Why won't that work? A debt workout would likely be a win-win for the Eurozone debtors and their creditors.

The market has already set the stage for such a workout for Greece, whose outstanding debt is now trading at a fraction of its originally issued value. Why not go the rest of the way by offering creditors repayment with a substantial haircut? That would then set the stage for similar "workouts" across Europe.

This would reduce Eurozone debt, force creditors to absorb some of the impact of their poor investment decisions, and avoid the austerity measures that can only lead to political upheaval.

No need to abandon the Euro. All that is needed is a touch of realism

Monday, November 21, 2011

Sequestration is a Better Solution

The Super Committee, at best, would have ended up with a variety of tricks that would not reduce the burgeoning size of government, so we should all celebrate the failure of the Super Committee. Bring on sequestration. The US cannot afford it's current path and whatever reduces the size of the mountain is a plus. We should resist any and all efforts to restore any of the cuts that are mandated under sequestration.

Time to include entitlements in the sequestration.

Sunday, November 20, 2011

Why The Young Have a "European" Future

Young people in America face much less opportunity than their parents. Why? Corporate greed?

Is greed something new that just burst on the scenes in the past ten years or so and has squashed the hopes of our young folks? Is greed the reason that young folks increasingly can't find jobs and are forced to take the European way -- live at home with your parents until you are in your late 30s? So, if no one is greedy, then jobs will magically appear and all will be well? Is that the thinking of the OWS crowd?

For starters, absent greed, there would be no jobs. Someone has to be greedy enough to want to make a profit and thus hire employees. The more profit they want to make, the more they have to expand their business and the more employees they will have to hire. Greed creates jobs. The absence of greed means there is no motive to hire anyone.

Those who push the "greed" thesis believe that an economy is a fixed pie that is available for everyone to take a slice and that politics is about who gets the biggest slice. If that view of the economy is correct, then the OWS people are right. That would simplify things a lot. That would mean that some of the poorest nations in the world have figured it out. Everyone is on the brink of starvation. The pie is fixed, not growing, and the only political issues are how to divide it in countries like that. OWS folks would like that, I suppose.

"Greed" has taken over in China and pushed it to nearly 10 percent economic growth year after year. The result is nearly 300 million people have moved from a standard of living of $ 200 per year to a standard of living of $ 20,000 per year in the newly prosperous cities of China. Where there is no apparent greed, in the Chinese countryside, the standard of living remains stuck at $ 200 per year. The OWS folks would like this because there is no 1 %. 100 % of folks in rural China live badly, but the pie is certainly sliced fairly....everyone gets virtually nothing.

What has happened to America that young people don't have the opportunities that were available to their parents? First and foremost, our parents were not saddled with modern employment laws that dramatically raise the cost of labor. Our parents got to keep most of what the employer paid in labor costs. Not anymore. What an employee gets is a fraction of what an employer must pay in modern America. This means that employers that want workers are becoming a vanishing breed. Minimum wage laws, family leave acts, OSHA, discrimination laws. growing legal liabilities for things both in the workplace and outside of the workplace, health care costs (why are health care costs an expense to be borne by employers?). All of these "good" things make labor too expensive in modern America and those who will suffer the most will be the least skilled amongst us -- minorities, youth, the unemployed. These are the victims of the big government agenda.

Second, social security and medicare have provided benefits to the older folks that are paid for by young workers and future young workers. That's a bad deal for young workers and future young workers to be saddled with a monstrous debt load that arose by providing benefits to people that never earned them (in any actuarial sense). But they have to paid for. The youth do that. What do they get for this? Nothing.

So young folks are prisoners of bad government policy. What the country needs is for those who want to get rich to have the opportunity to do so by hiring workers. If you don't like rich people, you probably don't mind high levels of unemployment (as long as it's not you) and young people increasingly forced to return home to their parents. That's been the European way for generations. It is now becoming the American way and for pretty much the same set of reasons.

Tuesday, November 15, 2011

OWS: Gimme, Gimme

Occupy Wall Street is not about a political argument really. It is simply the idea that some folks are entitled and others are not. The protestors are "demanding" various things that they claim are theirs by right -- mostly they want things other people have worked hard to obtain.

