Lost in the maze of the great Save Europe debt rescue?
You should be – the whole exercise is no more than an extension of the same snake oil economics that caused the meltdown in the first place. And where is it all going? To capitalism without capital and democracies without democracy.
Here is the hitchhiker’s guide to the universe of the global financial meltdown.
We now have the central banks of foreign countries on different continents offering to “help” the beleaguered Eurozone. Having failed to convince Germany to “pool” its wealth with the debt of its profligate southern cousins to avoid a giant Euro-pouff, the world is now willing to spread that debt globally by easing up the flow of US dollars to cash-strapped European banks.
This is because the European banks are not lending to each other. Instead, they are making huge deposits in the European Central Bank (ECB) – just like U.S. banks are making deposits at the Federal Reserve and getting interest. The only thing that these troubled European banks care about is the European Stability Fund (ESF), the backstop of last resort that’s supposed to bail out troubled banks and even countries. They should be happy. The Euro finance ministers have all but decided to raise the draw of the fund quite a bit, from 440 billion to over a trillion euros. Trouble is, no one has actually raised the money yet for the big Top Up. The solution is really another problem – a flood of more printed money.
There is another problem that is being passed off as a solution. Ministers have agreed that the ESF will also partially guarantee losses from the purchase of toxic government bonds to the tune of 20 to 30 percent. That’s a fancy way of saying taxpayers will now be giving another bonus to bankers who made reckless investments in the first place. Everyone has agreed that someone would have to pay for the meltdown of 2008 and the continuing quasi-recession, and now it’s crystal clear who – the wage serfs at the bottom of the pyramid.
So the Europeans are expanding the bailout fund with tax dollars, and banks are being forced to add more capital to cover losses from future defaults on bad bonds. Everyone knows there are more coming. Banks are also being asked to take a 50 percent haircut on money invested in Greek bonds but the ECB promises to make them whole again.
A word on Greek debt and the American connection, since the Federal Reserve is one of the central banks which says it will backstop the European financial system with access to slightly cheaper US dollars. The per capita debt in bankrupt Greece is 31,000 euros per citizen, or $41,695 US dollars. So they need to be rescued, right? But the per capita debt in the United States as a share of the federal debt is $48,176. That doesn’t include state, municipal or personal debt. The cavalry may be coming but who will rescue the cavalry?
For a lot of reasons, bailouts are nothing more than a shell game. Nor have they worked. In the US, the Fed has expanded its balance sheet by $2 trillion and pumped a total of $6 billion new dollars into system. What did it get – zero growth in real GDP, high unemployment, and the beginnings of an inflation problem. Bailouts and stimulus packages have done no better on the other side of the pond. Remember when they said Greece had to be bailed out to contain the spread of the debt contagion? Well, Greece has been bailed out twice and neither exercise contained the damage. The Greek bailouts were followed by bailouts of Portugal and Ireland.
Based on rumblings of the imminent downgrading of 15 Euro states by the bond rating agencies, the line up for emergency cash can only get longer. In the case of Greece, private lenders took a 20 percent dead loss on their bond investment. That does two things – it makes private investors shy away from all European sovereign debt, as Germany’s recent failed bond auction clearly demonstrated. It also drives up the cost of borrowing for governments by driving up bond yields.
Italy is already at the threshold of over 7 percent and has even strayed above 8 percent. At those yields, Italy’s future bond issues are unsustainable. In layman’s terms, the market will decide that Italy can’t pay back what it borrows and that means more bad things; Mafia level bond yields backed by the ESF, or no loans at all.
When you consider that wages in countries like Italy and Greece are relatively high, it means their economies aren’t competitive. So they can’t improve their finances by goosing economic output. Since they are inside the Eurozone, they haven’t got the ability to devalue their currencies to make their economies competitive. And because they are inside the Eurozone, they can’t borrow from the ECB.
So with huge debt and uncompetitive economies, there are really only two ways to deal with public penury – higher taxes and government cuts. But austerity leads to recession, which in turn leads to high unemployment, another key feature of both the Eurozone and the United States. With high unemployment, two more bad things happen. The government’s tax revenues shrink, and there are more social welfare checks to write at precisely the moment when the government cupboards are bare. In a nutshell, government austerity kills growth. So what to do?
