California Deserves the Greek Prize for Debt. Start Cutting and Cease Spending or Suffer.

Abstract: Much of the civilized world, even including California if we must, are sinking in a sickly swamp of debt and now many nations must cut spending and take severe austerity  measures to cut their deficits. This is not happening and argues strongly for the historical policies of most governments to overspend and then default. The Greek and Spanish debts are so high that the European Union may either collapse or unravel and expel members or some members will just unilaterally exit the community. Governments do not have a very encouraging collective history when it comes to handling debt and spending. Most of the world is headed toward debt defaults because there is insufficient capital to refinance debtor nations. Thus, the world will change drastically in the next decade and the new wars will be conducted with debt.

The unchecked growth of government is the most serious danger we face as a collection of societies on this planet. Governments have killed some 200 million people in the last 120 years with wars and genocides of various sorts and with speckled but pressing political justification. Given the opportunity to spend or grab assets, the ever mandated maintenance and preservation of government and its wellbeing tends to be dependent only upon taxation and spending with consequential debt. Once governments achieve power they tend to fortify their position with spending programs that have a built-in tendency to permanently enlist certain blocs of voters into their party. When some social problem arises the first option is always to spend more money whether they have the economic and financial basis to do so or not.  The temptation to spend everything a given country owns is illustrated by FDR who went to war and transformed a nation into a military machine resulting in the death of 400,000 US soldiers and more civilians and a debt equal to the U.S. GDP. The ostensible excuse was to save us from Fascism but we inherited a nuclear cold war for a half century after that with the Soviets and that was also costly. Many believe that this massive spending was part of a grand plan by Roosevelt to aid Europe, ignoring or modifying our several Neutrality Acts[1] while antagonizing Japan and deliberately provoking a war.  The tragic predicament here was that FDR was expertly counseled that another involvement in a second Great War would mire the US deeper into the enduring depression after the termination of hostilities and we would be stuck with massive debts if we won. He was prepared to sacrifice our entire economy perhaps for decades for selfish geopolitical reasons, many born of arrogance, mental illness or corruption. Nothing could be viewed as more irresponsible, but Germany, England, Italy, France and other countries have also willingly followed this path toward financial oblivion. A careful reading of the 1957 book: War and Aftermath 1914-1929 by Pierre Renouvin enlightens us on diplomacy and the unavoidable events that led to World War 1, the conduct of World War 2 and the many wars of the 1920s.[2] FDR was not that different from Wilson, the Kaiser, Lloyd George, Winston Churchill and the leaders of Germany, Austria, Italy and most European states. Such detailed histories do not offer us much solace or hope that governments can make reasonable decisions about spending, debt, taxation or war.

The current financial crisis, which bloomed up from asset bubbles such as ‘affordable housing’ and its construction counterparts in the rest of the world, has apparently ‘forced’ astronomical government spending in the US and the EU and elsewhere. Many countries now have debt-to-GDP ratios near unity meaning that the ability to pay off this level of debt is more than problematic and becomes impossible for all players in this game. Many so-called economists such as Paul Krugman[3] see no major problem with massive spending that would exceed 100 % of our GDP and beyond but offer no scenario to cover this debt later. Now in California[4][5][6] and New York, along with several other tottering states, all cesspools of boiling, caustic spending, we find a rush to escape default that includes the sale of junk-grade bonds, growing and taxing marijuana and tactless begging for alms. There is no visual insinuation of prudent spending cuts that might mitigate the debt anywhere in the world as far as I can see.

At a time of high debt for dozens of nations we are then pressed with massive new spending and taxation schemes like the Cap and Trade taxes, the switch to green products and some new energy basis and for the establishment of a US national healthcare of the single-payer sort. How can this be financed? There is no way given our 14 trillion dollar debt limit soon to be increased. The new green products will certainly lead to more debt and boosts financial risks by creating new debt-driven asset bubbles. This an energy substitution scam that only decreases efficiency because an equivalent amount of energy will simply cost more. Places like California that is 64 billion dollars in debt with an additional projected current 20 billion dollar deficit [20% or so of their budget] that must be financed somehow and the implied notion that they will cut spending is apparently not acceptable to their state government.[7] Thus, California is heading toward financial oblivion created by massive debt they cannot repay or even service from state tax revenues and are simultaneously funding massive green projects that act as economic gangrene and rots out the financial infrastructure of the state.  The novel solution to this is to grow, sell and tax dope and to raise taxes wherever possible except on homes which are protected by the infamous Proposition 13. A philosophy like this drives out tens of thousands of high-wage earners every year from the state and tax revenues plummet. Isn’t this strange? No, not for the far left.

