The global debt threat

I’ve been warning about the danger of the massive debt overhanging the global economy since 2002 to absolutely no avail. 

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

Official figures show that Chinese banks pulled back on their lending in December. If such trends persist, China’s economy, the second-largest in the world behind the United States’, may then slow even more than it has, further harming the many countries that have for years relied on China for their growth.

But it’s not just China. Wherever governments and central banks
unleashed aggressive stimulus policies in recent years, a toxic debt
hangover has followed. In the United States, it took many months for
mortgage defaults to fall after the most recent housing bust — and
energy companies are struggling to pay off the cheap money that they
borrowed to pile into the shale boom.

Europe, analysts say bad loans total more than $1 trillion. Many large
European banks are still burdened with defaulted loans, complicating
policy makers’ efforts to revive the Continent’s economy. Italy, for
instance, announced a plan last week to clean out bad loans from its
plodding banking industry. Elsewhere,
bad loans are on the rise at Brazil’s biggest banks, as the country
grapples with the effects of an enormous credit binge.

2008 was the first stage, but instead of doing as I recommended,
permitting the bad loans to default, and allowing the banks and other
credit holders to go bankrupt, Ben Bernanke and the Republicans “saved
the economy” by kicking the can down the road just as Alan Greenspan did in 1987.

Granted, they kicked it further than I would have believed possible in 2009, but nevertheless, we’ve now reached it again, and it is bigger and heavier than it was 7 years ago. And the Fed’s metaphorical foot is broken.

They should have started with him

Ben Bernanke says financial executives should have been arrested and charged with crimes:

With publication of his memoir, The Courage to Act, on
Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what
went right and what went wrong. For one thing, he says that more
corporate executives should have gone to jail for their misdeeds. The
Justice Department and other law-enforcement agencies focused on
indicting or threatening to indict financial firms, he notes, “but it
would have been my preference to have more investigation of individual
action, since obviously everything what went wrong or was illegal was
done by some individual, not by an abstract firm.”

He also offers a
detailed rebuttal to critics who argue the government could and should
have done more to rescue Lehman Brothers from bankruptcy in the worst
weekend of a tumultuous time. “We were very, very determined not to let
it collapse,” he says. “But we were out of bullets at that point.”

he does acknowledge some missteps by the Fed. Analysts were slow to
realize just how serious the economic downturn would become, and he
faults himself for not doing more to explain to Americans why it was in
their interests to rescue the financial firms that had helped cause it.

Needless to say, I will be reading and reviewing this book in the near future. And I will be very, very, very surprised if Mr. Bernanke manages to convince me that he is doing anything except whitewash his record. The idea that it was essential to rescue the financial firms that are still preying on the American economy and weighing it down is simply nonsensical. The Federal Reserve didn’t succeed in anything except kicking the can down the road and ensure that the next crisis will be even more severe.

You had ONE job

If the central banks eliminate cash, people will no longer need banks:

It has long been believed that when it comes to interest rates, zero is as low as you can go. Who would choose to keep their money in the bank if they had to pay for the privilege?

But for the people who control the world’s money, this idea has recently been thrown out of the window. Many central banks have pushed their rates into negative territory and yet the financial system has still to come to an abrupt end.

It is a discovery that flips on its head the conventional idea of how authorities could respond to future economic crises; and for central bankers, this has come as a relief.

Central bank policymakers had believed they had run out of room to support their respective economies, with their interest rates held close to the floor.

Traditionally, it was thought that if you wanted to boost the economy, the central bank would reduce its interest rates. Normally, the rates offered on savings accounts would follow, and people would choose to spend more, and save less.

But there’s a limit, what economists called the “zero lower bound”. Cut rates too deeply, and savers would end up facing negative returns. In that case, this could encourage people to take their savings out of the bank and hoard them in cash. This could slow, rather than boost, the economy.

What is happening now should not – according to conventional thinking – be possible.

As central bank rates have turned negative, the rates offered on bank deposits have followed. Yet rather than stuffing cash under mattresses, people have left their money in the bank or spent it.

Nowhere is the experiment with negative rates more obvious than among Nordic central banks. Sweden – the first to dabble with negative rates – is perhaps the prime candidate for such experimentation.

