Financial diarrhoea

I suggest that it wouldn’t be unreasonable to say we are all occasionally, act in a hypocritical manner.  We call ourselves law-abiding and then drive over the speed limit  or we call ourselves Christians but don’t publicly bear witness to Christ the Redeemer, etc..

It seems to me though that when it comes to hypocrisy, governments practise this on what might be called an industrial scale.  When the ‘government’ is the European Union, the scale increases exponentially.

Let me explain.

For a few years now, European governments and conservatives in the USA have been preaching the virtues of living within ones means and the need for austerity in order to get the country back on track, etc., etc..

How many times, in the last five years, has UK Premier David Cameron or his Chancellor of the Exchequer, George Osborne, spoken of the need for austerity and that cuts, in public expenditure,  have to be made?  How many times has German Chancellor, Angela Merkel or any number of other German, Dutch and Finnish politicians, lined up to lecture the Greeks, Spanish, Italians, Irish and Portuguese (the so called (and rudely so) PIIGS countries), of the absolute and dire need to reduce their government expenditure and to make swingeing cuts in public service provision and pensions, etc., etc.?  Cast your mind back and recall the same sort of comments coming out of the IMF and the World Bank.  Indeed, I also seem to recall some similar comments, in relation to Greece, coming out of the hallowed halls of Goldman Sachs.

Don’t bother ‘googling’ the subject, we can take it as read, that these members of the governing elites have spouted this ad nauseum. 

The cannier politicians ‘humanise’ this by putting this into a family context.  The line runs something like this:

Imagine that the UK (Greece, Ireland, etc., etc., ) is like your family household.  You have been living beyond your means for years – spending more money than you have been earning and filling the gap by borrowing more and more money each year.  You are now in a position where you owe so much that a not insignificant part of your earnings is just used to cover the interest payments on your overdraft or credit cards.  As a responsible family, you decide that this is unsustainable and things need to change.  So you abandon the 2-3 foreign holidays a year – you stay at home or holiday in your home country.  You eschew the latest electronic gadgets and curved wide-screen TVs and make do with what you’ve already got.  No more weekend shopping excursions buying impulse items, where your flexible friend (your credit card) takes the strain.So you stop the monetary bleeding by cutting off your expenditure or rather, dramatically reducing it – maintaining only that which is necessary for the basics of life.  Then you start to pay down the debt and get your finances on an even and sustainable keel.  After time, you develop a habit of avoiding debt and only buying for cash rather than on credit and all of the family accept that while the journey to where you now are, was hard, it was worthwhile as we didn’t drown in debt, which was a very real prospect.

And this is where the hypocrisy comes in. 

Those very same politicians ‘talk the talk’ but don’t ‘walk the walk’.  While they have been mouthing-off about the need for austerity, they have continued to spend taxpayers money like a drunken sailor.  Indeed, I do drunken sailors a dis-service.  When a drunken sailor runs out of money, he doesn’t rush off to the printers and ‘magic-up’ some extra bank notes.

And that really is the core of the hypocrisy of these governments.  Like the above mentioned family, they have been over-spending for years.  The 2008 financial crisis supposedly caused these governments to realise their wild spending sprees had to end and so we entered the times of austerity.

  

Except, we didn’t  - governments continued to borrow more and more money and interest payments continued to mount.  For the UK, interest payments on national debt is running in excess of £47 billion  (US$71Bn) each year – that is, more than the UK currently spends on defence or on education. 

There have been significant cuts in government spending in Greece and the other PIIGS countries  and these have directly impacted on people – so, using the family analogy, the multi –holidays and wild spending have been cut back but because earlier spending and borrowing in countries like Greece was so very far out of control, these cuts, severe as they are at the human level, are really insufficient.

Going back to the family analogy,  the family would have declared personal bankruptcy and the lenders would have taken a loss on the overwhelming part of their reckless lending.  That’s not the case here in Greece and the other PIIGS countries. 

The lenders - major international financial institutions and banks - have seen their assets - the loans to the Greek and other PIIGS governments - protected and their interest payments - income or revenue for the banks - continuing.  This was achieved by these PIIGS governments implementing austerity and creating major problems for their own people.   Youth unemployment in some of these countries is in the 50% region!  Ireland has seen an exodus, mostly of its young, that the 'celtic tiger' thinking back to the days of the potato famine, had thought was banished from its memory.  Not so!

