Thursday, March 1, 2012

Just Say No To Corporate Greed: The Case Of Iceland

http://www.informationclearinghouse.info/article30662.htm




Just Say No To Corporate Greed: The Case Of Iceland

By Ellen Russell

February 28, 2012 "
Rabble" - - Capitalism is looking pretty mean these days. No amount of profit is enough, and no level of collateral damage to get that profit is unreasonable. And when capitalism on steroids runs amok, any extremes of public pain are justified to save the butts of those who made the mess in the first place. Corporations understand that they have a green light to punish people ruthlessly for even a modest improvement to their bottom line (ask Caterpillar workers if you want details). Whole nations may be bled dry to shield financial institutions from the consequences of their own bad behaviour. The Greek government is deliberately creating a national great depression to appease international financial interests.
Happily there are some instances of people saying no to this madness. Iceland is a great example of people who stood up and fought for civility.
Iceland used to have a sound but not too adventurous government-owned-and-operated banking system. It more or less did what it was supposed to do to serve local needs. An orgy of neo-liberalism in the 1990s culminated in the privatization of the banks in the late 1990s and early 2000s. The mavericks who took control of the newly privatized banks took corporate greed to extreme levels. They caught the worldwide disease of speculative euphoria, and made immense profits as the country's banks started doing some pretty crazy stuff.
Financial journalist and former investment banker Michael Lewis offered one financier's apt depiction of the hocus pocus that was going on in Icelandic banks: "'you have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets.'"
This lunacy was largely fuelled by borrowed money. Iceland's top three banks went on such a pathological borrowing spree that their assets were 10 times Iceland's GDP. It doesn't take a genius to realize that this loony behaviour will end badly. When the speculative bubble burst, all three of the country's major banks suddenly collapsed.
Since Icelandic banks had borrowed so heavily, there were a lot of angry creditors looking to get money back from the government of Iceland. Intense pressure was exerted to force Iceland to compensate anyone that lost money when Iceland's banks hit the wall -- regardless of whether those out-of-pocket were local depositors or international financial high-flyers who should have done their due diligence before getting involved with dodgy hijinks. Governments around the world were issuing blank cheques to pay for the sins of their bankers, and Iceland should be made to pay too.
But the people said no. Weekly assemblies outside parliament made it clear to politicians that the people were not going to be forced to pay for the craziness of the bankers. Politicians responsible for the crisis were given the boot. Out went the prestigious David Oddson, who as Prime Minister (and later as chair of the central bank) had championed the neo-liberal agenda. Geir Haarde, Prime Minster at the time of the crash, has been brought up on charges concerning his handling of the crisis. A left-green alliance elected Prime Minister Johanna Sigurdardottir, who is herself a trailblazer as an openly lesbian head of state.
Iceland's government faced intense pressure to compensate those financial interests hurt by the wreckage of Iceland's bank failures. The shoot-out at the OK Corral came over the misadventures of one defunct Icelandic bank that had expanded willy-nilly in Europe. When it collapsed, Britain and the Netherlands rushed to bail out its creditors in an attempt to buttress confidence in their own financial sector firms.
Now the British and Dutch governments demanded that Iceland reimburse them. Naturally Britain and the Netherlands figured they bore no responsibility for their lax oversight in allowing dodgy upstart Icelandic bankers to jeopardize British and Dutch financial stability.
The total bill was US$5.8 billion, but the sale of the failed bank's assets covers a big chunk of that bill. The estimated final cost to the people of Iceland to compensate these foreign governments would have been over $2 billion. That is a lot of money for a country with a population comparable to that of Windsor, Ontario. A deal was proposed that Iceland pay back this debt -- with interest -- until 2046.
OK, dear reader, are you sitting down? Because this just might knock your socks off: Iceland figured that this matter should be democratically decided. Those radical Icelanders actually demanded that they vote on the decision to compensate foreign governments.
The people decided not to pay up. In fact, they held two referendums and it was voted down both times. In the words of a spokesperson for the anti-bailout coalition, "It is totally insane that taxpayers foot the bill for failed private companies. It was odious. We had to say no."
Very ominous threats were made that Iceland would become an international pariah. The U.K. even used anti-terrorism legislation to freeze the Icelandic bank's assets in Britain. Litigation is still ongoing as Britain and the Netherlands seek ways to force Iceland to pay.
Of course, Iceland went through some tough times in the aftermath of the financial meltdown. Ordinary Icelanders suffered plenty because of the economic fallout from the recklessness of their banks. But Iceland is emerging from this mess in much better shape than it would have been forced into the equivalent of a country-wide debtor's prison. Even the IMF is holding up Iceland as an example of how to overcome deep economic dislocation without undoing the social fabric.
All of us owe a debt of gratitude to the people of Iceland. They took a stand and held their ground when all of the forces of international capital were allied against them. Whether it is at Caterpillar or in the streets of Athens, we all benefit when people say no to paying the price for corporate greed. Every time we just say no, we have a better shot at demanding sanity in the face of barbarism.
Economist Ellen Russell is a professor at Wilfrid Laurier University. Her column comes out every two months in rabble.ca.

