The US government’s response to the 2008 financial crisis triggered the Tea Party protests. The protestors wanted lower taxes, less government spending and a financially prudent government.
But since then, the Modern Monetary Theory (MMT) crowd have emerged onto the US political scene. Their argument is precisely the opposite of the Tea Party’s. The government should print the money it needs and not worry about the debt.
Who will win? That’s easy. Fiscal prudence is nigh impossible in the US any longer. It could only slow the descent into ever more spending, debt and money printing.
Fiscal conservatives are merely virtue signalling in the hope they’ll live long enough to say ‘I told you so’ when the consequences arrive.
The real action will be on the other side of the Atlantic, where some nations are already on track to exceed their world war debts! Bloomberg:
‘Italy’s debt this year will exceed the country’s previous record amassed in the aftermath of World War I, laying bare the debilitating cost of the coronavirus pandemic on the euro-zone’s third-biggest economy.
‘The new borrowing tally of 159.8% of gross domestic product featured in a fiscal outlook ratified by Prime Minister Mario Draghi’s cabinet on Thursday. That exceeds the probable all-time high of 159.5% achieved in 1920, shortly before the era of Benito Mussolini’s fascist dictatorship.’
That last sentence is a big a hint for what’s coming, by the way…
Matthew Lynn writes in the UK’s Telegraph that Italy isn’t the worst offender:
‘Which country in Europe has the most total government debt? Italy, perhaps, as it grapples with a depression that appears to have gone on for decades? Or maybe Greece after it nearly brought down the euro? Or even Spain after its wild boom of the early 2000s?
‘In fact, it isn’t any of those. As of this month, it is France. In hock to the tune of €2.67trillion (£2.32trillion), this month it finally overtook Italy as the Continent’s biggest debtor — and the third biggest globally.’
Now there’s an important reason why Europe should have all your attention if you’re worried about a debt crisis.
Why euro debts are more dangerous than dollar debts
Greece’s defaults and bailouts during the European Sovereign Debt Crisis were digestible for a simple reason. Greece’s size relative to the eurozone currency bloc.
Before the euro, the Greek currency would’ve crashed as the Greek government printed up the money to fund its own bailout. Instead, the costs were born throughout the whole eurozone, which means the currency’s drop wasn’t very large. German exporters were happy with the drop too.
But the problem has now shifted to far larger bond markets inside the eurozone. A bailout of the eurozone’s largest debtors would do far more damage to the currency and economies.
Not necessarily a Lehman Brothers-style 2008 crash, but it would require a government and central bank response, which really would put the euro’s value at risk.
That’s what the Germans fear most ever since their experience with an unpayable debt load after the First World War. Attempting to pay that debt ended in hyperinflation. As the Germans see it, being on the hook for others’ spending is a little familiar…
If the Germans do refuse to risk a replay of that episode in order to rescue the French, Italian and other European governments, then a Lehman Brothers-style 2008 crash really is on the cards. Because nations would have to leave the euro and default on their debts in order to be able to print enough money to save themselves.
But that risk only applies in Europe — the common currency is what makes things so dangerous there. All other overindebted nations are in charge of their own currencies. And so they will prefer the inflationary route of printing the money needed to keep things going. In the eurozone, as French Politician Marine Le Pen explained to Greece’s prime minister, austerity and the euro are Siamese twins.
All these fears are beginning to make themselves felt in the political scene. Which, in Europe especially, is never a good thing…
Bloomberg’s article ‘French Voters Fret Over Debt Levels Not Seen Since the War’ has some interesting twists too:
‘When Benedicte Peyrol, a lawmaker in President Emmanuel Macron’s party, meets constituents in central France, she says there’s one issue worrying them above others: a massive pile of public debt.
‘“Frankly, I was surprised,” says Peyrol, who’s 30 and trained as a tax lawyer. “It’s a rural area, debt isn’t necessarily an issue in day-to-day life, and yet people are very apprehensive about how we’ll pay it back.”
‘Such worries are more often associated with voters in Germany than in France, where successive governments have overseen an upward trajectory of public borrowing over decades without any major backlash.’
A French Tea Party?
What do the Germans know which the French are figuring out? It’s simple: there’s no pain free way out of this much debt. Taxes, inflation or a crisis.
Not everyone wants to run this system into the ground, for all it’s worth. They want a system that is sustainable and will function.
But it’s much too late for any European Tea Party to be effective. Interest rates are already at zero. Many government bonds actually have negative yields in Europe…and still the debt is ballooning, the economy stagnating and the spending growing.
Instead, any European Tea Party which tries to reign in government threatens to trigger a debt crisis. The government is just too large a chunk of GDP to reverse without facing falling GDP.
French generals are openly warning about civil war in France, and they were backed by Presidential Candidate Marine Le Pen in their warnings. The letter from the military singled out treatment of the gilets jaunes protestors — a tax motivated revolt.
The end is much closer today than we realise for Europe. The question is whether it’ll be deflationary or inflationary? And how the monetary chaos would affect politics there.
How will Australia fare?
Here in Australia, the government is buying into all the same mistakes of its European and American peers with its latest budget. We’re on course to be in the same position as they are now, eventually.
The inherent flaw in Australia’s budget is quite simple really. If government stimulus worked then debt-to-GDP ratios couldn’t grow. The GDP would rise more than the government debt if government borrowing and spending stimulated GDP. But that never seems to happen…
Instead, government stimulus results in less GDP than debt, so government stimulus actually worsens the position of the economy over time. Eventually you end up where Europe and the US are today. With the choice between inflation or a crisis because debt levels are so huge and government spending is such a large part of the economy.
The only good news is that we may see what that path delivers to the US and Europe while there’s still time to for our politicians to change course. We’d need a Tea Party sometime soon though…
Unfortunately, our international financial markets will be caught up in the carnage as other nations choose between Weimar and Lehman Brothers. Investors cannot escape.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.
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