The Solution That Doesn't Exist

Europe's problems are simple: every country in Europe -- there are no exceptions, not even Germany -- borrows to pay for promises that their own economy hasn't got the resources to pay for. The same is true in the US, but it hasn't become front burner yet. It will. Ultimately, you run out of people willing to loan you the money to pay for things that you otherwise can't afford.

It's not as if the US and Europe are borrowing to build bridges. That might represent a legitimate reason to borrow. Instead the indebtedness is a result of current funding needs that will only escalate over time. When does social security and medicare get less expensive? This is the heart of the European problem. They are not borrowing to fund long term investments, they are borrowing to fund the welfare state.

Put another way, they are borrowing for current consumption. The consumption being funded is part and parcel of the way of life in Europe, as it is in the US. There is no real difference. When your economy does not produce enough resources to fund it's obligations, then borrowing from somewhere, anywhere for a while will postpone the day of reckoning. But, not forever. Sooner or later bondholders realize you have no way to pay them.

So, what is the Obama solution. Float more debt. How? Who's going to buy it? Even if Germany were to relent and agree to underwrite the rest of Europe, Germany doesn't have the resources to do so. Once you have a debt that's not payable and you know that it not ever going to be payable, the jig is up. The jig is up. It's just a matter of time until the default process begins. That can either be an orderly process of "restructuring" or it can just be pure chaos.

If Greece returns to the Drachma, how does that help them? Who's buying Drachma based debt? And will Drachmas fund their social welfare agenda? Who's kidding who?

Economists are partly to blame for this fiasco because they have been negligent in pointing attention to unrealistic sovereign debt levels that exist in every western economy. In fact, they've encouraged these absurd debt levels by arguing that higher and higher government expenditures and higher and higher debt levels are good for economies. Read Paul Krugman if you want a taste of this reasoning. If your debt levels are growing so that you fund consumption by transfer payments to "entitled" people, it can't be good for the economy.

There is no serious economic research out there that suggests that this has any beneficial economic effects. Yet most academic economists have remained silent. Many are in the forefront of the clamoring for Germany to underwrite the Eurozone. But, that doesn't work either. Has anybody looked at Germany's numbers? There just isn't anyone left out there to buy bonds to fund other people's retirement at 60. It's over for that. This is not about European unity or a fiscal union or any other nonsense. The is about raw numbers.

A Journalistic Coup

John Isner, the top seeded American in the French Open which begins play today in Paris, found himself trapped when I discovered him with his entourage of trainers and coaches in his hotel in Paris yesterday. Isner had agreed to a 9 PM phone interview and made the serious mistake of providing me with the name of his hotel. I wandered over to his hotel and found him in the hotel lobby conversing with his tennis buddies and he graciously granted me the exclusive interview that I sought.

You can read the resulting article in Sunday's Daily Progress at Dailyprogress.com. I may not be a great sports writer, but I am doggedly persistent. I discovered, among other things, that tennis players at the top of the world rankings live much better than I do. Isner's hotel put my poor fleabag of a hotel to shame. His hotel was just off the Champs Elysee in a neighborood that I know I could never find a restaurant that I could afford. C'est la vie.

Today, the French newspapers were discussing the Spanish bank problems. They look insuperable. Combined with the fact that regional governmets are imploding financially, the latest in trouble is Catalonia, Spain looks like the next Greece. Spanish unemployment exceeds the levels the US reached in the Great Depression. Soon, the Spanish bond auctions will begin attracting more (negative) attention. This has pushed Italy to the back pages, but their problems will soon reassert themselves and gain better media coverage. The expectation now is that Greece is gone, but then what? There will be no good news out of Europe for a long while.

 I also read a review of another book on the problem of income inequality. I think I will write a book about the problem of tennis playing inequality. There is certainly a bigger gap than ever between the best players and the worst players. In fact, I suspect that is true in every sport. What to do? Why not forbid good athletes from training or competing? That might level the "playing" field some. Or just handicap all the good athletes. Make LeBron James carry an anchor around while he plays.

That seems to be the economic solution proposed by those that decry inequality. Isn't the real point to improve the economic position of the folks at the bottom? Why does it matter what the gap is between the top and the bottom? That is a ridiculous preoccupation and emphasizing inequality may preclude policies that improve outcomes for those at the bottom of the economic pile.

Of course, I am reading papers published in a country that just elected a socialist at its President. But, then, are his policies much different from those of Obama. The rhetoric seems identical. I guess I have to return to Asia to find a real interest in promoting free markets. Who would have guessed?

