Europe is defaulting on promises

Jan 31, 2011

Baltimore, Maryland

Friday may have been a key turnaround day. Stocks fell 166 points on the Dow. Gold leaped $22.

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What's up? Hard to say... we'll have to see what happens this week.

A falling gold price means people think things are under control...that they believe the present system works...and that it will deliver growth without excessive inflation.

When people lose confidence in the system, on the other hand, the gold price goes up.

By the end of last week, people must have been losing confidence.

Egypt seemed on the brink of a major blow-up, possibly destabilizing the entire mid-east.

And from Japan came more disturbing news:

"S&P Downgrades Japanese Debt," said the headline. Standard and Poors said Japan had no plausible plan for keeping itself from bankruptcy.

The country has the highest debt to GDP ratio in the world. And it just keeps adding debt.

Is that a problem? Lenders - mostly the Japanese themselves - don't seem to think so. They lend money to the Japanese for 10 years and ask only 1.24% interest. Can you imagine? If the yen lost only 2% per year - which is the TARGET in most advanced economies - the real interest rate would be negative. Meaning, the lender would lose money every year.

And how will the Japanese repay the money? Lenders are putting up money to a borrower who, as the S&P puts it, has 'no plausible plan' for paying it back. And asking only 1.24% interest. What are they thinking? Are they thinking at all?

Saving rates in Japan are falling. People are getting older. More people are retiring than entering the workforce. How can this movie possibly have a happy ending?

Meanwhile, here's another headline. This one probably didn't rattle investors. But it should have shown them where we're headed:

Spain to Raise Retirement Age to 67

MADRID - Spain 's government and main labor unions agreed on Thursday to raise the retirement age as part of an overhaul of the country's pensions system, averting threatened organized protests and responding to investors who have been demanding that Spain clean up its public finances.

After a year of negotiations, the draft deal ensures that Spain's normal retirement age will rise to 67 from 65. As part of a compromise, however, the government agreed that workers could retire at 65 if they had contributed to the state pensions system for at least 38.5 years. The agreement is also intended to cut the cost of future pension payments by basing the calculation for such payments on a worker's last 25 years of earnings, rather than the 15 years under current law.

Pension reform has been a political hot potato in several European countries, including France, which was hit last autumn by a nationwide strike and protest movement before the government won support in Parliament for its plan to raise the minimum retirement age to 62 from 60. Similarly, Greece was the scene of serious unrest after its government also agreed last June to radical changes to its retirement program - including cuts in benefits and curbs on early retirement - as part of changes promised by Athens in return for a Ä110 billion, or $150 billion, bailout.

Like many other Western countries, Spain is facing mounting difficulties in supporting the cost of an aging population, at a time when its economy is showing little signs of recovering from the worldwide financial crisis. Last year was the first in which Spain's pension system did not manage to run a surplus.

What is this? It's a default. Spain is defaulting on promises made to its working classes.

We'll see a similar default in all the advanced, social welfare economies. America included. They all made promises they can't keep. Now, they have to many different ways.

Some will cut back fast on promises in order to protect their credit. Others will let themselves be pushed to the wall - like Argentina in '01. They will not willingly cut back...they will be forced to do so. Then, when they run out of money, they will be unable to keep their promises. In desperation, they will seize assets and cause all sorts of mischief - just like the Argentines did.

Still others... like a ruined man reaching for a loaded pistol....will turn to the printing press.

It doesn't matter how many bailouts you give them. It doesn't matter how far down the road you 'kick the can.' All will default. The only questions are how and when...

*** Now here's something interesting. Every year, Foreign Policy magazine produces a list of the Top 100 Global Thinkers in the World. We picked up the list...looking for our own name.

But wait...

The key is that these are 'global' thinkers. They're not just thinkers, in other words, they are people who are thinking about how people on the other side of the planet should conduct their business.

We were suspicious even before we look at the list. 'Foreign Policy?' We're against it. Why should we worry about things that don't concern us?

" can't put your head in the sand," you might reply. "You have to be concerned, because things that happen overseas do affect you."

