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

To follow John Brian Shannon on social media – place a check-mark beside your choice of Facebook, Twitter or LinkedIn: FullyFollowMe/johnbrianshannon

Crash of the Bumblebee — MY COMMENT

by John Brian Shannon

READ PROFESSOR PAUL KRUGMAN’S ARTICLE “CRASH OF THE BUMBLEBEE” HERE…

Supposedly, the bumblebee is not able to fly according to all the known laws of physics. But fly it does and it does so adroitly.

So too, according to all the known laws of working political models (those are called countries) Europe is not supposed to work. But it does so and is as adroit as any bumblebee will ever… be. Ahem.

Since the ashes of WWII, Europe has risen like the Phoenix of lore, from self-destruction to become a fully-fledged working model. Europe has many disparate parts, you would expect it to be unwieldy and it should definitely not fly. But it has surpassed everyone’s expectations – including the expectations of many European citizens and I daresay, some of Europe’s greatest leaders past and present.

A tip of the hat must always go to the foresighted American politicians of 1945-1950, who gave their blessing to the Marshall Plan to rebuild Europe and feed it’s people, until the Europeans could again feed themselves. Even after that the U.S.A. pursued a successful European project with vigour. There were many disagreements and even outright arguments between the Americans and the Europeans from 1945 right down ’till the present day. No doubt, there will always be differences of opinion, but so much more has gone right, than wrong over the past 67 years.

Differences aside, the U.S needs a successful Europe and Europe needs a successful America. Neither can afford a disaster on the other side of the pond.

The American Civil War can be considered America’s coming-of-age moment, while the gradually coalescing Europe, still fresh from reunification with it’s Eastern European counterparts, post-Cold War, must now forge some kind of coming-of-age moment for itself – or history will indeed pass Europe by.

One such test is the present ‘Eurozone Moment’ — where the wealthy northern European’s (where most of the euro-dollars live) must find a way to co-exist with their poorer southern cousins, who are in hock up to their nostrils.

If Europe can find a solution now, it may well be written down by future historians as Europe’s coming-of-age moment, the glorious moment when Europe realized that she is, in totality, greater than the sum of her individual parts thereof. Let’s hope Europe is self-aware at that level.

What time honoured political strategy could assist us here? I’m glad you asked. For one of the best-tested and time honoured practices for success is, the strategy of win-win.

But how to apply this to the present Eurozone Moment?

By simply finding many different things which will work to mutual advantage, where both sides can gain some amount of benefit. It doesn’t have to be an exact science. Forward progress is forward progress. On some matters, the north may gain more and on other things the south may gain more. What matters here is the need to not lose the Moment! And, to find multiple ways to succeed together.

The simplest idea in the world here is to create some kind of Euro-stock in order to ‘buy-down’ the interest rate of the southern European nations, especially the ones which are deeply in debt, or which have high unemployment and/or stagnant growth.

How could this profit the northern Euro stock-holders? The market works the same, anywhere you go. Price things over 5, 10, 15, 20 and 25 years. Investors will make money on the spread between the estimated price vs. the actual selling price.

If Spain, just for example, is having trouble affording the payments on the debt it owes, it doesn’t really matter that Spain isn’t carrying a lot of debt compared to some countries, what matters is, they can’t make the payments. How better to help Spain pay it’s debts, than to lower the interest rate on the money they owe? If 10% interest rates are killing them, then maybe those same multi-billions of debt financed at 2% interest, won’t.

If northern European’s can make money on buying down the interest rate for Spain, then Spain will be better able to fix it’s economy.

I would call that a win for northern European investors (whether sovereign, institutional or private) and a win for Spain.

That’s how to make a country (or a bloc of countries) pull together — instead of pulling itself apart. That is how to make Europe fly. The trick is to be there when needed, not after the crash.

John Brian Shannon writes about green energy, sustainable development and economics from British Columbia, Canada. His articles appear in the Arabian Gazette, EcoPoint Asia, EnergyBoom, the Huffington Post, the United Nations Development Programme – and other quality publications.

John believes it is important to assist all levels of government and the business community to find sustainable ways forward for industry and consumers.

Check out his personal blog at: http://johnbrianshannon.com
Check out his economics blog at:
https://jbsnews.wordpress.com
Follow John on Twitter: https://www.twitter.com/#!/JBSCanada

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.