The country already has high savings rates, the third highest in the developed world according to the OECD and, despite growing at healthy rates, there appears to be plenty of slack left in the economy to prevent an overheat.

Unemployment is unusually high for an advanced economy at more than 7pc, still well above its pre-crisis levels of sub-6pc. Crucially, the Riksbank’s mandate suggests that such a radical experiment is necessary. Policymakers have battled with deflation since late 2012, and with inflation at minus 0.2pc in August, it remains well below the central bank’s 2pc target.

To a great extent, the Riksbank’s hand has been forced by the plight of the eurozone. A tepid recovery in the currency union has required the European Central Bank (ECB) to bring in ever-looser policy.

As the ECB’s actions have weakened the euro against Sweden’s krona, the cost of importing goods into Sweden has fallen, and weighed down on inflation. The Riksbank has had to cut its own rates in response in an attempt to avoid deep deflation.

Sweden’s flexible approach to monetary policy has won it the plaudits of leading credit ratings agency. Standard and Poor’s recently reaffirmed the country’s triple AAA sovereign rating, remarking on the benefits it derives from “ample monetary policy flexibility”.

Noting that the Riksbank had introduced both negative interest rates and quantitative easing, S&P said that “should inflation rates stay low or the krona appreciate materially, the central bank could lower the repo rate further”.

Many City analysts believe that the Riksbank will continue cutting, reducing its key interest rate to minus 0.5pc by the end of the year. Switzerland’s is already deeper still, at minus 0.75pc, while Denmark and the eurozone have joined them as members of the negative zone.

It shouldn’t surprise anyone that people are willing to accept low negative interest rates. After all, banks began as institutions that charged people to hold their gold for them. It wasn’t until they began creating money by handing out multiple certificates of ownership that they needed to start paying “interest” rather than receiving “fees”.

However, banning cash will go too far; the reason people use “money” is that it is less of an annoyance than barter. In their desperate attempt to remain profitable in a deflationary environment, banks are taking the risk of rendering themselves irrelevant.

The Greek drama is far from over

Now there are stories about two alternative angles explored by the Greek government before they finally submitted to the Eurotroika:

In short, Varoufakis claims Tsipras had pre-approved the creation of secret accounts for every tax filer (which, knowing Greece, might have left Varoufakis short on accounts for quite a few citizens). Greeks would be made aware of the accounts’ existence in the event the banking system ceased to function altogether, and Athens would effectively facilitate payments through the new system in defiance of the EMU. Clearly, this would not have been well received by Brussels – especially the bit about hacking their software – but ultimately, because the new system would be entirely controlled by Varoufakis’ finance ministry, it could be converted to the drachma immediately.

Kathimerini goes on the quote Varoufakis as saying that German FinMin Wolfgang Schaeuble intended to use Grexit as leverage to force France into supporting a system that ceded fiscal decision making to Brussels (which would of course mean giving Berlin more say over EMU countries’ finances):

    “Schaeuble has a plan. The way he described it to me is very simple. He believes that the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes that for that political union to work without federation, without the legitimacy that a properly elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinary way. And he said explicitly to me that a Grexit is going to equip him with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”

The new revelations raise serious concerns for Alexis Tsipras. The deep divisions within Syriza are by now well publicized, but reports of covert plans to establish parallel banking systems using tax filers’ IDs and the idea that elements within the ruling party plotted to seize billions in currency reserves and take control of the central bank have left some lawmakers demanding answers.

There is always considerably more to these things than meets the eye. But it is interesting, is it not, that a national referendum is so completely irrelevant to the events nominally happening around it? Why, it’s almost as if we’re living in a post-democratic age!

The one thing everyone seems to have in common is that no one wants to bite the bullet and deal with the economic realities. Debt that can’t be repaid will be defaulted. Everything else follows from that.

Abject surrender is never easy

The tide of national opinion appears to be turning against the sovereignty sell-outs of Syrizia:

The Greek leader is fighting for political survival after abandoning his opposition to austerity earlier this month with his country on the brink of financial collapse. He’s trying to hold off elections long enough to steer the country through the bailout negotiations, Michaelides said.

