It All Falls Apart

Happy families are all alike; every unhappy family is unhappy in its own way.

— Leo Tolstoy, ‘Anna Karenina’

It is hard to keep up with events.

The current, non-Varoufakis Greek government has surrendered to German austerity demands. How this turns out is anyone’s guess … except for the big picture. At the beginning of the day, Greece and the rest of Europe were broke. At the end of the day, regardless of policy or direction, Europa and Greece will still be broke.

Fred GDP-debt 061515

Figure 1: US total credit market liabilities compared to US GDP, chart by @FRED. At the foundation of the crisis in Europe is a false narrative; that countries- or firms can retire their debts by way of labor. Those who do not do so are lazy or thieves. This US chart indicates that economic activity (GDP) by itself cannot retire the debts that are taken on to subsidize it. Maturing debts- plus accrued interest are rolled over into larger loans, debts are diluted over time — inflation — but never repaid.

Greece and the European Union are unhappy families right now but their misery is common. Greeks cannot repay … neither can the Spanish, Irish or Italians. Argentines cannot pay, neither can Puerto Ricans … or Chinese manufacturers. Energy companies whether in Canada, Australia, North Dakota or Brazil cannot pay, neither can citizens/governments/firms in Venezuela, Egypt, Ukraine, etc. All are broke, their pockets are turned out; unhappiness — along with total debt — expands exponentially.

The problem really isn’t so much a credit shortage but energy- and resource crisis coupled with political denial. Energy crisis does not take the form of physical shortages; there are no gas lines, coupon rationing or odd-even days. Instead, oil is depleted and credit breaks down at the margins … Since 1973, world governments have erected every sort of fuel price hedge, all of them make use of credit in some form or other to allocate fuel. What is underway the credit allocation taken to its logical conclusion, where for increasing numbers there is no more credit: ‘Conservation by Other MeansTM

The shortage of fuel => higher prices due to supply and demand => greater need for loans as the use of the fuel is non-remunerative => the combined cost of fuel + credit becomes breaking => insolvent customers can no longer borrow or repay => as credit unravels the fuel bid declines. Within this dynamic, the two larger themes are energy deflation and dollar preference:

– Energy deflation; which occurs when the real price of fuel — its price relative to other goods and services — remains unaffordable even as the nominal price declines.

– Currency preference; takes hold when one currency such as the dollar becomes a proxy for fuel rather than a proxy for commerce: both credit and foreign exchange are discounted against preferred currency, which is hoarded.

During energy deflation, fuel price declines become self-reinforcing: lower prices lead to shortages that adversely affect end users who are unable buy … this leads to even lower prices and more shortages in a vicious cycle. At the same time, the absence of solvent customers offers the appearance of a fuel supply glut. When one currency becomes dominant, fuel becomes scarce due to lack of investment. The price then falls to reflect actual return on use of fuel rather than false returns offered by way of credit — which vanishes. Because the actual return on fuel use is small- or negative, the ultimate fuel price is very low.

As with debt-deflation, the energy scarcity premium is levied against the economy as a whole, it can take any form including decreased employment or solvency, diminished reserve holdings and tax revenues, etc. Keep in mind, when fuel becomes unavailable due to its unaffordability it tends to remain so indefinitely. Fuel shortages do not make the oil users wealthier- or more credit worthy, the driller does not become wealthier by way of reduced output, either.

In order to promote commerce, currency is continually depreciated … as an outgrowth of policy- credit expansion. Because money is continually worth less, the incentive exists for citizens to spend it rather than hold it. Money becomes a proxy for commerce which is always worth more than money is by itself.

Trend price declines in fuel markets indicate currency appreciation; at some point the money as a proxy for fuel is worth more than anything that can be done with the fuel. As a component of energy deflation, currency preference is self-amplifying as commerce is starved of funds and worth less over time compared to holding (a particular kind of) money … which is always good for that last, emergency tankful of gas.

