Thursday, November 10, 2011

A Beginner’s Guide to the European Debt Crisis

For ordinary, non-specialist people just tuning in to the horror-show which is the European crisis, the whole mess can seem daunting and almost hermetic—almost like a secret language, or a really complicated code.

Euro-this and euro-that and euro-the-other—that’s all everyone seems to be talking about. That, and words like troika, haircuts, bailouts, yields, not to mention an alphabet-soup’s worth of acronyms like EC, ECB (they’re different), EFSF, PIIGS, IMF, EMU—

—OMFG!

For us dweebs neck deep in this stuff, it’s all mother’s milk. At my Strategic Planning Group, we’ve been game-playing what do when the eurozone breaks up since May—but for people who’ve just realized, “Hey! Something’s going on over there in Europe!”, it can be a bit much, like tuning in to a soap opera five minutes before the end of the episode: Everything seems terribly portentous and important and shocking . . . but basically incomprehensible.

Which wouldn’t matter if this was a soap-opera—but this is real life. This European crisis will affect your financial future, no matter if it’s happening on another continent. This is major

—which is why so many ordinary people are confused and frightened: Because it seems terribly complicated.

But like all things which seem complicated at first glance, when you break it down, it’s simple.

This is what happened:

In 1999, the Europeans implemented a common currency, the euro. They did it in order to improve trade between the eurozone nations, and thus bind the European countries closer together.

This new currency was centrally managed—that is, there was a single issuer of this new currency. Which of course makes sense: In the United States, you don’t have 50 states issuing currency—you just have the Federal Reserve, issuing dollars for the entire country.

Same with Europe: Thus the eurozone—the zone of countries that had the euro as their currency. This new currency was managed by the European Central Bank—the ECB—out in Frankfurt, Germany. The ECB’s primary concern—like all central banks—was making sure that the currency it was supervising did not lose value. That is, it made sure that inflation stayed below 2% per year.

However, just like in the U.S., though there was a central bank—in this case the ECB—each of the member states of this European Money Union (from where we get the acronym “EMU”)—could issue its own debt.

So far, so good: The euro was printed and managed by the ECB in Frankfurt. The individual countries—Spain, France, Germany, Holland—could each issue their own debt, and of course manage their own government budgets.

Now, the strongest economy in Europe is Germany’s. For our purposes, the reasons why of this don’t matter. What matters is, Germany’s cost of borrowing was the lowest of the eurozone.

This makes sense: If I make a million bucks a year, and borrow $10,000 for expenses and stuff, I’m going to get a pretty good interest rate from my credit card company or my bank. You know how lenders are: They lend you an umbrella when it’s sunny, then take it away when it rains. Since I don’t need to borrow the ten grand, all the lenders will trip over themselves to lend me money at extremely low rates, because they know I’m good for it. I won’t default on the debt.

Same with nations—and same with Germany: German debt was always cheap, in the 1%–3% range, because Germany was good for it. After all, it’s the fifth largest economy in the world, and the biggest within the eurozone, racking trade- and fiscal budget surpluses year after year. So who wouldn’t feel comfortable lending money to the Germans? Nobody—‘cause see the Germans? They pay up—always.

But here comes the problem: Banks felt very comfortable lending money cheaply to Germany. Germany was a member of the eurozone. Therefore, lenders assumed that the other countries in the eurozone were going to be as good a credit risk as Germany.

So the banks lent money to the other, weaker countries in the eurozone at the same rates of interest as they lent to Germany.

Yeah, I know: !!!

Imagine you have a great credit rating—so the bank gives your kid a $100,000 consumer line of credit, just because he happens to live in the same house as you do. The bank lends your kid the money because it says there’s a “tacit promise” that if your kid doesn’t pay back the money, you will.

Crazy, right? Right—but that is the core problem: Countries like Portugal, Italy, Ireland, Greece and Spain—countries whose initials spell out the acronym “PIIGS”—could go into debt at the same rates of interest as Germany, just because they shared the euro as a currency.

The economies of the PIIGS were not as sound as Germany’s—but the lenders treated them as if they were. Not only that, the lenders assumed that, if any country got into trouble—i.e., if any one of the PIIGS couldn’t pay back their loans—the eurozone as a whole would be good for the debt.

This was great for the PIIGS. Because it meant cheap and plentiful loans, with which they could go out and buy stuff.

So they did: The PIIGS went into debt—too much debt—while the banks gave them all the slack they needed. Which makes complete sense: If before 1999, these countries were borrowing at (say) 6% or more, and all of a sudden their cost of borrowing drops in half, what will they do? Go into debt!

Which is what they did—massively.

And what did these countries do with the debt? Create a false sense of prosperity!

This in a nutshell is what happened between 1999 and 2010, when the Greek crisis first erupted: During those “boom” years (which were really no more than junior going crazy with the credit card), the various countries of the eurozone went into massive debt, in order to both fund a social safety net, and cut taxes on their citizens.

In other words, something for nothing, bought and paid for with cheap debt. Kind of like America . . . —but that’s for another time.

Though they now don’t want to admit it, the Germans encouraged this over-indebtedness, by the way—as did the French. Why? Because with this false sense of prosperity, the over-indebted nations bought German and French goods and services. German and French banks were at the forefront of lending money to the PIIGS—which essentially made the whole scheme nothing more than vendor financing on a massive scale: I lend you money so that you can buy my products.

Just like a junkie setting up an addict, or a predatory credit card company giving you teaser rates, the Germans and the French—via their banks and government institutions—gave the weaker economies all the incentive in the world to go into massive debt, and then go out and buy German and French products.

It was bound to end in tears. As is happening now. It all goes to the issue that all these countries are over-indebted. And that overindebtedness is being reflected in the sovereign bond markets.

Let’s take a slight detour, to explain what this means.

What Are Bonds? What Are Yields? And Why Do They Matter?

A bond is a bit of paper that is traded, just like stocks. But unlike a stock, which is a piece of ownership in a company, a bond is essentially a promissory note: You lend me money, and I give you this piece of paper where I promise to pay you back. The bond has a face value, and an interest rate. The person who buys the bond at the market price collects the interest, and receives the principal of the bond on maturation. A person can own a bond, or sell it to someone else, just like a stock.

Corporations issue bonds, in order to finance factories, expansion, whathaveyou. And governments issue bonds, in order to finance various infrastructure projects, as well as their deficit spending.

With all bonds, there are three pieces you have to understand: There is the face-value of the bond, there is the interest that the bond pays, and then there’s the effective return-on-investment of the bond—which is known as the yield.

The yield of a bond is what everyone pays attention to. The yield on a bond is a percentage value: It is the interest rate of the bond, times the face value of the bond, divided by the current price of the bond. The yield is inversely affected by the price of the bond: The higher the price of the bond, the lower the yield, and vice versa.

So you see, it’s a seesaw: When the yield of the bond is going up, then the price of the bond is going down. When the yield is going down, then the price of the bond is going up.

