The Condition Of The World Economy Reminds Me Of An Old Joke – But It Isn’t A Joke

Did you hear the one about the robber that stuck a gun in the face of the victim and said, “your money or your life?”  Here’s the punch line:  the victim said, “take my life, I am saving my money for my old age.”  This joke conjures up the behavior of world monied elites and their high paid technocrats.  Let me explain.

The Sick Joke

Saving in a capitalist system is a desirable and economically beneficial behavior.  However, hoarding is not a good behavior.  Bottling up too much money in sovereign wealth funds, college and non-profit foundation endowments, off-shore accounts, etc. reduces tax revenues, investment in plant and equipment, and direct fiscal stimulation of the economy   We have so much “super hoarding” throughout the world that demand for goods and services is weak while the world sits on piles of capital and idle factories – otherwise known as low demand, excess liquidity and excess capacity.  Not a good thing.

The government of China now has a current account surplus of $3 trillion – much of which is invested in low yield U.S. bonds. Yes U.S. treasuries are considered one of the safest places to park oodles and piles of excess dollars today.  What does that say about the validity of the S&P downgrade of U.S. debt?  With the price for a barrel of oil at the $100 mark, the SWFs of the oil exporter nations will keep growing at a phenomenal pace.  The top 40 university endowments are sitting on at least $200 billion.  With thousands of university endowment funds plus huge amounts of super-rich family dollars parked in 501(c)(3) or some other form of tax shelter, trillions of dollars that could be invested in roads, bridges, schools, housing, and other projects – in the people of all the countries of the world – is moved about the financial markets as the super rich attempt to enhance and/or protect their “hoarded wealth.”

The problem is this:  too much capital flowing into countries like Greece, Italy, Ireland, Spain, and Portugal from countries like Germany, from massive hedge funds, or from the petro-dollar recyclers in London and the U.S., fuels crony capitalism, speculative bubbles, politically popular too-low tax rates,  and ill-conceived and wasteful governmental programs (think farm subsidies, war, and other give-aways that do nothing for the betterment of society).  This became a particularly glaring problem when the world-wide economic weltanschauung morphed into the Reagan-Thatcher promoted “dog eat dog,” “winner take all,” deregulated, free market belief system.  In other words, grab all you can get and don’t give a damn about your fellow humans, the planet, and the future of the human species.

The Sick Punch Line

The super-rich and bankers in countries that invested heavily in bonds of countries like Greece fueled out-of-control consumerism – made possible by government fiscal policy.  Ostensibly, this was irresponsible behavior only on the part of the debtor countries.  However, as in the case of Europe, the consumerism of debtor countries fueled the very robust economic growth of  creditor countries.  In other words, the healthier economies of Northern Europe were recycling their export Euros back to the less healthy economies of Southern Europe so they could keep up their consumer madness.  It was a crazy feedback loop.

Eventually, all of this hot capital flow had to end badly.  The Southern European nations can no longer service their massive debt and, with bond yields rising rapidly, this can only get worse.  With U.S. and European banks heavily exposed in the European bond markets, this financial collapse will eventually be devastating.

But wait!  There is a solution.  The European Central Bank could step in and “bail out” the Greeks, Italians, Portugese, and so forth.  They could stop this catstrophe from happening and keep everyone from suffering badly – including the Germans.  If the collapse continues – and it may be too late to stop it – we are looking at a very deep world-wide recession and perhaps a depression.

Here is the sick punch line:  Just as in the United States, the super rich of Europe – particularly the Germans and bankers of Germany – are demanding that economic collapse be solved through austerity.  Lay off teachers, cut pensions, increase unemployment – make the people suffer.  Teach those profligates a lesson.  This will be disastrous for the bankers, super rich, and nations calling for punishment of the debtor nations’ peoples.  As demand continues to dissipate from their economies,  bonds held by the bankers and other investors won’t be worth diddly squat.  But they will ride this thing down before they share some wealth to save the whole system.  Take their lives – they are saving their money for their old ages.

The Solution

Nations must regain control of their economies and their wealth.  The way to do this is to equalize their tax codes, control their own capital markets, invest – through direct fiscal stimulation and creation of meaningful jobs and projects – in their people.  Taxation must be designed to produce adequate government revenue for equitable housing, education, health care, for infrastructure, research and development, and all of the other things that modern, progressive countries should and could do (and all nations should become modern and progressive).

However, if the rich and powerful persist in punishing debtor nations gone bad, and if they persist in hoarding their wealth in endowments, 501(c)3s, in off shore accounts, and through finding various and sundry other forms of legal gimmicks for escaping their tax responsibilities, the current catastrophic failure mode of the world economy will end very badly for them as well as for all of us.