The potential collapse of the euro currency, sinking stocks and a dead job market here have combined to push long-term rates down. Ten-year Treasurys are trading at 3.57 percent despite a huge new borrowing next week, and mortgage rates are at 5 percent flat.
Job losses appear to be bottoming, but the issue is new employment. The "V" recovery spinners are the same guys as all last year — and someday they’ll be right — but new unemployment claims are back up to 480,000 weekly, 2009 job losses were revised up by a million, and the drop in unemployment to 9.7 percent is statistical wandering.
We have survived the Great Recession thus far because of "sovereign guarantees" all over the world. Bailouts and deficit spending are ultimately backed by national tax revenue to make good on promises and debts, and it has been a matter of some curiosity which nation or currency might fail the test of confidence: Europe it is.
The euro experiment rested on belief that participants — let’s call them the "Club Med" nations — would behave like Germans, disciplined in annual borrowing and cumulative debt. They never had behaved so, pre-euro, and their lower-productivity economies allowed them to play Germany only in good times.
Now in hard times, the club’s massive debt and deficits require massive sales of new bonds, and the soaring interest rates they must pay now have concluded the Ponzi scheme.
Dominoes, again. Big ones. A bunch of banks, no matter how big, was nothing compared to a row of sovereigns.
The G-7 ministers meet this weekend, and they will slap on some kind of shin plaster before Monday’s market-opening. However, the Europeans have only two choices: the strong may bail out the "Club Med" nations, or the euro-zone will break up — back to drachma, lira, peseta and a super-strong, remnant deutsche-euro.
A bailout may buy time, even years, but would weaken the strong (even Germany’s fiscal/debt position is precarious) and still not change the club’s behavior. A bust-up would collapse the value of its bonds, a great many held by gullible German-zone banks.
In the short term, euro lose-lose is U.S. win-win. We are suddenly a safer haven than the previous safe haven. Dollar up, commodities crashing, it is easy to float our own version of the euro club. …CONTINUED
However, in the long term we are a domino ourselves, vulnerable by economic, financial and political disarray.
Released Monday, our 2011 budget calls for $3.8 trillion in spending and a $1.3 trillion deficit. The $900 billion in defense spending is almost as big as Japan’s total budget. Our deficit is larger than any nation’s entire budget.
Total Social Security, Medicare and Medicaid spending in 2011 — with boomer retirement bulge still ahead — will be $1.5 trillion vs. $934 billion in revenue.
One of the central lessons of the Great Depression: Don’t try to balance your budget during a sick economy. Truth then — when we owed practically nothing — is not necessarily truth now.
A fiscal fix is terribly difficult in the belly of the "Great Recession," and in the presence of deeply deceptive sirens like Paul Krugman, who advocate limitless borrowing but plan equally limitless tax increases at the first sign of recovery.
There is a lot at stake here: 400 years of Western democracy brought unimagined prosperity, now threatened by 40 years of unspeakable self-deception; the system of government itself corrupted.
Most democracies have behaved like warring spouses, each with a credit card, one wanting big house and travel, the other clothes, wine and a boat. And the inability to agree has racked both cards to the sky. In the end game, we lose both house and boat.
Different times, different challenges. If then-President Franklin Delano Roosevelt had insisted in 1933 that the nation’s greatest need was reform of health care, his own party would have hauled him off to a padded cell.
Today, this nation is aching to hear someone, in either party or a new one, say, "Our national security depends on living within our means, and competing in the global economy. Nothing else matters, or is even worth talking about."
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
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