Wednesday, November 2, 2011

Get Him To The Greek

Here are some more thoughts about the financial and political crisis that has a stranglehold over Greece and threatens to overwhelm the entire world.

Some pundits have suggested that the proposed Greek referendum is a good idea.  They feel that putting the matter into the hands of the people is a win-win.  If they accept the austerity measures and bailouts then the government will stabilize somewhat and the process with be smoother than if the measures are rammed down a reluctant public's collective throat.  If they refuse the measures and bailouts they are effectively seceding from the European Union by choice, which is far more palatable than being forced out by the other EU members.

If Greece was vacuum sealed then I would agree with this position, but it is not.  Everything that happens there will affect the entire EU, and for that matter the entire world.  Seceding from or being expelled by the EU will not be a neat formality or a mere change on paper.  There will be extreme consequences for both parties.  Spillover will be equally extreme.  The rich will get richer and the middle class and lower will be squeezed harder and harder.

The global economy is already so fragile that this kind of turbulence is almost certain to be disastrous.  The only countries that are doing reasonably well right now are emerging economies.  Here, doing well is entirely relative.  India and China are dominant mainly due to overwhelming numbers and providing cheap labour for outsourcing foreign (Western/G-20) corporations, but in the case of China decades of intentionally impoverishing its people while the government (and politicians) stockpiled incredible and obscene amounts of money and subsequently using that wealth to buy the world.

That having been said, even China's economy is barely growing, this according to their own economic ministries.  To make matters worse, China is fueling their economy with the worst forms and extents of pollution on the planet, the worst forms and extents of human rights violations and with extensive criminal activity.  (Who knew that communists would outdo the world's staunchest capitalists at greed?)  China is home to the bulk of the world's knock-off and piracy industries, stealing from trademark and copyright holders with impunity.  They are also widely suspected and/or known to be the world's leaders in industrial and political espionage stealing further wealth from other nations and corporations.  Their self-imposed isolation from the rest of the world has allowed them to do this more or less unhindered.  At this point, the wealth and power of the government has grown to the point where it is the equivalent of "too big to fail."  Other countries have virtually no leverage or influence over China and are suffering without hope of justice.  Every once in a while China 'cracks down' on the knock-off and piracy in what is pretty much exclusively for show.  These crackdowns do very little to stem the tide and are few and far between.  They merely allow the government to claim that they are 'working on the problem' when they really have no interest in preventing international crime that economically favours China.

So, basically the whole world is teetering on economic disaster.  This is not surprising.  For the past forty years the global middle class has been under assault by the financial elite, the juggernauts.  Governments and corporations have 'conspired' to make this so.  Every right wing government lowers taxes on the ultra-wealthy and on corporations, often drastically.   They hide this behind minor tax cuts to the middle class and small business.  So long as people think they are getting something out of the policy changes they are placated.  Right wing governments also sell off money-making government properties and assets since right wing policy dictates that all business should be in private hands.  It is not relevant whether the property makes or costs money, provides an essential service or would hurt the public if privatized (e.g. cuts to essential service or price hikes to increase the return on investment).  This means that subsequent left of center governments' hands are more or less tied when it comes to trying to restore their ability to provide services, which in general acts as a financial leveler.  They can ill-afford to raise any taxes without raising a hue and cry from the public -- even those that would receive net benefit from the change react with their gut.  (People are generally not very sophisticated nor particularly far-sighted.)  So, inexorably, over time, this tug of war favours the political conservatives.

From the World Wars to the 1970's the middle class flourished and as a result the global economy did as well.  Since then, the  process has reversed with greater and greater concentrations of wealth moving into fewer and fewer hands.  Economic 'growth' has been frictional, or even fictional!  Allow me to explain.

It has been largely population growth that has fueled the global economy and when the population growth (primarily in the Western economic powers) ebbed, so did the economy.  Also, the bulk of economic growth for the past fifteen to twenty years has been fueled on ever-increasing personal debt.  Citizens owe more than they every have in human history.  They are only borrowing against their children's future so most people don't care.  The same thing is happening with the environment -- current practices leave the burden of payment upon future generations.  Now that more and more people realize that they cannot justify further borrowing to fuel their addiction to consumption and spending the economy has stalled, stagnated and in some cases shrunk.  Instead of spending people are paying down debt or saving, particularly since they have little to no confidence in their local economies.

This too is not surprising.  All you have to consider are needs, wants, liquidity and dergulation.  People have to spend on needs whether they feel poor or flush, though they will cut corners if they are forced to.  People will be lavish on wants when they think they can afford it but will stop spending entirely when they can't justify the expenditure.

When wealth is concentrated in few hands few people are willing to spend on wants.  Individual people can only spend so much on wants before they run out of things to consume or time to consume them.  Excess wealth is amassed and/or invested, and investment is not limited to domestic concerns.  The rest of the population is left to spend only on their needs which they can't avoid at prices sufficiently low that they can afford them.  The net result is relatively low spending.

In the opposite scenario wealth is distributed among the entire population.  The middle class gets to spend on wants as well as needs and doesn't have to cut corners on their needs either.  The wealthy still have more than enough disposable income/wealth to spend to their hearts' content.  The net result is greater total spending and a more robust economy.

