World View: Eurozone and Obamacare Continue Parallel Economic Collapse

World View: Eurozone and Obamacare Continue Parallel Economic Collapse

This morning’s key headlines from

  • 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 bondcrisis in Europe, Obamacare and the euro currency appear to be collapsingin parallel as the global financial crisis continues to worsen andheads for worldwide panic. 

Portugal’s government is collapsing because its austerity measuresare failing. Portugal’s government had to agree to the austeritymeasures in May 2011 in order to receive a 78 billion euro bailout.Since then, Portugal has been feted as an example of a countrydoing the right thing. But unemployment is at 17.6%, andthere are 932,000 people without jobs. Two cabinet ministersresigned this week over bitter disagreements over the financialprogram. 

But Europeans are panicking since the real bombshell occurred onWednesday, when Portugal’s 10 year bond yields briefly spiked up above8% before falling back to 7.47% by the end of the day. This is themarket interest rate that Portugal will have to pay and investors aredemanding if they’re going to lend money to Portugal by purchasingbonds. Everything about 6% is considered unsustainable, since debtkeeps growing exponentially. (For comparison, the yield on U.S. 10year Treasuries is 2.5%. For Germany, it’s 1.65%.).

If you look at the above graphs, you can see why people are suddenlypanicking. Beginning in May, Portugal’s bond yields started spikingup again, and the trend line is up again. Apparently, Portugal isgoing to need another bailout. Furthermore, the “contagion” issue isrising, as Spain’s bond yields are also going up, though not asquickly as Portugal’s. 

What happened in May? Well, there were the disastrous unemploymentfigures that were announced in April. Also, there was the disastrousCyprus bailout that was completed in April. Since then, there hasbeen bad economic news almost every day, and investors are respondingto 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 toremember that nothing that the European politicians say can bebelieved. I’ve documented many overt lies by these politicians duringthe various Greek bailout crises. In fact, Jean-Claude Jüncker,chairman of the Eurogroup finance ministers at the time of one ofthese crises, was quoted as saying, “When it becomes serious, you haveto lie.” 

As I’ve said many times, there’s a good reason why the Europeanpoliticians can’t agree on a solution to the euro crisis. It’s notbecause there are three or four really good solutions, and they can’tagree 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 elsewill be blamed when the inevitable total disaster comes. In themeantime, they’ll make up numbers that are obviously false, and thecredulous 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 (stockvaluations) on Friday (June 28) morning was 18.41, which is a newrecent high and astronomical by historic standards, indicating thatstocks are far overpriced, and the bubble is worse than ever. Thebubble started growing again when the Fed reversed itself and saidthere are no plans in the foreseeable future to end the $85 billionper month quantitative easing program. The historical average is 14; as recently as 1982, the index was down to 6. It appears to beheaded that way again, which means that the Dow Industrials will fallto below 3000. 

As I’ve written many times, the financial analysts on CNBC and othermainstream 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 politiciansin Europe or Washington, or analysts on CNBC, lies and fraud andextortion have become the norm today. 

Obama Administration postpones major Obamacare provision

When Obamacare was announced in 2009, I called it “a proposal ofeconomic insanity,” and I’ve said repeatedly since then that it can’tbe 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. Obamacareis worse than Nixon’s 1970s wage-price controls, and those were anunmitigated catastrophe. 

The 1970s movie is continuing as the administration postpones thebusiness mandate for a year. Just as Nixon’s wage-price controls wereso disastrous that they collapsed of their own weight, Obamacare isdoing the same. 

Unfortunately, they waited so long for this postponement that most ofthe damage has already been done. Millions of businesses have alreadychanged their policies to reduce employment, or to keep part-timeemployment below 30 hours per week, and they now have no incentive toreverse direction since they’re facing the same disastrous policy in2015. This means that the poor and minorities will find it evenharder to find jobs, which means that they won’t have any healthinsurance at all. 

The only core thing left is the “individual mandate.” So now we’resupposedly going to hear how perfectly young, healthy poor people aregoing to be forced to buy a government-endorsed health policy or paya 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 areaccomplished liars who will say anything they can get awaywith. 

