We have all been reading about the economic collapse in Europe. The government bond yields for Spain are rising and soon Spain will follow Greece into a sort of bankruptcy. So what is behind this collapse? I read an editorial that “explained” the situation and now I am really lost.
It seeems that Spain was not guilty of profligate spending and the economic problems are not caused by a wasteful government. Rather, it was a housing bubble resulting in large mortgages on properties that since their purchase, lost much of their value. Then, it seems, German banks were backing the Spanish banks in this mortgage debacle so now the Spanish banks are upside down on their debts to the German banks.
Ok, I see where there is a problem with the banks, but how does that affect the bond rates for the government? Somehow, the financial world says that a country with banks in financial danger is also in danger of financial trouble so the response of the moneylenders is to raise the interest rates on the bonds issued by the government. This means the government has to use more of its income to pay interest and has less left for services.
The solution to this problem is an austerity program. Cut the services that the government provides to the taxpayers and do not reduce taxes. Use the money saved by reducing services to pay the increased interest to banks. But, now that there is less money spent in the country, there are jobs lost, tax income goes down, interest rates go up again and more severe austerity is needed.
This sounds like a program that is guaranteed to bankrupt every government while the moneylenders grow richer. Am I cynical? Am I stupid? Or, is the world economy being sacrificed for the sake of the astonishing greed of a few people? I think I know the answer, but then, I must be stupid.