Friday, December 21, 2012

Fiscal Cliff

The world’s governments are not coping at all well with their financial crises. Big and small, they are displaying the same incompetence that got them into the mess in the first place. They all borrowed more money than their taxpayers could ever repay – more, even, than their taxpayers’ children and grandchildren could repay.

With no spare money in the kitty, they must renew each loan as it falls due, at whatever interest-rate the creditors ask, or pay it back. Even to pay interest on the loans they must squeeze more money out of their constituents – and reduce the amount spent on government services. The term “fiscal cliff” describes the effect of that combination – each economy lurches from a plateau of prosperity to a chasm of recession: higher government expenditure, less loan-money coming in, and less revenue.

A thousand books have been written on how the world got into this situation: very few on how to get out of it. Bankers without conscience persuaded politicians without morals to borrow money for vanity projects and vote-buying projects, and/or to invest it in new types of securities (“derivatives”) endorsed by crooked rating agencies.

NINJA loans became famous. (N I N J A stood for mortgages granted to borrowers with No Income No Jobs or Assets.) Thousands of rubbish mortgages were diced and sliced and the pieces glued together in the same process by which bits of hooves and skin from slaughterhouse floors become sausages. The rubbish was advertised as Triple-A securities, the same rating as Swiss Government bonds. That’s how bankers became “banksters” – gangster-bankers.

The securities proved worthless. The loans that paid for them could have been defaulted on, but the banksters threatened to cut off all future loans to the borrowing governments, and politicians without morals will never agree to that. So the governments signed contracts to repay the existing loans as they fell due, and ended up in the same place.

Nations that fall off today’s fiscal cliffs will take generations to recover. Infrastructures will decay – Google “Detroit decay” for photos. Private companies will go broke: check the unemployment lines in Greece and Spain. Government services will shrink, except for the military (!). Pension Funds (private and public alike) will fail to cover retirees’ needs. Government employees will join their private-sector fellows on the dole, after it has been reduced to the bare minimum – or below.

How will nations ever climb out of the fiscal chasm, back up the fiscal cliff? There is a way; of course there’s a way. There is always a way. In this case, the way is inflation – maybe even hyper-inflation. But that’s a story for another day. Hyper-inflation is a very drastic solution – like cutting off a person’s gangrenous legs in order to save his life. Check out the Wikipedia entry for hyper-inflation.

Currency notes become worth less and less until they become literally worth-less. At some point some Central Bank invents a replacement currency – a hundred old dollars for one new dollar, say. In 1922 the German government of the day thought about doing this, but wasn’t quite brave enough. Two years later, when German workers were carrying their wages home in wheelbarrows full of near-worthless notes, the government finally authorised the Central Bank to make the switch – and by that time the rate of exchange was set at a trillion old marks for one new mark.

When I was a boy, I once had a German postage-stamp with a face value of fifty billion marks. It was worth a penny in the catalogue. It’s worth twenty-five cents today, with inflation.