Greek rescue more than everyday political monkey-business
Poof – above Europe, a trillion dollars just popped out of the air! The Greece bailout is even more impressive than the $700 billion that popped out of the air in September 2008, for the U.S. Wall Street bailout. It’s not just that politicians delight in distributing money like candy, knowing the invoice won’t come due until after they have left office. When gasp-inducing amounts of money pop out of the air, something more than everyday political monkey-business is at hand.
European Union nations decided they have an extra $1 trillion to spend because the Greek debt meltdown threatens not just Greece, but money itself. Currency, at heart, is a Ponzi scheme. Money has no inherent value. You can’t eat it or wear it: money is only good to the extent someone will trade you something for it. Nowadays most money can’t even be held in the hand, rather, exists entirely as numbers on electronic ledgers. If Greece failed financially, why should anybody believe government statements about money? That’s what had European governments spooked.
No gold ingots were offered to Greece, no satchels of unmarked bills — only some zeroes. “Your money problems are solved because we assigned you a bunch of zeroes:” that was the essence of Monday’s statement to Greece by the European Central Bank. The award to favored businesses of a bunch of zeroes was likewise the essence of the 2008 Wall Street bailout. Only by drawing ever-more people into an arrangement this nebulous can nations keep alive the notion that currency – digits on ledgers – holds great value. This is a Ponzi scheme on a scale that would make Charles Ponzi blush.
Three core powers sustain a modern state: military force, police power and the administration of money. Of these, money is most important. The United States Congress, and the legislatures of the European Union, quickly would be reduced to poorly run debating societies if they didn’t exert authority over money.
And money at the national-government level is a Ponzi scheme. Money that you trade face-to-face to a grocer or car mechanic is real enough, zeroes on government and big-corporate accounts are abstractions. The fear that big banks would be exposed as guardians of vaults full of zeroes caused Congress to throw $700 billion without protest in 2008; now the fear that sovereign purses would be exposed as stuffed with tremendous quantities of nothing caused European governments to throw $1 trillion.
Many commentators are pointing out that it is fundamentally absurd to respond to excessive debt, whether in Greece or on the part of U.S. homeowners who signed gimmick mortgages, by offering more debt. It is absurd. But this absurdity sustains the illusion of currency – it continues the Ponzi scheme. (See below on other unsettling aspects of borrowing-based bailouts.)
Political-elite fear must run deep in order for $1 trillion to be offered as a gift. When Congress bailed out American banks and mortgage-holders, at least the funny-money was flowing to constituents of the legislators making the decision. In this week’s European bailout, voters in Germany and France are being asked to sacrifice to sustain a spoiled, unproductive lifestyle in another nation, possibly in several. Why would Germans who work hard sacrifice so that Greeks can continue to work little, perhaps so that Spain and Portugal can take the afternoon off with pay?
Because money itself is at stake. German and French politicians are sure to be hammered by angry constituents who don’t like being compelled to subsidize Greece. But Germany and France benefit because at least the illusion of currency is sustained. That’s what is in the deal for the European nations providing the $1 trillion.
“We’ll just borrow more” cannot, logically, go on forever. But sustaining the notion that government-issued bonds are valuable allows today’s politicians to avoid hard choices, passing them along — with more problems added — to tomorrow’s politicians. And after handing out free money, the second-favorite activity of politicians is avoiding hard choices.
Before becoming Barack Obama’s budget director, Peter Orszag ran the Congressional Budget Office. At the CBO, an advisory agency, Orszag repeatedly warned against debt: since becoming a White House official, he has yet to meet a giveaway he didn’t like. In September 2008, in a little-noticed exchange on the PBS television show Newshour, Orszag the CBO director warned of an ultimate day of reckoning in which lenders stop lending. The subject of discussion was the $700 billion being thrown at credit markets:
ORSZAG: One thing we need to remember is we’re lucky that we have the maneuvering room now to issue lots of additional Treasury securities and intervene aggressively to address this crisis.
JEFFREY BROWN: Wait a minute. Explain that. Lucky in what sense?
ORSZAG: That people are still willing to lend to us. If in 20 or 30 years we continue on the same path, with rising health-care costs and rising budget deficits, we would reach a point where we wouldn’t have that ability.
Will it be 20 years until “people” – meaning Asian governments and oil-state sovereign funds – stop being willing to lend to the West, or will that moment come sooner? In 2000, the United States national debt, stated in today’s money, was about $7 trillion; now the number is nearly $14 trillion.
That is to say, adjusting for inflation, Washington has incurred as much debt in the last decade as in the entire prior history of the United States. Money can pop out of the air at such a prodigious pace if you’re running a Ponzi scheme — but all Ponzi schemes ultimately are exposed. How long until the United States and European Union want to postpone yet another problem by yet more borrowing, and no one is willing to lend?
WHY IS THE BAILOUT OF GREECE WORSE THAN THE BAILOUT OF WALL STREET?
