Living in Euro-Cloud-Cuckoo land
<p>I often tell people that I think <cite>The Economist</cite> is the best news magazine in the English language &#8211; and not because they make a relatively frequent habit of quoting me, either.  The house style is intelligent, often penetrating, witty, and sober about important things.  </p>
<p>It is very rare that <cite>The Economist</cite> indulges in wishful thinking to the point of doomed fantasy.  But that is exactly where their lead editorial, <a href="http://www.economist.com/node/21529049">How To Save The Euro</a>, goes this week.  Save the Euro? Really? One wonders what they&#8217;re smoking over there.</p>
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<p>The editorial makes hilarious reading, if you have the bleak sense of humor I do about such things, because while <cite>The Economist</cite> owns up pretty frankly to the large risks of a Euro rescue plan and concedes how unlikely it is to succeed, its wise men are still in denial on some very fundamental points.  The most important of these is its insistence that there is a useful distinction to be made between governments like that of Greece &#8211; frankly insolvent &#8211;  and governments like those of Spain and Italy which merely have a liquidity problem.</p>
<p>The ugly truth, which the bond markets are now waking up to, is that there are <em>no</em> solvent governments in Europe.  Every single one (including <cite>The Economist&#8217;s</cite> native United Kingdom) has made political commitments to future entitlement spending that they will be unable to meet, and taken out loans they will be unable to repay.  The governments that  <cite>The Economist</cite> persists in regarding as solvent are merely those about which the bond markets have not panicked <em>yet</em>.</p>
<p>Why are there no solvent governments in Europe?  Because the logic of social-democratic politics, both in Europe and the American dare-not-speak-its-name version, leads to a perpetually expanding class of government clients being funneled money that is increasingly outright borrowed, because the ever more taxed and regulated private sector simply cannot generate enough wealth for the redistributors&#8217; political needs.</p>
<p>&#8220;The trouble with socialism,&#8221; as Margaret Thatcher observed, &#8220;is that eventually you run out of other peoples&#8217; money&#8221;.  Yes, I&#8217;ve made this point before &#8211; but it bears repeating, because all the grave mumbling and comic-opera posturing now going on from the state of California to the shores of Greece is designed to obscure that central point.  <cite>The Economist</cite>, along with the elites it sells to, is caught up in ever more frantic efforts to evade the fact that the political fixers have run out of other peoples&#8217; money.</p>
<p>That&#8217;s what the recent downgrade of U.S. Treasuries means.  The bond markets are figuring out that no amount of tax-rate fiddling will close our structural deficit.  Anyone who thinks &#8220;taxing the rich&#8221; will do it is a particularly innumerate idiot (but there&#8217;s never any shortage of those). &#8220;The rich&#8221; don&#8217;t have enough money for that. <em>Nobody</em> has enough money for that.</p>
<p>So&#8230;don&#8217;t expect the Euro to survive another six months.  What we&#8217;re going to see, over the next few years, is an increasing frequency of sovereign defaults as the big-state system collapses under the weight of the debts it has run up.  There will be bank runs, more financial panics, depressive convulsions, and (all too probably) hyperinflation from governments that don&#8217;t outright default.</p>
<p>If we&#8217;re lucky, there won&#8217;t be more than a lot of civil unrest while this goes down.  If we&#8217;re unlucky, there will be a war or two and some serious crackups in major nation-states. History does not suggest much ground for optimism here.  In reality, there is no such thing as &#8220;Too big to fail&#8221;; there is only &#8220;The bigger they are, the harder they fall.&#8221;</p>