Instead of putting their shoulder to the wheel and working to accomplish things in life, the protestors want others -- the rich, they say -- to fund them. College graduates after four years of fun frequenting the local bar scene on government (taxpayer) loan funding, now, with sociology degree in hand, want high paying jobs for which they have no qualifications.

None of this is really about politics. This is merely the anthem of the entitlement -- give me what others have because I am me and I am entitled. Not much else going on.

People with real responsibilities do not have time for this. They are busy out working hard either at their job or they are working hard looking for a job. Only the entitled need to do neither. Hopefully, the "entitled" are not 99 percent, but a much smaller percentage of our society.

Eventually as more and more people join the "entitled," you arrive at the situation Europe finds itself in. Everyone wants free this and free that. Unfortunately, there aren't enough "rich" people or naive bondholders to permit this situation to go on indefinitely.

Monday, November 14, 2011

What About the US?

With Europe heading for massive defaults and economic contraction, what is the future for the US?

Weakness in Europe will not be a plus, but more fundamental problems await the US. Our debt situation is worse than the situation currently plaguing the Eurozone. Yes, our situation is worse.

The various "states" of Europe have unsustainable levels of debt, just as most of the larger states in the US have unsustainable levels of debt (Illinois, California, New York, New Jersey, etc.). But Europe does not have a federal debt problem. The Eurozone does not issue it's own debt. The US does. So, the US has sovereign debt at two levels -- the federal level and the state level, while the Eurozone has sovereign debt only at the "state" level.

No amount of cuts and tax increases will have any impact whatever on the dynamics of US debt. Thus, the current discussion about the Supercommittee is largely irrelevant. (Democrats have pretty much admitted that by listing as $ 1 Trillion in cuts the cuts from "not fighting future undeclared wars!)"

The problem of US federal debt is an entitlement problem and has an easy solution -- a very easy solution, an almost trivial solution. Moving the age of eligibility out a few years for both social security and medicare is the one and only solution that will have any impact whatsoever on our national debt problems (and scaling back medicaid). Nothing else really moves the (long term) needle at all.

As for the states, the states' problem is a problem of the benefits or "entitlements" that they provide for their public employees. Moving the age of "eligibility" out and substantially reducing the benefits for those not currently retired is the only way of moving the needle for the problems of the states (and municipalities). Nothing else really matters at all.

All the talk about tax increases and reducing (discretionary) spending is largely beside the point. Whatever virtues or vices there may be in altering the tax system and reducing the levels of discretionary spending, such tinkering does not make any difference at all in the long run debt dynamics of the US.

The numbers are the numbers.

Wednesday, November 9, 2011

Goodbye Italy

Look at the numbers: $ 2.6 Trillion national debt which amounts to 120 percent of GDP. Nearly 15 percent of that debt comes due within the next twelve months. Yields on 10 year bonds now north of 7 percent. That's Italy.

The Italian political leader Berlusconi has resigned, joining his pal Papandreou. It's over for Italy. All that is left to speculate about is when Italy will recognize the necessity to do a planned workout -- commonly known as a (partial) default.

Before this is over, the leadership in Germany, France, and Spain will also step down, either voluntarily or by action of the voters.

This game has only one end. Either these countries sit down with their bondholders and work out a partial default plan or total chaos will be the end result when they simply can no longer sell debt at all and can't pay their day to day bills.

The unreality of the approach of European leaders is almost comic, except for the tragic implications that their foolishness may lead to.

There is no harm in a partial default. The bondholders already know they are in deep, deep trouble. A partial default only recognizes what markets have already accomplished -- major losses for bondholders. The bondholders are already there -- time for a workout.

Of course, this means that the entitlement systems can no longer function as they have in the past. There are simply no funds available for these systems. No one is willing to lend money to support other people in a grand lifestyle -- not anymore.

The countries of Europe will be forced, after a debt workout, to dismantle the entitlement systems that have undermined the work ethic in Europe and saddled their countries and much of the rest of the world with bonds that cannot be repaid.

Next up on the docket is the US. It's just a matter of time, but it is basically the same scenario.

