"no one could buy or sell" - Revelation, 13:17
In autumn 2008 the banks lost liquidity as a result of running a massive global pyramid scheme. The governments stepped in and pumped trillions of euros into the system. This saved the banks from collapse. Yet the governments did not liquidate the global pyramid scheme. The money given to the banks only prolonged the existence of the pyramid and increased it in size. At the same time the governments ended up in heavy debt.
This rescue operation worked at the time as the sovereign debt then was not that high and the governments had enough credibility to repay the debt incurred. (Such repayment was to come from the future tax receipts.) Now, on the back of Greece looming default, a new liquidity crunch in the banking system appears inevitable. Basically if Greece defaults many banks will lose the capital adequacy and will require bail outs. As the European governments have the experience of the autumn of 2008 they want to prevent it by setting up a bail out fund to the tune of 2 trillion euros. In fact the Greek debt crisis is supposed to be saved by taking even more debt. Is such situation sustainable? Solving Greek sovereign debt by even more sovereign debt and spreading it
In 2008 when the governments took on massive debts to bail out banks the governments had credibility that they would be able to repay the debt (of course, with taxpayers' money). However with the debt even growing, with hundreds of billions euros added to it since, and very little economic growth it does not look credible at all that the governments will be able to repay the debt after additional 2 trillion euros are added. 2 trillion euros is more than 2.5 times of an unsustainable annual public deficit for 2010 of the entire EU: a deficit that heavily impedes growth and hence the chance to repay the debt itself. In such situation the sovereign debt will be heavily downgraded. This will result in banks ending up in further liquidity crisis as banks reserves will lose in value. As the sovereign ratings will be downgraded, pumping more money into the banks by the government will not even be a theoretical option.
This is a scenario of banks going bust spectacularly and the currencies (as apart from euro other currencies including the dollar) are likely to lose credibility. The only way out - a technical one - will be fast running printing presses: i.e. a hyperinflation. And, in practice, western economic system will be reduced to some form of a barter. And if the EU or the governments try to keep a tight control over it, well, "no one could buy or sell". Angela Merkel seems to realise that there are such risks.
This scenario is not inevitable. There are ways out. But to implement them, the governments must understand the nature of the current crisis first and then be prepared to make difficult political decisions. And the things can keep going, actually getting worse, for some time with taking half measures: you can only imagine what the ministerial discussions in Brussels are all about.
This rescue operation worked at the time as the sovereign debt then was not that high and the governments had enough credibility to repay the debt incurred. (Such repayment was to come from the future tax receipts.) Now, on the back of Greece looming default, a new liquidity crunch in the banking system appears inevitable. Basically if Greece defaults many banks will lose the capital adequacy and will require bail outs. As the European governments have the experience of the autumn of 2008 they want to prevent it by setting up a bail out fund to the tune of 2 trillion euros. In fact the Greek debt crisis is supposed to be saved by taking even more debt. Is such situation sustainable? Solving Greek sovereign debt by even more sovereign debt and spreading it
In 2008 when the governments took on massive debts to bail out banks the governments had credibility that they would be able to repay the debt (of course, with taxpayers' money). However with the debt even growing, with hundreds of billions euros added to it since, and very little economic growth it does not look credible at all that the governments will be able to repay the debt after additional 2 trillion euros are added. 2 trillion euros is more than 2.5 times of an unsustainable annual public deficit for 2010 of the entire EU: a deficit that heavily impedes growth and hence the chance to repay the debt itself. In such situation the sovereign debt will be heavily downgraded. This will result in banks ending up in further liquidity crisis as banks reserves will lose in value. As the sovereign ratings will be downgraded, pumping more money into the banks by the government will not even be a theoretical option.
This is a scenario of banks going bust spectacularly and the currencies (as apart from euro other currencies including the dollar) are likely to lose credibility. The only way out - a technical one - will be fast running printing presses: i.e. a hyperinflation. And, in practice, western economic system will be reduced to some form of a barter. And if the EU or the governments try to keep a tight control over it, well, "no one could buy or sell". Angela Merkel seems to realise that there are such risks.