The plenary debate began at about 9 a.m. in Athens with the vote in the Greek parliament scheduled for around midnight. The bill under consideration includes the transposition of the European Union’s Bank Recovery and Resolution Directive into national law, as well as an overhaul of Code of Civil Procedure.

“There is a risk of the number of rebels growing,” said Michael Michaelides, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “It will be a question of whether Tsipras can maintain the party under control to prevent unwanted political developments.”

Considerable risk, I should think. But I think it’s cute that they call what is little more than an unconditional surrender veiled by a modicum of trivia to help the sell-outs save face “negotiations”.

The more interesting thing is the word that Tsipras had intended to go back to the drachma, but neither Russia nor China would come through with the $10 billion they needed to print drachmas. But I’m not sure I buy that, as they could have simply declared they were back on the drachma with or without the notes.

Don’t laugh, it will happen everywhere

Greeks don’t appear to be inclined to provide their banks with any more unsecured loans:

President of Greek Banks Association Louka Katseli appealed at the citizens to return their money to the banks. “Banks are absolutely trustworthy,” Katseli told Mega TV “as guaranteed by the ECB and the Bank Association, but they would have been even more powerful if 40 billion euros had not been withdrawn in the last months.

Katseli, a former PASOK Minister, appealed to citizens to return their deposits  to the banks “now that the banks are open” after a three-week holiday and capital controls.

“Let’s all help our economy,” Katseli urged Greeks and added “If you take your money out of your chests and houses – which are not safe in any case – and deposit at banks, this will enhance liquidity.”

Katseli’s appeal triggered laughter among Greeks and one stressed with hint to capital controls “Oh yes! I will bring my money back to the bank and get it back 60 by 60 euro.”

Another one noted “Ah sure! Banks will never see my money again, I prefer to buy tonnes of peanuts with it.”

A third commented “Certainly. And the banks will go bust after a while…”

A fourth reckoned a very unfortunate incident in 2010 and busted into tears and laughter. Back then Finance Minister Evangelos Venizelos had appealed to the Greeks to buy Greek bonds. The man invested 10,000 euro to help Greece. Two years later, his investment underwent a 53%-Haircut due to the PSI. Now the nominal value of his investment is … “I don’t even open the envelopes coming from the bank anymore, too frustrating,” he told me.

We are witnessing the slow death of the global financial system. While the elites fantasize about the idea of electronic money that can be controlled at all times, everywhere, they had better remember that their whole plan depends upon keeping the masses fat and happy.

Because these days, no one is untouchable.

Another kick of the can

The EU and the IMF managed, with extreme difficulty, to kick the can one more time than anyone thought they would be able to. But the cans keep getting bigger and heavier. And in the meantime, Paul Craig Roberts points out that the financial powers’ savage treatment of the Greeks, and determination to wring them dry in order to avoid paying out on the losing derivative bets by their banks, is teaching countries outside the system that there is nothing in it for them.

When a member of the EU itself is being looted and driven into the ground by its compatriots, how can Russia, China, and Iran expect better treatment? If the West has no good will toward Greece, where is the West’s good will toward Russia?

The Greek government was forced to capitulate to the EU, despite the support it received from the referendum, because the Greeks relied on the good will of their European partners and underestimated the mendacity of the One Percent. The Greek government did not expect the merciless attitude of its fellow EU member governments. The Greek government actually thought that its expert analysis of the Greek debt situation and economy would carry weight in the negotiations. This expectation left the Greek government without a backup plan. The Greek government gave no thought to how to go about leaving the euro and putting in place a monetary and banking system independent of the euro. The lack of preparation for exit left the government with no alternative to the EU’s demands.

The termination of Greece’s fiscal sovereignty is what is in store for Italy, Spain, and Portugal, and eventually for France and Germany. As Jean-Claude Trichet, the former head of the European Central Bank said, the sovereign debt crisis signaled that it is time to bring Europe beyond a “strict concept of nationhood.” The next step in the centralization of Europe is political centralization. The Greek debt crisis is being used to establish the principle that being a member of the EU means that the country has lost its sovereignty.

