Tuesday, July 07, 2015

Financial Nonsense Overload

Kelly Hensing
[En français] [In italiano]

“Those whom the gods wish to destroy they first make mad” goes a quote wrongly attributed to Euripides. It seems to describe the current state of affairs with regard to the unfolding Greek imbroglio. It is a Greek tragedy all right: we have the various Eurocrats—elected, unelected, and soon-to-be-unelected—stumbling about the stage spewing forth fanciful nonsense, and we have the choir of the Greek electorate loudly announcing to the world what fanciful nonsense this is by means of a referendum.

As most of you probably know, Greece is saddled with more debt than it can possibly hope to ever repay. Documents recently released by the International Monetary Fund conceded this point. A lot of this bad debt was incurred in order to pay back German and French banks for previous bad debt. The debt was bad to begin with, because it was made based on very faulty projections of Greece's potential for economic growth. The lenders behaved irresponsibly in offering the loans in the first place, and they deserve to lose their money.

However, Greece's creditors refuse to consider declaring all of this bad debt null and void—not because of anything having to do with Greece, which is small enough to be forgiven much of its bad debt without causing major damage, but because of Spain, Italy and others, which, if similarly forgiven, would blow up the finances of the entire European Union. Thus, it is rather obvious that Greece is being punished to keep other countries in line. Collective punishment of a country—in the form of extracting payments for onerous debt incurred under false pretenses—is bad enough; but collective punishment of one country to have it serve as a warning to others is beyond the pale.

Add to this a double-helping of double standards. The IMF won't lend to Greece because it requires some assurance of repayment; but it will continue to lend to the Ukraine, which is in default and collapsing rapidly, without any such assurances because, you see, the decision is a political one. The European Central Bank no longer accepts Greek bonds as collateral because, you see, it considers them to be junk; but it will continue to suck in all sorts of other financial garbage and use it to spew forth Euros without comment, keeping other European countries on financial life support simply because they aren't Greece. The German government insists on Greek repayment, considering this stance to be highly moral, ignoring the fact that Germany is the defaultiest country in all of Europe. If Germany were not repeatedly forgiven its debt it would be much poorer, and in much worse shape, than Greece.

The brazen hypocrisy of all this cannot but have a destabilizing effect on Europe's politics, with the political center cratering and being replaced with radical left-right coalitions. Note how quickly France's right-wing presidential front-runner Marine Le Pen applauded the result of the Greek referendum organized by Greece's left-wing government. The disgust with officialdom that pervades the European Union is beginning to transcend political boundaries, making for strange bedfellows.

In the end, finance—at any level—has to be about rules and numbers, or it becomes about nonsense. Break enough of your own rules, and your money turns to garbage, because in a world where money is debt and debt is garbage, money is garbage. But there is a proven method for solving this problem and moving on: it's called national bankruptcy. Greece is bankrupt; if its resolution brings on the bankruptcy of Spain, Italy and others, and if that in turn bankrupts the entire Eurozone, then that's exactly what must happen.

But something else might happen instead. The Eurocrats are already appalled by the Greek show of democracy, and will work hard to derail any such democratic effort in the future using all of the means of political and economic manipulation at their disposal—all simply to muddle along for a bit longer, making the end-game, when it finally comes, all the more painful. I am sure that the Eurocrats plan to follow model of the British Civil Service, which reached its maximum staffing level right when the British Empire ceased to exist. Let's look for ways to not help them do this.


Unknown said...

The elephant in the room of course is demographics. There are simply not enough young people in the EU to pay the generous pension and welfare benefits of the old, both north and south. But since Europe is now thoroughly secular, retirement has replaced the afterlife so the financial crises is also an existential one for the European political system.

NJGuy73 said...

"The Eurocrats are already appalled by the Greek show of democracy."

Yeah, what would Greeks know about democracy?

Oh, wait...

Jim R said...

It's not what you don't know that kills you,
it's what you know for sure that ain't true.
- Mark Twain

There is this meme floating around, an unfortunate consequence of WWII and a half century of US history, "war is good for the economy".

So that, and the bottomless greed of the usurers, is in the process of wrecking the economy of Europe. The money wasted on war in the Ukraine and the vast liquid war in the Middle East, will never result in anything for the greedsters. All that remains to be seen is how deep the destruction will go..


Unknown said...

I think some mention of the Greek oligarchs is in order, since they were the primary beneficiaries of the debt and they have acted with impunity, in fact with treasonous malice toward the Greek people.

Unknown said...

