Economic Undertow

Unknown videographer, ‘Mrs. Goebbels’ Lament’

“The people of Germany
have no right to democracy and a free market economy in the
future.” Angela Merkel

Deal reached on $170 billion Greek bailout

This ‘bailout’ goes to the banks, the Greek citizens see a pittance: it is all to pay interest taken on odious debts that can never be repaid.

ATHENS — After months in which Greece teetered on the verge of bankruptcy, European officials agreed Tuesday to give the country a second massive bailout in exchange for harsh austerity measures, as grim new estimates about the country’s economy pushed off a resolution until what some officials called the last possible day to reach one.

The decision buys time for the Mediterranean country to try to fix its staggering problems, and gives assurances to the world that a Greek default — and its possibly disastrous ripple effects — will be forestalled, at least for now. If Greece had been cut loose, it would have defaulted in late March, and doubts about the viability of larger countries such as Spain and Italy might have grown.

After more than 12 hours of talks, the countries that use the euro reached an agreement early Tuesday to hand Greece $170 billion in additional bailout loans to save it from a potentially disastrous default next month.

Under the terms of the deal, private bondholders will take a larger loss than had previously been planned in an attempt to get Greece’s debt to what European officials consider a sustainable level by 2020. The officials also agreed to reduce the interest they charge Greece for the long-term loans.

“We have reached a far-reaching agreement on Greece’s new program and private-sector involvement that will lead to a very significant debt reduction for Greece,” Luxembourg Prime Minister Jean-Claude Juncker, who heads the bloc of 17 countries that use the euro, told reporters in Brussels after a 14-hour negotiation. He called the amount of aid “unprecedented.”
Washington Post

Here is odious debt: debt taken on by a tyrannical regime in the name of the state to serve the interest of the tyrant rather than the state or public. As such it is personal debt of the tyrant and his cronies, not any obligation of the public. The Greeks did not have a vote regarding the hundreds of billions of euro debt just now lodged against them. Such a vote is forbidden by the powers outside of Greece who run the country. This dead-money debt was imposed by a cabal of bankers using the outer forms of the European state and the IMF to ‘manage’ the sock puppet Greek government.

Meanwhile, there is no more Greek sovereignty, neither the government nor the Eurocrats can protect the country or defend its citizens’ interests. Institutions are de-funded, discredited and co-opted by the financiers.

About 100 years ago a German economic entity started to be formed out of many regional economies. As unification of the country was still way out of the question, economic treaties started to develop, finally reaching its peak in 1843 with the German ‘Zollverein’ (Customs Union) and bringing with it huge economic advances.

What did the situation look like before? Anyone passing through Germany traveled on poor roads and had to pay countless duties and tolls on his way through dozens of states. Each of these states had its own sovereignty, financial system and currency attempting to form something like its own independent economy.

Those in charge then simply could not understand that their great neighbors, England and France, had advanced because they had created an economic area for themselves, which corresponded to the level of technology and transport reached at the time. Friedrich List, the great proponent of Germany’s economic union, criticized the situation at that time saying, “The chances for German industry to rise up would immense if each factory owner could choose from an pool of 30 million people! Mining, agriculture and cattle rearing could really take off if each branch of production could take its natural course!”

One of the decisive forces, which the small nation ideal finally had to bow to, was the revolutionizing effect on the economy and transport of technical progress, especially the steam engine. If we say Europe now, instead of Germany, then we come naturally to a similar, if not identical, conclusion – from a purely economic perspective. Once again it is the economic and technical progress, which pushes inexorably to the formation of large continental economic areas. Today technology offers possibilities, which cannot be fully utilized by individual national economies. Nations’ borders have been brought closer together by the increased speed of trains, the extension of the road network and waterways, the transcontinental energy supply, which offers so much potential and, above all, the airplane. Outside Europe, huge economic areas are already, or are in the process of being formed, from a combination of these factors. For its own good, Europe has to be dragged out of its romanticized backwardness. The difficulties, of course, of a European economic union are larger than those that had to be overcome by the German Customs Union. The means will be difficult and more complicated, and it certainly will not be achieved just through a customs union. Nonetheless, there will be a European economy entity because its time has come.

The Economic Face of the New Europe
by Walther Funk, Reich’s Economic Minister and
President of the German Reichsbank – 1942

Here is the world order: the engrossing trains, airplanes and automobiles: whomever embraces “romanticized backwardness” gets stuffed into a furnace.

The National Socialists represented the putsch of the German chemical and dyestuff industries: IG Farben, Bayer AG, Bosch/BASF: the post-war German political elite is the who’s who of Farben/chemical industry alumni including Hermann Abs, Konrad Adenauer, Otto Ambros, Etienne Davignon, Max Ilgner, Helmut Kohl, Karl Krauch, Anton Reithinger, Fritz ter Meer, Carl Wurter, Angela Merkel.

Merkel is the ‘reformed’ Stalinist rather than the Nazi but an authoritarian, nevertheless:

Angela Merkel became German Chancellor
in 2005 and has close connections to
the chemical lobby.

• Merkel studied physics at the university
of Leipzig in Eastern Germany
from 1973 to 1978. Later, she was awarded a doctorate for a
thesis on quantum chemistry. Between 1978 and 1990, Merkel
worked and studied at the Central Institute for Physical Chemistry
at the Academy of Sciences in Eastern Berlin.

• After the reunification of Germany, Merkel was elected as Member
of Parliament of the German Bundestag in 1990.

• In 1991, Merkel became Minister for Women and Youth in
Helmut Kohl’s cabinet. From 1994 to 1998, Merkel served as
Minister for Environment and Nuclear Safety. She had a close
relationship with Kohl and became known as “Kohl’s Mädchen”
(Kohl’s girl). In 2000, Merkel succeeded Kohl as the party chair
of the CDU party.

• In 2005, Merkel became Chancellor in Germany. In a speech,
shortly before being elected, she said: “The people of Germany
have no right to democracy and a free market economy in the
future!” It was obvious that Merkel had been briefed by representatives
of the cartel.

• One of her close advisors is the chief executive of BASF, Jürgen
Hambrecht. During WWII, BASF was one of the members of the
IG Farben cartel.

Old ideas die hard, the model for the European Union is from Alexander Hamilton by way of Friedrich List. It turns out Magda Goebbels had very little to worry about:

We’re talking about ALEC, the American Legislative Exchange Council, a secretive organization from the Koch Brothers made up of politicians, corporations and think tanks, and this is the first in a multi-part series about the group, its goals and the people behind it.