Let’s see an example: Say I sell you a bond for €1,000, paying 5% interest per year. The bond is trading in the open markets at €900. So 5% times €1,000, divided by €900, equals 5.55%—the yield has widened, as they say in the biz. That is, the yield has gone up, since the price of the bond has gone down.

But say instead that the bond has risen in value, which of course can happen: Say the price is up to €1,100 per bond. So 5% (the original interest) time €1,000 (the face value), divided by €1,100 (the current price, gives us a yield of 4.54%. The bond’s yield is said to be narrowing.

Since bonds all have different conditions insofar as maturation, interest rate, etc., it is simpler and quicker to speak of changes in yield only: “The yield is rising” means that the price of the bond is going down.

Why is the price of a bond going down? Because investors think that the person who owes the debt—the bond issuer—is not necessarily good for the debt. That is, they think the debtor might default. So the owners of the bond sell it at a lower price, because they don’t want to have the risk of a default.

Why does a bond go up in price? Because the debtor might show signs that it won’t default—so the high yield makes it attractive for a buyer to pay more for the bond, thereby driving up the price, thus paradoxically lowering the yield of the bond.

So what does this mean for countries?

Well, when the yield of a government bond rises, it means that people are selling that country’s bonds. Take the above example of €1,000 bonds paying 5%. If the bonds are now at €900, the yield is at 5.55%, as per the above example.

Now, if the yield on that bond rises to 7%, what does that mean? It means that the bond is trading at distressed levels. Because for a €1,000 bond paying 5% interest to be yielding 7%, then the bond is trading in the €715 range. (The face-value price of €1,000 times 5% divided by a current price of €715 yields 7%.)

(By the way, this is a simplified version of calculating yields. In markets, often as not, the “yield” being referenced is the “yield-to-maturity” (YTM), which is a more complicated calculation. If you’re interested, check out this discussion, which explains it in relatively straightforward detail.)

So say you’re a government, and you have to fund €1 billion for a bridge. You will issue bonds to finance the bridge, bonds that will pay an interest of 5% a year. In order to raise those billion euros, you have to sell not a million €1,000 bonds—you have to sell 1,400,000 bonds with a face value of €1,000.

And therefore, you have to pay interest on 1,400,000 bonds, instead of 1,000,000 bonds. And when these bonds mature—that is, when they have to be paid off in full—the government won’t be paying out €1 billion in principal: They’ll be paying out €1.4 billion in principal, on what was supposed to be a €1 billion bridge. Because bonds are paid full face value on maturation.

Thus a government’s cost of borrowing has risen. And it’s all expressed in the yield.

That’s why yields matter. And unfortunately, rising yields is what’s been going on with European debt: They have risen massively—because investors think there is a less likelihood that the bonds will be paid back in full.

Why does this matter? Because these nations are all relying on deficit spending: They spend more money than they bring in. So they need to issue more debt, in order to pay off their obligations, such as salaries, pensions, medical care, not to mention pay off the interest on the previous bonds they’ve already issued.

So in this situation, a country can get to the point where its bonds are selling at such a discounted value that it cannot issue enough bonds to simultaneously pay off their obligations and allow them to continue to function at their current level.

That is, countries can get to the point of bankruptcy—depending on how high the yields on their bonds rise.

Now, About Greece

This is what happened to Greece: Its cost of borrowing rose so much that they no longer had the ability to raise the cash to pay off all their obligations.

So starting in April of 2010, the so-called Troika—the International Monetary Fund (IMF), the European Central Bank (ECB), and the European Commission (EC, the executive arm of the European Union)—structured a bailout package, which was eventually passed through in June.

The bailout package of course had some conditions, which the Greeks agreed to in order to get the money—and which they then promptly failed to live up to. (How am I not surprised . . .)

The details aren’t that important for the purposes of this discussion. What matters about the Greek Drama is two-fold:

    • One, Greece is a small economy within the EMU—about 2% of the eurozone’s GDP—so therefore its debts, while massive, were all-in-all manageable.

    • Two, the bailout of Greece was supposed to be swift and decisive, and act as a signal to the markets that the Troika would defend the eurozone, and not allow any of its members to go bankrupt. In other words, Greece was a firewall, to protect the other economies.

But the problem was, the Troika dithered.

Why did they dither? Because it became immediately clear that the only way to fix the Greek situation was by debt haircuts—and haircuts were impossible, because they would bankrupt the European banks. And the American ones too.

Let me explain.

Fear of a Credit Event

Part of any debt restructuring—be it a poor man’s bankruptcy, or the bankruptcy of a large corporation—is debt haircuts: That is, lenders get less than the 100% of the debt that they are owed.

Say I owe $10,000 to a car dealership for a new car I bought last year, and I go bankrupt. The dealer will get a percentage of the money I have left after everything (including the car) is liquidated. But they won’t get the full $10,000 that I owe them, obviously, because I’m bankrupt: I owe more than I have.

Same with nations: Greece owed more than they had—so Greece’s lenders were going to have to take a haircut. That is, they would have to take less money than they were owed.

This is what’s known as a “credit event”.

This was a problem.

If there was a haircut on Greek debt—a credit event—then the banks and insurance companies which held the debt (predominantly German and French banks) would have to write a loss on those loans. Huge losses. Losses bigger than their capital.

Thus these banks would go bankrupt, if there was a credit event in Greek debt.

Even if they didn’t go bankrupt, these financial institutions would have to sell off other bonds, in order to raise the cash to stave off bankruptcy.

This massive sell-off of sovereign bonds would have a contagion effect: In order to cover their Greek bond losses, banks would have to sell their Italian, Spanish and French bonds—at a loss—so as to raise the cash to stay solvent, which would in turn make Italian, Spanish and French debt toxic.

In other words, a domino effect.

Furthermore, American banks—which don’t own much in the way of PIIGS debt directly—have written a lot of insurance on those sovereign bonds: The famed credit default swaps (CDS). Bank of America especially has made a lot of money selling CDS’s on those debts in 2008, 2009 and 2010, as has JPMorgan.

If those sovereign bonds defaulted, those American banks would have to pay off these CDS’s—

—and thus they would go bankrupt too!

Everything is connected: A credit event in Greek bonds would trigger credit events in Italian, Spanish and eventually French bonds, which would bankrupt European banks as well as American banks—

—basically, a repeat of the 2008 Global Financial Crisis, only bigger, and without the happy ending.

This is why the Troika dithered. They talked tough, and they even put the gun to Greece’s head: Pass these austerity measures, or else no bailout money. But they never pulled the trigger and let Greece fail—because if they did, the European and American banking sector would collapse.

Since the Greek financial hole grew bigger between 2010 and 2011—because the Greek’s didn’t live up to most of their promises—a second bailout package had to be created.

Again—more dithering. This time, the dithering was because the Germans in particular feel that they are propping up spendthrift countries—and nobody likes to feel like the chump who’s paying for other people’s good times.

There is enormous political pressure on Merkel to not save Greece. The people pressuring Merkel don’t realize what will happen if Greece collapses.

