What IS a bailout?

The latest news is that Germany is being told that it must act quickly to save Europe and to stave off the impending apocalypse. The plan now is for the European Central Bank (which is prohibited from purchasing sovereign debt of member nations) to loan money to the International Monetary Fund (IMF). Then, in a money-laundering quid pro quo which would land any legitimate (or illegitimate) businessperson in prison, the IMF will, in turn, loan money to these nearly bankrupt states.

But, here is the kicker... by doing this little transaction, the burden of risk shifts from the ECB and the EU nations, and falls upon the members of the IMF. The United States comprises almost 18% (if I read this chart properly) of the risk and the EU members are in total about the same. The money still needs to be 'printed' by the ECB and the Federal Reserve, but now we (US citizens) are now on the hook for a sizeable chunk of the debt that will NEVER be paid back.

Why do I say NEVER paid back? Well, historically, very few countries ever pays the US back for anything. Most of these loans end up being grants or at the very least rarely paid back in full without the lenders taking a serious haircut. Why should they pay it back? What is the penalty for default? Could we foreclose on their natural resources? Doubtful in this day and time. Hell, we haven't even taken oil from Iraq (which the left swore was the reason we invaded that country.)

[Let me digress for a moment. The jihadists claim that the great Satan rapes and desecrates their land by stealing their oil. Last time I checked, oil was trading at $100 per barrel and we were stroking some seriously large checks for that oil. Perhaps what they really mean is that they aren't getting a cut of the action. That sounds like a domestic political issue to me, not a reason for global jihad.]

Let me cut to the chase. Any money loaned to these bankrupt countries will be like pissing in the ocean. None of the countries (with the possible exception of Spain) have done anything to make a serious cut in their expenditures. Recently ABC News spotlighted a Greek man who retired at 48 years of age with a $45,000 annual pension. The next week ABC also described the retirement benefits of a US Congressmember with 20 years of service. This amount was purported to be just north of $40,000. Sure, the former Congressman may get the gold plated health care, but compare that to the Greek. I doubt he pays for his health care either.

If a nation is paying 48 year old healthy men to go into retirement for 30-50 more years at a pay rate that exceeds the average salary of a currently working US citizen, and if they are powerless to reduce this amount SIGNIFICANTLY, then they will never get out of debt. Period.

Think about it. Say you have maxed out your credit cards and have gotten all of the equity out of your house. You make X dollars, but you spend 150% of X every year and reducing next year's 5% increase in projected spending to 4% is viewed by your spouse as a draconian cut, what good would it do to give you a loan for half a year's salary? Would it fix anything?

The only way out of this global crisis is widespread hyper-inflation. For some miraculous reason, we have avoided inflation so far, but with several trillion new dollars (unbacked by any real assets) having been pumped into the economy in the past three years, it has to happen. It has to. No way out of it. When it hits, the collective debt becomes proportionally smaller as the dollar becomes less and less valuable. Debtors win. Everyone else loses. Perhaps holders of gold, silver, other precious metals, real estate and commodities will do OK, but the economy around them will be devistated.

So, anyone up for a bailout?


Craig Hollins said…
Oh, come on. Are you seriously trying to suggest that NONE of the Iraq oil drilled since Gulf War 2 has made it to US shores? Even if only a small proportion did it will exert downward pricing pressures on US prices at the pump. I'm pretty sure most of the oil in Iraq is now "managed" by US based companies. You guys went for oil - no doubt about it.

And before you play the moral high ground on debt default, remember Nixon (Republican, if I remember correctly) decided that the US$ should no longer be tied to gold, hence effectively defaulting on anyone who gave gold to the US in exchange for bits of paper. Suddenly they could no longer get their gold back for the same number of US$.

Final high ground error is blaming the Greeks for spending more than they earn - because that's been happening in the US since, oh, Nixon! Detroit motor workers have been high paid labourers producing sub standard product that couldn't survive when the going got tough. Farmers in the US are earning more from subsidies than from the market. Remainder of US industries are guilty of pretty much the same behaviour.

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