Big Mac Index

Check it out folks! The Big Mac index is out. I'm sure BK are none to happy about it. Maybe Wall Street can name something after BK - Have it Your Way Index of Financial Fraud and Bailouts. Starbucks tried to float an index of their own some years back, but Ronald beat them hands down. The Starbucks Virgin is no match for Rumbling Ronald. Even the Colonel and Long John are mum about it.

http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=12998224&source=features_box4

A multi-country survey done a few years ago listed recognition of the golden arches even ahead of the cross (of Christ). Go figure!

MEASURING THE UNFUNDED OBLIGATIONS OF EUROPEAN COUNTRIES

Europe is undergoing two major transitions. On the demographic front, many European countries are undergoing rapid population aging as their Baby Boom generations enter retirement, senior citizens live longer and fertility rates remain well below the population replacement level.

On the economic front, 15 European countries have adopted the euro as a common currency, eliminating the ability to use monetary policy to achieve country-specific economic goals. Both transitions will place tremendous, conflicting pressures on the domestic national budgets of European countries.

As a result, all European countries have large unfunded liabilities, the difference between the projected cost of continuing current government programs and net expected tax revenues. In general:

• The average EU country would need to have more than four times (434 percent) its current annual gross domestic product (GDP) in the bank today, earning interest at the government's borrowing rate, in order to fund current policies indefinitely.
• At the low end, Spain would need to have almost two and one-half times (244.3 percent) its annual GDP invested.
• At the high end, Poland would need to have 15 times its GDP invested in real assets, forever!

No EU government has made the necessary investment. As an alternative, the next-best option is for these countries immediately to gradually but significantly increase saving and investment. In particular, the average EU country could fund its projected budget shortfall through the middle of this century if it put aside 8.3 percent of its GDP each and every year. Despite this adjustment, a budget shortfall is likely to emerge after 2050, requiring additional fiscal reforms.
What will happen if EU countries do not set aside these funds? Unless they reform their health and social welfare programs, they will have to meet these unfunded obligations by increasing tax burdens as the larger benefit obligations come due.

Spending already averages 40 percent of GDP today:

• By 2020, the average EU country will need to raise the tax rate to 55 percent of national income to pay promised benefits.
• By 2035, a tax rate of 57 percent will be required.
• By 2050, the average EU country will need more than 60 percent of its GDP to fulfill its obligations.

Looks like the brightest and best minds in Europe will have to think fast on what remedial measures should be in place, least the whole continent breaks into uncontrollable riots.

WHAT WOULD KEYNES DO?

Every day that goes by makes clearer the parallels between the current financial crisis and the one that led to the Great Depression. Then, as now, the core problem was one of deflation, or falling prices. But fixing it will require more than just low interest rates. This was the key insight of British economist John Maynard Keynes, whose theories finally explained how to end the Great Depression.

What Keynes figured out is that when conditions such as these exist, the federal government must step in to raise spending in the economy and thereby increase velocity; this means running a budget deficit, but that is only part of the solution. Spending just to buy financial assets does very little good.

Keynes argued that the only thing that will really work is if the federal government uses its resources to purchase goods and services; it must buy "stuff" -- concrete, computers, paper, glass, steel -- anything as long as it is tangible; in other words, the government must spend the way households do, by buying things.

It must also employ labor, because much of what people spend money on today is in the form of services; this doesn't necessarily mean putting workers on the federal payroll, it just means that, to the extent that the government purchases services, this will also help raise spending in the economy.

Once the federal government increases its purchases of goods and services, it preempts resources that private businesses would otherwise use in production. As they compete with each other for those resources, their prices will rise and interest rates will rise. As prices and interest rates rise, the liquidity trap disappears and money begins circulating more rapidly (i.e., velocity increases). This is what ends an economic crisis.

Source: Bruce Bartlett, "What Would Keynes Do? The government should spend on stuff, not on bad assets," Forbes, December 5, 2008.

For text:
http://www.forbes.com/2008/12/04/depression-deflation-velocity-oped-cx_bb_1205bartlett.html