Credit Crunch Image by HappyHaggis via FlickrBondholders of the world, beware, you are under attack!
Nobel Prize economist Paul Krugman has just come out with another brilliant article, this one on the "rule by rentiers", as he calls it. Great term! At least one French blogger (see article below) was thrilled by the use of this French word. Of course, what Krugman means are bondholders - and the credit rating agencies that "oversee" sovereign debt.
Krugman in his article doesn't mention the credit rating agencies by name, but the reference is implicit. By rating a country's debt, like for example Iceland or Greece, and lowering it repeatedly, sometimes down to junk status, they signal to bondholders that they should stay away from bonds issued by those countries. Result? Those countries have to pay a much higher interest rate to refinance themselves, which means it costs more to carry the debt (and run the government), causing untold pain to the average, hapless tax-paying citizen. Because in the end, it's the little guy who gets it in the teeth. You and me.
End result? A slowdown in recovery (or even none at all) and more unemployment! And while that is exactly what is happening both in the US and in Europe, it is a highly unfashionable subject, as Krugman notes.
The media on both sides of the Atlantic is full of news about budget deficits and how governments should adopt austerity programmes to cut expenses and raise taxes. Politicians, from the US Republicans Tea Party to UK's Conservative PM Cameron and Germany's Chancellor Angela Merkel are wed to the idea of cutting deficits. Even Bernanke's Federal Reserve which so far had fought the slowdown with a monetary "easing" policy has said it will do nothing more. Nothing about how to deal with unemployment. Mum's the word.
In this context, the latest news on Greece come as no surprise: don't restructure the debt, don't force bondholders to take a "haircut" (a dainty term for loss), just keep throwing more bailout funds at the government in exchange for more austerity measure and more taxes. And hope for the best.
Bondholders have to be preserved at all costs, and in this case, one of the biggest holders of Greek bonds is...the European Central Bank. No wonder Trichet won't hear of restructuring the Greek debt! Yet the Greek economy has already contracted 4% (and probably worse to come). The contraction is so bad that tax revenues continue to drop and at this rate, there's no way Greece will ever manage to pay its debt back. How much more should its economy contract before bondholders are finally told to shut up?
Cutting government expenses and raising taxes are a surefire way to kill off any budding economic recovery and ensure that unemployment remains intractable. This, I know, places me among the "liberal" economists who believe that Keynes had it right and the conservatives had it wrong. By "conservatives" I mean those who are ideologically committed to Small Government = Big Economy, convinced the key to growth is the private sector.
Sure, the private sector is the key to growth but when difficult times come (like now), the public sector has a role to play: it should counterbalance the economic slowdown, ease the pain of unemployment and lay the basis for the next growth cycle. How? By doing everything that is needed from incentives to innovation, in particular supporting small innovative startups with grants or at least tax holidays, all the way to structural investment in areas that are not normally attractive to private investors because they don't easily generate profits - mainly two areas: innovations that have yet "to prove themselves" as profit-earners (like much of green energy) and humanitarian public services that level the income inequalities in society (like public provision of health services and minimum pensions).
This is a roundabout way of saying that one of the government's fundamental roles in society is to take care of the poor.
But as Krugman says, this approach to economic governance has gone out the door. To describe what has happened, he uses striking images: the "rule of rentiers" govern capital markets, the "pain caucus" has put a stop to any attempts at solving the unemployment problem. The political class is aligned with the interests of bondholders worldwide (including the Chinese government). There is, as Krugman suggests, reason to suspect a conspiracy of the wealthy bonholders, brought together in a "pain caucus" to wield their "rentier rule" against the rest of us.
If you consider that we are living in an increasingly unequal society where the rich are getting richer and the middles classes are losing ground, there is indeed something to worry about. Some statistics are astonishing: for example, 50% of American consumption expenses come from 10% of American households. That's how skewed the society is!
Bondholders are only thinking of defending their wealth - and the rest of the economy be damned! Small wonder the bonholders are strangling the world economy. Because make no mistake about this: the Chinese economy may well be the second most important one in the world, but is is dependent for its growth on the American and European markets. They are all linked, and if we go down, so will they.
And ultimately, so will the bonholders who will be paying for their shortsightedness. Unfortunately so will we!
Link to Paul Krugman's full article here
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