Wednesday, November 24, 2010


Last night while driving home from work, observing the lovely scenery from a standstill position on the BQE, I was listening to Bloomberg Radio, specifically a replay of “Bloomberg on the Economy,” which was originally broadcasted earlier in the day. The host, Sarah Eisen, was discussing the debacle that is the state of EU finance and the Euro itself with a guest, who was the top economist from a major investment firm.

Eisen began by referencing a statement German Chancellor Angela Merkel made earlier in the day, which was something to the effect of “The Euro is in an exceptionally serious situation,” due to the crushing debt:GDP ratios of EU countries and the bond markets realization that, hey!, this could be more problematic than we previously thought. Eisen then asked the guest, “What was she [Merkel] thinking in saying that?!!,” implying that the bond and currency markets reactions would be harmful. Several thoughts immediately popped into my head, only one of which is discussed below:

How on earth can a politician telling the truth be a bad thing? One need not be a long time economic analyst or expert on EU financing to understand the entirely unsustainable debt load the member States are facing. Yes, the specifics of the problems facing each country are somewhat different, i.e. Ireland’s is the result of the government’s guaranteeing of horrific bank loans, whereas Greece’s stem more from impossible entitlement programs and public sector contracts. The main thrust, however, is the same for all – bondholders realize that these States’ debt repayment abilities are more or less non-existent.

The only thing I could infer from Eisen’s comment was that she somehow believes that if politicians, central bankers, etc. simply lie about the true state in which the EU and its member States find themselves, everything will end up bright eyes and blue skies. The ever-so en vogue “kick the can”/“extend and pretend”/“O.D. on hopium” meme that governments, banks and most of the mainstream media would have the (mostly) economically illiterate populous swallow as a panacea is nothing more than snake oil.

Eisen's inferred position is, of course, pure folly. The idea that one can simply stick his head in the sand and avoid problems by ignoring them is so ridiculous that the average 6 year old has little trouble understanding the concept. Merkel’s comments are exactly the type that should be made. The most important function of markets is their ability to convey information, through pricing, in the fastest and most efficient manner known (and, indeed, possible). By lying, extending and pretending, and kicking the can, prices do not drop to where they must. This leads to poor decisions based on incorrect information. In a truly freed society, this resolves itself easily and of its own accord, as issues of sovereign debt would not exist. Sovereign debt is far different than any other type of debt, since other borrowers do not have the option of throwing millions of people in cages if they refuse to surrender money to the borrower. Additionally, other borrowers do not have the ability to counterfeit money to pay off these debts (although individual EU member States do not have this option either).

No, in a freed market, the only option for a borrower who cannot repay its debts is default and bankruptcy. In the current world in which we live, however, governments no longer default. They bailout banks and bondholders, they bailout member States, they steal through taxation, they counterfeit money by printing at will, with nothing of value behind it. These “solutions” are always at the tips of their fingers and, therefore, they always believe that if they can just have a little bit more time, the situation will resolve itself. “If we could just get people spending again!” … one is left with no savers, ergo no investors, ergo no way to create new businesses or expand current businesses, ergo no way to produce jobs, ergo no way to truly recover. Economies do not grow on hopes and dreams, they grow on investments made with the aid of free-flowing, unencumbered information.

But it’s OK – keep up the lies distorting the true economic reality. Keep perpetuating the biggest Ponzi scheme ever devised.

1 comment:

  1. "How on earth can a politician telling the truth be a bad thing?"

    This got me thinking: should we assess this statement from the standpoint of institutional design or from the standpoint of pragmatic administration? In other words, should we assess the truthfulness of politicians with an eye towards systematic consequences or on a case-by-case basis? I can easily think of hypothetical situations where it is a "good" thing for politicians to fudge the truth (e.g., probabilistic chance that awful event X happens, and the only possibility of preventing event X is if the general population remains calm and orderly).

    But with that in mind, who is to decide when this strategy is appropriate? What constitutes an event "awful," etc.? Do we design institutions such that the decision-makers themselves are to use judgment in deciding when it is appropriate to lie and when it is not? Or can we design some other mechanism?

    Within democratic theory (this from another perspective and regarding somewhat different issues), to what extent do voters say "you are my representative and I trust you to know when to lie to me"? Seems kind of odd.