What is ALEC?

The one thing it’s not is a lobbying group. As their page at SourceWatch states:

 

ALEC is not a lobby; it is not a front group. It is much more powerful than that. Through ALEC, behind closed doors, corporations hand state legislators the changes to the law they desire that directly benefit their bottom line. Along with legislators, corporations have membership in ALEC. Corporations sit on all nine ALEC task forces and vote with legislators to approve “model” bills. They have their own corporate governing board which meets jointly with the legislative board. (ALEC says that corporations do not vote on the board.) They fund almost all of ALEC’s operations. Participating legislators, overwhelmingly conservative Republicans, then bring those proposals home and introduce them in statehouses across the land as their own brilliant ideas and important public policy innovations—without disclosing that corporations crafted and voted on the bills. ALEC boasts that it has over 1,000 of these bills introduced by legislative members every year, with one in every five of them enacted into law. ALEC describes itself as a “unique,” “unparalleled” and “unmatched” organization. It might be right. It is as if a state legislature had been reconstituted, yet corporations had pushed the people out the door.

 

An “unparalleled” and “unmatched” organization, funded by corporations who craft “model” legislation that is then filtered through to state legislatures through their political members. Not something that inspires any sense of security. But this is the real fight, people. In many ways, this is not red vs. blue, this is not Democrat vs. Republican, or Progressive vs. Conservative; this is democracy vs. a corporate coup of the United States of America.

Who is behind ALEC?

It should come as no surprise that the Brothers Koch, Charles and David, are major players in ALEC.

It is always the power elite Nazis who conspire to deprive the rights of the ordinary citizens rather than the other-way around:

The membership of ALEC should scare the pants off of anyone who values a true democratic government and society. It is made up of a combination of politicians and corporations from almost every state. Their “Public” Board of Directors consists entirely of Republican lawmakers:

Executive Board:

• National Chairman – Rep. Noble Ellington (R-Louisiana)
• First Vice Chairman – Rep. Dave Frizzell (R-Indiana)
• Second Vice Chairman – Rep. John Piscopo (R-Connecticut)
• Treasurer – Rep. Linda Upmeyer (R-Iowa)
• Secretary – Rep. Liston Barfield (R-South Carolina)
• Immediate Past Chairman – Rep. Tom Craddick (R-Texas)

Board Members:

• Sen. Curt Bramble (R-Utah)
• Rep. Harold Brubaker (R-North Carolina)
• Sen. Jim Buck (R-Indiana)
• Sen. Kent L. Cravens (R-New Mexico)
• Rep. Jim Ellington (R-Mississippi)
• Sen. Billy Hewes, III (R-Mississippi)
• Spkr. William (Bill) Howell (R-Virginia)
• Sen. Owen Johnson (R-New York)
• Sen. Michael Lamoureux (R-Arkansas)
• Rep. Steve McDaniel (R-Tennessee)
• Sen. Ray Merrick (R-Kansas)
• Sen. William (Bill) Raggio (R-Nevada)
• Sen. Dean Rhoads (R-Nevada)
• Sen. Chip Rogers (R-Georgia)
• Sen. Bill Seitz (R-Ohio)
• Rep. Curry Todd (R-Tennessee)
• Sen. Susan Wagle (R-Kansas)

ALEC also has a Corporate Board, made up of a plethora of corporations who have their dirty paw prints on legislation across the country:

• CenterPoint 360, W. Preston Baldwin – Chairman – Lobbying firm
• Altria Group, Daniel Smith – Formerly tobacco giant Phillip Morris
• American Bail Coalition, William Carmichael, Jerry Watson – Criminal court appearance bonds
• AT&T, William Leahy – Communications giant
• Bayer Corp., Sandy Oliver – Pharmaceutical giant (Bayer AG: Nazi Germany chemical industry kingpin)
• Coca-Cola Company, Gene Rackley – Soft drink giant
• Diageo, Kenneth Lane – Global, consolidated liquor company
• Energy Future Holdings, Sano Blocker – Texas energy company
• ExxonMobil Corporation, Randall Smith – Oil giant
• GlaxoSmithKline, John Del Giorno – Pharmaceutical giant
• Intuit, Inc., Bernie McKay – Software company
• Johnson & Johnson, Don Bohn – Healthcare/pharmaceutical giant
• Koch Companies Public Sector, Mike Morgan – Largest private company in U.S.
• Kraft Food, Inc., Derek Crawford – Food giant
• Peabody Energy, Kelly Mader – Coal company
• Pfizer Inc., Michael Hubert – Pharmaceutical giant
• PhRMA, Jeff Bond – One of the largest lobbying organizations in the U.S.
• Reed Elsevier, Inc., Teresa Jennings – Professional journal publisher
• Reynolds American, David Powers – RJ Reynolds tobacco company
• Salt River Project, Russell Smoldon – Arizona utility company
• State Farm Insurance Co., Roland Spies – Insurance giant
• United Parcel Service (UPS)[2], Richard McArdle – Shipping and freight company
• Wal-Mart Stores, Maggie Sans – Retail giant

In addition to the politicians and corporations, several think tanks serve as members including the National Rifle Association, the Friedman Foundation for Educational Choice (started by the “shock doctrine” mastermind Milton Friedman), Dick Armey’s Institute for Policy Innovation, and the Mackinac Center for Public policy, which spent a lot of time meddling in the Wisconsin protests.

Also on board are several “scholars,” the majority of whom have direct ties to the Koch brothers. The most recognizable is Stephen Moore, the founder of the Club for Growth and a former senior fellow at the Cato Institute, founded by Charles Koch in 1977.

Debtonomics:

– There are two forms or sectors within debtonomy, the so-called productive sectors; mainly the automobile, aircraft, energy supply/transmission, basic metals and materials, chemical and warfare industries, industrial agriculture; the ‘health’care rackets; pharmaceutical, house-building and highway construction; the mining industries and ‘retail’. These are the instruments of waste and tyranny. Supporting the industrial sector is the finance sector which provides credit without which the industrial sector cannot exist.

– Classical Economists who purport to run the ‘economy’ have not seen fit to include credit into their operating models.

– Debtonomics argues that industrial enterprises are empirically not productive. These industries have no special rights or claims to debt subsidies but have simply overthrown the credit establishment. The productivity claims are lies repeated enough — by way of advertising — to become the truth.

– Debtonomics argues the way to end the abuses of industrial enterprises is to end their subsidies, to make industries pay their own way. The instrument of self-financing debt then can be used for other activities, such as to undo the damages done over the decades by the industrial enterprises. These ‘undoing’ activities would in turn tend to be productive over the longer term as they would represent capital husbandry rather than its erosion or destruction.