What the Europeans have decided is part of the solution is that the ECB, like the Federal Reserve, should buy sovereign debt and put it on their balance sheet. The Federal Reserve has been drinking its own bath water for years in the US and interest rates have been kept near zero. That’s why the ECB will soon drop the interest rate from 1.5 percent to virtually zero, just as the Fed has done. But none of these solutions are nearly big enough, as Japan’s lost decade of zero interest rates has already shown. So what is?
The poorer countries in the Eurozone, namely southern Europe, believe the answer is the economic dynamo that is Germany. They want to be “Merkeled”. Germany must financially backstop its other partners by agreeing to spread the debt – asking its taxpayers to kick in to save Greece, Italy, Portugal and maybe Spain. Not many of them are impressed. Why should their lower wages and higher productivity subsidize their Ouzo-drinking Mediterranean brethren who have lived above their ability to pay for decades?
Angela Merkel knows that it would be political suicide to simply bail out Europe at Germany’s expense – especially since there is no guarantee of a lifestyle change in the debtor nations. So that’s why she said Germany might help, but only under very strict conditions. Merkel’s terms would make a loan-shark blush.
Germany will help, and may even agree to the issuing of Eurobonds, provided that the national governments of needy European countries would be subordinate to a non-elected group with the power to review and repeal sovereign budget measures deemed to be fiscally unsound. In other words, forfeiting your democracy would be the price of living the dolce vita on the credit card. The people would no longer be in charge of nations like France, Spain, Ireland and Greece. Italy is now governed by a commission of government comprised of financial technocrats who never had their name on a ballot. And Italy hasn’t even been bailed out – yet.
You might wonder why Germany would ever consider endangering its prosperity in the first place to bailout such a collection of wastrels? The answer is self-interest. First of all, Germany and France are the largest holders of toxic European sovereign debt. They would be the biggest losers in the event of a default. Preventing one staves off the mother of all haircuts.
But there is a second, even more important reason for Merkel to risk rage at home by supporting the weak sisters of the Eurozone. If the euro currency goes bust, the 17 members of the European Union would likely revert to national currencies. For weak countries like Greece that would be a boon. They could then devalue the drachma as a means of making their economy more competitive.
But if the Germans had to revert to the mark, it would have a disastrous effect on their economy. Based on Germany’s trillion dollar export trade, the mark would appreciate wildly against Europe’s weaker currencies and the US dollar. The currency would become so strong that German exports, which have greatly benefited from the relatively soft Euro, would price themselves out of most markets.
And perhaps most important of all, time is now a factor. There is already a credit crunch, some would say a credit crisis, others even a recession in Europe; but with 17 parliaments needed to ratify any deal, it will take more time than the Europeans have. And that’s where the international central banks come in.
Knowing that the problem won’t be solved in time, and knowing that the cash needs of European banks will outstrip their ability to make further borrowings, international central banks led by the Fed will offer cheaper money. Trouble is, the Fed’s balance sheet is now loaded with toxic assets and the U.S. government’s bottom line is worse than the European countries that have already been bailed out. Everyone’s learned to say it with a whisper, but the United States remains the most indebted country in the world.
So while Europe is handing over the reins of sovereign nations to unelected technocrats, the US has refused to get serious about its desperate debt problem. It can’t muster the courage to either cut or tax, but it continues to spend itself into oblivion. Instead of facing the facts, the new thing in America is to have the Federal Reserve drive the country’s nominal GDP, you know, the one that looks good on paper until you subtract the inflation rate to get real GDP.
The thinking of people at Goldman Sachs and the former chair of President Obama’s Council of Economic Advisers goes like this: if flooding the economy with cheap money has managed to sustain a stock market bubble when the economy is gasping, even more cheap money might spark moribund consumer demand. If only people started buying again, the economy would “grow”.
Perhaps, but on borrowed money and with a huge risk – inflation. Driving the nominal GDP is just another shell game played with printed money. And that’s what the Big Brains see as the role of average citizens. They want them to go to the plaza, to the automotive show room, and the sub-division and buy something – on the tab. Transactional capitalism looks good but real capitalism requires capital. It has to be saved, not spent, before it can be invested in profitable enterprises. And the system has created every incentive, including interest rates paid on savings accounts, to invite citizens to forget about paying down their debt and just pile up a little before inflation puts everything but a loaf of bread beyond their budget.
Capitalism without capital and democracies without democracy – sound like a solution to you? And by the way, when they’re not buying sovereign debt that no one else will touch with a barge poll, what are central banks buying? Gold. Hmmm.
