Self-Interest and the Pathology of Power: The Corruption of America, Part 2

by Charles Hugh Smith
Posted February 9, 2012

 

The self-interest of the alcoholic is to keep drinking. Is this truly in his best interests? The answer illuminates the pathology of power in America.

 

IF WE IGNORE THE LIP SERVICE SHOWERED ON “REFORM”, WE FIND THAT THERE IS REALLY ONLY ONE STRATEGY in America: extend and pretend. Individuals, households, communities, cities, states, enterprises and the vast sprawling Empire of the Federal government and its many proxies – all are engaged in extend and pretend.

 

The closest analog is a seriously ill alcoholic who tells himself he just has a hang-over when it’s abundantly clear he is suffering from potentially terminal cancer. With a hang-over, extend and pretend is the only strategy that works: you can try various “magic potions” to relieve the symptoms, but the only real cure is to give the body enough time to cleanse itself of the toxins you’ve created and pretend to be functioning in the meantime.

 

In the case of aggressive cancer, then extend and pretend is the worst possible strategy: ignoring the rapid progression of the disease only makes eventual treatment more difficult and uncertain. The only way to treat cancer is to face it straight-on, learn as much as you can about the disease and the spectrum of treatments, consider the side-effects and consequences of various treatment strategies, and then get to work radically transforming your entire life, mind, body and spirit to effect the cure.

 

Why do we perpetrate the delusion of a hang-over when it’s painfully clear we have cancer? We’re afraid, of course; we fear the unknown and find comfort in the belief that nothing has to really change. We call this denial, but it arises from fear and risk aversion. In the moment, amidst all the swirling chaos of fear and uncertainty, we choose extend and pretend because it seems to be in our self-interest.

 

This is the ontology of extend and pretend: a delusional view of our self-interest. The drunk is terrified of not being able to drink himself into a stupor; in that dysfunctional state of being, then he perceives his self-interest as denying he has cancer because he knows that treatment will require him to stop drinking. In effect, what he perceives as acting in his self-interest is actually an act of self-destruction.

 

Political and social revolutions occur when the productive classes realize the Status Quo no longer serves their self-interests. In other words, the revolution is first and foremost an internal process of recognition and enlightenment: all the propaganda issued by the Status Quo, i.e. that it serves the best interests of the productive classes, is finally recognized as false. As this awakening begins, a divergence between the definitions of self-interest by the Power Elites (financial and political) and the productive classes begins to open. This is extremely dangerous to the Power Elites, who are fundamentally parasitical and predatory: their wealth and power all flow from the labor, taxes, debt service and passivity/complicity of the productive classes.

 

The Power Elites’ time-honored strategy to protect their own wealth and grip on power has three components: one is to pursue a strategy of pervasive, ceaseless propaganda to persuade the productive classes that the system is sound, fair and working for them; the second is to fund diversionary “bread and circuses” for the potentially troublesome lower classes, and the third is to harden the fiefdoms of power and wealth into an aristocracy that is impervious to the protests of debt-serfs and laborers below.

In addition to “the system is working for you” social control myth, the wealth/power aristocracy also invokes various fear-based social control myths: external enemies are threatening us all, so ignore your debt-serfdom and powerlessness, etc. In the ideal Power Elite scenario, a theocracy combines faith and State: not only is it illegal to resist the Aristocracy, you will suffer eternal damnation for even thinking about it.

Ask yourself this: how much influence do you as a citizen, voter and taxpayer have over the Federal Reserve? If we’re honest, we must confess that the Federal Reserve is as remote to us as any branch of the North Korean government: we have zero influence over it, and the same can be said of our elected representatives. This is the definition of an aristocracy, oligarchy (a power structure in which power is held by a small number of people), kleptocracy, etc.

 

The Power Elite has a key advantage over the citizenry: its own self-interest is clear. The citizenry must entertain this question: is the Status Quo really working for me or not? The Power Elite aristocracy has no such confusion: the Status Quo is working beautifully for them, and the only threat to their wealth and power is the possibility that the productive classes might opt out and stop paying the taxes and debt service which funds the parasitical Power Elite. Thus the Power Elite has a single goal: to persuade and coerce the citizenry into accepting their powerlessness and debt-serfdom as a pathological form of self-interest.

 

There is another dynamic to the Power Elite aristocracy’s grip on concentrated wealth and power: the self-selecting, self-perpetuating pathology of the aristocracy and the Upper Caste that so slavishly serves them. Author Chris Sullins identified this dynamic as one of self-propagating fractals (The MacRib is Back! September 23, 2008):

 

There are readers who might feel I’m being very hard on the public with the comparison so far. But look how people have allowed their names to be changed. They have gone from being called citizens to consumers. A citizen is a very human word which denotes awareness, involvement, and participation. It’s a word that sounds active and conscious in its very nature. A consumer by contrast sounds far more passive. A lot of other animals and even inanimate processes consume things. A consumer sounds like sheep grazing.

