Borrowing for investment may be a good idea. Debt is not a bad thing. It can be a good thing. It depends upon what you are borrowing for.
Borrowing to finance a new business or to expand an old one is a good idea. Borrowing for investment purposes is generally a good idea.
Borrowing is generally a bad idea if you simply borrow to finance consumption that you cannot otherwise afford. Eventually 'consumption borrowing' will lead to disaster since nothing is taking place that can pay off the debt that is being created. This is the type of borrowing that is taking place in western economies today.
As much as politicians talk about 'investing in our future,' what they invariably mean in practice is financing consumption for a favored part of the electorate. Rarely if ever is modern government spending intended to finance investment of any kind. Paying more money to your favorite public employee, including teachers, is not a form of investment -- it is a form of consumption for your favorite public employee unless they choose to save some part of it. Transferring wealth from rich to poor and supplementing that with more debt is simply an expansion of debt and consumption.
Borrowing to consume at the expense of private and public investment activity is a ticket to disaster. We see that disaster unfolding in the western economies today. In short order, the current euphoria in the US and in Europe over the virtues of printing money as a substitute for capitalism will turn to despair as their economies are crushed with the weight of too much debt. and too little economic activity.
You can only live off false promises for a limited period of time. Sooner or later, crushing the private economy, expanding the government sector, letting sovereign debt increase without limit only results in disaster.
Tuesday, 18 September 2012
Friday, 14 September 2012
More Bad Policy from Bernanke
Ben Bernanke is printing money once more. Not content with the current historic expansion in the money supply, Bernanke is headed off to new records. Somehow pumping more liquidity in the system is going to offset the negatives that face employers. How?
If paying an employee $ 35,000 per year means a cost of $ 70,000 per year because of health care mandates, employee payroll costs and litigation risks, how does additional liquidity matter? With Dodd-Frank and the regulators forcing the banks out of the lending business for middle Americans, what difference does additional liquidity and lower mortgage rates make? What is Bernanke thinking?
Bernanke's policies are not without cost, though they seem clearly without benefit. The cost will come when inflation rears its ugly head. Bernanke assumes that can't happen unless the economy is near full employment. He's wrong. We can have inflation and unemployment and they can both grow at the same time. The Democrats were able to accomplish this in the late 1970s which was a prelude to the Age of Reagan.
Perhaps it is time to rethink whether or not we need a Fed. America's fastest growth in GDP was the period from 1865 to 1913. America had no central bank during that period. No Central Bank may be a better solution than what Bernanke is providing.
If paying an employee $ 35,000 per year means a cost of $ 70,000 per year because of health care mandates, employee payroll costs and litigation risks, how does additional liquidity matter? With Dodd-Frank and the regulators forcing the banks out of the lending business for middle Americans, what difference does additional liquidity and lower mortgage rates make? What is Bernanke thinking?
Bernanke's policies are not without cost, though they seem clearly without benefit. The cost will come when inflation rears its ugly head. Bernanke assumes that can't happen unless the economy is near full employment. He's wrong. We can have inflation and unemployment and they can both grow at the same time. The Democrats were able to accomplish this in the late 1970s which was a prelude to the Age of Reagan.
Perhaps it is time to rethink whether or not we need a Fed. America's fastest growth in GDP was the period from 1865 to 1913. America had no central bank during that period. No Central Bank may be a better solution than what Bernanke is providing.
Friday, 7 September 2012
Winners and Losers
It is not as if some folks aren't winning. Politicians are winning. They are well paid, have juicy retirement benefits and if, perchance, they lose an election, there are more than enough PACs around who will hire them as consultants to live out life in luxury. Look at Newt Gingrich for example. He made himself millions of dollars after 'retiring' from public office by consulting, not only for PACs, but for beta noires like FNMA.
Who else is winning? Academics with tenure are winning. They have protected jobs with high income and rich benefits. Public employees and teachers, who haven't lost their jobs. They are winning. Upper income folks collecting social security and medicare. They are winning. Middle income Americans on food stamps -- they are winning. Rich folks. They are winning. They know that the coming tax increases won't effect them, because they don't have to show income. Warren Buffett, if he wishes, can reduce his taxable income to zero and pay no taxes. So, what does he care what the tax rates are? Raise them, he says. Why not? He won't be paying them.
