42 Grandchildren for 100 Grandparents

Mark Steyn nails the demographic problem behind recent financial crises.  He points out that in Greece there are only 42 grandchildren for every 100 grandparents.  In such a society, who will pay for the pensions of the not so elderly? (Many Greeks retire at 50.)  Some key quotes:

Look at it another way: Banks are a mechanism by which old people with capital lend to young people with energy and ideas. The Western world has now inverted the concept. If 100 geezers run up a bazillion dollars' worth of debt, is it likely that 42 youngsters will ever be able to pay it off?
. . .
If the problem with socialism is, as Mrs. Thatcher says, that eventually you run out of other people's money, much of the West has advanced to the next stage: it's run out of other people, period.
. . .
The notion of life as a self-growth experience is more radical than it sounds. For most of human history, functioning societies have honored the long run: It's why millions of people have children, build houses, plant trees, start businesses, make wills, put up beautiful churches in ordinary villages, fight and, if necessary, die for your country.

My friend KT would look at the problem as having its roots in our culture, much like Steyn does.  I am not so sure, because this demographic trend seems a feature of post-industrial economies.  Russia, Japan, China and Germany all have this problem.  India does not, but it has not pulled most of its people out of poverty yet.  America's demographic problem has been mitigated by immigration from poor countries.

The subject of how subsidies and immigration policy affect birth rate are subject for another day.  Suffice to say that cradle to grave "safety nets" create disincentives to having children to take care of us in our old age.

Towards an Imperfect Union

The Economist newspaper has come to the conclusion that European monetary union is in trouble; hoist on its own internal contradictions. They see the stark choices for Europe as either full on federalism with an accompanying loss of national sovereignty or dissolution of the euro, with attendant chaos. They then attempt to offer a third way that will not work because it fails to solve the key contradictions. This matters to America because chaos in Europe will deeply affect our economy and some of the lessons have direct applicability to our situation. From the leader:

One road leads to the full break-up of the euro, with all its economic and political repercussions. The other involves an unprecedented transfer of wealth across Europe’s borders and, in return, a corresponding surrender of sovereignty. Separate or superstate: those seem to be the alternatives now.

Why is this so? The currency union presupposes a single market; with one currency and goods and services flowing freely in response to the signals of the free market; just like in the United States. But this has not been achieved in Europe. Labor markets in Europe do not function like those in America. First, labor is not really free to flow across borders in Europe. Language creates barriers, as do habits of peoples used to living in their native land. More importantly, in many countries, and especially Greece, large sections of the economy are under state control. Employees are state workers, further restricting labor flows. Finally, national labor unions in Europe have lobbied national governments for restrictions on labor, in the way of required benefits, minimum wages and rules about firing employees and these rules differ significantly by nation.

Beyond the lack of an integrated labor market, some sovereign governments, by dint of their huge share of the economy, form a barrier to economic integration. The solution was supposed to be that member countries had limits on debt as a share of GDP. The Greeks cheated on this, but it was never realistic to believe that politicians could keep this promise over the objections of disgruntled electorates during a severe recession.

The Economist's proposal doesn't really address the core issues. It admits to a purely technocratic solution. They propose European central regulation of banking, to prevent banks from being pressured by national governments to by sovereign debt and to institute a European wide system of deposit insurance. Second, they argue for a limited effort to mutualise deb of all euro-zone economies above 60% of GDP. I don't really understand this latter plan, but I don't have to, because it won't be implemented. It is a sop to the reckless that the Germans will never accept, IMHO. They argue that this is not a step to full scale federalism. That's not the point anyway.

The move to European regulation of the banks is actually the move to federalism. As the banks are regulated by centrally, but lend locally, the local conditions will become the next target for central European regulators. If union demands make it unprofitable for banks to do any lending in Greece, for example; the logical next step is for central regulators to step in and change those conditions. Banking is so central to capitalism that central control leads inevitably to federalism. To the extent that countries continue on the path to socialism in Europe, their economies will be not be viable.