– Currently, industrial enterprises are fatally undermined by their own operational efficiency. Physical limits in the form of relative resource scarcity reprices inputs out of the reach of the industries that require them to waste. The feedback loops effect both finance/debt and the enterprises themselves, the effects including strong deflationary vicious cycles and compounding spirals as is seen now in Greece.

Greece does not produce any petroleum energy to speak of: a few thousand barrels per day from offshore fields. It has to import fuel from overseas, mostly from Middle East producers such as Iran. Where does Greece get the hard currency to swap for petroleum overseas?

From an energy standpoint Greece is insolvent. It once borrowed — euros — from banks to buy fuel. Now it has to borrow from new banks to pay off the old banks AND to buy the fuel. Greece is on the road to oblivion. It buys less fuel even as it falls further into debt. Without some drastic change Greece will not only default but collapse.

Like the other countries, Greece obviously failed to earn enough from using the fuel to pay its energy bill otherwise it would not be insolvent.

Credit is needed to save the Euro-states from bankruptcy, adding credit pushes up the price of crude petroleum in the ‘asset’ markets. A severe recession is underway in the Eurozone regardless of what takes place in Greece and elsewhere:

Figure 1: The barrel of crude in the Eurozone, priced in euros as expensive as it was in 2008. The outcome of the high price is demand destruction.

Carmaker Sergio Marchionne of Fiat (unwittingly) speaks the truth about his industry:

“We need to remove the fact that we’ve got the mass car market in Europe, which is economically unproductive and which, just in raw, pure economic analysis, does not deserve capital allocation of any kind,” Fiat chief Sergio Marchionne said on a conference call with analysts Feb. 1.

“If volumes stay where they are, I think if you took out 10 to 15 percent of the capacity, maybe 20 percent of the capacity in Europe,” it would result in a sustainable level of production, Marchionne told reporters.

“Such a dramatic reduction — which would require mass layoffs at a time when Europe is reeling from economic turmoil and has not yet resolved its crippling government debt problems — would be very difficult to achieve,” he said. “It s a tough discussion.”

“I guarantee you re going to have some very negative reactions from industrial European countries to my suggestion.”

Asked what his forecast is for European vehicle demand, Marchionne said he expects it to “stay flat through 2014.”

Fiat’s Italian plants are currently operating at less than 60 percent capacity, a situation Marchionne said is untenable and is mirrored by other European automakers.

The Europeans are broke, prices of all goods are simply too high. This includes the prices for fuel. The Europeans are in a trap. Finance can continually expand without restraint as long as it continually expands without restraint. The fear of large numbers on the part of administrators AND the failure of important finance establishments such as dollar- ‘shadow banking’ in 2008-09 has slowed the expansion of credit, the amount of debt taken on. The slowdown itself is the economic crisis, not the result of it.

Renault, Fiat Pace European Car-Sales Drop as Demand Stalls

Tommaso Ebhardt (Bloomberg)

Renault SA (RNO), Fiat SpA (F) and PSA Peugeot Citroen (UG) led the biggest decline in European car sales since June as consumers balked at making big purchases after the region’s economy shrunk.

Registrations in January fell 6.6 percent to 1 million vehicles, marking the fourth consecutive monthly decline, Brussels-based European Automobile Manufacturers’ Association, or ACEA, said today in a statement.

Sales in France, the region’s second-biggest market after Germany, plunged 21 percent, while deliveries in Italy, the third-largest market, slumped 17 percent. Gross domestic product in the 17-nation of euro area fell 0.3 percent in the fourth quarter, the first drop since the second quarter of 2009.

The Establishment solution is to ramp up the Nazism: starve the European periphery of credit granting it to the car industry and the finance which supports it. What is taking place in the EU is a contest over debt subsidy, Germany rendering Greece and the rest car-free.

What vanishes now is the confidence in systems, which purchase oppression and sell common-sense and any longer-term view. Bankrupting Greece will not cure Europe’s ills. Instead of relief such things lead straight to the bankruptcy of the other Euro-nations including France and Germany. The center of the industrial vortex is the German auto industry, for which the entirety of Europe and the ‘euro enterprise’ trembles at the edge of the pit. The instrument of German finance and industry is the euro. The finance costs associated with the euro are now greater than what the car industry and its finance supporters pretend to earn. If this was not so there would not be a crisis in Europe! The outcome of this will be stupendous: a major currency does not simply vanish without consequences.

But the euro with all of its baggage cannot pay its own way. The clock is ticking … don’t look now … dollar!

– Credit amplifying or triggering price changes.

– The dollar/crude trade which determines the worth of both.

– Creeping dollar preference and amplified deflation.

– Ongoing collapse of the euro currency as a ‘going concern’.

– Bilateral international trade deals involving crude production that exclude the dollar.

– All of the above taking place in a world economic context of distrust and failing institutions.

It is a travesty of justice what the technocrats, the nanny-zone supporters, and the politicians have done to Greece.
Mish

It is said that one cannot borrow one’s way out of debt, that more debt is not the solution to a debt crisis. These remarks are truisms, that is, they make sense at the surface and have the ring of truth but are completely false.

At a personal or even the enterprise level it is hard to make a living from continually taking on more debt but this is due to the finance rule which requires debt service at the smallest scale to be more costly than debt service at the largest. Even so, the debts of an individual are extinguished practically by the end of the debtor’s life. It is possible for creditors’ demands for repayment to outlive the debtor leaving no one and nothing from whom to collect.

For finance and sovereigns, there is no other way for the debts to be retired or serviced other than by the taking on of new debts. The idea is not to borrow oneself free of debt which is absurd but to maintain a level of perpetual indebtedness as a manageable state of affairs, to gain as necessary the monetary benefits of debt, to escape the pit that repayment represents. The understanding here is that finance entities such as governments outlive their creditors, that debts eventually fade into meaninglessness.

The suggestion of the Good German is that there is some sort of debt-free utopia where obligations are purged by dint of Teutonic hard work and suffering inflicted upon others, that the Good Germans have themselves endured these things many times, it is a bitter medicine but must be swallowed. This suggestion is also a lie: not the simple untruth of childhood corrected by the cane and some bawling, but materially destructive falsehood punishable by national ruin!

Such a debt-free state has never existed anywhere on Planet Earth, has certainly never included any industrial nation, has certainly never included Germany whose last encounter with austerity and Bruning deflation led to a particularly Pyrrhic brand of military Keynesianism which began and ended with massive debts that the same Germans took on then defaulted upon!