 

Once a populace accepts a self-definition that strips out their participation as anything but passive consumers, then the maintenance of power boils down to test-marketing new social control myths and fear-mongering. This sophisticated level of marketing and predation requires a highly trained class of servants: an Upper Caste of technocrats, middle managers, marketers, lobbyists, “creatives,” engineers, etc. who do the heavy lifting that keeps the Power Elite’s wealth and status not just intact but expanding. The reward for this service is a hefty salary that enables the purchase of the signifiers of upper-middle class existence and an intoxicating proximity to power and status visibility, i.e. some measure of recognition as “being somebody important.”
 
Until very recently I reckoned this Upper Caste of loyal servants comprised about 20% of the American populace, but upon closer examination of various levels of wealth and analysis of advert targeting (adverts only target those with enough money/credit to buy the goods being offered), I now identify the Upper Caste as only the top 10% (the aristocracy is at most the top 1/10th of 1%). Wealth and income both fall rather precipitously below the top 10% line, and as globalization and other systemic forces relentlessly press productivity into fewer hands, then the rewards aggregate into a smaller circle of laborers.
 
As noted yesterday in Social Fractals and the Corruption of America (Of Two Minds, February 8, 2012), you cannot aggregate healthy, thrifty, honest, caring and responsible people into a group that is dysfunctional, spendthrift, venal and dishonest unless those individuals have themselves become dysfunctional, spendthrift, venal and dishonest.

 

This is the ontology of the pathology of power: If you want to join the elite levels of the Upper Caste, where “doing God’s work” is a daily practice of fraud, embezzlement, misrepresentation, collusion, purposeful obfuscation, all in service of a pathologically self-destructive notion of self-interest, then you must become dysfunctional, venal and dishonest (with becoming spendthrift in service of acquiring signifiers of status a close fourth).
 
Since non-pathological people will quit or be fired, then these fractals of corruption are self-selecting and self-perpetuating. This is true not just of financial America but of elected officialdom. Anyone who is still naive or delusional enough to think that getting elected to Congress or the state legislature will empower “doing good” will soon learn the ropes: the next election is less than two years away, and if you want to retain your grip on power you’re going to need a couple million dollars.

 

And if you want to “get something done,” you will need to take orders from your party leadership and service your donors. I once had a friend who by extraordinary effort got himself elected to the state legislature. Being a young idealist, he actually refused to vote as his party leadership directed: thus identified as a rebel, he was predictably out two years later.
 
So much for “working within the system.” By the time all the donors, lobbyists, leeches and parasites have been properly serviced, the “reform” bill is 2,000 pages long. As a result of the feudal structure of wealth and power in America and the self-reinforcing, self-propagating fractals of pathological servitude, the citizenry are increasingly remote from power. The aristocracy, like feudal lords in distant, fortified castles, demands obedient service of the powerless citizenry: work hard, pay your taxes and service your debt – and fears any awakening of true self-interest.
 
Just because a devoted member of the Upper Caste is allowed to enter the castle to do his work doesn’t mean he is part of the aristocracy. That glow of proximity to power is his reward for dutifully slaving away as a higher-order serf.

 

The American Revolution was triggered not by a sudden upwelling of noble ideals, but by the realization of the landed nobility and productive classes that the commercial and political domination of Great Britain was placing their wealth and liberty at risk.

 

Put another way: they awoke to the fact that the Status Quo no longer served their essential self-interests. When the Upper Caste and productive classes reach this same conclusion, then perhaps they will elect a transformational third party to sweep away the corrupt political class. This new party must embody a moral imperative that acts as a social fractal: retaining power is not the goal. If the people want to restore the pathological aristocracy to power in two years, then by all means let them have it. They will do so without our complicity, interest payments, labor and servitude, for we have opted out of pathology.

The Nightmare after Christmas

by Detlev Schlichter
of The Cobden Center
Posted December 26, 2011

THE PATHETIC STATE OF THE GLOBAL FINANCIAL SYSTEM WAS AGAIN ON DISPLAY THIS WEEK. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously? On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.

None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.

There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.

How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)

Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.

Lender of all resorts

Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.

Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.

So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.

The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.

So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.

The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?

And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)

Deflation? What deflation?

It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.

Gold, Eurodollars, and the Black Swan that will devour the US Futures and Derivatives Markets

by Jesse at CaféAméricain
Posted December 3, 2011

THE EURODOLLARS ESTIMATE IN THE CHART BELOW IS BASED ON THE BIS BANKING ESTIMATES from Commercial Banks and may not include official reserves held by Central Banks. As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply. I like to think of Eurodollars and banking system derivatives as the Fed’s off-balance-sheet method of monetization and policy implementation, with plausible deniability.

