»The Daily Reckoning by Bill Borner

Can Europe go the same way as Japan?

Baltimore, Maryland

Dow up 198 points yesterday. Why? People think the Europeans are going to sort out their problems. But are they?

Europe is the world's biggest economy. It is menaced by bank and government debt defaults. It is growing old and has far more social spending obligations than it can afford. It is paralyzed by competing national governments and decentralized financial institutions. It can say 'drop dead' in 17 different languages.

And if Europe goes into a deep or prolonged economic slump, the rest of the world follows. Because Europe is a big customer, not only for Asia, but for America too.

The only way out of the debt problem for Europe is growth. Austerity alone won't do it. Europe's debts can only be serviced if the economy grows. Not that we're counting on it. On the contrary, we're guessing it won't happen.

Europe's social spending can only continue if there is growth. Without growth, everything goes bad. Debts can't be paid. Public workers can't be paid. And neither the stock market or the bond market are worth nearly as much as people think they are.

Everybody assumed growth would continue - even if it were interrupted from time to time by recession. Every recession since the '40s has been a relatively quick and relatively painless pause, not a major change of direction.

But now, something seems to have changed. Maybe it is a Great Recession, as some call it. Maybe it is a Great Correction , as we call it. And maybe the age of growth is over.

What a helluva thing that would be if it were true. When people lent money to government and private borrowers they were betting on growth. When the government extended its promises of pensions and health care, it was counting on growth. Take away the growth and the credits and promises turn bad. And if they're bad, the whole capital and government structure is in danger. Without growth almost all the world's major banks will go broke. Without growth, every government in the developed world will default (or worse). Without growth, the world we have known falls apart.

But why would growth stop?

We don't know. But it stopped in Japan. Today's output in Japan is actually lower than it was in 1991. What happened? Banks were over-indebted. Corporations were over-extended. Real estate and housing were over-bought.

The Japanese government has been able to hold things together...but only by over-doing it itself. Now, it has such heavy debt that the home islands may sink under the weight of it. Stocks and property have lost about 2/3rds their value. There are no more jobs than there were 20 years ago..

And still no sign of growth.

Could Europe go the same way? Yes, it could.

How about America? Ditto.

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*** We arrived home yesterday in the midst of a major rain squall. Water dripped from the ceiling of the kitchen in several places. Pools of it had formed on the soaked plywood. The tide was rising in the basement too.

The plastic over the windows had been ripped by cats. Wind and rain blew through the flapping holes. The makeshift furnace was running, but it made little headway against the prevailing winds and falling temperatures.

This does not seem like the way your august Daily Reckoning editor should live, does it? Which is the point we made to Elizabeth just before she got mad.

Earlier this year, Elizabeth had decided that it was time to renovate our house. But the renovations did not go as expected, so when we returned from Europe we found ourselves practically homeless. Now, we live in a construction site. It's not too bad when the sun is shining and the weather is nice. But when the weather turns bad, as it did yesterday, it is miserable.

"How long are we supposed to live in this place," we wanted to know.

"Stop complaining...it will toughen you up."

"I'm already tough enough. I'd like a little comfort."

"Comfort is for the weak and the old. You don't want to be weak and old, do you?"

"Achoo! I think I'm getting pneumonia."

"You're the one who is always extolling the virtues of simplicity. Stoic philosophy and Spartan living, isn't that your recommendation?"

"Yes, but only when it is warm."

"Couldn't you think of it as an adventure? Like camping out. And it will only last a little while longer. The windows have been ordered. The tile is coming in soon. They'll be able to get this place back together pretty fast."

"Achoo! I hope I can last that long..."

*** You'll recall that two days ago we introduced our new theory of government. Of course, we are not entirely serious. And not entirely unserious either.

But it hardly rises to the level of a theory. It is more like an insight:.

Government is the natural phenomenon wherein the "insiders" take wealth, power and status from the "outsiders."

They may provide a useful, even necessary, function - such as keeping the peace. Or they may not. They sometimes redistribute wealth among the outsiders. Sometimes not. They sometimes claim to be acting in the name of the greater good...and often do not. Sometimes they claim their privilege from God; sometimes, they don't bother. But they always take wealth, power and status from those who are not among the insiders.

We've already seen how a small group of Romans were able to reach beyond their home town, for nearly 1,000 years, taking wealth from people on the outside. One tribe fell under their control. Then another. Then, one town. And another. And always the power, prestige and wealth flowed back to Rome.

But not all Romans benefited in the same way. Rome itself was divided. During the Republican period the insiders were the leading families who controlled the Senate. Then came the dictators, the emperors, and the scalawags who were able to get control of the government. Often, they were military men, popular or cunning generals who rose through the ranks, murdered their rivals, and took the reins of power for themselves. Each brought in new insiders...and kicked out some of the old ones. Rome sizzled with intrigue...and sometimes erupted into open warfare, with one group of insiders battling it out with another.

After Rome fell, barbarian tribes swept over Europe. Local strongmen were able to set up their own governments. There was little theory or justification involved. They used brute force to take what they wanted. Then they settled down to govern. One local lord provided protection from other local lords. All demanded payment, tribute, wealth and power. In the largely un-moneyed economies of the Dark Ages, taxes were in the form of a share of output...and/or days of labor. A serf typically worked one day in 10 for his lord and master.

The local warlord and his entourage were the insiders. They took from the outsiders as much as they could get away with. Or as much as they thought it prudent to demand. Some even asserted a droit du seigneur, known in France by the more carnal expression "the right to the thigh." The local chief demanded the right to deflower the brides of his peasants. Even as recently as the beginning of the last century, Kurdish chieftains claimed the right to bed Armenian brides on their wedding night.

As the Dark Ages progressed government became less locally peculiar. Across Europe, serfs, lords, and vassals knit themselves together into the feudal system. One governed a small area and was in turn governed by another, who governed a bigger one. At the top was the king, who owed his allegiance to God himself.

Justifying and explaining the phenomenon of government also evolved. How to make sense of it? Why was one man powerful and rich and another weak and poor? Europe was Christianized by then. All men were supposed to be equal in God's eyes. How come they were so different in the eyes of each other?

Reaching back to into antiquity, the doctrine of the "Divine Right of Kings" was developed to explain it. Scholars did not maintain that kings were divine, because that would undermine the foundations of judeo-christian monotheism. Instead, they claimed that kings had a special role to play, that they were appointed...and annointed, by God (through his ministers in the church of St. Peter)...to rule. Some people thought the kings were descended directly from the line of Jesus Christ. Others thought that God gave kings a "divine" right to govern in His name.

In the fixed order of the world, each person had a job to do. One was a hewer of wood. Another was a drawer of water. A third was a king. Each man did his duty.

Scholars in the middle ages spent a lot of time on the issue. As a theory of government is seemed coherent and logical. But there were traps and dead ends in it. If the right to rule were given by God, man could not contradict Him. But men did. One divinely-appointed ruler met another divinely-appointed ruler on the field of battle. Only one could win. What kind of game was God playing?

And if God granted a man the right to rule other men, did that mean that every order he gave must be obeyed, just as though it had come from the mouth of God himself? And what if the king seemed not to be doing God's work at all? Adultery was clearly a no-no. God disapproved of it. But kings often made it a habit and a sport. Did not the king defile his body and betray his Lord? In an effort to explain away the problem, scholars put forth the idea that the king actually had two bodies. One sacred. One profane.

But which was which?

More to come...

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