Table Of ContentPublic Debt Dynamics of Europe and the US
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Public Debt Dynamics
of Europe and the US
Dimitris N. Chorafas
AMSTERDAM(cid:1)BOSTON(cid:1)HEIDELBERG(cid:1)LONDON(cid:1)NEWYORK(cid:1)OXFORD
PARIS(cid:1)SANDIEGO(cid:1)SANFRANCISCO(cid:1)SINGAPORE(cid:1)SYDNEY(cid:1)TOKYO
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Contents
Preface xi
Part One The West Today
1 Globalization of a Casino Society 3
1.1 “My Lord,” Answered Solon to King Croesus, “You Are
Asking Me What I Think of Human Life” 3
1.2 Globalization Worked As Long As It Worked 5
1.3 The Web of Debt Has Led to Slavery 9
1.4 Policies That Brought Us to a Mess 12
1.5 Leveraging and Getting Deeper into Debt 15
1.6 Tic, Tac, Tic, Tac ... The New Bubble Builds Up 18
End Notes 21
2 Kingdoms of Debt 23
2.1 Debt and Growth 23
2.2 Debt and Decline 26
2.3 The Debt Reduction Pact for Europe, Real or Fancy? 29
2.4 Outright Monetary Transactions Mean Debt to Infinity 32
2.5 The End of ECB As We Knew It 36
2.6 Still, the Big Short Is Europe 39
End Notes 43
3 Options for this Decade 45
3.1 Three Main Options for the Next Years 45
3.2 “The Worst Is Over” Is a Defeatist Slogan 47
3.3 The Italian Government’s Daisy-Chain 51
3.4 Banks Did Not Deserve the Bailout 55
3.5 Political Backing for Financial Stability Has Declined 58
3.6 Reinventing Personal and Collective Irresponsibility 62
3.7 Conclusions 65
End Notes 66
vi Contents
Part Two Destiny in the Land of Homer
4 The Greek Economy Pays the Price of Drift 71
4.1 “My Lord,” Said Demaratus to King Xerxes, “Do You
Want Me to Tell You the Truth or Flatteries?” 71
4.2 The Target Should Be Competitiveness 74
4.3 Fakelakia and the Wages of Corruption Buy Yachts 77
4.4 Coming Up from Under Is a Tough Job 81
4.5 Private Sector Involvement in Downsizing the Greek Debt 84
4.6 The PSI’s 73.5 Percent Writedown Did Not Really
Help Greece 88
4.7 Credit Events and Bonanzas for Speculators 90
End Notes 93
5 Impact of Bailouts on the Economy of a Sovereign 95
5.1 Bailout Fatigue 95
5.2 Aristophanes, Euroland, and Greece Today 98
5.3 State of Politics and of Sovereign Debt 101
5.4 Restructuring Efforts Don’t Necessarily Provide
Expected Results 105
5.5 Rescue Funds Can Turn into Monkey Money 109
5.6 Using CDSs as Predictors 112
End Notes 115
6 Drachmageddon: Exit from Euroland and Bankruptcy? Or
Bankruptcy Within Euroland? 117
6.1 Drachmageddon 117
6.2 Exit from Euroland? 120
6.3 Cost of an Uncontrolled Exit 123
6.4 Parallel Currencies 126
6.5 Myths and Realities About Sovereign Bailouts 129
6.6 Bankruptcy Is No More a Dirty Word 132
6.7 The Difficulties Greece Encounters Are Extreme,
Not Unique 134
6.8 Conclusion: Oedipus at Colonus? 137
End Notes 140
Contents vii
Part Three Case Studies with Teetering Sovereigns
7 Spain in Free Fall 145
7.1 Spain Is in the Danger Zone 145
7.2 Internal Devaluation Would Have Been the Better Solution 148
7.3 The Spanish Government Is Not in Charge 151
7.4 Investors Fear Spain Will Battle Against Austerity 154
7.5 Spanish Banks and Euroland’s Taxpayers 157
7.6 In Financial Terms Spanish Banks Wounded Their Clients 160
7.7 Bad Banks and Wanting Spanish Fiscal Policies 163
End Notes 167
8 Italy Tries a U-Turn on the Road to Nowhere 169
8.1 Public Debt Is Mounting, Growth Is Elusive, and the
Country Has Been 124 Days Without a Government 169
8.2 Italian Premium and Spanish Premium 171
8.3 The Public Debt Will Not Be Paid by Santa Klaus 174
8.4 Italian Parliamentarians Could Ask: “Austerity?
Which Austerity?” 177
