Day QE2 Ended
by Bill Bonner: Why
Greece Should Default and Go Broke With Dignity
had something to celebrate this Independence Day. QE2
the Feds $600 billion money-printing program
ended on Friday. And guess what? The world didnt end with
stock market gave a loud yahoo! The Dow rose 168 points.
If QE2 is going to be the death of the US economy, the stock market
doesnt see it.
Not that stock
market investors always have 20/20 vision. These were the same people
who were buying Lehman Bros. and mortgage lenders stock just before
the company collapsed.
not saying that todays prices will necessarily be the same
as tomorrows. The market may know the price of everything
at every moment. But it doesnt know the value. So, as it discovers
value, it changes its mind about the price.
Still, we find
it mildly disturbing that the Fed can cut off a $100 million-a-month
buying program without upsetting investors sangfroid. It doesnt
make us wonder about the Fed
but about investors. Whats
wrong with them?
But since it
was a national holiday, we decided not to worry about it.
spared a little pity for the US Senate. The poor senators decided
to stay in session this 4th of July. They thought it was important
to pretend to solve the US debt crisis.
As you know,
from the day of its founding that is, July 4th, 1776
to the present day, the feds have run up approximately $14.3 trillion
of official national debt. And since Congress has only authorized
$14.3 trillion of debt, theyre running into a problem. Either
they pass a new law, raising the debt ceiling. Or they cut spending
so they dont have to borrow more money. Or, they treat the
debt ceiling law like the US constitution, and simply ignore it.
We know which
choice we would make. But nobody asked our opinion, so well
keep it to ourselves.
The debt ceiling
is distraction. Its just an American nuance to a genuine problem
that is plaguing all the mature democratic/capitalistic economies.
Greece, Britain, Ireland
dozens of other countries
readers of this Daily Reckoning know, It is a problem with
the funding of the modern social welfare state
and the social
contract itself. The bargain is this:
give up 20% to 50% of their output
and sometimes, their lives
the government promises to make their lives better than they would
But how can
the feds make the common citizens life better? If it gives
them back in services only as much as theyve paid in taxes,
whats the point? In fact, the government cant even do
that. It is a poor capital allocator. And theres a huge amount
of inefficiency and friction in the system. So, the government spends
money unwisely. It gets a poor return. If people get half of what
they pay for it will be a miracle.
When the system
was first invented, in the 19th century, it worked well enough.
GDP growth rates were high. Old people, regulations and government-provided
services were few.
But as the
system matured, over 150 years, it became zombified. That is, the
friction, misallocation of resources, fixed costs, old people and
parasites increased. The feds spent more and more. People got less
and less for it. They didnt want to raise taxes
the voters would feel they werent getting their moneys
worth. But the voters still wanted more and more “services.
So, from approximately the end of the 30 glorious years
in about 1980
to the present, the government
was only able to expand services by borrowing.
And now, borrowing
is becoming a problem. Wise
countries such as
Greece and Britain (not necessarily in that order) are now being
forced to cut back. Either because they cant borrow now
they fear they wont be able to do so in the future. Naturally,
the zombies dont like it. Theyve taken to the streets
in Athens as well as London.
the schoolteachers interrupted services all across England
last week. In Greece, they didnt even have to strike; they
werent supplying much service anyway.
this lead? We dont know. But its a serious question.
And we dont think about serious questions on a national holiday.
Besides, its probably against the law.
with permission from the Daily
Bonner is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis
and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets (Wiley, 2007). His
latest book is Dice
Have No Memory.
Since 1999, Bill has been a daily contributor and the driving force
behind The Daily Reckoning.
© 2011 Daily Reckoning
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