Well, say what you will, but Angela Merkel gets what she wants. The Euro has dropped below $1.30 US, and that may prove to be a significant psychological barrier. But don’t blindly stare at stats like that. There is no end to Greece horror stories out there that see the EU, the Eurozone and Europe itself imploding (let's drill a relief well, or dump a 74-ton bunker on top of it, that should work).
What the Greek drama brings home is our very own personal reality. Or where do you think California's 30% drop in state revenues will lead? Do you really believe with numbers like that the state will be spared what’s coming to Hellas? The mayor of Fresno puts on the bravest face she could find in her Halloween closet to declare that the city of Fresno will be well positioned to come out of this economic storm.
Only, to get there, she's "responded with a budget that's filled with pain": she’ll fire hundreds of city workers, and outsource those services to the private sector (where, she claims, the just-fired workers could find jobs. Yay!!). One in 12 city workers will be laid off. Oh, yeah, and she declared a fiscal emergency in between firings. And so she'll use emergency funds to keep afloat both the city and her political career. Until those are gone too.
I don’t have the numbers handy right now, and I don’t really need to, do I, to show that the already gravely battered Austrian Terminator, who now appears to run on ultra-low battery power, did not base his budget for the present fiscal year on a 30% plunge in revenue. And that budget, we all remember well, already cut whatever could be cut and then some. Califoohhrniah, get ready for another cut, by about a third. And this one will hurt for real, trust me.
Nor is California an exception in the US. Try New York, New Jersey, Ohio, Michigan as budgets for the new fiscal year are due. And then eventually, everybody else, with no exception. Even Texas and North Dakota, the sole states that have so far done kind of well, will find out that being surrounded by impoverished neighbors is not a recipe for prosperity.What awaits us all? First, take a look at the terms Greece has accepted (well, on paper), to get its €110 billion EU and IMF loans.
- Cut budget deficit by 11% of GDP by 2013, through spending cuts valued at 7% of GDP and revenue increases valued at 4% of GDP.
- Reduce budget deficit to 'well below' 3% of GDP by 2014.
- Reduce debt-to-GDP ratio from 2013, with primary budget surpluses of at least 5% of GDP up to 2020.
- Cut public-sector pay and pensions.
- Raise average retirement age.
- Increase value-added taxes and excise duties.
- Deregulate the labor market and industries.
- Privatize some state industries.
- Cut public investment.
- Crack down on tax evasion.
Obviously, the privatizing and outsourcing is straight out of 1950's IMF manuals, the ones that seduced such fine characters as Pinochet and Yeltsin. Bad for the people of Greece, real bad, and sure to lead to increased street battles and toppled governments, either tomorrow or 5-10 years from now.
But the main point in that list in the last one. "Crack down on tax evasion". As I wrote a while ago, John Mauldin had this great stat that I will probably never forget (barring Alzheimer). Only 6 people in the whole country of over 10 million filed a tax return in 2009 that said they made over €1 million. There’s 6 on very single inhabited island, if you ask me, and they have more islands then they know what to do with. There was this great story recently where only a very small number of an affluent neighborhood's Athens citizens had declared a swimming pool near their homes, and the government (?!) had chartered a plane to fly over the area that found tons of pools.
Ironically, this sort of thing may point to the idea that Greece isn't doing so bad after all. The country has a long standing history (shaped by occupations) of not paying taxes. If the Greeks can be made to pay their taxes, or even just for instance a third of what they legally owe, the entire Greek issue might be solved. I’ve seen numbers as large as $30 billion missed in revenues because of the "proud" evasion culture. But it may take a while: I’ve also read tales of people wanting to pay taxes, but unable to get through the bureaucracy and actually deliver their money.
Not that different from the US, though: 47% of Americans pay no federal income taxes, and when it comes to corporate taxes, dont’ get me started: the US may even put Greece to shame on that one.
Still, so, yes, that’s your foreland, wherever you live in the western world. And it could, and very probably will, get much worse.
Britain has a major election on Thursday, and for some reason (turn chaos into profit?) the bonds and sterling futures markets have decided to open at 1.00am local time. If the election results are too confusing for pundits to explain, expect a deep, low and loud sucking sound just off Blackfriars Bridge.
If you dare look a little deeper into your own future, though, try Latvia. It laid off one in 3 of its government workers (remember, it was "only" one in 12 in Fresno), and whoever was lucky enough to keep their jobs saw their pay cut by 25%. Private sector wages are down 30%, and unemployment stands at 23%. I would venture that the Latvians understand by now that there's no guarantee whatever that this is as bad as it will get. And neither should any of us who happen not to be proud citizens or Riga.
Today’s stock and forex exchange markets may be an aberration, or an anomaly, or anything you wish to call them. Still, the overall tendency stands, and while you wouldn’t be able to recognize it from watching Wall Street, a good albeit brief look at Sacramento, Fresno, Athens, London and Riga, Latvia should tell you all you need to know. It’s getting ever harder for incumbent power to keep pressure levels high enough to fool enough people into thinking the boat's not sinking. The credit crunch is a global phenomenon, always was.
I used the term "Beggar thy currency" a while ago, talking about Angela Merkel trying to bring down the Euro vs the USD. And as I said, she gets what she wants: a better exports position. But Chris Whalen today comes with one that fits government (and IMF) policy around the globe even much better: "Beggar thy citizen".
And to quote the Fresno mayor once again: what we will increasingly see are "budgets filled with pain". Please don’t be caught blindsided.
Disclosure: No positions