Page 1 of 2 In the shadow of unwanted bunds
By Julian Delasantellis
Yes, America in the 1970s was a grim place. The country had to deal with its
first-ever loss in war, the resignation in disgrace of its president and vice
president, inflation, unemployment, queues for gas, rising violent crime,
two-toned platform disco shoes; it was horrible. Still, among all the pain and
humiliation, one figure, one cultural archetype, provided some measure of
solace and comfort to the nation - the vigilante.
It started with Clint Eastwood as San Francisco police detective Harry Callahan
in 1971's Dirty Harry, but the genre reached the true epitome of its
form with 1974's Death Wish. That had Charles Bronson playing previously
mild-mannered New York City architect Paul Kersey, who goes on a personal,
incredibly violent
revenge spree after his wife is murdered and daughter raped by urban street
thugs led by Jeff Goldblum - that's another indication just how bad things were
at the time, in that honest and law-abiding citizens were laid low and
helpless, at the mercy of bad actors such as Jeff Goldblum.
The vigilante gave the American public exactly what it then wanted, someone
who, ignoring any manner of lily-livered laws or constitutional protections
meant to safeguard suspects' rights, blew away any and all measure of the
social pathologies that the American middle-class thought was besieging it.
The societal elite despised the genre - in the New York Times, Vincent Canby
called Death Wish "a despicable movie, one that raises complex questions
in order to offer bigoted, frivolous, oversimplified answers ... a bird-brained
movie to cheer the hearts of the far-right wing, as well as the hearts of those
who don't think much about politics but just like to see people get zapped,
without regard to color or creed".
But the audiences loved it, bursting into wild exultations of unrestrained joy
more commonly seen at X-rated movie theaters with each bullet's flight. The
vengeance franchise stirred numerous sequels and copycats; my favorite was
1985's Death Wish 3, which had Bronson blowing away whole legions of
East Brooklyn toughs with a 30-caliber belt-fed Browning machine gun. I
remember thinking that, as the bullets bloodlessly tore the thugs' bodies
asunder, followed by their highly stylized, acrobatic demises, that all if this
had been true, the ballet school founded by George Balanchine at New York's
Lincoln Center for the Performing Arts would be having a very sparse graduation
that year.
Even with the recent reductions of violent crime in the United States, the
vigilante genre just keeps plugging on, most recently with Kevin Bacon's Death
Sentence, and Jodi Foster's The Brave One, both from 2007. But,
now, in 2009, we see vigilantes once again performing their black art, not in
the movies but in a place few would expect, the international government bond
market.
Amazingly enough, many people seem to go through their daily lives with little
or any knowledge of what's going on that day in the international debt markets.
In 1987's Wall Street, young stockbroker Bud Fox gets hung up on after
he cold calls a number from the phone book offering to explain "the
opportunities emerging in the international debt market".
If Bud were making the pitch today, he might spice it up by talking about "the
opportunities emerging in the international debt market to watch the current
international financial crisis get a whole lot worse than it already is".
Benjamin Franklin said that "in this world nothing is more certain than death
and taxes". These days, with Treasury secretaries and Exchequer ministers
continuing the tradition followed by their fathers and grandfathers of having
their government always spend more than it takes in, nothing is more certain
than death, taxes and debt.
When governments want to spend more than they have, they borrow the difference.
In true, free-market style, this is commonly done with some sort of auction,
usually a sealed-bid auction. If a lot of people want to lend the government
money, the price they will have to pay gets bid up. That reduces the
compensation, the interest rate they will receive in exchange for agreeing to
delay the gratification they could have had from the money by spending it today
instead of lending it to the government.
For instance, an investor who pays $96 for a government security that pays back
$100 in a year is receiving an interest rate of 4.16%, (4 divided by 96) but if
there are so many more prospective lenders that the price rises to 98, that
rate is reduced to 2%, 2 divided by 98.
This is not just financial math for nerds, it is the core mechanism through
which the capitalist world's economic mandarins are now hoping to save the
global economy. Across the seven continents and now almost 200 nations, one
factor unites the human race, the fact with the private sector finance-centric
economic system that bestrode the world since the fall of the Berlin Wall now
lying in tatters, the private spending that the system previously gleefully
financed is evaporating. Governments are being called on to spend what the
private sector won't and/or can't, and if the governments don't have the money,
they're being called on to borrow it. That's all well and good - as long as the
funds are available to be borrowed.
