Aboriginal Tent 'Embassy', Violence and the Left

So it turns out that a media staffer in Julia Gillard's office, Tony Hodges, called an intermediary, identified as Unions ACT boss Kim Sattler, and told her that opposition leader Tony Abbott has made a comment about the Aboriginal Tent 'Embassy' and just happened to be conveniently located a couple of hundred metres away from said embassy at The Lobby restaurant.

As reported by Tim Blair and Andrew Bolt this is a scandal for the Prime Minister of increasing proportion.

The Prime Minister tried to head off trouble at the pass:

Adviser Tony Hodges “acted alone” when he called union official Kim Sattler before the ugly Australia Day riot in Canberra, Julia Gillard claims.

The Prime Minister said she was “deeply disappointed” and “furious” to learn her staffer had let protesters know the whereabouts of Tony Abbott at a medal ceremony in Old Parliament House before scenes turned foul.

“He acted alone and his conduct was unauthorised,” Ms Gillard said today in Treasury Place, Melbourne.

“He made a grave error of judgment.”

But she said at no time did Mr Hodges bend Tony Abbott’s words to say he wanted the tent embassy torn down.

Who in their right mind does not believe:

• That Hodges acted with anything other than authority of his direct manager?
• That he accurately conveyed the sense of Tony Abbott's opinion?
• That his action was completely consistent with the reality of the culture of the Prime Minister's office?
• That it was completely normal to ring an intermediary such as Sattler when looking to stir up trouble?
• That "there shall be no carbon tax under a government I lead" Gillard is telling the truth that Hodges acted alone?

I'll bet that policy cuckolded pokies' reform champion Andrew Wilkie has some doubts about the truth of the PM's story, that's for sure.

But there's a bigger issue at play that has not yet been reported on, probably because the mainstream media are Labor supporters and don't want to face the ugly truth that it's their side that owns political violence in this country and has done since the founding of the nation. That's why Kim Sattler knew that all she needed to do in order to stir up trouble was to tell people the distorted story about what Abbott had said and where he was and let the normal leftist mob mentality run its course.

But, Jack, I hear you cry, these Aboriginal people are passionate about their cause and so you can understand why they become so upset and sometimes things get out of control, can't you?

No, I can't.

Firstly, reports said that there were some hundreds of people at the Aboriginal Tent 'Embassy'.

How many of those people were Coalition supporters, do you think?

Let me think about that for about a nanosecond. How about none?

If it had have been a crowd of Coalition supporters protesting against the carbon tax or the incompetence of the government then do you think that violence would have broken out?

Oh, that's right. That happened. It didn't.

Here's a thought experiment.

If the crowd at the Aboriginal Tent 'Embassy' were all Coalition supporters then do you think that the same outcome could have occurred on the basis of what a Labor leader was reported as having said?

Not on your life.

And here's a real kicker. If even half of the protesters were Coalition supporters then do you think things would have become riotous? No. Because the sensible half would have held the other side in check.

That organised political violence belongs to the left is a fact of life. Who else can bring together unions, uni students, Environmentalists and the anti-globalisation crowd into the kind of destructive force we see on our TVs on a weekly basis?

Where are the organised right wing equivalents? There aren't any.

Leftism is about tearing down what exists be it successful people, institutions they don't like such as the Catholic Church or an economic system that they believe is unfair.

It should come as no surprise that a mindset whose goal is to pull down the pillars of society should also take to literally pulling down the physical infrastructure.

Thus, the Aboriginal Tent 'Embassy' disgrace is a perfect example of the left's careless embrace of lies and violence in order to implement its agenda.

Aboriginal Tent Embassy mob prove they're nothing but scum

The Prime Minister of Australia had to be evacuated from an Australia Day event this afternoon, along with the opposition leader, due to the racist scum who inhabit the so called Aboriginal Tent Embassy.

I am deadset sick of these people.

They give decent Aborigines a bad name and prove that they have absolutely no care about anything other than themselves while accusing those who have tried to help them for many decades of being racists.

They are scum.

