As the Eurozone continues to crumble, it would be wise not to forget that we are not any better off here in the United States. We have the benefit of being the reserve currency of the world. This let’s us print money until a $1,000,000 won’t buy you a cup of coffee. Certainly, if you think the act of printing money is going to solve economic problems, you’d also find no problem with a million dollar cup of coffee. For the rest of us–sane individuals–we know this is no good.

There is no historical evidence to suggest that money printing has ever done anything except destroy economies. Just ask the people of Zimbabwe.

We’ve already enacted bailouts in the tune of trillions with no upturn in the economy. Unemployment remains high. There is no recovery without employment. The idea that unemployment is a “lagging indicator” is ridiculous. It isn’t a lagging indicator, it’s the only indicator. The stock market can go as high as it wants. A high nominal value is meaningless. As much as the stock market has “recovered”, how stable is it? When the Dow Jones can drop 1000 points in a matter of minutes, we know we aren’t standing on solid ground.

This is volatility like we’ve never seen.

Bye Bye EU

There is an excellent chance the Euro won’t be around for much longer. It was an idiot’s idea to begin with. Who has it actually helped? No offense to any of the member nations of the EU but, the only really productive nation is Germany. The rest of you are–more or less–freeloaders. Ultimately, the EU has been great for the rest of you who do very little while Germany carries your asses.

That might be okay with you but, let’s not forget how the Euro has killed tourism. It is just too damn expensive for people to travel to Europe. Especially the big spenders from America. It’s lovely that you have a “stronger” currency–for now. But, what good has it done for your economy? Imposing a strong currency on a weak economy is economically unnatural. You become dependent on the entity that imposed this currency. Example: Greece.

The Greeks are rioting. They are burning buildings. Killing people. I do not support any of it but, the Greeks will do what they do. I am glad we haven’t resorted to that here in the United States. Force isn’t the answer. We can still accomplish what we need with peace.

But, can you blame the Greeks for rioting? The EU wants to impose austerity on Greece. Sounds like a nice word. But, what does it mean? It means the Greek people are going to suffer a drastically reduced standard of living. How happy would you be if some foreign entity forcefully made you poorer? I do mean foreign. The EU is not Greece.

None of this were the fault of the Greek people. It was the European Central Bank that kept interest rates too low for too long that allowed the bubble in the Eurozone to grow. This bubble is most devastating to weaker economies like Greece, Spain, Portugal, and Ireland. This should be to no one’s surprise but, those same nations are all in trouble. At this point, it’s just a matter of time.

The EuroBubble

Anyone with any sense could have seen that this arrangement with the EU was only going to end terribly. With the ECB, the Greek government no longer had to raise taxes on the people to fund their idiotic projects. They just had to create bonds, sell it to the ECB, and voila! brand new spanking Euros! This is the same arrangement the US Treasury has with the Federal Reserve.

Low and behold, Greek never had the capacity to pay all the bonds they created! And now Greece is where they are now: about to default. But we can’t have that! Those holding Greek bonds would lose a boatload of money. And apparently, those holders have friends in high places. I have no idea who owns Greek bonds but, I would not be surprised if some of our financial wizards on Wall St owned some. These are the same geniuses that bet on mortgage-backed derivatives so, it isn’t a far stretch.

On Mother’s Day, May 9th, 2010, the Federal Reserve agreed to be one of the handful of central banks to provide for the almost $1 trillion EU bailout. Great. American taxpayers are going to be on the hook for economic crises in Europe too. We really must be rich!

But, no. We aren’t. Our economy is still in the toilet. There are now a record number of Americans on food stamps. Yea, shit hasn’t gotten better.

The Last Straw

Our involvement in the EU bailout isn’t going to implode what remains of our economy. In the bigger picture, our involvement in the EU is negligible. This doesn’t mean we should be involved. We surely should not be.