Friday, December 9, 2011

EU now belongs to Goldman Sachs

 This is from uk.yahoo news. I always like this stuff from mainstream sources as I feel that, for doubters and waverers, it carries more weight than stuff from the more "alternative" sources.

See the original article by Ian Dunt at Yahoo! Newsblog

Italy is no longer a democracy. It is a frontier outpost in the gradual takeover of governments by the financial markets. When technocrat Mario Monti was installed and filled the government with unelected administrators, it was not just a defeat for democracy, it was a victory for the banks.

Monti is Goldman Sachs' man. He was lifted out of academia by Berlusconi in 1995 to work at the Europe Commission, first in internal markets and then on competition. The bank spotted him and made him international adviser.

Something similar happened in Ireland, where Peter Sutherland, attorney general in the 1980s and former EU competition commissioner, became non-executive chairman of Goldman Sachs International and a non-executive director of Royal Bank of Scotland, until, you know, it collapsed, and we had to share the pain — but not, it goes without saying, his salary.

Mario Draghi, who recently became president of the European Central Bank, is a former Goldman Sachs man, as is Antonio Borges, who recently stood down from the IMF for personal reasons.

The banking lobby could not win its war in Greece, where creditors — the big banks of Europe - were forced to lose 50% on bonds. This was an unprecedented defeat, although not one which will save the Greek people from brutal and self-defeating austerity for a generation.

The banks made sure they won their other battles. The big fear, that they could lose out from the situation in Spain and Italy, will not be realised. The most important aspect of Merkozy's eurozone deal this week is that it rules out creditors ever having to shoulder a portion of future bailouts in insolvent eurozone countries.

Even the use of current IMF practise - that experts should decide on a case-by-case basis whether bondholder losses are necessary - is being negotiated, with a push for it to be moved from the text of the treaty to its preamble, where it would have no legal weight.

The idea that creditors should not suffer a loss when their investment goes wrong is the reason we are inflicting unparalleled economic and social misery on Europe. The austerity measures, the rescue funds, even the European Financial Stability Facility, derive from this principle, the principle that whatever happens, we must not penalise the banks. Every national bailout is in fact a bailout of the banks. Add it to the bill.

By cementing the complete subservience of European political life to the market, the Markozy deal does an extraordinary disservice to our continent and our society. But it doesn't stop there. The deal also suggests automatic sanctions on countries that allow a budget deficit of over three per cent of GDP and inserts a rule into eurozone countries requiring a balanced budget. Unlike creditor amnesty, this is at least a commendable economic and political principle - but it directly overrides the principle of national sovereignty.

Nicolas Sarkozy has been offered joint press conferences with Angela Merkel, complete with a torrent of barely-conscionable photographs of them kissing. But these presentations are merely theatre. Everyone knows France is an afterthought. We are seeing the takeover of European national sovereignty by Germany, which will effectively wield a veto against individual states' budgets. The national angle is easy to overstate, however. Germany is merely the handmaiden of the financial markets, which got us into this place and now sit like vampires turning their own catastrophe to their advantage.

