People in glass houses…

Who are YOU calling “PIG”?

There is a demeaning acronym given to Euro countries under the spotlight at the moment – “PIGS” (Portugal, Ireland, Greece and Spain). This labelling fuels the feelings of superiority on the part of the finger-pointers and the feeling of oppression by those being pointed at. But how valid are those pointy fingers?

Simply put – they are the pointings of people in glass houses.

We are inundated by media confirmation of these very naughty, overspending countries being the cause of our current market wobbles. Commentators tut-tut at the profligate lifestyles and the eventual need to bring all back to order, through something called “austerity measures”. Before getting all heated under the collar at these ne’er-do-well rogue states, it is worth consider the facts and figures.

For a start, you can get a very good picture of the state of finances of the major European Union countries from the Spiegel International website. They show that the “PIGS” are joined by Italy in displaying woeful finances.

However, what they do NOT show is the relative figures for the United States and for the United Kingdom. If they did then the condascending label “PIGS” would have to be amended to include these two very naughty countries. So here is my contribution to the debate. From now on, whenever you read “PIGS”, substitute this little label.


It has a ring to it, don’t you think? Let’s get specific. Time precludes me from redoing the graphs – but here are the figures.

Public debt – the best of the PIGS is Spain at 66.3% of gdp. The US is 67% and the UK is 62.1%. FAIL.
Budget deficit – Greece is 12.25 of gdp (which will reduce significantly with the start of the austerity measures). The US is 11.2% and the UK is 11.1%. FAIL.
Unemployment – Spain is woeful, at 20%. Italy is 8.7%. Greece is 10.2%. The US is 9% and the UK 8%. FAIL.

So, what is the fuss really about? Commentators and analysts keep telling us that Germany is annoyed at having to contribute funds to bail out Greece. It is rarely mentioned that the terms of the Maastricht Treaty, which all Euro countries are supposed to adhere to, require a budget deficit of no more than 3% – when Germany’s is 5%, Frances 8.2% and Italy 5.3%… Is the pot calling the kettle black? Do those same commentators point to the massive economic windfall that drops in Germany’s lap (as the world’s largest exporter) when the Euro falls in relative value the way that it has following the very public ‘outing’ of Greece’s repayment problems?

As usual, i am being a tad tongue-in-cheek. The Greek government did hide those very bad figures and basically fibbed to its Euro business partners. However, in an awful repeat of the United States experience, the general community is being asked to pay for the actions of business and government leaders who failed to act appropriately. For example, in Greece’s case private debt held in the county is lower per capita, than it is in Germany – so you could hardly argue that the country in general has acted in a naughty way with debt. That argument simply does not stack up.
Hedge fund manager George Soros is the man who took on the Bank of England – and won. Hugely. This fellow brought out a book in the early stage of the GFC, “The New Paradigm for Financial Markets”, in which he stated that the GFC would be bigger and longer and deeper than was expected at the time, and that the same thing would continue to happen until some fundamental attitudes were changed. George Soros thinks that markets are fundamentally unstable, and that it is the job of regulators and legislators to understand that and to act in ways that help to maintain some element of stability. In other words, don’t assume that someone out to make money is going to care too much about how they achieve their ends.

Coming back to our people in glass houses. The United States and United Kingdom are economically in the same hole as the countries that are labelled “PIGS”. The speculators that are currently gouging funds from the Euro state of affairs will eventually turn their attention to the US and UK, at which time commentators will ask us to tut-tut those countries as well.

We here in Australia have accidentally benefitted from an emerging Chinese industrial revolution and a mixture of population growth and housing shortages that combined to help keep our residential housing market from falling in a heap in the way that it has overseas. We must be very careful of pointing fingers at the rest of the world, a point highlighted when the recent tax changes resulted in a flight of money out of the country (i understand that this coincides with the “Euro problem” but have tried to highlight above how this is a perception problem – NOT a materially real problem). It must always be kept in mind that Australians have more money sunk into houses than they do in the entire sharemarket (to a ratio of around 3 to 1), so the bulk of our wealth is stored in bricks, concrete, steel and wood. All of which depreciate in value and need new capital to keep shiny and pretty. To keep all that wealth intact, we must continuously seek capital from overseas sources so that banks can keep lending enough money for our house prices to stay level or keep rising.

Our ability to continue to maintain a healthy economy relies on our ability to keep raising funds from overseas. So we had best stop pointing fingers at those who are trying to reduce living standards in an effort to cope with the deflationary impact of a deleveraging world. The Euro’s moves to stop the plunge of the common currency will add yet more soverign borrowings to the world market over the next few years. That is another trillion or so dollars that will be competing with Australian government and businesses when they go overseas looking for cash. Competition for cash means higher interest rates, and a cascading host of compounding negatives.

The Chinese government is likely to lay fairly low in amongst all of this, as they would be all too aware of how their currency peg to the US dollar is keeping more of their exporting businesses going at the cost of competing economies. Not the least of which is the suffering unemployed of the United States. A few billion piling into the reserves each month can do wonders for adopting a benign condascension to one’s neighbours.


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