Why Are We In Debt? – MY COMMENT

by John Brian Shannon

As far as economist’s go, you can’t have enough respect for Professor Paul Krugman. Passionate about his calling, vociferous in his critique of failed fiscal or monetary policy and as fine a gentleman as you could ever hope to meet.

He is so compelling and believes in his mission so deeply that even his fiercest economic critics find themselves nodding in agreement with him – before they snap out of it and return to the party line they were following prior to the beginning of the good Professor’s speech.

He is arguably the leading economist on the planet – and I doubt he would have a problem with me putting his life’s work into those terms as he himself realizes that he is in some pretty fine company.

So why would I, wearing my junior economist hat, ever disagree with him on any matter of economics? Just who do I think I am?

Well, I have found a clearer version of my usual answer and it was the kind Doctor of Economics himself, who provided it to me in one of his recent articles.

To read his article, please visit: The New York Review of Books

How to End This Depression
by: Paul Krugman
http://www.nybooks.com/articles/archives/2012/may/24/how-end-depression/

In case you just got back from Mars, Krugman is famously anti-austerity, regularly informs us of the ills of the American economy and posits remedies for present fiscal and monetary maladies. I should say right now that he is most often right. Depending which year it is, that is usually 364 out of, oh well, 365 days of the year. Just saying.

So, three paragraphs into his fine article, we read this:
“But don’t we have to worry about long-run budget deficits? Keynes wrote that “the boom, not the slump, is the time for austerity.” Now, as I argue in my forthcoming book*—and show later in the data discussed in this article—is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Imagine me nodding my head in full agreement with Professor Paul Krugman! Me – a fervent austerity-booster! Imagine that. Didn’t I tell you that was going to happen? Yes I did.

He does have that effect on economist’s all over the world – including those who disagree with his views on the austerity question.

I too, am a Keynesian and I agree profoundly with those words spoken by John Maynard Keynes so long ago and I’ll prove it now.

Ricardian Equivalence aside, lagging economies do need stimulus! The time for the government to begin spending money to boost the economy is in the first few seconds after an official recession has been called by the market. That’s three consecutive quarters of zero growth or decline, or a mixture of both, followed by an official announcement in order to qualify for recession status.

Irregular government stimulus has been happening since before the stock market crash of 1929 when government intervention began in earnest the American marketplace as a force against market turmoil.

Let me say it as plainly as I can, John Maynard Keynes and Paul Krugman are absolutely right, stimulus has been proven to work, it begins to work immediately and it does fulfill the desired effect. It works every time.

The fact that Ricardian Equivalence kicks in part way through the process to begin the incremental process of diminishing the government stimulus – doesn’t change a thing. The stimulus does exactly what it is supposed to do and the fact that consumers later adjust their savings and spending, resulting in a flat net gain to the economy a decade or two later matters little – because all of that takes place on a completely different schedule compared to the instant economic gratification stimulus spending plan.

To put it plainly, the full effects of Ricardian Equivalence take 10-20 years – and if the stimulus hasn’t recovered the economy before Ricardian Equivalence kicks in, you have way bigger problems than three quarters of net loss in the market!

Spending our way out of recession by virtue of taxpayer-supported government stimulus is the equivalent of knowing well-in-advance the exact future day that your house will burn down — and going to the bank as soon as you find this out, in order to borrow sufficient funds to buy the property next door and build your new house identical to the old house — and having it completed and ready to move into, just hours before your old house burns down.

You are no further ahead in absolute terms – but you have an exact duplicate house and property and the exact same mortgage and you don’t have to sleep in a hotel for six months waiting for your new house to be built. Saving you significant misery – which is the whole point of government stimulus, saving millions of citizens from significant misery in the 0 – 10 year time-frame.

This is the secret of government stimulus spending. The government can spend as much stimulus money as it wants. If government stimulus is large and the spending commences soon after the announcement of recession, the economy begins improving almost immediately.

If it spends the stimulus money too slowly, over a ten year period for example, the effect is greatly minimized and could end up a complete failure in every sense. The law of diminishing returns is what happens when government begins a large slow-motion spending program designed to stimulate the economy.

But when it begins immediately and is targeted to produce the best results, it is the exact medicine a country needs – even if, sometime past the ten-year mark, the national economy is no further ahead in absolute terms on account of that stimulus.

