World View: Eurozone and Obamacare Continue Parallel Economic Collapse

This morning's key headlines from GenerationalDynamics.com

  • Euro crisis returns as yields spike in Portugal and Spain
  • Wall Street stock valuations reach new recent high
  • Obama Administration postpones major Obamacare provision
  • President Richard Nixon's Wage-Price controls
  • Mao Zedong's Great Leap Forward
  • What can we expect from Obamacare?

Euro crisis returns as yields spike in Portugal and Spain

10-Year bond yields Spain 4.77% and Portugal 7.47% on 3-July-2013 (Bloomberg)
10-Year bond yields Spain 4.77% and Portugal 7.47% on 3-July-2013 (Bloomberg)

With the postponement of a crucial part of Obamacare and a new bond crisis in Europe, Obamacare and the euro currency appear to be collapsing in parallel as the global financial crisis continues to worsen and heads for worldwide panic. 

Portugal's government is collapsing because its austerity measures are failing. Portugal's government had to agree to the austerity measures in May 2011 in order to receive a 78 billion euro bailout. Since then, Portugal has been feted as an example of a country doing the right thing. But unemployment is at 17.6%, and there are 932,000 people without jobs. Two cabinet ministers resigned this week over bitter disagreements over the financial program. 

But Europeans are panicking since the real bombshell occurred on Wednesday, when Portugal's 10 year bond yields briefly spiked up above 8% before falling back to 7.47% by the end of the day. This is the market interest rate that Portugal will have to pay and investors are demanding if they're going to lend money to Portugal by purchasing bonds. Everything about 6% is considered unsustainable, since debt keeps growing exponentially. (For comparison, the yield on U.S. 10 year Treasuries is 2.5%. For Germany, it's 1.65%.).

If you look at the above graphs, you can see why people are suddenly panicking. Beginning in May, Portugal's bond yields started spiking up again, and the trend line is up again. Apparently, Portugal is going to need another bailout. Furthermore, the "contagion" issue is rising, as Spain's bond yields are also going up, though not as quickly as Portugal's. 

What happened in May? Well, there were the disastrous unemployment figures that were announced in April. Also, there was the disastrous Cyprus bailout that was completed in April. Since then, there has been bad economic news almost every day, and investors are responding to that by demanding higher and higher interest rates on Portuguese, Spanish and Italian bonds. 

As the eurozone heads into the next crisis round, it's well to remember that nothing that the European politicians say can be believed. I've documented many overt lies by these politicians during the various Greek bailout crises. In fact, Jean-Claude Jüncker, chairman of the Eurogroup finance ministers at the time of one of these crises, was quoted as saying, "When it becomes serious, you have to lie." 

As I've said many times, there's a good reason why the European politicians can't agree on a solution to the euro crisis. It's not because there are three or four really good solutions, and they can't agree which one to take. It's because there are no solutions at all, and all they can do is cover themselves and hope that somebody else will be blamed when the inevitable total disaster comes. In the meantime, they'll make up numbers that are obviously false, and the credulous mainstream press will simply repeat them. BBC

Wall Street stock valuations reach new recent high

According to Friday's Wall Street Journal, the S&P 500 Price/Earnings index (stock valuations) on Friday (June 28) morning was 18.41, which is a new recent high and astronomical by historic standards, indicating that stocks are far overpriced, and the bubble is worse than ever. The bubble started growing again when the Fed reversed itself and said there are no plans in the foreseeable future to end the $85 billion per month quantitative easing program. The historical average is 14; as recently as 1982, the index was down to 6. It appears to be headed that way again, which means that the Dow Industrials will fall to below 3000. 

As I've written many times, the financial analysts on CNBC and other mainstream financial media lie about stock valuations constantly, claiming that stocks are "cheap," and P/E ratios are around 9 or 10. (See, for example, "14-Apr-12 World View -- Wharton School's Jeremy Siegel is lying about stock valuations" from earlier this year.) Whether it's politicians in Europe or Washington, or analysts on CNBC, lies and fraud and extortion have become the norm today. 