Origin
Source: iPolitico
You should be – the whole exercise is no more than an extension of the same snake oil economics that caused the meltdown in the first place. And where is it all going? To capitalism without capital and democracies without democracy.
Here is the hitchhiker’s guide to the universe of the global financial meltdown.
We now have the central banks of foreign countries on different continents offering to “help” the beleaguered Eurozone. Having failed to convince Germany to “pool” its wealth with the debt of its profligate southern cousins to avoid a giant Euro-pouff, the world is now willing to spread that debt globally by easing up the flow of US dollars to cash-strapped European banks.
This is because the European banks are not lending to each other. Instead, they are making huge deposits in the European Central Bank (ECB) – just like U.S. banks are making deposits at the Federal Reserve and getting interest. The only thing that these troubled European banks care about is the European Stability Fund (ESF), the backstop of last resort that’s supposed to bail out troubled banks and even countries. They should be happy. The Euro finance ministers have all but decided to raise the draw of the fund quite a bit, from 440 billion to over a trillion euros. Trouble is, no one has actually raised the money yet for the big Top Up. The solution is really another problem – a flood of more printed money.
There is another problem that is being passed off as a solution. Ministers have agreed that the ESF will also partially guarantee losses from the purchase of toxic government bonds to the tune of 20 to 30 percent. That’s a fancy way of saying taxpayers will now be giving another bonus to bankers who made reckless investments in the first place. Everyone has agreed that someone would have to pay for the meltdown of 2008 and the continuing quasi-recession, and now it’s crystal clear who – the wage serfs at the bottom of the pyramid.
So the Europeans are expanding the bailout fund with tax dollars, and banks are being forced to add more capital to cover losses from future defaults on bad bonds. Everyone knows there are more coming. Banks are also being asked to take a 50 percent haircut on money invested in Greek bonds but the ECB promises to make them whole again.
A word on Greek debt and the American connection, since the Federal Reserve is one of the central banks which says it will backstop the European financial system with access to slightly cheaper US dollars. The per capita debt in bankrupt Greece is 31,000 euros per citizen, or $41,695 US dollars. So they need to be rescued, right? But the per capita debt in the United States as a share of the federal debt is $48,176. That doesn’t include state, municipal or personal debt. The cavalry may be coming but who will rescue the cavalry?
For a lot of reasons, bailouts are nothing more than a shell game. Nor have they worked. In the US, the Fed has expanded its balance sheet by $2 trillion and pumped a total of $6 billion new dollars into system. What did it get – zero growth in real GDP, high unemployment, and the beginnings of an inflation problem. Bailouts and stimulus packages have done no better on the other side of the pond. Remember when they said Greece had to be bailed out to contain the spread of the debt contagion? Well, Greece has been bailed out twice and neither exercise contained the damage. The Greek bailouts were followed by bailouts of Portugal and Ireland.
Based on rumblings of the imminent downgrading of 15 Euro states by the bond rating agencies, the line up for emergency cash can only get longer. In the case of Greece, private lenders took a 20 percent dead loss on their bond investment. That does two things – it makes private investors shy away from all European sovereign debt, as Germany’s recent failed bond auction clearly demonstrated. It also drives up the cost of borrowing for governments by driving up bond yields.
Italy is already at the threshold of over 7 percent and has even strayed above 8 percent. At those yields, Italy’s future bond issues are unsustainable. In layman’s terms, the market will decide that Italy can’t pay back what it borrows and that means more bad things; Mafia level bond yields backed by the ESF, or no loans at all.
When you consider that wages in countries like Italy and Greece are relatively high, it means their economies aren’t competitive. So they can’t improve their finances by goosing economic output. Since they are inside the Eurozone, they haven’t got the ability to devalue their currencies to make their economies competitive. And because they are inside the Eurozone, they can’t borrow from the ECB.
So with huge debt and uncompetitive economies, there are really only two ways to deal with public penury – higher taxes and government cuts. But austerity leads to recession, which in turn leads to high unemployment, another key feature of both the Eurozone and the United States. With high unemployment, two more bad things happen. The government’s tax revenues shrink, and there are more social welfare checks to write at precisely the moment when the government cupboards are bare. In a nutshell, government austerity kills growth. So what to do?
