Friday, February 17, 2012

Why is it important to watch Europe now?

With so many battles to fight today in the U.S., you might wonder why I am spending time watching and writing about Europe. You could also point out that the U.S. is a vastly different sort of place. Policies and doctrines common in Europe since the fall of the Roman Empire were rejected in the U.S. We just do not have the socialist history that they have.

Unfortunately, the argument that everyone else is socialist is becoming accepted in the U.S. That was a big point in the argument for ObamaCare. We are becoming more like Europe. Our government has become a democracy in that demands for government controls and redistribution of wealth are now openly accepted as reasonable political discourse. Our government is spending like a drunken social democrat. Certainly our entitlement commitments are like what is happening in Europe. The problems they are seeing result from the same policies pursed by our own politicians of either party. The concept that made the U.S. different, individual rights, is just as unknown here today as it is in Europe.

Further, the economic policies practiced in Europe are based upon the same economic theories as is used by Bernanke, the Treasury, and the advisors of either U.S. party. Government action, focus on spending (consumption) as the power in the economy, regarding jobs only as a way to acquire income, and ignoring any real issue of production is standard everywhere.

The consequence is that the U.S. is moving toward a situation like that found in Greece, Spain, and Italy just as rapidly as France and Germany. I don’t know which large country will reach disaster first.

It is the case that our economy is not as regulated as those in Europe, although we are moving that direction rapidly. There is a lot of attention being paid to the steps required in Greece and Spain to make it a little easier to hire and fire an employee. But the controls and even the availability of capital aren’t changing much. Many core, important European industries are state owned and the labor unions have more sway than managers.

What is becoming understood, by many modern economists who regard themselves as scientists in some fashion, is that there are limits to the amount of debt that a government can sustain. This point was substantiated in a book, This Time is Different, by Carmen M. Reinhart and Kenneth S. Rogoff. For anyone who is serious about economics and the consequences of debt, I recommend this book. It is written by two modern economists, which means that their understanding and conclusions are superficial. They completely fail to recognize the difference between individual actions and those based upon force. Nevertheless, they provide important information and do offer some insight as to what the problems are in Greece, and soon the rest of the social welfare states.

The historical record is undeniable. If a government amasses debt amounting to more than sixty percent of their total production (considering only consumer goods), then they are tending toward trouble. Governments with more than one hundred percent are in trouble and there will soon be a financial crisis of some sort. The book does not mention interest rates, but certainly, if rates raise, the trouble is greater. From other sources, many modern economists seem to be convinced that the national production will be lowered by about one percent when government debt reaches ninety percent.

The U.S. will reach a government debt of one hundred percent of national production of consumer goods (called GDP) this year.

The book does not suggest what the financial crisis will be like. The world has not experienced a government debt crisis in an advanced technological country like ours, with the power that our government has amassed.

So I watch Europe to see how they are dealing with their problems and to see reality take its course. I watch to see if anyone questions their premises. I watch to see if any of the politicians choose to act intelligently or only with regard to their confused voters (see this article about the German PM) It is interesting that the Germans are now trying to put off the pending big, Greek bailout until after the April Greek elections.

I am looking to see how France and Germany confront their own fiscal/debt problems. Will they do something to actually improve their economies or not. France is headed for another Socialist government, it seems. The Socialist party is offering straight contradictions as its platform. It should be interesting.

I am not ignoring the U.S. and its impending problems. I just note that the big battle waged on the occasion of the vote to raise the U.S. government debt limit was over nothing. The amounts of the so-called cuts and what programs those cuts were suppose reduce were all inconsequential. It was all for show. A show that is now generally forgotten and ignored.

The only way that this country is going to avoid the gapping pits that Europe and the rest of the world are staggering toward is for some new group to make the obvious real to people. That means we have to do it. There is no other source for that understanding.

P.S. I watched Yaron Brook’s presentation as to why our country continues to make the same mistakes repeatedly and doesn’t seem to learn. (It was one of the videos at the bottom of the email I got from ARI. Number 191, I think.) It was excellent, and even if you know the issue, Dr. Brook’s phrasing and brevity in this complex subject is worth hearing.

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