The implosion of our economy was ensured as we enacted our own bailouts and increased the national debt to over 90% of GDP. It is going to go over 100% of GDP in no time with the gigantic budget deficits–bigger than the GDP of Canada. But even that wouldn’t necessarily result in armageddon. Japan’s debt is 200% of GDP and they’re still around. Granted, they have a zombie economy. But even a zombie is still “alive”–reanimated, whatever.

The last straw is going to be when interest rates go up. They have to. Either interest rates stay low and we suffer from massive inflation or we raise interest rates, the interest payments on the national debt becomes sky high, so we print money to pay it, and suffer from massive inflation anyway. No matter what, inflation is coming. And it’s going to destroy what remains of the US economy.

I won’t even include the $60 trillion of unfunded liabilities from Social Security and Medicare. No matter how slowly those unfunded liabilities become funded, inflation is unavoidable. It would take some magical free market ingenuity to create a bunch of Apple’s and Google’s for the economy to “grow” its way out of this.

This is highly unlikely. It would be more likely that you win the lottery tomorrow than it would be for a crippled and handicapped free market to create an army of companies like Apple and Google within the next decade. But, this is what the people in government are hoping for! Cross your fingers!

A Ray of Sunlight

This is a terribly dark future. But, there is some good to all of this. Granted, it would be much better if we never bailed out Wall St and we didn’t grow government to the size it has become but, too late for that. We have what we have and there’s no sign that we can change course in time.

If we can cut the size of government drastically and alleviate the tax burden drastically, there is some hope that the worse won’t happen. But again, this is about as likely as “growing” our way out of the problem.

The only likely ray of sunlight is the fresh start we all get when the US Dollar collapses. It won’t be fun to get there but, at least the end of the rainbow will be a pot of gold.

In February of 2009, there was only one country without any national debt: Zimbabwe. They had a fresh start. Super markets with empty shelves as price controls were enacted by the government are once again plentiful.

Ultimately, this is not going to be fun. The other bright side is that all the technology we have are still going to be here. Economic destruction doesn’t just make these leaps in civilization disappear. It will never be as bad as the Great Depression or the Dark Ages. We have better technology. Humanity has improved virtually everything we do. Even Kings never had air conditioners or computers.

No matter the shit storm, it could always be–and has been–worse.

We’ve been blessed with the recent deflation during this economic crisis. Prices have collapsed so that less strain would be placed on our wallets as jobs start to disappear. The government has been printing money like it is going out of style to prop up prices and bailout incompetent companies.

AP reported that wholesale inflation made the biggest jump in six months. The economists being cited in that article all expected less inflation than what actually happened. When are they ever accurate? They couldn’t see the financial crisis and said everything would be rosy. These mainstream economists are about as good as the weathermen.

These same economists also say, “despite the big jump in wholesale prices in January, economists do not believe inflation is on the verge of becoming a problem, given the country’s deep recession.”

I don’t see why anyone should believe them. They’ve been wrong and are still wrong.

With the low interest rates instituted by the Federal Reserve and the amount of reserves the banks are holding, inflation is not going to be kept in check. It might not explode in the short term but, inflation is coming. You cannot print money like a mad man and expect inflation to stay at bay.

The House defeated the $700 billion bailout plan today and the Dow Jones responded by dropping 777 points–777.68 to be exact. This was the largest single day drop ever. Analyst and politicians may start blaming the people for being non-supportive of this bill but, the market had to fall. It was up or held steady because of speculation that a bailout was coming and due to the naked short selling bans. The market is now merely doing what it is supposed to do: find equilibrium.

TV pundits and Washington elites will try and convince us that we need to do something now more than ever. We should continue to do nothing to bailout Wall Street. Any bailout will only compound the problem and cause more economic problems. We are in the worse crisis since the Great Depression and if government doesn’t keep its hands off, the problem is going to get much worse.

The idea that we need to ensure prices do not fall is a ridiculous notion. By propping up home prices, gas and food prices will go up as well and no one wants that. Housing prices cannot stay at their current levels. In most of the country, home prices have already fallen through the floor from their highs. There should still be more to go. In big cities like New York, real estate prices have held pretty well. It can’t and won’t last.