The markets reacted with sluggish enthusiasm to news of democracy's acquiesce. Spain's ten-year bonds were down 5.2% while Italy's fell to 6.3%. With commendably comic timing, however, Standards and Poor intervened to put major European economies on watch. Only the best will do for the markets, you see. They won't be pacified until they have total immunity set in stone.

It won't fix the problem in the short-term, because it will kill demand and force European economies into a death-spiral. It won't fix the problem in the long term, because fiscal fetishism, while bafflingly politically popular, does little against what is, at heart, a balance of payments crisis made particularly acute by currency union. Actually, fiscal austerity makes us particularly vulnerable to cyclical downturns.

And what has David Cameron's response been to this dramatic turn of events? He has shown even more contempt for democracy than his counterparts on the continent. The left — a political designation Cameron spoke of as if it was contemptible during last week's PMQs - wants the public to be protected from the tyranny of the markets. The right wants some recognition of national sovereignty in Europe, some guarantee that their worst dreams of an ever-expanded, monstrous technocratic super-state are not being realised.

Both left and right are correct. There is plenty of scope for cooperation in preventing this disaster from unfolding. The idea that investors should be protected from the ramifications of their gamble is not a capitalist one — quite the opposite. The idea that the public should swallow losses and be denied profits is not capitalist either. Similarly, there is nothing right-wing about believing countries are entitled to make their own laws and their own budgets, without the arrogant intervention of other, more powerful, states.

Cameron has shown himself deaf to both concerns. He has ignored eurosceptic pleas to extract Britain from the situation and his only demand in exchange is that the City of London be protected from further regulation.

Paris and Berlin's desire for a financial transaction tax is self-interested, but that does not make it wrong. It is at least one small commendable action against the tyranny of the financial markets.

Opposing it is not, as Cameron says, in the national interest. The national interest would see Britain take action against a financial sector which has ruined its economy and now demands public austerity for its own mistakes.

The modest proposals for a financial transaction tax constitute one small ray of hope in utter darkness. It is one the British prime minister is intent on defeating. Not only will he support the dismantling of European democracy, he will do so on the basis that he can promote the market's dominance even further than the puppets of Europe would tolerate.

Thursday, December 1, 2011

Stuart Jane Bramhall -The Solution to the $100 Trillion Global Debt

I tip my hat to Stuart Bramhall!  I rave -on post after post about the debt crisis and the criminal banking system and here she wraps it up in one succinct post. Go to her original post and add her blog to your reading list - and don't forget to peruse her archive material too.
  
The Solution to the $100 Trillion Global Debt- by S.J.Bramhall

There seems to be broad agreement among both classical corporate economists and latter day non-corporate ones that the $100 trillion global debt is suffocating the world economy. The large amount of debt banks carry on their books severely restricts their ability to issue loans for the business creation and expansion needed to create jobs. At the same time consumers, who are losing jobs or taking wage cuts aren’t spending money. Because of massive drop in consumer demand, corporations are finding other uses for their record profits (CEO bonuses, for example), rather than reinvesting them in new factories or retail outlets.
Where the two economic schools part ways concerns the solution. Externalizing costs (getting someone else to pay for your messes) is a basic pillar of classical, corporate economics. In the case of the global economic system, the investment bankers who crashed the system through greed, fraud and speculation want the middle class, youth and the poor to pay for their recklessness. Although mainstream economists like Ben Bernanke agree that debt reduction and austerity cuts aren’t enough, they refuse to officially endorse “monetization” as part of the solution. This is why he calls it something else (QE1, QE2 and QE3 – which are short for quantitative easing) and fudges on the true amount of monetization that is occurring.
Ending Debt-Based Money, Perpetual Growth and Ecosystem Destruction
On the other side, most latter day, non-corporate economists (for example Ellen Brown, Steve Keen, Deirdre Kent, Thomas Greco, among others) call for an end to our debt-based monetary system and perpetual economic growth, along with a “downsizing” of the economies of the industrialized north in line with dwindling resources and rapid ecosystem destruction. They make a strong case that the citizens of western society are living beyond their means and must drastically reduce consumption if we are to preserve the human species. The problem is figuring out how to get there without creating an intolerable level of human suffering for disadvantaged groups who already struggle to meet basic survival needs. It’s much easier for mainstream corporate economists, who have already decided to reduce the global debt burden on the backs of the middle class and young people, dooming an entire generation to becoming a marginalized underclass. Instead of doing any belt tightening themselves, the richest 1% are using the economic crisis as an excuse to further increase their personal wealth.
Political Reform Must Accompany Economic Reform

