Just don’t call it a default

Bill Bonner on how Europe's politicians have wall-papered over the cracks - yet again.

$100 billion down, $40 trillion left to go!

Hey, don't hold us to those figures. But yesterday European sages cut another deal to stave off the truth. Instead of defaulting openly and honestly as Greece has done over and over again ever since 1827 the Greeks will be rescued'.

Sayeth Lucas Papademos, the technocrat leading Greece through its vale of deceit: "It's no exaggeration to say that today is a historic day for the Greek economy."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

He's right. It's no exaggeration. It's an outright lie!

What's historic about the 15th rescue?

And as soon as the Greeks are fished out of the water, they're to be given a shave and a haircut. No kidding. They're supposed to shave off more public employees, more spending and more benefits.

Already, one of five people is out of a job with two out of five young people unemployed. In November alone, 126,000 Greeks lost their jobs the equivalent of 3.5 million job losses in the US, in a single month.

But the Greeks aren't the only ones who are suffering. Their creditors are supposed to suffer a $100 billion haircut, too. Sounds like a default to us.

And what's important about Greece's sixth major default on its foreign debt? It defaulted for the first time in 1827. Since then, it's made a habit of it.

The important thing, from our point of view, is that the Europeans are de-leveraging, getting rid of debt at least a little, around the periphery of Europe.

Trouble is, there's a whole lot more. And the level of debt, generally, is still increasing thanks to the very same officials who just cut the latest Greek deal.

Here is where the numbers get a little unreliable. No, heck, they're totally unreliable. But at least they give us a sense of the scale of the problem.

If you have debt equal to 100% of your income you can probably handle it. If the interest rate is 5%, you devote one twentieth of your revenue to debt service.

But if your debt goes to 200% of your income, the burden of the past begins to weigh on the future. You have to cut spending and investing, because so much of your income must be used to pay for things that have already been produced and consumed. Growth slows. The economy groans.

At 5% interest, you'd have to devote a full 10% of your income just to pay the interest. At 10%, you're in real troublewith one of every five dollars already spoken for, even before you get it.

The world produces about $50 trillion worth of output per year. Some countries usually poor ones have very little debt, for the simple reason that no one would lend them money. Others such as the UK and the Netherlands have total debt burdens over 500% of GDP. (Much of it is mortgage debt, which is a special case since it may be considered an on-going expense, a substitute for rent.)

Even at 200% of GDP, debt doesn't have to be a permanent and irreducible drag. If the economy grows faster than the debt, the burden becomes lighter over time. That is what happened in the US, for example, after WWII and again, during the Clinton years.

The problem now grosso modo is that the growth is in the countries with little debt and the debt is in the countries with little growth. In the US, for example, debt increases two to three times faster than GDP.

Most of the developed world is not so different from Greece. Some have more debt. Some have less. Overall, they have government debt equal to 100% of GDP. Household debt adds another 200% of GDP or more; the typical developed country has total debt somewhere around 300% of GDP.

And overall, in order to get total debt even down to two times GDP they need to wipe out an awful lot of debt.

A long way to go, a tough row to hoe...

And more thoughts

Austerity comes to the USA?

Not exactly. But the Wall Street Journal reports that taxes are set to go up:

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemised deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates - 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over

$200,000 ($250,000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases).

The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%). Unless action is taken, these tax increases will take some of the metal out of America's already-anaemic recovery.'

And here's something else that's blocking the path to genuine recovery: Young people no longer start off in life with a clean slate. They're heavily burdened with debt. They can't spend. They can't buy. Bloomberg reports.

Normally, the housing escalator' works like this. Young people buy starter houses from older people. The older people move up to the family homes, buying the houses of people who are selling out so they can buy retirement houses. If the starter houses aren't bought, the escalator stops. Young people can't buy; so, older people can't sell.

The other part of the story not widely reported - is the enslavement of the young to the old. In effect, instead of families paying for their children's education, they force the children to borrow the money from the government. Then, paying it back, the money is recycled to old people through Social Security, Medicare and so forth. Meanwhile, the government borrows trillions more to fund their giveaway programmes. In the US, the total is over $15 trillion and rising most of it destined to pay benefits for people over the age of 50.

And guess who's supposed to pay for all this debt? The young, of course!

How long before they revolt?

Don't miss Bill's next Daily Reckoning. To receive the next article straight into your inbox as soon as he's written it, sign up to the email list here .

Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Customer services: 020 7633 3600. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. https://www.fsa.gov.uk/register/home.do FSA number: 1152 34