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.

More Reasons Why Oil Prices are Going Up

For all of you “oil price equals inflation” enthusiasts, watch what happens with Japan’s nuclear power industry. Reports are that after April of 2012 Japan will have no working reactors. They will have all shut down permanently for various, mostly irrational, reasons. To still provide power, Japan will have to import fossil fuel, oil, to the tune of about $30 B a year. Think that won’t have some impact on international oil prices?

Coal fired power plants in the U.S. are expected to be shut down over the next few years because of environmental regulations. Where that power will come from is not clear as far as I can see, at least publicly, but oil may play some role (I would like to hear form someone with accurate information).

Those people in the U.S. who are losing their coal-fired power plants will see a double attack on their standard of living. Not only will their electric bills go up by an estimated 40% to 60%, but their bill for fuel for their car will stay high or also go higher. Who will they blame?

In other words, for various reasons, mostly having to do with government regulations, we are going to see a necessarily higher demand for oil over the next few years. If the large developing nations, especially China (I have written about China’s potential difficulties, so its oil demand is not a sure thing.), continue to demand more oil, and the nations of the world continue to restrict the oil industry’s attempts to find, develop, and produce from oil exploration (government owned “oil companies” are not competent to fill this need), we will see oil prices stay high, very high. As of this writing, oil prices are about $90 a barrel for light crude. (The price is lower than it was because a few countries, including the US, released oil from reserves. This is a short-term bandaide and will only mask the problem until they stop releasing oil or can’t release any more. No one is moving to free the oil companies.) If China continues its present demand level, we can expect to see oil prices rise. If China has economic problems (as I think it will) then oil prices will merely stay near their present levels as all of these regulations and irrationalities play out.

Japan, Disasters Natural and Economic

Let’s start, not with economics, but with the scare of the century: nuclear energy.

Japan has now demonstrated that it is no more advanced or science savvy than any other country in the world. Its politicians are picking up on the irrational fears of a portion of the population and have begun pushing the country toward energy policies that will not only take them away from the safest and (if allowed to be) cheapest energy source, but will lead the country toward bankruptcy much faster than their current pace.

One thing that really astounds me, angers me, too, is that the media and popular frenzy over the problems at the Fukushima Daiichi power plant has apparently overshadowed the real, desperate plight of hundreds of thousands of their fellow citizens.

Further there is such a disparity between the real and, at best (worst?), potential danger. Where is the disaster? Think of it, all of the deaths and missing from the earthquake and tsunami versus all of the deaths and missing from the nuclear accident. Wait, what deaths? What missing. So the actually dead and missing from the actual disaster have been shuffled aside because of uneducated, poorly founded, hysterical fear of a potential. (At this time three employees of the electric company have died, two from the tsunami. I have not seen a report as to the cause of the third death.) Even the property damages are not comparable. The tsunami destroyed, obliterated, thousands of homes, businesses, and all of the infrastructure for over five hundred thousand people. Around the power plant, all of the homes and belongings are there, and, at this point, there has been no scientific suggestion that the contamination from radiation that there might be is anything but short lived. Some of the radioactive material that has been mentioned has a half-life of a few months and much of the material that has reached the ground around the plant will be washed away. Of course, we will not know the actual damage until the problems at the power plant have been solved. But that is what is missing here, knowledge. We have hysteria, not thought.

Granted, one has to recognize that Japan, alone among nations, has some reason to feel more concern about radiation. It has its own history. I do not want to belittle or underestimate the personal feeling many Japanese may and do feel. But I think that the Japanese who are voicing their fears and declaring nuclear energy to be evil have not given their personal connection to radiation proper respect, either. Rationally, you would expect someone to do research and learn about the reality that concerned them. Knowledge is the first and best way to deal with a subject, especially one that has such a scientific foundation. But, no, there is no evidence that the protestors or whimpering, crying “victims” have made any attempt to gain knowledge. They expend all of their energy beseeching the government to protect them and make Japan nuclear free. Instead of knowledge they went for dumb and are unquestioningly giving more power to the politicians, who go for dumb by definition (by choice).

Also ignored is the fact of the unprecedented size of the earthquake and tsunami. The earthquake is one of the largest man has experienced. There hasn’t been an earthquake to rival the recent one for over a thousand years in Japan. The tsunami was equally out of the ordinary. The preparations at the Fukushima Daiichi Power Plant protected it from a wave three houses high. What it got was one four houses high. One wonders that if the planners had proposed protection from such a massive tsunami, and insisted on funding the required cost, would the government regulators in Japan have allowed such an expense. The entire controlled planning process is ignored.