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers. So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain. But the effect is there, and the smart money closer to the financial system sees it coming. I do not know if the Fed’s swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base. But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollars to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy. But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed’s Balance Sheet and the domestic US economy and the savings of many. The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling. And how this will manifest in the real world economy is not fully known. A good sized chunk of the financial system may simply vaporise.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector.

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy. As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision. Period. Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are. The Fed owns a printing press, and it uses it selectively.

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically. The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable ‘real interest rates.’ However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them. So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system. ‘Not on the horizon’ does come to mind.

Why we are totally finished

by D. Sherman Okst
Posted June 27, 2010 

In a nutshell: Corporatocracy has replaced capitalism

 

CAPITALISM FIXES PROBLEMS AND PRESERVES DEMOCRACY: Capitalism is what we should be relying on to fix our problems. Capitalism has it’s own ecosystem, just like biology’s ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance.

The problem is we are no longer a capitalistic society. What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past. As outlined in “It’s Not A Financial Crisis – It’s A Stupidity Crisis”, we created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble.

Now, after the second Stupidity Crisis there isn’t a third bubble to inflate. If we still lived in a capitalistic environment the banks and financial institutions that created loans for folks who should have remained renters and then sold those loans as investments to pensions and countries would have been cleansed by capitalism’s ecosystem. But that isn’t what happened.

In a very anti-capitalistic move the government decided that stupidity and criminal activity should be rewarded. I’d say they took our money, but it is worse, we didn’t have that much money. So they borrowed the money in our name. The loan has a variable rate. They borrowed so much money that our kids cosigned the loan. In fact, our kid’s future kid’s signed on the dotted line.

That is unequivocally immoral. They gave that borrowed money to a bunch of morons as a reward for stupidity. Morons who created subprime loans, liar loans, no income, no documentation loans and other fraudulent instruments. Morons bundled that trash, got it rated AAA and then sold these turds or weapons of mass destruction that they had the audacity to name complex financial instruments or derivatives to pension funds, countries and other “investors”. Then it all blew up.

Big surprise. For blowing up the world’s economy this Stupidity Crisis was falsely named an Economic Crisis by CNBS and 535 morons on a hill in DC (Ron Paul and a few other fiscally responsible adults excluded). The idiots who created the mess were rewarded with a 700 billion dollar “bailout”. This “bailout” was anything but a bailout and had a price tag of anything but 700 billion. The actual price tag is closer to 11 trillion and puts us on the hook for another 13-17 trillion – not counting interest.

Think about that for a second. This stupidity crisis is the equivalent of our Federal Debt which took a generations of politicians over a hundred years to wrack-up. For anyone who still believes we live in a free country where capitalism reigns please show me one economic textbook which states that failure, and fraud get rewarded with borrowed taxpayer money. For anyone who believes we live in a democracy please show me a textbook that says the government will en-debt you and your kids and their kids to pay for a failed business. How is that democratic?

“Law of Morons”: Years ago, while serving on a committee I came to a sad realization. Like gravity, there is the another invisible force which I dubbed “The Law of Morons”. Put a group of very intelligent, well meaning people in a room together, put them on a committee or some governmental body that is devoid of guiding principles or merit-based decision making and “The Law of Morons” will prevail. The collective IQ will drop to the smallest shoe size in the room. And hope for loafers, because collectively this body won’t be able to tie anything together – not even a single shoelace.

Government Creates Problems: Basically our government is comprised of many well meaning intelligent people who for whatever reason, re-election, greed the “Law of Morons”, corporate puppet strings (read: lobbyist), self interest, corporatocracy or whatever else, do nothing but create massive problems. Lack of regulation, too much regulation.

U.S. Corp and the impending IMF merger

by Robert Denner
of Daily Economic Update
Posted December 1, 2011

BEEN LOTS OF TALK AROUND LATELY REGARDING THE COLLAPSE OF THE U.S. DOLLAR AND WHAT THAT WOULD MEAN FOR THE UNITED STATES OF AMERICA AND THE WORLD. There has also been a lot of talk about the Federal Reserve Bank of the United States of America and how unhappy the people of the US are getting with this largely unknown organization.

These two forces are converging together in what could be a very serious and detrimental way as it relates to the average US citizen. This article will rely heavily on flawed analogies to help the lay person understand the inner workings of both the IMF and the Federal Reserve Bank. This is not to be taken as an academic piece and I would ask that it not be judged as such. This is meant to help those people that have recently woken up to the reality that their country has been hi-jacked and those that are desperate to get up to speed as quickly as possible. So let’s jump right into the thick of it shall we? First we need to start with what I hope are simple lessons so that you can take what I am about to teach you and apply it to the real world.

There is one thing that bankers and computer people love to do and that is to use big scary acronyms to scare off the simple folk. So here is your first lesson.