Most latter day economists are committed to the principle that belt tightening is only tolerable if it’s shared equally. Here is where a discussion of solutions becomes really hypothetical. There is no political commitment at present for the ruling elite and special interests to share in the belt tightening. Thus true economic reform is highly unlikely so long as corporations continue to dominate and control western democracy. It’s possible that the economic and ecological crises that confront humankind can’t be fixed without dismantling capitalism itself, a view shared by many in the Occupy movement. Others believe that channels can be created (through constitutional conventions or similar national gatherings) to establish direct participatory democracy and make corporations accountable to local, state and national authorities. It’s only in this context that economic and monetary reform has any chance of being meaningful and effective.
Latter Day Economic Solutions to the Debt Crisis

Where there is political will to share the costs equally for fixing the financial crisis, there are a handful of straightforward policies which, if enacted together, could restore global economic stability within months. Monetization (the good kind, where new government money is spent directly into the economy) is a major one, but monetization alone is unlikely to be enough. As the Germans proved after World War I and the Japanese after their 1989 economic collapse, monetization on its own only makes things worse – either by creating hyperinflation or increasing debt and deflation. To work, monetization must be enacted simultaneously with other basic debt reduction measures:
  1. The world’s largest economy (the US) must end their deficit spending, not via austerity cuts, which will only worsen deflation, but by ending their deficit-financed wars in the Middle East, by repealing Bush’s tax cuts on upper income earners and by ending corporate tax avoidance.
  2. Western governments must require global investment banks to forgive the sovereign debt they have incurred by assuming their toxic assets (their valueless subprime mortgages). This extent of forgiveness (referred to as a “hair cut”) must depend on the amount of toxic debt these banks still carry on their books and the extent to which they have insured themselves via Credit Default Swaps. Banks that become insolvent in this process need to be nationalized, rather than bailed out, to protect depositors and pension funds with major bank shareholdings.
  3. World governments must agree to end the private debt-based monetary system and replace the Federal Reserve and other central banks with national government banks charged with creating and controlling the money supply.
  4. These national banks must be allowed to create and spend new money directly into the economy to create jobs and repair infrastructure, make good on depositors savings and repay unforgiven debt. To avoid incurring new debt (i.e. borrowing from future generations), it may be necessary to temporarily increase taxes (above 39% in the US) for millionaires and billionaires.

Tuesday, November 29, 2011

What about the "New Economics Party?"

I've seen a video courtesy of  Robin Westenra's blog:
   
 
   
-and seen their website
   
Still I can't get my head round their website, seems like a dogs dinner of vaguely populist ideas mostly adopted because of their acceptability to the disposessed without actually requiring them to get off their arses and become responsible for their own sustenance, i.e. we just adjust certain facets of the structure of the economy and all good things follow.
   
 The trouble is that any movement that is aiming to achieve prominence by collecting votes is doomed to populist policy. This party is clearly aimed at urban populations that don't own land, don't have access to land, dont want to work on the land but see land as a priviledge of the wealthy that can be taxed to provide an income stream to be given free of any commitment to do real productive work to those who have become unhealthily attached to their urban service sector "thinking rather than doing" lifestyle jobs that are in reality only possible because of the anachronism of a century of subsidy by cheap oil.
   