So then last October 28, the Troika plus German Chancellor Angela Merkel and French President Nicolas Sarkozy finally came up with a “solution” to the Greek Drama.

I say “solution” in the loosest possible sense of the word: In the weeks previous to the Oct. 28 announcement, the Europeans had been going around the world, hat in hand, asking emerging markets—especially China—to fund their bailout facility. They had been politely refused—because they’re not stupid: They saw that the bailout facility—the famed European Financial Stability Facility (EFSF)—was just a lot of smoke and mirrors, essentially throwing good money after bad.

Through some clever accounting tricks and some not-so-clever baldfaced lies involving accounting standards, the Europeans managed to cobble together a workable EFSF which could give Greece and potentially one of the other PIIGS a lifeline.

But in order to show that they were “serious”, the Troika and Merkel and Sarkozy insisted that the Greeks agree to a serious of painful austerity measures.

The big news, however, was that this second bailout of Greece included haircuts on Greek debt. The advertised number on the Greek haircuts was fifty percent! (Though when you looked more closely at the details, it was more like 20%.) The Oct. 28 deal stipulated that the haircuts on the Greek debt would be voluntary—“voluntary” as opposed to “forced”, which would have triggered a credit event)—

—but then on the following Monday, Georgios Papandreou, the Prime Minister of Greece, threw a monkey wrench into the Rube Goldberg contraption that is the Second Greek Bailout Package:

G-Pap called for a popular referendum of the bailout!

All hell broke loose.

The eurocrats famously do not like going to the public to ask for their support—they like to dictate instead. Why? Because they consistently lose the popular vote, to the point where they no longer bother putting things up for a vote.

For Papandreou to put the austerity package to a popular referendum meant that it would likely not pass—because no citizenry likes to be asked if they want their government to give them less services and entitlements (duh!).

Therefore, the Troika suspended the €8 billion tranche of the first bailout package that the Greeks were supposed to get in November.

Without that tranche, Greece goes bankrupt on December 15.

So Papandreou backtracked on Thursday, November 3, and said that there would be no referendum.

But the damage was done: The bond markets got so freaked out that they started looking at the next weak link in the European chain.

So Now, We Have Italy

In mid October, Italian debt was yielding about 3.5%—very respectable. Italy, furthermore, has a very large debt, but it is far from insolvent: In fact its government regularly meets its budget with a bit of a surplus. Balance of trade is okay, growth is low but in line with the rest of Europe. And aside from periodice sex scandals, the Berlusconi government is fairly competent and efficient.

Overall, Italy is in pretty good shape.

But it needs more debt to pay off previous debts, and to shore up its economy, which is in a recession much like the rest of the world’s. It’s debt load is growing, but strictly because its government is spending to prop up the sagging Italian economy.

Nevertheless, after the Greek fiasco, the bond markets turned on Italy.

On the Monday after the Greek Week (Nov. 7), Italian yields rose from their 5% level—then spiked on Wednesday to above 7.6%, which is potentially catastrophic. Why catastrophic? Because at those levels, no advanced economy can finance itself—not to mention the fact that certain derivatives require that yields stay below certain thresholds. If they remain above certain yield numbers for a set period of time, they are considered credit events—which triggers CDS’s, which lead to bank bankruptcies.

So those yields have to go down now—fast.

This crisis in Italy has led Silvio Berlusconi to announce he will resign, once austerity measures are passed. His resignation will likely calm the markets—for a bit. At my Strategic Planning Group, I’ve been live-blogging the nightmare, and discussing what to do about it.

What strikes me is the inanity of the eurocrats’ response. They come up with vague and flimsy packages, and a lot of flowery rhetoric—you should have just heard Sarkozy, after the Oct. 28 deal, going all French Literature on the thing.

But the Europeans don’t seem to understand that they have a nuclear weapon at their disposal—which they refuse to use.

And that nuclear weapon in the European Central Bank.

Fear of Monetization

The easiest way to fix this entire debt situation would be for the European Central Bank to simply print up money, and go out and buy enough Greek and Italian debt to bring down their yields.

It wouldn’t even have to be very much—a mere €50 billion would do the trick. The fear that the markets would have of being caught on the wrong side of a trade against the ECB would be enough to keep the markets docile and quiet.

I’m not saying this is a best solution to the current situation—or even a solution at all. However, you cannot make sound economic policy on the fly, as you react to a crisis. You have to stabilize the patient, before you give him the treatment—not operate him for liver cancer while he’s still bleeding from a gunshot wound to the leg.

Having the ECB come in and decisely calm the markets—like the Swiss National Bank did a month ago—would be the best way to get the European house in order, and then implement the structural reforms and austerity measures that everyone agrees need to be implemented.

But the ECB isn’t stabilizing the patient. Why? Because the Germans are greedy.

See, if the ECB does a European version of Quantitative Easing, the Germans are afraid that their currency will weaken—which they do not want, because they are a creditor nation. If the euro’s value erodes, then Germany will have lost some purchasing power.

They are so afraid of the euro weakening—and thus the Germans losing a bit of their surplus—that they are making the other economies in the eurozone crash.

The Germans do not seem to understand that, if the nations of Europe go down, there will be no buyers for their goods and services—so they will suffer too.

Thus the ECB sits there, while this Greek problem becomes now an Italian problem—

—and soon a French problem: The yields of French bonds are rising precipitously, and already one French bank, Credit Agricole, is in trouble over the Greek Drama. It’s only a matter of time before the big French banks start tumbling—and then France itself—unless the bond markets are calmed.

So What’s Going To Happen?

What’s going to happen is—best case—the Germans come to their senses, and the ECB starts buying up European sovereign debt, calming the markets. Greece and a couple of other small and/or weak eurozone countries exit the European Monetary Union, go back to local currencies, devalue, and then rebuild their economies; say Greece, Portugal, Spain and maybe Italy. And finally, austerity measures are imposed, fiscal budgets are put on a sounder footing, and things right themselves in a few years.

Worst case? Italy gets really sick, and then France falls as well, leading to the eventual break-up of the whole eurozone, with Germany, Austria, Holland, Finland and Belgium maintaining the euro as their currency.

This would not be a good thing for those countries, by the way: If the union between France and Germany breaks, the non-eurozone countries would be poor—so they would not be able to buy the goods and services of the rump-eurozone countries.

So all the countries would lose, if there is a break up of the monetary union.

Unfortunately, at this time, the worst case seems the likely case.
If you are interested in an analysis of what to do and how to react if there is a break-up of the European monetary union, please check out my Strategic Planning Group Scenario, “When The Euro Breaks”.

60 comments:

  1. I would disagree on demonizing the Germans. The Germans lived through Hyperinflation in 1920s, which stories of Grandparents/Great Grandparents burning Deutch Marks, as a direct result of Germany attempting to monetize their debts during the Weimar Republic. In addition, Hyperinflation gives rise to the possibility of hyper-rightists gaining power. The loss of purchasing power of the Deutch Marks is within the national psyche, so much so that the rise of Hitler and the Third Reich is being blamed in the instability of the DM during the Weimar. As such, Germany will be extremely hesitant on ECB printing on the backs of German money

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  2. The ECB has already bought a trillion in toxic shit. German ECB residents have been fleeling their ECB posts out of disgust....