The U.S. banks and Wall Street firms bailed out in 2008 had assets; Greece has only liabilities. So far about $370 billion of the $700 billion Wall Street bailout fund has either been repaid to U.S. taxpayers or never actually spent, and it is likely more will be recouped. However zany or ill-managed, the Wall Street bailout involved tangible assets that had a decent chance of recovering their value.
Greece, on the other hand, is a pure money pit. Suppose the European Central Bank offered you a loan to take Greece private. The asset side of the ledger – historical sites, Mediterranean vistas – would pale before the liabilities side.
The latter shows hostile public employees who shut down cities and commit arson as they demand two months’ of bonus wages for no work; a public pension system that offers full retirement at age 61 (in the United States, it’s 66); corrupt, spineless officialdom; and tax-evading millionaires protected by said corruption.
Greece’s productivity is low, its welfare costs high, its business climate poor – and try to name the last important economic innovation to come from this nation. There is little chance the Greek GDP will grow rapidly enough to pare debt. The best-case for the bailout (assuming austerity actually is imposed, which may not happen) is that it prevents debt from growing appreciably worse.
Reuters dispatch, Tuesday, regarding Greek government bonds: “Moody’s said a cut to the Baa range or even below investment grade was possible.” Is there one single person in the world who believes Greek national debt is an investment? Investments offer future yields. All Greece currently offers is ever-more demands for special handouts. That Greece may be the future of the West is more than a little disquieting.
BUT AMERICA ISN’T GREECE, RIGHT?
The sudden jump from $7 trillion to $14 trillion in U.S. debt is hardly the only scary sign. A year and a half ago, the CBO projected that Social Security outlays would not exceed revenue till 2017; instead this has already happened.
In 2009, the CBO said Social Security would run a roughly $150 billion surplus in the years representing a two-term Barack Obama presidency; now a $70 billion deficit is projected for that period. In 2009, a report from the trustees of the Social Security system said the United States has $107 trillion in unfunded future pension and health care liabilities – that’s about eight times present national debt. Not one thing is being done about the liabilities, while Congress expands health care entitlements and for three consecutive years has awarded bonus Social Security checks to pensioners.
All the current, undisciplined U.S. borrowing is happening before the main cohort of the Baby Boom retires. Debt loads have long been expected to increase at that point. Responsible administration of government would have entailed a concerted effort to pay down debt prior to the Boomers’ retirement party.
Instead in Washington under Obama and George W. Bush it’s been giveaway after giveaway, without accountability. Those projected billions in “savings” from health care reform? No specifics in the bill. Supposedly cuts will be imposed by an “independent physician advisory board,” but the board does not hold its first meeting until 2015. Cost controls on subsidies to the new insurance exchanges don’t begin until 2019, by which time Obama, Nancy Pelosi and most everyone else who backed the bill will have left office.
AREN’T WE ALL KEYNESIANS NOW?
We are. The argument for increased government spending during cool economic periods is quite solid. But the flip side of Keynes is that when the economy is strong, government spending should decline, in order to retire bonds incurred during the cool period. With the global economy now bouncing back, is there any chance any Western government will respond by reducing spending? Giveaways justified in 2008 and 2009 as “emergency” appropriations will become the new norm, from which interest groups will demand further sweeteners. Benefits must go up because of the cloudy-weather crisis! The chocolate milk shortage! The bridge-abutment repair crisis!
AT LEAST INVESTORS STILL LOVE THE UNITED STATES, RIGHT?
Allan Meltzer of Carnegie Mellon University, author of the authoritative and ultra-ponderous “A History of the Federal Reserve” — Volume Two, Book Two was just released and only brings the reader up to the Reagan years – has noted that gimmicks are being used to mask the printing-money aspect of the last three years of Washington policy.
The Federal Reserve has been lending money to banks at token interest – in late 2008 and throughout 2009, the Fed charged banks half a percent, the rate now is .75 percent. (The average in 2007, the year before runaway federal borrowing began, was about 5 percent.) Banks draw funds from the Fed at almost no interest, then buy Treasury bills, or loan to clients who buy them; Congress spends the proceeds from the sales of T-bills; government goes further into the red using money that appears to come from investors, but actually comes from government issuing IOUs to itself.
Not only is this a bookkeeping swindle on a scale not even Fannie Mae dared contemplate, Meltzer believes such gimmicks will cause a round of ruinous inflation. Because there hasn’t been inflation in a generation, we forgot the lesson of the 1970s, which was that inflation is much worse for the average person than slow growth.
Further, inflation could trigger a feedback loop on debt. In the current fiscal year, Washington is paying about $200 billion in interest on federal borrowing. Even mild inflation could push federal debt-service costs to $700 billion annually – roughly the total expenditure for Social Security benefits last year. The only ways to service such high added debt will be higher taxes on the middle class, plus cuts in Social Security benefits and Medicare. Defense spending cuts and higher taxes on the wealthy would help, but cannot alone solve the kind of problem that rising borrowing costs would trigger.
Thus even with the improved tax revenues that economic recovery will bring, the U.S. debt situation may grow worse. Unless you think China is going to give the United States a $14 trillion low-introductory-rate, no-docs liar’s loan.