Cutting Expenses to Borrow More Money

It is very cold in London. “This is the coldest it’s been in 25 years,” said a colleague.

People are bundled up in scarves and hats. There are patches of ice on the sidewalk. Heck, it could be Baltimore or New York.

London is usually milder. It snows occasionally, here. But rarely do you get such a severe cold snap.

Still, we take the world as we find it.

So, let’s see… What do we find in the financial world this morning…


The prime minister of Spain gave speculators a little advice. Don’t sell short Spanish debt, he said.

As far as we know, government officials give investment advice that is at least as unreliable as the advice you get from anyone else. But that doesn’t mean Jose Zapatero will be right.

As we go to press, investors are not paying much attention. They seem to think they can find a better place for their money than Spanish bonds.

But how cometh the elected chief of a major European government to be giving financial commentary? That’s our job. Here at Markets and Money nobody pays us for it. But we do it anyway.

The other night, we had a dream…that we had been elected to Congress. It was a nightmare really. We wanted to demand a recount. We arrived in Washington to take our seat and we couldn’t figure out how the voting machine worked. The other members were voting on expensive, preposterous bills. We wanted to vote “no.” But we couldn’t make the voting machine work. We’ve never been very good with gadgets, but this was maddening. Hour by hour, they were proposing and disposing…while we couldn’t do anything about it. They were running up trillions in new financial obligations…more wars…more health care benefits…more farm subsides… More meddling. More world improvement. More intervening.

The US was already broke. Still, they kept on spending.

Hey, wait a minute… This was no dream. This was no nightmare. This was real life!

The difference between Europe and the US is that the Europeans have begun to get their voting machines to work properly. The latest news is that the Irish have committed themselves to lop another 20% off of state spending. The Greeks, Portuguese and Spanish are all headed in the same direction. They’re acting like responsible citizens. In order to convince investors that they’re good for the money, they’ve got to cut spending.

If investors lose confidence, they won’t be able to borrow money at low interest rates.

Hold on… Let’s get this straight. They’re cutting expenses so they can borrow money?


If they don’t cut expenses, they won’t be able to borrow at decent rates, right?

And then what? Then they’ll have to cut expenses even more.

So why not just balance their budgets now, so they don’t have to borrow at all?

What, are you some kind of nut, dear reader? Balance the budget? Spend only what they can raise in taxes? Don’t make us laugh.

In America, federal deficits are projected from here to eternity. There is no plan to balance the budget ever again.

At least the Europeans are trying to get their budget deficits down – to 3% of GDP. Ireland pledged to do so as part of its rescue deal. And to cut 25,00 jobs from the payroll – 10% of its entire workforce.

That was enough to bring out the protestors – even in this bitter cold.

And more thoughts…

Let’s look at how the European debt situation developed.

When Europe brought out the euro in 2002, it changed everything. All of a sudden, you could lend money to Ireland or Greece without having to worry about the Irish pound or the Greek drachma. They were all using the euro, which was managed by the Germans. So why not lend to one of these peripheral states of Europe and earn a little more interest?

Things began to change fast. Interest rates in Spain and Ireland dropped. People started buying houses. Builders began putting them up all over the place. Prices were going up. It was similar to what happened in the US, but amplified. Ireland, for example, had always been a relatively poor country. But by 2007, rising house prices had turned the Irish – on paper – into the richest people in Europe.

Bust follows boom. Always has. Always will. And when the bust came to Europe, its banks were holding a remarkable amount of mortgage debt. The trouble was, debtors didn’t have enough income to pay it. In a panic, investors dumped bank stocks…figuring the banks would go bankrupt.

But in stepped governments. They tried to halt the correction. They gave guarantees. They made commitments. The told the world that they would make sure senior lenders got their money. But how? The governments were deeply in debt themselves. But that didn’t stop them. They went ahead – to varying degrees – and guaranteed bank debt.

And so here we are. Ireland guarantees its bankers’ debt. Europe guarantees Ireland’s debt. And who guarantees Europe’s debt?

And why do they bother?

Why not just let the speculators take their losses?

“There will be no haircut on senior debt,” said Olli Rehn, EU commissioner for economic and monetary matters.

They made the decision to invest of their own free will. It’s gone against them. Shouldn’t they be permitted to learn from their mistakes? Why not?

We have never heard a good explanation. And we have a suspicion that no one else ever has either. Instead, it is more of an implied threat…whispered…too terrible to think about. “Pssst… They’re TOO BIG TO FAIL.”

Oh yeah? Why? What, exactly, would happen? Weak banks would fail. They’d be quickly taken over by stronger banks. Government debt that was too closely connected to the weak banks would fail too. Paper currency may even collapse, if people feared “the whole system” was coming down.

Governments may have to come out with a gold-back currency – one that people could trust. Then, unable to borrow more, they would have to live within their means. And the surviving banks would know better than to take risks bigger than they could cover. Would that be so bad?

*** Well, this is a first. Danny Ortega, president of Nicaragua, has given casus belli to Costa Rica, on the basis of Google maps. He looked at Google and realized that part of what is now Costa Rica should really be Nicaragua. So he sent armed Nicaraguan forces to claim the land.

At least, that’s how we heard the story on CNN en Espagnol. Our Spanish is far from perfect, so we might have gotten the details wrong. But the gist of the story was confirmed for us at Thanksgiving dinner.

“Hey Dad,” said one of the boys, “I hear you’re going to Nicaragua for Christmas.”


“Uh… And you’re going to fly into Costa Rica, and then cross the border?”


“Do you realize that you could be going into a war zone? Danny Ortega is getting a lot of flack in the country, because his policies don’t work very well. And people don’t like the fact that he is twisting the constitution to suit his own purposes – just like his pal Chavez. And he has an election coming up next year. So he’s stirring up trouble with Costa Rica in order to get the yahoos behind him.”


Bill Bonner,
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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