No other term is suitable. Even respected Aboriginal figures said they went too far:

Indigenous leader Mick Gooda has condemned the aggressive behaviour of Aboriginal protesters towards Prime Minister Julia Gillard and Opposition Leader Tony Abbott at a Canberra restaurant on Australia Day.

About 200 protesters from the nearby Aboriginal tent embassy banged on the three glass sides of The Lobby restaurant chanting "shame" and "racist".

At least 50 police, including the riot squad, were called to the scene shortly after 2.30pm (AEDT).

The two leaders, protected by police and security officers, escaped out a side door after about 20 minutes.

Protesters chased their car down the road, banging on its roof and bonnet.

The tent embassy is celebrating a 40-year milestone with a three-day "Corroboree for Sovereignty", with thousands of indigenous Australians travelling to Canberra for the occasion.

What did these people hope to achieve?

Whatever it is they've surely set back their cause and have probably killed off completely any hope that the constitution could be amended to recognise Aborigines as the first Australians.

So what set them off?

Tensions boiled over on Thursday afternoon following comments Mr Abbott made in Sydney earlier in the day that it was perhaps time for the embassy to move on.

Ms Gillard and Mr Abbott had just spoken at a ceremony for the inaugural national emergency medals when the protesters arrived at the restaurant.

Aboriginal and Torres Strait Islander Social Justice Commissioner Mick Gooda said he was appalled at the level of disrespect and aggression shown towards the two leaders.

"An aggressive, divisive and frightening protest such as this, has no place in debates about the affairs of Aboriginal and Torres Strait Islander peoples or in any circumstances," Mr Gooda said.

So, Tony Abbott - a man who spends a couple of weeks every year in the outback helping Aboriginal communities (with no cameras and no media) - makes a common sense statement that the eyesore that is the 'Embassy' should move on and it justifies a complete breakdown of law and order, does it?

Scum. Shameful scum.

We need to start treating Aborigines the same as everyone else in this country be they white, brown, black, yellow or whatever and stop treating them as spoiled children. It's the only way they'll be able to improve their lot in life.

Why you should be an optimist

If you haven't heard of Matt Ridley aka the Rational Optimist then you've missed out on a different point of view to that promoting the fashionable doomsday du jour.

Ridley articulates very well, I think, why we should all be optimistic. His views on this topic align very well with my own. Even though there are rocky days ahead and almost certain financial doom and gloom, when you take a thirty thousand foot view of things for the long term one must conclude that humans will yet again defy the doomsdayers' predictions and work things out.

Imagine how miserable it must be to live life thinking that CO2 is going to make the planet uninhabitable and is already responsible for fire, flood, earthquakes and whatever other natural disasters that used to carry exactly that name until a generation grew up largely uneducated about how the world works - and uncaring, to boot. And uncaring that it's important that they know.

Who seriously thinks that when the oil eventually becomes uneconomical to produce - which is many hundreds of years away - mankind won't have transitioned to something like nuclear to fuel society?

Who seriously thinks the world is going to get to the point that it can't feed itself?

As I said, it would be a miserable life indeed.

Matt Ridley's presentations should be played to all 14-15 year olds in school. It would inspire them and get them to focus on the big picture.

If you like the video then send it to your 'miserable' friends so that they can find a reason to turn their thinking around.

Race baiting crowd won't be happy to confront reality

Here's the current results of the poll at The Australian. It won't please those who think they'll be able to make a quid suing the rest of us for being racist:

It's a pity that conservative values, especially that of race-blindness, are not more widely held in the community. Perhaps they are but you wouldn't know it from listening to the media. Ironically, those that think these laws are necessary to rein in the racism of (mainly) white men don't understand that those white men inhabit the same political orbit as the race baiters.

My new favourite news site

Thanks to the great Tim Blair I have now become aware of what must be the best news site on the planet.

Certainly, if you asked the North Koreans then they'd agree.

That's because it's the new English language version of North Korea's official paper, The Rodong Sinmun.

The articles are completely hilarious. My current favourite is an editorial Full Play to Advantage of Socialist Economic Management System.