IMF and the SDR

So right off the bat we are using acronyms that mean absolutely NOTHING to the lay person and yet that is an actual sentence believe it or not… IMF stands for the International Monetary Fund. The SDR is short for Special Drawing Rights and is the currency of the IMF. The International Monetary Fund is a private bank that is used to help sovereign nations engage in international commerce. Just like if you owned a company and you used bank A, and your supplier used Bank B, the IMF would be the bank that both banks A and B used to transfer payments and credits back and forth to each other. To Company A and B (using Bank A and B) it would be seamless.

But the IMF does a whole lot more for the global economy. They are the creditor of last resort for a lot of countries. For if you want to engage in international commerce in the free world (meaning the world now) you must be a part of the IMF system. Should a country that is part of this system become over leveraged because of mismanagement and debt accumulation, the IMF stands ready to come to the rescue. To understand how this relationship has worked in the past (and the present); I MUST go into some history. I will keep it brief I promise.

To understand how the global monetary/commercial world works you have to go back to the end of World War II. Following the war the United States was alone as a major industrial power. The rest of the industrial countries were in shambles. The United States was also nearly alone as a producer of oil. It is this later point that needs to be highlighted.

The United States used its vast oil reserves and coupled it with a highly trained industrial labor force and put it to work in its vast expanse of industrial capacity to re-build the rest of the world. It is this fact that is at the very center of our current monetary system some 60 years later. So I will start with my first analogy…

The US Corp could be seen as a huge company like General Motors. Following WWII US Corp was the only company left with the capacity to make things and it had the working capital and energy to do what it wanted. US Corp went out into the world and started to acquire other businesses. First was Japan Corp which US Corp had beaten into a pulp during the war. US Corp decided that it was in its own best interest to build Japan Corp back up but it needed to make sure that it never again could threaten US Corp the way it did in WWII.  Japan Corp used its own currency called the YEN and US Corp obviously used the Dollar. So to make this all work, US Corp had to make sure that the workers at Japan Corp didn’t feel like the last of their country was being taken from them. To keep them vested in the viability of their own country it was very important to let them keep their own currency and their own political structure, albeit greatly modified under the surface. We allowed Japan Corp to keep their figurehead CEO (the Emperor) and we installed a new board of directors (Democratic institutions). We linked the Bank of Japan to US Corp’s bank the Federal Reserve Bank through a new institution called the International Monetary Fund and the World Bank.

If we were to compare this to General Motors this would be like GM buying another company and bringing it under the umbrella of the GM brand. So in this case Japan is like Pontiac and they are given free rein to run their subsidiary the way they see fit, SO LONG as they abide by the parent companies rules.

This setup worked wonderfully and within a decade Japan Corp was back on its feet and was supplying cheap labor and products for US Corp and with every single barrel of oil Japan Corp bought on the international market it further linked them with our monetary system.  To keep the Japanese citizens from feeling that it was the US Corp in charge of everything we came up with the International Monetary Fund and the World Bank. Of course these institutions were funded initially by the United States and Great Britain and as such they were just pseudo US institutions. But it worked and the Japanese subsidiary of US Corp gladly bought oil and products from the United States in its own currency (the Yen) but it was linked via the IMF to the US Dollar. For you see US Corp linked everything that the industrial world needed to the US Dollar. All gold/oil/silver/food/etc were priced first in US Dollars and depending upon the relative “strength” of your currency to the US Dollar, this would dictate how much of your currency it would take to purchase a barrel of oil or an ounce of gold. This gave US Corp a huge advantage in the world as we produced almost everything anyways. We had most of the world’s oil supply and a very large portion of the food supply. We were the largest producer of the big complex things the world needed to rebuild. We allowed the smaller subsidiaries to produce the little stuff we needed or wanted. Japan Corp was great at the later, supplying us with small radios and other cool electronic gadgets.

US Corp built a company with dozens and dozens of subsidiaries, each one of them bringing something to the table either large or small. And as the world re-built, other countries wanted to get in on the good times and they voluntarily sold themselves to US Corp. Other countries were very reluctant to join our big happy company. Those countries fell into two groups. Either they were affiliated with Russia Corp or they wanted to stay neutral. But in a world that was moving fast towards globalization it became apparent that each country would have to choose a side lest they be shut out of the global market. For remember that the only way to gain access to US Corp’s vast array of markets and supplies is to be a part of the IMF/World Bank. It was the only way to convert your currency to other currencies (like the US Dollar to buy OIL!!).

I will end this history lesson there as I could get sucked in for hours explaining how US Corp and Russia Corp went to economic(and sometimes real) war with each other and how Russia Corp tried to have it both ways by linking themselves partially to the IMF to gain access to US Corps vast supplies and labor.