The Good Germans will find out on their own account soon enough when all of Europe’s debts come knocking first upon their doors then crashing down upon their heads: there is no practical difference between a Greece and a Germany that make use of the same debt-money system.

Any distinction is a matter of timing: the Good German gets to watch his fate spinning out in real time on television. The half-constructed Greek economy is identical to the German version but for the layer of smug certainty that ripens in the German. What is underway in Greece is inevitable in Germany. As with the rest of the EU, Germany has no organic credit but must borrow from its neighbors, right now its sales pitch is a bit better than the Greeks’. Germany is another ‘failed auction’ away from the sickening slide, the inability to beg some ‘confidence’ from gimlet-eyed bond speculators bent on gain.

Germany’s finance minister Wolfgang Schäuble wishes to expel Greece from the euro … “We can’t keep sinking billions into a bottomless pit,” he said on Friday.

Sinking billions is precisely what they must do! There is nothing else. The “billions” is simply a number so is trillions and more. There is no end to the numbers, there is nothing precious about them. Looking to give numbers meaning ends with ashes and dust, not billions not even thousands. Germany cannot support its own debts, only a fool believes in childrens’ fantasy, that a consumer economy like Greece’s — or Spain’s or Italy’s — can support its own finance debts by way of labor … ‘competitiveness’!

The more Germans hammer at the failure of the Greeks the more obvious this is the failure of the euro:

EU to punish Spain for deficits, inaction

Julien Toyer and Paul Day (Reuters)

The European Union is likely to take action against Spain’s newly installed government by May for delaying austerity measures ahead of a regional election next month, sources familiar with the situation have told Reuters.

Spanish and EU officials said in response to Reuters’ story that the government in Spain was working hard to reduce its deficit and that it was premature to say the country might be punished.

Three senior EU officials told Reuters that a final decision still has to be made, but the European Commission believes the new government overstated the deficit figures for 2011 so the current year’s data would look better. Spain is also not addressing quickly enough the deterioration in public finances expected in 2012, risking the country’s longer-term growth, the officials said.

Asked if the European commissioner for economic and monetary affairs, Olli Rehn, would take action and recommend that the bloc’s 27 finance ministers adopt sanctions against Madrid, one of the officials said: “It is very likely.”

Neither the Greeks nor the Spanish can pay finance debts by any means other than borrowing. Here is some bad news for Mr. Schäuble, the Germans cannot pay the Greek finance debts either! When it comes to it and it shall as inevitably as Monday, the Germans will borrow billions and throw them into the bottomless pit or become beggars living in the streets.

Schäuble does not understand the basics of economics:

The wealth is those who lend to German banks: the debtor Greeks are the counterparties on the banks balance sheets, the pitiful objects of Minister Schäuble’s pointless class war,

The twenty- or forty or so trillions in euro debts are equal to European wealth —

When the Greeks fail, this will not be success for the rest of the Eurozone. Europe is in a recession, this is not Greece’s fault but rather the failure of consumption waste-based economies that have no organic return.

Here is the precarious state of euro wealth, dependent upon the financial health of Europe’s least citizens:

– Europe is in the grip of an energy crisis that the same establishment refuses to acknowledge. Because Europe has some fragment of credit remaining to it, Europe pretends it has access to crude oil at any price.

– European policy-makers strangle access to credit for inexplicable reasons, fuel availability diminishes. What is underway in Greece and elsewhere is fuel conservation by other means.

– Credit bids the price of fuel on the asset markets: (TFC Charts, click on for big):

Figure 1: The outcome of high fuel price is demand destruction which has its own diminishing effect upon credit.

Dispense with the LTRO right away: it is the means by which non-cash assets are swapped for currency, it is a money laundry. As a by-product of the laundering process, there is a temporary bending of the EU’s self-destructive rules: “that Euroland is now strong enough to withstand contagion, and that the European Central Bank’s `Draghi bazooka’ for lenders has eliminated the risk of a financial collapse.” says Ambrose Evans-Pritchard in describing it. What frees the Germans to smash the Greeks in the face is the ‘success’ of the central bank’s criminal enterprise!

Euro debt is a system, claims against what appears to be a shrinking pool of funds within Europe. These funds are euros, it does not matter if the claims are against Greeks or French, the obligations in euros are fixed against those who have the euros, not those who have lost them. The claims are made by the banks. If the claims cannot be paid or financed then the banks who are due the money must be bailed out. The cost of their failure is too high. Claims are by one bank against another, they are direct in the form of debt by one bank to another or indirect by way of derivatives such as Credit Default Swaps.

The claims multiply against the largest pool of euros which is Germany. As with dollar claims in America, the individual euro issues are ‘sliced and diced’ into components and re-assembled into a rattatouille. Parts of each obligation are assigned to all debtors. The same way all dollar claims can be made against the US government because of its guarantees to depositors, so are euro claims made against the German government and German citizens. There is no ‘Greek debt’ that is not also German debt.

The German’s choices are stark: he can attempt to hold euros against multiplying claims and be ruined by them or he can not hold euros. This has nothing to do with the German’s character or morality but is a flaw of the euro-finance structure, with the euro itself. If the German holds the euro he will accept the euro-costs, he will be the fool in the market, the bag-holder in the euro scheme. If/when Greece fails, Germany will have to pay. Same with all the other countries in Eurozone. Germany pays because they are the only country that has any money.

Germany pays because they are so stoutly defending the euro. If they defend it they are immolated by it.

If the German decides he cannot bear the euro-debts he will change his euros for Deutschmarks. By doing so the euro claims are fixed. The German can also refuse to entertain any claim that is not German in origin. The German can protect his own economy as a natural right, he can do this or follow the Greeks and the others.

The Greeks will repudiate their euro debts and redenominate them in drachma. Greece lacks the euros to service and retire its debts and cannot borrow more from non-Greek lenders. The euro-using German will lack euros but will face massive euro-denominated obligations. All of its banks will require euro-bailouts, so will all the other banks that have ‘bought’ pieces of German guarantees. Germany will be in a recession, unemployment will be rising. There will be a failed German auction and the interest rates will increase. The Germans will be unable to borrow from lenders who are not German.

Those whose property is the debt are generally those whose property is the currency. Only debts that can be inflated away by inflation are those ‘fixed’ externally by way of foreign exchange.

Because the euro is non-native to any European country, nobody actually ‘owns’ the euro. All of Europes euro-debts are external, all can be fixed by way of foreign exchange. Trillions in wealth in the form of paper euros are now hostage to countries suffering under the same paper euros.

