$ 645 Billion Fund Makes Matters Worse Not Better

The problem is that budget deficits in Europe are out of control -- in every country. Nothing in the bailout package deals with that. The so-called "austerity plans" will not work in the middle of a recession. As the economies stagnate, so do tax revenues. So even budget cuts will be offset by revenue declines. Only economic prosperity will generate the tax revenues needed and, as prosperity goes forward, then budget cuts become possible, though they are never popular.

All the bailout package does is, ironically, postpone any serious efforts by European countries to bring their fiscal houses into order. So the situation will get worse. In a nutshell, the problems of Greece, Spain, Italy, and Portugal are now the problems of German and France. In time, someone will need to bail out Germany and France. Who will that be?

The only answer is to let Greece, Spain, Italy, and Portugal take some kind of controlled bankruptcy similar to what Argentina did in the late 1990s. Greece, for example, could offer bondholders $ .25 on the dollar for every bit of outstanding sovereign debt. Sure, French banks and German banks would then be in some serious trouble, but they are going to be in trouble anyway, eventually. Why not take the medicine now?

If you permit these countries to do a partial default, then there will be no need for extreme austerity measures and they can issue new debt, which they will now be able to do. This is the correct policy for Greece, Portugal, Italy, Spain, California, New York, Illinois, New Jersey, and so forth. There should be no bailouts. They will only permit miscreants to continue their miscreant ways.

Hello Portugal

Portugal's 2 year note finished the week at 8.78 percent yield. The prior week, the handle for the 2 year note was in the 5's. Hmmm. For bondholders, that's a pretty good hit, even for a 2 year note. It will get worse.

The European Union officials think the worst is over as they attempt to patch up a bailout effort for Greece. It is only beginning. Portugal cannot conceivably survive if has to finance two years notes at this yield. What will the EU do with Portugal?

Shall we move on to Spain and Italy? Who is going to bail out the German and French banks? Is everyone on the planet too big to fail?

The bankruptcy of the European welfare state is simply a matter of time. The best strategy is to let Greece go and not to compound this foolishness. The sooner the welfare state is demolished, and it will be demolished at some point, the sooner that Europe can begin a sustainable economic path. Either that or they will descend into the state run economy that held sway in China and Russia during the dark years.

Free retirements, free health care and bloated government sectors are not consistent with economic growth. Europe will learn, eventually.

Eurozone Bailout Won't Work

European leaders, rushing over the weekend to fashion a bailout of Greece, are simply throwing good money after bad. It won''t work. It is simple arithmetic.

The Greek economy, already in deep trouble, is now in a state of collapse, replaced by rioting and street violence. Where are the tax revenues going to come from in a country plunging into chaos? The answer: tax revenues will be falling not rising. The Greek fiscal situation is going to get much worse, not better.

Greek citizens do not support austerity. Why should they? Their politicians have been telling them for two generations that they are entitled to free retirements, free health care, and all kinds of government largesse. Who pays for this? Folks that buy Greek sovereign debt. The problem is that no one wants to buy it anymore. That won't change.

The problem is the welfare state. It is not sustainable, not in Greece, not in Germany, not in the United States. It doesn't work anywhere. It can work for a while as long as you can fool people into not worrying about who pays for this stuff. But, eventually, time marches on and the costs of the welfare state move in the direction of infinity. It takes time, but the end result is inevitable.

There is no fix for Greece and soon there will be no fix for France and Germany. Hang onto your seat belts. You can only drink the koolaid for so long.

Here's a glimpse into the future. German and French banks own more than $ 120 billion of Greek sovereign debt. Guess how much Spanish and Italian sovereign debt these banks own? Try $ 1.6 trillion! How's that sound? Spain and Italian debt is getting crushed in the debt markets and they are now on the watch list to follow Greece down the road to collapse. Who is going to bail out the $ 1.6 Trillion that German and French banks now own in Spanish and Italian sovereign debt?

Letting Greece (and ultimately, Portugal, Spain, Italy, etc.) simply go bankrupt is the only viable solution. All other solutions will eventually end in bankruptcy anyway.

A Good Jobs Number -- No Doubt About It

Today's employment number is good news, not bad news. The private sector has shown its first serious sign of recovery on the jobs front.

The unemployment rate moved higher to 9.9 percent, mainly because more than 800,000 people entered or rejoined the work force.

To keep this in perspective, we need a couple of dozen months like this to move the unemployment rate back into the territory that healthy economies exhibit.

We're a long way from that. But, this is good news.

Greece Should Simply Default

The idea that that the Eurozone can start a series of rolling bailouts is a joke. Greece should simply default. That would be followed by further sovereign defaults. Banks, who own these debts may end up defaulting as well. That is what should happen when you make bad decisions and buy securities that you shouldn't have bought.

The problem is not the debt. The problem is the spending levels: entitlements and the public employee costs. These aren't affordable anywhere. Further, entitlements destroy incentives to save and destroy incentives to protect your health. Once you assume that someone else is going to take care of your every need, you are in trouble. That's why Greece is in trouble. That German and French banks provided over $ 100 billion to Greece by purchasing Greek bonds is too bad. They should sustain the losses they deserve and move on.

Doubling down is not a solution. The solution is to eliminate the entitlements and reduce the size of government. If you don't do that now, you will simply have to do it later.

Our friend, President Obama, said it best: "The United States is the only civilized country in the world who cannot afford universal health care." He was dead wrong. No country can afford universal health care, if, by that, you mean "free" and "universal" health care. No country in the Eurozone can afford it and the US can't afford it.

Anyone can afford anything for a while, until the creditors demand to be paid back their money. That time has arrived for Greece. It will arrive for every other member of the Eurozone in time and it will arrive for the US in time.

There is no easy out.

The IMF -- A Predatory Lender

We have been treated, during the last three years, with frequent scenes of politicians villifying mortgage lenders, who loaned money to people who cannot conceivably pay that money back.

Now, comes Greece. The new predatory lender is the IMF. They are putting together a package that cannot possibly be paid back. No way. And, everyone knows it.

Borrowing the analogy from the US, when this mess finally collapses in a heap, one wonders if Obama will fault the IMF for luring poor Greece into taking on more debt that Greece cannot afford?

There is simply no way for Greece to avoid bankruptcy, with or without the IMF and the EU rescue package. Ditto for Spain, Portugal, Italy, France, Greece, and the US.

Watch out below.

Summers Admits Failure

This morning's Wall Street Journal has an article that focuses on Larry Summers' views on the future unemployment in the US. Summers is Obama's number one economic adviser.

According to Summers, "even on optimistic assumptions, there is going to be substantial unused capacity in this economy." No kidding! What Summers means by "unused capacity" is sluggish economic growth and sky high unemployment. Summers is admitting the failure of the Obama economic strategy, assuming there is one.

An economy that had under four percent unemployment just a scant five years ago, now cannot find its way back to eight percent unemployment. Why? How did the world change so fast?

Summers thinks its because of evil Wall Street. As long as that's how you see things, there is no way to turn economic engine around. Free markets can turn things around and quickly. But free markets are not part of the Summers-Obama agenda. Instead villification of the business community, higher taxes on entrepreneurs, more mandates on employers -- these are the strategies of the Obama Administration.

The predictable result: Summers' stagnation. He's right. They have shackled the economy in a way that recovery will prove very difficult.

Thanks Larry for setting us straight.