I will leave that to YOU to go out and study on your own as it is a story to rival any fictional book you have ever read. The important thing to take away here is that the International Monetary Fund and the World Bank are institutions that were created by the United States and Great Britain. It is a global system that allows countries using different currencies to exchange their goods and services with each other almost seamlessly. Remember also that the system was setup INITIALLY to allow US Corp to control the world’s most important supplies. Things like FOOD, OIL, COMMODITIES (gold,silver,etc) and the rest. At the time this system was created it was the United States that was supplying the lion’s share of these items. But as the decades have come and gone, these items have increasingly come from other parts of the world.  And a good portion of these countries are ones that were FORCED into our system either out of necessity or by direct manipulation of their country by forces outside their borders(meaning the US and the IMF).

CONFESSIONS OF AN ECONOMIC HITMAN

This next part of our story is centered on how the US has maintained its spot at the top of the economic order even in the face of massive budget deficits and seemingly unending debt loads. The title of this section is called Confessions of an Economic Hit Man, as I give a nod to a book of the same name written by a man named John Perkins. Mr. Perkins is a trained economists and his specialty was international finance. His job was to go out into the world and sell foreign leaders on US Corp and to convince them to get on board with our system. Or more importantly, it was his job to make sure that they were forever caught up in our system and that they did not attempt to leave our company.

As the world crumbles: The ECB spins, the Fed smirks, and US banks pillage

by Nomi Prins
Posted November 21, 2011

OFTEN, WHEN I TROLL AROUND WEBSITES OF ENTITIES LIKE THE ECB AND IMF, I UNCOVER LITTLE OF STARTLING NOTE. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.

We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Our fragile “hothouse” economy

by Charles Hugh Smith
from Of Two Minds
Posted November 03, 2011

Financialization has led to a “hothouse” global economy where the slightest disruption in central bank/Central State intervention will cause the sickly flowers to wilt and expire.

Of the three great financial truths that have been left unspoken for the past four years out of sheer dread, lest their mere mention collapse our economy, let’s start with the most obvious:

The first great financial truth: If the Federal Reserve and Federal government ever crimped the dripline of “easing” and bailouts, America’s financial sector would promptly roll over and expire.

Does this strike you as a robust, flexible, transparent system? Of course not. Rather, it is a “hothouse” financial sector, one that needs constant injections and a carefully controlled environment just to keep it alive.

And since the U.S. economy has been fully financialized, it is now dependent on financial machinations and skimming for its “growth,” profits and the debt expansion that fuels everything else, including the metastasizing Savior State, a gargantuan aggregation of an unaccountable National Security State with crony-capitalist cartels and a dependency-inducing Welfare State.

Without the debt conjured into existence by the Fed, Treasury and the financial sector, even the mighty multi-tenacled Savior State would quickly starve.

As a result of our dependence on financialization and exponential debt, our entire economy has become a weak, sickly “hothouse” economy which can only survive in a narrow band of temperature, debt injections and opaque manipulations of data and what’s left of the nation’s shriveled markets.

Once exposed to Nature, i.e. “wild” transparent markets that are allowed to discover the price of all assets naturally, then both the nation’s financial sector and its economy would implode.

The second great financial truth is that the financial sector has long been detached from the real economy. The real economy is for chumps; the “no-risk” skimming of monetary legerdemaine is the raison d’etre of the entire financial sector, a point brilliantly made in this “must read” essay posted on Zero Hedge: MF Global Shines A Light On Monetarism’s Incapacity To Enhance The Real Economy. Granted, some of the financialization schemes described are not that easy to grasp, but here’s the primary point:

That is why this system has to change at some point. It is exactly designed to be misleading, and the reason is so very simple. In any fractional system there will be a desire to amplify that fraction to the maximum degree. But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization. So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.

The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades. Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again. Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions. So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer. But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system.

The third great unspoken truth is that the conventional Status Quo – the financial punditry, the Cargo Cult of Keynesianism, the incestuous academic community, the PhDs in the Fed and Treasury, the politico lackeys, the self-serving think-tanks of both empty ideologies (“which is better, Bud or Bud Light?”), not to mention the lobbyists, revolving door toadies and all the other hangers-on in New York and Washington – have no Plan B and certainly no Plan C. In other words, they are utterly clueless about what to do when their abject and total failure becomes unavoidably obvious.

It is of course a crisis of self-service; nobody dares put their own status, wealth, power and perks at risk by thinking independently, much less speaking All That Cannot Be Spoken Lest This Sucker Implode.

But it is also a monumental lack of imagination; the lackeys and toadies cannot imagine any other Beast other than the one whose teat they have sucked all their lives. They live in mortal fear not of being ignorant or lacking in imagination – those deficiencies are too obvious to contest – but of the truth of the system’s increasing weakness and vulnerability being openly revealed.

America’s (and the world’s) financial sector is a fragile, sickly hybrid which will shrivel and expire the moment it is placed in the real, dynamic world. And because the global economy has become dependent on the slouching beast of financialization, it too is fragile and sickly, sensitive to the slightest perturbations and exquisitely vulnerable to any disruption of the constant life support offered by central banks and Central States.

It is neither capitalism nor socialism, but a twisted hybrid of the worst traits of each.