Several years ago I heard a financial commentator remark, “I understand quantitative easing now but what I don’t understand, is money”. Exactly. Money that can be created without limit and with no regard for reality is in fact an illusion that will in time be discovered. It will be unmasked as counterfeit. Meanwhile, we are all using and spending it. In my mind the purpose of money is as a unit of account, store of value, and its role in exchange, but, how much is enough? And, who decides? It is probable that we have too much money now( because we have too much debt). We are trashing the planet in search of enough for everyone and yet the poor are getting poorer and the rich, richer. Almost by definition the poor are bad with money. They cannot hold onto it. They are always BUYING something; McNuggets, new tires, drugs, etc. You have to keep giving poor people money—I heard 47% of Americans are on government assistance. Some earned it, some just need it. The rich are also bad with money. They don’t spend it or give it to anyone else. They have good reasons for this because money is ALSO power. They want to use it later. Or they have some higher order meta- need like becoming a big shot. In my simple world, I want to save so I won’t go hungry when I’m not working.
What if money couldn’t be saved? Suppose it had an expiration date? It wouldn’t be a store of value. Could we divide the function of money into 2 separate things: a transactional medium and a storage medium? Two different “monies”. I am envisioning a Gresham Law kind of good money and bad money. Then we could have Treasury issuance (like federal reserve notes) and gold or silver. People would save in precious metals and use currency. The exchange rate would fluctuate between the two. If the issuer was prudent the rate might not change much but if they needed more money (which governments always do) the rate would trend down. Do you think the political money people and the gold bugs would BOTH be happy? I think if people had a choice it could moderate the worst aspects of using either system exclusively. This would not be a gold standard because you would just buy gold to save and then sell it when you wanted to buy something,

Charles Fasola said...

The comments above provide the perfect example of why the economies of much of the world are a complete disaster. They prove the vast majority possess little or absolutely no understanding of what money is or of economics in general. If you understood money you would certainly not make any of the previous comments. If you had the slightest concept of its history you could not make those comments. Things will never change for the better while you believe, and from your comments you surely do, in the Big Lies about money and economics that the controlled mainstream media and their corporate benefactors preach.

Dmitry Orlov said...

Charles -

Keep in mind that people who submit comments are generally not at all representative of the readership of this blog. I believe the commenters on this blog are above average, but that's not saying much. Only 0.04% of my readers submit comments. About half of those seem to have serious mental health issues. Their comments are never published, but they keep trying. But even my most enlightened readers, who, by the way, never submit a single comment (unless it's to point out that I make a mistake) have very little impact on international finance, because their voices are drowned out by the multitudes that are permanently attached to the corporate teat, so I suppose it all adds up to the same thing anyway.

Unknown said...

I was hoping you would share your take on the "Greek Crises" and I wasn't disappointed. It's an interesting "current event" but my friends and associates don't seem to know about this "crises" or if they do, they are only mildly curious about it. Greece? Think of Sparticus, guys in sheets and badly remembered history. But the modern country? Not unless you've been there. To be Greek in America is to be a member of a college fraternity. So they're having money problems. Uhm, this matters because ?... Care to explain? Count the seconds as their eyes glaze over.

So I looked up "Greece" and "Ohio" on Wikipedia. Ohio has a few more people. Greece has more land. Ohio has more money, but the comparison here is about as clear as comparing Ohio's corn fields to Greece's islands. Greece's government owes about $30,000 (wild guestimate) per Grecian to various entities, that somehow seem to be nations. I'm trying to imaging every Ohioan owing a student loan to the New York State government. But if they don't pay, the banks close, grocery stores go empty, pensions don't get deposited, savings get raided, the Vandals descend from (upstate NY) Germania and loot all the gold and women, etc. Counter-party hedge derivitives, I've been told, have turned this debt into financial high-explosives.

Now what started as a silly comparison starts to make sense -- If you are a Vandal with an urge to plunder. Once I understand that this is just a ruse to throw the Greeks under the bus so the other "more European" countries can pretend to be civilized for just a while longer, I'm wondering why Greeks don't, ahem, "go Greek" on them as they would the Persian hordes of Darius.

I'm fascinated, and can hardly wait for New York, Pensylvania and Virginia to start ganging up on Ohio and West Virginia. Maybe I can pick up some pointers to help them lose their steam before going too genocidal.

While I'm grateful you typed up your thoughts in English. Indeed, this is one of those posts you might want to translate into Russian.

Thanks again.

Unknown said...

