Global Economic Crisis

Having published numerous blogs over the past year on the evolving  sovereign debt crisis with the EU, I want to put these events into perspective. First point, the crisis continues to escalate, despite the several supposedly decisive (and costly ) measures enacted by European policymakers. Witness the bailout of Greece, and now the bailout of Ireland, along with the countless statements from EU political actors that these massive bailouts will prevent this crisis from getting worse. The reaction of the bond markets to the Irish bailout deal is a clear wet blanket being thrown at the EU.

Next point, given the disastrous track record of the European political class, it is highly unlikely they will prevent the next debt domino from falling, namely Portugal. After that, Spain, with a vastly larger economy  than Greece, Ireland or Portugal is almost certain to be the next country in need of a bailout. However, it is unlikely that  Europe will be able to cobble up the resources required for a bailout of Spain.

I therefore believe that the European debt crisis is now irreversible, and the only question is how severe the consequences will be. And a final point; the United States, which has only remained afloat due to its ability to borrow cheaply, has virtually all the same vulnerabilities as the struggling countries within the EU. Once the sovereign debt crisis strikes the U.S. with full fury, all bets are off.

The Taoiseach of the Republic of Ireland, Brian Cowen, has a paper-thin majority of a mere three seat in the Dail, Ireland’s parliament. Its junior coalition partner, the Green Party, is already threatening to pull out and force a general election, unless Cowen agrees to call new elections by late January. Whether or not the current Irish government is forced into an immediate dissolution of the Dail, or agrees to new elections in January, it faces certain retribution at the hands of an increasingly irate and depressed Irish electorate.

There are two primary causes to the soon-to-be finale of the Cowen government. The first involves the disastrous management of the Irish economy and its acute financial crisis. Reckless speculation by the Anglo-Irish Bank created one of the worst banking crises amid the global financial crisis of 2008. As in other countries facing a similar predicament, the Irish government used the taxpayers of the nation as a backstop for the banking system. In effect, the troubled institution was nationalized, and the entire banking system had its deposits and obligations underwritten by the government, meaning the taxpaying citizens. The net effect has been an ever-escalating figure for the cost of bailing out Anglo-Irish Bank, and the concomitant public obligation to cover the surreal expenses of the banking bailout. While the banking system was being “saved,” the ordinary citizens of Ireland have been punished with higher taxes in synchronization with sharp cuts in social appending, as the unemployment rate reached historic highs.

Despite the cuts in public spending and tax increases, the cost of the bank bailout and the increasing spreads  on government bonds defied the ability of a nation of four and a half million people to cover such a large fiscal obligation. Yet, when word leaked out regarding the secret negotiations between Dublin, the EU, IMF and European Central Bank over the terms of a bailout of Ireland itself, the Cowen government at first sharply denied the widely circulated accounts. It turns out that the Cowen government was lying through its teeth, and has now openly admitted to the need for an EU bailout of the Republic of Ireland, to the tune of at least $120 billion.

With Ireland already confronting an annual deficit equal to about 35 percent of its GDP, the even higher levels of tax increases and public spending cuts the EU and IMF bailout will require, on top of the emergence of political instability, point to the meager prospects for the long-term future of the Irish economy. Her sovereign debt crisis is now clearly of catastrophic proportions, and the Irish nation is facing the very real danger of a sustained economic implosion.

First it was Greece and now it is Ireland. In each case, the European policymakers boasted that their massive binge of public borrowing to put together sovereign bailout packages has saved the continent from a much worse financial and economic disaster. But given their track record, how certain can we be that Portugal and Spain won’t be the next dominos to fall? The financial and economic disarray within the European Union appears to be metastasizing rapidly.

At first the Irish government, headed by Brian Cowen, the Taoiseach, denied the reports that Dublin was talking to the European Central Bank about a bailout. But with the ECB, EU and IMF shuttling into Dublin by the planeload for meetings with key Irish economic and financial policymakers, Cowen and his ruling party have been forced to admit what the whole world already knew; Ireland is in advanced negotiations with the ECB and IMF for a vast financial bailout, measured in the tens of billions of euros.

In a fierce editorial, the Irish Times asked rhetorically; is this what Irish patriots sacrificed their lives for in the Easter Rebellion of 1916? As the editorial points out, Ireland struggled for its national sovereignty, not for a corrupt and incompetent clique of politicians to bankrupt the nation, forcing it to beg for a handout, in the process eroding what is left of its national sovereignty.