The DPRK and its people are now greeting the 50th anniversary of the Taean Work System created by President Kim Il Sung.

The President created the Taean System, model of the socialist economic management, in the early 1960s when the socialist system was established and the overall technical modernization of the national economy was progressing in the DPRK.

This system is the advantageous Korean-style socialist economic management that embodies the Juche idea and the revolutionary mass line based on it.

It helps conduct all the business activities under the collective guidance of party committees and rouse the popular masses to the implementation of economic tasks by giving priority to political affairs. The system also makes it possible for the superior to help the lower in a responsible manner and to closely combine the science and technology with production and turn the economic lever into good account in order to ensure the production in a rational way.

It is the people-centered economic management system, whereby the popular masses manage and run the economy in a scientific and rational way as the true masters of its management, and the socialist economic management system that embodies the collective principle of "One for all and all for one!" This is essential character of the Taean Work System and herein lies the source of its inexhaustible might.

The past five decades after establishment of the system are a glorious and immortal history in which the socialist economy of the DPRK hewed out the original path of its development under the leadership of the great leader and the great party and the Korean people have wrought epoch-making miracles in the economic construction while overcoming all sorts of trials and challenges.

It is important to solve any problem arising in the economic activities in a Korean way suited to intrinsic nature of socialist society, with clear awareness that the victory of socialism is just victory of the revolutionary principle.

All the people should give full play to the advantage of the Juche-oriented socialist economic management system under the leadership of Kim Jong Il.

If anyone can tell me what that means then feel free to provide feedback!

My favourite bit is that "One for all and all for one!" is now a collective principle in North Korea. I'm sure that The Three Musketeers is banned there, as it might give people funny ideas about rising up against the oppressors, so the ruling party is probably pretty safe from being discovered.

The left's remarkable lack of knowledge of history

I tell you something that constantly surprises me - the lack of knowledge of history of those on the left with whom I discuss political matters.

Take Martin Luther King Day as an example.

The left write articles and make speeches and send tweets containing one or other of MLK's profundities in an attempt to cloak themselves in moral rectitude. MLK was the leading figure in the Civil Rights movement and is quite rightly regarded as the man who brought to an end the last vestiges of racial discrimination in the United States.

What these people don't seem to be aware of is that the entire reason there had to be a civil rights movement in the first place was due to the racist policies of the Democrats! From Jim Crow to miscegenation laws to lack of voting rights these were all policies introduced and supported by the Democrats.

Since the time of Lincoln the Republican party has been at the forefront of the equality argument. It's ironic that to now argue that white and black are equal and that there should be no racial preferences for work or university placement is guaranteed to attract a charge of racism. MLK would certainly be shocked at the blatant racism of these policies.

But it's not just the civil rights movement that those who claim to be the defenders of equality are ignorant about.

The eugenics movement of the early twentieth century had as one of its primary objectives the restriction of having children of those who were less educated. It was an almost entirely race based policy.

The union movement is one of the worst racial offenders going. The minimum wage was introduced entirely to deal with the 'problem' of cheap, black labour which would threaten the jobs of a unionised, white workforce. As Thomas Hazlett points out in this terrific article, this policy led to apartheid in South Africa. The great Tom Sowell calls the minimum wage the most racist legislation ever to be introduced.

A lefty will learn more in the three minute discussion between Williams and Sowell than they will in a lifetime of watching the ABC or SBS or reading The Age or Canberra Times or in the USA the New York Times etc.

In fact, while I'm linking to Tom Sowell here's another short lesson for the world's ignorant left.

But it doesn't stop there. The original purpose of Planned Parenthood was to create an environment in which young, pregnant, black women would have abortions on the grounds that they were not able to look after the children.

And there's more! Gun control in the United States south was introduced (by Democrats) entirely because they didn't want newly freed slaves having firearms. They feared, probably correctly, that a number of them might want to exact some vengeance before settling down.

Somehow or other history has been turned completely upside down and it's the historically race-blind party - the Republicans - who are tarred with the racist slur while the historically racist party - the Democrats - have been given a free pass.