 These guys really need to understand the concept of distributism, which is a well thought-out concept of land use that is the only way that everyone is going to get fed in the post oil age. Unfortunately working the land is an abhorrent thought to the vast majority of those in Auckland or Wellington and that is where political power (and civil disorder danger) lies. For these populations, I'm afraid only the misery of an empty belly at some future time will be sufficient to cure them of their attachment to town life. See here my blog post on supply chain collapse for likely outcomes.
 
For a seriously plausible alternative economic strategy see Positive Money NZ.
 
Deirdre Kent of the New Economics Party replied:

There is nothing populist about our policies. We leave that to the Green Party to go for the middle ground and not campaign on the urgent issues of our time which are positively alarming. No one is going to argue that recommending a 4-6% decrease every year in our oil imports would appeal to anyone except those who know the reality and know we must face it.

If you think it is a "dog's dinner" by which you mean it doesn't fit any previous models (actually I meant it was a basketful of snippets from here-and-there) you are right. No other party wanting the whole world to have access to food, housing, water, health, education and social justice is currently recommending such a radical reversal of tax policy.

We say we need to tax unearned income not earned income. After all it was the banks in the early 20th century who demanded of our government that they impose income tax, we didn't have it in NZ up till then. GST is regressive and why should any government tax enterprise?

On the other hand, as Greens have pointed out for two decades, prices give the wrong signals because companies and individuals use water, land, oil, artificial fertilisers, pesticides and herbicides etc and society pays the price of clearning up the mess, (rivers, toxic sites and so on). The way to internalise costs is to charge an annual rent for the privilege of using that part of the commons you "own". Many industries today can only operate because their costs are externalised – an "I keep the income, someone else pays the costs" mind-set.

As Charles Eisenstein says in his book Sacred Economics "The price of a tank of fuel doesn't include the cost of the pollution it generates, nor the cost of the wars fought to secure it, nor the cost of oil spills."

Ours is a party that recognises that more people need to return to the land and to work the land. Just outside our major cities we watch as lifestylers commute all week and play on horses and ride-ons all weekend but don't use their valuable land for growing food. And meanwhile they watch their property value rise as community infrastructure round them is built by others while they gain unearned income. Here where I live I know a guy who bought his land on a river near a town which was growing. He bought it for $400,000 and it is now worth over a million while he has worked in Wellington and let the property decline and decline. And our council wants people to grow food on our good land! But without tax signals and rating on unimproved value they are relatively helpless. Ridiculous and unfair.

Our policies of imposing resource taxes rather than income tax and GST are designed to reward those who work to improve their properties. If they are not working the land they should sell it to someone who does.

Actually when an Australian NGO called Earthsharing Australia did some research on land values they found that the biggest concentration of land value was in the centre of the cities. A land value tax is the way to stop speculators sitting on valuable sites and waiting for them to appreciate. As the 2009 Tax Review stated a land tax will bring in income from overseas owners where before they didn't pay tax.

And our policy is that those who contribute back to the commons should be monetarily compensated. This includes farmers who remove land from production to provide ecological services like carbon sequestration, water and soil conservation or provide habitat for plants insects and fish.

With land value taxes and the removal of the incentive to speculate on land and resources the cycle of boom-bust is evened out. The price of land remains more even and doesn't rise exhorbitantly.

The Greens in their campaign seem to have one resource tax – the tax on the commercial use of water. This is a good start. Capital gains tax will never do it for land though.

 Kevthefarmer Replied:
  
I have to say, re-reading the website there is nothing in the NEP that I can disagree with apart from the Land Value Tax, which I find perverse and offensive in every way, and which provoked my snarky blogpost.
  
"But income is a poor predictor of someone’s ability to pay. Their wealth is a much better predictor, and much of their wealth is often tied up in property."
  