So there are winners! That helps explain how in an economy with no job creation, the current Administration still commands the support of half of the electorate. The losers are ordinary citizens -- mostly middle and lower income -- who hope to provide education and a future for their children. They and future generations are the losers. Opportunities for ordinary citizens without political connections or who don't fall into a politically connected or protected class are disappearing in the Obama USA. The losers are the poor who are denied a leg-up in the economy by minimum wage laws, litigation threats built into law and employer mandates on employees. The war on poor people engaged in by the Obama Administration has born fruit. Poor and minorities in the US are in the worst economic condition in three decades.
So while the rich, the movie stars, the public employees, the tenure-protected world, and the politicians comfortably enjoy the fruits of the Obama economy, everyone else better find some way to survive. It certainly won't happen in the job market as long as the Obama folks are in office.
Who else is winning? Academics with tenure are winning. They have protected jobs with high income and rich benefits. Public employees and teachers, who haven't lost their jobs. They are winning. Upper income folks collecting social security and medicare. They are winning. Middle income Americans on food stamps -- they are winning. Rich folks. They are winning. They know that the coming tax increases won't effect them, because they don't have to show income. Warren Buffett, if he wishes, can reduce his taxable income to zero and pay no taxes. So, what does he care what the tax rates are? Raise them, he says. Why not? He won't be paying them.
So there are winners! That helps explain how in an economy with no job creation, the current Administration still commands the support of half of the electorate. The losers are ordinary citizens -- mostly middle and lower income -- who hope to provide education and a future for their children. They and future generations are the losers. Opportunities for ordinary citizens without political connections or who don't fall into a politically connected or protected class are disappearing in the Obama USA. The losers are the poor who are denied a leg-up in the economy by minimum wage laws, litigation threats built into law and employer mandates on employees. The war on poor people engaged in by the Obama Administration has born fruit. Poor and minorities in the US are in the worst economic condition in three decades.
So while the rich, the movie stars, the public employees, the tenure-protected world, and the politicians comfortably enjoy the fruits of the Obama economy, everyone else better find some way to survive. It certainly won't happen in the job market as long as the Obama folks are in office.
Thursday, 6 September 2012
When The Cheering Stops
The ECB's bond buying program is essentially equivalent to printing Euros and buying bonds of countries whose finances are failing. This shifts the burden of debt toward France and Germany, all but engulfing them into the same cauldron as Greece, Spain, Italy, Portugal and Ireland. That all of these countries continue to run large fiscal deficits seems not to concern anyone. Nothing has changed in regard to the dramatic debt buildup that continues to run apace throughout the Eurozone.
Now to add to their other woes, all of the Eurozone countries are now headed into recession. Germany had been an exception, but no longer. Greece and Spain live with daily street riots and unemployment in excess of 25 percent. It is hard not to see France and Germany headed that way.
Monetary expansion will not solve Europe's problems. It actually make them worse, because it weakens each country's resolve to get their fiscal house in order. Rising yields on sovereign debt forces countries to face facts. An explosion of printed Euros does the opposite. Now Greece and Spain will think there is no reason to reform their economies. After all, Germany has ridden to the rescue.
Don't laugh America. This is coming to your shores sooner than you think. California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes. This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.
No one seems to want to face reality. The welfare state is failing throughout the Eurozone and in the US. There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state. The jig is up. What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away. It won't.
Now to add to their other woes, all of the Eurozone countries are now headed into recession. Germany had been an exception, but no longer. Greece and Spain live with daily street riots and unemployment in excess of 25 percent. It is hard not to see France and Germany headed that way.
Monetary expansion will not solve Europe's problems. It actually make them worse, because it weakens each country's resolve to get their fiscal house in order. Rising yields on sovereign debt forces countries to face facts. An explosion of printed Euros does the opposite. Now Greece and Spain will think there is no reason to reform their economies. After all, Germany has ridden to the rescue.
Don't laugh America. This is coming to your shores sooner than you think. California and Illinois will soon be pressing Washington for a similar bailout of their fiscal catastrophes. This would mean that Texas and Virginia, states with much better fiscal discipline, would essentially begin underwriting the nonsense that goes on in California and Illinois.