I happened to catch a brief interview on DW TV (German TV, with English announcers and subtitles) of one of the few ECB (European Central Bank) officials with the integrity to resign in protest at the ECB’s blatant interventions in the bond market (buying Italian bonds to prop up a market that would implode the second ECB support vanished) and the central bank’s slippage toward money-printing as the answer to every problem.

This gentleman said that the ECB had to monitor the global economy 24 hours a day lest some tiny policy mistake bring the entire shaky edifice down.

Does that strike you as a description of a robust, adaptable, capitalist system based on transparancy and price discovery of assets? Of course not; it describes a hothouse economy, always on the ragged edge of collapse if its central bank and Central State minders make the tiniest error in its care.

For four precious years we have been force-fed nothing but lies, obfuscation, misdirection, fear-mongering, spin, sins of omission, misinformation, propaganda, false rumors and false hopes. The hothouse is slowly falling apart, and the sickly global financial sector is wilting. The financial media is heralding every “save” and every “rescue” with ever-shriller enthusiasm, lest a contagion of truth spread through the hothouse like a chill wind.

But we can be sure of one thing: those who know better have already sold, and it is now the job of the politico lackeys and the toadies of the Mainstream Media to convince the bagholders to hold on and not sell, because “everything’s been rescued.” Distilled to its essence, that is their one and only job: to convince you not to sell. That keeps the bid up for their Masters to sell into.

If history is any guide, the final collapse will be triggered by an apparently “controllable” event, something like the bankruptcy of MF Global. All eyes are on Greece’s referendum, apparently scheduled for December 4 or 5; but regardless of the vote, does a “yes” or “no” change that nation’s fundamental insolvency? No, it doesn’t.

Does the passage of some toothless law in Italy magically render that nation solvent? No, no, a thousand times no; none of these public-relations tricks can change the fact that all these nations are insolvent, the banks are insolvent, and even France and Germany are staggering under unprecedented burdens of debt.

The smart money sold in May, 2010, and the disbelievers among the Power Elite sold in May 2011, or perhaps August. Now those below the smart money (but still above the dumb money) are sniffing the fetid hothouse air, where the rank, sweaty desperation of the minders is now ever-present.

So the apparatchiks and foot soldiers have been ordered to keep the dumb money from selling, until their “betters” can sell into a rumor-juiced bid. This explains the sudden jump in the S&P 500 on every rumor of rescue, as if an over-indebted and leveraged-26-to-1 financial system can be rescued with “belt-tightening” and ECB intervention with taxpayer money.

The entire euro “project” was a scam that enabled a vast new scale of financialization. Now that the “project” is falling apart, the bagholders who bought into the shuck-and-jive are nervous and fearful; has it all really been “saved”?

No, it hasn’t; it cannot be saved. The only “solution” available is to sell: sell now, while there is still a bid. Sell fast, sell hard, sell everything denominated in euros. That is precisely what the Status Quo fears the most: an awakening continent of bagholders and debt-serfs.

Anyone thinking the euro (and eurozone) can’t possibly go down until after the Greek referendum may well find their confidence in the Status Quo’s “rescue” has been sorely misplaced.

500 Million Debt-Serfs: The European Union Is a Neo-Feudal Kleptocracy (July 22, 2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
The European Model Is Also Doomed (February 7, 2009)
When Debt-Junkies Go Broke, So Do Mercantilist Pushers (March 1, 2010)
Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010)
Why the Eurozone Is Doomed (May 10, 2010)
Ireland, Please Do the World a Favor and Default (November 29, 2010)
Why The European Union Is Doomed (March 28, 2011)
Greece, Please Do The Right Thing: Default Now (June 1, 2011)
Why the Eurozone and the Euro Are Both Doomed (June 23, 2011)
Greece Is a Kleptocracy (June 28, 2011)

The real contagion risk

 by Chris Martenson
Posted October 24, 2011 

 

AROUND HERE, WE LIKE TO TRACK THINGS from the outside in, as the initial movements at the periphery tend to give us an early warning of when things might go wrong at the center. It is always the marginal country, weakest stock in a sector, or fringe population that gives us the early warning that trouble is afoot. For example, rising food stamp utilization and poverty levels in the US indicate that economic hardship is progressing from the lower socioeconomic levels up towards the center –that is, from the outside in.

That exact pattern is now playing out in Europe, although arguably the earliest trouble was detected with the severe weakness seen in the eastern European countries nearly two years ago.

Because of this tendency for trouble to begin at the periphery before spreading to the center, here at ChrisMartenson.com headquarters we spend a disproportionate amount of our time watching junk bonds instead of Treasurys, looking at weak sectors instead of strong ones, and generally spending our time at the edges trying to scout out where there are early signs of trouble that can give us a sense of what’s coming next. In this report, we explore the idea that Europe is the canary in the coal mine that tells us it is time to begin preparing for how the world might change if the contagion spreads all the way to US Treasurys (which is mathematically inevitable, in our view).