It was due to the government passing legislation that forced banks to lend money to anyone and everyone so that everyone could “own” a home that caused this crisis. If you cannot afford a home, you should not be buying one. Using “creative” financing is not a good solution. I don’t like to point a finger at any particular party but, in this case, it was the Democrats who pushed through the Community Reinvestment Act. It was originally signed by Carter in 1977 but, not well enforced and amended until 1995. Essentially, it was President Clinton who presided over the increase for mortgage access in inner cities and distressed rural communities.

This act also promoted the use of Fannie Mae and Freddie Mac as a means to unload these mortgages due to their risky nature. Fannie and Freddie were GSEs–government sponsored enterprises–and now they are fully government owned. The two GSEs would repackage the mortgages as securities and sell them on the open market. Because Fannie and Freddie were government backed, their mortgage securities were given high ratings even though they clearly did not deserve it.

The point is, the government caused this horrible financial mess we are in. If left to free market devices, the amount of bad mortgages would have never risen to such levels. So when politicians–especially Democrats–try to blame this crisis on the lack of regulation, they are lying through their teeth or just plainly do not understand economics. Either of which is not a positive for holding public office.

The exponential rise of real estate prices is directly attributed to the massive amount of buyers that flooded into the real estate market due to government demanding everyone own a home and bid prices up higher and higher. Now because everyone’s houses went up in value, some decided it a good idea to refinance and borrow against their home so that they could take that vacation, buy that new car, or whatever. It was fun for several years until people started missing payments and foreclosures started taking place.

Housing prices started to collapse and now millions of Americans have upside down mortgages with negative equity in their homes. The party had ended and here comes the hang over.

Government bailouts and interference of market forces is the equivalent of drinking more and more alcohol in order to delay the hang over. It is logically not a good idea. You need to allow the alcohol to leave the body or in this case, allow the bad debt to leave the market. In fancy-pants talk, we need to liquidate the bad debt. It won’t be painless–hang overs aren’t painless but, they are necessary.

The economy is not in good shape and if we can keep the government from trying to “fix” things, it will start to improve a lot sooner. However, if we allow the government to intervene like it did during the 1930′s, the 16 year Great Depression is going to look like a walk in the park. We do not need government works projects or any other absurd creation of Hoover or Roosevelt.

While it is difficult to do nothing while people are suffering–you and me included, one must remember the ideas of economist Frederic Bastiat. We need to take into account the opportunity costs that we do not see. It may look like a good thing if government provides jobs because in the short run unemployment would be kept in check but, new and more efficient jobs and markets will not get the capital they need because government had directed capital elsewhere. That is exactly how a short painful recession can turn into a long painful depression.

The other danger of government intervention is that the only way government is going to be able to pay for the bailouts and works projects is to increase the national debt by borrowing or by printing more dollars. Both choices are incredibly bad. The current economic crisis won’t kill us, hyperinflation will. Having a lot of dollars is meaningless if they can’t buy anything. The Federal Reserve has already increased the money supply by 8% in the last week to try and “smooth” the gears of the financial system–it won’t work. It is only going to devalue the dollars we currently have.

It was a great victory for the American people today that this bailout of the rich and well connected was defeated. We cannot privatize profits and socialize losses. It is unlikely that Paulson, Bernanke, Bush, and co. is going to let it go. They will try to push some sort of bailout through as best as they can. The Senate will vote on the bill later in the week. This bill does nothing to benefit the people. We need to tell our Senators that we do not support the bill and demand that they vote against it.

Any Senator who votes for this bill should not expect to be re-elected. This is a grand robbery of the American people and I’m glad we didn’t stand for it. The massive public outrage over this bailout bill played a great role in its defeat in the House. Today was a victory for the people. May we continue the fight.

For more insights into the economic crisis and its inner workings, check out LewRockwell.com and The Mises Institute.