In the other EU countries, bankers and their Central Bank ‘masters’ then came up with the wheeze of using  Quantitative Easing or QE.  This is the process whereby the country’s Central Bank ‘prints’ virtual money which it then uses to buy bonds issued (to fund the country’s deficit or overdraft, if you will) by the same country’s Government and its financial institutions.  The rationale is that this helps the local economy.  The reality is that this means that those preachy countries don't have to make the same cuts - which by rights they should be making - and could carry on spending beyond their own means.  It also supports those banks and financial institutions who can shore-up their balance sheets with good and reliable government debt - it's not as if those countries are going to default, is it?

A kind of quid pro quo if you like - large banks get their governments and the IMF, EU and World Bank to force austerity upon these really over-extended/borrowed countries and the banks then agree to not cry default on the loans that they have outstanding.  This helps the banks - they don't have to write-off their uncollectable loans - and it helps these more powerful governments - by not having to face the effects, of the extremely poor lending policies of these banks, on their own local economies, and it also keeps sacrosanct, a phoney currency like the Euro.  Then these banks use the money, that they can borrow ever so cheaply from their own governments, to buy the bonds issued by their very own governments.  Their own governments can issue cheap loans - essentially interest free - because the money is not real, it is virtual, created out of this air!  The banks' governments then have sufficient 'money' to avoid those austerity cuts that they have forced upon the PIIGS.

Yes that is all very confusing but that is what 3-card monte or a shell game is all about - it's a con!  The pea is never under the shell and the queen is never on the table except when the dealer wants you to see it!

And, dear American readers, please don't think that you have been above such reproachful behaviour.  You can expect any  US Government led by the likes of President Obama, Nancy Pelosi and Harry Reid to have absolutely no morality when it comes to economic matters.  They haven't in any other policy arena, so why would they have it here?  Also the US does have some rather large, and aggressively so, banks and these could not be allowed to suffer the consequences of their reckless lending decisions.  So QE was invented in the US and America needed to defend its leadership in the field by issuing a staggering $4 Trillion of phoney money.  Now, in fairness, the US economy has recovered - kind of.   America's GDP is growing but unemployment remains stubbornly high.  Some Americans believe that this isn't really so but then these people choose to ignore the individuals that have removed themselves from the jobs market which make the unemployment statistics look better.  The reasons for leaving the jobs market are manifold but it is strongly suspected that many people have just 'given up' looking for a job!

Not to be outdone, the European Central Bank has now decided to get in on the act.  They are to issue QE to the value of Euro 1.1 Trillion over the next couple of years.  This will stave-off any need to address the economic malaise in Europe by this act of financial ledger-de-main.  They will continue to allow Europeans, even in the strong economies of Germany, Netherlands and Finland, to live beyond their means, to enjoy short working weeks and extensive holidays and unaffordable welfare programmes but at some point (I guess in two to three years) the game will be up and things will start to unravel.  Indeed, given the large budget deficit already being seen in France (at more than 4% it already exceeds the 'allowable' level, set by Europe) we may have to amend the acronym to FIGSIP.

These countries, those in the European Union, the USA and UK, have managed to get away with these acts of devaluing their currencies, by the virtue of all doing the same thing and them being major currencies.  The Chinese Yuan is not traded widely in international markets and so people can only use, US$, £ or Euro and while all these countries practice monetary diarrhoea the devaluation isn't apparent - relatively speaking, there is no change since they get measured against each other.  

Except, Switzerland, which is above such financial shenanigans has removed its currency's peg against the Euro and immediately saw its unsullied Swiss Franc soar in value against the Euro - and that was before the ECB decided to switch-on the 'printing presses'.

In the elections that come-up in the coming months, don't be fooled by claims of one party being in favour of austerity and so support us because we care and don't support it  The current reality is that all of the major parties in all of the major economies are in favour of continuing, to a lesser or greater degree, the current over-spending and  reality-avoiding policies which store-up problems for our children and grand-children.

Not a good start to 2015!