As  in Iceland and Greece, the financial and economic crisis in Ireland, in her case driven by the reckless speculation of the Anglo-Irish Bank that necessitated a massive taxpayer bailout (according to the same politicians who allowed the speculation in the first place) is about to morph into a political crisis. Until recently, some commentators have expressed amazement at the restraint of the Irish people, as their taxes exploded along with the unemployment rate, while social spending plummeted in order to finance the massive bailout costs involved in rescuing Anglo-Irish Bank. However, with the combination of a looming bailout with strings attached, coming after the outright deception of the Irish government, public anger may be about to explode. The revised Anglo-Irish bailout costs will push Ireland’s deficit to an incredulous 35 percent of GDP. This is not only unsustainable; it will break the back of what is left of social restraint in Ireland. The bailout package being put together by the ECB and IMF is unlikely to prevent the public outrage that will gather momentum, as hinted at in the Irish Times editorial.

The last time members of the political establishment and media commentators seriously grappled with the question posed by my title occurred in the weeks following Senator John McCain’s seemingly mercurial and impulsive selection of Alaskan Governor Sarah Palin as his vice presidential running mate. Many would say that doubts about the intellectual and leadership fortitude of Ms. Palin as a possible successor to an elderly and illness-prone Senator McCain, had he prevailed in the 2008 U.S. presidential election, was a leading factor in persuading many independent voters, and even some Republicans, to cast their votes for Barack Obama.

Despite the continued doubts about her intellectual acumen among many powerbrokers within the Republican Party, echoed by the intuitive feeling among Democrats that if the GOP selected Sarah Palin as their 2012 presidential nominee this would be the best guarantor of a second term in office for President Obama, an objective assessment of Palin’s political viability leads to a different conclusion. No doubt, Sarah Palin (along with many other figures within America’s political establishment) is profoundly ignorant  in matters of foreign policy and macroeconomics. However, as the election of George W. Bush to the presidency demonstrated, the intellectual capacity of the commander-in-chief is not a priority among the majority of the American electorate. In a national edifice dominated by corporate media and ten-second sound bites, Palin has demonstrated that she is highly accomplished in the attributes that tend to attract interest and support among the electorate. With Sarah Palin having emerged from the midterm elections as the most visible and potent political brand in the GOP, and likely to further enhance her political rock-star status with her recent television series, <em>Sarah Palin’s Alaska</em> and forthcoming promotional tour in connection with her new book, <em>America By Heart</em>, there is little doubt that should she enter the race for the Republican presidential nomination, Palin would prove to be a formidable competitor.

If Sarah Palin were to be the GOP’s standard bearer in 2012, those who might be praying for such an outcome within the leadership circles of the Democratic National Committee better be careful what they wish for. If the economy were to miraculously recover and the current calamitous joblessness rate significantly recede, the power of incumbency would normally be sufficient to assure Obama would prevail over any Republican challenger in 2012. However, what if the American heartland remains devastated by an unrelenting Great Recession? In a time of economic crisis compounded by never-ending wars abroad against an elusive and ill-defined enemy, Americans like other peoples throughout history may clutch at the charismatic alternative with easy answers and inspiring patriotic slogans. In addition, there is the Tea Party movement, already anointing Sarah Palin as its principle icon, which may prove to be a decisive force in mobilizing alienated Americans on behalf of Palin in a presidential contest with Obama.

The possibility of a Palin presidency cannot be dismissed as logically impossible under the circumstances I have described, and it behooves serious thinkers to reflect on the implications for America and the world if in fact Sarah Palin were to run for president, and prevail over Barack Obama on November 6, 2012. I have <a href=”http://www.eSarahPalin.com” target=”_hplink”>done so</a> in my novel, <em>Sarah Palin Apocalypse Americana</em>, which presents a scenario for the first few months in office of a hypothetical Palin presidential administration. There are elements in Palin’s background, past statements on the public record and demonstrated proclivities that offer much to speculate on.

In her role as the toastmaster of the Tea Party movement and most right-wing corner of the Republican Party, Ms. Palin has demonstrated an intolerance of Americans who harbor views that are contrary to those of Palin and her followers. She has frequently used extreme rhetoric in describing those who do not follow her brand of conservatism as not being merely “liberal,” but “socialists” as well, the implication being that they are somehow un-American. On domestic policy, it is highly likely that Sarah Palin in the White House would contribute to further polarization among the American people.

