I have a soft spot for Italy. It’s got style, beautiful scenery, a lot of history and a great people. It plays good football, builds some of the finest cars and has some excellent thinkers. Above all it has wonderful food and wine – let’s get down to basics. I have a number of close Italian friends and a reasonable grasp of the beautiful language. Yes it has had a bad run of politicians and some issues with organised crime but – hey, who’s perfect? Take the plank out etc etc.
Now Italy has to pay 7% to service its debt. Which means that if it had to roll all its debt over in a year, it would pay $200 billion in interest alone, which is 10% of its GDP and 20% of the public finances and, per head, pretty nearly the per-capita income of its 60 million people. Fortunately not all of its sovereign debt is due to be repaid immediately – the 7% figure was on only $6.8 billion one-year bills – but all the same, this level is unsustainable.
But what does this interest rate represent? Does this mean that the chance of Italy defaulting is 7%? Has someone dipped into their piggy bank to find the money in the first place? Are there better places to stash their stash? Likewise does anyone think that the US is more likely to default on its even bigger debt? Because that’s what the ratings agencies are saying. These nations are collections of people. People are the only part of this world that actually work – organise, build, design, create and generally make things better. Machines don’t, nor does water, oil, tree, whales or anything. So a country of 60 – or 300 – million people is an enormous asset, not a liability.
The answer of course is that the interest rate is totally illusory. It represents some “analyst’s” estimate of how much they can get away with, how much they want to make some poor sod – or country – tow the line and doff their cap. They reckon that they can get Italy to cough up this amount – or maybe the burghers of Berlin will have to chip in – so they are just maximising their profit. Oh – and by the way, change your government and here’s the list of people we will accept. It has nothing to do with the money because most of it was ‘created’ by banks in the first place who may be upset because they won’t get it ‘back’ but the only result would be some red faces and slashed bonuses.
You have to feel sorry for these ‘analysts’. If they set too low a rate, their bank will lose out because either they won’t get the return that their competitors are getting or, given that they have to have a little real money before they print the rest, they will run out even of that. If they set too high a rate, then default becomes inevitable so then they lose – the money they printed. It’s just one giant game of poker and nothing to do with real risk. W ho blinks first?
In my previous post on Excess Interest, I suggested that an interest level is set above which a substantial and increasing proportion of the excess goes to the government on the basis that default by individuals and businesses becomes a social cost. I think this should be applied to international debt as well with the levels set rather lower than for personal or business loans. The balance going (subject to a lot of reform) to the IMF. That way the members of the IMF need not put their hands in their taxpayers’ pockets but countries could be properly bailed out because Central Banks just cannot.
Meanwhile the effect on the Italian people is drastic, as it is on the Greek, Spanish, Portuguese, Irish. Here in the UK, instead of the markets setting astronomic levels, the government is intent on a scorched earth policy. So poor us! And as we in the West become less affluent, we buy less from elsewhere, we do less work because unemployment becomes rife, everything stops, people starve and wars break out. Will the last person to leave please remember to put out the lights.
All because the banks and ratings agencies – all shady and unelected – decide everything.
Government has the privlege to pass laws and get people to accept them. That’s what they should do instead of wringing their hands. Start with the national economies but consider also that nations are only collections of people and the same protection and ideas should benefit them all.