8.5 Italy’s Balancing Act and The Labor Unions’
Rearguard Action 180
8.6 It’s Time to Stop Gambling and Deliver on
Economic Change 183
8.7 Wrong-Way Policies Lead to Beleaguered Governments 186
End Notes 190
9 France Is Not Italy. True or False? 193
9.1 The French Balancing Act 193
9.2 Creative Destruction and the Limits of Socialist Policies 196
9.3 When the Government Tries to Be Everything to
Everybody, Public Debt Is King 199
9.4 The French Dilemma: Cutting Entitlements or Going Bust 202
9.5 The French State Spends Too Much. Its Debt Is a Timebomb 205
9.6 The French Banks’ Fragility as Lenders 208
9.7 Efforts to Stabilize the French Banking Industry 211
End Notes 214
viii Contents
Part Four Who Killed the Golden Eagle?
10 Public Health Care Is the No. 1 Suspect 219
10.1 Sequester 219
10.2 Don’t Let Grandparents Steel the Young Generation’s Money 222
10.3 Case Study on Health Care Expenditures
and Their Incoherence 226
10.4 A Bankrupt America Needs an Age of Austerity,
Says Mort Zuckerman 230
10.5 Sweden’s Near Bankruptcy in 1993 Provides Food
for Thought 233
10.6 Everybody Will Suffer from Currency Wars 236
End Notes 239
11 Public Debt, Balanced Budgets, and Current Accounts 241
11.1 The Debt Ceiling 241
11.2 US Public Debt Is Over $16 Billion. Who Is to Blame? 244
11.3 Balanced Budgets Do Not Come As a Matter of Course 249
11.4 The Current Account Balance Has Much to Do with
Discipline and Competitiveness 252
11.5 “Too Big to Jail” Has Become the New Moral Code 256
11.6 Faculties Should Give the Example, and Students
Must Put Up Their Best Effort 259
End Notes 265
12 The Merger of Quantitative Easing and Politics Is the No. 2
Suspect 267
12.1 “Bernanke Should Show Humility at the Fed,” Says
Senator Bob Corker 267
12.2 Employment and Unemployment Are Political Issues,
Not the Central Bank’s Remit 270
12.3 Money Is Always Invested, but There May
Be Bad Investments 273
12.4 Twisting the Treasury’s Refinancing and QE3.5
Releveraging 276
12.5 An Unwarranted Worst-Case Scenario 279
12.6 Financial Stability and Systemic Risk 283
End Notes 286
Contents ix
Part Five Returns are Not Rising Forever
13 Storm Clouds over the BRICs 291
13.1 The Rise of Emerging Markets 291
13.2 The Ascent of China 294
13.3 China Faces Important but Not Unprecedented Challenges 297
13.4 The Japanese Economy—A Comparison 301
13.5 “Abenomics,” the Falling Yen and Longevity Risk 304
13.6 Japan and China. Is There an East-Asia Syndrome? 306
13.7 The First Letter in BRICs: Brazil 309
13.8 Is India’s Economy Another Falling Star? 313
End Notes 317
Part Six Which Therapy? Where are the Doctors?
14 Iceland, Latvia, Ireland, Britain, Germany, and a
Taste of Fantasy Economics 321
14.1 Iceland Comes Up from Under 321
14.2 Contrarian Opinions on Iceland’s Escape from the Abyss 323
14.3 Latvia Is Much Better-Off than Argentina 325
14.4 Ireland Is in its Way to Win the Battle of Austerity 328
14.5 Britain Tries to Put its House in Order 331
14.6 Germany and the Policy of Fiscal Discipline 334
14.7 Mervyn Le King, Mark De Carney, and Fantasy Economics 337
End Notes 341
15 Ineptocracy and the New Policy of Grabbing 343
15.1 Is Public Debt Good or Bad? 343
15.2 Ineptocracy Increases the Complexity of Sovereign
Bankruptcy 345
15.3 Western Living Standards Have Become Unsustainable 348
15.4 Lack of Ethics and Ineptocracy Lead to a Dark End 351
15.5 Bail-In Is Blessed by the Masters of Indecision 354
15.6 The Parliament Votes in Favor of Democratic Cleptocracy 357
End Notes 361
Case Study and Conclusion 363
TheTrickeryAssociatedtotheBirthoftheEuro