As long as the euro provided benefits in the form of cheap credit, it was made use of. The credit never produced goods of any value, nothing that would allow a user to weather a euro-generated storm. The euro is monetary crack, it never did any country any good, not even Germany.

The product of the euro are excess houses in Spain and Ireland, some consumer sales in Greece and elsewhere, some extra car sales for Germany. The benefit was an abstraction, an airy advertisement of ‘European unity’. What actually arrived was an inflexible bureaucracy in Brussels and a horror-show from Berlin. The crack high is now gone with the wind. EU policy has become a mixed bag of bullying, threats and rear-guard actions. Nobody speaks of a grand European future under the euro anymore. The talk is of how to escape the onrushing euro-amplified depression. The euro politicians are to be thrown under the wheels. The inept Merkel will go, so will mafia-man Schäuble. The new German government will throw money down the bottomless German pit … if the euro lasts long enough for the Germans to elect a new government.

The technocrats and euro-enablers have failed. Nobody in the European establishment appears to grasp the ongoing economic unraveling is permanent. There will not be any growth. The fuel constraints mean an ongoing recession. The old measures of prosperity — carefree waste behind the wheel of a new car — are now obsolete.

The euro was intended as a means to obtain fuel on the same seigniorage terms as the Americans. The euro is revealed to be an economic dictatorship. If fuel cannot be obtained anyway for unrelated reasons, if credit cannot be obtained for structural reasons there is little use for the euro.

As countries such as Greece exit the euro, euro-debts will be shifted to those still making use of it, those who still have the means to repay. As more countries abandon the euro the bailout obligations multiply against a shrinking pool of euro-users. These users will have to issue credit or exit. If credit is extended at the last minute, the Europeans will ask at once, “Why now? Why not when it could have done some good, when it could have saved Greece (and others)?” Otherwise, the towel is thrown in and there is no more euro.

If the euro dies the vast, paper fortunes that were once euros will become other things. Governments will be intent on inflating the external euro debts into nothingness: only debts that can be inflated away by inflation are those ‘fixed’ externally by way of foreign exchange.

Euros into drachmas, lira, francs: that is some foreign exchange. Most of those holding euros are the German banks, they would be ruined, the Greeks would relentlessly devalue the drachma if only to crush external holders of Greek debt. So would also be the holders of euro ‘wealth’: their euro position too large to readily convert, with D-marks out of reach. The end of the euro would mean the end of any euro-dollar swap. The Euro-plutocrat would become the ex-plutocrat with bags of petit currencies rapidly falling worthless.

What is more likely is that Euro-credit will be extended in dribs and drabs. Greece will fail and the exit will be messy. This will be the excuse to pitch dullards Merkel and Schäuble into the fire. Debt will be taken on to repay more debt, there will be no collapse in Europe. Instead, the slow unraveling over time, a Japan-style deflation taking place over decades.

Is the euro the means to a criminal end? Such a thing is hard to imagine if only for reason of ambition. The appearance of LTRO along with the absence of institutions that would permit a euro debt-money system to function properly suggests a criminal scheme. First comes the flood of artificial currency as a means to gain assets cheaply. The euro flood is then withdrawn which leaves deflation and the demand that collateral be turned over. Ownership is shifted by way of debts to finance elites. If the gigantic mortgage financing scam had not already taken place it would be incomprehensible for such an ambitious fraud to take root. To create a currency and then persuade actual countries to make use of it, to take on trillions of debt is something far beyond the reach of the average bank robber.

– Credit amplifying or triggering price changes.

– The dollar/crude trade which determines the worth of both.

– Creeping dollar preference and amplified deflation.

– Ongoing collapse of the euro currency as a ‘going concern’.

– Bilateral international trade deals involving crude production that exclude the dollar.

– All of the above taking place in a world economic context of distrust and failing institutions.

The Greeks and the rest of Europe are in the middle of an energy crisis. Greece and the others are in the process of becoming ‘car-free Europe’. This is a process fraught with a great deal of struggle and despair as automobile possession is the central feature of modernity along with its ‘singular(ity)’ product.

There is more Euro-drama than the shrinking availability of gasoline, it’s a drama that cycles around the issuance of new debt (and its absence WaPo):

Greece, proponents of austerity say, has no one to blame but itself. After a decade of excessive borrowing and spending, evidence emerged in late 2009 that Greek officials had lied about the extent of the country’s whopping deficit. That lighted the first sparks of the European debt crisis, touching off a firestorm of investor panic that spread across Europe and is jeopardizing the global economy.

European powers, led by fiscally conservative Germany, have been insisting that Greece correct years of mismanagement by enacting swift waves of cuts and other major economic reforms to regain the confidence of investors and ensure the integrity of the euro. Slashing the deficit quickly is essential to ushering in a sustainable future, they have argued, and the resulting social pain is necessary to impress on Greek politicians and society that such excesses should never happen again.

How many foolish errors are contained within the two paragraphs There is no such thing as ‘excessive borrowing and spending’, there is no one who can judge whether borrowing is excessive or not. Lying about past spending did not effect Greek credit by itself, there is no ‘magic line’ or magic number where debt morphs from good to bad. Investors did not panic, they moved deposits from some banks to others as they do periodically, it is the actions of administrators are forcing members of the Eurozone to brink of default as costs that would ordinarily be safely deferred are now brought immediately forward.

Germany isn’t conservative, it borrows against the accounts of its overseas customers. Mismanagement is on the part of the Germans rather than the Greeks who can see that their economy cannot support finance debts. There is no such thing as ‘investor confidence’ any more than there is ‘airplane passenger confidence’ to keep commercial jets in the air. Meanwhile, a ‘sustainable future’ is indeed being ushered in all around the world … one where there are no fuel-wasting automobiles, jet airlines, ‘modern’ military establishments and whatnot, the sorts of goods the sale of which make up the German economy!

In the debtonomy there are the two major segments, the production economy of goods and services and the finance economy. The goods sector is generally bound by conditions while finance is bound by rules.

It is self-evident that the output of physical things is governed by physical conditions. Geology, distance, availability of materials and weather, the inherent qualities of materials, all these and more determine the flow of inputs-to-goods and goods-to-markets as well as the availability of services. All things, all human affairs are subject to thermodynamics and entropy. The leverage provided by ‘artificial’ energy supplies effects object relationships over time but does not change their nature. We recognize the conditions and have to the most part have adapted to them … or refuse to do so, for good or ill.

