Public Debt Dynamics of Europe and the US Public Debt Dynamics of Europe and the US

Public Debt Dynamics of Europe and the US Public Debt Dynamics of Europe and the US Dimitris N. Chorafas AMSTERDAM ' BOSTON ' HEIDELBERG ' LONDON ' NEW YORK ' OXFORD PARIS ' SAN DIEGO ' SAN FRANCISCO ' SINGAPORE ' SYDNEY ' TOKYO Elsevier The Boulevard, Langford Lane, Kidlington, Oxford, OX5 1GB, UK 225 Wyman Street, Waltham, MA 02451, USA Copyright © 2014 Elsevier Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without permission in writing from the publisher. 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To the fullest extent of the law, neither the Publisher nor the authors, contributors, or editors, assume any liability for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions, or ideas contained in the material herein. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress ISBN: 978-0-12-420021-0 For information on all Elsevier publications visit our website at store.elsevier.com Preface Niels Bohr, the quantum physicist, once said that every statement should be taken by a scientist as a provisional hypothesis that has to be tested. This holds true not only of physics and engineering but as well of finance and economics whose theories are too often accepted without scrutiny by chiefs of state, ministers of finance, central bankers, economists, analysts, and common citizens. An example is the theory (or, more precisely the myth) that high leveraging is good for a person, a company, or even a nation. If accepted, this leads to the DEBT syndrome and its disastrous aftereffects. The fallacy that “debt is good” is the sub- ject of this book. In each of its 15 chapters, the evidence emerges that piling up public debt can lead to an unmitigated disaster. This is documented through case studies on Greece, Spain, Italy, France, and the United States—in short, those western countries that nowadays lost control of their senses and of their economy. Bohr’s thought demolishes the generally held opinion that scientific, economic, or social “truths” and “theories” are forever. By extension, it dissipates the widely prevalent delusion that books in science and in economics contain only eternal wisdom. Books are learning tools written by people who are fallible. As such, they may include impractical theories like: G The reign of debt, and G The gates of nirvana. Written for professionals, academics, and researchers, the book the readers have in their hands provides the documentation and describes the implications of current policies by sovereigns and central banks, in dealing with the debt abyss.Inso doing, it brings in perspective the diversity of opinion reigning in modern economics and finance. It also outlines themes which, among themselves, are defining the society in which we live. “Authors are the engineers of the human soul,” Stalin once said, adding that: “If you want to know the people you deal with learn about what they are reading.”1 In this, the Soviet dictator was right. Ideas and arguments contained in books are basic to culture and civilization. They are eye-openers to the wisdom of the past and help in positioning one’s mind in a way confronting present challenges by making use of assumptions, interpretations, and extrapolations. Usually, though not always, when the author succeeds in his or her mission, books become living entities aimed to both inform and provide the grounds for a discussion where different, contradictory opinions can be heard. “I completely 1 Montefiore SS. Staline. Paris: Editions des Syrtes; 2005; London: Weidenfeld & Nicolson; 2003. xii Preface disagree with you but will fight for your right to state your opinion,” said Voltaire to Jean-Jacques Rousseau. Like Voltaire’s writings, this book brings to the reader contrarian opinions, but its intention is not polemics. It is a reflection of the dynamics of social, economic, and financial life which are almost entirely built on contradiction. Contradiction and diversity enlightened the past centuries and permitted different philosophies to develop. By contrast, our world has been flattened by the steamroller of the nanny state. Margaret Thatcher was right when she said: “... too many people have been given to understand that when they have a problem it is the government’s job to cope with it. ... They are casting their problems on society. And you know, there is no such thing as society. There are individual men and women and there are families.”2 There are individuals and families who in the post-World War II generations have been taught that “debt is good” and they are accumulating it crazily. Individuals and families depend on entitlements to enlarge their income, and if they are homeless, the government must house them. Run by politicians who are no better than second raters, western governments are happy to oblige no matter how illogical are their citizens’ demands. G The cost goes to increase the already ultrahigh public debt, and G Not even a thought is given to the fact that, at the end of the day, debt means slavery. Deception is far from being unheard of in politics and in society at large. In 1957, at the time of the Treaty of Rome, the “European dream,” embraced by the majority of the old continent, promised a middle-class lifestyle for most people. But delays and bickering made this almost impossible. The more public debt rose, the less was the prospect of secure jobs for the young as financial crises: G Destabilized the politicians, and G Created a widening gap between social classes. No wonder that the majority of Europeans have deep cynicism toward their governments, national institutions, and political leaders. To make educated guesses about how long this will last, we must appreciate what has happened and why. Part of the answer can be found in drift, which always accompanies a rich society misled to believe that the good times last forever. Another part of the answer is wrapped in the comic thinking that “debt is an asset.” That’s the concept which led to wrong-way policies by chiefs of state and their cohorts, all the way to common citizens. We will see why. Hopefully, this wrong-way thinking could be corrected through decisions which are factual, motivating, and able of changing the direction of future events. The potential of a correction is increased by nonmainstream books able of showing how to think out of the box, inciting their reader to: G Examine alternatives, 2 Financial Times, April 19, 2013. Preface xiii G Challenge the “obvious”, and G Organize to get out of the trap. Along this line of thinking, this book provides a probing discussion on the state of the economy, the reasons why we came into the trough in which we reside for over 6 years, and what it takes in terms of effort to get out of it and get moving again. The text makes plenty of critical thoughts public, relying on the right to freedom of opinion and of expression, as well as on the obligation to provide thinking people with contrarian arguments and information different to the one that so often is being heralded by politicians and the media. ÃÃÃ The book divides into six parts. Part One provides the reader with a snapshot of the economic, social, and financial world today which, as different commentators suggested, is a casino society. This includes the globalization without limits which started in earnest in the 1980s and the “kingdoms of debt” which it created, practi- cally in all western countries. No attention has been paid to the fact that both public and household debt is in the upside, and it is very difficult getting up from under if this could be done at all. The theme of Part Two is an answer to destiny by the land of Homer: The Greek economy and its fall to the abyss can teach very valuable lessons on what “not to do” if you wish to keep your freedom and your independence. But is any- body listening? Part Three presents to the reader more case studies on self-wounded economies: Spain, Italy, and France. These are brought to the readers’ attention in an as is way, with every effort made to avoid the political and bureaucratic romanticism that “the worst is behind us.” The worse is still ahead of us and nobody can tell for how long it will last. Part Four attempts to answer a daunting question: “Who killed the Golden Eagle?” When WW II came to an end, the US economy was supreme and it contin- ued being so for over a decade.

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