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BBC News on Switzerland’s unorthodox success

The BBC did a feature story on the “Eurosceptic Swiss” and why they’re well-positioned in the Euro zone as compared to their neighbor states.  They make a few good points before glossing over the most important one and continuing onto a fulsome, yet fully useless, discussion of the trade balance.  So why is Switzerland doing well?

  • A VAT rate roughly half (7.6%) of the EU minimum rate (15%), to say nothing of actual rates (France 19.6%, Germany 19%, Italy 20%, Belgium 21%, Sweden 25%).
  • Strong national currency, especially as compared to the Euro, which has been used as a tool to socialize the losses of profligate nations.
  • High wages, and low mortgage rates, according to the BBC’s obligatory man-on-the-street interview.

Most importantly, however, and disappointingly not elaborated upon, is this little tidbit:

What’s more, long-standing laws in Switzerland that prevent both the federal government and the cantons from running up big debts mean that, unlike in many of Switzerland’s neighbours, there are no huge public deficits to cope with and therefore no big austerity measures.

Note that I don’t think that Switzerland is a paragon of debt-free efficiency.  Far from it.  If you want an example of a country that treats debt as it should be treated, look first to a place like Chile.  Then again, the idea of structural limitations on debt is a very good one in theory, and I believe it could be made to work in practice.  The perils of Greece, and soon of the rest of the PIIGS (and eventually of the debt-loaded economic powerhouses who are currently heavily dependent on the printing press) are a stark contrast. 

What happens is that countries get caught in a vicious cycle.  First, when times are good, spending gets increased as though times will always be good.  When the economy goes south and tax receipts dry up at the same time transfer payment demands start to increase, budgets get squeezed and countries go into further debt.  The more debt piles up, the less investors are willing to buy it and the more it costs (interest-bearing state-issued debt will carry a higher coupon, increasing debt service costs to the governments that issue it).  The situation becomes intractable once countries realize that the more debt they have, the more debt they’ll need, and the harder it is to sell their debt. 

Once a country is caught up in this cycle, it uses the printing press to inflate away its sins (if it can, unlike Greece), all at the expense of its citizens’ savings accounts and financial wellbeing.  Alternatively, if the country is lucky enough to be able to hop onto the IMF gravy train, it can take bailouts to cover up its sins, all at the expense of the unassuming German and American taxpayers.  If it is unable to do either of these things, it defaults.  Take a look at this Forbes graphic, and try to tell me it can’t happen here:

This, then, is an opportune time to remind my dear readers of the mounting debt of the United States.  When you include off-the-books debt from unfunded entitlement liabilities, it quickly reaches well beyond the $100 trillion range.  (By way of comparison, Chile’s national debt is less than one one-hundredth of a percent of this, at about $11.9 billion.)  According to Richard W. Fisher, the President of the Federal Reserve Bank of Dallas:

In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.

We need to ask ourselves as a country whether we want to be Greece or Chile.  It’s possible to provide for the social welfare without running up massive debts, but we’ve chosen to implement impossibly optimistic systems, and then we’ve compounded the problems over the years with other impossibly optimistic entitlements such as the new health care “reform.” 

You might be comfortable now, but depending on your age, there could very easily be no money left by the time you’re eligible to get it.

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