No one seems to want to face reality. The welfare state is failing throughout the Eurozone and in the US. There simply are not enough resources, no matter who you tax or what other spending you cut, to fund the grand plans of the welfare state. The jig is up. What the ECB is doing is burying their head in the sand, hoping and praying that the problem will go away. It won't.
Wednesday, 5 September 2012
The ECB Buys Bonds
Today, Mario Draghi is scheduled to announce that the ECB will buy the bonds of Greece, Portugal and Ireland (this gives holders of Spanish and Italian bonds the near certainty that they will be next if line if only their countries request it). Somehow this cheers financial markets. You have to wonder why. A similar pattern occurs when bad economic news hits the US economy. The market pundits then rush to the microphones to announce gleefully that the Fed will act and all will be well. Is all well?
The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous. The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks. It is just a question of numbers. Taxing rich folks won't help either. Eliminating defense spending in the US and everywhere in the world won't matter either. The only thing that matters is reigning in the entitlements. Absent that, the debt crisis and economic crisis will simply get worse.
There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights. These things would make employees more attractive to employers and spur hiring.
What is happening in Greece is instructive. The black market economy is thriving. Greek workers can get jobs in the black market and they are taking these jobs. There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy. Much of this goes on in the US as well, of course. New Yorkers who have nannys are well aware of how the black market works even in the good old USA. Perhaps the black market is the only real hope for those struggling to find jobs. The legal market has too many "protections" for employees that make employees toxic to employers.
But, meanwhile at the aggregate level, countries have run out of funds. The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on. Then it will cease to work and the reality of "no money" will once again set in. Both Europe and the US are broke. Nothing but cutting entitlements will have any impact on their current plight.
The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous. The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks. It is just a question of numbers. Taxing rich folks won't help either. Eliminating defense spending in the US and everywhere in the world won't matter either. The only thing that matters is reigning in the entitlements. Absent that, the debt crisis and economic crisis will simply get worse.
There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights. These things would make employees more attractive to employers and spur hiring.
What is happening in Greece is instructive. The black market economy is thriving. Greek workers can get jobs in the black market and they are taking these jobs. There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy. Much of this goes on in the US as well, of course. New Yorkers who have nannys are well aware of how the black market works even in the good old USA. Perhaps the black market is the only real hope for those struggling to find jobs. The legal market has too many "protections" for employees that make employees toxic to employers.
But, meanwhile at the aggregate level, countries have run out of funds. The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on. Then it will cease to work and the reality of "no money" will once again set in. Both Europe and the US are broke. Nothing but cutting entitlements will have any impact on their current plight.
A new course in financial literacy
I was asked to teach a quick course to our new batch of Global MBA (GMBA) students. The idea was to refresh their math and economics skills, and thus it was named “Jumpstart.” I resisted doing it with all my strength. The course was scheduled for the first week of August and I had my sandcastle-building supplies together and was ready to head to the Italian beaches. But the faculty dean knows my weaknesses and told me I could use the course to teach financial literacy. So, I put aside my swim suit and sun block and started designing and preparing for this short course (in case you were wondering why I have not been writing my blog. . . ).
As you can imagine, the challenge was what to teach to students who come from all over the world and who have different backgrounds, in particular now that our dean is set to admit only students who want to change the world. (I am not kidding, and he says this when he meets the students; it is impossible not to like him.) But I discovered that this is an ideal group to teach financial literacy to; after all, this is a topic based on rigorous and universal concepts (interest compounding is the same in the US as it is in China), and I do not have to hold back the math.
The course was structured in four classes of three hours each. In case you think this allows for little time, let me assure you that there is a lot you can teach in three hours; the difficult part was choosing what is most important. I structured the course to cover the following topics: 1) understanding interest compounding and the time value of money; 2) understanding probabilities and risk; 3) essential macro concepts; 4) applications to personal finance and macro problems.