It is in the arena of foreign policy, however, where I believe a Palin presidency would prove to be a nightmare for America and the world. As far back as the 2008 presidential campaign, then vice presidential candidate Palin told reporters that she supported the Republic of Georgia acceding to full NATO membership while the South Ossetia war was raging between that country and Russia (a war instigated by Georgia) even if that meant an eventual military conflict between Russia and the United States. Palin may lack in-depth knowledge on the Northern Caucasus, but that did not inhibit her from supporting policy prescriptions that could very well lead to global war between the two leading nuclear powers. The impulsive naivete Palin demonstrated at that time is a clear marker of the potential dangers that lurk for world peace, if such an individual were to become America’s next commander-in-chief. The neoconservatives who advise her on foreign policy cannot be expected to be a restraining influence; on the contrary, the neocons are likely to exploit a President Palin to further advance their theories on employing American military power on behalf of their desire to impose “American values” on other countries through force.

Rather than ridicule and seek to belittle Sarah Palin, who continues to advance her political brand despite the arrows of skepticism that have been thrown at her since 2008, those who recognize the acute dangers that would flow from a future Palin presidency should find ways of clearly articulating those dangers so that the electorate will be informed, before it is too late. (information on “Sarah Palin Apocalypse Americana” at http://www.eSarahPalin.com )

From Ireland to Portugal and back to Greece, the catastrophic public finances in the weaker Eurozone economies continue to throw off further nasty surprises, despite the massive debt-based stabilization fund the stronger economies in the Eurozone cobbled together to bailout their weaker partners. An example is found in ground zero of the European sovereign debt crisis, Greece. Fraudulent bookkeeping in Athens hid a massive and unsustainable government deficit. Once exposed, the official word was that the true size of the Greek deficit was now revealed, until that “final” figure was revised upward, then revised at a still higher figure again. Now we are informed that the last “final” upward revision was itself too low, and the latest figure from Eurostat is that the actual Greek public deficit for 2009 was an eye-popping 15.4 percent of national GDP.

The latest news on the Greek deficit, combined with bond spreads widening on Irish and Portuguese debt, are the latest markers pointing to sovereign fiscal doom in the Eurozone.

Sarah Palin Book

http://www.eSarahPalin.com

Three days after the Democratic Party lost control over the U.S. House of Representatives in the midterm election, the Obama administration heralded a supposedly impressive jobs report. According to the Bureau of Labor Statistics, the U.S. economy created a net total of 150,00 jobs during October. Sounds good. However, the unemployment rate stood at 9.6 percent, suggesting that previously discouraged workers reentered the job market.

Now here is where things get really strange. According to Nouriel Roubini, there is something contradictory about the claim of strong job creation in October. Here is what he tweeted: “Household survey: employment fell 330K last month & labor force participation rate at 25yr low. How does that square with 150K jobs gain?”

If Professor Nouriel Roubini is skeptical about the laudatory jobs report just released, we all should be.

Ben Bernanke, Chairman of the Federal Reserve, is up to his old tricks and gimmicks. His earlier bout of quantitative easing, totaling nearly two trillion dollars, was a miserable failure, attested to by an official U.S. unemployment rate of 9.6% and unofficial but more accurate rate of 17 percent, when underemployed and discouraged workers are accounted for. With no likelihood that Congress will spring for a second economic stimulus spending program, Bernanke and the Fed are now implementing QE2.

The second round of quantitative easing by the Federal Reserve will involve the purchase of 600 billion dollars in long-term U.S. Treasuries by the 2nd quarter of 2011. This is a gamble by the Fed, which I don’t see having a snowball’s chance in hell of being any more effective than the first round of quantitative easing. Furthermore, printing money out of thin air to buy government debt, in effect monetizing the debt, creates the risk of severe inflation, failed treasury auctions and the radical devaluation of the U.S. dollar.

It may be that Bernanke is doing QE2 precisely to weaken the dollar, though he would never say so publicly. In theory, a weaker dollar would make U.S. exports more competitive, leading to the creation of new jobs. However, as reported in an earlier blog, virtually every major economy is manipulating its currency in a race to the bottom. Not even dollar devaluation, if that is the Fed’s goal, will reverse the negative character of the U.S. economy and its grim unemployment crisis.