Friday, November 26, 2010

Liabilities and Assets

I’ve been waiting for Krugman to weigh in on Ireland’s current troubles. As a bonus, he included an update on Iceland too. Remember what happened to Iceland? In researching the subject, I was surprised to find Ireland and Iceland tied together in my own blog -- as the only two countries with lower taxes than the U.S. Hold that thought for a moment. I don’t want to get too far away from Krugman’s column.

Eating the Irish

”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.”

Essentially, the Irish Government has agreed to pay its bank’s private debt. The Irish taxpayers will pay for the errors in judgment (not to mention greed) of private bankers. It is a crushing burden for the people.

”Now what? Last weekend Ireland and its neighbors put together what has been widely described as a “bailout.” But what really happened was that the Irish government promised to impose even more pain, in return for a credit line — a credit line that would presumably give Ireland more time to, um, restore confidence. Markets, understandably, were not impressed: interest rates on Irish bonds have risen even further.”

In America, you hear Conservatives squawking about mortgaging their children and grandchildren’s future with “out-of-control government spending”. You could say the same thing about Ireland (they have a very generous welfare system) but you need to look deeper -- both in Ireland and America. The debt is there. What is disastrous is that -- by panicking about the debt and insisting it be paid NOW NOW! NOW!! -- the ability of the future generations to pay the debt is being compromised.

In other words, by firing the government-paid school teacher in order to balance the budget, you are ensuring that the children they were supposed to educate will never have a decent job -- a job that produces enough to service the debt.

While comparisons can be instructive, they have their limits. Comparisons aren’t a substitution for clear thinking. The current worry is that investors are fleeing Ireland, Portugal and Spain. (They pretty much already fled Iceland and Greece.) Some want to worry that they will flee the United States -- to which I ask, “Flee to where?” The U.S. isn’t Ireland. Or Spain. The investors fleeing those countries have to go somewhere. Where will they go?

For all those that watch too much TV and are currently saying “Gold”, I’ve got news for you.

”The United States holds more gold bullion than any other country, with about 2.39 times that of the next leading country, Germany.”

(I can live with the fact that the two different Wikipedia entries seem to disagree about the #2 slot. The #1 slot is occupied by the U.S.)

Those that grasp the concept that the flip side of scary liabilities is assets might be interested in this article in the Financial Times by Martin Wolf. (Free subscription required.)

The less-emotional-than-GOLD! answer to the question is that scared investors flee to safety. I’ve said this before but it bears repeating. Capitalists giving their money to Communists (China) for safekeeping is just plain crazy. Oh, they’ll dip their toes in the water. They will certainly try to get into the consumer markets to make money. But when push comes to shove -- when there is a world economic crisis -- they bring their loot home to Mama. And Mama is married to Uncle Sam.

Never, never, ever forget. The United States has biggest, baddest, safest asset around.

And that’s just the Navy part.

Don Brown
November 26, 2010

1 comment:

ETrust said...

China = communists? I don't think you have been there for a while Don! It is 100+% full on capitalism. The ideology is only rolled out when they need to control something... hmm, sounds familiar.