Wednesday, November 30, 2011

Kicking the Can - in Europe

Today's action of major global central banks to work together to ease the liquidity issues in Europe is sparking a major rally in global stock indexes, but fundamentally is doing little more than kicking the can a little further down the road regarding the EU's economic challenges.

Michael Hewson, a market analyst at CMC Market notes:
“It gives an indication that monetary authorities are prepared to do what is required to stop a freeze up in the funding markets. But, basically all they are doing here is QE (quantitative easing) on steroids. It does not deal with the underlying issues.”

As the New York Times reports in one of their stories on the move of the central banks...
Some analysts were quick to note that the program does not address the root causes of the European crisis, falling far short of the steps that the European Central Bank, in particular, is under pressure to take, like intervening in bond markets in support of Italy, Spain and other troubled countries.

“It doesn’t change any of the fundamental issues in Europe,” Michael Cloherty, head of interest rate strategy at RBC Capital Market, said in a note to clients. “We don’t think this is a real game changer.”
At best, analysts said, the move could buy the 17 European Union nations that use the euro a little more time to agree on a broader plan to stabilize financial markets.

The Economist also is sharing the viewpoint that the action today is doing little than providing a means to buy time...
This action has contributed to a surge in equities, but the move is less significant than it seems. The central banks are extending and expanding programmes that were already available, and the focus is purely on liquidity issues. The underlying dynamics of the euro-zone sovereign debt crisis are unchanged. As we've seen over the past few years, these actions can delay a meltdown but cannot, in the absence of other steps, prevent it altogether. Central banks have effectively provided hydration to a cancer patient; a useful thing to do, but ultimately just a means to buy time.

Addressing the liquidity issues of the major European financial institutions will assist those institutions to continue to provide credit services for the businesses of Europe. Most may be able to, with this boost, to weather a possible default of one or two of the most troubled countries in the EU without creating a cascading series of collapsing organizations even more dramatic than seen in late 2008 precipitated by the collapse of Lehman Brothers.

But as noted across these analysts and observers, none of the core challenges in the EU region are being addressed. When given the choice of taking decisive, but painful, action to address the root problem, once again the decision makers are choosing a path that is intended to provide an appearance of doing something while working to postpone the need to take decisive action as long as possible. Kicking the can down the road is far easier.

Why is it easier to kick the can down the road? Because making the claim to embrace austerity measures - to reduce entitlements and government deficit spending - is very hard. Voters are loath to vote against their government entitlements and gifts - and they are loath to help provide the government with the revenues that it needs to responsibly path for those entitlements.

As an example, Forbes Magazine notes that many 'rich' nations have gone broke in history by spending too Greece is doing now...
Greece has bloated government bureaucracies where unionized employees were accustomed to being paid for 14 months’ work every 12 months. For decades, Greek politicians pacified disgruntled citizens by adding people to the government payroll, and now about 1 out of every 4 Greeks work for the government. In an unsuccessful effort to pay for all the spending, taxes were raised so high that more and more Greeks did business tax-free on the black market. An estimated one third of the economy is “off-the-books.”

Everyone wants their cake for free.

Consider the post about the greed of the Teacher's Union of Neshaminy, Pennsylvania, or the actions of the public sector Unions in Wisconsin and Ohio to protect not only their political status and power, but to protect their financial benefits that are far wealthier than those available in to workers in the private sector - particularly if the company in the private sector wishes to remain competitive.

In Britain today, over 2 million public sector union workers are staging a 24 hour strike against the British government and their efforts to bring austerity to the government's budget and entitlement programs.
The strike closed more than three-quarters of schools in England, as well as courts, museums, libraries and job centres, disrupted transport, hospitals and government departments, led to around 15% of driving tests being cancelled and was described by unions as the biggest since the 1979 Winter of Discontent.

Civil service union Prospect said action by 26,000 of its members alone disrupted or stopped work at more than 400 locations, ranging from Ministry of Defence sites to prisons while more than 1,000 rallies were held across the UK, including one in central London attended by tens of thousands of workers, some accompanied by their children.

This is the largest such pro-union action in Britain since 1979's 'Winter of Discontent' which crippled the nation and antagonized millions of Britons. The country was facing a show down - either to embrace the socialism and economic stagnation advocated by the greedy public sector unions or to embrace austerity measures, limited government, and a return to common sense conservative economic policies. The result then? These steps paved the way for Margaret Thatcher to become Prime Minister and start the revitalization of Britain.

Margaret Thatcher famously said that when one embraces the socialism and progressive economic policies advocated by the unions and huge entitlements, there comes a tipping point where one runs out of other people's money - be it borrowed or taxed.

Europe is at that tipping point - but remains unwilling to change direction or face the tipping point. It's far easier to kick the can down the road...particularly thanks to the actions of the US and it's Federal Reserve Bank.

The thing is, here in the US, we are at the same tipping point....over $15 trillion in debt, $1.5 trillion annual budget deficits, Federal, State, and Local governments in financial dire straits because of irresponsible fiscal policies and kowtowing to greedy public sector unions. Like the members of the EU, like Britain, we've run out of other people's money. There is no one available to bail us out when we reach the edge of the cliff. That same cliff edge makes it harder to keep kicking the can down the road - because the road ends at the cliff.

We have very little time left to change our direction - and those who oppose that change in direction, the unions, the progressive / socialistic / Marxist Occupy movement are going to start resorting to more violence and threats to prevent any change in direction.

The riots that took place in Greece, the strikes that are plaguing Britain today, all of these are going to be taking place in increasing frequency here in the US until the American people make their last stand next November 2012. That is when we decide if we are to leap off the cliff or not.

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