But look through these anti-establishment theatrics to the deep structures of political and economic power, and suddenly the surge of populism feels like so much sound and fury, obscuring the real story of our time. From Washington to Athens, the economic crisis is producing consolidation rather than revolution, the entrenchment of authority rather than its diffusion, and the concentration of power in the hands of the same elite that presided over the disasters in the first place.
Among the examples he cites is the EU massive bail-out to prevent sovereign debt default. But my sense is that Western governments are overreaching and that their interventions won't succeed. Also in the New York Times Paul Krugman shouts that the wobbly euro zone members need to cut wages 20-30% to regain their competitiveness. They can't hope to grow their economies to pay down their debts when their labor forces (at least those still working) are so overpaid.
WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.
This can't be done inside the euro unless the European Central Bank decides (against vehement German opposition) to inflate the euro. If the ECB could do this then Germany and the Netherlands might find it sensible to form their own sound currency union outside the euro.
The European Union's leaders might turn the financial crisis to their advantage and create a real political union with greater central powers. But the market has a say in this. Greece's debt is so large and growing larger that avoidance of default can't be done without taxing citizens of other European countries to pay for Greece's government. I am very skeptical this can be done.
On a similar note, Barack Obama just signed into law a big expansion of medical entitlements. Obama has also continued George W. Bush's policy of large scale military deployments and fighting in Muslim Middle Eastern countries. All this costs big money. But the US government's debt is on a course that runs a very real risk that capital markets will turn against American debt. Again, an overreaching government could be forced into a big retreat - just as has been happening for years in California and more recently in Greece, Spain, and Portugal.
I see the Western nations as coming off a high water mark. Aging populations, huge unfunded entitlements, growing debt, wobbly financial institutions, and the approach of Peak Oil seem very likely to come together and force huge retreats and reductions in scope of what governments do. Simply put, they can't afford the expansive roles they've developed for themselves.
Update: Could governments expand their powers in economies that go into long term contractions? Certainly, the US government expanded its power in the Great Depression. But now the US government many other Western governments have entered into what Bill Gross calls a public debt ring of fire where their existing debt is becoming unsupportable. They can't go on a borrowing binge to fund another expansion in scope of government. The credit markets are going to push back and hard. Legislatures are going to meet Mr. Market and Mr. Market is going to say NO.
The US government spending splurge in response to the financial crisis of 2008 might well be the great expansion of government before a shrinkage that fits the model we see in California, Ireland, Greece, and next Portugal and Spain. The only way the US government can avoid this reckoning is to inflate away its debt. So the key question: Will the US government force the Federal Reserve to inflate away most of the US public sector debt? I am very curious to hear arguments on this question. We should adjust our investment portfolios very drastically one way or another depending on the answer to that question and make career decisions based on it as well.
|Share |||By Randall Parker at 2010 May 18 11:28 PM Economics Political|