The Greeks will vote on Sunday. The election is probably going to install a far(ther) left political party that intends to renounce the austerity program that has been forced upon them by their richer European neighbors. That means the end of the Euro for Greece. Greece will then descend into utter chaos and likely political anarchy. If you were plotting a visit to the Acropolis this summer, it might be best to seek a refund before its too late.
So, Greece will be gone. Then what? Spain and Italy are already gone, but no one is yet willing to admit it. Yields on 10 year government debt in both Spain and Italy are rapidly moving to the 7 percent level. At debt levels of more than 120 percent of GDP (that's Spain's debt level, if you correct for last week's bailout), Spain and Italy are now past the point of no return. Their debt levels are not sustainable. It's over for Spain and Italy.
Meanwhile, check out Germany's situation. The impact of the bailout adds debt on Germany's plate of nearly 40% of their GDP. That puts Germany in a perilous situation. Even though Germany's economy is still puttering along, their debt is rapidly moving toward the unsustainable level and, in truth, is not far behind Spain and Italy. So, Germany is toast as well. Is it worth analyzing the situation in France, which is not really much different now than the situation in Spain or Italy?
The whole house of cards is coming down and Act one of our chaotic future begins next week in Greece. All of this has been predictable; all of this was completely avoidable. To repeat the most recurrent theme of this blog: the modern welfare state is not affordable. There is no set of taxes, bond sales, or anything else that can provide the majority of any country's citizenry free goods and services at the expense of an ever-dwindling number of productive citizens. It is not a question of left or right wing politics or absence of political leadership. It is simply a question of arithmetic.
The lesson to be learned is that if no one is responsible for their own education, health care retirement, housing or anything else, then there will, in time, not be anyone left to produce these goods and services. "Taxing the rich" is the last refuge of the demagogue. Once you hear this theme, you know the game is over.
It doesn't really matter whether Obama wins or loses the election in November. The US is on the same trajectory as Europe and the ultimate outcome will be the same as what is now unfolding in Europe. Until the US body politic is willing to unwind the welfare state, eliminate bureaucratic rigidities to the free market, and face the fact that accumulation of wealth by individuals is a crucial and indispensable component of economic growth, then there is no avoiding the predictable outcome of the collapse of the modern welfare state.