The notion, prevalent in the Western financial media, that a solution has been imposed on the Greeks is nonsense. Nothing has been solved. The conditions to which the Greek government submitted make the debt even less payable. In a short time the issue will again be before us. As John Maynard Keynes made clear in 1936 and as every economist knows, driving down consumer incomes by cutting pensions, employment, wages, and social services, reduces consumer and investment demand, and thereby GDP, and results in large budget deficits that have to be covered by borrowing. Selling pubic assets to foreigners transfers the revenue flows out of the Greek economy into foreign hands.

Unregulated naked capitalism, has proven in the 21st century to be unable to produce economic growth anywhere in the West. Consequently, median family incomes are declining. Governments cover up the decline by underestimating inflation and by not counting as unemployed discouraged workers who, unable to find jobs, have ceased looking. By not counting discouraged workers the US is able to report a 5.2 percent rate of unemployment. Including discouraged workers brings the unemployment rate to 23.1 percent. A 23 percent rate of unemployment has nothing in common with economic recovery.

Even the language used in the West is deceptive. The Greek “bailout” does not bail out Greece. The bailout bails out the holders of Greek debt. Many of these holders are not Greece’s original creditors. What the “bailout” does is to make the New York hedge funds’ bet on the Greek debt pay off for the hedge funds. The bailout money goes not to Greece but to those who speculated on the debt being paid. According to news reports, Quantitative Easing by the ECB has been used to purchase Greek debt from the troubled banks that made the loans, so the debt issue is no longer a creditor issue.

And so the world spirals closer to widespread violence. Having repeatedly ruled out the possibility of change through the ballot box, what else does that leave? Frankly, I’m a little surprised that the Greeks haven’t resorted to politics by other means yet.

ISIS has already brought the War in Iraq home to America. It seems highly unlikely that they will be the only ones to do so.

These actions by the global financial community smack of either desperation or provocation. I can’t tell if they actually want war – as Gen. Butler would say they do – or if their position is so precarious that they are willing to run the risk of war just to buy a little more time before the crash.

Either way, it doesn’t bode very well for the rest of us.

Daneistocracy in Europe

The abject surrender of the Greek government demonstrates the growing irrelevance of democracy, not only in Europe, but across the West:

Less than a week after they triumphantly gave international creditors a bloody nose by rejecting a harsh austerity plan, angry and bewildered Greeks are left wondering how they now find themselves swallowing an even worse deal.

In a nationwide referendum just last Sunday, nearly 62 per cent of voters rejected an austerity deal that had been offered by the European Commission, International Monetary Fund and European Central Bank.

There were scenes of wild jubilation across the country.

In Athens’ Syntagma Square, the Greek answer to Trafalgar Square, thousands of joyous ‘No’ voters hugged and kissed each other, waved Greece’s national flag and swigged cans of beer.

“It was an expression of the will of the people,” Manos Agelidis, 27, a biomedical engineering PhD student, told The Telegraph as he celebrated with friends.

Fast forward just a few days, however, and Alexis Tsipras, the prime minister, did the unthinkable.

On Thursday, with a deadline imposed by the creditors looming, he buckled.

His radical Left-wing Syriza government, which came to power in January on the unrealistic promise of putting an end to austerity and the country’s six-year long economic nightmare, put forward a plan that promises spending cuts of €12 billion in return for a third international bail-out, this time worth €53.5 billion (£38.4bn).

The European Union is not only post-democratic, it is openly and avowedly anti-democratic. It has continued to override the expressed will of the Irish, French, British, Italian, and Greek people by putting pressure on the elected representatives to subvert the will of the people.

This is why direct democracy is the only form of democracy that may still be considered viable. The idea of representative democracy is that the limits it places on democracy will be in the long term interests of the nation, but the way it has easily been subverted in the interests of the financial powers demonstrates that representative democracy is actually more susceptible to corruption and subversion than direct democracy.

Mob rule has its own flaws, but it is certainly to be preferred to creditor rule, or daneistocracy. And that is what representative democracy now amounts to, as the elected representatives of countries such as Greece agree to give up their national sovereignty just to keep the credit money spigot flowing.

