No Vote On Rotten Debt

The Dow rose 208 points yesterday. Hardly a day goes by without a 100+ point move. We’d be disappointed with anything less.

What these extreme moves are telling us is that investors are very uncertain. They know there’s a lot at stake. And they don’t know which way it will go.

Yesterday and the day before they were betting that Europe would muddle through. Their optimism seemed justified as Greek premier George Papandreou dropped the idea of holding a referendum.

‘Hey, George,’ said the bankers… ‘You can’t let the voters decide something like this. You know what they’ll say. They’ll say they don’t want to pay our damned debts. And what are we going say?’

Of course, it’s not that simple. When the going was good, the Greeks were able to borrow a lot of money at German interest rates. Anybody who bothered to look at the history of Greek debt would have known that it was a bad bet for the lenders. The Greeks have been in default during about 1 out of every 2 years…ever since they gained independence in 1828. The Greeks are good at gaming the system, having a good time…and living well. They stay up late…but they retire early!

Who can blame them for taking the bankers’ money? And who can blame them for not wanting to pay it back? The bankers should have known better than to lend to Greeks!

At the heart of the problem is a lot of debt that really cannot be repaid. The more you squeeze an economy with austerity measures…the less juice you get out of it. The more you try to pay…the less you are able.

The debt is bad, rotten…it has turned…it is way past its “sell by” date.

The smart thing would be to let the market handle it. Greece goes into default. The banks go broke. The debt is ‘paid’ by the people who ought to pay it — the people who lent it to the Greeks in the first place.

Naturally, the bankers…and the people who run government finances…don’t want that to happen. They’ve invested their careers in keeping the debt-ball rolling. They want to see it continue…at least until they retire.

So, they push it. And clear the path ahead — by taking obstacles, such as democratic referenda, out of its path. Democracy is great when the voters give you the answer you want. When they don’t…forget it.

Here at Markets and Money, we’ve never had much truck with democracy. After all, why should a bunch of strangers get to tell us what to do? But there are some things it is good for. Deciding the colors of the national flag, for example. Or the tune of the national anthem. Or who will represent the country at the Miss Universe contest.

Otherwise, we don’t need no stinkin’ democracy… Better to let people decide for themselves how to organize their lives.

But there’s no point in telling people our creed. They don’t care. Besides, they want someone to tell them how to organize their lives.

The problem in Greece ought to be a private matter. It’s between debtors and creditors. They can work it out between them. Always have. But if you’re going to try to bail out the creditors…by making the citizens pay…you should at least have the courtesy to let them have a say in it!

Meanwhile, back in the USA…Bloomberg reports that the number of really poor people is increasing:

Economy Drives More Americans to Extreme Poverty

The number of Americans living in neighborhoods beset by extreme poverty surged in the last decade, erasing the progress of the 1990s, with the poorest areas growing more than twice as fast in suburbs as in cities.

At least 2.2 million more Americans, a 33 percent jump since 2000, live in neighborhoods where the poverty rate is 40 percent or higher, according to a study released today by the Washington-based Brookings Institution.

The report, which analyzed Census Bureau data, shows the extent to which the US lost ground in efforts to fight poverty during a decade marked by recessions, including the deepest slump in seven decades. The Midwest and South were hardest hit, suffering from manufacturing job losses and the housing bust.

One of the interesting things to come out of the study was that poverty is no longer just an inner-city problem. It’s moved to the suburbs. A few years ago you could escape poverty by moving to the suburbs. Now, you’ve got to escape from the suburbs too.

We have been exploring the zombification of the US economy. Major industries — finance, health, education and defense — have been taken over by zombies, parasites whose real interest is to transfer wealth to themselves, from the part of the economy that remains productive.

As the economy becomes more zombified, the part of it dominated by these non-productive industries increases, leaving fewer resources for the productive part. And as the productive part weakens, so does the entire economy’s ability to produce real wealth, or grow its way out of debt.

How much of the economy is now in zombie hands?

Cindy Williams, of MIT’s Security Studies Program, figures that the US now devotes about 6.2% of its GDP on “defense” and related activities, including international affairs, homeland security, veterans affairs, and intelligence. She was not trying to figure out how much the nation could spend effectively, only on what it could afford. That, she calculates, is between 2.1 percent and 3.4 percent of GDP.

If this is true, we could say that about 3% of GDP is either wasted, unnecessary, or unaffordable. That’s about $450 billion right there.

As to health care…we can assume that the standard of health care is acceptable in those countries where people live much the way Americans live…and tend to live longer. In those countries — mostly in Europe — people spend about half as much as they do in the US, giving us an overspending of about $2,500 per person, or about 5% of GDP…or about $750 billion.

Education expenditures are twice what they were, in real terms, when US students got the same results they get now. The US currently spends about 6% of GDP on education. This suggests that 3% is wasted. That’s another $450 billion.

As for finance, it is impossible to measure how much of it is worthwhile and how much is just money-shuffling and debt mongering. But we will take a guess anyway. In 1940, the financial industry accounted for just 2% of the economy. By 1960, it was about 3%. Today, it is 8% or 9%. Before the big run-up in debt began — in 1980 — the financial industry probably averaged about 4% of GDP. The extra 4% is arguably wasted…it merely transfers money from the wealth-producing parts of Main Street to the wealth collecting parts of Wall Street. Four percent of GDP is another 600 billion, or so.

Adding it up, education, health and defense together may be costing the nation $1.65 trillion — almost exactly the amount of the 2011 deficit. In other words, if the squandering were stopped, the US budget would be in balance.

Add the waste in the financial industry, and you are up to $2.25 trillion — or 15% of GDP. Compare that to the IMF’s calculation of total national savings at 10% of GDP. (We don’t know how the IMF got this figure…it seems high.) And now let’s return to our small farmer to try to understand what these numbers mean.

The small farmer wants to get richer. So, he creates a surplus of 10% per year. This he will invest in greater production so as to increase his output (his wealth) year after year. But he invests poorly. He plants in swampy areas. His seed gets wet and rots. Birds eat his grain before he harvests it…then, he waits too long, and much of the harvest is lost.

Imagine that he squanders 15% of his output. Result? He grows poorer, not richer, at a rate of 5% per year.

That is the price of a zombie economy. You get poorer. If the economy appears to grow, it is usually growth in unproductive industries. If people appear to live well, it is because they are living off the accumulated capital of the past.

At the present pace, over the next 10 years, the real value of America’s output will fall nearly in half. Measured in terms of output, Americans will be only half as wealthy as they are today.

Get ready for it, dear reader.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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