In his usual colorful style, CNBC commentator Rick Santelli joins Jim on the Financial Sense Newshour to clear up the confusion on a number of hot-button issues.
First, he explains why austerity—without applying all the necessary ingredients, like reform—hasn't worked in Europe or elsewhere:
Austerity right now is maybe the nastiest word to utter in public ever. I am convinced that if you go into Europe now and say “I like austerity”, they will lock you up and throw away the key. But the reasons they don’t like it are just not correct. Austerity has been deemed a negative solution to getting debt and spending in economies under control, because what it is now equated to, as you somewhat pointed out, is raising taxes and cutting spending. But what actually happens is taxes are raised and there are very little spending cuts; but the magic ingredient of why austerity works is because what you should be doing in a country, like what the IMF has suggested, is you should be lowering taxes when you can—certainly not raising them—you should try to cut spending, but do it in a way that is commensurate with major reforms. Without all of those present it isn’t the same animal. If I forget to put eggs or sugar or baking powder in my cookies—just one ingredient!—you don’t have a cookie anymore, you have really rotten tasting raw dough.
On why junk debt from troubled European nations is in such high demand, Rick boils it down to this:
If you have a bunch of rubber ducks and some of them are very hideous looking and some of them are very beautiful, if you put them in the bath tub and you fill it with water, they all float. That pretty much describes any financial asset worldwide as the water in the bathtub, which of course is the metaphor for central bank liquidity raising all levels of investment, whether it’s the southern European securities like Italy, Portugal, or Greece.
On how flooding the world with money is part of the design by central banks to push investors into riskier assets, like European debt, Rick explains:
When you talked about how Italy’s yields have almost been cut in half in a short period of time, the Europeans didn’t cure what ails them—they’re still potentially looking at recession and negative growth. What they did do is they found a way to put a band-aid on funding issues. But just because there’s funding issues and the cost to fund countries like Italy or Portugal or Spain have dropped doesn’t mean that their unemployment is going to drop any time soon—in Spain, for example, it’s about 26%; for the EU as a group it recently posted a record high of 12.2% unemployment. So what you have going on is very predictable and the central banks have designed it. This is the design: they call things like stocks and high yield bonds riskier assets, and now if you watch CNBC, many times we’ll say, “Well, today is a risk on day,” meaning all that capital central bankers have created is being put to work in high yield junk bonds, into equities, the German DAX—even though their economy is really slowing down and their stock market is at record highs as well. So, once again, all the rubber duckies—the pretty ones and the not so pretty ones—are moving higher.
In the rest of this interview airing Friday, Jim and Rick discuss the number of hours required by businesses and households to comply with new regulations coming on board, whether with Dodd-Frank or Obamacare, along with various tax measures that will continue to stifle economic growth moving forward.
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