What would work? The only way that European monetary union would work would be to limit national sovereignty by preventing socialist and Peronist-style intervention in free markets. It is the size of the state sector, and uneven workplace flexibility, including restrictions on wages, that prevents a single market. Unless the EU is willing to guarantee a minimum level of market freedom, including a ban on state participation in the economy, then monetary union won't work.

For the U.S., I foresee a rocky road ahead, because European turmoil will affect our economy directly through the banking system and indirectly through trade. The U.S. already has a federalism with a largely flexible labor market, so most of the issues in the EU lack direct relevance to our situation. The biggest question is what happens if California or Illinois can't run their governments with the revenues they take in. Short of the employees taking serious pay cuts, I don't see any way out of the messes for those states. Greek state workers have already suffered this fate.

To paraphrase Abraham Lincoln, I believe this union cannot endure, permanently half socialist and half free.

Slow Motion Greek Tragedy

The slow and painful exit of Greece from the euro continued. I would actually applaud the move, because there was never any way they could remain in the currency union, except for the manner of his exit. Syriza (a left wing party that had a surprisingly strong second place finish) has failed to form a coalition of left wing parties. This probably means a new round of elections in June. Syriza's leader, Alexis Tsipras, has called for abrogation of austerity measures that were pledged as part of the bailout package from the Germans and ECB. This will effectively lead to the Greek exit from the euro, although he denies it. Tsipras has called for nationalizing the banks, restoring pay and pensions that were cut and all the usual leftist clap trap. If they leave the euro and inflate the currency, they can have their cake and eat it too, because they will in effect cut wages and pensions. From the Irish Times:

“The bailout parties no longer have a majority in parliament to vote for measures that plunder the country. There will be no €11 billion of additional austerity measures; 150,000 jobs will not be cut,” he said, adding he was only prepared to work with New Democracy and Pasok in government if their leaders sent a letter to Brussels reneging on their written support for the bailout programme.

Syriza came a surprise second in Sunday’s election, garnering 16.8 per cent of the vote and landing 52 seats in the 300-member parliament. New Democracy took an 18.5 per cent share but 108 seats, thanks to a 50-seat bonus awarded to the first party. In third place was Pasok, on 13.2 per cent, which took 41 seats.

Under the Greek system, the party with the most votes gets a bonus of 50 seats in parliament. This has probably denied the left wing parties a chance to form a coalition, because the more right wing party New Democracy, was the leading vote getter.

I doubt that the Greeks could ever comply with the "austerity" measures. It's not well understood that the Greeks have increased their taxes massively as part of the bid to reduce deficits. Nothing has really helped them out of their difficulties.

H/T National Review's Veronique DeRugy, from Matt Mitchell:

Lots and lots of papers* have now studied this question and the evidence is rather clear: the types of austerity that are most-likely to a) cut the debt and b) not kill the economy are those that are heavily weighted toward spending reductions and not tax increases. I am aware of not one study that found the opposite.

DeRugy points out that the asterisk refers to 21 peer reviewed papers. So it matters that the left is seeking to reverse the spending cuts but not the tax increases in Greece. In my view, the Greeks would be best off leaving the euro zone, reforming their tax code, through massive simplification, getting the government out of important industries, and imposing the spending cuts by inflating the currency. Their current situation is hopeless and even more socialism will just be the death knell for their society. It will be interesting to see how this plays out, because the right of center party remains committed to the euro and the left remains committed to fantasy football.

More Evidence the Greeks Will Default

As Dean is fond of saying constitutional republics, are like, hard. In the case of Greece, no matter what the government does, the people aren't going to accept the necessary measures to pay back their debt, and for good reason, they probably can't. However, in a parliamentary system, such a question should have been put to the people in the form of new elections before the negotiations continue. But the current "unity" government has plunged ahead with voting on austerity measures that seem uncertain to actually solve the debt problem, and definitely won't if too many more buildings are burnt and all the tourists leave. A vote would have the salutary effect of denying legitimacy to the protesters, because they would either have to live with the measures or take responsibility for the consequences of default. Either way, they might receive a dose of reality.