It was just a couple of weeks ago the President Obama said that theObamacare implementation was on track while others were pointing outthat it that it was facing massive problems. Obama probably knewmonths ago that this announcement would have to be made, but hedecided 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 theentire medical services sector of the U.S. economy. A personwould have to be exceptionally stupid to believe that’seven possible, but here we are. 

With the business mandate now postponed, and with the individualmandate likely to be postponed, it’s possible that the entirething will be canceled, sparing the country an economic disaster. 

But if the mandates are implemented, we can get an idea of what willhappen by looking back at Nixon’s wage-price controls. The followingsummary is from a paper, Nixon wage-price controls – Forty Years After The Freeze, byWilliam N. Walker, who worked for President Nixon and played a majorrole in the implementation. 

Obamacare has been an enormously divisive issue among the Americanpeople, but Nixon’s wage-price controls were extremely popular amongboth 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 announceda wage-price freeze on August 15, 1971. 

The rules were simple in the first phase: neither prices nor wagescould increase, period. Virtually the only exception was rawagricultural products. As one politician said, “Remember, Virginia,when it’s a cucumber you can raise the price, but when it becomes apickle, it’s frozen.” 

Powerful bureaucracies were set up to control inflation.  First therewas a Cost of Living Council, and after 90 days there was a PriceCommission to control prices, and a separate Pay Board to limit wageincreases. 

At first, everything seemed OK and the inflation rate actually fellto below 3% in the next few months. But by June 1972, less than ayear 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 economicconditions had undergone a profound and dramatic change. The cycleof wage-driven price hikes had been broken during Phase II. Butgovernment and private forecasters uniformly failed to recognizethat demand had begun putting such severe pressure on suppliesthat within a matter of months, prices of virtually allcommodities — foodstuffs, minerals and petroleum — wouldexplode, reaching historic highs. The rate of inflation shot up to11% by the summer of 1973, leaving Phase III inshambles.

Then the Administration got tougher and started threateningmajor industries. The Cost of Living Council targetedmajor U.S. oil companies for price increases, and the IRS launched an immediate investigation. (As we now know, theObama administration’s IRS is also targeting political enemieswith investigations.) Similar threats were made to the foodindustry. 

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

The Administration had anticipated some pressure onfood prices during the first half of 1973 and had retainedmandatory, though looser, controls over the food industry duringPhase III. The results, however, were worse than even the mostpessimistic predictions. During the first quarter of 1973,consumer food prices shot up at an annual rate of 29.8% while thewholesale price index for farm products rose at an annual rate of51.9%. Red meat prices alone surged at an annual rate of 90%during the quarter.

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

The program ended on April 30, 1974. It was a disaster for theU.S. economy from which it didn’t recover until the Reaganadministration a decade later. 

Mao Zedong’s Great Leap Forward

Another drastic government economic program that led to disaster wasMao Zedong’s Great Leap Forward, implemented in China in 1958. Thefollowing summary is from John King Fairbank’s 1986 book, The GreatChinese Revolution 1800-1985

500 million peasants were taken out of their individualhomes and put into communes, creating a massive human work force. Theworkers 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 totransform China into a socialist powerhouse — producing both food andindustrial 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 thesize 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 farmersand managers to provide accurate reports, since everyone in asocialist society is paid the same (“according to his need”). 

On the other hand, there was no independent check of the cropharvest estimates. If the population had been much smaller, thenthe central government might have been able to send out enoughbureaucrats to check the reports or at least do spot checks. Butwith about a billion peasants, no such meaningful checks werepossible. 

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

Early in 1959, and again in July 1959, officials in Mao’s governmenthad begun to see that the program was failing. Their objections wererewarded with punishment. Mao was determined to follow hisideological course, no matter what else happened. 

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

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

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

What can we expect from Obamacare?

Hopefully, the postponement of the business mandate is the first signof a total collapse of all the Obamacare mandates. If that doesn’thappen, then history tells us that the results will far worse thaneven the most pessimistic forecasts: massive doctor shortages, massiveinsurance shortages, massive price increases for insurance andservices, poor medical services, shortages of medicines and medicaldevices, 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 — likethe parts about preexisting conditions, or parents insuring their kidsto age 26. Whatever parts remain, Obama will claim that Obamacare isa success because those things have been implemented, and he will gethis political legacy anyway. 

Whether in Europe or America or China, politicians are always thesame: No matter how much damage and destruction they cause, theyalways 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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