As the debt crisis drags on, more questions
Europe falls apart.
Dow down again 鈥� 134 points. Oil back below $100.
We鈥檙e back in the USA after 5 months in Europe. What a delight it was to be Europe. It鈥檚 always a pleasure to watch something fall apart.
How far apart the Old World will fall, we don鈥檛 know. But it looks as though big chunks of the continent must be cut adrift鈥r the whole of it will sink.
Sometimes things come together. Sometimes they fall apart. You make money, generally, when they come together. When they fall apart, it鈥檚 harder. Because everyone begins to ask questions.
In a boom, question marks disappear. In a bust, they come back.
鈥淲hat鈥檚 this stock really worth?鈥� people want to know.
鈥淲ho鈥檚 on the other side of the trade?鈥� they ask.
鈥淲hen the check comes back marked 鈥榠nsufficient funds,鈥� who are they referring to, us鈥r them?鈥�
The bond holders want to know if the Euro-feds are going to bail them out鈥he Euro feds want to know if the Chinese are going to bail them out鈥nd the taxpayers want to know how long their pension checks will keep coming.
Angela Merkel gave an answer yesterday.
鈥淚f politicians believe the ECB can solve the problem of the euro鈥檚 weakness, then they鈥檙e trying to convince themselves of something that won鈥檛 happen,鈥� she said in a speech.
The question she was answering was when the ECB would step in to buy more bonds and bail out the bondholders. Apparently, that鈥檚 not a question worth asking, she says.
What the Germans really want to know is whether the Greeks and Italians can act like Germans. What the Greeks and Italians want to know is when the Germans are going to stop acting like Germans.
And what the French want to know is where to get a good piece of fois gras and a good bottle of Bordeaux.
And everybody is counting on something impossible happening. Governments spending has to fall鈥r at least cease growing. While tax receipts have to rise鈥r at least, cease falling. And the economy has to grow at 6% per year so that tax receipts can increase enough to support the level of debt. How does the economy grow at three times today鈥檚 rates with no boost from government spending鈥hen everybody is cutting back, trimming debt and saving money? You tell us!
In America, there aren鈥檛 quite so many questions. Nobody doubts the full faith and credit of the US government. Not yet anyway. And nobody doubts the Fed will backstop America鈥檚 public debt鈥y printing as much money as it needs to.
Trouble is, the thing they count on to save them from having to ask questions comes with a whole bag of question marks too. When the Fed starts printing again, investors will begin to wonder how long it can continue鈥efore all Hell breaks loose.
We don鈥檛 have an opinion on it. And we don鈥檛 need one. That鈥檚 a question, as the judges say, that鈥檚 not ripe for a decision.
So let鈥檚 move on鈥�
Here鈥檚 another question. What gives? Bread鈥r circuses? Social Security, Medicare, and other domestic spending. Or, the military circuses abroad? In order to bring federal deficits under control鈥nd avoid the bankruptcy of the country鈥omething has to go.
You鈥檇 think the military spending would give way. Who really cares what happens in Iraq? Or the South China Sea?
But here we have another unstoppable force running into another immoveable object. And we鈥檒l make a prediction. Neither will give way. Neither the bread nor the circuses. The super committee will not be willing to battle it out with the voters鈥or with the military contractors. And if it did, it would get no support from the president鈥r Congress.
Polls show more than 75% of Americans oppose any cuts to Social Security or Medicaid. Since it takes only a majority of voters to decide an election, the chances of any candidate winning on a 鈥渃ut social spending鈥� platform is nil.
But don鈥檛 expect any candidate to win on a 鈥渃ut the military鈥� platform either. The social services may have the votes, but the military has the money. That鈥檚 why major Republican candidates are trying to out-hawk each other with preposterous claims and absurd proposals. They鈥檙e all Teddy Roosevelt mixed with Thomas Friedman鈥lowhards and dimwits, almost every one of them.
Small wonder. The campaign contributors demand it. The lobbyists insist on it. And the voters deserve it.
But won鈥檛 the bond vigilantes stop them from borrowing a trillion dollars + a year? Won鈥檛 the dollar鈥檚 guardian angels prevent them from printing money to cover America鈥檚 deficits?
Oh, dear reader. How long have you been reading these chronicles? If you鈥檝e been reading for a while you know that the gods 鈥� and Mr. Market too 鈥� are fun loving, mischief-makers. What kind of a trap could they set that didn鈥檛 let their prey get in it? What kind of a flim-flam could they play if their mark always showed good judgment?
The Super Committee is considering budget cuts of between $330 and $400 billion per year over the next 10 years (you can bet that any cuts they come up with will be heavily loaded on the backend of the 10-year period). First, those sums are peanuts. The feds will probably run deficits in excess of a trillion a year even if they make those cuts. Second, the cuts are not from current levels of spending but from projected levels鈥igher levels, that is. And those projections are worthless. They systematically underestimate expenses and overestimate revenues. Third, they ain鈥檛 gonna happen anyway.
This will leave the feds in need of lots of money. But with so many question marks in Europe, investors think they can sleep easy at night by moving their money to America. All things considered, the dollar and the US bond market looks like the best games in town. This makes it easy for the feds to continue borrowing at low rates鈥ontinue going into debt鈥nd keep their bread and circus program going almost indefinitely.
The end of this phase may be many years ahead. Japan has been at it for 20 years. The US could pile up debt for another 10 years. But when the end comes鈥t will be something to see!
