10 May
2010
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Thinking this Through

I’m sitting here this morning, unable to do much work, stunned by the Euro bailout.  What we’ve done is invest in a state of perpetual financial crisis.  I think of it like this:

1) Greenspan/Bernanke drop our interest rates to 1% for something like 1 or 2 years
2) The real estate boom ensues, distorting industry globally
3) The mortgage industry defaults, destroying balance sheets and blowing up all derivatives
4) The Fed/Fed gov’t bail out the banks of America, creating a nearly 0% interest rate environment, and no incentive to invest
5) Debt is added to debt, and the value of each dollar is diluted through inflation
6) Who knows what’s next for America, but Greece is a good archetype

Meanwhile,
1) Europe is running a transnational welfare state with no fiscal discipline
2) The smaller, louder, less robust nations experienced a boom when they joined the Euro and reaped a higher purchasing power than they would have otherwise received on the market (Greece added high-end boutiques, strip malls, and funded an over-the-top Olympics)
3) Their spendthrift habits are catching up with them, slowly but surely
4) One by one, they are imploding.  Greece was first, and cost nearly $1 tril to keep “afloat”
5) Portugal, Spain, Italy are next.  They make Greece look small (because it is)
6) The citizens of Europe who live in relatively stable economies are about to get fleeced, as the bureaucrats begin diluting their currency and transferring wealth to keep unhealthy economies churning
7) They’re all managed by Euro bureaucrats, who answer to the elected politicians, who have as constituents a bunch of socialist voters

Both situations, in which authorities are rushing from one fire to the next to prevent outbreak/collapse, remind me of the readings I’ve done on the Soviet economy:

People: We have a shortage in bread.
Government: Increase bread production by 25%!
P: But now we have a shortage in flour?!
G: Ah!  Well increase flour production by 50%!
P: Now we have a shortage of corn??  And people are beginning to starve!
G: We must increase food production by 20% in 9 months, so long as it does not interfere with our GREAT military expansion!
P: The famine has gotten worse… the machines we use to farm have been neglected for too long.  You put the machine workers into the fields to grow more crops, but they stopped repairing the tools!
G: We will shift all available production from food to machines that make food!
P: But we’ll starve if you do that!
G: Good point.  We will shift all production into military efforts to prevent you, our slave population, from fleeing over the border!

G (alternate): We will import a quasi-legal underclass to support the scheme a little longer.  We will call it free immigration, open borders, comprehensive immigration reform.  When they riot, as they did in France, we will placate them, too.
And that’s about how it goes when you try to “manage” an economy, so it seems.

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