But this all might be mooted because even the Germans don't think the Greeks are going to pay much back, which has been my opinion all along.

The German finance ministry is actively pushing for Greece to declare itself bankrupt and to agree a "haircut" on the bulk of its debts held by banks, a move that would be classed as a default by financial markets.
. . .
Wolfgang Schäuble, the German finance minister, does not believe that any government would be able to implement them.

His pessimism has been tipped into despair with a secret European Commission, Central and IMF report that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120 per cent of GDP by 2020.

"He just thinks the Greeks cannot do what needs to be done. And even if by some miracle they did what has been promised, he - and a growing group - are convinced it will not pull Greece out the hole,"

The only remaining question is what happens after a de facto default? I think that the Greek economy is going to go through a long depression. The only way they will be able to receive new lending to finance a recovery, will be to pledge physical assets, like their islands and the Parthenon perhaps. Even then, lenders would be reluctant to accept the collateral without constitutional protections to prevent nationalization.

Pretty nice collateral?

But let's also be clear about the game being played by the rest of the EU. An anonymous commenter previously posted that it is not really that big a deal if the Greeks default, the worry is the example set and the impact to banks. Much of the worry has been about the spread of bank failure if Greek default causes Italian and Spanish bond yields to rise. Once again, too big to fail leads to irrational economic policy. No one wants to learn this lesson, not the U.S. and not the Europeans. Heck even the Chinese prop up their banks with enforced savings and below market interest rates for the working stiff. So instead of too big to fail, why don't we require ever increasing capital reserve requirements as banks become larger? That would make it harder for big banks to leverage access to cheap capital from the Fed to make easy money, but that should be their problem.

Taking Responsibility in Greece

I had the same reaction as fellow SLOB KT, regarding the decision by Greek PM George Papandreou to call a referendum on the euro bailout package. (By the way, I'd like to welcome KT to the SLOBs, he is a great addition, as well as a good friend.) The Greek people need to face up to their own responsibility for their future. A referendum is a good way to concentrate their attention and take the air out of their childish demands to be bailed out without making any fundamental changes to their system of government or economy.

Further, from a political perspective, the prime minister has little to lose. The New York Times is reporting that his government may collapse over the referendum question. But he was already a dead man walking, politically; new elections would give him a fresh mandate to govern or toss the problem to some other hapless sap who would have to live with the consequences of either default or austerity.

My personal opinion is that the Greeks should just default and exit the eurozone. They have proved they can't live within the rules laid down by the union, and full default, like bankruptcy would give a fresh start. The lack of foreign meddling would also concentrate the minds of the Greeks on solving their own problems, starting by re-instituting real capitalism and getting the government out of the shipping and tourism industries. Where would they get the capital to grow? They still own plenty of assets, including many islands that the wealthy or large corporations would love to lease or buy.


Here is a picture from the Greek island of Ios.


This could be the start of the Greek nation making a comeback. The first step is always taking responsibility for one's self.

Lessons from the Greek Tragedy

Successive Greek governments borrowed heavily and lied about it to sustain spending on high wages for public sector employees, close to half the work force. Now that the bill has come due, a massive general strike, further reducing the output of the economy has been called to protest austerity measures the current government is putting into place to please creditors and the other European governments who are putting up rescue money. Seemingly no one is willing to face the essential fact, that no amount of rescue money can save the Greek economy, especially given the popular mood in Greece. The current government of George Papandreou has said that elections will be called early next year, but his party is unlikely to retain power. From the WSJ:

Greeks have become frustrated, suffering from rising crime and suicide rates as more shops are boarded up and personal bankruptcies spiral higher. The country has a young-worker unemployment rate of more than 40% and likely faces a fifth year of economic recession in 2012 amid deeper austerity measures.

Austerity is the word for what the government is doing, but unwinding the socialist economy might be a better plan. Corruption, bureaucracy and significant state ownership of telecommunications, tourism and energy companies have wrecked the Greeks ability to grow their economy.