I have had many discussions at conferences with people who assert that one cannot teach (and people cannot learn) interest compounding. I cannot disagree more. This is a fundamental concept and is at the basis of every financial decision. If there was one thing, and one thing only, that I could teach in a course, this is what I would choose. It is only by appreciating the power of interest compounding that one learns the importance of starting to save early in life or of being careful when borrowing, given that interest rates charged on borrowing are often much higher than interest rates earned on assets. Most importantly, because our financial resources are spread over time, we need to be able to understand that a dollar tomorrow is worth less than a dollar today, and how much less depends on whether the interest rate is high or low. We cannot sum values due at different points in time (for example, our earnings each year); we need to discount future values to the present, and we do so simply by applying the formula of interest compounding. Because financial decisions are essentially about shifting resources over time, we need to have a basic understanding of interest compounding.
As an aside, I would like to remind those who think that people cannot understand or learn interest compounding that we let students take up large loans to pay for their education and that we have put people in charge of saving for their retirement. It is scary to think that people can and do make these sorts of decisions without understanding interest compounding; if we do not teach them, we all are going to pay for it. I told this to the GMBA students, too, since they are charged with the small task of changing the world. Giving people an understanding of this concept seems to bring results. I will not know what my students end up doing with this knowledge yet, but according to a recent paper describing a field experiment in China, teaching people living in rural areas about interest compounding increased their pension contributions by 40% . How about that! (The link to the paper is at the end of this post).
Teaching the concept of risk was the most difficult part of the course. In the many surveys I have conducted to assess financial literacy across countries, questions covering the concept of risk always get the smallest percentage of correct answers. This is why I covered this topic in the second rather than the first class and why I provided many examples—some of which involved dealing with pirates, just to remind students that finance has a wide range of applications. Like interest compounding, risk is an essential concept; most financial decisions have to do with the future, but the future is uncertain. Thus, we need to reason in probabilistic ways. For example my income next year may be, say, $50,000, but I also face a probability (about 8%) that I will be unemployed; and, while the interest rate on my bond is set at 5% for next year, there is also a chance that the issuer will default (yep, and these issuers can be governments…). It is critically important not only to grasp the concept of risk but also to know how to deal with it. While we all face risk, there are ways we can reduce it and minimize its impact. In fact, an important component of personal finance is not only to grow assets (using the power of interest compounding) but also to protect those assets (using the concept of risk diversification). One of the applications the students most enjoyed were the lotteries; they may be fun, but if you plan to become rich by winning the lottery, you are in dire need of taking this course!
And speaking of the future, one thing that changes over time is prices, for example, the prices of the goods we normally buy (this is what the Consumer Price Index, or CPI, measures). This is a bummer, because it means that if our money does not grow, our dollar today will buy less tomorrow. In other words, to make financial decisions we need to understand inflation and what inflation does to our purchasing power. This is why in the third lecture I turned to macroeconomics, and we studied inflation and the difference between nominal and real interest rates. It was also a lecture designed to teach the critical role of central banks and why we need these institutions in the economy. I hope my students have a better understanding now of the Herculean job that Chairman Bernanke and President Draghi have at the helms of the US Federal Reserve and the European Central Bank, respectively. Given that, by this time, students knew about interest compounding, we also covered economic growth (it is the same formula!) and calculated when China’s economy is expected to surpass that of the US. Write me a note if you, too, want to know this.
In the final class, we covered many applications that were also sprinkled through the other lectures. Armed with the knowledge of the fundamental concepts we had covered, there were almost no decisions we could not attack! For example, we calculated the return on the investment in an MBA degree and whether (and when) it makes sense to leave your job, pack your suitcases, and head to school again. We looked at methods of payment and when it is advantageous to lease versus pay cash and the implicit interest rates in a stream of payments required, for example, when paying back a loan. We calculated the gain from exploiting employers’ retirement saving matches and the return on contributions to Social Security under different longevity scenarios. Most importantly, we calculated what it takes to become a millionaire and discovered it is not overly complicated (again, you need to take this course if you want to know).
There were several rewards in teaching this course. First, I could finally pack my bags and head to the beach in mid August, when the sun in Italy was still burning. Second, I felt like I was making a difference—as my dean would say— if not in people’s lives, at least in their financial decisions. One student sent me a thank you note at the end of the course that was very touching and inspiring. So inspiring, in fact, that I plan to keep it in my desk drawer and read it whenever I return from conferences that discuss the futility of teaching interest compounding and the ineffectiveness of financial literacy.
