Europe going the American way - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 11 May 2010
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Paris, France

Europe has lost its head!

First, the weather is completely out-of-sync with the calendar. Perhaps it's because the volcano in Iceland... The dust is blotting out the sun. There's no sun here today. Instead, the sky is pale grey. And it's raining. The calendar say's May 11th, but it could easily pass for February.

The euro markets lost their heads too. Yesterday, Europe exploded to the upside. Stocks went up. Bonds went up even more. Especially Greek bonds.

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Why the good time? Because Europe decided to follow the US into full-scale combat with the future. Yes, the Europeans are as eager to prevent real change from happening as their American counterparts.

The change they most don't want is what we're calling 'the Great Correction.' It's a combination of several corrections at once - including a correction of the welfare state.

Europeans live well. And thanks to so many transfer payments and so many government-provided services, they live well without really having much money to spend. Their incomes go to pay taxes and social charges.

Trouble is, they enjoy a standard of living that they can't really afford.

This will sound familiar to Daily Reckoning readers. For many years, we pointed the finger at Americans, claiming that they spent too much money. Americans lived beyond their means. Individual households over-spent and went into debt. That over-leveraging in the private sector in the US is now being corrected. At least, we think it is being corrected. (Recent figures are mixed...with some indications that private households are up to their old habits, trying to increase their standards of living by going into debt.)

In Europe, the phenomenon is a little different. It's the public sector that is living beyond its means. Military budgets are small. Most government spending is focused on services and transfer payments. This social spending is responsible for a big part of the GDP and a big part of living standards. But as in the US, living standards are higher than people can afford. Governments provide more employment, more transfer payments and more 'services' than they have tax revenue to pay for. The result is public debt, which is getting worse every year.

Europe, generally...excluding England, does not have high levels of private debt. The debt is in the public sector. That said, government debt in Europe, on average, is no worse than it is in the US. The Eurozone, altogether, has government debt to GDP of 88%.

In terms of deficits, Europe is actually in better shape than the US. US deficits are running around 10% of GDP - or more. In Europe, the average deficit this year is expected to be 6.6%.

In Europe, the center is solid. But like the edges of a carpet, the periphery states tend to get a little worn. Greek public debt is expected to reach 150% of GDP next year. Its budget deficit is as large as that of the US.

You can't sustain a debt of 150% of GDP - not unless you are Japanese. So, a correction was inevitable. Greece had to change course.

This is what caused a crisis last week, a 'rescue' over the weekend, and a sharp rally yesterday. America rescued its private sector. Europe is rescuing its public sector. Both are actually making the situation worse...but that subject is for a different day.

Rather than permit problems to correct themselves, the euro feds stepped in to aggravate them. That is, the euro feds are following the same program as the Americans. If people get into trouble because they have too much debt, the feds come to their aid with more debt!

In the event, EU financial officials worried that the Greek illness could be catchy. They were afraid that Portugal, Spain and maybe Italy would get whatever the Greeks had. So, they decided to inoculate the whole Eurozone with a $1 trillion program.

Where will the money come from? Just as in the US, it will come from people who don't have any. All the Euro states are borrowing money already. Now they will have to borrow more to pay for people who borrowed too much.

The plan calls for loan guarantees and money from the IMF too. Plus, the European Central Bank will do its part. It will go into public and private debt markets to buy troubled debt, the equivalent of the Fed's 'quantitative easing' program.

Yes, dear reader, the Europeans threw in everything they had. Under no circumstances did they want anyone to say it was 'too little, too late.'

It was a "historic" occasion for the European Union, said French finance minister Christine Lagarde.

On that point, she was surely right. Up until now, Europe had shown some dignity...some skepticism...and some good sense. It had intervened to protect speculators from their mistakes, but reluctantly. Now, it has thrown in the kitchen sink, the oven, the refrigerator...and everything else.

But what's this?

Asian markets seemed to slough off the Euro miracle this morning. And even the euro seems to wondering if this rescue effort will be as smooth and effective as people thought. Markets are quite likely to continue second guessing today...and then third guessing tomorrow... The gains could prove very short-lived.