We see the same type of reaction from hysteria and ideology in California. People are shown on TV trooping down the beech near a nuclear power plant, claiming that if there were to be a big earthquake there, the power plant would suffer the same fate as the one in Japan. Yet, if you were to discover that the power plant has been built with a 8.5 magnitude earthquake and not a 9.0, you would still have to wonder about the protestors. If such a disastrous earthquake occurred along the California coast, the fatalities and missing from the earthquake and tsunami would be enormous. Where is their concern about the actual event? The fact that they are ignoring the obvious real, immediate consequences and worrying about what would be a mere potential, a maybe, indicates that they really aren’t concerned at all, but are engaging in thinly veiled ideological attacks on nuclear power, technology as part of the industrialized world, and capitalism.

At least those people in California can be ignored, since they would be swept out to sea by the tsunami never to be heard from again. They wouldn’t have to worry about potential radiation. But, in Japan, it is disheartening to see such ignorance paraded in a country that was so proud of their educational system and their recognition of technology as an important foundation to their prosperity and liberty. It indicates that the attack on the mind epitomized and lead ay Immanuel Kant has spread far and wide. His influence is not merely a Western phenomenon. When someone says that Western culture is spreading we know now that the spread includes the entire package. (I do realize that the historical culture in Japan isn’t particularly supportive of independent thought and learning. So the Japanese are being intellectually undercut by both influences.)

We can also see the spectacle of supposedly modern Western countries banning Japanese products without regard to the actual area of potential radiation. Apparently the Europeans do not have maps of Japan or have a clue as to its size. It is certain that there is little regard for science or reasoning in Europe, only the appearance of the authorities “protecting” the public. And by protecting, we mean stopping international trade and prohibiting free, voluntary exchange of goods and services. In the name of safety, we get lowering standards of living and a more rapid move toward poverty.

In the face of the reaction of Western Europe, one can hardly criticize a backwards country like Russia or even other Asian countries for similar hysteria.

Back to Japan, look at what is happening economically because of the earthquake and its consequences. Before the March 11 earthquake, the Japanese government was talking about finding new sources of revenue to cover the growing needs of the elderly and retired. They knew that the current arrangement, and the debt they expected to require would not be sustainable. They were headed for major difficulties. Now, with a small, but significant part of the country almost completely destroyed and over a hundred thousand evacuees living in shelters with their lives completely disrupted, not to mention the businesses of all kinds that no longer exist, plus the other consequences of the disaster, the Japanese government is being asked, demanded, to do much more. The government is being asked to backstop the damages that the utility company that owns the Fukushima Daiichi power plant in paying damages to the people and companies forced to evacuate from the area immediately around the power plant. (One hopes that there were actual dangers involved and not government hysteria.) The government is intent upon cleaning up the areas destroyed by the tsunami, building temporary housing, and, no doubt taking care of the survivors for some time. Communities across Japan are asking that their nuclear power plants be closed, and that the national government provide compensation for the resulting economic cost. The list of new demands on the Japanese government just keeps growing without any regard for reality.

The government is now asking for a supplemental budget from the Diet to cover their initial expenditures. At the same time, the current government is getting a lot of criticism. It appears that the governmental leaders haven’t spent enough or made sufficient promises.

The Japanese government just released figures that show their economy going into recession earlier this year (meaning output is falling). They expect the decline to continue throughout most of the year. So, the government is spending more, borrowing more, receiving less in taxes (or taking a greater percentage of the national and personal income in new, higher taxes) in a declining economy. They think that the governmental expenditure will help turn the economy around. They have not noticed that governmental expenditures haven’t help much over the last twenty years. No one there actually looks at the results of what the government does. They just make demands.

Japan is the world’s third largest economy. On a per capita basis, it is also a prosperous one (national figures don’t mean much, really). That it is in decline means a great deal internationally. It will hurt the Asian economy. It will hurt everyone. We are seeing again how the world economy, world production, is interconnected.

But one thing that you won’t see internationally from Japan is a government credit default. The problems we see in Europe won’t happen in Japan. Greece, Ireland, Spain, and the others have sold their debt, government debt, to a great extent to non-citizens, mostly foreign banking institutions. If Greece were to default on its debt, the problem would be felt in other countries, and we would have an international banking crisis, as we have had in the recent past.

Almost all of the Japanese debt is owned by its citizens, not by its banks (although I am sure that some is), but by individuals. Much is owned by the elderly. No wonder the elderly are dependent upon the government. They invested heavily in government bonds (the Japanese were, are, great savers) and the government has been repaying them by keeping the interest rate very low, about 1.25%! Japan doesn’t have a lot of price inflation, but it isn’t a cheap place to live. Getting 1.25% on your investment has got to make life very difficult.

When the Japanese government gets into trouble, because of all of the obligations it has, the people who will suffer will be its own citizens. The government will not be able to support them, pay their medical bills, or pay them the interest or principle on their savings. It is going to be a very great tragedy. The March 11 earthquake and tsunami will be relegated to secondary importance (Of course, a nuclear accident, with no deaths from radiation, will always be bigger than any other event. Just ask about Three Mile Island!)

When the U.S. gets to the point where its debt is so large that it can no longer support it, we will go more like Greece, and take the world with us.