I guess that's what happens when the mainstream media and universities and others in the chattering class overwhelmingly inhabit the left side of the political spectrum.

Why fixing Europe's financial woes is so difficult

John Mauldin is a well known economics commentator and forecaster. I recommend subscribing to his email newsletter "Thoughts from the Frontline", which you can do here.


In this week's newsletter he provides a concise description of what ails Europe and that the banking system's debt is a creation of government policy (allowing banks to buy sovereign debt at a 30:1 leverage ratio) and the inexorable effects of having to borrow more to pay back previous debt.


The root cause, of course, is paying for the increasingly large promises of the social welfare state. Not that today's left can understand that basic fact.


When the Labor government won power in Australia in 2007 it inherited probably the strongest economy on the planet, which included near zero government debt. In only a few years it has managed to grow that debt to $230 billion. The tragedy is not only that the country has nothing to show for all that spending but also that we are not able to learn from the disaster in Europe.

One of the interesting things about being in Hong Kong is that I get to see the weekend edition of the Financial Times 12 hours early. And the headlines were not all that pleasant. As I promised last week, we will cast our eyes to Europe and ponder what is in store for Europe for the year and the next five years. And what do we read on page 2? The "ECB raps revisions to draft a fiscal pact." Seems they feel there are too many loopholes, which will make the document meaningless … somewhat like the treaty they have now. And we further learn that "Greek default threat grows as talks falter." Seems there is a lack of agreement on how much of a haircut the investors ought to take, and the Greeks don't want to guarantee any future debt, just in case they need to default some more in the future. But they do want the €15 billion they need to keep the debt machine running for a few more months.

And on page 1, in big type, we are surprised (but not very) by the headline, "France and Austria face debt blow." Seems those sharp-eyed accountants over at S&P have decided to downgrade French debt from AAA. Which of course leads to another headline on page 2, suggesting "Firepower of bail-out fund cast into doubt." The currency markets were shocked – shocked I tell you – that S&P would do such a thing and promptly took back the euro rally and cast the euro down to recent cycle lows. Who knew, other than the entire free world not watching reality TV, that S&P was planning to do such a thing? And we read elsewhere that the European Commission is dismayed that S&P would do something so clearly not right, at least according to the way they keep their own books.
Even here in amazing Hong Kong, with the growth of China driving a wave of prosperity, eyes are fixed on Europe. How will they deal with the crisis? We read that US exports to Europe were down 7% last quarter, and Europe has not yet really entered into recession, which is almost guaranteed this year. And if US exports are down, then so are Asian and Latin American exports. Global growth appears to be threatened.

Solving the Mayan Code

There are so many pieces of data to go through in order to augur Europe's future – I want readers to know I have left no stone unturned! In fact, I went to some very old stones to get help with this week's letter. I began to scrutinize the Mayan Code from ancient Central America, which so many feel predicts the end of the world on December 21 of this year, bringing my fresh eyes to an old mystery.

After much deliberation, I have come to this astounding insight: The Mayan academics who created the code were not in fact astronomers or even astrologers. No, it is clear they were another breed of even more dubious forecasters, called economists. Once you approach the glyphs with that understanding, it becomes clear they are not predicting the end of the world, merely the end of Europe. One symbol clearly shows the Greek flag dipping to the ground. Another depicts the Italian flag with its wheels coming off. Oh, and you don't even want to know what they have prognosticated for the French. This is a family e-letter and I can't squeeze such language past the censors. But now that I have provided the basic insight, I leave it to you, fellow scholars, to decipher the rest of code.

And we will spend our time together here this week trying to discern what it means, in fact, for Europe to come to the place in its journey where it must make extremely difficult and often painful choices. As I wrote last week, as I started this voyage of discovery with you, the choices the various countries in the developed world are now making will put us on a path that does not allow us to turn back without severe consequences. (If you missed last week's letter, here it is.) We are left with debt that must be dealt with, with imbalances that must be balanced, and with deficits that must be brought under control. No matter what we choose, there will be pain for all of us. You cannot make debt go away without paying it back or defaulting, one way or the other, which means someone loses. And as we will see, paying it back can be very difficult, indeed, once it has grown this large.

