Weekend Reading - Greecing the Wheels

I'm done with Greece.

I was getting sick of it last week and now I'm really done after doing some research: First of all, Greece's deficit (as we discussed last week) is a shocking 12% of their GDP and their national debt is 120% of their GDP (ours is about 100% now so something about glass economies and stones comes to mind) BUT, their whole GDP is $343Bn so we're looking at a grand total of $41Bn to completely bail them out this year – the boyz at Goldman probably took about that much home in bonuses just betting on Greece to fail!

Do we really believe the $16,000,000,000,0000 EU economy is going to go down over $42,000,000,000 (0.26%)? Kind of hard to imagine when put in perspective. Of course it's not just Greece, there's Spain, Portugal and Ireland, although Ireland was last year's worry with a $100Bn debt that they ended up fixing themselves by tightening their belts. For the Greeks, it's more a matter of is there a will than a way as Greece has long been the EU's least productive economy (followed by Portugal), which has historically made them uncompetitive with their northern cousins.

All it would take to fix Greece ($343Bn GDP) and Portugal's ($220Bn) deficits is for Germany ($3,235Bn) and the UK ($2,200Bn) to buy a few extra Greek and Portugese goods and the factories would be humming again. The two countries each have about 1M people out of work (10% of the population) and if we assume 5% is close to full employment then we're just talking about employing 1M people. Even if we pay those people $50,000 a year each, that's "just" $50Bn and suddenly, everyone in Greece and Portugal is back at work, off the dole, paying taxes (iffy in Greece) and contributing to the GDP, which fixes the deficit.

$50Bn is just 1% of the GDP of Germany and the UK and back to 0.3% of the EU's GDP. Hell, the global markets have lost $4,000,000,000,0000 in the last two weeks worrying about this $50,000,000,000 – THAT's the magic of Credit Default Swaps – we get to leverage relatively small and correctable global problems into market catastrophes so fast that heads of state don't even have time to call a meeting before the bankers have slashed and burned their economies.

So I was leaning this way at the end of last week and, now that I've had a chance to dig into it, I've decided it's time to move on because this "crisis" is now officially baked into the cake. What is really going on over in the Euro Zone, is a battle between the EU, the member states and the working class people over who should be footing the bill for all this. In the end, despite many fine example of patricide, regicide, infanticide etc in Greek literature – the fact is that Greece is family and, for the good of the family, they and Portugal will eventually be rescued.

Spain, on the other hand, is a real concern. Their GDP is $1.4Tn while also weak Italy is $2.1Tn and France $2.6Tn – THOSE countries may be too big to bail for the EU. Of course, the EU knows this and the WOSRT thing they can do is allow Greece and Portugal to drive up the borrowing costs of Spain and Italy, which will lead to a domino effect that can send the UK and France over the edge and bye, bye EU (and Europe for that matter). This is the same exercise that led us to conclude that the US would not let the financials fail last year – when you follow it through to the end game, it simply can't be allowed to happen.

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We did the math above and it costs less than $50Bn to put 1M people to work. Spain has 4M unemployed and half of them can be put back to work for $100Bn. What about US, then? Could we, should we spend $250Bn to put 5M people back to work? What is the economic benefit of a working person vs. an unemployed person?

Harvard economist Martin Feldstein pointed out in the 1970s, that the costs of unemployment to taxpayers are very great indeed. Take the example above of the individual who could work for $15.00 an hour or collect unemployment insurance of $8.25 per hour. The cost of unemployment to this unemployed person was only $4.39 per hour, the difference between the net income from working and the net income from not working. But other taxpayers as a group paid $8.25 in unemployment benefits for every hour the person was unemployed, and got back in taxes only $1.49 on this benefit. Moreover, they gave up $3.85 in lost tax and Social Security revenue that this person would have paid per hour employed at a $15.00 wage. Net loss to other taxpayers: $10.61 ($8.25 − $1.49 + $3.85) per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of hours of work, and you get a cost to taxpayers in the billions.

So if we ignore the MSM's cries of "Socialism" every time we try to discuss jobs programs (and here's the great John Stewart/Bill O'Reilly interview), we may actually be able to solve something by simply putting poeple back to work. What Feldsteins study shows us is that more than 2/3 of what we would spend to "give" people jobs, comes right back to the taxpayers in the form of less social support costs and more taxes collected. You would almost think then, that spending $250Bn to put 5M people back to work would be a no-brainer as it only costs us a net of $70Bn a year, which is less money than we spend on fuel in our two wars (which "employ" about 300,000 people).

Why is it that we can rush to throw $750Bn at the banks and $500Bn at a war but spending $250Bn to cut (official) unemployment by 50%, which can be argued to cost us $80Bn or less as the money flows back through the system is politically unpalatable? Of course the reson is that putting 5M people back to work raises the cost of labor for big business and that may impact the bottom line and THAT is the real sacred cow of American politics.

We need to get real about this stuff. The latest NFP data shows long-term unemployment (over 27 weeks) is up 5M in 2 years. 2.5M people have dropped out of the labor force and are not being counted and the average workweek for all workers is still near record lows. If we add 500,000 jobs a month for the next 2 years (through mid 2012), we will barely get back to the employment levels of 2007. What is the cost of waiting? As Bob Herbert said this weekend in the NYTimes – "Time Is Running Out."

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Very important article by Dan Solin addressing my 2nd pet peeve behind consumer debt rip-offs and that's 401(k) rip-offs. Dan neatly summarized the $85Bn fee scam that is run by the industry and also gives very easy-to-follow pointers as to how you can run your plan in such a way that employees can gain as much as $450,000 over 30 years.

Prepare for a new "British Invasion" as the next generation of wealthy may flee the UK to avoid what's looking to be a 50% tax rate as of April. High Taxes in the 60s and 70s brought so many great rock bands and movie start to America that it's probably not a bad thing – except for England, which will once again become a cultural wasteland. Of course, America isn't the popular destination it used to be with Switzerland being the country of choice for the UK's top 1%.

Nice, concice history of the country's top 10 banks. What's scary is top 4 (BAC, JPM, C & WFC) have $7.6Tn and #5, HBC, has just $396Bn with USB (6) $115Bn behind them down to STI with $173Bn. So too big to fail in the big 4 is too big to fail by a factor of 10 compared to the 9th largest bank in America. #10 is STT but they are strange because they have $17.9Tn if you include their institutionaly investment management – not the name you usually think of when you wonder where 20% of the planet's money is stored… The same site has a list of "America's Best & Worst Banks For 2010" also interesting.