This post is taken from Barry Ritholtz’s Big Picture blogsite.  Ritholtz is a no nonsense investment advisor who pulls no punches when he thinks someone is playing fast and loose with the facts, or is essentially getting away with financial murder.  The post is about Greece and its kleptocrats, but read it through and substitute the United States for Greece and the Federal Reserve for the European Central Bank (ECB).

Here is a quote from a first-person report (via Zero Hedge) titled The Ugly Truth:

What angers me and most hard working Greeks is that the common workers are bearing the brunt of the austerity measures while the rich get off scot free. In Greece, if you want to strike it rich, become a specialist dealing with critical life and death decisions, tax collector or a high profile minister in the government. The scandalous stories that are coming out now of doctors, tax collectors, and ministers with millions of euros in their bank accounts and villas in Santorini and Mykonos are no surprise to regular hard-working Greeks.

This is a classic description of a kleptocracy: a financial and political Elite which skims and concentrates the wealth of the nation via corruption and embezzlement while being protected by the winking complicity of their fellow plunderers who hold civil and financial authority.

Here’s the real dynamic in Greece: The Kleptocracy–broadly, the political and financial Elites of the nation–saw a stupendous opportunity to embezzle hundreds of billions of euros from greed-blinded European banks at super-low rates of interest.

Being kleptocrats, they sniffed out the basics of the bezzle right away, and have been playing it ever since: we’re not paying any of these loans back, so go get the money from the European Central Bank (ECB) and the German taxpayers, or declare bankruptcy. Your choice.

The Greek kleptocrats knew all along that the German, Dutch, French and Finnish taxpayers were easy marks, just as they knew the European Union Power Elites would fall all over themselves to “save the euro” which was the centerpiece of their “one Europe” strategy of domination.

Only the Greek kleptocrats just beat them at their own game. The entire game plan of the “one Europe” Elites depends on nation-states actually complying with non-enforceable codes of conduct and on European banks making prudent loans.

Neither condition held: Greece’s Elites reckoned they could game the system and string along the Eurocrats, if not forever, then certainly long enough to engorge their Swiss accounts with euros skimmed from the banks, and they’ve played that hand to perfection.

Their performance is truly a thing of beauty, a masterful display of the Big Con. Yes, we will agree to austerity, but of course that is only for “the little people.” Then, we’ll renege on that, and demand another bailout. The Eurocrats will of course comply, lest their own plans for domination crumble along with the euro and the Eurozone edifice.

Meanwhile, the European banks were playing a similiar bezzle. They knew Greece had a history of defaulting on a regular basis, and any employee of the bank who lived in Greece could have briefed them on the kleptocracy’s hold on that nation. But the banks knew they could play the Eurocrats and the ECB, too, as the Eurozone had what amounted to a “German Put”: if any bad bank loans to Greece ever threatened the Eurozone, the German-led European Central Bank would make them whole.

Once again, the Eurocrats responded as expected, quickly massing hundreds of billions of euros to backstop the impaired loans to Greece and promising that bondholders would not suffer any losses.

The banks and the Greek kleptocracy are like the wife and the mistress of a prominent conservative socialite who absolutely needs to preserve a facade of conventional propriety. The kleptocrats, like the mistress, know they can blow down the entire charade, and so when they demand some baubles (bailouts) from their “Sugar Daddy” European Central Bank, the bank whimpers and complains but forks over the cash, lest the whole shaky facade collapses in a heap, along with the ECB’s dominance.

The wife, meanwhile, also gets her demand met. Now that the European banks have leveraged themselves up to pre-implosion Lehman Brothers levels of 30-to-1, they need a bailout, too, and so they tell the ECB, don’t even think about saying “no” because massive bank insolvency would also shatter the Euroland’s thin veneer of permanence.

The euro system is already broken, but the ECB and its Eurocrats are desperate to maintain the facade. The game is untenable, however, because the Greek kleptocrats and the European banks have all the leverage and the ECB is the bleating mark trying to satisfy the dualing demands of its wife and mistress.

“But you promised.” Ah yes, Dearie, but I changed my mind.

It is almost laughable to see the Eurocrats desperately trying to get another “austerity deal” approved, even as everyone involved knows it’s as phony as passing off your mistress as your “private secretary.” The austerity plan will not actually be put in place, none of the line-in-the-sand fiscal targets will be met, and the Greek kleptocrats will be smirking as the frantic ECB marks scrounge up another bailout and another face-saving “austerity program.”

The wild card here is the oppressed Greek citizenry, who might just spoil the fun by overthrowing their corrupt Overlords. They could also spoil the game by simply refusing to play any more, as a General Strike of any length would quash the fantasy of rising taxes and all the rest of the absurd assumptions at the heart of the “austerity program.”