    You are wrong on the best case. The ECB will have to buy roughly 2 trillion worth of rolling debt and new debt issuance's to plug the whole....banks can't do it with leverage of 25/1 and sovereigns can't buy cross border debt without crippling their AAA ratings.

    Therefore, while 50 billion would be a sticksave; it merely buys a month or so. It's why the worst case scenario is playing out. First, it will have to nearly unravel.....and only then will the ECB have the ability to print.

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  3. ok here i go, thanks for my comment? ok , your welcomed.

    first of all,, sorry for the typos. i you can see the forest and not only the trees.

    "implement the structural reforms and austerity measures that everyone agrees need to be implemented. "

    not everyone agrees on those cuts!

    we agree on this,..don't pay the debts of the banks, why do we have to save rich with people's money, that's just insane. when I bet and I lose
    the gov doesnt give me $, but if banks fail the gov give them money..what the heck, it makes no sense.

    So..the crisis is coming, we are not out of it, and we are just not going to be out of it, it started in the 1930's and we still haven't got out of it.


    ja-ja-que divertido

    and the euro zone, a brilliant idea to future generations to avoid wars among countries....what a good idea...that transformed into a covered operation for those greedy fat cats with more money than they can spend. what a weight they have over their shoulders, drinking cocktails in their boats and buying gold to save their assess, while a big amount of the ppl have no currency at all to spend. Because money? they have no money...$1,000 for the minimum buy of silver! that's just insane, the average joe is completely killled since the 1900's- he has no currency at the end of the month....so he's pretty dead ah? dead in life...but bread is not everything. and that's the beauty of the gospel. But back to business in here...yeah the situation sucks, and it's not fun at all. not fun at all. so let's be preparaed...I wonder how will it spread accross the different continents...and how people will loose their jobs.

    I think you should be more direct and use adults talking, try words like, stealing, robbery, fraud, crimes and corruption.

    bail out = stealing from people.

    "they are too big to fail" = crap

    eventough the criminal minset is dominatig the leadership positions in the planet the idea of a world government is still a good one to prevent wars and give real freedom for humanity, but but...you can't have it with clowns like the ones we have in power, merkel, sarkozy, obomba, and the rest of the bank servants.

    Sadly that fascism is in our faces everyday but you know the gospel of the kingdom will not fail, and bt, what a great service and recognition does
    stephen hawking givve to the creative intelligences when he says that we don't need a god to have a universe. tell me about blind people! victims of a secular society...now back to spend some quality time in my life, cya around and I wish you a wonderful rest of the day, bro!

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  4. The solution will come from the IMF in their future involvement in the next bailout. With the ECB and Federal Reserve politically strapped to react, we will see the emergence of the global central bank. This bank will also be used for the Japan, UK, and American sovereign debt bailouts. Then we either revalue to gold orderly or disorderly. I have been reading good material about what the future holds here: http://www.ftense.com/

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  5. spend and borrow
    spend and borrow
    livin like there's no tommorrow
    now its divorce time and lots of poverty and sorrow coming

    Hangs out the no vacancy for eurotrash sign , you all shit in your collective nests and can live in it.

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  6. I think your analysis of how this came about misses a few things and therefore paints the wrong picture. This crisis isn't just a matter of profligate government spending by the PIIGS because they got Daddy Deutsche's credit rate. Ireland and Spain were running budget surpluses prior to the GFC. Heck, Ireland was the Celtic Tiger - the Irish Miracle... up until the point they bailed out the private banks in Ireland after the GFC. You said yourself that Italy balances its budget with a small surplus even. The unsustainable profligate government spending happened in precisely one eurozone country: Greece. And the only reason they couldn't sustain it anymore was because of the GFC. Any analysis of the current Eurozone crisis that doesn't emphasize the role of the Wall St and European investment banks that blew up the world will end up looking for the wrong someone to blame. In your case you've landed on PIIGS governments. And now the blame is shifting to Germans for refusing to play ball and bail everyone out.
    As you've said previously, this is a repeat of 2008 only bigger, louder and uncut. The Germans are actually doing the right thing that the US Republican Administration couldn't bring themselves to do... let the banks fail. The market has been trying to make this happen for years now and governments keep getting in the way. Let's have it done already so we can begin rebuilding.

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  7. Then came the invasion of libya and all its treasures stolen, by the same broke motherfuckers, France, English and America, this is well planned.

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  8. I personally feel that the inward look at Europe and their problem creation is a typical head up your ass view. The truth is right here at home with the US banks and the US government. It is the brilliant money lenders of Morgan, Goldman, City, B of A, etc that have sold Europe and us a bill of goods and the road to free profit approach by false rating, insurance, derivitives, etc. Then with their collaboration the US Fed and the corrupt US government have led the world down the road to economic hell that we will all pay for in the comming years. Graft, greed, and godlessness is the credo. These 3 G's will lead to one big bend over as it is comming hard and bad for the world!

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  9. Hi Hawks599:

    You're right about my simplifying the European problems—after all, it is called “A Beginner’s Guide to the European Debt Crisis”.

    You're right, too, about Ireland: The government there was doing fine—it was the banks that got into overindebtedness. But then the government was forced and/or was foolish enough to guarantee the debts of the banks—hence the Irish people now have to pay.

    Inevitably, a lot of details were smoothed over—I wrote this so that a neophyte would understand more or less what's going on.

    GL

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    Replies
    1. Although I'm constantly reading everything I can, I've had a hard time wrapping my head around the situation at large. To that end, I'm that neophyte, and I really enjoyed your post and appreciate the time you took to write it. That said, clearly there's more to learn still!

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    2. me too - thank you!
      mossomo

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  10. How does this work? Twelve years of 'Euro'style socialism has led to the sitiuation today. Does 'QE' (more debt - read Trillions) solve this problem of insurmountable debt levels? Let's just debase the currency, silently rob the purchasing power of the middle classes, and call for more austerity which seems to have been sadly missing for the previous Twelve years. Just have faith that the mighty wise men and women of Europe (quite rich, by-the-way) will finally come to their senses and do the right thing, which may be after all is said and done .... bankruptcy. Government solutions are pure and simple examples of legalised price-fixing. Never give a bureacrat or politition a blank check with fiat money, that only makes it worse!!

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  11. I also disagree with demonizing the Germans-- expecting a rich nation to live within it's means is not too much to ask.

    I believe that Bernanke's Fed and the ECB will attempt to print their problems away, taking care to recapitalize European banks. I look for this coordinated action to take place within weeks. Italy and Greece will be given the choice of accepting socially dangerous budget cuts or leaving the Euro. I believe both will accept the deal. Lets see if their societies hold together as they both enter deep Depressions and their social programs are sliced like a provolone. Soon enough, Portugal & Spain will share Greece's fate

    http://themeanoldinvestor.blogspot.com/2011/11/ciao-italia.html

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  12. If there is European QE, what should be approx. EUR/USD price?

