June 23, 2010 Is Jefferson rolling over in his grave?

 

Thomas Jefferson must be rolling over in his grave if able to see our current condition.

 

We are watching Keynesian policies collapse economies throughout Europe with few governments seriously embracing budgetary reform to deal with excessive debt loads. Certainly, our Congress is not “leading by example” toward a path of resolution.

 

Others are, in spite of our Administration’s objections. Chancellor Merkel in Germany has quickly responded to citizens complaining of the costs associated with bailing out profligate governments whether Greece, Spain or any other EU member.

 

In spite the Chancellor’s jawboning, the market will determine the fate of Greece. With Moody’s finally classifying Greek bonds as junk, the chance of default is all but a coin toss.

 

It is difficult to overlook the fact that many believe bail-outs are banned in EU treaties.

 

She has proposed budget cuts and an end to unlimited economic stimulus. Austerity and growth are mutually exclusive. It is a choice to make: face reality or to be forced to do so by the market. Germany and the UK are choosing the former to avoid the latter.

 

George Osborne is the UK’s youngest Chancellor of the Exchequer since 1886. He did not hide the difficulties facing Britain in this week’s speech. Proposing 25% cuts in government spending with significant staffing reductions coupled with tax increases, he has laid out the terms of battle for both parties. Government employees, pensioners and other beneficiaries of the UK’s largess will certainly object. Clean house or become Greece.

 

It may be a little late in coming, but similar decisions are surfacing here. Union pensions at state and city levels are being altered. Increasing contributions and longer terms of service are but one step forward in reducing budget shortfalls. Where changes are unconstitutional, semi-permanent wage freezes will eventually cause unions to accept the reality of empty coffers. If not, then Meredith Whitney’s forecast of 2 million state level reductions in force is probably conservative.

 

“Some day, some where, when you least expect it, you will hear ‘Smile, you’re on Candid (Credit).” And, then it will be too late. Every level of our government must deal with uncontrolled spending and reduced tax revenues. Germany and the Brits have chosen to be proactive. Our leaders, on the other hand, well…

 

China has warned us by allowing the Yuan to float, albeit slowly. Their purchase of Treasuries will decrease thereby putting pressure on prices causing rates to rise hopefully attracting other buyers. If not, then what? “The Chinese will keep treating us like they have us on a yo-yo unless we make a serious push for our legislation," Senator Schumer said on Wednesday. Psst! They do, Senator. Resurrecting Smoot-Hawley type legislation will backfire. China’s manufacturing is moving to lower cost countries such as Viet Nam. Increasing the cost of Chinese imports will only hurt consumers, reducing the breadth of their spending and negatively impacting the economy. That will be fewer jobs and lower tax revenues. The choice is ours to make.