Outside of the few conditions which are universal, the economy of finance and debt is governed by rules. The money-cost of money or interest rate is a rule as is the subordination of one form of debt to another. The process which results in the creation of currency is a consequence of rules. Taxes are rules along with the setting of interest rates. The product of the credit industry is debt, it is an abstraction not found anywhere else in nature. It is largely unaffected by physical forces or limits but is governed by advantage which is made manifest in the form of rules.

The conditions to which debt must submit relate to its creation on one hand and its maximum extent on the other. A reason for the rules in the first place is to counter finance conditions:

- Once debt is taken on at a level that has effects outside itself there is no turning back: new debt must continually be taken on as doing so is the means by which old debt is retired. This condition infers a second:

– The means to obtain credit and the means to manage must be organic to the particular finance economy and never external, it must be solely at the economy’s disposal and none other. To lack organic credit and the means to manage it — among these being a liquid native currency, a (fiscal) Treasury, a (monetary) central bank and distributary banks — puts the nation at the mercy of those who have these things, who would ration credit for their own advantage.

– Debt is always and without exception subject to the First Law: in that the costs of managing the surplus of debt increase along with it until at some point they exceed the surplus itself.

– Another condition is that debt is always quantitative, matters of debt are always matters of worth, never matters of quality or value. Debt is at best a substitute for capital, never capital itself.

Outside of these conditions, the finance economy’s functions are (be)set by rules, the general purpose of these is to favor larger enterprises over the smaller.

To retire debt is impossible, the debt economy must replace new debt for old. There are simply no other means to retire or service accumulated debts, any and all other means are inadequate. Even a completely industrialized state under the full-flowering of production cannot hope to retire its own debts. Speculative frenzies are inadequate, and in fact are the products of expanding debt rather than the cure for it. The idea that the products of the debt economy can be retired by ‘growth’ or GDP output or increase or anything else … is absurd.

Finance debts cannot be restructured, to even give the idea serious consideration is also absurd. The change the conditions of one part of the whole cannot do more than stir the leaves within a courtyard of a small building within an immense city.

Debts once taken on are too large to be inflated away, any analyst who makes this suggestion cannot be taken seriously. Debt is a system not an object, the currency denominating the debt is likewise a system. Rules that would be changed to permit inflation would be the same rules that effect new debt that is taken on. Both currency and debt exist as entries of account on ledgers or on electronic versions of ledgers. There is nothing concrete or unalterable about these entries, only their hold on the minds of those who keep the accounts. Changes in one significant part of an economy will effect other significant parts equally. Whatever technique would add zeros to the currency ledger (and by doing so reduce the currency’s worth) would cause the same zeros to be added to the ledger of new debts, no doubt by way of the same computer. The most likely outcome would be strangling debt service costs which would snuff out inflation at birth.

Those whose property is the debt are generally those whose property is the currency. Only debts that can be inflated away by inflation are those ‘fixed’ externally by way of foreign exchange.

The great fallacy is that finance debts are ‘things’ like spiders or lead weights that become excessive and must be done away with. Inflation aims to redenominate currency without redenominating debt at the same time so as to cause the debt to become less significant. What is not properly understood is that debt by itself has no ill significance, nor is there any particular size or amount of debt where it becomes harmful. Within finance, all carry costs are monetized. There is no ill effect of debt upon finance. There is no ‘magic line in the sand’ where an amount of debt suddenly becomes an intolerable burden to it. When debt’s costs are directed outside of finance it is because of improperly designed or applied rules or the result of sadistic policy aimed to oppress citizens.

It is only during an interruption or discontinuity of debt-replacement is there distress. The effect is on the carry cost of debt: the ordinary economy cannot bear debts’ burdens and will not lend in finance’s place. Without finance to bear finance’ burdens, all of the costs rush out into the open at once (which can be seen in Greece and across the Eurozone).

The solution is to remove the impediments to the creation of new debt: notice the effect of the LTRO upon the European debtonomy. Contrary to the alarms of the ignorant, the instruments by which old debt is replaced by new never tire. If they falter it is because the nation flirts with voluntary default which is political stupidity rather than the consequence of economics.

Because finance debt cannot be repaid or extinguished the state tends to become debts’ custodian. The debt-property of individuals and firms, both the debtors’ and the creditors’ are transferred to the state over time. When both sides of private debts are on the accounts of the state these are ‘dead money’ debts which can then be repudiated because they are also of no consequence to anyone.

Repudiation is the only possible way to extinguish finance debts. This is where the effects of The First Law emerges, when costs remain and nothing else, that the economy is so bound by them that reasonable justification exists for the entirety to be swept away. This appears to be underway in Greece and elsewhere in Europe where nothing remains of the euro but aggregated costs: the absurdity is that the amounts of debt in question are so small.

… the euro itself is not what is seems …

Japan, UK and the US appear to have come to terms with detonomics although some genuflection takes place periodically toward the unachievable goal of ‘repaying debts’ or ‘paying down’ the debts that now amount to the hundreds of trillions in whatever currencies. This gesturing is a form of public comedy, never meant to be taken seriously. Meanwhile, the actual limit to how much pyramided debt can be taken on exists far outside the arbitrary constraints that emerge from contradictory and counter-productive rules.

– The Debtonomy exists within a hall of mirrors. It is almost impossible to ‘see’ directly as its components masquerade as other components. This is by design as individuals comprehending the true nature of the industrial economy would refuse to labor under it, demanding the scheme support them.

– The Debtonomy has two components, a provision sector of goods and services and finance.

– The two components are integrated, the productive sector is the collateral for the product of the finance sector which is the primary operating sector.

– The productive sector isn’t productive, this is so generally by design. Production answers the dictates of fashion and nothing else. The production enterprises are supported by borrowing. Finance provides enterprise profits, to ‘entrepreneurs’ who are shills. Finance provides essential initial capital without which enterprises cannot be born. Finance provides required enterprise cash flow when it is not natively available. Fashionable enterprises which have no hope of gaining a productive return are supported entirely by borrowing over extended period. Given fashion demand — for supersonic jet fighters, for instance — tens of trillions in any currency can be borrowed without end.

– Enterprises can borrow against their own accounts, they can borrow against the accounts of their customers (who access debt through their own channels), they can also borrow against the account of the nation in the form of currency or national ‘money’ as well as against the accounts of others overseas in other currencies in ‘trades’ that favor the enterprises. This latter is what ‘globalization’ represents.

