THE BARBERS OF DUSSELDORF

One of Margaret Thatcher’s more trenchant observations is:  "The problem with socialism is that sooner or later you run out of other people’s money."

The purpose in life for most politicians anywhere in the world is to, by whatever sleight-of-hand shell game they think they can get away with, make that run-out-of-other-people’s-money moment forever later.

The world’s spotlight is currently on politicians in Europe who are frantically, hysterically, desperately engaging in this shell game.  The question of the immediate moment is:  will the barbers of Dusseldorf let them get away it – or at last and for once, put an end to it?

For if they opt for the latter, they could precipitate an end to Washington’s shell game here in America.

First, the background, starting with the Greek Limbo Dance. 

Greece was not allowed by the EU (European Union) to adopt the euro at its initiation in January 1999 because Greece’s debts and rate of inflation were way too high.  It took 18 months of the Greek government lying with fudged economic data to come under the limbo bar of euro criteria. It lied about the size of its debt, its inflation rate of 4%, and its unemployment rate of 10%.

With the drachma, Greece had to finance its debt by paying over 10% interest – but once in the eurozone, it could borrow in euros at 2 to 3%.  EU banks, especially French and German, were happy to loan the Greek government as many euros as it wanted – because the ECB (European Central Bank) accepted Greek sovereign bonds as collateral for the loans without requiring any equity to back them up.  That way, the EU banks could increase their balance sheets without any proportional fractional increase in their equity.

Maybe this would have worked if Athens had used all this borrowed money to pay down its debt.  Instead, it blew it all like a soused sailor in Piraeus on adding vastly more workers and bureaucrats to government payrolls, doubling their wages, and funding their pensions at 92% of their pre-retirement salary.

Then Athens went into the hole billions more by hosting the 2004 Olympics.  And it continued to play the Limbo Dance with increased vengeance, lying like a rug about its economy.

When the Socialist Party led by George Papandreou won the election last October, it decided to spill the beans about the lies of the previous government:  Greece had a public debt of $410 billion (117% of its $350b GDP), and a budget deficit of over 13%.

Greece’s debt rating was lowered to junk bond status, interest rates on Greek bonds shot up, and panic ensued – from rioting public workers in Athens demanding no reduction in their free lunches to German and French banks holding almost $200 billion of worthless Greek bonds.

The EU bankers had a lot more to panic about than just Greek bonds – for now their dirtiest secret was exposed, that they had bought gigantic amounts of worthless bonds from the other government PIGS as well, Portugal, Italy, and Spain.  German banks alone had sunk close to $700 billion into PIGS bonds.   

(Note that is exactly like our sub-prime mortgage crisis with US banks making trillions in loans to folks who could never pay them back because they thought the loans were government-guaranteed via Fannie & Freddie.)

The frosting on this poisoned cake is that EU banks, again especially French and German, have loaned scores of billions to Greek banks, many of which are going to go belly up.  This will cascade into bank failures in other PIGS countries where the EU banks are heavily exposed.

So of course the panicked banks are demanding a government bailout to "protect Greek solvency" – when the bailout is for them, not Greece.  The key to such a bailout is the participation of the EU’s economic giant, Germany – and Angela Merkel was ready to comply.  But the Barbers of Dusseldorf got in the way.

As Germany is the economic giant of Europe, the state of North Rhine-Westphalia is the economic giant of Germany.  Its 18 million population produces almost a quarter of Germany’s GDP.  The capital of NRW and of the entire Rhine-Ruhr industrial/metropolitan region, is Dusseldorf.

At the end of next week, May 9, elections will be held for seats in the NRW state parliament or Landstag.  They are absolutely critical for Angela Merkel.  Her CDU (Christian Democratic Union) party has in coalition with the FDP (Free Democratic Party) a bare majority control of the NRW Landstag (51%, 91 of 187 seats).

Germany has what our Senate used to be (prior to the 17^th Amendment), called the Bundesrat, members of which are not elected but appointed by the Landstag state legislatures.  Just as Merkel has a bare majority in the NRW Landstag, so she has a narrow majority in the Bundesrat.  Thus if she loses her majority in the former on May 9, she will quickly lose hers in the latter.

Since most legislation passed by Germany’s equivalent of our House of Representatives, the Bundestag, requires approval by the Bundesrat, loss of control of the Bundesrat means Merkel’s government would fall and she would have to call for early elections for a new government.

According to polls, between 70 to 80% of voters in NRW are opposed – really, angrily, opposed – to a government taxpayer-paid bailout of Greece.  They want the bankers and the bondholders to pay – by, in investor parlance, taking a haircut.  If the Barbers of Dusseldorf can’t get Merkel to give the bankers and bondholders a haircut of 50 to 70%, they are going to give her a haircut at the voting booth on May 9.  They may even shave her bald.

As the amounts of the proposed bailout keep escalating daily – from $10 billion to $45 billion to $150 billion – it is obvious to anyone rational that the solution is for Greece to be suspended from the eurozone, go back to the drachma, default on its debt – the euphemism is "debt restructuring" – then work hard to rebuild its economy with solid free market principles.

If this happens, hordes of public worker-moochers will go violently berserk.  There will be blood in the streets of Athens, literally and a lot.

But it’s hard to see how it won’t happen.  For a EU bailout of Greece needs the approval of all the other EU countries, for they all have to fork their taxpayer’s dough over – and that includes those next in line for a debt-bailout crisis, Portugal and Spain.  How, for example, is Portugal leader Jose Socrates going to convince his people to shell out billions when their economy is collapsing around them – to explain that the way to get out of debt is to go deeper into debt?

When you have gangrene, if you don’t amputate the limb that’s gangrenous, you’ll die.  Amputate Greece and the rest of the eurozone may survive.  Don’t, and the "bond vigilantes" are going to kill off the other PIGS one by one, then start circling around France and Germany themselves.  Or maybe they’ll decide to go for the Big Enchilada.  That’s us.

Our debt makes Greece’s look miniscule – and Zero is doing everything he and his Dems can do to grow, not diminish, it.  The evidence mounts that this is what they want. 

There are only two ways to get out from under the galactic-size debt the US government has accumulated:  partial default and total default.  The former allows politicians to play favorites, to give breaks to those who will help keep you in power and ruin those who won’t.  The latter – another name for which is hyper-inflation – wipes out wealth and savings across the board, impoverishing the entire society, and an impoverished society is far easier to control than a wealthy one.  Ask any Marxist.

Either way what we are seeing – first in Europe with the euro, then with our own dollar – is the death spiral of fiat currency.  The amount of government debt is escalating at such a rapid, almost exponential, rate that no financial system based on fiat money created out of air can be sustained.

How long this will take no one knows.  Allowing Greece to default will delay it for the euro.  The British pound will be next, for fiscally, economically, and socially, Britain is worse off than Greece.  Then it will be our turn.  One interesting question is, how quickly will the TeaPartyers learn the lesson the Barbers of Dusseldorf are teaching?

That lesson is:  give those who bought government debt a haircut, not the taxpayers.  No bailouts.  Politicians who vote for bailouts will be shaved bald.  The sooner you run out of other people’s money, the sooner you can rid of socialism.  Democrats are deaf to this, but RINOs should be listening.

Ps:  Some very clever people I know have come up with a solution to the coming hyper-inflating of fiat currencies.  What if there were a revolutionary way to attractively package and easily carry small amounts of gold or other precious metals?  I’ll be discussing this at the San Diego Rendezvous.  Call Miko at 703-992-4529 (or email him at [email protected])  to be there or know more.