Wednesday, March 20, 2013

What Us Worry?

The bar for an official “crisis” in the Euro Zone seems to get higher and higher. Basically, if a major collapse of part of the continent’s economy does not seem likely on this very day, then we’re not in crisis.

It seems as though anything that gets us through the month or the week or even just the rest of the day is hailed as “crisis averted.”

I notice that President Obama has adopted this same short-term approach. In his Good Morning America interview with George Stephanpoulos last week, the president said, “We don’t have an immediate crisis in terms of debt. In fact, for the next 10 years, it’s gonna be in a sustainable place.”

If that’s true, it’s only because he’s president of the United States of America and not of any other country on earth because few other countries would still be able to keep on borrowing money when their debt-to-GDP ratio had exceeded 100 percent and is still growing because its huge entitlement programs are on auto-pilot in terms of promises made to the current and future generations.

In fairness, the president is 100 percent correct, in the sense that there is no immediate crisis. This is because there is still a fair amount of time to avert disaster. The problem is that he shows no interest in averting disaster, but time keeps marching on anyway. Presumably one of his successors can deal with all this. But by then, the necessary corrections will be that much more painful. If he really cares about the people who are and will be dependent on Medicare and other entitlements, why is he making no move to ensure that they survive?

Maybe it’s because he reads Paul Krugman in The New York Times. Early last week the Nobel laureate declared in his column that the current deficit is sustainable and, in fact, that it is actually too small! Even though what the U.S. owes is equivalent to more than what it produces. His reasoning is that the deficit is really a much smaller number if you just adjust it for a more normal economy than we have now, i.e. one with near full employment. Really. You can’t make this stuff up. I’d love to see him try to explain that reasoning to someone who isn’t even counted in the unemployment figures anymore because she stopped looking for work years ago.

But the fact remains that Obama and Krugman are correct in the sense that there is no immediate crisis. Especially when compared to Europe, which is also inexplicably sanguine—despite all the portents on this side of the Atlantic. The latest crisis du jour, of course, is Cyprus. At the last minute the island nation’s politicians balked at the insistence of the European Union (spurred on by the International Monetary Fund) that Cyprus pay for part of its own bailout by confiscating money from of the accounts of the banks that have brought the country down.

On the face of it, that insistence seems unfair—and ultimately it is. Why should bank customers have to forfeit a portion of their savings to pay debts incurred by bankers? The rationale is that some portion of those bank deposits are dirty, since Cyprus has become an international facilitator of money laundering. But not all of them are. Certainly, accounts with small amounts in them should be presumed to be the savings of honest people, shouldn’they?

But here’s the rub. Without taking money from the small accounts as well as the large ones, the percentage that would have to be taken from the large accounts would be unbearably high. And there’s a limit to how much the Cypriot politicians want to tee off the Russian customers that have given them so much business. So the plan was to take a smaller amount (6 to 10 percent) from everyone.

Not surprisingly, the outrage poured into the streets. And who can blame people for a little protesting when the money in their bank accounts is about to be confiscated to pay for the bad judgment and/or crimes of others? So the politicians flinched, and the crisis enters a new phase. Will the EU blink and cough up a bigger share of the bailout? Or will they just kick Cyprus out and let them contend with the wolves at their door by themselves?

By the way, Cyprus’s debt-to-GDP ratio was 127 percent late last year. Not to worry. The U.S.’s is projected to be only 112 percent by 2016.

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