In the new book This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff we find dire warnings about sovereign debt, financial crises and lengthy and tearful repayment schedules for those governments who spend too much.[8] A review of the financial history of mostly Europe but also including other places since 1500 is offered by Niall Ferguson in the book Ascent of Money.[9] The conclusion derived from a careful reading of these studies and a recent survey of the debt in the US and EU is that governments will not sacrifice their political power and address these financial problems but are willing to spend or borrow us all into terminal debt. The outline of spending by president Obama in the US now appears to first grow government and then address unemployment by deficit spending.  Some states in the US and nations in the EU are better off financially than others and the weak sisters are now forcing some difficult decisions by the group and solutions may result in the disintegration of the fabric of such organizations. Many states are now in serious financial conflict with other members of their groups and the continuation of such an arrangement is not reasonable.

There are strong parallels between Greece and California in their respective relations to their common economic groupings.

A view by Ambrose Evans-Pritchard

“We can argue over whether Greece, Portugal, or Spain are at risk of being forced out of the euro. But there is another nagging question: whether events will cause Germany and its satellites to withdraw, bequeathing the legal carcass of EMU to the Club Med bloc.”[10]— Should Germany bail out Club Med or leave the euro altogether? By Ambrose Evans-Pritchard

Published: 7:00PM GMT 31 Jan 2010 [Emphasis is mine in all quotes.]

Here, the ensemble of sovereign nations that comprise this experiment in Europe [including the island nation of the U.K.] is in jeopardy because of massive deficit differences and the perceived ability to pay off debts. Thus, we have a world war of debts and the major offensive weapon is the threat of sovereign default.

Governments can be forced to be financially prudent?

“In an assessment closely watched by markets weighing up Greece's credibility as a debtor, the European Union executive put Athens on a short leash, ordering it to submit an interim report on progress in reducing its huge deficit by mid-March.

It said the plan to cut the budget gap from 12.7 per cent of gross domestic product (GDP) in 2009 to below 3 per cent in 2012 would not be easy to implement, and Greece must be ready to make further deep fiscal adjustments.”[11]—EU forces Greece to take more action as it endorses plan to cut deficit [Emphasis is mine in all quotes.]

This ‘order’ has neither teeth nor force. The tentative conclusion here is that governments will not rationally handle their debts and will sacrifice their citizen’s lives or assets to survive.  This is called cleptocracy in the language of the state versus the citizen wars. There is rarely a superior political reason to cut spending so social programs take on some of the attributes of leprosy as they tend to spread the infection and hang around for eternity. Expulsion from some union as in the EU case is an option, but it requires that such expellees print their own currency and deal with legacy debts denominated in euros. This is a complex opportunity for Greece and Spain and Ireland.  Argentina[12], as a test case, merely conjured a new currency and notified creditors that they would pay off all foreign debts with the new fiat paper. This infuriated the creditor world, but they seemed to get away with it.

The study of governments and their spending habits, especially in time of war or financial crisis, leads us to a more ominous culmination: The citizens and their wealth and welfare seem to appear last in a list of priorities. There are probably exceptions to this such as Singapore, Israel, Norway, Sweden and smaller places, but the current spending by the Obama administration is essentially terminal and unsustainable in any objective terms, since there is no available plan to deal with either the debt or the spending or even the Fed’s off-balance sheet spending however much that might be as we cannot find out. The Social Security system was put off-budget so FDR could tax the public and it wouldn’t appear in the budget and be a threat to politicians of the New Deal and he could actually borrow money from this system and use it for political reasons. This is a Ponzi scheme, of course, and the politicians got away with it because of their promises to a later generation.[13]  That system is now dead broke and wallowing in some 30 trillions of liability.

The Greeks are now mired in several rounds of strikes[14] as the citizens and bond holders do not really believe that their government can get the economy and debt back on balance.  This favors leftist governments, like Greece, as their major voting blocs threaten to destabilize their own party and require immediate attention. The options for the opposition party are thus not so trouble-free because any crash in the system with a rapid change in government only puts the onus to fix things upon the newcomers as in the case what happened when president Obama was elected. The opposition party, in general, is in no position to fix the problems without more spending and thus we get back into the debilitating circular debt-driven rat race. People like Paul Krugman welcome a devalued dollar and nationalized banks and his views are powerful enough to form or augment policy in Washington.[15] Not everybody in the world buys into this:

The Chinese respond in this manner:

“Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.””[16]—wild rant by Luo Ping, a director-general at the China Banking Regulatory Commission [Emphasis is mine in all quotes.]