If the Eurocrats and the ECB really want to save the euro, then they should help the Greek citizenry evict their kleptocratic Elites. But that would take genuine courage and insight, and alas, the Eurocrats, like all bureaucrats seeking to protect their fiefdom at any cost, don’t really care about the oppressed Greeks. They just want to play for time, and hope that a miracle will occur. Even as their fat, sweaty fingers hold a jumble of worthless cards–not even a pair of deuces–they persist in a laughably transparent charade of holding four aces.

The game is over for the ECB, the Greek kleptocracy and the european banks. All that needs to happen now is for the players to reveal their miserable cards and fold. The losses will be stupendous, but they will only get more horrendous the longer the game is allowed to go on.

Beezer here.  The con in the United States is exactly the same.   Now, of course, in both the US and Greece the average citizen who had nothing to do with the problem is being forced to shoulder all the austerity responsibility. 

We’ve suspected all along that the Republicans would prefer a national sovereign default over raising the debt ceiling in a deal that includes raising revenue–either by straight out tax increases or by eliminating various subsidies and tax loopholes while maintaining existing tax tables.

Now it’s rumoured that Republicans will demand a balanced budget amendment as well before they’ll sign off on compromise.  The first point is that the Republicans aren’t compromising at all, so the word ‘compromise’ is inaccurate.  The accurate word is ‘extortion.’   And the people being extorted aren’t in the White House, it’s the people of the United States who will suffer when the economy staggers backwards into recession as a result of this madness.

The so-called balanced budget amendment is in reality an Unbalanced budget amendment.  This isn’t legislation aimed at balancing the budget over a business cycle where in good times surpluses are accumulated which can be used during recessions.  This is a balanced budget that treats the federal government budget just like everyone’s household budget on an annual basis.  The basic problem here is that the federal budget and its financing is the flip side of the private economy budget.   When the private economy goes into recession where family and business reduce consumption and investment, the federal budget is required to expand it’s budget in order for the economy’s budget to be in balance.    The private economy’s surge in savings (that’s what is going on when consumption and investment declines) must be countered in proportion by government spending.   Otherwise the nation’s books are out of balance.   In other words, the balanced budget amendment is, in reality, an unbalanced budget amendment.

The average voter may not understand the relationship between a government budget and the budgets of the private economy, but it’s astonishing that those who are in Congress don’t understand, Republican or Democrat.  If they do understand this vital relationship then the unbalanced budget amendment is astonishingly cynical and manipulative. 

The rascals will be thrown out, of course, in 2012.  But long before that remedy will be available to the citizens of the country, tremendous damage will be done to the economy and the family and business budgets these cranks profess they want to protect.  US businesses better get on their collective phones and pull these attack dogs back in, and soon.

Raise cash.

If the Republican Party insists on default by not raising the debt ceiling then President Obama and Secretary of the Treasury Tim Geithner should simply issue Treasuries anyway while Federal Reserve Chairman Ben Bernanke continues paying the bills.

How is this possible?  It’s in the 14th Amendment, section 4.  From Wikipedia:

Section 4 confirmed the legitimacy of all United States public debt legislated by the Congress. It also confirmed that neither the United States nor any state would pay for the loss of slaves or debts that had been incurred by the Confederacy. For example, several English and French banks had lent money to the South during the war.^[47] In Perry v. United States (1935), the Supreme Court ruled that voiding a United States government bond “went beyond the congressional power” on account of Section 4

Berkely economic professor Bradford DeLong addresses the issue with more detail:

The black-letter law:

§3101. Public Debt Limit:

(a) In this section, the current redemption value of an obligation issued on a discount basis and redeemable before maturity at the option of its holder is deemed to be the face amount of the obligation.

(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than $12,394,000,000,000, outstanding at one time, subject to changes periodically made in that amount as provided by law through the congressional budget process described in Rule XLIX [1] of the Rules of the House of Representatives or otherwise.

(c) For purposes of this section, the face amount, for any month, of any obligation issued on a discount basis that is not redeemable before maturity at the option of the holder of the obligation is an amount equal to the sum of—

(1) the original issue price of the obligation, plus

(2) the portion of the discount on the obligation attributable to periods before the beginning of such month (as determined under the principles of section 1272(a) of the Internal Revenue Code of 1986 without regard to any exceptions contained in paragraph (2) of such section).

§3102. Bonds:

With the approval of the President, the Secretary of the Treasury may borrow on the credit of the United States Government amounts necessary for expenditures authorized by law and may issue bonds of the Government for the amounts borrowed and may buy, redeem, and make refunds under section 3111 of this title. The Secretary may issue bonds authorized by this section to the public and to Government accounts at any annual interest rate and prescribe conditions under section 3121 of this title…

The Treasury Secretary’s argument would be that the debt in excess of limit issued is required in order for him to faithfully execute the appropriations bills, and that the 14th Amendment makes the debt in excess of limit full faith and credit obligations of the U.S. government in spite of the limit in §3101(b). The excess bonds are not authorized by §3101 and §3102. But they are authorized by the 14th Amendment.

