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Tuesday, June 19, 2012

Tick, tick, tick...

I was talking to my wife, I believe, about the euro and the European Union (EU).  I made the comment that it's long been almost common knowledge that the EU was going to fail from the very beginning of its existence.

She looked at me with the, "Hey, a**hole, not everyone spent 30 years in banking" and would know this.

Oh.  Right.

OK, so, the problem from the get-go with the EU was that it was ONLY a financial arrangement.  The political portion is weak, at best.  Without politics and finance working in conjunction, you're doomed for failure.

As has happened, you can have one country that says, "We're going to set up a Social Security system that lets people retire at age 50 and get paid what they were getting paid when they were working.  We're going to give them 8 weeks of vacation, and make sure they're always happy and content, regardless of the cost."  Obviously, unless you have a massively growing tax base, the existing (or shrinking) tax base simply can't support the cost.  The tax base shrinking as the tax draw grows ain't a healthy economic model.

So you have to borrow to pay for your promises.

Here in the US where the Treasury Department is part of the US government, the govenment can tell the Treasury exactly how to behave.  In the EU, it's a different story.  The European Central Bank doesn't take it's orders directly from Germany, France or any of the other individual EU members.  They don't have direct control.

As we saw with the recent election in Greece, one of the candidates had run on the platform that if he were elected, he would reject the austerity program proposed by the EU.  That would be like Obama giving Geithner of the Treasury an order, and Geithner flipping him off.  Obama would just replace him, and put in a guy that would follow his orders.  The EU has no power to remove elected officials from the soverign nations that make up the EU.

The EU has a number of financial criteria that the members must maintain.  Debt ratios, GDP and the like.  Well, if a member doesn't meet these benchmarks, the EU can kick them out, but they never will.  As we saw with Greece, their threat to leave is what had everyone worried.  There was no talk of kicking them out.

When you have such an imbalance between the political and the financial, you have conflict.  The inability of the EU members to force austerity programs on their free-spending bretheren will ultimately result in the dissolution of the EU.

I'm guessing you have seen the irony of what's going on here in the US.  We have our political and financial systems intertwined, so things should be hunky-dory.

They're not.

THAT'S because we don't have the political will to act like adults and cut our spending when tax receipt decrease.  Like Greece, we're making promises which we don't have the money to pay.  Unlike Greece - where the rest of the EU (for now) is paying for their largess - we are saddling our children, grand children and great grand children with the bill for our foolishness.

The event that spawned the conversation with my wife this weekend was the aforementioned Greek election.  That ended up being a non-event.  For now.

What I found much more interesting - both in its outcome and its miniscule coverage here in the US - is the election that was also held last weekend in France.

They elected a Socialist majority to their parliment.  And they're going to reverse the austerity programs the previous right-of-center government had imposed on the country.

Just like what was going to happen in Greece.

France is the EU's second biggest economy - just behind Germany and just before Italy.  They have an economy that is almost 10 times larger than Greece, yet everyone had their panties in a wad over the tiny, economically insignificant island.

Pay no attention to the man behind the curtain....

As a personal aside, I picked up a decent bit of gold last week.  My gut says it's getting close to systemic failure.  Or at least the start of the cascade.  I don't normally buy outside of my regular routine, but my Spidey Sense is a-tinglin'.

In unrelated news, I'm making another trip to Idaho this week to look at property.  Nope, not related at all...

Copyright 2012 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


mama4x said...

Idaho will be glad to have you!!

Chief Instructor said...

LOL, we'll see!

We rented an SUV to drive the trip from California to Idaho (I won't subject myself to a TSA feel-up unless it's an emergency).

Let's just say that we have gotten a number of dirty looks from folks with our CA license plates.... we're heading out for some more rural properties today.