Quantum Pranx


EU leaders throw Europe a plutonium life preserver

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by Charles Hugh Smith from Of Two Minds
Posted October 27, 2011

The euro system was doomed from inception for fundamental reasons; trying to conjure up “something for nothing” solutions will fail catastrophically, and soon.

As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it’s plutonium, and will take Europe straight to the bottom. Plutonium is of course one of the most toxic materials on the planet, and the “rescue” cooked up by the EU leadership is the financial equivalent of plutonium.

Stripped of propaganda and disinformation, the “rescue” boils down to this: something for nothing. Sound familiar? Isn’t “something for nothing” what inflated the bubbles which have popped so violently? The EU “rescue” conjures something for nothing in two ways:

1. The financial alchemist’s favorite magic: leverage. Take a couple hundred billion euros in cash, leverage it up with various magic (unlimited power is now at your fingertips!) and voila, you can suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money. Something for nothing.

2. “Guarantees” to cover the first 20% of loan losses. This is being presented as the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. In other words, the credulous buyer of at-risk Euroland bonds is supposed to be reassured enough to load the wagon because 20% of the bond is backstopped.

This is something for nothing because the EU leadership is explicitly claiming the at-risk portion–80% of every bond–is somehow “safer” because the first 20% will be paid by EU taxpayers.

In essence, the EU is claiming that its illusory “something for nothing” magic will turn lead into gold. Abracadabra….oh well, close; it’s heavy, it’s metallic – oops, it’s plutonium.

The leadership is resorting to Cargo Cult incantations and legerdemain because the alternative is to raise the 1 trillion euros in cold hard cash needed to bail out the first wave of failed banks and underwater bondholders by raising taxes and cutting budgets, i.e. austerity. (Recall that the total bill will be at least 3 trillion euros, so 1 trillion is just a down payment.)

Raising cash the hard way is politically unacceptable in both France and Germany, not to mention every other nation in the EU, so the political lackeys of the banking sector and bondholders are cravenly substituting a “something for nothing” magic show which they hope will fool the global bond market.

Note to EU lackeys: there is no free lunch. Leverage is plutonium, not gold, and guaranteeing the first 20% of bonds that are doomed to lose 40%-75% is not terribly appealing to anyone not influenced by the ECB’s mind tricks. (“These are not the euros you’re looking for; move along.”)

No wonder France was so anxious for the ECB to crank up the euro printing press: they wanted– just like everyone else involved–something for nothing.

The best way to understand the EU’s current situation is to imagine an astoundingly dysfunctional family of deep-in-denial-addicts, screaming co-dependent parents, and grown-up grifters acting like spoiled brats, all trapped in a rat-infested, flooded flat that’s had the gas turned off for lack of payment – and there’s a plutonium life preserver glowing in the knee-high water. Admittedly, this analogy is imperfect, but it does capture the essential psychology of the end-game being played out.

A slightly more formal model for understanding the increasingly unstable dynamics of the EU is the post-colonial “plantation” model I’ve described before. The key characteristics of the Colonial Model of Capitalism are:

1. Low cost labor and low-value materials flow from the periphery (colonies) to the Empire (center), which then ships high-value, high-profit finished goods back to the colonies.

2. The colonies must buy the high-value finished goods on credit that is issued and controlled by the Imperial center.

Hmm – doesn’t this sound like the relationship of Germany to the European periphery? The euro cemented this co-dependency: Germany had the most efficient production, and once the euro raised the cost of production in the periphery nations, then of course nobody could beat Germany’s cost advantages. The euro actually lowered Germany’s cost of production in terms of foreign exchange rates while raising the costs in periphery nations that were previously able to lower their cost of production via currency devaluations.

Having surrendered that mechanism to access the deep credit markets of the center, then they had no choice but to buy the high-margin finished goods from Germany, as nobody else could make the same goods for the low German price.

These booming high-profit German exports of finished goods to the European periphery generated vast surpluses of capital that were then loaned to the periphery to enable their further purchases of German goods. Why risk the heavy investment costs of production in the periphery when Germany had the lowest costs of production and was willing to loan the buyers the cash needed to keep buying?

It’s the classic mercantilist-consumer co-dependency on a gigantic scale, with low-cost credit fueling both increased consumption and production. As long as the credit flowed in vast torrents of low-cost, easy to borrow money, the co-dependency looked like a “virtuous cycle.” Debt junkies eventually have to start servicing their debts, of course, and that’s when the ugly realities of colonial dominance become visible.

Germany casts itself in this melodrama as the wronged party, the industrious craftsfolk churning out high-quality goods who have somehow been lured into pouring hard-earned cash down various ratholes to save nefarious EU banks – including their own.

But setting aside the melodrama for a moment, let’s ask: how many German goods would have been imported by the EU periphery if those nations had been forced to pay cash for everything from the start? Precious little is the answer; the cash – in the form of actual surpluses available to spend on imports – would have run out immediately after the euro was launched.