What the Europeans have decided is part of the solution is that the ECB, like the Federal Reserve, should buy sovereign debt and put it on their balance sheet. The Federal Reserve has been drinking its own bath water for years in the US and interest rates have been kept near zero. That’s why the ECB will soon drop the interest rate from 1.5 percent to virtually zero, just as the Fed has done. But none of these solutions are nearly big enough, as Japan’s lost decade of zero interest rates has already shown. So what is?
The poorer countries in the Eurozone, namely southern Europe, believe the answer is the economic dynamo that is Germany. They want to be “Merkeled”. Germany must financially backstop its other partners by agreeing to spread the debt – asking its taxpayers to kick in to save Greece, Italy, Portugal and maybe Spain. Not many of them are impressed. Why should their lower wages and higher productivity subsidize their Ouzo-drinking Mediterranean brethren who have lived above their ability to pay for decades?
Angela Merkel knows that it would be political suicide to simply bail out Europe at Germany’s expense – especially since there is no guarantee of a lifestyle change in the debtor nations. So that’s why she said Germany might help, but only under very strict conditions. Merkel’s terms would make a loan-shark blush.
Germany will help, and may even agree to the issuing of Eurobonds, provided that the national governments of needy European countries would be subordinate to a non-elected group with the power to review and repeal sovereign budget measures deemed to be fiscally unsound. In other words, forfeiting your democracy would be the price of living the dolce vita on the credit card. The people would no longer be in charge of nations like France, Spain, Ireland and Greece. Italy is now governed by a commission of government comprised of financial technocrats who never had their name on a ballot. And Italy hasn’t even been bailed out – yet.
You might wonder why Germany would ever consider endangering its prosperity in the first place to bailout such a collection of wastrels? The answer is self-interest. First of all, Germany and France are the largest holders of toxic European sovereign debt. They would be the biggest losers in the event of a default. Preventing one staves off the mother of all haircuts.
But there is a second, even more important reason for Merkel to risk rage at home by supporting the weak sisters of the Eurozone. If the euro currency goes bust, the 17 members of the European Union would likely revert to national currencies. For weak countries like Greece that would be a boon. They could then devalue the drachma as a means of making their economy more competitive.
But if the Germans had to revert to the mark, it would have a disastrous effect on their economy. Based on Germany’s trillion dollar export trade, the mark would appreciate wildly against Europe’s weaker currencies and the US dollar. The currency would become so strong that German exports, which have greatly benefited from the relatively soft Euro, would price themselves out of most markets.
And perhaps most important of all, time is now a factor. There is already a credit crunch, some would say a credit crisis, others even a recession in Europe; but with 17 parliaments needed to ratify any deal, it will take more time than the Europeans have. And that’s where the international central banks come in.
Knowing that the problem won’t be solved in time, and knowing that the cash needs of European banks will outstrip their ability to make further borrowings, international central banks led by the Fed will offer cheaper money. Trouble is, the Fed’s balance sheet is now loaded with toxic assets and the U.S. government’s bottom line is worse than the European countries that have already been bailed out. Everyone’s learned to say it with a whisper, but the United States remains the most indebted country in the world.
So while Europe is handing over the reins of sovereign nations to unelected technocrats, the US has refused to get serious about its desperate debt problem. It can’t muster the courage to either cut or tax, but it continues to spend itself into oblivion. Instead of facing the facts, the new thing in America is to have the Federal Reserve drive the country’s nominal GDP, you know, the one that looks good on paper until you subtract the inflation rate to get real GDP.
The thinking of people at Goldman Sachs and the former chair of President Obama’s Council of Economic Advisers goes like this: if flooding the economy with cheap money has managed to sustain a stock market bubble when the economy is gasping, even more cheap money might spark moribund consumer demand. If only people started buying again, the economy would “grow”.
Perhaps, but on borrowed money and with a huge risk – inflation. Driving the nominal GDP is just another shell game played with printed money. And that’s what the Big Brains see as the role of average citizens. They want them to go to the plaza, to the automotive show room, and the sub-division and buy something – on the tab. Transactional capitalism looks good but real capitalism requires capital. It has to be saved, not spent, before it can be invested in profitable enterprises. And the system has created every incentive, including interest rates paid on savings accounts, to invite citizens to forget about paying down their debt and just pile up a little before inflation puts everything but a loaf of bread beyond their budget.
Capitalism without capital and democracies without democracy – sound like a solution to you? And by the way, when they’re not buying sovereign debt that no one else will touch with a barge poll, what are central banks buying? Gold. Hmmm.
Origin
Source: iPolitico
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