Leadership refuses to discuss energy and the ongoing consequences of wasting energy for lifestyle purposes. It isn’t just Europe: differences between the euro, yen, sterling, yuan and dollar currencies are minuscule. Euro debts are no different from the debts of the others, European waste is no different from the waste of others. There is nothing special about the euro other than a defective, failure-prone managing regime. Debt and waste ultimately condemns all currencies as all of them represent the elusive promises of a (low-cost) fill-up at the pump …

Energy deflation and currency preference are headwinds being faced by Greece and the other countries in the eurozone. But that’s not all. European lenders and their clients along with conniving politicians have erected a conduit scheme that is right now breaking down under the weight of its own costs.



Figure 2: The euro is a conduit scheme whereby contributors and the promoters/final recipients work together to take advantage of the conduits — the persons in the middle who are the promoters’ unwitting victims.

Conduit schemes are similar to Ponzis in that recipients gain unearned funds from others by guile and misrepresentation. Whereas Ponzis involve the transfer of savings/’investment funds’, conduits are debt transfer machines. Loans flow from contributors (banks) to recipients/beneficiaries who are often investors or clients of the same banks. The conduits are ordinary citizens who are offered vague abstractions with negligible- or negative worth that nevertheless are part of the ongoing progress sales’ pitch. The conduits are on the hook for the ongoing cost of the borrowed funds; fees, interest costs and repayment of principal: it’s his debt, someone else’s benefit.

Conduit schemes are highly leveraged. Because they are criminal enterprises there is little relationship- and much less concern regarding the ballooning cost of the funds lent to the schemes’ beneficiaries … or the conduits’ ability to meet these costs. As such, the scheme falls apart when conduits are unable to service the beneficiaries’ debts.

Conduit schemes have certain characteristics:

Conduits are coercive, gate-keeping regimes unlike Ponzis which require voluntary participation. Whether the participant borrows from the contributor or not, the costs to access the scheme’s services are set by the scheme itself, the conduit has no ‘bargaining power’.

– The benefit promised to the conduit is an abstraction: a ‘common good’ such as ‘European Unity’ … or a bailout. The abstract goods are unrelated to the actual funds-transfer.

– The transfer from the contributor to the recipient is always money, in staggeringly large amounts.

– The contributors are always entities with large capacity to generate funds; finance. The recipients are manufacturers, banking system creditors and tycoons.

– Both lender-contributors and recipients are aware of the scheme at hand and both actively promote it: falsely to the conduit (and the public), accurately to each other.

– The recipients who are part of the scam have no investment ‘method’, they simply accept the free money offered in the conduit’s name.

– The hapless conduit is incapable of acting in any interest other than those of the contributor/recipient. Taking on loans and accompanying repayment obligations are conditions of using the system in question! The process is self-limiting: those unwilling or unable to act in the scam promoter’s interest exclude themselves. The recipients gain enormous amounts of money, what the conduits receive has no worth outside of what they brought to the scam in the first place. Like the rest of the world’s industrial economy, the product of the eurozone is waste.

Greece has been rendered insolvent by the euro-scheme’s cost and its fantasy product. Every other EU country faces the same consequences because the relationship between sovereigns-and-scheme is no different from Greece. When enough conduits become insolvent, the euro regime will fall apart. Bailouts fail because they only add to the conduits’ burden.

Best thing to do is to walk away from the scheme and its false promises, to start thinking and acting independently. If enough people escape the outcome is the same as insolvency, the conduit racket unravels. Every ‘investment’ scheme requires a constant flow of new funds/credit; conduit schemes require gullible recruits willing to accept the scheme’s carrying costs. The euro racket insists its product has value … the Europeans can see the absence of value for themselves and come to their own conclusions.

Exiting the euro or introducing alternative currency.

– Because exit by any conduit would require beneficiaries to retire and service their own debts, almost every form of coercion is brought to bear to enforce the scheme. Coercion vs Greece takes the form of a ‘bankers’ strike’ depriving Greece of liquidity. Without swift, sensible action the Greek, and European economies will entirely collapse.

