U.S. stock-index futures dropped as Germany and France differed on when to introduce a banking union for the euro-area and a report showed optimism among Chinese manufacturers fell, adding to concern of an economic slowdown.
Let me guess — beyond the problem that transparent balance sheets would cause for certain financial institutions in Germany (and elsewhere) riots are good for Chinese confidence, yes?
I always find it amusing when people talk about “resolving” a debt crisis while continuing to run leverage ratios at ridiculous levels and using central banks to try to play “inflate it away” (which, incidentally, cannot work.)
Speaking of which, I wish to dispell one of the common lies told about the paths available when one is overwhelmed with debt. It is often said that Europe (and the US) can “inflate away” debt with central-bank policy.
This is a lie.
It is mathematically impossible for that to work because all money is debt in a fiat currency system. Therefore, attempting to inflate away the debt is in fact counter-productive and doomed to failure, as the credit in the system, growing faster than output does, must always destroy more purchasing power than it diminishes debt in current-unit amounts.
The reason is that economics has slippage, and thus behaves much like a system subject to the laws of thermodynamics. That is, all economic actions have loss in some form or fashion; they are less than 100% efficient. To no small degree this is because government is always involved somewhere in the economy, but that is not the only reason — private parties always have some waste in their economic processes as well, as we all interact with the material world and that interaction is always less than 100% efficient.
This, in the end, leads one to the inexorable conclusion that there are in fact only two ways out of having too much debt — one can either cut the spending and raise the taxes required to stop increasing deficits at a government level, and stop the unsustainable spending in the private economy, or bankruptcy is inevitable.
The United States has a different set of problems that Europe to a large degree mostly because our deficits come from two places — defense and health care. As I have previously expounded upon the health care spending issues are not about Medicare and Medicaid per-se; they are instead about the health system itself and the unjust and unsustainable monopoly-style practices that health providers of all sorts have managed to carve out in the law over the previous 50 years. Likewise, our defense posture and spending, which is also grossly unsustainable, is nearly all about our energy policy — or rather the lack of one.
Neither of these issues can be resolved by simply “fixing the budget”; one must remove the special protections in the health care system and allow competition to come back into the fore, which will inevitably result in a short-term contraction in GDP (and a large one at that) as realignment occurs. Likewise, we must also solve our energy dependence, which will in turn make our military protectionism unnecessary and allow for contraction of our defense spending.
But neither of these are likely on a voluntary basis; both are political hot potatoes and none of the candidates for high office are even talking about these facts.
You cannot solve a problem until you admit you have it.