Ultimately, the outcome will be a default which will impact the Greeks themselves, such as pensioners holding debt, foreign financial institutions, and international institutions such as the IMF. The fear is that banks in Europe, especially France will fail as a result, which would lead to a global financial melt down. Additionally, Greece itself would suffer as liquidity would seize up in that country.

But, too bad. This is unavoidable. Putting into household terms, what if you owned a house which kept rising in market value, due to a bubble, let's say? Let us further stipulate that you borrowed against that rising value to fund your current expenses. Your spending was your income (A) plus your borrowing (B). When the bubble burst, you would have two problems. First, you could no longer live at your prior high level of expenditure A + B. Further, the same problems that caused the bubble to collapse might also reduce your income. Finally, you are saddled with the debt from borrowing and lack the means to pay it back. Even if you file for bankruptcy and move out of your home, your new lifestyle is significantly less extravagant than before. Further, you will have a hard time getting new loans to finance a new business, for example, if you wanted to go for a higher income. This is the problem the Greeks are facing. They probably can't afford to pay back their debts unless they sell their assets, and even then, I am not sure that would work. They are going to face drastically reduced average incomes for some time to come. Right now they are striking and protesting, rather than dealing with moving away from the socialism that got them into this mess in the first place.

This also is essentially the message Chris Christie has for the union employees in New Jersey. You were lied to before, and the promises made cannot be kept. Unless we restructure pension deals you won't get paid at all. The earlier we start working on a solution the better, because the problems just keep getting worse the longer we put this off.

Miscellaneous Musings

I missed the Republican debate tonight, by all accounts, that now seems like a wise choice. Gary Johnson was excluded and CNN moderated, what were we to expect? Sarah Palin said that the winner on substance was Newt Gingrich? Maybe that's true, but that's a sad night indeed.

Douglas Schoen polls the OWS crowd and finds some interesting statistics. The one I found most perplexing was "And by a close margin, protesters are divided on whether the bank bailouts were necessary (49%) or unnecessary (51%)." I thought this was a protest against the greed of the financial sector.

Fire Dog Lake takes exception with Schoen's characterization of the protesters as leftist radicals.

Here’s one of the key questions in Schoen’s poll:

What frustrates you the most about the political process in the United States? {Open Ended}

30% Influence of corporate/moneyed/special interests
3% Our democratic/capitalist system
3% Stagnant middle class wages
21% Partisanship
15% Joblessness
6% Income inequality
7% Corruption
2% Entrenched bureaucracy
2% Bush tax cuts
2% Obama abandoned left
2% Military spending
2% Federal Reserve
5% Everything

Out of this, which is mostly a pro-jobs, anti-special interest message, Schoen sees left-wing radicalism.

Hard to know who is more accurate both sides have some reasons to exaggerate their point.

Meanwhile, the #OWS crowd discovers a certain love, for well, private property.

Greece is probably going to default on its debt, with massive strikes being called as the Greek parliament prepares to vote on austerity measures.

Greece is expected to grind to a halt, with a general strike that could ground flights, halt most public services and shut offices and shops.

The 48-hour strike comes as parliament prepares to vote on the latest round of austerity measures, including more tax hikes, pay cuts and job losses.

The irony of further damaging the economy and making their own situation even worse seems lost on the Greek unions. The dysfunction in the Greek political system is such that no amount of good news (Germans and French agreeing on new terms) on the next bailout will change my opinion that the Greeks will default. David Skeel in the WSJ argues that the Europeans have failed to learn the lessons of the Bear Stearns bailout.

Europe can't afford to bail out Italy, so it might as well send the right message now by forcing Greece to restructure its debt. Greece is Europe's Bear Stearns.
. . .
If the European Union continues to treat rescue as the principal option for Greece, and to treat "default" like a dirty word, it is headed down the same path the U.S. took in 2008. As bad as that sounds, the consequences of going the bailout route will be far worse than they were in the U.S.
. . .
The U.S. isn't setting the best of examples in this regard, of course. By continuing to inject the government into the economy and failing to allow the markets—especially the housing markets—to return to normal, we almost certainly have prolonged our own period of low growth.