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  13. Socialism for the banks, capitalism for everyone else.

    Nutshell.

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  14. Suddenly ... there is So MUCH going on!
    While the world focuses on Greece and Italy (with Portugal soon to come) and their problems- a new chain of dominoes is falling in the USA.

    Today Jefferson County in Alabama has filed for bankruptcy. The amount owed to creditors is somewhere in the region of $3 billion. But the big implication is that this is just the first of a string of major municipal bankruptcies that will impact the USA over the next 2-5 years.

    Credit default swaps will be triggered in every direction - not that many of these agreeements will actually pay off (!). We are seeing the arrival of a new and more serious phase of a collapse in credit across the global system.

    PeteCA

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  15. I think your primer is very clarifying despite the constructive criticisms offered above. The average inquiring mind simply can't rely on CNN or Bloomberg to make the unfolding story comprehensible; but your blog post today helps a lot, especially for those who can't quite get their minds wrapped around yields and spreads, not to mention derivatives. But here is my question: what should the average middle-class American do to gird up for this perfect storm? Or do we just strap ourselves in for the bumpy ride?

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  16. Thank you for this excellent article. I am probably not as sophisticated as some of the posters here, but I read economic and geo-political news daily from a number of sources, trying to get a handle on what is happening. I do know something wicked this way comes. I don't know how it will end. Badly, I fear. I would like to share this article with everyone I know. But they wouldn't read it. Ignorance is bliss, I guess. Thanks again for presenting the information in this way. Very helpful.

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  17. Quote:"Socialism for the banks, capitalism for everyone else."

    It's more like socialism for you capitalism for your grand kids since it's people of this generations spending it into an ocean of debt and then make the future several generations pay.

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  18. GL,

    In your previous article you wrote: The fact that the markets will be waiting for Lehman allows people like us—who realize that Lehman will in all likelihood never arrive—to make some bets which could pay off big.

    Are you covering your calls or holding on?

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  19. GL,
    Hmmm....let's think about these ideas - that having a central bank as a single issuer of currency makes sense, that printing money will solve the problem, and that the Germans are greedy...

    Central banks impoverish nations. They allow the creation of sovereign debt that would not otherwise exist. Andrew Jackson knew this. This is why his priority as president was to break up the central bank. He succeeded. This is why he was the most popular president since the founding of the nation. This is not taught in the history books or the economics books. I wonder why? Hmmm....

    Japan is 20 years into its central bank debt spiral. It is circling the bowl with no way out. They are so poor 2 generations must sign on home mortgages because paying them off can't be done in one lifetime. The wealth of the Japanese people has been looted.

    In America today, 30% of mortgage holders are under water. Foreclosure rates are rising. This means more declines in home values and even more folks going under water.

    College students graduate with thousands and thousands of dollars in debt and can't get jobs. When they fall behind in their payments, interest and penalties rack up and what they owe increases over time. Student loan debt is not dischargeable in bankruptcy.

    Those who have saved and who are on fixed incomes watch their wealth erode away. The wealth of the American people has been looted.

    The winds of truth are blowing. The internet is providing the power that spins the fan blade. More and more people are learning the true nature of central banks that enable the mountains of sovereign debt, debt that can never be repaid, debt that leads to war.

    Central banks are net buyers of gold. I wonder why? Twelve of the 50 states you mention that don't issue their own currency are in various stages of recognizing gold as legal currency. Hmmm.....

    Perhaps the Germans aren't greedy. Perhaps they are tired of doing all the heavy lifting. Perhaps they will do as the people of Iceland did, and stop perpetuating a system that loots the wealth of the working person.

    Making sound economic policy is not possible when the basis for the policy is unsound. Central banks and fiat money systems are unsound. They loot the wealth of the working person.

    A greenbacker money system is unsound, too. It is fiat money on steroids. So is a one world currency.

    It seems you are advocating QE-Euro. You say the best case scenario is for the European Central Bank to buy up European sovereign debt. This involves creating money out of thin air, which decreases the value of the money that is already in the pockets of those who have earned it. Why was QE 1, 2, and 3 a Bad Thing when the Bernanke was doing it here, but now when the Europeans are pushing for it, it is a Best Case Scenario?

    Hmmm....your post has prompted many questions......

    KS

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  20. real economics.
    i buy a farm on credit.
    i dont pay.
    i lose the farm.
    the bank still owns the farm and the money i did pay them.
    i lose.
    any loss the bank has is because its risky lending anything.even your toothbrush.
    anything else is a greedy corruption of sound economics by people who arent willing to pay for the risk they took.
    death to tyrants of all kinds.
    peace

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  21. Europe's private central bank create money out of nothing. They then lend this money at INTEREST, to other countries and this interest is never created in the first place.

    Say the loan is 1 million. The interest to be re-paid will then be 30,000 if the interest rate is 3%, but this interest is never created when the initial loan is created out of thin air.

    That is the root of the problem, because how can something that is never created be re-paid. There is therefore never enough money in circulation.

    This problem was then compounded by fractional reserve banking, where the banks only have to have 10% of the money they loan out in their vaults.

    If a bank had 1,000 Euros in its vault, it can therefore lend out 10,000 Euros. Say 10 people each took a loan of 1,000 rand each and used the money to buy something, this money would be transferred to the account of the product/service provider.

    If these 10 product/service providers each used different banks, you would end up with 10 banks getting a deposit of 1,000 Euros EACH, which enables them EACH in turn - according to the fractional reserve bank ratio - to lend out 10,000 Euros.

    So now you have 10 banks, each able to lend out 10,000 Euros (10 x 10,000 = 100,000 Euros) from an initial ammount of 10,000 Euros and when this process gets repeated thousands of times, you end up with the problems we have today.

    The banking system created the mess we are in today, but as they are seemingly to big to fail, they are passing their losses onto the citizen.

    Profits are therefore privatized and losses are socialized.

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  22. Ok let's cut the shit guys and gals...Eventually the IMF using US UK Japanese and Chinese funds (predominately), are all going to have to pony up at the Bullshit Coral. The markets will force this upon us and we can't do a frigen thing about it. The day of reckoning is coming and the poor and middleclass will be hand fed this trough of horseshit again.

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  23. Here's a thought experiment: what if we (the not-so-dumb-middle-class) started to stockpile coins (i.e., hard cash) so that when the hyperinflation sets in ... say, in a few years or so ... a kind of underground currency, recognized by all, kicks in. My friendly merchant in town might take either $10,000 (a single bill) for a loaf of bread, or one solid quarter coin. So, what if we use our coinage to begin to create a new currency in preparation for the collapse of the dollar? Thoughts, please.

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  24. whenever i read you i get some kind of elitist flavor that becomes a bit of travesty in the end when you write 'Whether you agree with me or not, thank you for your comment.'

