Debt and the Printing Press - 28 November 2011

Sooner or later, the jig will be up...

THE ENTIRE idea of modern government has been to promise the voters things you can't afford to give them...and then borrow money to fill the gap, writes Bill Bonner, founder of the Daily Reckoning.

Eventually, as any fool could see, you'd run out of willing lenders and the jig would be up. But lenders are either surprisingly generous or amazingly stupid.

Everything seemed to be going along fine in America and Europe...until the private sector got into trouble. Then, the banks were in trouble too...because they had lent money to private lenders who couldn't pay them back. 

In America, the feds stepped in. After Lehman Bros. collapsed, they made it clear that the money would be there to bail out any major lender. As for the government itself, there was never any question that its credits were good; after all, it has a printing press!

In Europe, things are not so simple. Because neither Spain, nor Ireland, nor Italy, nor Greece has a printing press. Collectively, Europe has a printing press, of course. But it's under the control of German bankers. And so far, the Germans have as much as said that if there are any printing press bailouts it will be over their dead bodies...

...which is the way the Greeks, Italians, Spanish, Irish, and all the rest of Europe would prefer it...

...But as of today, the Germans are still among the quick and the printing presses are still not running red hot.

As for tomorrow...anything could happen!

But a couple things are clear.

First, the debt won't go away...it can't be paid off...and — barring some growth breakthrough — neither Europe, America, nor Japan can "grow its way out."

Second, people in all three major developed economies are going to have to accept lower standards of living. In America, real, disposable household incomes — after energy and food costs, taxes, and debt-service — are going down. And people must now stop spending so much and save for their retirements — leading to less consumer spending, high unemployment and a more sluggish economy. In Europe, government-provided benefits must be curtailed.

In Europe and America people have been living beyond their means for many years, financed by going deeper and deeper into debt. The end of that cycle seems to have arrived in Europe...and, for the private sector, in America. The US public sector, on the other hand, still finds it easier to borrow than to cut spending. This will allow it to buy some more rope with which to hang itself later.

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