Industrial-scale enterprises require first and last credit in large amounts, goods-industry cannot exist without organic finance credit as a first condition. The difference between industrialized- and non-industrialized nations is native credit within the first and its absence within the second. All else being equal — resources, labor, infrastructure, market access, education of its managers, copyright/patent protections of inventions — the country with its own credit becomes the master while all others becomes the slaves.

Figure 1: The criminal mind instinctively grasps in a hearbeat what the honest man must labor to understand. The man who cannot identify among the others the fool in the market is the fool in the market!
 

Taken in the light of globalization, the euro represented an immense increase both in the market for debt and the amount that could be made available. Prior to the introduction of the euro, each European was subject to the limits (rules) imposed by national currency regimes. Post-euro, every European had access to the credit of all the other Europeans at once. Clever lazy persons could live like aristocrats against the accounts of others until their dying days by simply borrowing as much as possible at once then rolling over these loans. Countries could do the same thing and did.

In figure 1, the credit of ‘all other Europeans at once’ is represented by the banks on the left ‘plus Government guarantee”. The recipient banks on the right are the servants of the manufacturers, exporters (including China), contractors, developers and crime bosses, recipients of the euros borrowed in the name of Greece’s population and other ordinary citizens. What was promised to the Greeks were empty platitudes, the ‘unity’, ‘common purpose’ and ‘progress’ bought and paid for with euro-denominated debt.

The credit-worthy elites acted as private equity firms, borrowing against the assets that were created to facilitate the loans. Whether the collateral was worth anything did not matter: those who would determine worth were either cronies or ‘experts’ of some faraway ‘European Union’. There was never the intention to create economic value, only to roll over the debts and sell ultimately to the (friendly) state leaving the citizens on the hook for repayment. Loading onto the citizens’ the burden that only finance could bear was a ‘finance innovation’ designed to crush them.

Even as this gigantic crime was underway — not just within Greece but across Europe — the euro was fatally flawed. Robbery could only have been the intent of the euro from the beginning for no other improvement was accomplished upon it after its issuance: The means to obtain credit and the means to manage must be organic to the particular finance economy and never external, it must be solely at the economy’s disposal and none other.

This was never done, neither is the euro nor the credit available under it native or organic to ANY European country or ALL of them.

This wasn’t a matter of administrative oversight. Knowledgeable individuals instructed the Europeans on the need for a fiscal structure and a true lender of last resort since the currency’s beginnings. The outcome has been to allow speculators to treat countries within the currency union as ‘foreign’ countries, to selectively withhold credit from them. This is not panic, this is tactics practiced by the shrewd.

Limits To Credit

After a mere ten years of use the entire European currency union experiment stands at the edge of ruin with managers appearing powerless to effect the slide. The mere ten years: in that time the various enterprises have larded themselves with tens of trillions of euro-denominated debt. The issue of whether this debt is “too much debt” can be disposed with at once. Europe suffers from a lack of new credit to replace that which is maturing, not from costs of excess. What is taking place is contrary rules have run the European credit establishment aground and that Europeans lack organic credit establishments.

The Cost Of The Combined Greek Bailout Just Rose To €320 Billion In Secured Debt, Or 136% Of Greek GDP

Submitted by Tyler Durden – Zero Hedge

Some of our German readers may be laboring under the impression that following the €110 billion first Greek bailout agreed upon and executed in May 2010, the second Greek bailout would cost a “mere” €130 billion. Alas we have news for you – as of this morning, the formal cost of rescuing Greece for the adjusted adjusted adjusted second time has just risen to €145 billion, €175 billion, a whopping €210 billion, bringing the total explicit cost of all Greek bailout funds to date (and many more in store) to €320 billion. Which incidentally is a little more than Greek GDP (which however is declining rapidly) at 310 billion, only in dollars.

So as of today, merely the ratio of the Greek DIP loan (Debtor In Possession, because Greece is after all broke) has reached a whopping ratio of 136% Debt to GDP. This excludes any standing debt which is for all intents and purposes worthless. This is secured debt, which means that if every dollar in assets generating one dollar in GDP were to be liquidated and Greece sold off entirely in part or whole to Goldman Sachs et al, there would still be a 36% shortfall to the Troika, EFSF, ECB and whoever else funds the DIP loan (i.e., European and US taxpayers)! Another way of putting this disturbing fact is that global bankers now have a priming lien on 136% of Greek GDP – the entire country and then some now officially belongs to the world banking syndicate.

Consider that when evaluating Greek promises of reducing total debt to GDP to 120% in 2020, as it would mean wiping all existing “pre-petition debt” and paying off some of the DIP. Also keep in mind that Greece has roughly €240 billion in existing pre-petition debt, of which much will remain untouched as it is not held in Private hands (this is the debt which will see a major “haircut” – or not: all depends on the holdout lawsuits, the local vs non-local bonds and various other nuances discussed here). If you said this is beyond idiotic, you are right. It is not the impairment on the Greek “pre-petition’ debt that the market should be worried about – that clearly is 100% wiped out. It is how much the Troika DIP will have to charge off when the Greek 363 asset sale finally comes. This is also what Angela Merkel will say tomorrow when Greece shows up on its doorstep with the latest “revised” agreement from its parliament to take Europe’s money ahead of the March 20 D-Day. Because finally, after months (and to think we did the math for Die Frau back in July) Germany has done the math, and has reached the conclusion that letting Greece go is now the cheaper option.

To the ordinary German citizen, what began as a modest recapitalization of some small billions of euros has become a horror-show: tens of billions, now hundreds of billions then trillions are due without end. This is to replace euros that have vanished down the private equity/hedge fund rathole. (From Golem XIV, click on for big))

Figure 2: List of senior bondholders to Anglo-Irish Bank.
 

Says Golem,

“I only have figures for four of the seven. The largest, Union Investments of Germany, has a mere €165 billion in assets under management.

The total assets under management which I was able to compile from publicly available figures is €20,871,150,000,000. (Twenty-point eight trillion euros) That is an underestimate because the bond holders who turn out to be Private and Swiss banks don’t publish any figures. So Anglo Irish’s ‘bond holders’ hold and invest MORE than 20.8 trillion euros. Guido lists those bond holders as holding between them 4 Billion euros in Anglo Irish bonds.

Now, in my opinion both figures are likely to be wrong. Certainly my figure is a large underestimate. But taking them at face value Anglo Irish would account for an one 5000th of the total assets being managed by all the bond holders. So would even a total default by Anglo Irish cause that much, let alone systemic, pain and risk? Why are the ‘Bond holders’ and the Irish government so concerned that the Irish people be forced to take the loss and pay the debts for them?