With more economic turmoil in store, I can't see an improved economy saving Obama from being a one-term President, that can now only be achieved by Republican ineptitude, of which they appear eminently capable.

Greek Solution - UPDATE

This so obvious, that it won't happen, but I can't believe it took me until today to figure it out. The whole reason for the crisis is that the Greeks can't slowly default by monetizing their debt (i.e. devaluing their currency thereby inducing inflation) the traditional deadbeat and third world way out of this kind of jam. This is because they use the euro as their currency and can't print more. Further, their deficit and debt ratios exceed the thresholds imposed by the treaty that admitted them to the union. Since they lied about their finances, violating the treaty, the EU should just expel them. Then they can do whatever they like. Since that will also put them outside the EU, it will also staunch the bleeding in the EU markets. Further, it will have a salutary effect on any other member nations not getting their act together.

Of course, this won't happen, because the whole world has adopted the paradigm of TBTF.

UPDATE

The Wall Street Journal, (the nation's real newspaper of record, IMHO) addresses the difficulties of my plan. But at least it shows that it is being considered.

From a legal perspective, there is no mechanism to force a country out of the currency area, European Central Bank legal counsel Phoebus Athanassiou argued in a December 2009 working paper. And while the Lisbon Treaty introduced a means for states voluntarily to withdraw from the European Union, it was silent on leaving the euro. Ultimately, that means the only way a country could leave the euro would be to quit the EU, too, according to Mr. Athanassiou. That raises the stakes far higher, since it would affect the rights and obligations of citizens and companies.

Practically, too, leaving the euro would be extremely difficult. Beyond the huge logistical problems in introducing a new currency and untangling the national central bank from the Euro system, a euro exit followed by a devaluation would likely leave a country with a mountain of unserviceable euro-denominated debt, leading to major legal wrangles, mass personal bankruptcies and huge losses for creditors.

Doesn't change my position, but it does show what it would take. Exit question, will the Greeks themselves decide this their best option?

Stupid Headline of the Week

This one is too easy:

Euro market meltdown resumes despite Greek deal

How about because of the Greek bailout? How about what did you expect? The Greeks have shown neither the willingness nor the ability to figure out how to deal with their debts and structural deficit. That 110 billion euro promised? Might as well flush it. And the reason the euro market is melting down? Clearly more bailouts are on the way; in for a dime, in for a euro.

The reporting in the linked headlines isn't near as bad as the editorial writing that came up with the headline. Some tidbits:

In Athens, striking public workers challenged Greece's 110 billion euro ($146.5 billion) bailout-for-austerity deal, starting a 48-hour national strike that shut down ministries, tax offices, schools, hospitals and public services.

While I can get behind the whole tax office shut down; you have to ask yourselves, are these people insane? Where do those public workers think their salaries come from? I guess they don't think. Further, just because there was a bailout, don't think default isn't in the cards anyway. Look who's been signed on to help the Greeks:

News that Greece has appointed debt restructuring specialists Lazard to provide "general financial advice" fueled speculation that some form of orderly rescheduling or payment moratorium may be likely, despite vehement official denials.

Finance Minister George Papaconstantinou told Reuters after news of the Lazard hire: "Any form of debt restructuring is out of the question."

The denials are certainly convincing to me.

And if you thought this was an amusing little comeuppance for uppity euro-trash socialists, guess who's also footing the bill. From W.C.'s column today, quoting John Mauldin of Investor's Insight:

Let me start this week's Outside the Box by venting a little anger. It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can't tell you how outraged that makes me.

To quote W.C., welcome to bailout planet baby.

Here is the picture accompanying the article:


Exit question, why a sign in English and why the commie hammer and sickle? OK that's two questions, but somebody help me out.

