Austerity!
Austerity! We must have Austerity!
The concept
of Austerity with a capital A is mostly a European invention. It was used
during the second War to End All Wars, aka WWII, to bolster popular support for
doing without essential commodities so that the Allies could win the war.
Germany imposed its brand of austerity but more with the butt of a rifle than
with the rhetoric of the Ministry of Food and other governmental bureaucracies.
The populace was exhorted to conserve, ration, and do without in order to
spread around what supplies remained available so that everyone had something.
During WWI
and WWII the shortages were due to Germany's armies attacking the supply ships
and resource producing capacities. Today the austerity stems from government
inaction, willful refusal to raise the necessary financial revenues that the
economy needs and the unfunded growth in living population that requires
support.
In America
we call it "cutting entitlements" while the rest of the world calls
for Austerity. In the US the Conservatives disparage the poor, low-wage
employees, the lazy, and moochers for the state of deficit and growth of
spending. The reality is that the greatest growth in public spending is
military, increased cost of pharmaceuticals and other medical costs, the cost
for each additional American who reaches retirement age and tried to start
collecting his/her pensions and Social Security. Public welfare costs are the
smallest portion of the total costs.
In the US a
sizable portion of the retired and soon-to-be retired population has privately
funded and employer paid pensions. In the European economic sector most people
are expecting to receive publically funded pensions. Here in the US,
Republican-led legislatures are gutting the public pension sectors in advance
of accelerated retirement of our "baby boom" population that is 59
million strong. The people who were in charge of making sure that the revenue
collections and investment returns were adequate to the task failed to perform.
Now they seek to pin the blame of too many "welfare queens", moochers
and Union Thug attitudes that gift big pensions to public sector union
employees at taxpayer expense.
On both
sided of the Atlantic the underlying causes of national debt and budget
deficits are the aging population and the failure to assess and collect taxes
on business profits. In Greece the businesses just don't pay and nobody has the
juice to pursue the deadbeats. In the US the corporations and wealthy families
sequester their wealth in off-shore nations where the US Treasury cannot yet
touch them. The estimate of domestic profits of US companies sequestered abroad
range from 2 to 6 Trillion Dollars. Sometimes these same Dollars are the ones
that were used to buy the foreign and US national debt bonds. The difference
between the investments and the funds paid as taxes is that the bond funds
generate interest while the taxes don't.
The Three
Things That Money Will Get You
The idea
that money will get an investor even more money via interest and capital
appreciation is only the first and simplest of the benefits of having lots of
spare money. Even a few percentage points on a billion dollars is a huge
return. Even just 2% is $20 million per year.
The second
benefit of lots of money is the ability to leverage an investment. $100 Million
as matching can leverage another $900 million and build a lot of asset property
that will generate annual income and possibly appreciate in capital value for
later sale.
The third
benefit of lots of money is power over other peoples' lives. When someone owes
you money they owe you allegiance as well. This is the most seductive of the
three uses for the entity that has the money. It is also the one that gets the
lender the biggest potential reward.
Making a
loan that is paid back on time has an arithmetic maximum value. That 2% interest
is good for $20 million a year for maybe 10 years. So the value is limited to
$200 million. If the borrower is late, the interest amount paid goes up.
If the
borrower becomes less than AAA rated, the lender may require additional
collateral to be signed over to protect the balance. That total collateral may
actually exceed the original loan balance and might appreciate during the loan
term.
Lastly, if
the borrower defaults the lender may acquire valuable assets that he had his
eye on all along. Such is the urban Real
Estate game in some neighborhoods in some cities. What the borrower wanted was
title to all the properties within a contiguous area. Over lending on the
property, employing low introductory adjustable rates and helping a
neighborhood to decay assures that it is only a matter of time before everyone
defaults and walks away from their homes. Then the urban redevelopment is
designed and built.
In the case
of major lending to governments, even though the loans are not expressly collateralized,
when a default and a bankruptcy occurs, all public assets are placed on the
table to be haggled over by the parties and the court.
The world
saw that exact practice employed in South American countries in the 1970s when
Venezuela, Chili, Argentina, and other countries were forced into submission
with debt and austerity that left the populace unable to resist the fire sale
deals their US installed military Dictators signed with multinational
corporations. Prior to the privatization process, the countries' governments owned
all of the major businesses and resources: Gas and oil rights, water
distribution, telecommunications companies, roads and bridges, dams, and
electric generation capacity. Afterwards most of those assets were owned by the
likes of ITT, Goldman Sachs, et al.
Later the
same maneuvers were applied to Eastern Europe, Asia and Russia.
Austerity is one of the methods that Naomi Klein describes
in detail in her book "The Shock Doctrine: The Rise of Disaster
Capitalism". Cut the revenue stream i.e. don't actually collect taxes,
slash all public spending, raise prices, and lend money to "balance"
budgets then collect. Currency becomes worthless, banks are closed. Then the
government sells all its public assets (schools, water distribution, sewage
systems, telecom, natural resources at fire sale prices of Cents on the
Dollar.) Does all this sound familiar about Greece? It should!
. . .
This is a practice invented by the Milton Friedman
devotees and employed widely in South America in the 1970s. They used it to
privatize much of the economy by multinational corporations.
Greece is
now in jeopardy of defaulting on billions in national debt that was provided by
lenders outside of Greece. The German government finance people brokered the original
loans and convinced the backers of the International Monitory Fund (IMF) to
lend the funds. Those backers used German peoples' pension funds to make those
loans and now Germany is loath to forgive any amounts because Germans would
have to feel the pressure of the loss of their money. It goes around and around
and can be described by the Domino Model as described in the Principle of Imminent
Collapse. One weak link in the financial chain can bring down a host of other
money funds that are dependent on the music not stopping in the Game of Musical
Chairs.
The USA can
issue additional dollars any time it wants to to bolster and stabilize its
currency and have sufficient funds for people to continue to do business and
pay their bills. As part of the Eurozone, Greece cannot do that. They cannot
devalue their currency relative to other nations because it is Euros and they
don't control that. With Drachmas they could. But with an exit of the Eurozone
at this troubling time chaos would surely follow. This is not to say that an
orderly exit after becoming stable again, Greece won't choose to leave.
The bigger
worry in the world is the debt to GDP ratio that must be maintained in order
for people to not revolt must be kept in order. Every Western nation and in
Asia is on the same track to bankruptcy in they do not do something about their
lack of government revenues needed to pay their debts. In this scenario, Greece
is merely the Canary in the mineshaft and I've seen the canary.
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