Hmm, so given that my comments are sometimes published, I can conclude I have no serious mental health issues (of a sort that are visible in comments). Also, given the fact that I submit comments at all, I am different from 99.96% of readers. However I am not among the most enlightened readers, for the same reason, and because I seldom take issue or point out mistakes. Although since this whole comment is here to satirize the above reasoning, effectively declaring it a mistake, then perhaps I can now enter the ranks of the most enlightened. Except since I have taken exception to the very process by which I would be thus elevated to enlightenment, I'm left with a problem.

Unknown said...

Dear Dmitri.
This is why I donated to your engine... so that you could continue writing your good sane comments... I liked your little blackmail, if you don't donate I won't have time to write for you... as I shall have to go out and work for money.... reminds me of my son, when he was 3 and pissed with me... he would tell me if I was tough with him, I will never kiss you again. . . . so thanks for another sane voice... yes
EU need to change !!!!!

John Doyle said...

Money is not counterfeit. That would presume there is some genuine stuff we are missing somewhere out of sight. There isn't. Money can be characterised as coming in two forms. Bank money, which is nearly all the money in the economy and Reserve money, newly made every time the central bank pays a bill. Bank money is a financial liability and that includes bonds held in the CB. Reserve money is a net financial asset. It is the source of all the money in circulation, an accumulation since the nation began.
Bank credit money also comes from "thin air" but its creation and extinguishing happen every day.

So lets look at Greece. Greece's debt is both the loan capital and it's interest due. and that is what the creditors want paid. However Greece cannot pay. Perhaps then Greece could meet the interest component? If so they should offer to pay that much taking the referendum day as the interest cut off point. Because the banks cannot spend the capital - it cannot be spent as electronic sums in spreadsheets, but only when the money is credited to a borrower's account - they can only use it to mark down the loan amount. This means only the interest received is spendable money. Whether or not the loan sum is paid there is no additional financial benefit in getting it. All it does is change a number in the ledger at the bank and the loan is eventually extinguished. Whereas the Greeks have to sell, trade. etc, real assets to make repayments.

If Greece can do that it's creditors have no or little threat to their bottom line. so that also scotches the line that Greece's debt will contaminate the other indebted member nations. If they force a Grexit they will lose even that.
Even so Greece should exit anyway. It will, in regaining its monetary sovereignty, get back its most precious asset.

GT said...

Good article...
However, the machinations of the Troika go far deeper than just Greece or the Eurozone.
My take on the global financial circus is here: http://georgui.blogspot.com/2014/03/the-disfigured-past-and-ominous-future.html

Marc L Bernstein said...

Paul Craig Roberts ---

"Washington’s higher interest is the protection of the unity of the EU and, thereby, NATO, Washington’s mechanism for bringing conflict to Russia."


If I were a betting man, I would bet that Paul Craig Roberts is correct. When trying to predict what Washington will do, it is wise to consider what empires have typically done in the past. As far as I know, they have only very rarely executed a planned, prudent retreat from their empire. Usually they go to extreme lengths to try and hold on to it, even if that means bankrupting themselves and making a large collection of enemies.

Paul Craig Roberts and Steve Lendman have also mentioned that the Ukraine is getting bailed out and they are as bankrupt as Greece. However, the Ukraine has geo-strategic significance for Washington and its "grand chessboard" garbage a-la Brzezinski.

I hate to say it but aggression towards Russia is a major determining factor in all of these machinations by Washington and its puppets, fools and idiots in NATO. As you have said, Dmitry, "it's puppets all the way down."

I'm just sick of it. Instead of working to overcome genuine global crises such as human overpopulation, Peak Everything (Richard Heinberg), climate change, ocean acidification, deforestation, the 6th mass extinction, soil erosion, aquifer draining, etc. , the major governments of the world, led to a great extent by Washington, insist on focusing so much of their energies on engaging in military conflicts.

Rhisiart Gwilym said...

I second Tim Bloom's and Marc Bernstein's comments, in particular. And - as ever - thanks again for your exceptional gifts of insight and clarity to us, Dmitry!

Stuart Cram said...

Re: Mr. Bloom & His Vandals

As a recent Canuckistani transplant to North Eastern Ohio I would suggest bringing some heavy equipment if you plan on stealing the women.

Most of the wealth that was once here is now only vestigially represented in the ornate churches, schools and numerous grand houses. I suspect it’s now in Asia. Good luck taking it from them. Other than cheap housing, especially compared to Canada, there really isn’t much worth stealing. Settling would be a good idea though as it seems like lots of good farmland and a good stock of trees for heating. Maybe the Amish will give you some pointers if you’re nice to them.