Making it Worse in Greece

KT has two updates, here and here, on the Greek bailout situation. Greek unions' violent protests cut off tourists from their hotels. KT points out that one of Greece' main economic pillars is tourism. He also points out the inevitable failure of the bailout as the the Greeks haven't really shown the will to make the changes needed to mend their balance sheets. Further, they've been lying so long, who knows if the approximately $150 billion will be enough.

Tim Cavanaugh at Reason Hit & Run, shows how the bailout is already making things worse. A few of the juicier quotes:

Second, while German Chancellor Angela Merkel is taking credit for bringing in International Monetary Fund support and forcing some tougher fiscal-cleanup conditions on Greece, the bailout does not address the counterproductive elements in Greece's own so-called austerity package, including currency controls and cash-transaction limitations that will only slow the country's economy.
...
Fifth, Marshall's [an Asset Manager] doubts are well founded. As they have shown throughout this crisis, Greece's strong and ancient socialist institutions can only respond to market discipline with violence.

Compare this video of lefty Greek protests with any Tea Party event:

TBTF Hits the Euro Zone - Acropolis Now

I am close to canceling my subscription to The Economist. Today's leader (not yet online) calls for swift and decisive action to bail out the Greeks despite their obstinate refusal to do anything about the root cause of their massive (115% of GDP) debt. I am typing the money quote (can't link it yet):

What then is to be done? The mounting crisis - and the fact that Greece will almost certainly not pay everybody back on time - will renew some calls to abandon it. That would spell chaos for Greece, European banks and other European countries: the effect would indeed be Lehman-like. hence the necessity, even at this stage, of a show of financial force, linked to the construction of a stronger firewall between Greece and Europe's other shaky countries. The priority for European policy-makers is to do the same as governments eventually did with the banks: to get ahead of the crisis and to convince investors that they will spend whatever is necessary.

In other words, invoke To Big Too Fail, again. The leader goes on to argue that for the Germans, this is not an act of charity, but of self interest. I say hogwash, because the crisis is that of moral hazard. Unless some nation or some large bank is allowed to fail and suffer the consequences, we are doomed to permanent bailouts. The Greeks to date have refused to take any significant action that would prevent a recurrence of their current predicament. KT is again spot on with today's analysis:

Greece has borrowed money until they can't service their debts. Also, they aren't competitive in the world market - their wages are too high relative to what they have to sell. You can tell this because they have huge trade imbalances. Greece is insolvent - that is, it's not that they need a loan to carry them through bad times, it's that they don't make enough money to make their loan payments. Bailing them out now will just sign you up for another bailout later.

Here in America we see this thinking in the supposed financial reform introduced by that paragon of fiscal rectitude, Chris Dodd. Dean points out the institutionalization of TBTF in the U.S bill in his excellent recap of the Heritage Foundation analysis. A snippet:

Creates a protected class of “too big to fail” firms. Section 113 of the bill establishes a “Financial Stability Oversight Council,” charged with identifying firms that would “pose a threat to the financial security of the United States if they encounter “material financial distress.” These firms would be subject to enhanced regulation. However, such a designation would also signal to the marketplace that these firms are too important to be allowed to fail and, perversely, allow them to take on undue risk.

When are we going to get it. The bailouts just keep coming because .... we just keep doing bailouts. STOP!

Greek Update and a California Question

And no, I don't mean a frat party at UCSD. KT has been keeping up with the Greek debt situation and alerted us to the fact that the interest on Greek two year debt has shot up to 26%, "...26% is what you would pay on your credit cards if you missed a payment." My question is to what extent is California going to go the way of Greece? California can't print its own money, just as Greece can't print euros. California apparently lacks the political will to tackle its structural deficit, a la Greece. California will inevitably ask the feds for a bailout, much as the Greeks have done with the EU. And the promise of a bailout may come too little, too late to help. Bottom line, I wouldn't be holding California debt if I could help it, and that includes waiting on an income tax refund check, like I'm doing right now. There's a name for chumps like me that paid too much in taxes to the state and are now waiting for that check, Unsecured Creditors. Last in line for you, pal.