May in Paris

Greetings from Paris. It is another beautiful day in Paris where I find myself covering the French Open tennis tournament. This is my other job. The French Open starts tomorrow morning on the courts of Roland Garros. One of my favorite trivia questions is "who was Roland Garros?" You will be surprised. Guess before you google it and see how well you do.

 I am staying at a small hotel a block from the Tuilierries and around the corner from the Place Vendome in the heart of Paris. Wandering around this morning I discovered a parka for sale in a storefront, the price of which is equivalent to my extending my stay in Paris for another three weeks. Wonder who buys things like that? For a clue, I stood outside the entrance to the Westin Hotel to watch how the other half lives. One thing for certain, the other half smokes a lot -- at least they do in Paris. For the convenience of the wealthy tourists and locals in the area, there are conveniently placed receptacles on the sides of buildings that say: "Etienez votre cigarette." How handy! They also say, in English, "Take Your Pill." Hmmm.

I wandered by the Hotel Meurice. I stayed there once many years ago, but it now costs somewhat more than my roundtrip flight to stay there for a single day. But then, Smith Barney was kind enough to pay the bills back then. Here in socialist France, things are quite expensive. A soft drink will run about six euros in any of the establishments within a two block walk of here and it is best not to eat too often or you may not have enough money left to sightsee. A five day metro pass is a mere 31 euros, so getting around is cheap and you see lots of bicycles and motorscooters in use. But the cost of eating is so high, it is not surprising that are few overweight people on view. Not many older people either. Small wonder.

The local French papers say that Angela Merkel is close to a compromise with Francois Hollande regarding Euro-wide guarantees of sovereign debts in member countries. I would doubt that. But, if true, it simply extends the agony and postpones any real resolution of the Eurozone's problems, which is that the current debt levels are not payable. Extending them doesn't really get at the real issue. So more pain ahead for Europe.

I must appear an obvious tourist. The same pickpocket team singled me out twice yesterday in the Place Vendome. The trick is that one of the team appears to find a gold ring on the ground. They pick up the ring and ask if it is yours. Then, as you try it on at their request, another member of the team, finding you distracted, lifts your wallet neatly from your pocket. Since I had no interest in acquiring a ring or trying one on for size, the scheme did not work on me, but it is interesting that the same team tried this on me twice in one day.

Today, I have an exclusive interview with John Isner, 10th seeded (highest American seed) in the tournament. He is one of the few college grads on the tour. Wonder if he will hit a few with me after the interview?

The Jamie Dimon Saga

Jamie Dimon has made himself too visible.  He basked in the glow of a powerful Wall Street post and a left wing image.  Dimon was one of Obama's strongest supporters in 2008.  Like most of Wall Street, Dimon saw nothing wrong in loading up costs on employers, who had made the mistake of hiring workers.  After all, the workers that Dimon hires are high-end, highly skilled employees, who are largely unaffected by minimum wage laws, health care mandates, and a variety of worker protection schemes and union promotions (think "card check").  So Dimon, like Buffett, courted the media and made clear that he was a "caring" soul.  Now, Dimon is finding out, as Buffett will also, that this is not about "caring."  This is about a war on capitalism, waged from the White House.

Dimon had harsh words for Paul Volcker when the so-called "Volcker Rule" became part of the regulatory landscape.  Ouch!  Now, Dimon is getting blasted from the left.  See Simon Johnson's note in today's New York Times, where he quotes "Native-American" Elizabeth Warren and Socialist Bernie Sanders saying that Dimon should resign from the Board of Governors of the New York Fed.  Right!  And maybe put someone on the board that knows next to nothing about Fed Policy, like Elizabeth Warren or Bernie Sanders.

Ironically, J P Morgan should be praised, not villified, for owning up to a relatively minor trading loss that went awry.  J P Morgan weathered the 2008 crisis better than any other major investment bank and has been much more forthright than brethren banks.  But, no one cares about this.  All that matters is that Dimon and JPM stumbled and that is enough to bring forth the "no-nothings" demanding that something be done.  Whatever that something turns out to be, it will further damage the financial services industry and make it even tougher for a moribund economy to get off the mat and less likely that job seekers will find work.

But, who cares about the unemployed or the bad economy, when there is another rich guy to roast.

The Fixed Pie Theory

Modern public policy in Western countries seems to be based upon the assumption that the economy is a fixed pie, waiting to be divided up "fairly." How else to explain the economic utterances of President Obama and the leaders of Western Europe? It's all about who gets what. Now "economic growth" is on their mind. Where has that been? Who thought about economic growth when politicians were busy saddling their economies with regulations and mandates?

