Thursday, September 6, 2012

The ECB Buys Bonds

Today, Mario Draghi is scheduled to announce that the ECB will buy the bonds of Greece, Portugal and Ireland (this gives holders of Spanish and Italian bonds the near certainty that they will be next if line if only their countries request it).  Somehow this cheers financial markets.  You have to wonder why.  A similar pattern occurs when bad economic news hits the US economy.  The market pundits then rush to the microphones to announce gleefully that the Fed will act and all will be well.  Is all well?

The idea that the ECB purchases of bonds will have any impact on the collapsing economies in the Eurozone and their spiraling debt is ridiculous.  The welfare state is no longer affordable in Europe or the US and that reality cannot be offset by temporary gyrations of the central banks.  It is just a question of numbers.  Taxing rich folks won't help either.  Eliminating defense spending in the US and everywhere in the world won't matter either.  The only thing that matters is reigning in the entitlements.  Absent that, the debt crisis and economic crisis will simply get worse.

There are micro-economic things that could help: eliminate minimum wages, curtail employer mandates, roll back employee litigation rights.  These things would make employees more attractive to employers and spur hiring.

What is happening in Greece is instructive.  The black market economy is thriving.  Greek workers can get jobs in the black market and they are taking these jobs.  There are no employer mandates, minimum wages, free health care, guaranteed vacations or guaranteed retirements in the black market economy.  Much of this goes on in the US as well, of course.  New Yorkers who have nannys are well aware of how the black market works even in the good old USA.  Perhaps the black market is the only real hope for those struggling to find jobs.  The legal market has too many "protections" for employees that make employees toxic to employers.

But, meanwhile at the aggregate level, countries have run out of funds.  The sleight of hand at the ECB will work only so long as the markets have not really understood what is actually going on.  Then it will cease to work and the reality of "no money" will once again set in.  Both Europe and the US are broke.  Nothing but cutting entitlements will have any impact on their current plight.

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