It was the best of times. It was the worst of times.
It is certainly the best of times for economists with a sense of humor. Absurdity and cupidity are right out in the open where you can laugh at them. Today’s financial events – predictable consequences of clownish meddling and currency debasement – are funny enough. The official reactions practically double us up. Central bankers and finance ministers are proudly doing things that they used to be punished for. Henry II brought his bankers together in 1124. Those found guilty of debasing the coinage – an earlier form of quantitative easing – were either castrated or they had their right hands cut off. What can you say about that kind of monetary policy? It worked.
But as for today’s monetary system…it is the worst of times. Not in 3,000 years, says Nobel prize winner Robert Mundell, have we experienced such “monetary instability.” What? What about when a German Mark lost nearly all its value in a single day? What about when the French replaced the old francs for new francs at 100 to one? What about the Hungarian pengo hyperinflation of 1947? Currency crises come around much more frequently than Mundell, the “father of the euro,” thinks.
In England, the government of David Cameron has announced the biggest cutbacks since WWII. He’s going to lighten the UK government expense load by 81 billion pounds over the next 5 years. Nearly half a million government employees are to be given the heave-ho. So far, the British public is taking the news like a donkey informed about original sin. “Carry on!” they said to each other as if it were the Blitz, as if there were something vaguely noble at stake.
In France, the government is implementing pension reforms, the highlight of which is to increase the retirement age for government employees from 60 to 62. This seems like such a timid reform. Anglo Saxons wonder what the frogs are so upset about. But they’ve taken to the streets. Early this week, one out of four French gas stations were out of fuel. Hundreds of autos were torched. Even schoolchildren were on the barricades. At least most of the manifestants were in it for a good reason – to get money. The deluded students thought they were upholding a matter of principle.
On the surface, the two nations seem to be taking two very different approaches to solving a problem. The English buckle down. The French rise up. The English submit to reality. The French stick to fantasy. In London it is the season of Light. In Paris, Darkness descends before noon.
“What separates civilized man from the wild beasts?” they ask in The City.
“The English Channel,” comes the reply, followed by a good chuckle. On one side of the water, it is the spring of hope, or so they believe. On the other, it is winter of despair. And yet, they all hope to go to Heaven and sit on the right hand of God. That they are headed in another direction is the point of today’s reflection.
The real problem in both countries is the same. The welfare democracies made promises they can’t keep. “Government can have only two legitimate purposes,” said William Godwin, “the suppression of injustice against individuals…and the common defense against external invasion.” Beyond that the decline in marginal productivity of government spending is remarkably steep. The courts and police protection have real and immediate payoffs. Retirement, unemployment, bailouts, payoffs, tariffs, subsidies, free food and lodging, committees, councils, regulations – all quickly have perverse outcomes. More and more people switch from producing to conniving and chiseling. The more something for nothing is available from the government, the more people do nothing useful to get it – including getting control over the government itself.
In both England and France, the spending cuts on the table so far are too little, too late. A three percent deficit was regarded as such a serious threat to the financial integrity of the European Union that member states who surpassed that level were supposed to lose their right to vote. France runs a budget deficit of nearly 8% of GDP. Its public expenses are about $1.5 trillion per year. Even if the projected savings of $96 billion by 2018 (when the pension cuts kick in) were realized, the amount is trivial. But so are the savings to be realized by the Cameron government – also trivial, and likewise programmed so the presumed benefits are realized sooner while the costs are suffered later.
But at least give them credit for pretending. Over in the USA, the Obama government shows no interest in jettisoning any of the accumulated ballast of the last half a century of boondoggles, bailouts and bunkum. Instead, with new health care and regulatory programs, it is adding to them. The current budget deficit is close to 10% of GDP, with no plausible plans to reduce it significantly. Instead, the political elite dream that they will “grow their way out” of their financial problems.
They count on stimulus to rev up their economy. But what do they have to “stimulate” with? Only the same quack elixirs that got them into trouble in the first place. The government either spends more money…or creates more of it to spend. More fiscal stimulus is off the table in Britain, and probably in America too. Instead, they both aim to get by with a little help with their friends at their central banks. Ben Bernanke has made it clear that he is ready to provide more unconventional stimulus – via money printing. The smart money is betting that Mervyn King will do the same.
And the really smart money is getting out of town.
For Markets and Money