Beezer here.  In a press conference today President Obama made a point of saying that most of the spending has already been appropriated by Congress, and much of it already spent.  Was he thinking of the 14th amendment here?

Wow.  Here’s a speech for Obama.

Writing in the New York Times, senior advisor to both Presidents Ronald Reagan and George H.W. Bush,  Bruce Bartlett produces an easy to understand essay explaining who pays no or little taxes.   Bartlett also quickly reprises the origin of earned income tax credits and other tax breaks for the outright poor or poorly paid workers who pay little or no taxes, which is instructive.

That said Bartlett also details how many folks with high incomes fail to pay taxes too.  

Surprisingly, a not insignificant number of those who are clearly well off are also among the “lucky duckies.” There are 78,000 tax filers with incomes of $211,000 to $533,000 who will pay no federal income taxes this year. Even more amazingly, there are 24,000 households with incomes of $533,000 to $2.2 million with zero income tax liability, and 3,000 tax filers with incomes above $2.2 million with the same federal income tax liability as most of those with incomes barely above the poverty level…..

Perhaps the right and left can at least agree that it is unseemly for those in the top 1 percent of income distribution, with incomes at least 10 times the median income, to pay no federal income taxes. It’s not socialism to ask them to pay something.

Beezer here.  Middle class folks who earn wages have fewer techniques to avoid income taxes, but then again they are the largest group numerically and critically important in allowing the government to pay its bills.  The wealthy get a larger percentage of income from capital gains, which is taxed at 15% compared to the top rate of 35.9% on income over $250,000 and they can afford tax exempt municipal bonds as well.  Bartlett also asserts that illegal tax avoidance is a big problem.   The article includes the following chart.

We’ve maintained all along that reasonable progressive tax tables are of secondary importance when it comes to building robust economies.  By inference that means cutting taxes is of secondary importance too.  The important difference between the two is that progressive taxes help pay the bills, even build surpluses when the economy is good, but tax cuts instead aggravate deficits and debt when times aren’t so good. 

There’s another important aspect that arises when thinking along these lines and it deals with savings.  To quote from economics professor Nick Rowe, co-author of the blog Worthwhile Canadian Initiative in a recent post entitled The Macroeconomics of Doing Nothing:

Suppose there is an increase in desired saving, and the monetary and fiscal authorities do nothing. What happens?

That’s the most important practical question in macroeconomics over the last few years. And it’s also a really stupid question. And understanding why it’s a really stupid question, and changing the way that question is asked — not just in academia, but in the real world — is the most important practical task of macroeconomic theory today.

Let’s start with “saving”. In macroeconomics, “saving” is defined as “not spending part of your disposable income on newly-produced consumption goods and services”. It’s a purely negative definition. And it invites the supplementary question: “OK, so if you are not spending it on newly-produced consumption goods and services, what are you doing with your disposable income instead?”.

If everyone is saving, then overall demand for goods and services declines.  If the decline is large enough then you get a recession, or worse.   Rowe asks the question ‘what are you doing with your disposable income instead?’  There aren’t really a lot of options here other than making investments in stocks, bonds or direct purchase of productive capital like a new machine or a new employee.   In a recessionary level drop in demand for goods and services the impulse to make direct investments declines for obvious reasons, so that pretty much leaves stocks and bonds–or a new home if you’re under the impression a new home is an investment.

Rowe assumes, or at least appears to assume, that ‘savings’ includes ‘disposable income’ but the definition of savings is ‘not spending’ which is not exactly the same thing as having disposable income.  In a severe recession a lot of people will ‘not spend’ as much as before but will have exactly zero ‘disposable income.’    This doesn’t require them to have any debt either, but in the real world recessions tend to come as a surprise and in the United States credit has been suffused as an everyday means of consumption, of day to day living, so there was a lot of private debt in the economy when this last recession arrived.

Regressive, instead of progressive, tax tables are a major part of this mess. This tremendously aggravated the depth and width of the recession by increasing income inequality leading into the financial house of cards collapse.

Reduced consumption means only reduced consumption for too many Americans. There is no disposable income resulting other than the fictional identity cited by Rowe.

The wealthy now find themselves with only two stark choices: Either spend all that disposable income (God knows they’re trying, they account for 50% of discretionary spending already); or face default on their bond portfolios chock full of leverage risk.

The Republicans are setting America up for the latter eventuality and most of them don’t even know it. Politically they are signing their death warrant too, and they don’t know that either. Whoever said the rich are smart obviously was rich–and a moron.