< HOME  Wednesday, April 19, 2006

Euros Can't Buy Freedom Any More Than Dollars

And I thought we were in bad shape. Turns out governments that finance their budgets in Euro are even worse off than US.
For all its success as a currency, the euro has yet to give European taxpayers the advantages in financing their governments that the dollar gives U.S. citizens.

Almost every country using the euro has joined in paying a total of $345 million to investment bankers since the start of last year to sell bonds, data compiled by Bloomberg show. The comparable price paid by the U.S. Treasury in selling $4.8 trillion in debt in the same period: zero.

The paradox of governments' getting charged by less creditworthy middlemen to sell their securities has left some of the most sophisticated investors in disbelief.

"You have strong demand" for European government bonds with the highest credit ratings and no risk of default, "so why pay someone else to sell it for you?"

* * *

So far, 10 of the 12 governments using the euro have chosen to hire such middlemen rather than going it alone in the market.

Government officials like Gerhard Schleif, Germany's head of debt management, argue that having taxpayers pay bankers' fees is worth the price because the bankers gauge investor demand and get the lowest borrowing costs.

* * *

Selling through banks helps find the right price for the debt, Richard said. "An auction is just a shot in the dark," he said.

That is nonsense, said William Kittredge, director of the nonprofit Center for the Study of Capital Markets and Democracy in Arlington, Virginia.

"The argument that these people need some kind of mechanism to identify opportunities in the market falls under its own weight," he said. "Do you honestly think these people don't survey the markets worldwide? It's the 21st century."
Lest you think that means we're in good shape . . .
The Senate just raised the national debt ceiling to $9 trillion, representing 70% of GDP. Interest expense is now the third-largest category of the federal budget, only exceeded by defense spending and domestic welfare expenditures. Imagine the impact as interest rates start climbing again.

* * *

[According to a CBO report (.pdf) issued last August,] rising government debt can sap national saving, slow private capital formation, lower economic growth, and in the extreme, produce a sustained economic contraction. Moreover, such a policy could increase the United States indebtedness to other nations. Implying that more of the economy’s output would have to be used to pay interest on the debt and less would be available for U.S. residents.
And it's completely unnecessary.
"If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also.

The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way.

It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."
--Thomas A. Edison (1847-1931)


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