Real austerity could work - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 8 May 2012
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Baltimore, Maryland

In yesterday's note, we learned that the Pentagon has gone rogue. This assertion is so shocking...and so apparently irresponsible....a few Dear Readers wrote to suggest that we had spent too much time in the hot Argentine sun.

Clearly, the burden of proof is on us...more in a minute.

First, let's look at the economy. The financial news yesterday was dominated by alarming reports from Europe.

"Backlash," said the Financial Times...referring to an "anti-austerity wave" that washed over Europe in weekend voting.

If the FT doesn't mind mixing metaphors, we don't either. But our metaphors are a bit different. What has happened is not a backlash but a wake-up call. It comes as voters realize that the placebo medicine -- phony, half-hearted austerity measures peddled by the Euro elite - don't work. They want an elixir with more of a kick to it. That's why the leftists are gaining so much ground.

In Greece, support for leftwing parties has trebled since the last elections. But what do you expect? The typical family has lost almost a third of its real income since the recession (which continues) began. Youth unemployment is at 50%. Young Greeks fear being a 'lost generation' that must emigrate in order to find jobs.

In France, Francois Hollande promises to be reasonable. But he won the election by attacking Sarkozy's austerity moves. He won't make Sarkozy's mistake. Instead, he'll go after the rich with a top marginal tax rate of 75%...and promise 'growth,' not 'austerity.'

The trouble with the austerity proponents is that they didn't go far enough. Budgets were cut. But not enough. The average deficit is still about 5% -- well above the Maastricht 3% limit. This left the deficit nations in tough spots. They cut spending, which angered the leftists and the layabouts. But they still were beholden to lenders to cover their deficits. And whenever their unemployment rates rose...or the GDP growth rate fell...they had to pay more for their borrowed money.

Real austerity - with deep cuts and balanced budgets - could work. But it contradicts the whole idea of government, which is to transfer as much wealth from the outsiders to the insiders as possible. Besides, such deep cutbacks would probably trigger a zombie revolution.

And by the way, 'austerity' is coming to the US too - if Congress doesn't stop it. Economists are calling it the "fiscal cliff." The nation is scheduled to run off the edge on Dec. 31st... Mohammed El-Erian explains:

Economists are rightly starting to warn that the United States faces a worrisome "fiscal cliff" at year's end. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling - and the failure of the "supercommittee" that followed - along with across-the-board tax increases would derail the U.S. recovery and undermine the well-being of the global economy. We should be avoiding the edge of this cliff - and politicians should not believe that they have until the end of this year to act.

The sequestration mandated by the Budget Control Act of 2011 and the reversal of the Bush-era and payroll tax cuts would essentially mean withdrawing from the economy some 4 percent of the national income in one blunt go - and this doesn't factor in possible knock-on effects. The importance of this issue cannot be overstated. A fiscal contraction of this magnitude and composition would stop dead in its tracks the economy's nascent healing and job creation. Consumption and investment would be harmed. Foreigners would become more cautious about buying our ever-increasing debt issuance. And with our internal growth momentum weakened, the headwinds from the European debt crisis could prove overwhelming.

The austerity show has been playing in Europe for the last two years. That's why half of Europe is in recession...with the other half not far behind. Europeans are tired of it.

So, now the Europeans seem to be giving up on phony austerity and turning to phony growth. They are going to spend more borrowed and printed money. This will look vaguely like "growth." There will be more jobs and more incomes. But there will be precious little real prosperity going on.

Of course, going for growth is precisely what got the developed world into such a jam in the first place. Too many people spent too much money they didn't have on too many things they didn't need.

In America, the Fed encouraged it with low rates...then after the private sector debt bubble blew up, the feds made up for the missing spending by spending more themselves.

In Europe, the euro-feds made a debt bubble possible by establishing a single currency bloc...with harmonized interest rates. All of a sudden Greece and Ireland could borrow as easily and cheaply as France and Germany. And so they did; they borrowed their way to the brink of bankruptcy.

Now, Francois Hollande has a plan. He wants to make Europe more like America...with a central bank that lends to government directly and "mutualization" of credit risk. In other words, he wants to do what Alexander Hamilton did to the US in 1791, make the states collectively responsible for each other's debt. And then he'll let the ECB print the money to buy sovereign bonds directly.

Yes, dear reader, the trend towards centralization continues...with central financial planning...central bank counterfeiting...and everybody going broke together.

In Europe, as in America, it's one for all...and all for one...

...and every man for himself.

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*** The pentagon goes rogue...

The Obama Administration deserves credit. What other government ever reached such staggering achievements?

On the home front, as we reported last week, over the last 4 years more people have been declared disabled than have found jobs.

And overseas, an American soldier shipped out to serve in Afghanistan is more likely to be killed by himself than by the enemy. That is, the suicide rate is higher than the rate of combat losses.

Which raises a question. What kind of military force would fight a war in which its soldier's worst enemy was himself?

Answer: one that has gone rogue.

What happens when a military establishment goes rogue? Simple, it stops serving the country and begins serving itself. Instead of protecting the nation from war, it deliberately causes wars. Instead of defending the country's most sacred principles, it over-turns them in the interests of national security. Instead of holding expenses to those that are actually necessary and appropriate, it sucks up so many resources it weakens...and ultimately destroys...the economy it is meant to serve.

Typically, as the nation becomes more financially desperate, it also becomes more disorganized and unhappy. Strikes, mob violence, terrorist attacks increase. Then, to the noise of cheering crowds, the military makes its move.

That is what happened, for example, in Argentina in 1975. Isabelita Peron was making a mess of the economy. Her chief economist was a fellow named Celestino Rodrigo, who believed he was the Archangel Gabriel reincarnated. No kidding.

Rodrigo knew no more about economics than, say, Ben Bernanke. On July 17, 1975, he devalued the peso...yes... by "more than 100%." Which proves our point about money from "out of nowhere". Take away 100% of something and what do you have left? Nothing. So, what do you take away the "more than 100%" from? The same place you got the money in the first place.

At first, the crowds were delighted with Rodrigo. Then, he raised prices and the fickle mobs of Buenos Aires turned on him. They coined the term "rodrigazo" to describe the fiasco. He was gone in a few weeks. So was Isabelita, who had to be rescued from the roof of the president palace by helicopter.

Then what happened? Another election? Nope. Robert Cox tells us:

"...the armed forces, encouraged by the establishment, the media and public opinion, not to speak of the guerrilla/terrorist organizations, preferred another military dictatorship..."

When economic policies fail, people soon get sick of the politicians. They want a more muscled form of leadership. Uri Avnery describes what happens:

In some countries, they arrest the president, occupy government offices and TV and annul the constitution. They then publish Communique No. 1, explaining the dire need to save the nation from perdition and promising democracy, elections etc.

In other countries, they do it more quietly. They just inform the elected leaders that, if they don't desist from their disastrous policies, the officers will make their views public and precipitate their downfall.

Such officers are generally called a "junta", the Spanish word for "committee" used by South American generals. Their method is usually called a "putsch", a German-Swiss term for a sudden blow. (Yes, the Swiss actually had revolts some 170 years ago.)

What almost all such coups have in common is that their instigators thrive on the demagoguery of war. The politicians are invariably accused of cowardice in face of the enemy, failure to defend national honor, and such.

Don't expect a military coup in America. It won't be necessary. The security industry already gets 8% of GDP - about the same amount as America's deficit. With that kind of money to spend, there is barely a single member of Congress or a single corporation that the Pentagon can't buy.

More to come...

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

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