    GK

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  25. Would love it if you or your readers could share thoughts about Soros’ “Bazooka” plan to shoot down Euro debt crisis http://www.billionairechronicles.net/soros-plan-to-save-euro

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  26. What's going to happen indeed...Signore Lira !!!

    Under your best case scenario....The Germans WONT come to their collective senses. I have this sneaky feeling that deep down they have a long held resentment for the hell they were put through after WW 1 (one must analyse the causes and the perpetrators). One needs to have a "full" appreciation of the history of events leading up to and succeeding their bout with Hyperinflation. Then it is always a salient point in overlaying history with current events to get a full appreciation.
    Ever experience that "OH Shit" moment ?
    Has the penny dropped ? Light gone on ? Bell started ringing?
    The Germans have long memories of what transpired in the Hyperinflationary period of 1920-1923. They are fearful that the "causes and perpetrators" are rearing themselves again. Do they wish to be taken to the cleaners simply because the EURO cannot fail and that they are considered the Rock of Europe..(ie. to be raped and pillaged) ? AND not just by their fellow EUR countrymen but the whole financial system nonetheless (incl US Banks). But what should also be remembered is that Germany, after the collapse of their currency, became the strongest growing nation by creating a new currency backed by gold. As far as I am aware they have the 3rd largest stash of the shiny gold stuff in the world (behind the US and the IMF). They are rightfully sitting pretty.

    The worst case scenario is probably a little closer to the mark. What is evidently clear is the lack of commonality of culture between the northern EURO states and that of their mediterranean cucine..no amount of sustainable fiscal union through common currency will be achieved. They are literally worlds apart notwithstanding their geographical proximity.
    The future portends that the world financial markets will have their separation and dislocations from time to time with increasing frequency.
    It is not beyond the realms of impossibility that the EUROZONE will eventually draw a line through its mid section....and cast aside the austerity averse, reckless, credit hungary lazy no hopers of the south. Europe always was and always will be a two speed continent. Unless you have commonality of political and economic and financial pursuasion you cannot have a UNION.
    A real solution would be to makeover the world's monetary system. Clearly the governments and banks continue to demonstrate that greed and reliance on fiat money does not work in the end. The flaw in the Keynesian economic cycle is that Virtual Cycles built on ever increasing debt levels will ultimately fail. We should all know that the end game is truly closer than few expect or can imagine.

    Liquid Motion

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  27. Hey GL,

    ..a possible title for another blog entry....

    "A Beginners Guide to the European Tsunami"

    The Tsunami I refer to is the mass exodus of foreigners and nationals being displaced from the collective soon to be basket cases of Euroland. Austerity will accentuate the downward spiral and recessionary trends.
    I ask ...Where do they go...Germany, Austria, Holland, Belgium, .....China, UK, India, Sth America ????

    Are the governments and elitists of EUR and the rest of the world prepared for this wave of people. This leaves questions to be answered for not only those austerity impoverished countries but also the recipient countries.
    The focus on the financial crises has conveniently discarded the ensuing humanitarian crises. Has this world become so narcissistic and materialistic that we forget the real suffering. We need REAL world leaders to step up.

    Liquid Motion

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  28. First, thanks GL for this simplified write up. A lot of non-expert people will appreciate it.

    As a non-expert in European affairs, but as one who has learned much in the past decade on such things, here my take:

    1) GL should set the stage of his explanation better by saying at the outset that the root cause of the EU crisis is American-made financial ideology. It was the US who invented much of this financial crap, practiced it, run it like an imperial war machine, and proceeded to blow up half the world while they raked in untold billions in personal wealth. Many of the major EU *private banks* copied the American financial ideology in their portfolio to the PIIGS. But at least they did it to other EU members and not to the rest of the world as Wall Street did.

    2) Blame not the German please. (I am not German.) Germany joined the Eurozone on the strict condition that they will not bailout any other members, and can exit if other members try to inflate the Euro to 'solve' their fiscal mismanagement problems. These conditions are so strict and profound that they are spelled out in the Eurozone treaty, cast in German laws and certified by the German supreme court. Therefore DO NOT ask the German to agree to any bailout of other governments, to QE actions by the ECB, and to any measure to inflate the currency artificially. Not only German hates that due to ideology, painful history, but it is against German laws. This is *not* greed!

    3) You mentioned the fear of 'credit event', a situation so dire that even sovereign governments of the EU are held hostage. These 'credit events' can bust up big banks overnight and plunge major advanced economies of a billion people into utter hell within a week. But who created these 'credit events', and who can pull the Red Button to nuke humanity?

    Answer: They are created by the biggest western banks, most of them Wall Streeters, for the purpose of making the most obscene profit out of monetary nothing, out of useless financial complexity, and out of blackmail. They are the toxic nuke of derivatives and credit default swaps. The banksters and hedge fund monsters created these nonsense, then link them up into a web so large, so evil that nobody can touch them for fear of blowing everything up.

    The financial nuke event is not '2%' Greece defaulting on its debt. It is the derivatives, networked nuclear missiles, installed by the banks to enrich themselves.

    BAN ALL FINANCIAL DERIVATIVES AND CDS!

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  29. The others are right. I was looking for more references to derivatives.

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  30. What totally sucks is that we still permit these international 'banksters" to create our currencies as an instrument of debt. As mentioned above,private banks generate the principal....which becomes the money supply. So, WTF, where does the money come from to service the interest on a
    30% BOA credit card?

    Fuck austerity! These pricks are just going give themselves bonuses...and
    then foreclose on us.

    ¡En los estados unidos.... estamos judidos!

    Hey, let's start a war. We can blowup a couple of tall buildings and blame it on some hapless oil producing nation. The nice Zionist TV man can tell everyone that "said" nations leader is a nut-job, and is killing his own citizens. While we are there spreading democracy,we can pilfer all their resources. This has never been done before.

    P.S. Nice job on Black Listed News, Gonzalo! http://www.oraclebroadcasting.com/archives.php?stream=/Intelstrike/Intelstrike.2011-11-10_16k.mp3

    Joey Z. some where in the States

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  31. Anonymous @ 12:45 - stockpiling coins will not work.

    With high inflation, the melt value of coins exceeds their circulation value. In times of rapid inflation coins disappear from circulation because the value of the coins as metal is greater than the face value. People don't use them. They hold onto them and don't spend them.

    You can track the melt value of coins here.
    http://www.coinflation.com/

    Be sure to scroll down to the second chart, the "United States Circulated Silver Coinage Intrinsic Value Table." The numbers are mindboggling. They are a stark illustration of the magnitude of the debasement of our currency.

    Here is a piece on the coin shortage in Argentina in 2009.
    http://www.newyorker.com/talk/financial/2009/06/08/090608ta_talk_surowiecki?yrail

    US coins whose melt value currently exceed their face value are already very hard to find. They have virtually disappeared from circulation.

    KS

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  32. I would put myself more in the neophyte category wrt this topic - given that, I would tend to agree with Hawks5999's post providing more detail to enhance GL's straightforward (thank you!) analysis.