Further, the wealth held by the richest people come sin many forms, many of which are not liquid.  Among these forms are corporate holdings, real estate, fine art and jewelry.  This wealth does not help the economy because it doesn't do anything.  The greater the concentration of wealth in fewer and fewer hands means more and more money tied up in non-liquid assets and a smaller economy.

Finally, a general lack of regulation and further deregulation allows money to further concentrate reducing the size of the economy.  Had there been proper regulation on credit rating agencies, banks and other financial houses the economic meltdown of 2008 would not have happened.  It is not surprising that some people became obscenely wealthy (or wealthier) from this global crisis.  With tens of thousands of American foreclosures someone ended up buying a lot of property for a song.  Surely more people made a mint selling (short) before the crash and buying back at severely depressed prices.  Like the Greeks, the banks were bailed out even though the crisis was of their own making.  (Amazingly, the first thing they did with bailout money was richly reward their corporate executives for a job miserably done.  Public outrage stemmed this practice somewhat but it continues to this day and money has not been paid back to the public.)  It happens every single day but it is magnified a million-fold when there is a crisis.

With forty years of increasing wealth concentration it is entirely predictable that the overall economy has suffered and will continue to do so as long as this wealth dynamic is allowed to continue.

All the while, governments have been running deficits.  (Initially it was thought that inflation would devalue these debts into trivial amounts, but the deficits continued and the debts grew too large for inflation to render moot.)  Overall, this has more to do with reduced revenues (i.e. taxes) than increased expenditures, though the 'needs' of aging Baby Boomers, through ballooning pension and health care costs, are now reversing that trend.  Historically, governments only ran deficits when at war, which is notoriously expensive, and to a lesser extent during recessions in order to stimulate the economy back to growth.

Continuous deficit has led to record debt and thus record debt financing, crippling the ability of government to provide services to anyone but their creditors.  Mostly, this means banks, corporations and foreign (mainly the Chinese) government but does include private citizen holders of government bonds.  The wealthier are able to hold these bonds to term, typically realizing interest greater than inflation.  Others are frequently forced to liquidate them early, incurring penalties and ending up with returns below inflation.  The more crisis there is the more defaults there are and the greater the disparity.  More importantly, governments are too small and too strapped to effectively stimulate the economy during recession.  So, even in times of debt the rich get richer and the middle class (and lower) suffer.

Crisis, which is what we are talking about, is a huge boon to the rich and a disaster to those of more moderate means.  There is a reason why it is said that war is good for business.  Crisis leads to distressed assets.  Distressed assets are holdings that have to be liquidated quickly due to an immediate need for cash, typically to pay debts and obligations.  Who buys these distressed assets?  Donald Trump and the rest of the uber-rich.  Books (written and sold by the wealthy, including Trump, further enriching them) about how to use crisis to further your own financial position are commonplace and popular reading.  But it is unfortunately true that you need money in order to make money.  Pretty much only the wealthy have enough access to money to capitalize on distressed assets.

The securities ploy of 'selling short' works in exactly the same way.  The rich, the only people who can guarantee payment if they prove to be incorrect in their speculation have almost exclusive access to this financial transaction.  Basically, one 'sells' other people's stock holdings, in order to buy it back later at a lower price, restoring those other people's holdings.  The transaction is entirely virtual.  The difference in price between selling and buying becomes pure created wealth, unless you are wrong and the stock prices rise in which case you have to cover the difference immediately.  (Hence the restriction to the rich.  Risk of this nature is not a viable option for the poor and middle class.)  The ridiculous part of this transaction is that it is completely speculative.  At the end of the day there has been no investment in business.  The number of shares held before and after the transaction is the same and the businesses themselves do not benefit in any way.  It is just a legal form of gambling for the most privileged only things aren't entirely up to chance.  All it takes is good information, good instinct, good timing and a basic understanding of human psychology to make crazy money.  A little insider information or leverage on the market through rumours, innuendo and timely information leaks always helps and is very difficult to prove.  Crime pays, you just have to be rich enough to commit the right crimes.

So, the poor Greeks are rocking the boat and threatening to capsize it entirely, meaning they are refusing to live up to their responsibilities, which will only result in making them poorer, along with most of the citizens of the modern world, and the wealthy will laugh all the way to the bank.  The net result of this transfer of wealth is to further shrink the economy putting more people out of work and into the poor house while the obscenely fat get fatter.  Governments will ultimately have to raise taxes on the wealthy or face complete collapse for an inability to maintain the welfare state and other social services which keep the disadvantaged populace appeased..  The nouveau poor will rebel either toppling governments or resulting in mass death at the hands of the police and military (arms of the government/wealthy)...or perhaps both will happen.  Basically, what is happening in the Arab world (see Libya, Yemen and Syria) will spread everywhere only the rich will be calling the shots (directly) more than the government has.

Greece itself is in danger of becoming a distressed asset to be bought, absorbed, annexed or defeated militarily.  Someone or someones, who definitely is/are not Greek, will stand to gain millions, if not billions, as a result.  The Greek people *have* to suck it up and pay the piper for years of neglect and abuse.  Failure to do so will not only cook their goose but the geese of the poor and middle class around the world.

Greece is just a symptom of a larger problem.  This is where we are heading and virtually no one understands, knows or cares.  They will, but likely only after it becomes too late to fix, like it seems to be awfully close to being in Greece.

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