海角大神

Oh my, oh my鈥�this is getting interesting鈥�

鈥淗ow zombie consumers menace the world economy,鈥� is a headline from Yale Professor Stephen Roach. Mr. Roach is misusing the word 鈥榸ombie,鈥� but he鈥檚 coming closer to understanding what is really going on.

That is, he鈥檚 beginning to see things our way!

Greek 2-year debt was yielding over 30% on Friday. Everybody said the situation was dire. And everybody agreed that this time, the Greeks were not likely to get away without a default of some sort.

This is a great moment for the world鈥檚 intellectual and moral life. Suddenly, people are beginning to realize that you can鈥檛 make bad debt go away by piling more debt on top of it. And yes, when you make mistakes, you have to pay for them.

Perhaps this insight could be teased out into a broader, deeper understanding of how life actually works. Maybe it is true, after all, that you can鈥檛 create real wealth by printing up pieces of paper. And maybe it鈥檚 also true that economists working for central banks can鈥檛 do a better job of running an economy than they can of running an anthill. Maybe central planning doesn鈥檛 work after all?

And maybe there are some things you just should not do鈥�such as spend too much money. Or murder people, even if you don鈥檛 like them. Or send photos of yourself in a ridiculous, obscene pose via the Internet.

Yes, dear reader, maybe there are some things that are right鈥�a苍诲 other things that are wrong 鈥� no matter how smart you are.

As Mr. Yanis Varoufakis, an economics professor at the University of Athens, explained to The International Herald Tribune:

鈥淲hen you are insolvent you do not solve things with new and larger loans.鈥�

In Europe, the very smart financial authorities kicked the can down the road. And now they鈥檙e tripping over the can.

In America, they kicked the can so far you can barely see it. And it鈥檚 the size of a 55-gallon drum.

Europe鈥檚 problem is sovereign debt 鈥� government debt 鈥� and bank debt. America鈥檚 problem is private debt now, government debt later.

Europe could fairly easily solve its problem. Greece doesn鈥檛 really matter to anyone 鈥� not even to the Greeks. It could be cut loose. Abandoned. Allowed to go broke, as we predicted it would a couple years ago.

The problem is that there is an ankle bone connected to the leg-bone鈥�a苍诲 the foot-bone is connected to the ankle bone. And without feet or legs, Europe can鈥檛 walk. The big banks 鈥� especially French banks 鈥� hold Greek debt. If the loans go bad in a big way, the banks will probably go broke too. That鈥檚 why Moody鈥檚 downgraded the banks last week.

The press says authorities are worried that one thing will lead to another鈥�a苍诲 pretty soon it will get out of hand. They say they鈥檙e afraid of a 鈥淟ehman moment.鈥� But what they鈥檙e really frightened by is something that happened closer to home. It鈥檚 a 鈥�Creditanstalt moment鈥� they fear most.

Creditanstalt was an Austrian bank that went broke in 1931. Before it went under, most people had never heard of it. But after it couldn鈥檛 pay its bills it became infamous. The bank owed a lot of money to a lot of other banks鈥�a苍诲 then they couldn鈥檛 pay their bills either鈥�then, the whole banking system went bust. The Great Depression resulted 鈥� in which nearly half of America鈥檚 25,000 banks failed.

So, the authorities want to avoid a Great Depression. Very understandable. But what鈥檚 the plan? To kick the can farther? What do they do when they catch up to it again?

In the US meanwhile, it is consumer debt that is the immediate problem. There too the authorities booted it down the road as best they could. But in the New World as in the Old, there鈥檚 always something that goes wrong. You refinance Ireland鈥�a苍诲 Portugal needs cash. You give the Portuguese some money鈥�a苍诲 then the Greeks threaten to go belly-up.

In the US, the authorities refinanced the banks. The bankers got their usual bonuses 鈥� and more. But they couldn鈥檛 do much about consumers. The poor working stiffs were losing jobs, income, and housing wealth 鈥� all at the same time.

And now, with their lack of purchasing power, US consumers have the whole world economy at gun-point. 鈥淥ne false move鈥�a苍诲 you鈥檙e all dead!鈥� More below:

America鈥檚 Greece may be California.

鈥淐alifornia nearing fiscal crisis,鈥� reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn鈥檛 do the job. We didn鈥檛 see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can鈥檛 print its own.

So the fingers are pointing. And the hands are wringing. And everyone is worried鈥�except us.

Here at The Daily Reckoning, we鈥檝e learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we鈥檇 send it one or two. Maybe with photos attached.

鈥楤ut if California can鈥檛 pass a budget the police won鈥檛 get paid鈥︹�� say the worriers.

So what? Private citizens have plenty of guns in California. The crime rate will probably go down.

鈥楤ut what about the teachers?鈥� Don鈥檛 make us laugh. Besides it鈥檚 summer. Time for a vacation.

鈥榃hat about people on welfare?鈥� Don鈥檛 expect us to cry for the zombies.

鈥楾here must be something that the state does that is essential!鈥�

Name one thing! Ha ha鈥�

Actually, we don鈥檛 know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off鈥�a苍诲 we鈥檒l see what we really miss.

Back on the national stage鈥�the scene is set for another recession. Here鈥檚 The New York Times:

For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.

The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about.

Yes, such as Greece. California. China. Housing. Inflation.

And those are just the shocks we know about.

The fact is, when Humpty Dumpty is sitting on a wall, there鈥檚 always someone around to give him a push.

Let鈥檚 define our terms. A 鈥榸ombie鈥� is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.

A consumer who has no money is hardly a 鈥榸ombie.鈥� He鈥檚 only a zombie if he gets his money dishonestly 鈥� that is, through theft, fraud, or government.

Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.

But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it鈥檚 gone down. This is a big change. And it puts a strain on the whole consumer economy.

The US economy 鈥� as well as many foreign economies 鈥� is set up to anticipate more and more consumer spending. But US households haven鈥檛 been able to deliver.

鈥淕rowth in consumption has averaged 0.5% annualized,鈥� write Roach. 鈥淣ever before in the post WWII period has consumption growth been this weak for this long.鈥�

Well, Stephen, it鈥檚 a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.

In many ways, this is a worse problem than Europe鈥檚 sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.

But America鈥檚 consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income 鈥� down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.

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