Bleeding Europe — MY COMMENT

by John Brian Shannon

In one of Paul Krugman’s latest blogs (which are always great reads) entitled “Bleeding Europe” our favorite Professor takes the side of all the Eurozone nations — except for the one that has to pay the bills — Germany!

Which is fine, because those countries have been beaten up by everyone including, well, everyone. They need as many powerful voices on their side as possible, so that they can continue to run huge deficits forever — and have Germany foot the bill.

And, why not? It’s all Germany’s fault for WWI and WWII, isn’t it? Ergo, they are punishing Germany and it feels good!

The fact is, that all of the people who started both wars are long dead, as are most of the brave soldiers who were told to fight brother Europeans because the politicians of the day on both sides couldn’t get their diplomatic acts together.

But it’s a great relationship while it lasts, isn’t it? Spend like drunken sailors and have Germany’s grand-kids pay for it and if they so much as dare to hint this is a bad deal, then browbeat them with WWII-era propaganda until they stop.

It is not a sustainable relationship — even for the Germany-haters. Why? Because the combined debts and deficits of southern Eurozone nations are so large, soon even Germany won’t be able to cover the losses at the casino and they will all sink into the economic abyss together. (Then it will be; “Hey, South Korea, wanna buy the Eurozone, cheap? Their assets are mortgaged to 200% of their value, but maybe you could kick-start it.”)

It is not a sustainable relationship for 21st-century German taxpayers either, all of whom have nothing to do with WWI or WWII by the way, and are tired of paying for the neighbour’s “no wine is good enough for us” trips to the casino!

But in the end, all of this will come to a crashing halt when German voters have had enough of footing the bill for spendthrift nations who badmouth Germany at every opportunity.

And then watch what happens. Not only will the good ole days of eat, drink and be merry on Germany’s tab be well and truly OVER, the credit-ratings agencies themselves will dictate what kind of budgets countries like Greece are allowed to run. A sudden transition to balanced-budgets would be quite the shocker! If you happen to be visiting southern Europe when that happens — be sure to duck.

I think German Chancellor Angela Merkel is the smartest woman on the planet. For now, she is paying their way, biding her time, no doubt biting her tongue and just waiting for the almost inevitable day that the credit-rating agencies finally take control of overspending Eurozone member-state economies.

If and when that happens she will suddenly be recast as the sweet and gentle fairy-godmother of Europe who convinced her countrymen and women to pay the bills for her free-spending southern neighbours for as long as humanly possible. Sie haben meine Bewunderung, große Dame!

JOHN BRIAN SHANNON

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Why Laurence Kotlikoff sees Economic Meltdown for the U.S.A.

(CBC Radio One) The fiscal cliff that overhangs Washington, is a legally-binding 600-billion dollar tax increase and spending cut package, which automatically takes effect unless another solution can be found, agreed, signed and enacted by January 1, 2013.

But according to Laurence Kotlikoff, that 600-billion-tax-increase-and-spending-package is a mere drop in the bucket compared to the 222-Trillion-dollar fiscal gap in the U.S. economy – which is also here right now, not in some distant future.

Kotlikoff believes Washington has been running a Ponzi scheme for six decades and higher taxes and belt tightening won’t be enough to stop the coming Greek tragedy.

If U.S. Senator Joe Lieberman is right, the U.S. economy will be side-swiped on January 1st by 600 billion dollars worth of tax increases and spending cuts. While that would certainly shrink the country’s annual budget deficit, most independent observers say it would also push the U.S. far into recession, and maybe take the rest of the world down with it.

Laurence Kotlikoff is an economist at Boston University and the author of several books, including Clash of Generations. He also launched a Presidential run in this last election as the candidate for the advocacy group Americans Elect, but ended his campaign last spring. CBC Radio One – Gord Westmacott

Listen to this fascinating ‘The Current ‘ segment produced by CBC Radio One Gord Westmacott. (Courtesy of CBC) Laurence Kotlikoff: Is the United States Broke?

JOHN BRIAN SHANNON

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Last Chance for the U.S. Economy!

by John Brian Shannon

This blog examines Canada‘s debt and deficit-cutting success of the 1990’s and early 2000’s which improved Canada’s credit rating, lowered borrowing costs for the government and when combined with a new 7% nation-wide Goods and Services tax (1990) allowed many job-creation projects to be funded which lessened the blow of the government’s (then) austerity program.

Read “How Canada Cut Its Deficits and Debt” — by former Prime Minister of Canada Paul Martin (prior to that he was Finance Minister) who famously took Canada from second-worst among the G-7 countries to the most stable economic performer in only a few short years. The above link takes you to a downloadable PDF document. It is a must-read for students of macroeconomics.