Why? Is it too little, too late?

No, it is not. It is too much...much too early.

*** "More bullets to dodge on the road from ruin," is a marvelous headline in the Financial Times. If they had just changed one word it would have been accurate too. Europe, like America, is still on the road TO ruin.

"Everyone has had a wake up call about limitations [to state borrowing,]" the paper quotes an economist with HSBC.

But when the wake up call sounded, Europe - like the USA, hit the snooze button, rolled over, and when back to sleep. That is the real meaning and real effect of the bailout. Instead of being forced to balance their budgets right away, the wobbly countries, will get to wobble some more before falling down.

What else could happen? If Europe's fringe states are to avoid falling down, they will actually have to reduce their spending - drastically. And, to judge from the riots in Greece, that would mean dodging real bullets. We don't think Europe has the stomach for it. Neither does the USA.

*** On the Police State we're in...

Here's a twist for you: China criticizes US abuse of civil and political rights:

"In the United States, civil and political rights of citizens are severely restricted and violated by the government."

"The country's police frequently impose violence on the people. Chicago Defender reported on July 8, 2009 that a total of 315 police officers in New York were subject to internal supervision due to unrestrained use of violence during law enforcement. The figure was only 210 in 2007. Over the past two years, the number of New York police officers under review for garnering too many complaints was up 50 percent (Source: chicagodefender.com). According to a New York Police Department firearms discharge report released on Nov. 17, 2009, the city' s police fired 588 bullets in 2007, killing 10 people, and 354 bullets in 2008, killing 13 people (Source: gothamist.com, November 17, 2009). On September 3, 2009, a student of the San Jose State University was hit repeatedly by four San Jose police officers with batons and a Taser gun for more than ten times (Source: mercurynews.com, October 27, 2009). On September 22, 2009, a Chinese student in Eugene, Oregon was beaten by a local police officer for no reason (Source: The Oregonian, October 23, 2009). According to the Amnesty International, in the first ten months of 2009, police officers in the U.S. killed 45 people due to unrestrained use of Taser guns. The youngest of the victims was only 15. From 2001 to October, 2009, 389 people died of Taser guns used by police officers (Source: theduckshoot.com)."

"Abuse of power is common among U.S. law enforcers. In July 2009, the Federal Bureau of Investigation put four police officers in the Washington area under investigation for taking money to protect a gambling ring frequented by some of the region's most powerful drug dealers over the past two years (Source: The Washington Post, July, 19, 2009). In September 2009, an off-duty police officer in Chicago attacked a bus driver for "cutting him off in traffic" as he rode a bicycle (Source: Chicago Tribune, September 2009). In the same month, four former police officers in Chicago were charged with extorting close to 500,000 U.S. dollars from a Hispanic driving an expensive car with out-of-state plates and suspected drug dealers in the name of law enforcement, and offering bribes to their superiors (Source: Chicago Tribune, September 19, 2009). In November 2009, a former police chief of the Prince George's County's town of Morningside was charged with selling a stolen gun to a civilian (Source: The Washington Post, November 18, 2009). In major U.S. cities, police stop, question and frisk more than a million people each year - a sharply higher number than just a few years ago (Source: huffingtonpost.com, October 8, 2009)."

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 going the American way"

SYJ

May 12, 2010

Well said Nitesh..the concept of long term investing is slowly but steadily fading away. While there may be still gains in long term investing, the gains are now restricted to 15% or so. I think a new investment period of 2-3 years is evolving. Call it medium term or any other name, this period seem to give optimium returns. Even govt. is encouraging short term investing by removing the tax benefits for LTCG in the new DTC which will be effective from FY11-12.
Regards,

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Nitesh

May 11, 2010

The relief packages are such a pity. For investors like me who have always believed in long term benefits of stock markets, its a real conundrum because announcement of such relief packages brings rally in the short term but everyone including the government knows its long term repurcussions. Is the principle of long term investments always reap benefits only for gullible investors while others make money in short term and leave the losses to be borne by long term investors.

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