For more information, see Changcheng Song (2012), "Financial illiteracy and pension contributions: A field experiment on compound interest in China."
http://www.baf.cuhk.edu.hk/research-activities/research-seminar-detaill.asp?DID=3&id=1220
As you can imagine, the challenge was what to teach to students who come from all over the world and who have different backgrounds, in particular now that our dean is set to admit only students who want to change the world. (I am not kidding, and he says this when he meets the students; it is impossible not to like him.) But I discovered that this is an ideal group to teach financial literacy to; after all, this is a topic based on rigorous and universal concepts (interest compounding is the same in the US as it is in China), and I do not have to hold back the math.
The course was structured in four classes of three hours each. In case you think this allows for little time, let me assure you that there is a lot you can teach in three hours; the difficult part was choosing what is most important. I structured the course to cover the following topics: 1) understanding interest compounding and the time value of money; 2) understanding probabilities and risk; 3) essential macro concepts; 4) applications to personal finance and macro problems.
I have had many discussions at conferences with people who assert that one cannot teach (and people cannot learn) interest compounding. I cannot disagree more. This is a fundamental concept and is at the basis of every financial decision. If there was one thing, and one thing only, that I could teach in a course, this is what I would choose. It is only by appreciating the power of interest compounding that one learns the importance of starting to save early in life or of being careful when borrowing, given that interest rates charged on borrowing are often much higher than interest rates earned on assets. Most importantly, because our financial resources are spread over time, we need to be able to understand that a dollar tomorrow is worth less than a dollar today, and how much less depends on whether the interest rate is high or low. We cannot sum values due at different points in time (for example, our earnings each year); we need to discount future values to the present, and we do so simply by applying the formula of interest compounding. Because financial decisions are essentially about shifting resources over time, we need to have a basic understanding of interest compounding.
As an aside, I would like to remind those who think that people cannot understand or learn interest compounding that we let students take up large loans to pay for their education and that we have put people in charge of saving for their retirement. It is scary to think that people can and do make these sorts of decisions without understanding interest compounding; if we do not teach them, we all are going to pay for it. I told this to the GMBA students, too, since they are charged with the small task of changing the world. Giving people an understanding of this concept seems to bring results. I will not know what my students end up doing with this knowledge yet, but according to a recent paper describing a field experiment in China, teaching people living in rural areas about interest compounding increased their pension contributions by 40% . How about that! (The link to the paper is at the end of this post).
Teaching the concept of risk was the most difficult part of the course. In the many surveys I have conducted to assess financial literacy across countries, questions covering the concept of risk always get the smallest percentage of correct answers. This is why I covered this topic in the second rather than the first class and why I provided many examples—some of which involved dealing with pirates, just to remind students that finance has a wide range of applications. Like interest compounding, risk is an essential concept; most financial decisions have to do with the future, but the future is uncertain. Thus, we need to reason in probabilistic ways. For example my income next year may be, say, $50,000, but I also face a probability (about 8%) that I will be unemployed; and, while the interest rate on my bond is set at 5% for next year, there is also a chance that the issuer will default (yep, and these issuers can be governments…). It is critically important not only to grasp the concept of risk but also to know how to deal with it. While we all face risk, there are ways we can reduce it and minimize its impact. In fact, an important component of personal finance is not only to grow assets (using the power of interest compounding) but also to protect those assets (using the concept of risk diversification). One of the applications the students most enjoyed were the lotteries; they may be fun, but if you plan to become rich by winning the lottery, you are in dire need of taking this course!
And speaking of the future, one thing that changes over time is prices, for example, the prices of the goods we normally buy (this is what the Consumer Price Index, or CPI, measures). This is a bummer, because it means that if our money does not grow, our dollar today will buy less tomorrow. In other words, to make financial decisions we need to understand inflation and what inflation does to our purchasing power. This is why in the third lecture I turned to macroeconomics, and we studied inflation and the difference between nominal and real interest rates. It was also a lecture designed to teach the critical role of central banks and why we need these institutions in the economy. I hope my students have a better understanding now of the Herculean job that Chairman Bernanke and President Draghi have at the helms of the US Federal Reserve and the European Central Bank, respectively. Given that, by this time, students knew about interest compounding, we also covered economic growth (it is the same formula!) and calculated when China’s economy is expected to surpass that of the US. Write me a note if you, too, want to know this.