Obama Administration postpones major Obamacare provision

When Obamacare was announced in 2009, I called it "a proposal of economic insanity," and I've said repeatedly since then that it can't be implemented. (See "Obama's health plan, a proposal of economic insanity, appears to be losing support" from 2009.) 

I made this statement because I've seen this movie before. Obamacare is worse than Nixon's 1970s wage-price controls, and those were an unmitigated catastrophe. 

The 1970s movie is continuing as the administration postpones the business mandate for a year. Just as Nixon's wage-price controls were so disastrous that they collapsed of their own weight, Obamacare is doing the same. 

Unfortunately, they waited so long for this postponement that most of the damage has already been done. Millions of businesses have already changed their policies to reduce employment, or to keep part-time employment below 30 hours per week, and they now have no incentive to reverse direction since they're facing the same disastrous policy in 2015. This means that the poor and minorities will find it even harder to find jobs, which means that they won't have any health insurance at all. 

The only core thing left is the "individual mandate." So now we're supposedly going to hear how perfectly young, healthy poor people are going to be forced to buy a government-endorsed health policy or pay a large fine. This disaster is far from over. 

And just like the European politicians and the analysts on CNBC, President Obama and the politicians who work for him are accomplished liars who will say anything they can get away with. 

It was just a couple of weeks ago the President Obama said that the Obamacare implementation was on track while others were pointing out that it that it was facing massive problems. Obama probably knew months ago that this announcement would have to be made, but he decided to lie constantly since then, just like Jean-Claude Jüncker, who said, "When it becomes serious, you have to lie." AP

President Richard Nixon's Wage-Price controls

The collapse of this factory building in Dhaka, Bangladesh, on April 24, containing 3,120 workers, of whom 315 were killed and over 1500 injured, is a good symbol of the catastrophic collapse of certain economic policies
The collapse of this factory building in Dhaka, Bangladesh, on April 24, containing 3,120 workers, of whom 315 were killed and over 1500 injured, is a good symbol of the catastrophic collapse of certain economic policies

Obamacare is supposed to impose government controls on the entire medical services sector of the U.S. economy. A person would have to be exceptionally stupid to believe that's even possible, but here we are. 

With the business mandate now postponed, and with the individual mandate likely to be postponed, it's possible that the entire thing will be canceled, sparing the country an economic disaster. 

But if the mandates are implemented, we can get an idea of what will happen by looking back at Nixon's wage-price controls. The following summary is from a paper, Nixon wage-price controls - Forty Years After The Freeze, by William N. Walker, who worked for President Nixon and played a major role in the implementation. 

Obamacare has been an enormously divisive issue among the American people, but Nixon's wage-price controls were extremely popular among both Democrats and Republicans. The inflation rate was 4%, and the American people thought that government could do anything, particularly lower the inflation rate. So Nixon announced a wage-price freeze on August 15, 1971. 

The rules were simple in the first phase: neither prices nor wages could increase, period. Virtually the only exception was raw agricultural products. As one politician said, "Remember, Virginia, when it’s a cucumber you can raise the price, but when it becomes a pickle, it’s frozen." 

Powerful bureaucracies were set up to control inflation.  First there was a Cost of Living Council, and after 90 days there was a Price Commission to control prices, and a separate Pay Board to limit wage increases. 

At first, everything seemed OK and the inflation rate actually fell to below 3% in the next few months. But by June 1972, less than a year later, the inflation rate started climbing sharply, as "Phase III" was being introduced. According to Walker: 

What no one understood at the time was that economic conditions had undergone a profound and dramatic change. The cycle of wage-driven price hikes had been broken during Phase II. But government and private forecasters uniformly failed to recognize that demand had begun putting such severe pressure on supplies that within a matter of months, prices of virtually all commodities -- foodstuffs, minerals and petroleum -- would explode, reaching historic highs. The rate of inflation shot up to 11% by the summer of 1973, leaving Phase III in shambles.