– The introduction of an alternative or parallel currency (unit of account) would bypass the conduit by allowing for internal Greek commerce. Information on an alternative and particulars can be found in papers by Trond Andresen – Robert W. Parenteau as well as Alan Harvey.

Alexis Tsipras; “Greece does not have the required currency reserves to support a return to the drachma.” That is, Greece cannot borrow, under any debt-money regime the country would still require external credit as it cannot provide for itself. Meanwhile, the minutes tick by, the Greek financial position deteriorates as banks remain closed and the government continues to miss interest payments.

On Greece issuing greenback euros.

Greek Outcome

Figure 3: Chart by Deutsche Bank/Zero Hedge with addendum by Steve Ludlum (2015). Note outcomes in Greece and euro area. Original chart does not show introduction of Greek fiat ‘Greenback’ euros.

– In a fiat scheme, the Greek government would issue funds denominated in euros to repay debts to Greek businesses and banks as well as individuals. This ‘money’ would have no liability attached, it is not debt-money, it would not be loaned into existence. A notable example of sovereign issue money is US Demand Notes introduced during the Civil War during the Lincoln administration by Edmund Dick Taylor. The notes were necessary because big Philadelphia- and New York banks would not lend the the government at reasonable rates.

– The current government in Greece has played into the hands of forces intent on consuming it as if Greece was itself a form of capital. Greece has become pathetic: even as it defaults it begs for more loans. Greece needs to do for itself rather than beg. The Greek government can do so by issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.

– Payments would be made electronically, out of ‘thin air’, the same way loans are made by banks … out of thin air. Payments would be made both inside- and outside the country.

– Issuance of drachmas or any parallel currency would still require Greek repayment of €320+ billion of euro-denominated debts in a state where Greece could not hope to borrow. Greenbacks would offer means for repayment … possibly even across Europe. Whereas repudiation and insolvency will break down the euro conduit scheme; issuance of electronic greenbacks would render the scheme irrelevant. Euros are fungible: Cyprus notwithstanding, each euro is the same as all others. Fiat issuance by a government is the same as fiat issuance by a private sector bank, however, there is no liability to the government issue. The government can issue without digging itself deeper into the debt hole.

– Loans made to Greece are simply issued by banks as credits on a spreadsheet. This ‘bank money’ does not exist until a loan is made. The gain from lending is the requirement on the part of the borrower to repay with money that is more costly to him than the loan is to the lender. Bank money costs the lender almost nothing to create as it requires only keyboard entries. The borrower must repay with circulating money; he cannot create repayment on his keyboard but must beg, steal or more likely borrow repayment- or have it borrowed by others in his name (bailout). Whereas interest cost tends to be a small fixed percentage of the principal payable over time, the expense of circulating money is determined by its availability in the marketplace, by supply and demand. When circulating money is scarce the real worth of repayment can be much greater than the nominal balance due, yet this is invariably when the demand to repay is fiercest, as during a margin call. If the loan is secured and the borrower cannot repay, he must surrender collateral along with other rights. These are always worth more than a keyboard entry.

The point of greenback euros is to give the government the ability to make keyboard repayments, to pay lenders ‘in kind’.

– Money created by lending is extinguished when the loan is repaid. What makes up the supply of circulating money is unpaid debts. Ironically, these are funds that are out of circulation, largely overseas or hoarded. When the sovereign issues fiat to retire debts, the borrowers’ liability is extinguished. There is no net increase in the amount of funds in circulation, which can only occur if funds are repatriated or dis-hoarded which would only take place if there is demand for them that the sovereign could not satisfy.

– By creating ‘greenback’ euros, the Greek government can recapitalize its banks directly, rather than by bailing in depositors. Over time, the flow of liquidity would temper the shortage of funds outside of Greece. A Greek repayment agency would act as ‘lender of last resort’ in place of- or alongside the (worthless) ECB.

