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"Masked youths … attacked the head of Greece's largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes." The Daily Mail account puts the blame for these disturbances on Germany's finance minister, who warned the Greeks that "the German government does not intend to give a cent". At least Bild, a popular German newspaper, tried to be helpful. It suggested Greece sell Corfu and that Greeks get up earlier and work harder.
Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bail-out plan. The Icelanders were slated to make good $5.3bn in bank losses. But why shackle common voters to the banks' losses? The plan was so outrageous and so unpopular that Iceland's normally compliant prime minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.
Insurrection is in the air. In the UK, government employees are preparing the biggest strike since the 1980s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say "nothing can be accomplished in Washington". Herewith, an attempt to deconstruct the rebel yell. By way of preview, it's not the principle of the thing, we conclude; it's the money.
There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years, particularly in the US and Britain. It began with a bogus insight. John Maynard Keynes thought consumer spending was the key to prosperity. He saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause-and-effect relationship between inflation and employment; raise prices and you raise employment too, he said. Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.
Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn't belong to them. Consumers could enjoy a standard of living they couldn't afford. And the financial industry could earn huge fees by selling debt to people who couldn't pay it back.
Never before had so many people been so happily engaged in acts of larceny and legerdemain. But as the system aged, its promises grew. From the 1930s, the government took upon itself to guarantee life's essentials – retirement, employment, and, to some extent, health care. Over the years this grew to include minimum wages, unemployment compensation, disability payments, free drugs, food stamps and so on. Households no longer needed to save. They could live up to their means… and then, beyond them.
As time wore on, more and more people lived at someone else's expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident an opportunity for wealth redistribution. And every trend was fully leveraged. If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitisations to profit from areas of the market that had previously been spared. By 2005 even jobless people could get into debt. Then, the bankers found ways to hide debt, and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke. As long as people thought they were getting something for nothing, this model enjoyed wide support. But now they're getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all are preparing to raise taxes. In Europe too, taxes are going up. Services are going down. Taxpayers are being asked to pay for banks' losses, and pay interest on money spent years ago.
Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it wouldn't be enough to put its balance sheet in the black. Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports. And now the patsies are in revolt. They needn't bother; the system will collapse on its own.
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