US Hints at Austerity, while Europe Rescues the PIIGS

On my Facebook, I posted "Line up the PIIGS". I think this is what the higher ups like Angela Merkel must be thinking. The IMF and ECB are giving bail outs to high debt countries - so far Greece and Ireland. Europe is a domino effect in the midst of an unfortunate crisis. What's important is to not lose focus on Europe's externalities.

The Irish bailout sent the Euro higher, only to fall back to record lows as investors anticipated more fallout. Spanish yields opened the day higher, and bond spreads widened across the Euro zone. There is much signal that more will come. I suspect Portugal to be the next country of focus, followed by Spain, then Italy. Europe is now struggling to pick up the pieces by implementing strict austerity measures. Just as the people of Greece lined the streets in protest, Irealand received its fair share of angry citizens, and so has Germany, bearing much of the financial brunt behind the packaged bailouts. There's also the concern that EU funds meant to stimulate the economy are being wasted, so there's the effect of moral hazard or just mismanagement on the government's part. The UK is also scaling back government spending. This is the consequence of years of failed policy, a comforting relationship based on government dependency, and the accumulation of debt to form the foundation of the free rider system. It's inevitable that those who remained comfortable for so long will be the first to lash out against pressure to tighten their belts.

The same is true for the United States. This morning, President Obama proposed his plan for freezing federal employee pay for two years, hoping to save the government about $28 billion over the next five years. Some argue that there should be salary cuts of government workers; but either way this is a warning of more to come. Oh, there will be more. Monetary policy is soon to be exhausted; there needs to be tough fiscal measures, despite public unrest.

The US Dollar will continue to climb as European troubles escalate, so the pressure is on for fiscal action. The government should scale back spending, but be clever with taxes.

'Dantes Floating Tax'

Taxes should be used like a monetary weapon to scale down or stimulate the economy. State governments should approach problems with a basket of tax tools: consumption, property, income, miscellaneous, and business. Decrease the burden while also adjusting taxes for an increase where there is high consumption, but little effect on overall consumer spending. Businesses and individual incomes should be the most incentivised, while miscellaneous taxes will discover strategic opportunities for investment through subsidies and tax breaks, but also new taxes on exposed sources of untapped revenue. We need to be smart about this; if an econometric model is needed, so be it. Every state should conduct its own indicator on budget balances through the form of an average tax rate being a function of the various forms of taxes issued. During times of economic distress, the average tax rate should be low. When the economy is roaring, the average tax rate should be high.

To the east, we have China. The Yuan is likely to appreciate more as China experiences domestic inflation. This will help Australia, as China's purchasing power increases; hence the steady rise of the Australian dollar these past two weeks. China's PMI this week will be an important indicator to watch.

Overall, Europe's troubles provides opportunity for America to get it together.