 Cursory examination shows this to be untrue. All farmers (and most people will be a farmer in the not-to-distant future) -are capital-wealthy and cash-poor.  You (or someone) use the phrase "tied up", which indicates lack of liquidity- which is exactly the case with land holding, whereas income is a liquid asset and is easily available for taxation purposes. This whole passage is an oxymoron. The perversity is that a person using the land for a productive purpose rather than speculation runs the risk of being driven off their land by the Valuation Officer. This happened to some fairly smallscale (few hundred acres) farmers in Golden Bay (Laurences turf so he should know) because the V.O.realised they had "million dollar views" of the mountains and sea!  Land Value Tax is popular with government book-keepers because you can"t export or hide the land. therefore it is easy to charge. That is its only "advantage".
  
Death duties and capital gains tax do work well for a wealth tax, given certain exemptions such as first dwelling house and land farmed in-hand. Community Land Trusts and the State could be exempted
Do you realise that land based industry only accounts for 5% of GDP in NZ, whereas service sector is 70% and manufacturing is 25%. how do you propose to extract a significant proportion of the more-or-less 40% of GDP that the state requires for its purposes from a sector that only accounts for 5% of GDP?

There is more- Let me join the discussion at your website!

Regards, Kev.

Predatory Banks Target NZ Farmers Again.

Well I just started to write a snarky bit of Agribiz-knocking invective but I thought I'd stop myself and take a bit of a different tack and bash the banks, which is really boring because that's what I do all the time. This article in Stuff.co.nz -Business Day entitled "Banks need to be choosier lenders"  gets the point completely backwards. The fact is that farmers need to be choosier borrowers, in fact, like the rest of us they need to not borrow but to pay down their debt as fast as possible- there will be no debt write-offs for those holding physical assets such as land -not even the however many of them that are sitting in parliament on the National government benches. Good point actually -can you be a sitting MP and a bankrupt at the same time? Perhaps we won't have to endure the full three years of this government after all.
   
The author of this article so wants to not take sides, be everyones friend. Why not tell us about the bullshit "audits" the banks offered farmers, totally slanted to encourage the taking of loans- I know about these things- I have a farming insider down in South Canterbury tells me, though anyone with a pulse ought to know intuitively that's what these sharks do for a living.
  
"The insinuation was that anyone over 50 is too old to be farming". More like too old to be intimidated / bamboozled into signing on the line eh?