In the German case we can examine this theme:

“"Politically," said Bundesbank chief Axel Weber, "it's not possible to tell voters that they are bailing out another country so that it can avoid painful austerity measures that they themselves have gone through. Such aid, whether conditional, or – even worse – unconditional, is counterproductive."”— Should Germany bail out Club Med?

Debt is a sensitive issue especially when persons other than the debtors are expected to pick up the tab for frivolous spending. We can extend this theorem to the U.S. case where some states are out of control in terms of importing poverty  in the form of illegal aliens to bloat their ballot boxes and are also spending far and beyond their means to collect tax revenues. This is mere government building. Why should states like Texas or Alabama take on higher taxes to rescue California or New York when they keep neat books and run a surplus occasionally? Charity has its limits. States like California and New York would not return the favor in reversed circumstances.

“Europe will have to embrace "fiscal federalism" if it is to hold monetary union together. That is when we will probe the limits of EMU solidarity. Hedge funds are betting that Berlin will pay to ensure stability. No doubt Chancellor Angela Merkel is of that mind, but the Free Democrats are not, nor are Bavaria's Social Christians, or the Bundestag's finance committee. Economy minister Rainer Bruderle said last week that there would be "no bail-outs" regardless of risks to EMU. Is that just brinkmanship?”—Should Germany bail out Club Med?

It always works out this way in my not-so-humble view. My experience tells me that leftist governments will crash any system to get control because they cannot effectively compete in the capitalist world. The New York Times always recommends, with superlative authority, increases in taxation and spending in any and all cases.[17] Our government believes that they can micromanage business--hence the economy--through taxes designed to force policy and that the all citizens have fundamental ‘rights’ to property [affordable housing], health care and jobs. This is a corruption of capitalism and has never functioned well because it offers goods and services for no effort on the part of the low class except their votes. Command economies [18][USSR, Cuba, and N.K.] never work out because of two factors: [1] the level of financial expertise in leftist elite political groups is always minimal while mostly openly hostile to commerce and lacking in essential cognitive attributes in many key areas and [2] they cannot deduce the correct price or supply level for any service or commodity and thus engender excesses and shortages and waste what money they have.

Government will fail at their tasks and unemployment will continue to rise until Americans realize what this Obama Outrage is all about. Home equity has been permanently lost and cannot be repatriated by TARP or any other phony government program, and national programs to ‘create jobs’ are only government tax or debt transfers toward political objectives and create no private sector jobs—the basis of economic growth in capitalism. When unemployment or inflation soars, the voters  will react at the polls or even before that with various revolts.[19] Debt, inflation or strikes frequently topple governments and the opposing political wings frequently trade positions of power in such cases. We are seeing signs of this in the recent elections in Virginia, New Jersey and Massachusetts. The voters were mad at George Bush, but are now angrier with Barack Obama.

The Debt Monster:

“Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.”[20]-- Société Générale tells clients how to prepare for potential 'global collapse' Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction. By Ambrose Evans-Pritchard 18 Nov 2009 [Emphasis is mine in all quotes.]

If we sort out those ‘rich’ countries from debtor nations and the poor countries we can view a potential scenario whereby China, Brazile and perhaps Australia now become overseers and bankers to those countries who may default or  just print money until those unfortunate citizen’s wealth is debased as may happen in the US, U.K. and parts of the EU. This only extends so far because the amount of capital is limited and thus will be rationed according to business predictions. Thus the extraordinary situation that the United States was in just after World War 2 is being handed to China and perhaps India and Brazile. But, can we expect these financially solvent countries to act as bankers and supply the west with capital so they can fix their economies? It is enigmatic that China [PRC] has now split their political and economic leadership into separate corridors mimicking Fascism in certain terms and now reigns as the chief creditor on the planet given that they were fiercely anti-capitalistic only a few decades ago.

This cannot turn out well and I see massive defaults on the financial horizon. Several cases are less than hopeless like California, New York and Greece and Spain not to mention Ireland and Italy. I see the coming age of debt defaults[21]because nobody can refinance this mess we are in now. The debt wars will soon begin.

rycK [a 5^th generation Californian in exile]

Comments to: ryckki@gmail.com