Recently by Bill Bonner: Why Greece Should Default and Go Broke With Dignity
Americans had something to celebrate this Independence Day. QE2 the Feds $600 billion money-printing program ended on Friday. And guess what? The world didnt end with it.
Instead, the stock market gave a loud yahoo! The Dow rose 168 points. If QE2 is going to be the death of the US economy, the stock market doesnt see it.
Not that stock market investors always have 20/20 vision. These were the same people who were buying Lehman Bros. and mortgage lenders stock just before the company collapsed.
So, were not saying that todays prices will necessarily be the same as tomorrows. The market may know the price of everything at every moment. But it doesnt know the value. So, as it discovers value, it changes its mind about the price.
Still, we find it mildly disturbing that the Fed can cut off a $100 million-a-month buying program without upsetting investors sangfroid. It doesnt make us wonder about the Fed but about investors. Whats wrong with them?
But since it was a national holiday, we decided not to worry about it.
Instead, wed spared a little pity for the US Senate. The poor senators decided to stay in session this 4th of July. They thought it was important to pretend to solve the US debt crisis.
As you know, from the day of its founding that is, July 4th, 1776 to the present day, the feds have run up approximately $14.3 trillion of official national debt. And since Congress has only authorized $14.3 trillion of debt, theyre running into a problem. Either they pass a new law, raising the debt ceiling. Or they cut spending so they dont have to borrow more money. Or, they treat the debt ceiling law like the US constitution, and simply ignore it.
We know which choice we would make. But nobody asked our opinion, so well keep it to ourselves.
The debt ceiling is distraction. Its just an American nuance to a genuine problem that is plaguing all the mature democratic/capitalistic economies. Greece, Britain, Ireland dozens of other countries and the US.
As regular readers of this Daily Reckoning know, It is a problem with the funding of the modern social welfare state and the social contract itself. The bargain is this:
The people give up 20% to 50% of their output and sometimes, their lives to their government.
In return, the government promises to make their lives better than they would be otherwise.
But how can the feds make the common citizens life better? If it gives them back in services only as much as theyve paid in taxes, whats the point? In fact, the government cant even do that. It is a poor capital allocator. And theres a huge amount of inefficiency and friction in the system. So, the government spends money unwisely. It gets a poor return. If people get half of what they pay for it will be a miracle.
When the system was first invented, in the 19th century, it worked well enough. GDP growth rates were high. Old people, regulations and government-provided services were few.
But as the system matured, over 150 years, it became zombified. That is, the friction, misallocation of resources, fixed costs, old people and parasites increased. The feds spent more and more. People got less and less for it. They didnt want to raise taxes because the voters would feel they werent getting their moneys worth. But the voters still wanted more and more u201Cservices. So, from approximately the end of the 30 glorious years following WWII in about 1980 to the present, the government was only able to expand services by borrowing.
And now, borrowing is becoming a problem. Wise or lucky countries such as Greece and Britain (not necessarily in that order) are now being forced to cut back. Either because they cant borrow now or they fear they wont be able to do so in the future. Naturally, the zombies dont like it. Theyve taken to the streets in Athens as well as London.
In London, the schoolteachers interrupted services all across England last week. In Greece, they didnt even have to strike; they werent supplying much service anyway.
Where will this lead? We dont know. But its a serious question. And we dont think about serious questions on a national holiday. Besides, its probably against the law.
Reprinted with permission from the Daily Reckoning.
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). His latest book is Dice Have No Memory. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.