– Issuing greenback euros would re-balance the relationship between banks and sovereigns. Creditors have gained power at the expense of sovereigns and the citizens. Greenback euros would represent power to render irrelevant the private creditors and their schemes.

– Location, location, location: Greece will always be a part of Europe. Greek exports and tourism will bring in euros and other hard currencies. Foreign exchange can be leveraged or merged with greenback issue. What would keep fiat issue local is inefficiencies of Greek transfer mechanism. Fiat euros would be more effective if issued by Italy or another, larger European country.

– The euro is the official currency of Greece, it has the same natural right to issue as does a private — crooked — bank in Frankfurt.

– External lenders would not be able to hold countries hostage by withholding funds, should they do so, the government would issue in the banks’ place.

– Whereas drachmas or a parallel currency would allow Greece to leverage its euro purchasing power by way of foreign exchange, fiat greenback euros would render such leverage unnecessary. More on this later …

Article 124 of the Lisbon Treaty does not specifically prohibit greenback euros. The Greek government would have to repeal the (pro-banking) 1927 Statute of the Bank of Greece which prohibits the government from issuing ‘money’ of any kind.

Any fiat regime would require stringent energy conservation as the external flows of borrowed euros to purchase fuel are what bankrupted the Continent in the first place.

It’s the economy energy, stupid!

– The current bailout proposal does not address any of the eurozone structural defects particularly its fuel waste and diminishing purchasing power.

– Spain, Portugal, Ireland and Italy are in the same situation as Greece. What befalls Greece will befall them. They are conduits, their debts cannot be retired, the waste of fuel-capital for lifestyle purposes provides no means to do so.

– The foregoing countries’ debts are currently assets to German firms, the benefits of the European conduit. When the debts are unpaid these assets become instant liabilities, when that occurs Germany must exit the euro or follow the others into destitution.

– Austerity is a permanent condition arising from the ongoing annihilation of irreplaceable capital. Managers need to address the resource issue directly rather than pretending it does not exist. The euro conduit scheme turns out to be a ‘blunt instrument with which to ration capital. Ironically, so also is a breakdown of the scheme! Adjustments to interest rates or bailouts will never return Europe to the ‘good old days’ of American suburban-style waste. Modernity advertises itself as a provider of abundance and prosperity, in our onrushing ‘Age of Less’ modernity becomes increasingly a harsh form of rationing and social control. What is poorly understood is the inevitability of this process.

What ties energy deflation, conduit schemes and currency preference together is credit/loans and debt. The banks have a death grip on us and our life-support system. The mechanism of funds’ dilution as debt repayment is incentive to strip-mine our entire capital base. The credit regime is falling apart under the weight of its own costs, not just in Europe. Government issue money ends a monopoly over a vital private good so that it becomes a public good, in this way the power of the banks to run our affairs is reduced. As a necessary component of this effort, the establishment must hold the financiers accountable for their crimes and negligence. The present conditions and schemes cannot be endured any longer. If the establishment refuses to act the citizens will take matters into their own hands, there will be revolutions.

Outmoded sovereignty- and policy fantasies must be thrown into the trash. The time for posturing is past, nobody is in a separate boat, there is not one labeled for Germans or Italians or ‘others only’. Like it or not every European country is a part of the world, each must carry its own burden of responsibility, which some countries such as Germany currently refuses to do.

Germany — and the rest of the world — must do with its auto tycoons what Germany has done with its nuclear variety and put them out of business. No country or economist acknowledges the ongoing drain of European credit overseas in an endless stream for petroleum energy to run the Continent’s toys. Running out is running out: as the EU runs out of credit, it runs out of petroleum at the same time … once energy deflation takes hold … it is permanent.

Voluntary conservation by way of policy is ‘friendlier’ than the alternative. Left to the status quo in Europe is nationalism and war.

Conservation by other means = Syria.

Copyright © Steve Ludlum 2015