Saturday, November 5, 2011

Greek Political Turmoil

According to the news media, what Greek politicians do next will determine whether or not the current Euro crisis can be "resolved." Not really.

The main significance of the past week of Greek political back and forth is that political leaders throughout Europe are in trouble -- big trouble.

Countries forced into austerity measures will, in the end, replace their political leadership. That process is already under way in Greece and Spain and is surfacing in Italy as well.

Countries who are putting their taxpayers on the line to support the bailout of the profligate countries will also soon begin the process of replacing their political leaders -- Germany and France.

Neither side of this grand scheme, the bailors or the bailees, have the support of their voters. Why is this a surprise? The effort to bail out the sovereign debt problems of Greece, Spain, Italy (Portugal, Ireland) is a "lose-lose" policy and voters can see clearly that it is not in their interest, no matter what country they live in.

What works is a recognition that the debts are unsustainable and that it is time to sit down with creditors and do a workout -- a planned default.

It might take changing the political leadership in all major European countries, not just in Greece, to get the focus on the real solution to the European debt crisis.

Friday, November 4, 2011

Corzine Bets and Loses

John Corzine, former Senator and Governor of New Jersey and former Chairman of Goldman Sachs, stepped down today as Chairman of MFGlobal, as MFGlobal remained in the headlines for its bankruptcy filing two days ago. Corzine presided over the firm as it made huge bets on European sovereign debt, thinking that the worst of that crisis had passed. Unfortunately for Corzine and MFGlobal, the worst of the crisis is yet to come and MFGlobal and its leader are no more.

To Corzine's credit, he has always espoused the view that sovereign debt problems are imaginary and not real problems. He never had much interest in measures that might tame the growth in US national debt or the debt problems in New Jersey. So, at least, Corzine is consistent.

The blind spot that poisoned Corzine's reign at MFGlobal is the same blindspot that pervades current attitudes on the US's national debt (and the obligations of a number of state governments). These huge debt loads are not sustainable, blind spots notwithstanding.

One good thing worth noting is that there was no rescue for MFGlobal, which is good. Second, Corzine took no severance as he fell on his sword today. That is also good.

There is a whiff in the air that there might be a problem in customer accounts, but I suspect that that is probably not the case, but we shall see. Assuming no mingling of customer accounts, this seems to be a case where markets worked properly and the outcome is the proper one. The company made a big bad bet and it didn't work. The result -- bankruptcy. That is as it should be. Firms will learn if we let them.

Thursday, November 3, 2011

The Unraveling of a Dumb Idea

The proposed "deal" that has been crafted by France and Germany for the EU to "save" the Euro is one of the most absurd plans that has ever been concocted. It should be obvious that neither the bailors nor the bailees are going to go along with this (even if their leaders continue to pursue such foolishness).

It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.

It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).

The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.

Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).

A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.

Tuesday, November 1, 2011

Greeks Should Vote No

Why should the Greeks agree to the bailout terms of the EU? If I were a Greek citizen, I would vote no. There is simply no way that generations of Greeks should buy in to austerity to support bad decisions by Greek bondholders. Default is the right answer -- for everyone -- not just for Greece.

If Greece defaults, and that doesn't necessarily mean leaving the Euro (any more than when Illinois defaults, which it will, that it means Illinois will leave the US dollar zone), then and only then can Greece, on its own, begin to correct the absurd government policies that have wrecked their economy. They have to reach this realization on their own. It cannot be forced from outside.

Greece is just the first gong in a series of bells that will ring of default through the Western world. No one, no one, can afford the economic policies that Europe has adopted over the past half century. Why the present US administration wants to emulate this disastrous course is not clear.

The idea that health care, retirement, education, housing, minimum wages, right to sue for virtually any absurd reason that one can dream up are all rights that must be provided to every citizen free of charge is so absurd as to hardly call for discussion. But these are the very policies that the Western world has adopted. Now, Europe and the US will have to live with the consequences and they are not pretty.

Again, Asia (ex-Japan), has not adopted the foolish policies of the West. Asia will achieve economic supremacy and fairly quickly as the West descends into the economic chaos that it has brought upon itself by the foolish view that government can provide all things to all people free of charge.