Sunday, November 27, 2011

debt and the end of democracy

Some interesting and related stories lately around western government debt.

Italy has to pay 13.4% to borrow. It's 13.4 annual if you take the 6.5% 6 months and roll it over in full for 6 more months. So the bond market seems to believe there's about a 1 in 8 chance that if you lend Italy money today for 1 year then you will get stiffed.

Part of me wants to take that action, 13.4% return on a sovereign where you can cash out after 6 months seems like a good deal. Is it possible for regular retail investors to lend on the sovereign bond market? Compared to basically 0% you can get locally. Of course the only way Italy can honour that debt in 6 months is if new lenders come along at that time at probably some even higher rate and lend Italy the money to settle its debt with you. It's not like Italy will have the money on its own. Plus there's the issue of converting from CDN$ to Euros and then back at the end so there's some exchange rate risk too (which could be hedged for a fee).

The real interesting story is that the Italian government fell and was replaced by a "technocrat" government.

Same in Greece. Elected Greek government falls and replaced by technocrat.

Finally onto America. As part of the debt ceiling deal last summer a bipartisan committee of only 12 senior members was charged with coming together to specify just what the "future cuts" would be as part of the "borrow and spend today" money Congress and Obama wanted when they raised the debt ceiling. Alas they failed to reach agreement and now automatic (i.e. technocratic) cuts will kick in - unless Congress votes to renege on the automatic cuts under the original deal to raise the debt ceiling.

I am really quite surprised at how little commentary there has been on the voluntary fall of the governments in Italy and Greece and just replacing themselves with unelected caretakers. If tough decisions need to be made then the elected politicians had the means and the authority to make and implement those decisions. Why would they be so spineless as to just step aside and leave it to these faceless technocrats do the unpopular dirty work then have the nerve to re-stand for election. What Italy and Greece should do is this: when the elections are held and the "new" government is elected, then anyone who was in office at the time power was handed to the technocrats should not be allowed to run in the election. Then they would get a real new government.

But technocracy is dictatorship. It is fascism. I know continental Europe doesn't have deep roots in democratic elected government but this is a bad sign. When the going gets tough the modern elected step aside and hand the reigns of power to the faceless technocrats. There's no reason to believe this is just a European phenomenon. The post 1945 industrial west political class is all cut from pretty much the same cloth (tax and spend, borrow and spend). I guess it says all you need to know about the contemporary leadership.

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