Monday, November 21, 2011

Let's not pussyfoot around with the banks

21 November 2011

Let's not pussyfoot around with the banks

Andy Wimbush Tony Greenham of the New Economics Foundation
Head of Finance and Business
A closer examination of money creation shows the need for major banking reform.
Originally posted at London Loves Business.
There is a simple fact about the UK banking system that is both profound and mundane. It is also little known, and yet the source of much hyperbole. What is this simple fact?
Commercial banks create new money.
This statement often seems to have a strange effect on people, either sending them down to St Paul’s with a Guy Fawkes mask and a tent, or backing away from you in horror as if you had just blasphemed in front of the Pope.
I really don’t know why, because it is merely a description of how fractional reserve banking allows banks to expand “broad money”, or bank deposits, when they create new credit. This is really the whole point of fractional reserve banking. Indeed, the ability to create new money in this way to finance investment and growth in consumption was arguably a major factor behind the successful industrialisation of nations, the UK being first and foremost among them.
So if you are not happy with the statement “banks create money” I hope you will read our new book Where does money come from? which has been endorsed by Professors Charles Goodhart and David Miles, former and current members of the Bank of England Monetary Policy Committee respectively.
The real questions should be: “Is this a problem? And if so, is there any sensible alternative?”
I think it has become a problem. The proportion of the money supply created in this way has shifted considerably over the past decades to reach 97 per cent, while the Bank of England’s control over this process is in reality minimal, or at least ineffective.
The result is asset-price inflation and a highly unstable financial system. The system reinforces booms, leading inevitably to credit bubbles, and reinforces the subsequent bust, leading to a credit crunch in particular for SMEs.
Another nasty consequence is that the creation of new money is privatised, but its exchangeability is guaranteed by the state – that’s you, the taxpayer of course – leading to the calamitous moral hazard spoken of by Mervyn King, and the inevitability of publicly funded bail-outs of private losses.
So what can be done to improve matters?
One approach is to go the whole hog and properly privatise money – broadly speaking the approach of the Austrian school of economic thought represented by Hayek.
There would be no state backing of bank deposits or banks, who would compete on their creditworthiness and reputation to ensure that their bank deposits were accepted by other banks.
Theoretically this should get taxpayers off the hook and, one would hope, restore market discipline to bankers. However, it is not clear that it would stop the boom and bust cycle.
Everyone seems creditworthy in a boom.
And as the credit crunch demonstrated, everyone looks like an unacceptable risk in a banking crisis. In this event, would it be credible to imagine that the central bank could sit by and watch large swathes of banks close their doors imposing potentially huge losses on their customers?
Another approach is to properly nationalise the control of Sterling. Give the central bank not just control over interest rates, but closer control over the quantity of new credit created by banks and its sector allocation – a sort of Project Merlin with teeth. This should improve the Bank of England’s control over inflation and stability. Credit control, or sometimes less formal guidance, is a feature of many country’s monetary systems including the UK up to the 1960s.
A more radical variation is to remove credit creation powers from banks entirely. Banks would then offer two sorts of account.
First, a payment and safety deposit account (think paypal, but backed by the Bank of England).
Second, an investment account where funds are actually transferred to borrowers (think Zopa or stockbroker). This is sometimes referred to as “full-reserve banking”’.
Key to this would be an acceptance by customers that if the bank’s lending was poor, that they could actually lose money on their investment account. Radical perhaps, but surely the alignment of risk with reward is at the heart of a free market system, so why should we expect risk free returns on our savings if they are being lent to businesses or individuals who might never repay?
Finally, we could have a multi-currency world where Sterling is used alongside local currencies issued and controlled by local banking institutions. Local currencies increase the local money multiplier effect that can support jobs and business is less wealthy areas. National and international currencies would remain the payment medium of choice for national and international transactions.
Pie in the sky? Not really, because each of these four suggestions have more or less operated successfully around the world in the past, including in the UK. As we watch the continuing debacle of chronic financial crises unfold, isn’t it time to ask some more fundamental questions about our money system?

Tuesday, November 15, 2011

The World is Drowning in Debt, and Europe Laces on Concrete Boots

 Thanks to Robin Westenra at Seemorerocks for forwarding this one. 

Tuesday, 15 November 2011

The World is Drowning in Debt, and Europe Laces on Concrete Boots

by Charles Hugh Smith
14 November, 2011

Three metaphors describe Europe: drowning in debt, circular firing squad and trying to fool the money gods with an inept game of 3-card monte.

The world's major economies are drowning in debt--Europe, the U.S., Japan, China. We all know the U.S. has tried to save its drowning economy by bailing out the parasite which is dragging it to Davy Jones Locker--the banking/financial sector-- and by borrowing and squandering $6 trillion in new Federal debt and buying toxic debt with $2 trillion whisked into existance on the Federal Reserve's balance sheet.

It has failed, of course, and the economy is once again slipping beneath the waves while Ben Bernanke and the politico lackeys join in a Keynesian-monetary cargo-cult chant: Humba-humba, bunga-bunga. Their hubris doesn't allow them to confess their magic has failed, and rather than let their power be wrenched away, they will let the flailing U.S. economy drown.

Europe has managed to top this hubris-drenched cargo-cult policy--no mean feat. First, it has indebted itself to a breathtaking degree, on every level: sovereign, corporate and private:


Germany, the mighty engine which is supposed to pull the $16 trillion drowning European economy out of the water, is as indebted as the flailing U.S.

Second, the euro's handlers have already sunk staggering sums into hopelessly insolvent debtor nations, for example, Greece, which has 355 billion euros of outstanding sovereign debt and an economy with a GDP around 200 billion euros (though it's contracting so rapidly nobody can even guess the actual size). According to BusinessWeek, the E.U. (European Union), the ECB (European Central Bank) and the IMF (International Monetary Fund) own about $127 billion of this debt.