The locals are a pretty shiftless lot, plenty of young men wandering around shirtless throughout the day or just lying in vacant lots with blank expressions. People are reasonably friendly in person, however there’s a distinctly different mentality going on when ensconced in their mechanical chariots.

There’s more crime in the city I live now in than the one I left which was eleven times more populous. Perhaps the Ohio-ans are the Vandals (they’re well armed) and those to the East of here are the Romans.

jwl said...

There are things that we cannot touch which are altogether real, such as peace or silence. And there are things that are not real, yet which we can touch, such as money. And yet we can and do say that the peace or the silence has been broken, while refraining from allowing the same for money. I observe that money, too, is now broken - and I don’t believe that we should be either silent or peaceful about it.

Jim R said...

Charles, I apologize for letting my lonely disaffected muttering go on so long. Back in the days of usenet, we would say if you don't like it don't read it. You may skip to the next comment now.

Dmitry, I suppose I am following this blog because you are living the fantasy, while I am still living with a 3 car garage into which zero working cars will fit, plunking away at a corporate job which pays the bills, and knowing how it's all probably going to go..

But I was wondering if you could post an update on your boat repair project? Did you get your cash out of Indiegogo? Make the purchase? Pics of the boat up on skids? Some nautical slang?

It was interesting to watcch the bitcoiners, n'est-ce pas? Spelling out the digits of Pi and other interesting numbers ... and they want it to be taken seriously as a currency, heh.


Marcel Cousineau said...

The little wanabe gods in Brussels, Washington and elsewhere on the
Rebel planet think they are in control and can fix anything. All of our problems, from wars
, global warming now climate change, economic collapse is due to global
Sin against a holy God proud fools have assumed to have gotten rid of and replaced.
This assorted collection of arrogant fools and their useful idiots are all headed for destruction.

"'Why are the nations in an uproar, and the peoples devising a vain thing?
The kings of the earth take their stand, and the rulers take counsel together
against the Lord and against His Anointed: Let us tear their fetters apart,
and cast away their cords from us!"'
He who sits in the heavens laughs, the Lord scoffs at them.
Then He will speak to them in His anger and terrify them in His fury...
Psalm 2

Unknown said...

OK back on topic. "The debt was bad to begin with, because it was made based on very faulty projections of Greece's potential for economic growth. The lenders behaved irresponsibly in offering the loans in the first place, and they deserve to lose their money."

Let's not localize too much -- part of why Greece makes everybody nervous is of course that fairly recently ALL projections of potential economic growth, everywhere, became faulty. Therefore essentially ALL debt is now bad. It's just a matter of short-term arbitrage at this point, shuttling money around trying to delay the inevitable. Certain evil empires are also having an OK time offloading losses to war zones and the like (which is why it's so important to continue creating new war zones).

Unknown said...

Chastened member of the .02% here. I was in Walmart yesterday with my people and didn't see anyone who looked interested in discussing the meaning of money so thought I would volunteer my .02 dollar. Since it was not about Greece it may have been "off topic". Thanks for allowing it. As a nearly 1 year reader, I feel compelled to move from the lurking shadows to the rarified air of the search for truth. I will try to post tersely rather than expansively in the future so as not to wear out my welcome. I will also try and take Lincoln's injunction to heart--"Better to be silent and thought a fool than open one's mouth and remove all doubt." I may not know a lot about money but I actually have enough of it and can be generous with those who need to ask for it.

seraphim said...

The acceptance of Greece in "Europe" where it does not belong, was motivated by the long political tradition of impeding Greece to form a natural alliance with Orthodox Russia and "stop the Russians to get to the warm waters". We can't evoke all the historical instances when this policy was applied (and which little by little conducted to the World Wars). Just a reminder that the goal of the European Union was defined by one of its godfathers, Count Richard Nikolaus von Coudenhove-Kalergi:

"The unanimous aim of all Europeans, regardless of party or nation, should be the prevention of a Russian invasion.... The only wise thing for Europe to do is pursue ... a Pan-European defensive pact against the Russian menace."

The Pan European Union,co-founded by him and by Otto von Habsburg in 1924, and financially supported by the Baron Louis de Rothschild and Max Warburg, who put Kalergi in contact with Paul Warburg, the German-American banker (the same who with his brother in law Jacob Schiff, bank-rolled the "Russian" Revolution)and Bernard Baruch.