“The Limits of Government Lies - Wall Street Journal” |
| The Limits of Government Lies - Wall Street Journal Posted: 29 Nov 2010 05:33 AM PST These days people remember with astonishment how easily the Enron and WorldCom frauds deceived investors and how willing those investors were to accept massive share valuations on the basis of questionable business metrics like click-throughs or eyeballs or Ebitda. Never again? Investors ought to be feeling an uncomfortable sense of deja vu. Only this time, the realization that they've been working on the basis of questionable numbers isn't coming from the equity market, but rather when they consider official statistics. The most egregious case was Greece, which for years blatantly lied about the state of its finances until it no longer could. The restatement of its fiscal position in the autumn of 2009 triggered Europe's sovereign-debt crisis. But Greece isn't alone. Other European countries have also manipulated their data, used off-balance-sheet accounting and dodges structured by clever investment bankers to hide their true liabilities. Eurostat, which is meant to monitor and approve the quality of the numbers being published by member states, was no better an auditor than Arthur Andersen. Nor is this a particularly European problem. Private-sector economists are skeptical about nearly all the official data published by the Chinese government, from GDP numbers to inflation statistics. For instance, some economists figure the true consumer price rate in China is about 50% higher than the officially reported 4.4% (that is, well over 6%). Across most developed countries, as bad as most governments' officially-reported finances are, throw in unfunded liabilities and off-balance-sheet elements and the actual drain on the public purse for decades to come is downright shocking. Investors have long been happy to accept official data on the basis that other investors accept official data and therefore, in the Keynesian beauty contest that is the markets, a universal suspension of disbelief can be maintained for long stretches. It doesn't matter if you doubt the numbers. For professional investors, if everyone else believes in them, then you need to play as well. That, though, falls apart when investors lose confidence that other investors will continue to have faith in the official statistics. This seems to be happening in Europe. A lack of faith that they're being told the whole truth (like Greece, or Ireland, where the official worst-case projections for the banking sector just get worse and worse) means that investors are demanding a premium for holding government paper across the euro zone. This infection of doubt then makes the underlying economic situation worse by pushing up yields to levels where governments just can't cover liabilities. Sure, governments try to intervene, either with rescue plans or direct action. They can suspend stock exchanges and even put a floor on prices (as Pakistan did). They can buy each other's debt (as the ECB is doing), or force domestic banks to buy the stuff, or they can set up capital controls, exchange rate pegs, quotas and any number of bureaucratic hurdles to prevent a full market adjustment. Sometimes this works to stem a panic. But when the underlying state of the economy is rotten; when a country's banks are not functioning because they aren't solvent; when a country's population cannot fund its obligations; then no amount of manipulation of data or of markets will cure the ill. Ultimately, if a government or corporation is not solvent, it goes bust, whatever fictions it passes off to the wider public. The result of the deceit, however, is that investors will then demand a premium to invest. The resolution of the current European debt crisis will be default. But the consequence will be more expensive government debts in future, and therefore either smaller government or higher taxes or a combination of the two. The previous generation may have benefited from the smoke and mirrors. The next generation will pay for it. This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read our FAQ page at fivefilters.org/content-only/faq.php |
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