To Solve the Crisis You Must Solve Three Problems

There are three main problems in Europe. The first is that most of the banks are massively insolvent, because they have 30 times their capital invested in the second problem, which is the sovereign debt of countries that are going to have trouble paying that debt. If the banks have to mark down the debt to what its real value is – or to what it will soon be – they will be bankrupt on a scale that makes 2008 look like a waltz in the park.

Countries simply cannot function in a manner that can be called normal without viable banking systems, which is why the authorities spend so much time worrying about them. If banks can't make loans, then businesses must cut back, which means fewer jobs, products, and services, which quickly becomes an ugly spiral. Losses in the private sector mount up. This obliges the treasury secretary to get on one knee and beg some elected official who has no understanding of how business and economics work to save the world as he knows it.

But if countries must step in and save their banks, then they have to assume some of the losses. (I am assuming that this time shareholders get completely wiped out, as do most bondholders. Taxpayers – read voters –are actually paying attention this time. They are in no mood to bail out bankers.) But most of the countries in Europe with the worst banks simply do not have the money to invest. They already have too much debt. Where do they get the capital? (More on that later.)

For most of the past two years, European leaders have tried to deal with the problems as though they were short-term liquidity problems: "If we just find the money to buy some more Greek bonds, then Greece can figure out how to solve its problems and then pay us back. Given enough time, the problem can get solved."
They have now arrived at the understanding that it this not a short-term problem. Rather, it's a solvency problem of the various governments, which of course creates a solvency problem for their banks. They are now addressing the problem of solvency and providing capital until such time as certain countries can get their budgets under control and the bond market sees fit to provide the capital they need.

But they are completely ignoring the third and largest problem, and that is massive trade imbalances. Germany exports products to the peripheral European countries, which run trade deficits. As I have shown in several letters, a country cannot reduce private-sector leverage, reduce public-sector leverage and deficits (balance its budget), and run a trade deficit all at the same time. That is simple, unavoidable math, based on 400 years of accounting understanding. Ultimately, there must be a trade surplus if leverage and debt are to be reduced.

Greece runs a trade deficit of about 10% of GDP. Until they can stop that bleeding, they cannot get their government and private budgets under control. It is not simply a matter of cutting budgets or raising taxes. Indeed, their economy will continue to shrink, making it more difficult buy foreign goods without increasing their own production of goods and services. It is a vicious spiral. And that same spiral will spin up to take in all of Europe. Again, more on that later, as we consider what their choices are.

But for now, let's start with my contention that if you do not solve all three problems you do not solve the real problem. Greece cannot "stand on its own" without a change in its cost of production relative to Northern Europe. Neither can Portugal, et al., unless Germany either changes how it exports and consumes more, or Germany is willing to fund Greek (and Portuguese and Italian and…) debt, so those countries can continue to run large deficits.
Let's resort to something I have done in the past, and that is to create a simple model to help us understand the issues involved. As always, when we make simple assumptions we are ignoring the real complexities. I know things are vastly more complicated than the following simple analogies, but the underlying truths are basically the same.

Getting Simple About Europe

Let's assume a country that has a gross domestic product (GDP) of $1,000. In the beginning it taxes its citizens about 25% of GDP and spends the money for the public's benefit. But alas, it spends about 30% of GDP, so it must borrow the overage (about $50) from its citizens or from the citizens of other countries. Because the country starts out with relatively little debt, interest rates on this loan are low, because those who buy the debt can easily see that the the country can pay them back. If the debt of the country is only 5% of GDP ($50) and the interest rate is 4%, then the amount that must be paid as interest is only about $2 per year. Not a whole lot, about 0.2% of GDP.

But this goes on year after year. Sometimes the deficits get smaller and sometimes they get larger, depending on the economy; but government expenditures grow at the same rate as the country grows, and the debt keeps growing at an average of 5% of GDP per year. Now, if the country is growing at 3% a year, after 24 years the economy will have doubled to $2,000 GDP. 

