Here’s the Fuss

About a month ago, Jonathan Capehart asked, “Hey, Tea Party, why all the fuss?” He cites some evidence—rather thin evidence, but evidence all the same—that many self-identified Tea Partiers are at the moment in decent financial shape. So what are they upset about?

That is a bit of a disingenuous question, since much of the Tea Party complaint, as I understand it, is about the future consequences of our current fiscal trajectories. But if you want an answer to the “What’s all the fuss about?” question, you might start with “The Mother of All Bubbles,” published last week by Der Spiegel. It explains in some detail—in horrifying detail—just how close to the fiscal precipice we are.

The Euro Zone economies are not just interdependent: they are deeply interindebted. They are all massively in debt to each other, so much so, in fact, that if the bailout to Greece does not stanch the bleeding, an all-too-real possibility is that Greece will fail, followed quickly by Portugal, Ireland, Italy, and Spain, whereupon the stress on Germany, the economically strongest economy in the EU right now (though itself with enormous and rising debt), will find itself pulled into the abyss by the other European Union countries. If that happens, as Der Spiegel, puts it, “the euro would fall apart.” No one really knows what would happen then—but everyone agrees that it would be bad; very bad.

The even larger problem, however, is that “All of the major industrialized countries have lived beyond their means for decades. Even in good times, government budget deficits continued to expand.” This puts the lie to the “principle of hope” on which Der Spiegel argues Greece’s bailout rests: “hope that it will be possible to repay the debt that has accumulated in past years, that governments will manage to clean up their ailing budgets, thereby averting the worst, and that life will go on, just as life has always gone on, somehow, after earlier crises.” One is reminded of the string quartet continuing to play as the Titanic took on water: just pretend nothing is wrong; that will make it all go away.

But of course it will not go away. Without immediate and dramatic changes in fiscal policy, not only will the catastrophe come, but, to paraphrase Mencken, it will come good and hard. And I would not recommend putting much stock in the chances of “immediate and dramatic changes.” The only way these bailouts will work is if everything goes according to plan in the best way it could. All the dice have to come up sixes, and there are dozens, even scores, of dice. What are the odds of that?

If you are still inclined to let your hope spring eternal, consider these sobering facts: “The national deficits of the 30 members of the [OECD] have grown almost sevenfold since 2007, to about $3.4 trillion today. Their total debt burden has also grown dramatically, to a record-setting $43 trillion. In the euro zone, national deficits have even grown 12-fold in the same time period, with the euro-zone countries accumulating $7.7 trillion in debt.” All the “austerity” measures imposed on Greece thus won’t make any difference, because all of the much bigger countries are accelerating their assumption of debt.

So, when Greece, then the other PIIGS countries, then the entire euro zone all fail, will the United States federal government bail them out too? Der Spiegel writes: “The United States is still capable of fulfilling all of its obligations [according to “a strictly confidential IMF document, referred to internally as an early warning device”], but [the document] also points out the worrisome rate at which the national debt is growing.” Right.

University of Chicago economist Liugi Zingales has written recently about the “menace of strategic default,” in which homeowners in the United States realize that their home is worth substantially less than their mortgage, and they simply walk away. Zingales correctly argues that if this practice continues to grow, the repercussions would be far and wide. But two thoughts are apposite here. First, these homeowners’ situations bears striking, and startling, similarities to the situations of some countries. So how bad will it be once countries realize that they might just be better off walking away from all the debt?

Second, consider the interesting “tragedy of the commons” dynamic this introduces. There will be bailout money available from the EU, then from the US, for a short time. No one knows how long, but if a country in as bad a shape, and as bad a risk as Greece can get a $150 billion bailout, then why wouldn’t some of the other precariously perched countries, who know they’re going to fail sooner or later anyway, not decide to crash now so that they can get their bailout while there are still bailouts to be had?

The interdependency, and interindebtedness, of the world’s countries make this we’d-better-get-ours-quick mindset—which will increasingly make rational fiscal sense for more and more countries—a threat of catastrophic proportions to the global economy and to every citizen in it.

That is what all the fuss is about.