Thursday, we will learn what exactly Mario Draghi meant last Wednesday when he said that he would do whatever it takes within the European Central Bank mandate, to save the euro. Remember, before Draghi spoke the big European stock ETF, ticker symbol EFA, had just dropped 6% in five trading days. Lo and behold a week after Draghi spoke, EFA made back it’s 6% loss. Nice rebound.
The reality is that there is nothing Draghi can do to save the euro except talk and print money. And perhaps all Draghi wanted to accomplish with his remarks was to stop the plunge in European stocks and kick the can a bit further down the road. When I say that there is literally nothing Draghi can do to save the euro, I mean that Draghi is as powerless as other central banks to fix the fundamental problem afflicting the U.S., Europe and Japan.
As I said before but worth repeating, all any central banker can do is talk and print money. Neither solves anything long term. The unsolvable problem is that all income subject to taxation in the developed world is not generating enough in taxes to meet current government expenditures. Let me repeat that. This is major. Globally, incomes are not enough to generate sufficient taxes to meet government expenses. What is even worse, is that there is no way that incomes can grow fast enough not only to meet current expenditures but all the increases in entitlements that governments have promised its citizens. And that does not even begin to address debt service, both interest and principal repayment on the trillions of dollars, euros and yens created out of thin air since the fall of 2008.
Here is a current example of reality and our unwillingness to deal with it. In the U.S., we at TrimTabs estimate that a whopping 115,000 jobs were created in July, less than what is needed for new labor market entrants, let alone rehire the unemployed. Wages and salaries are growing at about 3% year over year before inflation, or at a $200 billion a year rate, which is about $16 billion a month. The Pollyannas tell us that this means the U.S. is doing OK, growing slowly but OK.
Do you know that to generate 3% year over year growth in wages and salaries, $16 billion a month, the U.S. government is spending $100 billion a month more then it collects in taxes to pay its bills? Imagine if the U.S. government had to borrow from a loan shark instead of the Federal Reserve. Imagine asking a loan shark for $100 billion for a month that will enable you to make all of $16 billion! And then tell the shark there is no way you will be repay the $100 billion. You all know what the loan shark will tell you.
Yet, we keep printing and borrowing $100 billion per month to grow incomes by $16 billion. Such a deal!
The government model used by the developed world is broken. The governments of U.S., Europe and Japan are in the way and stopping incomes from growing fast enough to generate sufficient taxes to meet current and future government expenses. And, government spending cannot be changed because special interest groups own the elected representatives.
We are headed off a fiscal cliff, regardless of whether we keep current tax rates or not. Longer term, we need to change the way government works. Unfortunately, governments will not let go of control until they go bust. Look at the Soviet Union. No change in Russia was possible until the Soviet Union went broke. They were the first. Europe is next and the U.S. and Japan are not far behind.