The political leaders of the Western world seem to think that the government spending is the cure for what ails us. If that were true, would we be ailing? When did government spending not exceed revenues in any country in the Western world in the last three decades? Now we need more of the same? This is like the drunk, awakening with a hangover, asking for another drink to cure a hangover. Except, there is no more booze available.

Back when, western economies grew and provided rising living standards for their citizens. But that was before noble minded politicians decided that workers needed protection from management. Now workers have that protection, but no new jobs to go along with it What good is worker protection, if there are no jobs?

All of this is based upon the idea that economies do not and cannot grow. If economies cannot grow then sitting down to divide up a fixed pie makes perfectly good sense. But, sitting down to divide up a fixed pie may mean that the pie can no longer grow. That's where we are.

 Labor and management are natural enemies, so say the modern polticians. Therefore, all political activity should be devoted to providing benefits for labor -- minimum wages, health care, litigation weapons, disability rights, and on and on. The modern politicians got their way and now the reality of a fixed pie is upon us. The western countries really cannot grow any more at any significan rate.

Double digit unemployment is the new reality, both in Europe and in the US. It isn't fiscal stimulus that is needed, as Obama thinks, it is reform of our labor laws, repeal of employer mandates and an unshackling of an oppressive regulatory climate. Absent these things, the pie will stay fixed and we can continue to argue about who gets what, as opposed to having the pie grow larger.

The G-8 as an Ostrich

The G-8 communique this weekend is more of the same. The communique calls for "growth measures" for the Eurozone and is an implicit slap at the austerity measures that were imposed, by Merkel and Sarcozy, as the price of bailouts for Ireland and Greece. No mention of the over-regulation and labor laws that have made the Eurozone, even in the best of times, an impossible place for anyone under the age of 25 to find a job.

The G-8 politicians accepted the Obama Administration view that you can put an enormous tax on labor and still expect businesses to be enthusiastic about hiring workers. By piling mandate upon mandate upon employers who make the mistake of hiring anyone, the government has effectively put a huge tax on labor.

Is it any surprise no one wants to hire anyone, when it is effectively against the law to fire anyone in Spain? The 25 percent unemployment rate in Spain has nothing much to do with austerity measures, since so far there haven't really been any in Spain. Instead, the completely stifling labor laws are the main culprit for the plight of those in Spain looking for work.

So, what does the G-8 want? They want the US and Germany to fund the extravagant lifestyles of southern Europe and avoid making any of the tough choices about de-regulating their economies. Obama, of course, was the loudest trumpeter of the increased spending demands by the G-8. More infrastructure! Sounds great. But, where is the money going to come from for this? Obama pledges US funds. Really? From where?

The Eurozone countries look to Germany, but Germany will ultimately collapse if weighted down by the absorption of the debts of the rest of the Eurozone. So, what is the plan really? Avoid hard choices. Pretend that there is money from somewhere to continue to fund promises to the citizenry. Blame rich people. That's it. In other words, there is no plan, just rhetoric. That's the Obama way and is now the G-8 solution.

But, it doesn't really matter. The German public and the American public are out of chips. They can't fund this stuff, even if they wanted to. Which they don't. So put your head in the sand once more. Pretend like there is a way available for everyone to live high on the hog without anyone really working or saving. This is what I would call the "Ostrich policy." Pretend and pretend. It will not end well.

The Stock Market Swoons

The US equity markets have given up more than half of their 2012 gains in the last two weeks as the market has plunged more than seven percent in that short space of time. Why? Fear of a weaker economy in the second half is the answer. The economy still seems to be barely moving forward and, with major tax increases on the immediate horizon (January is not far off), a weakish economy could potentially roll into another recession. The odds are probably fifty-fifty.

 But, there is no set of circumstances favorable to a strong recovery. An anti-business White House has put so many roadblocks in the way of economic recovery, that the best hope is a muddling through and that is getting increasingly less likely. JP Morgan's travails will strengthen the hands of those bent on straightjacketing the finance industry.

Who loses? The average American seeking credit and small business seeking financing. The enemies that Obama has on his radar screen are, unfortunately, the only people who can provide the jobs necessary to get the economy really going again. So, the war on rich people surges along out of the White House, while Americans search fruitlessly for the job creators. The government has run out of bullets and the entrepreneurial classes are frightened out of their wits by the White House. That's basically what ails the stock market.

But, stocks are cheap. But, they are cheap for a reason. With the steady drumbeat of bad news that will continue to pour out of Europe, it will be difficult for American stocks to mount much of a rally. There will certainly be big up days in brief spurts, but over the next few months, don't expect much out of the stock market. The politicians have given the equity markets too much to ponder over.