George Rebane

[This is my regular column published in 8jan11 issue of The Union.  Its online edition can be accessed here.]

This promises to be the year of fiscal pyrotechnics from Sacramento to Washington to Berlin.  The socialists worldwide are in terminal denial of what earthquakes for the coming months their perennial spending programs have guaranteed.  In California the current budget is $28B out of whack and $500B in long term arrears.  And Governor Jerry Brown, our newly elected retread, promises us a future of gnashing teeth and rending of garment.  But that only after ‘the people of California’ decide who is going to do the gnashing and rending.

The more liberal than ever legislature is going to make sure that the Peter/Paul Principle will be uppermost in the minds of their constituents for the coming special election in March.  That’s when all the remaining Peters will be dunned to pay yet more to the Pauls who now make up the majority of the state’s electorate.   Someone once said that a mind is a terrible thing to waste.  If so, then the state’s progressives have gone wholesale into waste management.

Things in Washington are heading for the first significant fiscal dust-up in years.  The newly elected Republican House promises to dig in its heels on increasing the national debt limit another trillion dollar notch to get us through the current fiscal year.  The conservative firebrands in Congress are making noises as if they’ll shut down government if the debt limit increase legislation does not include some provision to mandate future budgets balanced to federal income levels.  Some are even demanding a balanced budget amendment to curb Washington’s out of control spending.  Don’t hold your breath.

The price of continued debt funded profligacy is that it will doubly motivate our lenders and the world’s energy producers to seek an alternative to the dollar as the global reserve currency.  And if that ever happens, our way of life will literally change overnight.  America can continue borrowing at the currently unaffordable rates so as long as it remains the only one that can print the money used in international exchange.  Once that status is removed, there will be blood in the gutters right here in River City.

In these columns I have made clear my assessment that the dollar will go the way of the Weimar deutschemark.   And that brings us to what’s coming down in the eurozone of Europe.  Several countries committed to the euro are hanging by a thread right now as the European Central Bank in Frankfurt is trying to cobble together a multi-trillion euro rescue system to bail out the next overspent states ready to collapse.  Meanwhile,  The Economist reports that the effective unemployment rate in Spain is over 40% after that country’s disastrous ‘investments’ stimulating unsustainable green jobs.  This compares with ours being north of 15% instead of the government reported 9.8%.

The next European dominoes ready to fall are Portugal, Belgium, Spain, and Austria.  And if they fall, it is very likely that that the damage will go far beyond these four to the point where the euro will be history along with US banks taking another beating.  Stratfor has just published an excellent analysis of this situation (‘Europe: The New Plan’ by Peter Zeihan) that will follow from the 16dec10 meeting of European finance ministers.

To gauge how serious things are, the procedures adopted at that meeting include allowing countries to partially default on their debt and make their lenders involuntary bailout donors.  It is easy to show that interest rates will then more than double for sovereign debt, and that will start a cascade that even Germany cannot stop.  That is why China is suddenly poking around Europe trying to find places where its foreign reserves will do the most good.

The Chinese are really worried about America because the impact of a fallen euro on the dollar will be immediate, plunging world markets and causing our interest rates to soar. The inevitable reversal on both European and US economic recoveries will be the same.  When that happens we can expect surprise diktats out of Washington that have not been seen since the Depression and WW2 – for example, the confiscation of gold and even private pension plans, as is starting now in Europe.

Remember, the governments have to take what we have saved, because that’s where the wealth is.  And they can do that only by forcing us to continue using their freshly printed funny money.  Now put all this together with our local focus on ‘creating jobs’ that are problematic in coming and sustainable only to the extent that Washington keeps printing.

George Rebane is a retired systems scientist and entrepreneur in Nevada County who regularly expands these and other themes on KVMR, NCTV, and Rebane’s Ruminations (www.georgerebane.com).

[9jan2011 update]  'Fears Mount Over European Debt, Banks'