Why the US should care about Europe

At the very core of the global nuclear money reactor are US Treasurys and the dollar. If the dollar’s role as the world’s reserve currency wanes or even collapses, then the scope and pace of the likely disruptions will be enormous. Of course, we’ll be glad to have as much forewarning as possible.

Accordingly, it is my belief that if the contagion spreads from Greece to Portugal (or Italy or Spain), and then to the big banks of France and Germany in such a way that they fail, then rather than strengthening the dollar’s role (as nearly everyone expects), we should reserve some concern for the idea that the contagion will instead jump the pond and chew its way through the US financial superstructure.

While I am expecting an initial strengthening of the dollar in response to a euro decline, I believe this will only be a temporary condition.

The predicament is that the fiscal condition of the US is just as bad as anywhere, and we’d do well to ignore the idea, widely promulgated in the popular press, that the US is in relatively better shape than some other countries. ‘Relatively’ is a funny word. In this case, it’s kind of meaningless, as all the contestants in this horse race are likely destined for the glue factory, no matter how well they place.

While there are certain to be a lot of false starts and unpredictable twists and turns along the way, eventually the precarious fiscal situation of the US will reach a critical mass of recognition. Before that date, the US will be perceived as a bastion of financial safety, and afterwards everyone will wonder how anyone could have really held that view.

A good recent example of how swiftly sovereign fortunes can change: One day, everything was fine in Greece, which enjoyed paying interest rates on its national debt that were a few skinny basis points (hundredths of a percent) above Germany’s. A few short months later, Greece was paying over 150% interest on its one-year paper.

What I am asking is this: What happens when the same sweep of recognition visits the US Treasury markets? Is such a turn of events even possible or thinkable?  Here’s one scenario:

How contagion will spread to the US

My belief is that someday, perhaps within a matter of months but more likely in a year or two, the US Treasury market will fall apart as certainly and as magnificently as did Greece’s. Here’s how that might happen:

The moral unraveling of the EU, bailouts and central banking

by Anthony Wile
from The Daily Bell
Saturday, October 15, 2011

SLOVAKIA HAS NOW APPROVED THE EUROPEAN DEBT-CRISIS bailout fund, but the problems Europe is experiencing are similar to those faced by America in the grip of the Fed’s immense bailouts of the past two years. Increasingly, these are seen as morally repugnant by citizens throughout the West. And this has significant consequences that the mainstream press declines to report.

Dominant social themes work by omission as well as commission; in this column, I want to re-examine potential ramifications. I’ve done it before, but I think it’s worth repeating. Not enough commentators, even in the alternative media, point them out in my humble opinion.

Money continues to flood Western regimes and financial institutions with billions and billions that they don’t deserve and cannot properly apply. Perhaps there is no alternative but to “kick the can down the road.” On the other hand, perhaps the bailouts are part of a wider elite destabilization effort, one intended to generate chaos and misery that will pave the way for global governance and maybe a new world currency. This is the view of the more conspiratorially-minded among the alternative media.

For whatever reasons, the bailouts, against all logic, continue apace and are being increasingly resisted … not merely for their Draconian impacts but because people are using technology to become more informed. This bailout saga, therefore, has been unusual, not only for the incalculable wealth that’s been extended but also because it’s played out in front of millions.

The ramifications continue to be felt in my view. The push-back began in the US with TARP and then continued with revelation of US$16 trillion-plus (probably more) in short-term loans extended by the US Federal Reserve to financial institutions – not just in America but around the world.

Now US Congressman Ron Paul is conducting the Federal Reserve’s first “audit.” Ben Bernanke speaks, but his pronouncements have nowhere near the power or authority of his predecessor Alan Greenspan. Occupy Wall Street and alternative journo Alex Jones are both holding organized protests outside Fed buildings. In Southern Europe, protests and riots (Greece) rise wherever the EU and its bankers attempt to impose “austerity.”

The Internet has allowed people to see – finally – exactly what’s going on. Prior to the Internet, the controlled mainstream news would have explained in unison that the Fed “made massive adjustments to the global financial fabric to ensure that systemic collapse was mitigated …” or employed other nonsensical euphemisms. These sorts of non-explanations would have been repeated ad nauseum.

But in the era of the Internet, such gobbledygook has been effectively negated by literally millions of articles (and thousands of videos) explaining what central banking really is – monetary price fixing – and how central bankers “print money from nothing” to advantage their cronies at the expense of everyone else.

The system survived because it appeared so incomprehensible that it was beyond criticism. Not anymore. People around the world “get it” and the anger is breaching even the indolence of the political class. Eventually, if certain fundamental knowledge becomes widespread enough, the elites may have to take a “step back” as we have predicted they might. Resistance is spreading.