That means the debt has grown (roughly) to a total of $1,800, which is now a debt-to-GDP ratio of 90%. Debt has grown faster than the country's economy. Note that if the country had held its budget down to where it grew slower than GDP, thus reducing its need for debt, that ratio would be lower, even if the debt had grown. You can indeed grow your way out of a debt problem if the growth of government spending is less than the growth of the economy.

But what if the size of government grows to about 50% of GDP, rather than 25% or 30%, over the 24 years, as politicians decide to spend more money and voters decide they want more benefits? (Think France.) Then the private sector must pay about 50% of its production to the state – plus, the debt is now growing unwieldly. The private sector has less to invest in new businesses and tools, and the growth of the economy slows.

And then along comes a very nasty recession. The revenues of the government fall as the economy shrinks. If the economy shrinks by 3% and total taxes are 50%, then tax revenue falls to $970. But the government does not cut back; and indeed, because it must pay unemployment benefits and welfare (because unemployment rises in a recession), its expenses actually rise by 5%! So it now needs $1,050 to pay all its budgeted expenses. And it must now borrow $80 to pay everyone it has promised to pay, in addition to the $100 it was already borrowing every year to cover its deficit, or a total of $180 a year, which is 9% of GDP. (Yes, I know that debt must change as a percentage over time and nothing is stagnant, but work with me here.)

Now debt-to-GDP is rising by about 5% a year. Not a large number in the grand scheme of things, and everyone knows that the recession will soon be over and the deficits will come down. Sovereign governments never default on their debts – our government leaders assure us of that. They can always raise taxes or cut spending, can't they?

And things rock along just fine, and the bond market continues to buy the debt, until one day you look up and the debt is 120% of GDP. Then the bond market gets nervous and says that instead of 4% it wants 7%. Now the interest payments are over 8% of GDP and 16% of government spending, which means the government must either cut back on services or salaries or benefits, or raise taxes, or borrow more money. But cutting spending and raising taxes have consequences. They reduce GDP growth over the following 4-5 quarters as the economy adjusts.

What if that interest rate cost rose to 10%? Then the interest cost to the government would become 20% of its expenses and be rising faster than the country could grow, even in the best of times. And if they continued to borrow at 7% and the country did not grow, those interest expenses would rise at least 7% a year – as long as interest rates didn't go up.

And what if the other countries who had been buying the government's debt looked at the basic math and realized that, another step or two down the current path of government spending, there was no way they would be able to get their money back?

How Much Risk Do You Want in a Government Bond?

Now, government bond investors are a curious breed. They invest in government bonds because they actually think there is not supposed to be any risk. They want their money to be safe. If they wanted risk, there are lots of opportunities to invest with the potential for more reward.

The moment that government bond investors begin to think they might be at risk, they leave. And history suggests they tend to leave seemingly all at once. It is the Bang! moment. Someone fires the starting gun, and they all head for the exits. They start selling their bonds to speculators at discounts, which makes the effective interest rates in the market rise, sometimes by a lot. That means that if a country wants to borrow more money, it will have to pay the effective price in the market, or maybe as much as 15-20% IF – a big IF – it can even get someone to buy the bonds, which of course makes it even more difficult to pay their debt as interest costs rise.

Now, let's add a twist. The other countries that have bought those bonds are not actually countries, but banks in other countries. And because the regulators of those banks knew it was impossible – inconceivable – that a sovereign country might default, they allowed their banks to buy 30 times as much sovereign debt as they had capital in their banks. They did not have to reserve against any losses, so these were "free" profits for the banks. You pay 2% on deposits or short term commercial paper and buy bonds paying at 4%. You make a 2% spread, which you then do 30 times. Now you are making 60% profits on your capital and deposits. It is a very nice business – as long as everyone pays the interest. And because it is such a good business, you just roll over the debt every time the bond comes due, because you want more easy profits.

Let's say that banks bought up to 10% of their total government sovereign-debt holdings in our problem country. If the country gets into trouble and says, we will only pay 50% of our debt (we will discuss why below), then that means the banks lose 5% of their total assets. But they only have about 3% capital, because they were allowed to leverage. That means they are functionally bankrupt.