In the 1960s, anti-Vietnam War activists wistfully wondered "what if they gave
a war, and nobody came?" Last Wednesday, we found out what would happen if
they, in this case Germany, gave a bond auction, and nobody came. It's not
pretty.
The German Ministry of Finance came into that morning hoping to sell about 6
billion euros (US$8 billion) of 10-year notes, called bunds, in the new year's
first government bond auction in the eurozone. They didn't even come close;
only 87% of the offering sold, the worst German bund auction since 2000, and
the second-worse in history.
Last summer, the financial crisis was signified by the unsold, gas-guzzling
sport utility vehicles that were gathering dust on car dealers' lots. Now, the
crisis is marked by the unsold bunds sitting in the ministry's vaults in
Berlin, and that's a whole lot more serious a problem than just a lot full of
cars.
What's the real problem here? Well, it's like the fire brigade arriving to
battle an inferno at a high rise and finding that its ladders don't work.
With the exception of the extremes of the political spectrum, like those who
think that the world economic collapse should only be addressed after the more
important problem of medical experimentation on pets is dealt with, a general
consensus has formed among economists and policymakers that far higher levels
of government spending will be necessary to get the economy moving again.
In the United States, the estimates for the fiscal stimulus package that,
starting next week, Barack Obama will try to drag out of the Congress continue
to spiral upward, and still economists such as economics Nobel Prize-winner
Paul Krugman continue to cry for more more more, as in this post from last week
on his blog at nytimes.com:
This is the most dangerous economic crisis
since the Great Depression, and it could all too easily turn into a prolonged
slump. But Mr Obama's prescription doesn't live up to his diagnosis. The
economic plan he's offering isn't as strong as his language about the economic
threat. In fact, it falls well short of what's needed. Bear in mind just how
big the US economy is. Given sufficient demand for its output, America would
produce more than $30 trillion worth of goods and services over the next two
years. But with both consumer spending and business investment plunging, a huge
gap is opening up between what the American economy can produce and what it's
able to sell. And the Obama plan is nowhere near big enough to fill this
"output gap".
Earlier this week, the Congressional Budget Office came out with its latest
analysis of the budget and economic outlook. The budget office says that in the
absence of a stimulus plan, the unemployment rate would rise above 9% by early
2010, and stay high for years to come. Grim as this projection is, by the way,
it's actually optimistic compared with some independent forecasts. Mr Obama
himself has been saying that without a stimulus plan, the unemployment rate
could go into double digits. Even the CBO says, however, that "economic output
over the next two years will average 6.8% below its potential." This translates
into $2.1 trillion of lost production. "Our economy could fall $1 trillion
short of its full capacity," declared Mr Obama on Thursday. Well, he was
actually understating things. To close a gap of more than $2 trillion -
possibly a lot more, if the budget office projections turn out to be too
optimistic - Mr. Obama offers a $775 billion plan. And that's not enough.
Krugman's entire line of thought is, of course, just a lifelong, big-government
liberal running well true to form. The desperate hope that government spending
will be the world economies' deus ex machina is also spreading into some
surprising places, as evidenced by this commentary from the HIS/Global Insight
forecasting consultancy in response to Friday's ghastly US non-farm payroll
numbers:
IHS Global Insight expects the jobs hemorrhage to continue
through much of 2009. During the first few months, the magnitude of the job
losses will be at least as large as the November and December drops. However,
if a large fiscal stimulus package can be enacted quickly, then the pace of job
losses in the second half of the year can be slowed.
Of course,
the desperate hope for salvation from fiscal stimulus is but the flip side of
the coin of the exhaustion of the monetary policy option. US short-term rates
are at zero, Bank of England rates, now at their lowest since 1695 (that is, in
more than three centuries), are well on their way to the that level, and even
German anti-inflation zealots at the European Central Bank are being dragged
kicking and screaming into the new, barely existent interest rate regime;
they've cut 200 basis points, to 2.5%, just since October, and more cuts are on
the way.
Still, 17 months after the US Federal Reserve commenced the current world
rate-cutting regime, there is every indication that these are just the opening
days of the world's economic travails. Thus, all over the world, government
spending and stimulus plans are the rage; even German Chancellor Angela Merkel,
who previously huffed and puffed her Prussian pride in the German economy's
supposed lack of need of fiscal stimulus, is now proposing a 50 billion euro
(US$66 billion) fiscal boost. That's all
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