We can see this in Slovakia, where that Eastern European nation was the last holdout among euro-zone nations to approve the EU’s most recent sovereign bailout fund. On Tuesday, the parliament rejected the fund and brought down the government of Prime Minister Iveta Radicova. On Thursday, the parliament voted FOR it, but the point had been made.

Even parliamentary representatives, notoriously resistant to the public sentiment they are supposed to be accommodating, are now beginning to reflect the animosity of their constituents. The Telegraph‘s Ambrose Evans-Pritchard recently captured this sentiment in a column entitled, “EU bailout is racket for financial elites.”

Twenty years ago, no mainstream paper in the world would have run such an article – even given today’s extreme stress and provocation. But times have changed. The financial system has come in for criticism the likes of which has not been seen (or heard) for decades. Here’s an excerpt from Evans-Pritchard’s article:

What the Slovak debate has shown us yet again – as if the political storm in Germany over the past two months has not been enough – is that escalating bailouts are nearing their political limits. The traumatic affair almost brought down the German government. It has in fact brought down the Slovak government. You can’t keep doing this. Democracies are not to be toyed with …

Slovakia’s cry of defiance has not been entirely pointless. Richard Sulik – the speaker of parliament – has caught a mood of popular disgust that goes far beyond his own country. His objections are unanswerable.

How can there be any justification for a state of affairs where a poor but rule-abiding EMU state must bail out a serial violator with twice the per capita income, and triple the level of the pensions – a country which is in any case irretrievably bankrupt? How can it be that the no-bail clause of the Lisbon Treaty has been ripped up?

But he also touched on the most neuralgic issue, reminding everybody that the EFSF is ‘mainly for saving foreign banks’. These are French, German, British, Dutch, and Belgian banks, of course … ‘I’d rather be a pariah in Brussels than have to feel ashamed before my children,’ Sulik said … Bravo.

“Bravo,” writes Evans-Pritchard, summing up the New Age’s defiance to establishment ways. We began to write about this back in August of 2009 when The Market Oracle’s Stewart Dougherty – a financial consultant – sent us a column entitled “The Metastasis of Moral Hazard and its Effect on Gold.” He wanted us to see what he’d written. Here’s an excerpt:

The colossal miscalculation made by Washington and Wall Street is that they could control the moral hazard genie once they removed it from the bottle. They believed they could use the genie to enrich themselves with trillions of dollars’ worth of taxpayer money, and then replace it in the bottle before its magic spell of immorality metastasized throughout society at large. They assumed that the people would be too stupid to see what was going on. And that even if the people did figure things out, they would willingly wear the thick, choking chains of debt being welded to their necks by the financial elite and its Washington enablers.

Instead, thanks to the Internet and the democracy of information and insight it affords, the people were instantly wise to what was happening, and it stirred them. The concept of “an eye for an eye, a tooth for a tooth,” harkens to the Bible. And perhaps Shylock was speaking for all of humanity when he said, “If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? If you wrong us, shall we not revenge?”

We thought then, and believe now, that Dougherty wrote one of the decade’s most profound columns, capturing the MORAL dimension of the fraud of “bailouts” and the impact of their fundamental – even obscene – unfairness. We wrote about his column (you can see it here: Have the Immoral Actions of Central Bankers Precipitated the Decline of the West?) and commented:

Dougherty has written a REAL article of REAL observations about the end of Western civilization. Sheesh, … Spengler’s Decline of the West in three darn pages … He’s right, he has gotten the morality right. It’s not just the culture of the West, or its promotions, or even its social organization that is finished.

You CANNOT, as a society, witness a couple of guys pull a trillion out of their back pockets without feeling, well … snookered. And after feeling snookered, something else begins to percolate. “Hey,” you say, “wait a minute. I sit here with my debts and my job and my house in foreclosure and this guy – THIS GUY – throws around trillions? Wait a minute. WHEN DO I GET MINE!”

Now the rage spreads.

The Internet Reformation is a process, not an episode.

The imminent failure of the Eurozone

by Econophile
Posted  September 2, 2011
This article originally appeared on the Daily Capitalist.

YOU KNOW THOSE MOVIES WITH THE BOMB SET TO A TIMER ticking down to 00.00 where the sweaty hero nervously cuts one wire at a time while holding his breath and then at 00.01 he stops the bomb? Well, Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world’s population is losing ground.

These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.

What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening “over there.” In a world that is so interconnected financially and by trade, a sinking Europe is everyone’s concern.

Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.

The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states’ banks. The responsible states know they will be stuck with the bill.

The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.

They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills  reached 60%.  It is a sign that investors have no faith in the Greek government’s ability to repay their debt.

The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland’s contribution.

Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don’t want to do, and they will no doubt take to the streets again in protest.

If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium’s Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany’s Commerzbank, it’s about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.

The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don’t doesn’t matter. The fact is that these banks are undercapitalized and in trouble. Their “stress tests” are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.

In other words the Europeans have created a problem that they can’t solve, easily at least.

Here are their alternatives:

1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.