Since the ECB is not allowed to "print money," the amount of cash available to buy depreciating bonds is limited. The handlers now own over 35% of the official debt (recall that doesn't include corporate or private debt), which they grandly refuse to accept is now worth less than the purchase price. (The market price of Greek bonds has cratered by 42% just since July. Isn't hubris a wonderful foundation for policy?)

In other words, they have not just put on concrete boots, they've laced them up and tied a big knot. We cannot possibly drown, they proclaim; we are too big, too heavy, too powerful. We refuse to accept that all these trillions of euros in debt are now worth a pittance of their face value.

When you're drowning in debt, the only solution is to write off the debt and drain the pool. The problem is, of course, that all this impaired debt is somebody else's asset, and that somebody is either rich and powerful or politically powerful, for example, a union pension fund.

Third, the euro's handlers have set up a circular firing squad. Since the entire banking sector is insolvent, the handlers are demanding that banks raise capital. Since only the ECB is insane enough to put good money after bad, the banks cannot raise capital on the private market, so their only way to raise cash is to sell assets--such as rapidly depreciating sovereign-debt bonds.
This pushes the price of those bonds even lower, as supply (sellers) completely overwhelm demand from buyers (the unflinching ECB and its proxies).

This decline in bond prices further lowers the value of the banks' assets, which means they need to raise more capital, which means they have to sell even more bonds.

Voila, a circular firing squad, where the "bulletproof" ECB is left as the only buyer who will hold depreciating bonds longer than a few hours, and all the participants gain by selling bonds before they fall any further. This is the classic positive feedback loop, where selling lowers the value of remaining assets and that drives further selling.

As many have noted, soaking up all the Greek debt--a mere sliver of the eurozone's impaired debt-- would essentially wipe out the entire EFSF "stability" rescue fund.

The "solution" to the cargo-cult crowd is "obvious"--print, baby, print, and use that new paper to buy 3 trillion in mostly-worthless bonds. But that is just another circular firing squad, as Nobel prize winning economist Thomas Sargent noted: "There's a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11)

The 3 trillion euros comes of somebody's pocket, one way or the other; there is no free lunch.

Even worse, debt is the only engine of "growth" left in the developed world. This chart shows how America's "growth" since 1980 has been fueled by debt that expanded by 136% ($30 trillion) beyond actual economic growth. The same is also true of Europe, where Italy, for example, borrowed 1 trillion euros over the past decade or so in return for essentially zero growth.



This reveals the key dynamic of the past decade: the diminishing productivity of debt. What happens when an economy is so burdened by the friction of inefficiency and indebtedness that borrowing a trillion euros just keeps the economy barely above water? The next trillion won't even keep "growth" at zero, and the economy sinks beneath the waves.



The world has reached the point of debt saturation. Creating more debt no longer generates "free lunch" growth, even in China, though the central bank in China is still playing as if shifting debt off-balance sheet into a "shadow" system will fool the money gods. It won't.

Everybody in Europe is playing the same sort of games, hoping to fool the money gods and keep the "free lunch" economy "growing." While everybody focuses on the circular firing squad in Italy, untold billions of euros of impaired private mortgage debt in housing-bubble-popped Spain still sits on the books of Spanish banks at full value, lest a sneeze of reality send Spain's entire banking sector to Davy Jones Locker.

Though no official publicly admits it, nobody really knows how much debt there is in Greece, or who even holds it. Here's the fig leaf confession: "Scarce data makes estimates difficult." Yes, I'm sure it does. So the true size of Europe's debt is unknown because everyone with a stake in the charade is trying desperately to keep the true scope hidden. (Ditto in China.)

The debt will get renounced, and debt as the "engine of growth" will also be renounced.

Europe is an inept 3-card monte player attempting to swindle the money gods. The gods aren't fooled by such shallow shuffling games, in fact they are greatly annoyed that humans even dare to attempt such flimsy tricks. Their wrath is building, and human hubris will only make the reckoning worse.