In other words, the debt orgy enabled not just carefree consumption, it also enabled vast German exports to the Eurozone. Now we start seeing how the once-mutually beneficial co-dependency has become toxic: now that the periphery’s debtors have become debt-serfs, German exports to the periphery are contracting.

This helps explain why even the supposedly prudent Germans are seeking something for nothing as the painless answer to an intrinsically unstable and self-destructive system. When it all implodes, German exports to the periphery will be a shadow of their past glory, and the surpluses which enabled the leveraged orgy of credit will dwindle. (Germany’s other big export markets, China and the U.S., are also contracting.)

Sovereign currencies are the only mechanism for discounting differences in credit worthiness and production costs. The euro was established as the currency equivalent of gold, holding the same value in every member country. But the mercantilist/quasi-colonial model requires credit to flow from the center to the periphery, and that is precisely what has happened in the EU.

In the colonial model, the colonists are indebted and poor. The net value of their labor flows to the Imperial center as interest payments, and the banks at the center set the cost of money and the terms – naturally.

This co-dependency based on credit flowing from the mercantilist center to the periphery is both exploitative and systemically unstable. Now that the ontological instability of the euro is being revealed, the dysfunctional family members are blaming each other and desperately trying to conjure up something for nothing to bail themselves out of a system which was doomed to implode from its very inception.

All the complexity and confusion distills down to this: the EU leadership needs something for nothing to save the EU, but there is no free lunch. There is only one solution to the exploitation, the illusory leverage, the crushing debts: massive write-offs of all the bad debt everywhere in the EU. And since debt is someone else’s asset, then that means writing down the assets, too. The only way to clear the insolvency is to write off 3 trillion euros of debt-based assets and re-enable sovereign currencies. Anything else is simply more tiresome melodrama.

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  1. Plutonium is mentioned a lot in this article. This is an interesting analogy to use here, for this element is one of the less well understood elements in the Periodic table. Its sheer toxicity is well recorded, and mere milligrams of the element are sufficient to kill humans.

    The fact that the author uses this analogy points to things that he does not speak of. Pluto after all is the god of the underworld, and whilst ancient mythology is long defunct in modern society, the archetypes that underpin these myths are still active. The Plutonian force is very real and very alive, take a look at the activity in the fields of weaponry for starters. Not for nothing is this dangerous and wholly un-natural element named for something that can be so easily misused – to use covert actions for beneficial use is one of the hardest skills one can learn.

    The point of this aspect of Plutonian activity indicates that much of what is going on is not open and above board (= democratic). If you act in a democratic fashion, you act openly that all can see. The character of plutonian activities is directly contrary to this. Corruption, is of itself something that requires covert actions, and thus comes under the rule of plutonian forces. It is part of the nature of these things that they require ever further and stringent efforts to keep them covert and it is this that is often their undoing. Humans after all are fallible – fallible in their execution of corruption as anything else!!

    How then do you track these things down? Well we have a clue here, in that they all act with the character of Pluto (amongst others) and act in a manner hidden. Look at the formation of the Eurozone, there was a great deal going on in secrecy, and it is also true that the EU has never had its accounts audited correctly. The EU is running scared now, and wants ever more draconian powers to protect itself (this link was sent to me by Aurick and goes to prove my point http://bit.ly/t69RPn ). The EU has reached the point of desperation, the people leading it have also reached the end of their emotional tether. If sleep is balm, these guys need it now, and believe me, I do pity them. Honestly. They are after all human, only deluded.

    But who is it of the European nations that acts in a manner that is not democratic? Germany, the Netherlands and even rudderless Belgium have democracies that are vibrant and bouyant. Frau Merkel is constantly under pressure to get the say-so from the Bundestag, and is pilloried for not acting properly, when she cannot because she needs democratic mandates for her actions. [Interesting note is that Belgium has an industrial growth of some 3% and has no government to enforce austerity measures … ]

    However there is a cuckoo in the nest, and it is not a European one. It is American. Look at the character of American actions across the world – paying for Egypt’s army in an underhand manner; propping up dictatorships like Saudi Arabia and others. This is not the act of a free and open democracy. Look to the character of an action and you will see the traces of other forces at play. The Eurozone project was tainted, nay poisoned by a tiny country. It needed only be small, for interest rates can explode quickly enough to destroy entire continents. So it was that gentle Greece, shorn of military dictators and serial defaulter on bonds was admitted to the top club in the world.

    One has to ask why. It was not for Greece’s benefit, that is for certain. Greece was the pawn that will be slain in the great chess game being played on three sides. America will keep its dominance at all costs, and paying Germany for her ratifying the latest eurozone silliness is money well spent.

    In conclusion I want to look at what would have happened to the Eurozone had it been established as intended. Sans Club Med, that is. It would have been a macrocosm of what is now happening to the Swiss Franc. It would have become a haven for money that needed safety from the depravities of the US fed and the madness of the dollar debts. In short, whilst not being the reserve currency, it would have threatened the status of the dollar as reserve. That was enough for serious intervention at state level.


    31/10/2011 at 9:08 am

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