Follow the god that failed
The first phase of the global crisis manifested itself in private credit, leading to widespread questioning of the financial system. The return of Keynesian policies while the influence of the Chicago school waned surprised no one.
As governments shouldered the crisis burden at the expense of taxpayers, we entered a new phase characterized by public debt. And as months pass, how private debt was “socialized” in the first place is turning into a distant memory, while the market dogma that was harshly criticized at first seems to get a good old whitewash.
One disturbing assumption that has accompanied the eurozone crisis is that the markets are acting rationally in regards to public debt problems. Thus, as they spike up public borrowing costs, they once again accumulate the power to dictate terms.
Indeed, the three new governments in Greece, Italy and Spain – only the last one democratically elected, mind you – are expected to shove yet another dose of austerity down the throats of their populace, regardless of the cost. If realized, the promises of Partido Popular, the market-friendly winner of Spain’s Nov. 20 elections, would boost social polarization: reduction of corporate taxes, draconian cuts in social spending, destruction of collective bargaining rights and “labor market reform” that will make it easier to hire and fire for employers, etc. The picture in Italy and Greece is no different.
“We can choose the sauce they will cook us in, but we’re still going to be cooked,” Reuters quoted a civil servant from Madrid as saying – a concise description of what European democracy looks like nowadays.
Such selective austerity will not only bring forth polarization; many analysts have been warning they will not do much to prop up the economy, either. Just look at the massive collapse in demand in “austerity poster boy” Ireland, which looks pretty ripe for social unrest.
Thus, the logic of the market is definitely not about fixing economies. Moreover, it is not categorically about public debt, either. Case in point: On Nov. 21, the U.S. Congressional super-committee failed to reach a deal on cutting the budget deficit. In essence, this means that American politics has become unable to solve the mounting debt problem of the world’s No.1 economy. As of November, gross debt – public debt plus intergovernmental holdings – stands at over $15 trillion, around 100 percent of gross domestic product. The public debt-to-GDP ratio stands at 69 percent. Plus, Washington has posted an annual budget deficit of $1.3 trillion in its fiscal year ending Sept. 30, the second-highest on record.
Coming on top of such a vulnerable outlook, the congressional failure adds insult to injury. And what have investors done? They rushed to buy U.S. bonds, sending the yield on the two-year note to below 0.25 percent. Thus, anxious over the worsening U.S. debt outlook, investors fled to the safety of ... U.S. debt.
All the talk of reserve currency status will not change the irrationality of this kind of flocking. As we enter a third phase of the crisis that will lay the ground for a tearing apart of all “contracts” between social classes, predatory “target-picking” of the market can only get worse.