Sunday, May 6, 2012

Will profits triumph over people?

Today voters in France and Greece go to the polls in the first elections since austerity measures were imposed. The situation in Greece is far more dire than in France. The unemployment rate in Greece is among the highest in Europe and the people are suffering from drastic austerity measures as part of an agreement the Greek government made to pay back international banks and investors. Unemployment rates for young people in France is bad (though not as bad as in Spain) and the economy is just grinding along.

The choice is clear for voters: people or profits. Drastic cuts in government spending and increases in taxes are choking the poor and middle classes. Those affected by the policies are those least able to absorb the sudden shock.

Banks and investors poured money into Europe over the last decade - lured by good interest rate spreads. Now for those of y'all not familiar with how interest rates work, here's a quick primer. Interest is the cost of borrowing money. The theory being that there are many things I can do with the money in my pocket and if I lend it to you instead of using it myself then I have lost the immediate use of that money. To compensate me for the things I can't do since I don't have the money in my pocket, you will make an additional payment, called interest. The amount of interest I charge you depends on how likely I think you are to pay me back on time. The more likely you are to pay me, the less I charge. The more I feel you might not be able to pay me back, the more I charge.

The other factor to consider is inflation. If the money I lend you today is likely to worth less when you pay me back, I will have to charge you more to make up for the lost value. On the other hand, if there is little inflation I will charge you less.

The difference between the interest rate and rate of inflation is called the spread. The higher the spread, the more profitable the loan should be.

Banks and investors bought Greek bonds because they looked at the expected spread and thought they could make a handsome profit - either because they anticipate inflation to be lower than predicted or because they thought the Greek government was promising to pay more in interest than the anticipated risk.

Well guess what. It turned out the Greek government wasn't promising enough of a risk premium and that banks and investors underestimated the chances of Greece not paying them back. That, my friends, is part of capitalism. If all investments were safe then the long term interest rate would equal the long term inflation rate. If that were the case then no one would lend money because there would be no profit to be made.

The imposition of austerity measures across Europe are the mechanism by which large banks and international investors can extort their profits from the European working class. These investors knew the risks of lending money and, instead of licking their wounds and looking for the next opportunity to exploit, they are using politicians in Germany and France to force those who can least afford it to boost their bottom lines.

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