    The analogy that I see between '08 GFC & current EUC:
    EU scapegoat = Greece/PIIGS irresponsible govts
    US scapegoat = Subprime irresponsible homeowners
    Common denominator "DEBT & CDS MIDDLEMEN/PIMPS" = Wall St/European investment banks (using same "Heads I Win/Tails You Lose" satanic agenda)

    As things unfolded, the blame-game narrative in the US initially focused on "loser" subprime homeowners but got properly revised (thank you "Inside Job" et al) and the public eventually saw who really master-minded the whole big mess.

    With the EUC, once again the MSM is painting a similar "loser" PIIGS narrative and I haven't really heard anything about the DEBT & CDS MIDDLEMEN/PIMPS (why not?).

    Some things in this analogy that are unclear to me:
    - If the Fed can simply expand their balance sheet by $1.4T to buy toxic mortgage debt from insolvent US banks at full face-value (and not really create horrible price inflation for US consumers ... yet?), then why can't the ECB just do the same thing with toxic PIIGS debt?
    (did the EUC 50% haircut improve upon the Fed's shitty purchasing job or is this not comparable?)
    - Who is the AIG equivalent in this analogy? From your article, it sounds like BofA sold a lot of CDS insurance? Do you think the global "we" will bailout this "EUC AIG" to ensure that the CDS insurance gamblers get fully paid out on their bets? Or cheaper to just prevent any default event whatsoever? I hope the Europeans go on a burning rampage if this did happen AGAIN.
    - Lenders would obviously lend at low rates if they could package the debt, misrepresent it as A+ rating, and dump on investors without being required to keep skin in the game (US housing debt crisis) - did Wall St/EU investment banks commit similar fraud with PIIGS securitized debt? (and simultaneously place bets on the debt to fail?)

    Fool us once, shame on you ... fool us twice, BURN BURN BURN investment bank MOFO's!!!

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  33. Thanks, K Smith, for the explanation re: coinage.

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  34. You can see how hyperinflation happens so often. Gonzalo is in the top 1% as far as understanding hyperinflation and even he advocates printing money.

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  35. I think the time has come to revalue gold as was done in the 30's the debts would then be more sopported, they just have to decide at what price to revalue it. Put the gold to use I say

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  36. Wow, Gonzalo, did you hire someone to write this up for you? Cause I do not recognize your style at all!

    Right of the bat you jump into lying (which I am not custom to read on your site):
    "They did it in order to improve trade between the eurozone nations, and thus bind the European countries closer together."

    No. If that was what they wanted, then they'd all established gold money and made appropriate agreements.

    They did it, because the "managers" wanted to steal from the people, just like the FED does. If I know paper money is a scam, surely the "managers" do, you think?


    and then again here:
    "The ECB’s primary concern—like all central banks—was making sure that the currency it was supervising did not lose value. That is, it made sure that inflation stayed below 2% per year."

    What???? Would you please tell me how that 2% or any inflation is happening at all, if you insist that the CB is there to make sure it never exceeds 2%? The CB is the one who creates inflation in the first place.

    So, this lie of yours, presents things as if the CB was some sort of inflation fighter entity, when it is the very entity that makes inflation by printing more money.

    The truth is that the CB was given a mandate to insure that the people do not ever find out that the rate at which their wealth is stolen is above 2%!

    No reason to read further. I came here for Gonzalo's "take no prisoners" style. But, I have found the usual propaganda I can get from the TV.

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  37. Et tu Gonzalo? Then fall the Euro to hyperinflation.

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  38. who made up the big lie that the banks need to be saved

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  39. Another crack analysis from Gonzo... I love those muppets!

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  40. "The easiest way to fix this entire debt situation would be for the European Central Bank to simply print up money ..."

    The ECB is already printing up money and monetizing debt. The problem is that this lowers interest rates so there are fewer other buyers. So then the ECB will have to buy more. The more it monetizes the more people know the Eruo will devalue in the future, so the higher interest rate they would want to buy bonds. And the ECB will be destroying the market for all countries that share the Euro. As there are fewer and fewer real buyers the ECB will buy more and more. You get to where there is no turning back and you get hyperinflation.

    I just can't understand why Gonzalo, of all people, would advocate something leading to hyperinflation.

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  41. "You're right, too, about Ireland: The government there was doing fine—it was the banks that got into overindebtedness. But then the government was forced and/or was foolish enough to guarantee the debts of the banks—hence the Irish people now have to pay. " - GL

    Gl and Hawks5999, as an Irishman I have to comment about your observations relating to the roles of government and banking establishments in Ireland.

    For one, the so called "Celtic Tiger" was primarily propagated with cheap credit and massive real estate speculation primarily in farmland which boomed 500-700% in a 10 year span. There was no real economy underneath the "Celtic Tiger" which is now blatantly obvious in the aftermaths of the GFC.

    I can also say with confidence that the reason we incurred such massive debt loads was not due to the banking system but the complete deregulation of government authorities in all area of finance. Banks were ENCOURAGED to borrow exorbitant amounts and leverage themselves up to the max while at the same time state-controlled propaganda machines ENCOURAGED the public to borrow and get into real estate as quickly as possible.

    The inevitable bail-out was ushered in without notice or vote to the people of this country. In Ireland, as with most other nations in today's sick world, the government ARE the bankers and the bankers ARE the government.

    If you want to really understand what happened in this country then I urge you to read the following books. I have listed them in order of my personal preference...

    (1)he Bankers: How the Banks Brought Ireland to Its Knees - Shane Ross
    (2)Who Really Runs Ireland?: The story of the elite who led Ireland from bust to boom ... and back again - Matt Cooper
    (3)Anglo Republic: Inside the bank that broke Ireland - Simon Carswell

    Thank you for your commentary Gonzalo. Good luck!

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  42. its interesting how metaphors will color a person's perceptions.

    "we must stabilize the patient - no cancer surgery until the gunshot wound has been dealt with"

    with this picture, a statist has staked his ground - the EU can stop this structural flaw - and Germany can provide financing. thus permitting the desired outcome, continue the EU.

    in contrast, try something like this:
    the EU has been on a 10 year bender, and they are all piss drunk on debt, but Germany did more serving than drinking, and so is left standing. clearly pouring more Ouzo down Greece's chafed gullet will not stabilize the patient, more likely kill him. but alas, the party goes on! next drunk, step right up for a fresh round of credit.

    this is clearly about a narrative that serves an elite, and we ain't it.

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  43. But is Gonzalo now serving the elite? He knows about hyperinflation. This seems so strange coming from him.

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  44. Gonzalo, why do you think monetizing European debt will be different than when the Zimbabwe central bank monetized the government debt in Zimbabwe?

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  45. vin cate - i don't get it either... years of reading GL occasionally, this is a real change in his sentiment, how is this view justified?

    GL - why is the EU extortion project now worth saving?

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  46. Hello,

    GL is a hyperinflationist. So I presume he is invested accordingly. If the ECB prints, he makes money. The possibility of profit can play tricks on the mind. So we'll let GL off the hook and with GL's argument itself.

