Change Is Afoot

by | Mar 29, 2017 | Economy, Keith, Politics | 0 comments

I peruse the news every morning and not the news you may necessarily see on Fox, CNN, NBC, CBS etc.

Several articles of note recently – that the EU Tax Chief says that a Le Pen win is the end of the European Project, another that France leaving the Euro would be the largest sovereign default in history,  the EU is conducting warfare via finance and that Trump’s economic predictions for U.S. growth are overly optimistic.*

* Disclaimer: I have no idea if Le Pen will win and no idea if there will be a Frexit. However it is obvious that some people of note find that plausible. I am not alleging that Le Pen will win or lose. I have not a clue.

All these articles tie together.

If Le Pen wins or not – change in Europe is afoot.

The EU, and specifically Germany, continues to re-nogotiate the terms of the debt which Greece owes. Greece will never be able to pay back the debt they have acquired. Everyone knows this. Each time the semi-annual Greek debt crisis reappears Germany extends terms and demands additional Greek assets as collateral. Germany has no practical way to collect the collateral on this debt when Greece defaults. There is no longer a Wehrmacht which will plow through the Balkans to get to Greek assets hence all of the Greek islands and airports and such that have been pledged as collateral cannot effectively become ‘German.’ Not going to happen.

This is all a charade that the EU goes through in order to avoid the day of reckoning. The EU wishes to avoid that day of reckoning because when that day of reckoning occurs it is highly unlikely to be contained to Greece.

This takes us back to Le Pen – and Trump – who have policies which will compel that day of reckoning upon Europe. The EU is a house of cards built upon debt which is mathematically impossible to repay. Le Pen wishes to pull France’s cards out of the house of cards and go their own way. There is a saying:  “It does not look like panic if you are the first to do it.” If France pulls out of the EU there will afterward be panic and the remaining members will most likely attempt to pull their cards out of the house of cards before it collapses – which in and of itself will cause the collapse of the EU as a viable political entity.

Contagion is what a Greek default represents. Contagion is what a Le Pen electoral victory represents. A great many people in Europe believe that contagion is what Trump ultimately represents.

This is not a small or insignificant thing.

This leads to Trump’s economic predictions for U.S. growth being overly optimistic and tying all of this together. Trump is forecasting 4-5% economic growth for the United States over the next number of years. For context, eight years ago Obama also forecast 4-5% economic growth for the United States over his term in office. Obama never saw 3% GDP growth, let alone 4% or 5%.

The primary restraint on our economic growth is the Zero Interest Rate Policy (ZIRP). Europe and Japan have even gone to a Negative Interest Rate Policy (NIRP). ZIRP and NIRP restrains growth, punishes retirees and savers and savages pension plans. ZIRP is a disincentive to invest in standard interest rate bearing instruments because of the lack of yield. Consequently it distorts the markets in a manner in which equities are more attractive and propels equities markets ever upward.

Propelling equities markets ever upward also allows the Federal government to increase its’ tax revenues via capital gains taxes on the sale of these equities.

Over the last eight years the world has absorbed unprecedented levels of debt – government debt, corporate debt and personal debt. ZIRP and NIRP allows this debt to continue to be serviced. For example – last year the Federal government cost to service the debt was about $250 billion at an interest rate that was a little bit above a quarter of one percent interest. The Federal budget was just about $4 trillion and about $3.4 trillion in tax revenue was collected. Do the math on how much it will cost the Federal government to service the debt at an interest rate of 2.5%, 5% etc. One pretty quickly gets to the point where the Federal government consists of servicing the debt, defense and the patent office. Even if you allow for historically low rates – one quickly arrives at a number that requires all Federal revenue be allotted to interest payments.

We know – that is highly unlikely to be allowed happen. The logical avenue is that we will not be voluntarily returning to market rates which will eventually create its’ own set of crisis.

Ultimately these are lethal problems – not today, not tomorrow, not next week but at some undetermined point on the horizon. Sadly our present response seems to be hoping some smarter people in the future can figure this out. Even sadder is that we are running out of runway for that future.

Quite a few people are having a difficult time grasping that math is not ideological.