Without a functioning banking system, other countries now have to step in and take the losses (and perhaps wipe out the shareholders and owners of their banks). That would be bad for the other countries, as that much spare cash is not just lying around in government coffers. They are ALL borrowing money already and have their own deficits to worry about.

So everyone gets together and they tell the bankrupt country (because that is what it really is), we will lend you more money to keep you alive, but you must agree to balance your budget. And since that is the only way the problem country can get more money, they initially say, "Sure. We can do that. Just give us some money now so we can get it figured out and get everything under control."
In the world of government, living within your means is called austerity. And it's an uphill slog. Let's say your deficit started out at 15% of GDP (somewhat like Greece's). If you agree to cut that deficit by 4% a year for four years running, if everything stays the same, you could be back in balance. But the other counties would have to agree to lend you the difference between what you budgeted to spend and what you took in as tax revenues. Just to keep things going. Otherwise you'd have to default on your debt. If the countries simply have to guarantee the loans and not actually spend the money, it is a lot easier than having to find real money to save their banks, so they agree.

But the cuts you have to make are not as easy as everyone hoped. It seems that employees don't like having their pay cut, and unions don't want pensions cut, and retirees certainly expect the government to fulfill its promises; and don't even get started on cutting healthcare, which is a God-given right.

So you raise taxes and cut spending by about 4% the first year. But a funny thing happens. That reduces the private economy by about 4%, so the base on which taxes are collected is reduced, which means less revenue is raised, which means that the deficit is much worse than projected. And then the following year you have to make another 4% in cuts, plus the last shortfall, just to make your plan and get to the agreed-upon deficit, in order to get more loan money. It becomes a very vicious circle.

And let's look at the endgame. That debt-to-GDP ratio will rise to at least 150%, while the economy is actually shrinking. If interest rates settle to a mere 7% (hardly likely), it means the people of the country are going to have to pay over 10% of their total production to foreign banks each and every year for decades, never mind paying down the principle.

Let's throw in one more twist. The country has been buying about 10% of GDP more from other countries than it sells to them. That is because the relative wages in the problem country are about 30% higher than in the "good" countries. The good countries get the money from what they sell and have a nice surplus. The problem country soon runs through its savings, trying to buy the goods and service it wants; and the private sector, as well as the government, must cut back.

What happens is that you are locking in what feels like a depression initially, and then you have a slow- or no-growth economy for many years, as so much of your work goes just to pay back that debt to the banks of other countries.

Understand, your government has freely obligated itself to pay that debt. But it means that its citizens in effect become debt slaves for a generation or two to foreign banks. Not a very popular platform for a politician to run on for re-election.

Long-time readers know I think the neo-Keynesians do not have a proper view of the world. They live in a theoretical world divorced from what really happens. But in this respect they are deadly right. Austerity on the scale needed by many countries will only reduce potential GDP. The Keynesian prescription is to therefore run deficits and borrow money until you get growth again; but when you have already exhausted your ability to borrow money, it just doesn't work.

More debt makes if far more difficult to grow your way out of the problem. If you are already drunk, you can't get sober by drinking more whiskey. If Greece cuts its deficit by 15% of GDP, the reality is that GDP over time will be reduced by about 20%, and the debt will grow, both in real terms and as a percentage of GDP. A 20% decline in GDP is by any standard a depression and makes it even harder to grow, as so much of what you do make has to go to basic expenses and not productive capital. And if you have the burden of massive debt it becomes damn near impossible.

That is why individuals can file for personal bankruptcy. We no longer force people into slavery or debtor's prison to pay their debts, at least in most places.

So our problem country goes to its lenders and says, "We think you should share our pain. We are only going to pay you back 50% of what we owe you, and you must let us pay a 4% interest rate and pay you over a longer period. We think we can do that. Oh, and give us some more money in the meantime. And if you refuse, we won't pay you anything and you will all have a banking crisis. Thanks for everything."