    In the contemporary world we live in, it is mostly right wing governments that go into crushing debt. Remember Cheney: deficits don't matter. The two American presidents who ran up the most debt were Reagen-Bush and Bush. Obama is closing in on them, but that only proves my point.

    Right wing governments run up debt in order to do two things at the same time, first, lower taxes on the wealthy, and second, maintain social and military spending at politically acceptable levels so as to not alienate both the demographic of "conservatives" and the demographic of "progressives". (Who really knows what these terms actually mean anymore...?)

    Under these governments credit needs to flow liberally so as to do two things, first, provide cheap credit for speculation, and second provide cheap money for governments to borrow. And this all requires little to no real regulation of the banks. Of course, eventually things go bad.

    German banks lent to other countries recklessly. They looked the other way when Goldman helped Greece's right wing government defraud its way into the Euro Zone. If they are now insolvant they deserve to go bankrupt. Individual bankers that were involved in fraud should be prosecuted and jailed.

    Germany should not print to save these banks. Nor should it tax the German people for this purpose either. Any pain Germany suffers from letting the banks go will be self inflicted for not having properly regulated these banks in the first place.

    But Pain, you should understand, is a good thing. Ask any biologist. Ask any parent. Pain fixes the collective mind of a population, and of a child, not to do the same foolish or selfish thing in the future. Pain, like Angst, liberates.

    If some of Germany's present prosperity is a result of the extention of fraudulent credit, then the pain will be instructive and positive. It will come about justly, through the application of justice upon the banks. In healthy societies, the hirearchy of values of the population will demand that Justice take vast precedence over short term economic comfort. Arguments to the contrary reveal who and what you are. People say, but if we allow Justice to happen there will be a "credit event". How petty our societies have become.

    In the long run, Germany will not prosper by selling things to people who do not have real wealth, as opposed to more credit, to pay. Prolonging a fraudulent credit system to sell VW's is not economically wise. Neither is throwing whole populations under the austerity bus politically wise either.

    Deep down Germans know both these things. They know what happens when you print money to prolong a disfunctionally indebted economy, cf 1923. They also know what happens when you throw the mass of ordinary people under the austerity bus to balance a budget, cf Bruning and von Papen, circa 1930-1933.

    Germany should not print money to prolong a bankrupt, criminal financial system. Germany should not print money so as to give this system a second chance to catch its breath and then go on to do more damage to real people who work real jobs in the real economy.

    Advocating steps which could lead to hyperinflation will only aid and abet the banks.

    The world will not end if these banks go out of business. In fact, History suggests there is much more long term risk in helping them stay alive.

    Regards,

    Unna





    These people cynicly relied on corrupt politicians to tax their own populations for bailouts if things went wrong. These politicians now blame "the Greeks" and not themselves and their banker patrons for the mess. Europe does not need this, considering its history.

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  47. I don't think Gonzalo thinks he will move markets and make money by advocating printing money. I think Soros does this. But Gonzalo does not seem to have such power nor such a personality to lie for money. I really don't get it.

    I am starting to think that hyperinflation is such subtle trap that even smart and well educated humans can be caught by it. So there is no hope. All fiat currencies will die sometime and looks like many will soon.

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  48. Real capital only comes from savings.
    You spend less than you produce.
    You save the difference.
    The price of real capital is it's interest rate.
    The more real capital there is the less the interest rate and vice versa.
    Real money is gold and silver.
    This is a stable and self correcting financial system.
    Fiat money, central banks and fractional reserve banking fuck this up.
    This is an unstable and fraudulent financial system.
    It allows governments and the banks to steal from us.
    It makes war possible.
    The whole world banking system is unstable and fraudulent.
    That's why we are all fucked up.

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  49. >> various countries of the eurozone went into massive debt

    I understand that this is a conventional way to speak about it, but the concept of a COUNTRY takinig on debt is a trick. It's CERTAIN PEOPLE with serial numbers, names and addresses that took on massive debt. I did not take any debt that I cannot pay off by the end of the month.

    Even though I am sure that my country takes massive debt, too, I have nothing to do with that debt. I have my own personal debts that I know the origin and purpose of.

    Calling somebody's debt "the country's debt" is nothing but an attempt to socialize it. Debts are to be repaid by whoever signed the papers.

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  50. Dear Comment:
    If you add up the amount of US Treasuries (debt) plus the US unfunded liabilities (Social Security, Medicare and Medicaid) then divide by the number of people in the US, EACH AND EVERYONE OF US OWES ONE MILLION DOLLARS.
    If you refuse to pay, even though you "... did not sign the papers" the IRS comes after you.
    Good luck.

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  51. we germans are greedy, you say. I do not agree.
    our government are assholes to go to a euro, yes.
    I think I'm aware what will happen after the system collapses. But I want to have rather this, than this phony debt-shit continuing.
    let's introduce a 100$ goldbacked nordic-euro, if necessary with the protection of russia and china! best regards Nikolaus

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  52. Good to become browsing your weblog once more, it has been months for me. Well this article that i've been waited for so lengthy. I need this post to total my assignment inside the university, and it has exact same subject together with your post. Thanks, excellent share.

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  53. There is no solution to this without the recognition that Zionism is a facist ideology that has sought global domination from day one that this malignant cancer was borne - less than 200 years ago. Milton Freeman was what? Yes - a hard-core Zionist.

    How old is Judaism? Right. And that's why anti-Zionism is not anti-semitism. Zionism is the top of the pile and it will be stopped - or the world is over....

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  54. It seems to me after reading all the above is that instead of accepting the traditional haircut that poorly-run banks awarded by due process.These too-big-to-fail institutions are able to hold the economy and citizens as human shields. That is they promise economic turmoil- no payrolls, no delivery of life's necessities to large urban areas and eventually insurrection. These countries would have to go onto a war footing and use quasi-military powers to ensure the minimal flow of goods and services while this infernal mess is being sorted out.

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  55. Great explanation of the situation! Thank you!

    Using you example of banks lending money to my kid because they know I'm good for it: Germany in this case is the rich parent, Greece is the kid. Now if Germany says "OK I'll pay", how do you think the lenders will respond? My guess is that they will be grateful for about 2 minutes before loading up junior with even more debt...

    I don't see any solution except kicking junior out of the house.

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  56. I liked your explanation...right up until you said the solution is more ECB money printing! We have enough evil/delusional central banking/Keynesian advocates out there. THEY ARE THE PROBLEM! I thought you were different.

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  57. "In order to raise those billion euros, you have to sell not a million €1,000 bonds—you have to sell 1,400,000 bonds with a face value of €1,000"

    Can you please explain this? Why wouldn't you just sell 1,000,000 bonds paying a 7% interest a year?
    Obviously the cost of borrowing rises as well, you're paying 7% instead of 5%, but it seems more logical (and cheaper) than your explanation.

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  58. As a german citizien, I can only congratulate you to this essay.

    ReplyDelete

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