Yes, that is true. They affect us. But so does the price of whisky, the traffic on the Beltway, and the weather. None of them is worth thinking about. We can do nothing about them. And it would be indecent for us to try.

Imagine if we took an interest in the whisky distiller's business. What could we do? Try to force him to lower his prices? Try to show him how to operate more efficiently - as if we could know? Set up a buyers' cartel to negotiate for lower prices? At best, we'd be wasting our time. At worse, we might succeed! Then, whisky producer would be responding not to market forces...but to meddlers' forces. What a mess that would be!

Meddling with things close at hand is bad enough. Meddling with things far away is worse. Remember our Daily Reckoning dictum: ignorance increases by the square of the distance. The farther you get away the harder it is to tell what is going on. The details disappear. All you can make out are the rough outlines. Shadows...reflections...silhouettes... In the darkness, you step on every rake and fall into every hole.

The next thing you know, you are calling for 'reforms' in countries you've never even visited...setting the price of China's money...and invading Iraq.

But let's look at who Foreign Policy magazine thinks are the 100 Top Global Thinkers.

Uh oh. In the first and second place are Warren Buffett and Bill Gates. Hmmm. They're smart guys. But what makes them 'thinkers?' What have they been thinking about? And what are their thoughts on the subject?

FP says they are there, not for the contributions to the wealth of mankind, but for their philanthropic activities. Wait a minute. What's philanthropy got to do with thinking?

Okay... we're stumped on that, who's the number 3 thinker? Barack Obama! Hold on...this is getting silly. Have you ever heard Barack Obama come up with an original thought? Or any kind of thought worthy of the word? No. That's not his thing. He's a politician. Politicians are not thinkers. They may be doers...but they're not thinkers. Obama gives us plenty of empty expressions and hollow words - 'change you can believe in'...'hope'...'winning the future' - but real thoughts? Original ideas? Nope.

Generally, politicians are not thinkers. Occasionally, you get a politician who pretends to be a thinker - such as Princeton University chief Woodrow Wilson. But he almost invariably turns out to be a jackass and a fool.

There must be exceptions - Marcus Aurelius and Thomas Jefferson come to mind. But they seem ill-suited to the political profession and probably should have eschewed public office in the first place.

So let's keep moving. There must be someone on this list who is a real thinker.

Let's look back at last year...let's see...who was FP's top thinker?

Ben Bernanke!

Well, that does it for us. What's the matter with these people? Can't they tell the different between tired hacks with worn-out, crackpot ideas...and real thinkers?

The Foreign Policy editors should do some real thinking of their own. Then, maybe they'd mind their own business.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "Europe is defaulting on promises"


Jan 31, 2011

FP got the right list under the wrong head. This is a list of people who dont care for money. Bill Gates and Warren Buffet dont care for their own money. The President and Bernanke dont care for taxpayers money. That is the difference



Jan 31, 2011

Very well written piece, Mr. Bill. Those top 10 or top 100 lists are mostly dished out to serve the insatiable human appetite to rank things; however irrelevant that exercise might be. As to the FP's thinkers list, it seems according to them that the most richest and powerful men are also one of the greatest thinkers - and you rightly pointed out, what has philanthropy to do with thinking!! As to the Japan crisis, I have lived here for almost 3 yrs now (with plans to move back to India soon), it shows all signs of disaster. The youngsters dont have the drive and passion, are almost resigned to their fate, dont know how to respond to global markets (some companies and individuals are exceptions to the rule but seems that number is small). Most Japanese companies had relied on domestic consumption and have largely ignored foreign markets (with some of them still deriving more than 80% revenues from within Japan) but the Japanese customer is now spending a lot less and saving more; unsure of the job prospects and the economy. The youngsters, who form a small percentage of the population, have to provide for huge taxes in order to sustain the elderly population. And even I don't see that Japan has a plan - Japan has traditionally been a closed nation and doesn't welcome too much immigration; the expensive Yen is also hitting exports badly and the strongest statement from the Central Bank in years has been that "they are monitoring the situation"!!

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