Zerohedge add that the Eurozone is no longer a voluntary union:

Despite the euphoria in global equity markets, The FT’s Wolfgang Munchau – once one of the keenest euro enthusiasts – warns regime change is coming in Europe. The actions of the creditors has “destroyed the eurozone as we know it and demolished the idea of a monetary union as a step towards a democratic political union,” Munchau exclaims, fearing they have “demoted the eurozone into a toxic fixed exchange-rate system, with a shared single currency, run in the interests of Germany, held together by the threat of absolute destitution for those who challenge the prevailing order.” He concludes rather ominously, “we will soon be asking ourselves whether this new eurozone, in which the strong push around the weak, can be sustainable.”

The EU doubles down

It’s not a huge surprise. They have never had any respect for democracy anyhow:

The European Central Bank has tightened liquidity conditions for the Greek banking system following the landslide victory for the Leftist government in Sunday’s referendum.

The central bank continued its freeze on emergency liquidity assistance (ELA) after Germany issued a humiliating ultimatum to Greece, warning that the country would be cast adrift and left to go bankrupt unless it agreed to much deeper concessions than anything offered so far.

Sigmar Gabriel, the German vice-chancellor, said the landslide rejection of EU austerity demands in the Greek referendum changed nothing, demanding that the Left-wing Syriza government must accept further belt-tightening without any prospect of debt relief if it wishes to remain in the eurozone.

“The final bankruptcy now appears imminent,” he said. The Greek leaders have been told that they have a deadline of Tuesday afternoon to come up with far-reaching proposals.

And before any morons pop up and start blathering about “those lazy Greeks should pay their debts”, understand that it is mathematically impossible for them to do so. Not difficult, not hard, impossible. It is never going to happen. And note that the IMF, which has been continuing to loan them money, has known this since 2011.

Keep in mind that the USA was actually more indebted than Greece until just a few years ago. The difference is that the USA can always print more credit dollars. The Greeks cannot, not until they get rid of the Euro and go back to the drachma. The core problem is not that the Greeks were profligate, although they were, but that they chose to join the EU and the Euro.

Don’t forget that wherever there are large sums of money involved, there is always quite a bit going on behind the scenes:

“the European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.”

Considering the crisis of the (not so) single currency is very much “inflamed” right now as it is about to be proven it was never “irreversible”, perhaps it is time for at least one aspiring, true journalist, unafraid of disturbing the status quo of wealthy oligarchs and central planners, to at least bring some closure to the Greek people as they are swept out of the Eurozone which has so greatly benefited the very same Goldman Sachs whose former lackey is currently deciding the immediate fate of over €100 billion in Greek savings.

Because something tells us the reason why Mario Draghi personally blocked Bloomberg’s FOIA into the circumstances surrounding Goldman’s structuring, and hiding, of Greek debt that allowed not only Goldman to receive a substantial fee on the transaction, but permitted Greece to enter the Eurozone when it should never have been allowed there in the first place, is that the person who oversaw and personally endorsed the perpetuation of the Greek lie is none other than Goldman’s Vice Chairman and Managing Director at Goldman Sachs International from 2002 to 2005. The man who is also now in charge of the ECB.

Mario Draghi.

A man of honor

It would be remarkable if the USA had a single political leader who cared as much about his nation and as little about his career as Greece’s newly ex-finance minister, Yanis Varoufakis, who resigned after successfully leading Greece’s campaign to reject the Eurogroup’s ultimatum:

The referendum of 5th July will stay in history as a unique moment when a small European nation rose up against debt-bondage.

Like all struggles for democratic rights, so too this historic rejection of the Eurogroup’s 25th June ultimatum comes with a large price tag attached. It is, therefore, essential that the great capital bestowed upon our government by the splendid NO vote be invested immediately into a YES to a proper resolution – to an agreement that involves debt restructuring, less austerity, redistribution in favour of the needy, and real reforms.

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum.

And I shall wear the creditors’ loathing with pride.

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government.

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

I don’t agree with Mr. Varoufakis on much, but his defense of Greece’s national sovereignty in the face of tremendous pressure from the banks and the European political class was as magnificent as it was astonishing. I hope that he soon realizes that Greece no more needs the European Union or the Euro weighing it down than it needed to pay the odious debts demanded by the Eurogroup.