Europe fixes debt with more debt

Financial Post (Link) - Terence Corcoran (May 10, 2010)

Anybody remember the last G20 Summit? Hard to forget. It�s only been what? - six months since the event, held in Pittsburgh last September. The words of our leaders, triumphant and self-congratulatory, still ring out today. Boasting of having launched �the largest and most coordinated fiscal and monetary stimulus ever undertaken,� the G20 looked back at the London Summit, where Gordon Brown, now former PM of Britain, orchestrated a rousing session around the theme of spend, spend, spend to get the world out of economic crisis. �At that time [in London], our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital. It worked.�

Monday, the subprime government debt crisis, the direct product of the above-mentioned summits and other meetings of the world�s economic and political leaders, produced another threat. The European Union, its members sliding into stimulus debt and losing market confidence, would again do �whatever is necessary� to end the crisis, restore confidence and protect the euro.

Whatever is necessary turns out to be more of the same. The amazing European and IMF economic stimulus machines will tackle their debt crisis with a new strategy: More debt! Already racked with rising deficits and debt loads that are in dangerous territory, the EU plans to fix the problem with US$1-trillion loan packages. And if the debt doesn�t work, they�ll crank up monetary policy and have the European Central Bank buy up government bonds and private bonds of banks that are lending money to the governments. That spells inflation, although the ECB said it would be taking countermeasures to �sterilize� or neutralize the inflationary impact of its bond plan.

The great muddle of Keynesian economics is crashing in on statists everywhere. The spending that was supposed to save Europe and the world economy is driving it to ruin. The Keynesian economists and forecasters who promised it would work and were plucking �green shoots� out of the economic desert failed to see the debt crisis rolling up behind them. As Peter Foster wrote on this page last week, the world is in the grip of Keynesian contagion, not the private or capitalist meltdown so many of the G20 leadership blamed when the crisis first struck.

The financial crisis was largely spawned by U.S. government policy to stimulate housing and monetary policy that kept interest rates low to stimulate growth. The policy response around the world was to pile on more stimulus, on the Keynesian belief that government spending and monetary fiddling can magically overcome the limits of markets. Instead of stimulating growth, however, the major industrial nations and their political leaders have driven their economies deeper into a quagmire of debt.

How nobody within the pompous self-satisfied cabal saw this coming is surely worthy of a detailed investigation by some authority. But who would do it? The International Monetary Fund, World Bank, United Nations, the European Commission? Maybe a whole bunch of Euro political leaders could be hauled before some U.S. congressional committee for a full-body inquisition into how they failed to appreciate that if you borrow US $5-trillion, it might have to be repaid, and that the borrowing might not generate the growth and prosperity claimed by the Keynesian economic models on which the spending was based.

This table tells part of the debt disaster within countries that ran up deficits. The twist is that the countries ringing up the debt are the developed nations, while countries in the usual basket-case regions - Asia, Central Europe and Latin America - have reasonable debt loads. These debt levels are nothing, however, compared with what is yet to come if the world�s richest nations - especially the United States and much of Europe - do not soon come to their economic senses.

A recent paper by economists at the Bank for International Settlements, an association of central banks including the Bank of Canada, painted a bleak picture of global fiscal irresponsibility. �Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences on long-term growth on monetary stability,� said the economists (BIS Working Paper 300). Unless action is taken in the United States and in other key G20 nations - from Japan to France to Germany and the United Kingdom - these nations face debt burdens in decades to come that would soar to 400% or more of GDP.

The crisis is related both to current spending and to future spending pressures at times when population growth is stagnant and populations are aging. The only way out of these looming crises is to cut spending and change the social programs that threaten to overwhelm the fiscal capacity of each country. The BIS paper also warns that if governments cannot control their fiscal situations, there is a growing risk that they will be tempted to use inflation to paper over their debts with less valuable paper money.

High debts will drive down capital formation, reduce productivity growth and have a negative impact on overall economic growth and wealth creation. According to one study, at 100% of GDP, government debt drives out private economic activity. The accumulation of stimulus deficits, in other words, is a threat to future economic performance.

As we�ve heard many leaders say in their various forms, you can�t let a good crisis go to waste. I think the concept of spending to get out of debt is a cover for some kind of phoenix initiative. For the uninitiated, there�s a complex plan that can be used to give reason to the decisions being made. For the initiated, the plan is to collapse the current system so that a new one can rise from the ashes - a New World Order complete with the necessary global business and financial infrastructure in place to initiate true global governance.

While the fulfillment of God�s Word that this would come about in the end times may be a stretch to imagine for some now, there�s nothing like a solid crisis to change the status quo. Look at what happened to Europe after World War II and how the interconnectedness of business and finance has grown globally with technology. Things can shift quicker now than at any other point in history. Keep watching!