This scenario is not inevitable. There are ways out. But to implement them, the governments must understand the nature of the current crisis first and then be prepared to make difficult political decisions. And the things can keep going, actually getting worse, for some time with taking half measures: you can only imagine what the ministerial discussions in Brussels are all about.
Another succinct and valuable summary; I really look forward to your posts.
ReplyDelete"... you can only imagine what the ministerial discussions in Brussels are all about". Self-preservation Greg, pure and simple. Everything else will be a codicil to that. For that reason, sadly, I have to disagree and say that the scenario you describe IS inevitable. I have been planning for the coming hyperinflation for some time now, and the more I hear fools telling us all that inflation will be down next year, the more I am convinced it is coming. It is impossible to debauch the currency and expect to get away with it. Anthony Barber and Heath tried in the 70s and poor old Healey had to clear up the crap after them.
17: "And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name".
18: "Here is wisdom. Let him that hath understanding count the number of the beast: for it is the number of a man; and his number is six hundred threescore and six. Or let's call it a round €2 trillion for cash"
Hi Caratacus, but wouldn't you think, would you, that too much of "self-preservation" may turn into a death wish? Delayed but possibly quite sudden and violent one? On that I am not wiser than anybody else. Unfortunately:-(
ReplyDeleteBest, Greg
As ever, a pertinent and considered analysis.
ReplyDeletePoliticians are probably the last people to turn to in a crisis. Whatever they decide will be from self-interest/self-preservation rather than what is best.
That we got to 2008 is one thing, the kicking of the can down the road then began. So huge the FUBAR, the ability to pretend it's going to be OK diminishing by the month.
The recession we should have had years ago would have been a good thing and perfectly natural in economic terms. Now it's a different matter, the outcome probably much more volatile and unmanageable.
"The only way out - a technical one - will be fast running printing presses: i.e. a hyperinflation".
ReplyDeleteNo. No. No. When will you learn that hyper-inflation solves nothing and is not therefore a way out.
Hi Rob
ReplyDeleteNot entirely agree. Hyperinflation solves the liquidity shortage in technical sense (which is also important): you do not have to rescue banks as they always have legal tenders to pay to depositors (albeit a worthless ones). Basically it prevents a technical collapse of the banks. In economic sense it actually destroys people's wealth.
But I agree with what you seem to implicitly mean, i.e. that we will still be in a massive economic mess and a proper solution will still have to be found.
Best
Greg
Fiscal union, the stumbling block. How will they overcome it? That's the interesting question, and to my limited mind, the very nub of the problem
ReplyDeleteGreg - is there a way for Europe to legally use some form of Triage when defaulting on the debts. For example, can Europe default on non-european debts? This is of course the path being taken by the USA w.r.t. to China.
ReplyDeleteGreg, I have been aware of the situation you describe since before the 2008 crisis simply by reading up on the subject, and using the power of my not excessive intellect. I therefore am forced to conclude that senior politicians, prominent economists etc., who are far more clever than I, know full well that their pyramid scheme has spiralled out of control. More importantly, they must also be well aware that the bailouts, and the various QE's over the last few years and over the years to come are guaranteed to fail.
ReplyDeleteI am now at the stage where I ask myself, "Why are they still heaping debt upon debt? What's their end game?" I'm afraid that I don't have an answer to my rhetorical question just yet, but the possible answers are frightening, ranging from intentional hyperinflation, to corruption as they build their stash before the inevitable crash occurs, to the more extreme "New World Order" tinfoil explanations one finds around the internet.
Attributing our current plight to misdiagnosis of the problem, or to ignorance or to stupidity just doesn't ring true to me any more.
Greg, why is there not a run on the Euro? If what you say, is even a fairly remote possibility then the best option would be to 'cash in your chips' and leave the casino.
ReplyDeleteI wouldn't take Euro's for my gold or any other hard assets at the moment, so why are others not thinking the same and cashing out of Euro's into US$ or Aussie $'s?