Why is stimulus important? Because it immediately and dramatically begins to lower the misery felt by millions of citizens who suddenly become unemployed during recessions. In fact, government stimulus spending creates jobs and can prevent further job cuts as the market sees the strength of the economy and the level of government commitment to the economy. Many a recession has turned out to be a paper recession because a government took early action, spent much – and pushed the evil day farther down the road.

We’re here at the evil day. And if not now, certainly by the next recession – which used to be farther down the road, but is now close to where we live these days.

Keynes wrote that “the boom, not the slump, is the time for austerity.”  – That is very true.

As Professor Krugman wrote in his article which I quoted above:

“Now, as I argue in my forthcoming book… is the time for the government to spend more until the private sector is ready to carry the economy forward again. At that point, the US would be in a far better position to deal with deficits, entitlements, and the costs of financing them.”

Which decade after decade, continues to not happen. Many multi-billions have been spent on government stimulus but none, not one, of those borrowed multi-billions have ever been paid back. Deficit after deficit has accumulated since before there were rocks, and now the debt is piled so high we might not have the chops with our lenders to borrow stimulus multi-billions so that we may assist those who are in unemployment misery – or worse.

The simple fact is, governments can borrow as much as they like and not pay it back – ever! And they have. But eventually, a day will arrive when nobody will lend us more money. Whether this is the case now, or whether it waits till the next recession, we are at or near the end of this particular paradigm of borrow, stimulate and not pay it back during the boom times.

We can’t blame the economist’s – their job is to help the economy progress, to create wealth, to lure capital, to innovate new ways of using money for the good of the nation – and so much more. But economist’s do not have secret powers to force governments to “pay off deficits and pay down debt when times are good” as John Maynard Keynes many times suggested.

We can’t blame the Russian’s anymore – this wasn’t their fault.

We can’t blame our politician’s – because any politician who brings up the topic for even a nanosecond – simply does not get elected!

We want our nice life now, we want our tax breaks now, we want our government spending programs now, we want our toys now, and we don’t want to hear about paying for them.

Why are we in debt? Because that’s what we have asked for every year since before there were rocks.

If we want to continue as a solvent and sovereign nation, we need to authorize a President and a Congress (at the same time!) to print enough money to cover next year’s deficit, effectively clearing our current account to zero. We need to pass legislation that will eventually outlaw deficit spending – except during times of national emergency. We need to pass laws that will force the government to pay down the accumulated government debt by 2% per year until it reaches a sustainable level, say debt-to-GDP ratio of 50%, or less. And we need to start living within our means as a civilization.

Other nations cannot be expected to take the lead on this and until the U.S. begins to do so, western countries will remain uncomfortably near the end of this present paradigm, living uncomfortably close to economic disintegration.

An economic netherworld beckons.

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada

____________________________________________________________

Related articles

Greek and French Voters Overturn Austerity

By John Brian Shannon

Greek and French voters have overturned austerity in Europe, but voters have really overturned a change to sustainable economic policies.

The structural changes there have caused some level of financial problems for individuals and families.

But the alternative was to let the outrageous, drunken-sailor spending continue until there was nothing left of the economies in question. Eventually that would have caused a real pan-European depression  – instead of five years of austerity in only those countries foolish enough to have overspent themselves for decades.

It is the obscene deficits which have run year after year (and have piled up into unaffordable debt) that are responsible for the lowered credit ratings in those countries and the poor economic performances found only in those particular European countries, it must be said. I note that the rest of Europe is doing quite well – even accounting for the combined drag and multi-billion euro bailouts of Greece, Portugal and Spain.

Blaming austerity, is like blaming the doctor who is now fixing your broken arm for the original accident — as you drunkenly stumbled out of the casino! The Greek economy was a basket-case long before austerity ever arrived and it will be a basket-case now that austerity is leaving Greece.

Greek and French citizens have voted for the former glory days of unrestrained spending with lots of toys and goodies from their governments – and to hell with paying for it!

“Let the EU bail us out forever, for tonight, we drink like drunken sailors!” And, if you think that isn’t being hollered at full volume at many thousands of cantina’s and spilling out on to the streets of Greece tonight, you’ve never been there!

Follow John Brian Shannon on Twitter: https://twitter.com/@JBSCanada