Was reading about the situation in Greece. Feel so badly for their people. Yesterday they withdrew $400M in Euro from their banks-to stuff in mattresses. It’s not like this was a secret. The smart money pulled their money out of Greek banks at least a year ago.
By the way, Italy, Portugal, Spain and France aren’t much better.
What’s interesting is the defiance of the quasi communist/socialist government officials. They think that not negotiating is a reasonable idea. What they don’t understand is the Germans are in power. They are the only productive nation in the EU. This isn’t a contest between what Greece wants, and what Greece doesn’t want. It’s a contest between the opportunity costs facing Germany between picking up the tab for Greece, and taking a loss on Greece with an exit.
An interesting stat to look at is economic freedom. Here is a chart of Greece Economic Freedom. Hey they are beating Russia and China. Just a point of information. Economic freedom has dropped in the US since Obama was elected.
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US Economic Freedom Index data by YCharts
The impact on markets of a Greek exit will be outsize because of the other non-performing countries in the EU. The result of an exit for the Greek people will be rampant inflation. It’s anyone’s guess where the drachma will trade relative to the Euro, Pound, Swiss Franc, and US Dollar. Should the Greek government capitulate, Greek citizens will have to live with a much smaller government. That’s probably a good thing.
Greece has a problem because they loaded up on public pensions. Just like Illinois. Here is a chart.
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Citizens in Illinois can’t pull money out of their bank and stuff it into mattresses. Instead, they move away. Thankfully monetary policy is in the hands of people outside of Illinois, otherwise we’d be like Greece. Fortunately, Bruce Rauner won the election for governor. Illinois government is now at an impasse. That’s a good thing. The heavily gerrymandered Democratic controlled House and Senate passed an unbalanced budget. They cut funding for offices controlled by Republicans-and increased or kept spending levels at 100% for Democratic controlled offices. They kept 100% spending or increased spending on favorite programs.
Last night, I listened to Senate President John Cullerton on WGN-AM. He showed zero signs of backing down. It’s a mistake. Not because of politics or politically constituencies that he is loyal to. It’s a mistake because Illinois will not be able to borrow money to pay deficits at any sustainable rate.
Illinois can’t afford the government it has today. Neither can Chicago for that matter-or Cook County, or DuPage County, or Lake County and so on. Since Illinois doesn’t control its own currency, citizens won’t see inflation. Instead, other things will be seen. Because Democrats have most of the power, the first cuts will be cuts in physical things and services that will scare people. Cuts in fire, police, and education. Roads won’t get fixed. Instances where people actually need government service will slow down. They’ll make citizens feel it so they scream.
What people don’t understand is that government debt is a claim on the future tax revenues of the government entity that issues the debt. The interest rate that is charged is the cost of borrowing, but it is also a calculation of risk. The higher the interest rate, the higher the risk. Illinois is the riskiest state in the union to lend money to. That raises the cost of government, and costs taxpayers money.
Want to avoid the debt? Change your residency. Thousands of people are doing that. I was at a Chicago Economic Club dinner speaking with wealth managers. Their clients are fleeing the state. They are establishing residency in Florida, Texas, Indiana and other lower tax states. People I know are spending 6 months and a day outside of Illinois.
Here is a graphical illustration of the risk in Illinois debt. Muni bond fund manager Bill Gurtin said he wouldn’t buy Illinois debt at any price. He feels the same about Puerto Rico. A shorter bar indicates better financial health.
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Illinois has a dynamic economy. Except, it’s totally hamstrung by all the rules, regulations, and government agencies set up by the Democrats. Illinois state, county and city governments need to be entirely dismantled and reimagined to operate more efficiently-and employ less people. Pensions need to be turned into 401(k) type instruments, and the responsibility for those pensions need to shift from the government to individuals. Government programs need to be eliminated. Assets the state owns need to be sold off. Government entities need to be eliminated.
This all makes sense, but why would Madigan and Cullerton be against it? Because as soon as responsibility transfers from an appointed government entity that they control, to an individual who is free to choose-they lose power. They are all about power. When they pull the string, they want the puppet to move. They are afraid of what could happen if people had individual freedom.