It’s like watching a magician at work. If you want to see how the trick works, watch everything except what the magician wants you to watch.
In this case, ignore the debt ceiling dispute in Washington, DC and keep your eyes on the rapidly deteriorating situation in Europe and the Euro.
Bloomberg reports:
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Do you remember when the housing decline first appeared on the radar screen a few years ago, and all the “experts” told us that it would be contained to certain states? Then, when the subprime loan crisis hit, these same experts told us that the it would be contained to only subprime loans. Later, when Lehman fell, the experts again told us the banking problems would be contained as well.
The “experts” are once again dead wrong on another issue about to be “uncontained.” Now we’re being told that the Eurozone sovereign debt issues will be contained to the problem countries like Greece, Portugal and Ireland. Not only will Europe as a whole be just fine and dandy in the end, but so will the United States (which is quickly becoming a synonym for Greece).
Endgame author John Mauldlin, one of my favorite reads on Europe’s problems, begs to differ. Here he is in this video with Aaron Task of The Daily Ticker.
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Remember that old morality tale about the thrifty, hardworking ant and the spendthrift grasshopper? In the 2011 version, you star as the ant and the government co-stars as the grasshopper.
Ireland has announced that it intends to tax (a far more pleasant sounding word than confiscate) parts of hard-working Irish citizens’ private pensions so politicians can invest (a far more pleasing sounding word than redistribute) the proceeds as it sees fit.
The good news is that Ireland would only add a 0.6% tax on all private pensions. The bad news is that not all governments are so munificent. For example, Argentina seized all private pensions in 2008. Ireland claims the tax will end in four years, but doesn’t every tax begin with a politician’s claim that it’s only temporary?
Do not doubt for a minute that it could happen here.
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The governments of the world are getting desperate, desperate for money — their citizens’ money. And they are going after it in ways that transcend taxes and fees. They are going after individuals’ retirement savings accounts and pension funds.
The Adam Smith Institute Blog at The Christian Science Monitor has written about five European countries doing just this.
Hungary:
The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). In this extortionate way, the government wants to gain control over $14bn of individual retirement savings.
Bulgaria:
The Bulgarian government has come up with a similar idea. $300m of private early retirement savings was supposed to be transferred to the state pension scheme. The government gave way after trade unions protested and finally only about 20% of the original plans were implemented.
Poland:
A slightly less drastic situation is developing in Poland. The government wants to transfer of 1/3 of future contributions from individual retirement accounts to the state-run social security system. Since this system does not back its liabilities with stocks or even bonds, the money taken away from the savers will go directly to the state treasury and savers will lose about $2.3bn a year. The Polish government is more generous than the Hungarian one, but only because it wants to seize just 1/3 of the future savings and also allows the citizens to keep the money accumulated so far.
Ireland:
The fourth example is Ireland. In 2001, the National Pension Reserve Fund was brought into existence for the purpose of supporting pensions of the Irish people in the years 2025-2050. The scheme was also supposed to provide for the pensions of some public sector employees (mainly university staff). However, in March 2009, the Irish government earmarked €4bn from this fund for rescuing banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.
France:
The final example is France. In November, the French parliament decided to earmark €33bn from the national reserve pension fund FRR to reduce the short-term pension scheme deficit. In this way, the retirement savings intended for the years 2020-2040 will be used earlier, that is in the years 2011-2024, and the government will spend the saved up resources on other purposes.
Source: CSMonitor.com
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You heard leader of the UK Independence Party Nigel Farage’s wonderful rant against the Euro on the floor at the English Parliament. Now, listen to him interviewed by RT, about the Eurozone’s bailout troubles. Another Eurozone country, Italy, might need a financial bailout soon. The third largest economy that uses the Euro currency has started plunging in the same direction as Greece and Ireland, who he says couild be kicked out of the Eurozone. It comes as fresh protests sweep across Europe — with people angry at facing tough cuts to pay for it all.
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Pimco’s CEO Mohamed El-Erian is one of the brightest guys around. In this video he comments on the Irish bailout, telling viewers on CNBC that the Eurozone has not met the first rule of crisis management: get ahead of the crisis; be seen as proactive, rather than reactive. He says “as long as they are being reactive, they are going to have a slow motion wreck going on in Europe and we are going to wake up and it’s going to be a new country that you are talking about.”
He calls the order of the problematic countries, following Greece and Ireland, as Portugal, Spain, Belgium, Italy.
Listen to the whole interview to hear his recommendations for navigating the coming devastation.
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“In early 2009, a joke was making the rounds: “What’s the difference between Iceland and Ireland? Answer: One letter and about six months.” This was supposed to be gallows humor. No matter how bad the Irish situation, it couldn’t be compared with the utter disaster that was Iceland. But at this point Iceland seems, if anything, to be doing better than its near-namesake.”
I’m no Paul Krugman fan, but his column in the New York Times today, Eating the Irish, really nails it on Ireland’s problems. No big words, no financial mumbo jumbo, just the overall picture in an easy to read, quick story. The gist of it? Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, and it has its own currency to devalue, which improved exports. Ireland, on the other hand put its own taxpayers on the line to guarantee the bad private debts, and they are stuck with the Euro.
And did I mention the women in Iceland are much hotter than those in Ireland?
The article begins…
O.K., these days it’s not the landlords, it’s the bankers — and they’re just impoverishing the populace, not eating it. But only a satirist — and one with a very savage pen — could do justice to what’s happening to Ireland now.
The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.
Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.
Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.
Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.
Read the rest of the article at the New York Times.
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Ireland’s debt problems are not going to be contained by its borders, or even to the PIGS nations. The banks in France, Germany and particularly the United Kingdom have made large loans to Ireland, and when they default — not if, but when, says former IMF Executive Desmond Lachman — these banks will suffer huge losses.
Bank problems at the core of Europe would be bad for the Euro and good for the U.S. Dollar. And this is bad for American exports. And these exports that benefit from a weak dollar is what the U.S. stock market has largely been pinning its hopes on. And beyond this, of course, the U.S. financial system is part of the global financial system, and as we saw two years ago, everything is interconnected. If they go down hard, the U.S. will feel it.
http://www.youtube.com/watch?v=tTBU3AsZwC4
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