Heading in the Wrong Direction

A look at the headlines in Europe shows that there is a strong ant-incumbent and anti-austerity movement afoot. The Netherlands have seen an early break up to the ruling coalition. France's President Sarkozy lost the first round in his re-election bid to a socialist who would like to end austerity programs and undo the budget plans brokered by Germany's Chancellor Merkel. In Greece, Antonis Samarras, head of the New Democratic Party, promised to lower taxes and end the pension and wage cuts needed to bring spending in line with anticipated revenues. He said he could right the economic ship through the elimination of waste. That would be an incredible pile of waste Mr. Samarras. Do you think anyone would actually believe that?

There is no doubt that the recession brought on by austerity measures is difficult on many people, but a return to the old ways of easy government spending with a reduction in federal revenues is a prescription for disaster for Europe and to some extent the rest of the world. It is foolish and dangerous to the nation and its citizenry.

It might help to think of Europe as a family with dependent children. The family unit is going broke. They have borrowed at exceptionally low interest rates and have enjoyed a very comfortable, if not lavish, life style that has allowed them to live well beyond the income generated by the family unit. The family has now discovered that their creditors are not willing to provide any more cash. No new loans could trigger a liquidity crisis for the household. In addition, each and each family member is asked to generate more revenue. The parents, let's call them Merkel and Sarkozy, have said that cutbacks in the family budget will also be necessary in order to avoid bankruptcy.

That sounds like a reasonable plan for getting out of the tight fiscal bind, right? Not in Europe. The children do not want to provide more to the family budget and they rebel at the idea of cutting back on expenses. In fact, voices are saying that they should spend more than they have for as long as they want and somehow it will all be all right in the end. You and I know that this is ludicrous and would never work in the long run. No entity can consistently live beyond its means and somehow expect a fairy tale ending.

Of course, governments have an additional resource. They can print money, lots of money. The problem is that massive production of new money is inflationary and that causes interest rates and costs to go up, sometimes quite quickly. Now our fictitious family is not only delusional as well as broke, they are worse off than they were before. Gasoline, food, electricity, clothes, everything they need now costs more each month. The standard of living will likely deteriorate for years and years, whereas the prescribed austerity would have lowered the standard of living for a much shorter period while building a foundation for real growth in the future.
Our European friends certainly have a real problem to deal with. Their problem could become a North Africa, Asia, and U.S. problem before it is done if the voters don't sit down and do the math.

One more thing, does anyone think it will be any different here in the U.S. when our turn comes? Do we dare believe that the American public will vote for cutting budgets and seeking to raise revenue when our would-be political leaders are saying that neither is necessary? Take a lesson from Europe and start thinking about how you are going to protect your family and your company when that day comes.