Paul Martin, 21st Prime Minister of Canada
Paul Martin, 21st Prime Minister of Canada (Photo credit: Wikipedia)

The Fiscal Turnaround

“When the Liberal Party took office, Canada’s deficit and debt were by far the worst among the G-7 but for one, and our level of foreign debt was the highest of the industrial world. Indeed, the Wall Street Journal had publicly dubbed Canada all but bankrupt. Four years later, our debt-to-GDP ratio was dropping like a stone. Our financial record was second to none and Canada’s deficit was no more.” — Paul Martin quote in The Magazine of International Economic Policy — The International Economy.

Many American friends of mine, are asking how the U.S. can solve its massive U.S. deficit and debt problems — problems which seem almost as insurmountable as going to the Moon was viewed in the early 1960’s.

The fact is, these problems have been solved in Canada and they can be solved in the United States. What has been lacking up until now, has been the will to act. Once elected, leaders who are empowered by their electorate to slay the twin dragons of debt and deficit could do so relatively quickly.

Some final advice from the Right Honourable Paul Martin former Prime Minister of Canada, the man most directly responsible for solving Canada’s historic debt and toxic deficit problem.

“The final lesson I would draw is that if deficit reduction is to be a priority, then it has to be a “national” priority.

When Canada’s debt ratio hit 70 percent, it was assumed by most economists that we had crossed the tipping point. The United States is there now, and the IMF projects that within eight years it will hit 115 percent. [!]

These are serious numbers, and yet the so-called deficit debate in the United States is not about the deficit at all. It’s about winners and losers.

One thing to remember from the Canadian experience it is that for deficit cleansing to succeed, there can be no winners while most people are losing. If deficit reduction is to gain public support, it requires a united effort—in other words, it must be a truly national exercise.” — Paul Martin quote in The Magazine of International Economic Policy — The International Economy.

Related articles

JOHN BRIAN SHANNON

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The Canadian Austerity Success Story

The Canadian Austerity Success Story | 12/07/12
by John Brian Shannon John Brian Shannon

The Canadian success story on deficit elimination, debt reduction and significantly, strengthening the economy by adding jobs and improved economic performance during troubled economic times has been well-documented.

The Canadian icon known as MacLeans Magazine featured an outstanding piece by LEAH McLAREN in the October 10, 2011 edition entitled I told you so – which covered Prime Minister of the UK, David Cameron‘s speech to a joint session of the Canadian Parliament (both the Senate and the House of Commons) where PM David Cameron made a number of positive comments regarding Canada’s economic success.

Cameron commented:

“Canada got every major decision right” in the past few years of global market turmoil. He lauded the strength of both the Canadian banking system and our economic leaders, who, he said, “got to grips with its deficit” and were “running surpluses and paying down debt before the recession, fixing the roof while the sun was shining.”

Cameron’s admiration for Canada’s relatively peachy fiscal position stands in stark contrast to his dim view of his Eurozone neighbours. On the topic of Europe and the U.S. getting their own houses in order, Cameron said; “This is not a traditional, cyclical recession – it’s a debt crisis…”

He went on to say;

“When the fundamental problem of the level of debt and the fear of those levels, then the usual economic prescriptions cannot be applied.” – MacLean’s Magazine.

Read the entire article here…

MacLean’s is not the only publisher to write on this topic. Canada’s Globe & Mail have also published articles discussing the Canadian economic success story of the 1990’s and early 2000’s.

A seminal article by LOUISE EGAN and RANDALL PALMER ran in the Nov 21, 2011 edition of the G&M entitled The lesson from Canada on cutting deficits — a short excerpt of which appears below. Please take the time to read and save the entire article.

“Finance officials bit their nails and nervously watched the clock. There were 30 minutes left in a bond auction aimed at funding the deficit and there was not a single bid.

Sounds like today’s Italy or Greece?

No, this was Canada in 1994.

Bids eventually came in, but that close call, along with downgrades and The Wall Street Journal calling Canada “an honorary member of the Third World,” helped the nation’s people and politicians understand how scary its budget problem was.

“There would have been a day when we would have been the Greece of today,” recalled then prime minister Jean Chrétien, a Liberal who ended up chopping cherished social programs in one of the most dramatic fiscal turnarounds ever.

“I knew we were in a bind and we had to do something,” Mr. Chrétien, 77, told Reuters in a rare interview.

Canada’s shift from pariah to fiscal darling provides lessons for Washington as lawmakers find few easy answers to the huge U.S. deficit and debt burden, and for European countries staggering under their own massive budget problems.

“Everyone wants to know how we did it,” said political economist Brian Lee Crowley, head of the Ottawa-based think tank, Macdonald-Laurier Institute, who has examined the lessons of the 1990’s.