Then the Administration got tougher and started threatening major industries. The Cost of Living Council targeted major U.S. oil companies for price increases, and the IRS launched an immediate investigation. (As we now know, the Obama administration's IRS is also targeting political enemies with investigations.) Similar threats were made to the food industry. 

By mid-1973, there were gasoline shortages and food price increases, according to Walker: 

The Administration had anticipated some pressure on food prices during the first half of 1973 and had retained mandatory, though looser, controls over the food industry during Phase III. The results, however, were worse than even the most pessimistic predictions. During the first quarter of 1973, consumer food prices shot up at an annual rate of 29.8% while the wholesale price index for farm products rose at an annual rate of 51.9%. Red meat prices alone surged at an annual rate of 90% during the quarter.

There were more regulations, more investigations, and more freezes, but prices continued to skyrocket, with the inflation rate topping 12% (that's TWELVE percent) by the end of 1974. 

The program ended on April 30, 1974. It was a disaster for the U.S. economy from which it didn't recover until the Reagan administration a decade later. 

Mao Zedong's Great Leap Forward

Another drastic government economic program that led to disaster was Mao Zedong's Great Leap Forward, implemented in China in 1958. The following summary is from John King Fairbank's 1986 book, The Great Chinese Revolution 1800-1985

500 million peasants were taken out of their individual homes and put into communes, creating a massive human work force. The workers were organized along military lines of companies, battalions, and brigades. Each person's activities were rigidly supervised.

Mao's stipulated purpose was to mobilize the entire population to transform China into a socialist powerhouse -- producing both food and industrial goods -- much faster than might otherwise be possible. This would be both a national triumph and an ideological triumph, proving to the world that socialism could triumph over capitalism. 

The individual peasants and managers were required to report the size of the crop harvests up the line to the central government, but there was no way to guarantee that the reports were accurate. 

On the one hand, there was no economic incentive for the farmers and managers to provide accurate reports, since everyone in a socialist society is paid the same ("according to his need"). 

On the other hand, there was no independent check of the crop harvest estimates. If the population had been much smaller, then the central government might have been able to send out enough bureaucrats to check the reports or at least do spot checks. But with about a billion peasants, no such meaningful checks were possible. 

For the farmers and managers themselves, there was plenty of political incentive to over-report the crop harvest results. 

Early in 1959, and again in July 1959, officials in Mao's government had begun to see that the program was failing. Their objections were rewarded with punishment. Mao was determined to follow his ideological course, no matter what else happened. 

As a result, even though actual crop yield in 1959 was a little smaller than it had been in 1958, the crop reports added up to an enormous increase in production, more than a doubling of output. 

By the time that Chairman Mao was finally ready to accept the situation, it was too late. There was too little food to feed everyone, and tens of millions died of starvation. 

Chairman Mao was disgraced by the disastrous failure of the Great Leap Forward, and his critics proliferated. 

What can we expect from Obamacare?

Hopefully, the postponement of the business mandate is the first sign of a total collapse of all the Obamacare mandates. If that doesn't happen, then history tells us that the results will far worse than even the most pessimistic forecasts: massive doctor shortages, massive insurance shortages, massive price increases for insurance and services, poor medical services, shortages of medicines and medical devices, and so forth. Furthermore, assume that every politician, especially President Obama, will lie almost every time he opens his mouth. 

No matter what happens, parts of Obamacare will still survive -- like the parts about preexisting conditions, or parents insuring their kids to age 26. Whatever parts remain, Obama will claim that Obamacare is a success because those things have been implemented, and he will get his political legacy anyway. 

Whether in Europe or America or China, politicians are always the same: No matter how much damage and destruction they cause, they always make sure that they come out on top. 

KEYS: Generational Dynamics, eurozone, Portugal, Spain, Jean-Claude Jüncker, price/earnings ratio index, CNBC, Richard Nixon, Obamacare, William N. Walker, wage-price controls, Cost of Living Council, Price Commission, Pay Board, China, Mao Zedong, Great Leap Forward 

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