In the final class, we covered many applications that were also sprinkled through the other lectures. Armed with the knowledge of the fundamental concepts we had covered, there were almost no decisions we could not attack! For example, we calculated the return on the investment in an MBA degree and whether (and when) it makes sense to leave your job, pack your suitcases, and head to school again. We looked at methods of payment and when it is advantageous to lease versus pay cash and the implicit interest rates in a stream of payments required, for example, when paying back a loan. We calculated the gain from exploiting employers’ retirement saving matches and the return on contributions to Social Security under different longevity scenarios. Most importantly, we calculated what it takes to become a millionaire and discovered it is not overly complicated (again, you need to take this course if you want to know).
There were several rewards in teaching this course. First, I could finally pack my bags and head to the beach in mid August, when the sun in Italy was still burning. Second, I felt like I was making a difference—as my dean would say— if not in people’s lives, at least in their financial decisions. One student sent me a thank you note at the end of the course that was very touching and inspiring. So inspiring, in fact, that I plan to keep it in my desk drawer and read it whenever I return from conferences that discuss the futility of teaching interest compounding and the ineffectiveness of financial literacy.
For more information, see Changcheng Song (2012), "Financial illiteracy and pension contributions: A field experiment on compound interest in China."
http://www.baf.cuhk.edu.hk/research-activities/research-seminar-detaill.asp?DID=3&id=1220
Monday, 3 September 2012
Reflections on Eastern Europe
For those wondering....I have been traveling through Eastern Europe for the past three weeks, spending time mostly in countries that emerged from Soviet dominance in 1989-91. I visited some of these countries before the Soviet breakup and the difference is breathtaking. Freedom is breathed on every street corner. Gone are the gray and dismal lines of people shuffling along the streets with their eyes on the pavement. While there may be issues here and there -- there always are issues when people are free -- there is no question that all of these countries are in a better situation.
Putin is, of course, not happy about this. Gone is the Soviet empire. Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world. These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.
I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989. The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world. He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.
This Euro is a hot topic here. None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union. There is widespread agreement here that the Eurozone will not survive the current crisis. The numbers provide no prospect of survival. It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds. But, that strategy only puts off, briefly, the ultimate outcome. The Eurozone cannot pay its bills. It's that simple.
It is well known here that the US situation is no better. Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.
The Eurozone and the US have essentially the same problem. As societies get wealthier they decide that their governments need to do things, more things. But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations. For a while, this seems to work. But it doesn't work any more. There is no set of taxes, spending cuts or anything else that can make it work. The only mystery is when and how it collapses.
Most of the problems in the western world are bi-partisan in nature. This isn't a situation of Republican vs Democrat. Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment. The same is true in Europe. It seems democracy is ultimately a ticket to big government, improperly financed.
But those countries not in the Eurozone are generally in a much better position. Countries in Asia are sitting well also. Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates. As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.
Putin is, of course, not happy about this. Gone is the Soviet empire. Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world. These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.
I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989. The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world. He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.
This Euro is a hot topic here. None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union. There is widespread agreement here that the Eurozone will not survive the current crisis. The numbers provide no prospect of survival. It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds. But, that strategy only puts off, briefly, the ultimate outcome. The Eurozone cannot pay its bills. It's that simple.
It is well known here that the US situation is no better. Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.
The Eurozone and the US have essentially the same problem. As societies get wealthier they decide that their governments need to do things, more things. But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations. For a while, this seems to work. But it doesn't work any more. There is no set of taxes, spending cuts or anything else that can make it work. The only mystery is when and how it collapses.
Most of the problems in the western world are bi-partisan in nature. This isn't a situation of Republican vs Democrat. Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment. The same is true in Europe. It seems democracy is ultimately a ticket to big government, improperly financed.
But those countries not in the Eurozone are generally in a much better position. Countries in Asia are sitting well also. Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates. As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.
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