But to win its budget wars, Canada first had to realize how dire its situation was and then dramatically shrink the size of government rather than just limit the pace of spending growth.

It would eventually oversee the biggest reduction in Canadian government spending since demobilization after the Second World War. The big cuts, and relatively small tax increases, brought a budget surplus within four years.

Canadian debt shrank to 29 per cent of gross domestic product in 2008-09 from a peak of 68 per cent in 1995-96, and the budget was in the black for 11 consecutive years until the 2008-09 recession.

For Canada, the vicious debt circle turned into a virtuous cycle that rescued a currency that had been dubbed the “northern peso.” Canada went from having the second worst fiscal position in the Group of Seven industrialized countries, behind only Italy, to easily the best.

It is far from a coincidence that the recent recession was shorter and shallower in Canada than in the United States. Indeed, by January, Canada had recovered all the jobs lost in the downturn, while the U.S. has hardly been able to dent its high unemployment.

“We used to thank God that Italy was there because we were the second worst in the G7,” said Scott Clark, associate deputy finance minister in the 1990’s.

Canada’s experience turned on its head the prevailing wisdom that spending promises were the easiest way to win elections. Politicians of all kinds and at all levels of government learned that austerity could win.”  read more…

For those unfamiliar with examples of successful austerity, Canada holds great promise. There are others to discuss in the coming days – which will illustrate austerity can actually lessen the unfavourable effects of decades of excessive spending by governments and improve the economic position of a nation.

Nobody Understands Debt by Paul Krugman | MY COMMENT

Nobody Understands Debt  NYT
by Paul Krugman Jan 1, 2012

MY COMMENT — What is wrong with historically low interest rates in America? If not for those low rates, twice (or, even ten) times as many American homeowners might have lost their homes due to higher payments caused by — yes, higher interest rates!

Is that any way to stimulate the economy?

Paul’s second point, — “Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing.”

Take a good look around, citizens are already impoverished on account of huge government deficits and government debt. It’s called compound interest that the government pays to foreign lenders to finance American government overspending and it goes on decade after decade.

It is money that could have been spent in America for the benefit of U.S. citizens — but instead was spent to pay astronomical interest payments to Japan, Europe, Canada and recently, China.

You err in failing to account for the difference between the situation that exists now — and the situation which would exist if there were no government debt/deficit at all.

IF all the money that has been thrown away as interest payments on federal government deficit and debt financing — had been spent wisely — just imagine all the job-creating national infrastructure projects that could be continuously running in America. We’re talking mega-billions of dollars here. You know how compound interest works.

In practice, it goes like this; supposing we are talking about the paltry sum of 100 Billion dollars:

Which is a better use of 100 Billion dollars from America’s point of view?

A) Pay it to a foreign lender to cover compound interest payments.

B) Use it to build a job-providing infrastructure project.

Results:

A) that money, once gone, will not produce anything of value for American’s.

B) that money will be paid as professional services, to engineers, draft-person’s, architects, lawyers and others — and paid to companies who hire thousands of construction labourer’s — WILL spur the economy on the macro scale and American households.  Also, a good portion of it will return to the government in the form of taxes and income-tax.

From such spending, the government could reasonably expect to recover 50% of that 100 Billion dollars in taxes, income-tax and other fees and services paid to the government by engineering and construction companies within five years!

Possibly to spend again on even more infrastructure programs — starting that process anew!

In your scenario, ever-increasing taxes to pay an ever-larger deficit/debt load eventually leads to low citizen-satisfaction levels. Don’t believe that? Wait till the income-tax rate hits 70% — there will be a revolt, or outright revolution.

Western governments have proven to be among the worst historically, to curb excessive spending. Which means eventually taxes rise to meet lender demands for payment.

We will see much higher income-tax levels in North America, just to cover existing interest payments on government debt. Of that, there is no doubt. Let’s try to keep it under 70% by not adding to the problem daily.

Finally, only an economist like yourself would have a large enough calculator to calculate the following. How many American dollars have been paid out of the country to finance government debt and to finance government deficits, since the U.S.A. began deficit financing?

Of course, that is only half the equation. The other half is this; If no deficits had been run, how much national infrastructure or education spending would that very large amount have bought?

http://brillig.com/debt_clock

For just one example of how it’s done, Saudi Arabia has paid down it’s government debt which sat at 102% of GDP 20 years ago — to 6.3% of GDP for 2011. All while maintaining balanced growth.

http://arabnews.com/economy/article554645.ece
http://arabnews.com/economy/article554176.ece

It can be done. If the Saudi’s can do it – so can America! It’s called leadership. If anyone suggests otherwise, be advised I’m not listening — because I don’t want to ‘catch’ whatever you have.