Clowns are Better than Politicians

But Italians are still set for big disappointment...

START-UP political party led by a retired clown won 25% of the vote in Italy's recent elections. This must be applauded as a big upgrade in the caliber of Italy's political class. Clowns are merely clever buffoons. Politicians are dangerous psychopaths, writes Daily Reckoning Australia editor Dan Denning.

The clown in question, 64-year old Beppe Grillo, is performing the jester's role admirably. He refuses to form a government with either of the major political parties. And because he's a jester, he can say things to the ruling class that most people wouldn't dare utter.

For instance, Grillo says that if 'conditions do not change' Italy 'will want' to leave the Euro and take up the lira again. He points out that Italy must renegotiate its $2.5 trillion in debt, which it can never repay. He says that, 'Right now we are being crushed not by the Euro, but by our debt.'

Italy cannot devalue the Euro to make its debts more bearable. The Germans control the value of the Euro. The Italians do not. Even a clown knows you cannot beat the Germans at a game like this. And even a clown knows that adding more debt to the problem will not solve it.

But the young voters who supported Grillo in a rush of exuberant adolescent defiance are now being overwhelmed by their idealistic desire to 'make things better'. Viola Tesi, a 24-year old member of Grillo's 'Five Star Movement' started a petition on-line asking him to save Italy's 'gentle revolution' and not waste her vote.

Oh dear.

Ms Tesi is still under the illusion that her vote matters. She's still under the illusion that in a modern democracy, the people have inalienable rights and that those who govern are accountable to those who vote. She's under the impression that the political system can be reformed from within by well-meaning students and the clowns they support.

She's going to be bitterly disappointed, but such is life. Italy's politicians are engaged in a giant game of pretend, just like politicians in America and here in Australia. They pretend that the debts incurred are payable and that more government is the key to more economic growth. They either pretend this, or genuinely believe it, which is even worse.

It's not an Italian problem. It's a misunderstanding of wealth problem. For instance, here in Australia Treasurer Wayne Swan has assured us all that the economy will be just fine because there is $187 billion in capacity expanding investment in the pipeline for 2013. He says $105 billion of that spending is in the mining industry and $63 billion in 'other industries'.

This is presented as evidence that the mining boom isn't over, and even if it is, other industries will come along to support the economy in its time of need, and the government in its time of deficits. It is a nice tidy political and economic narrative. But it's unlikely to play out the way the Treasurer expects.

Investment booms – big increases in cap ex – are much closer to the end of the commodity cycle the beginning. You get a rush of investment by firms hoping to crank up production in order to take advantage of higher prices. You get marginal firms banking on higher commodity prices spending on projects that can only work when prices are high.

Commodity prices have already begun to fall. The cap ex in the pipeline doesn't indicate a longer boom. It indicates the end of the boom. The government has to tell it otherwise because it took advantage of booming commodity prices to raise the level of structural government spending. Now, with the revenues disappointing, the deficits are set to blow out even more.

A clown would absolutely love to comment on what happened to Australia's public finances during the commodity boom. The country spent most of the boom running larger deficits and adding to the public debt. And because of the way government spending works, the higher base for public spending will be permanent, even though the revenues from the commodity boom were cyclical.

The added trouble with all this new public debt in Australia is that it doesn't build anything productive. That's why you can be sure that between now and election in September there will be repeated calls for Australia to have a Chinese-style infrastructure boom, especially if it involves channeling money from the superannuation system into high-cost projects.

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