The difficult is that if our problem country A gets to cut its debt by 50%, what about problem countries B, C, and D? Do they get the same deal? Why would voters in one country expect any less, if you agree to such terms for the first country?

So now let's return to the real world of Europe. Greece cannot pay its debt without a major depression. So its wants to pay only 50%, but it doesn't even want to guarantee that in any meaningful way; so bondholders scream, "We get nothing in return for agreeing to take a 50% haircut?!" Which is today's headline.

Greece cannot print its own money, so unless it leaves the Eurozone, it's stuck. They can default on their debt, but that means they are shut out of the bond market for some period of time. That would force them to make the spending cuts they are now resisting, as they would simply not have enough money to pay their bills. Even with a 100% haircut they're looking at a shorter but very real depression. And because no one will sell them products they need, like energy and food and medicine, unless they can sell or trade something in return (that trade-deficit problem), they will be forced to change their lifestyles. Wages must drop or productivity rise to be competitive with northern Europe. And that differential is about 30%. I am not certain, as I have not been to Greece in a long time, but my bet is, you won't find many Greeks who think they are overpaid by 30%.

But that is what the market is going to say. And that is the third problem, which Europe is not addressing. Germany and the northern tier are simply more productive than the Southern periphery. (With the possible exception of Northern Italy, but Italy all gets lumped together, which is why many Northern Italians want to be their own country and not have to pay taxes that go to Southern Italy. I am not taking sides, just observing what we read in the papers.) Until Germany consumes more from the peripheral countries or the peripheral countries become more productive, the imbalance will not allow a positive solution.

Prior to the euro, the imbalances would be handled by currency exchange rates. The value of the drachma would go down relative to the value of the deutschmark. Things would balance over time. Now, all of the eurozone countries are effectively on a gold standard, with the euro standing in for gold this time. Britain, the US, and Japan print their own currencies. Their currencies can rise or fall over long periods of time, based on national accounts and the desires of foreigners to buy goods or invest in their countries.
Greece and the other peripheral countries face a difficult choice. Do we stay in the euro and pay as much as we can, and watch our economy drop; pay nothing and watch our economy drop (as we get shut out of the bond market); or leave the euro and go back to our own currency and watch our economy drop?

They have no choices that allow them to grow and prosper without first suffering (for perhaps a long time) some very real economic pain. As I have written in previous letters, leaving the eurozone has severe consequences; but the economic pain of leaving would go away sooner and allow for quicker adjustments, than if they stayed. However, the initial pain would be worse than the slow pain they'd suffer by staying in the euro. Their choice is, simply, which pain do they want – or maybe, which pain do they think they want? Because whatever they choose, they are not going to like it.

And just as I was finishing this section, this note came from Naked Capitalism:

"The three Troika inspectors—Poul Thomsen from the IMF, Mathias Morse from the EU, and Klaus Mazouch from the ECB—are supposed to head to Greece next week to inspect its books; the budget deficit is once again higher than the revised limit that Greece had vowed to abide by. And they're supposed to negotiate additional 'structural reforms.' But there probably won't be three inspectors, according to senior IMF sources. Missing: Poul Thomsen. The IMF has had enough.

"Already, according to more leaks, IMF Managing Director Christine Lagarde had warned German Chancellor Angela Merkel and French President Nicolas Sarkozy that the fiscal and economic situation in Greece had deteriorated. Hence, the 'voluntary' haircut on Greek bonds held by private sector investors should be increased to more than 50% to maintain the goal of bringing Greece's debt load down to 120% of GDP. And the second €130 billion bailout package, agreed upon on October 26, should be enlarged by 'tens of billions of euros.'

"The German reaction was immediate. 'There has to be a line somewhere,' said Michael Fuchs, deputy leader of Merkel's party, the CDU. 'This cannot be a bottomless barrel.' Even if Merkel were amenable to committing more taxpayer money to bail out Greece, she'd face a wall of opposition in her own party. And he wasn't brimming with optimism: 'I don't think that Greece, in its current condition, can be saved,' he said."

The article goes on with a description of the chaos in Greece. It is worse than I have described. Really. And so terribly sad.