Now lets look at the other side of the equation, at Ireland itself. Well Ireland’s GDP before the crash, in 2008, was … drum roll please… €207 billion. Or 0.207 trillion.

The crime is ongoing. There is the Irish robbery and the Greek: the Spain and Italian robberies are to come. The names on the list are on the other side of the Great Euro Debt Expansion. The ordinary people are on the debt side of the ‘Debt equals Wealth’ equation while the superrich are on the other.

The EU is constrained by rules that stifle lending. Changing the rules would allow debt creation to function and end the ‘credit’ crisis. German managers must understand that the stifling of debt that causes the debt crisis, not its ongoing expansion.

So far the euro has not been a good bargain for its users:

Germany’s Carthaginian terms for Greece

The austerity policy being forced on Greece by Germany and the eurozone cannot command democratic consent over time.

Ambrose Evans-Pritchard (Telegraph)

It is clear that Germany’s finance minister Wolfgang Schäuble wishes to expel Greece from the euro, calculating that Euroland is now strong enough to withstand contagion, and that the European Central Bank’s `Draghi bazooka’ for lenders has eliminated the risk of a financial collapse.

“We can’t keep sinking billions into a bottomless pit,” he said on Friday.

Earlier he was caught on camera telling his Portuguese colleague that Lisbon can expect softer terms on its rescue package but only once Europe has dealt harshly enough with Greece to satisfy German public opinion.

The old habits of ‘Lese Majeste’ and aristocratic hauteur die hard: the problems for the managers is that public discontent leads to the currency being abandoned, if not to any great effect by the Greeks, to certain, fatal effect by the Germans! Once the currency is gone, the debts are effectively repudiated and the trillions of euro-wealth are also extinguished.

Y hwvw rbe fol (I have the flu).

P[n h9ot goyubg to dtw. (I’m not going to die).

$b3m ygoyuhh * err;s ;8iju 8t (Even though it feels like it.)

Gipfyllt8 tge ey49 w9b;y w9lo 2laps2 nn2rir & f7ubysg tgte attr8cle ;;; (Hopefully, the euro won’t die first, before I finish my article …)

t6yaguw (thanks)

Marcello Paternostro /AFP/Getty, ‘Truck Driver Strike in Italy’

In the first part we briefly examined some of the effect of universal credit on prices. Because of our long experience with inflation we assume prices will increase because they always have. This subtle bias carries forward, we generally expect social and political changes to result in higher prices.

Now prices are beginning to decline because of deleveraging which in turn diminishes support for higher goods prices including that of petroleum.

There are multiple, important, somewhat conflicting dynamics underway right now:

– Credit amplifying or triggering price changes.

– All of the above taking place in a world economic context of distrust and failing institutions.

Times change, it’s adapt or die! Here is Economic Undertow from just last January:

The five or six people who read this blog know there are two simultaneously operating economies in the US and world, the real economy of production and labor, resources and capital with an abstract and parasitic finance economy attached where the real cannot reach to remove it.

The tapeworm economy is in the spasm of hyperinflation as credit is formed by finance firms with the moral hazard- encouragement of central banks and governments. Finance lends itself trillions so as to bid up assets and create a wealth ‘effect’ for itself. Ongoing real economy difficulties have so far not been allowed to spoil the wealth creation party. The tapeworm seeks to feed off the real economy more or less permanently rather than kill it outright.

The real economy is deflating, burdened by real costs for inputs alongside the excess debt service that the tapeworm economy refuses or is unable to lighten. The ‘container’ for both of these economies is a culture that holds out a (so- far false) material utopia of inevitable, endless progress. Advertising which is the lever of culture is a ‘diktat’: it is not just television or mobility that is demanded and promised but only acceptable types of flat screen televisions and SUV mobility.

Yes and no, that model is not quite correct. It doesn’t account for debtonomics.

We now understand that fuel by itself is worth more than the real-world enterprises that waste it regardless of what means are used to adjust the price. Enterprises earn nothing on their own and are essentially worthless. They exist solely to borrow, either on their own accounts, against those of their customers or against public accounts. Industrial enterprises produce credit as their primary product: other goods and services are intended to justify credit issuance in ever-increasing amounts. Part of this stream becomes the property of well-positioned ‘entrepreneurs’: enormous unearned borrowed profits are what drives the system. When debt = wealth, there is an incentive to take on as much debt as possible, keep what you can for yourself and to shift the burdens onto others.

Economies carry vast debts that cannot be retired or serviced by economies’ customers, system managers are wary of monetizing because the (debt) costs of doing so are even greater than the debts themselves.

Management is paralyzed by the internal contradictions of the debtonomy. We cannot get rid of (some of) the debt without getting rid of (all of) the wealth. We cannot get rid of the debt because we would need to take on even more ruinous debts immediately afterward. If we get rid of the debts the prices will fall leaving debt-tending establishments without capital. Our debts cannot be rationalized, the absence of debts cannot be tolerated. The debt system is rule-bound. Debts that were increased because of favorable rules face annihilation because of the same rules, changing the rules threatens debt elsewhere. Nowhere are there real returns to service the debts much less retire them. Nothing remains but the arm-waving of central bankers. If the banks create more debt against their own accounts, their efforts are felt at the gasoline pump which adversely effects debt service.

The debtonomy is Gresham’s Law applied (on purpose?) to goods and services; the bad drives out the good, the worst drives out everything else. The ‘bad’ enterprises which groan under massive obligations possess a competitive advantage over the virtuous ones that earn without taking any debts on. Debts are artificial earnings which are used to price the good companies out of business then engulf their markets. The final step is for the debt-gorged monstrosities to fall bankrupt due to their massive size, these are then bailed out by the even-more bankrupt sovereigns.

J. S. G. Boggs ‘Five Hundred Dollars’ (Pen and ink, click on for big.)
 

Obviously, if we don’t have debtonomics we will all wind up living in caves.

Chris Cook uses the term ‘Upper Bound’ to describe the fuel price level that constrains economic activity. The price rise can be caused by increases in the money supply or by a decrease in the amount of available fuel relative to the current money supply.

What happens at the other end of the bound? If the upper is tough to deal with the lower is good, right?

It goes without saying that the crude is vital. The ‘Business of debtonomy is debt’ but the presumption is of fuel waste for a ‘higher purpose’ which is embodied within our precious progress narrative. Without continuous waste debt becomes an unsupportable dead weight on all enterprises. Here is the confusion over the effects of fuel shortages on economies: ending waste is thrift, it is economical. Ending waste is fatal to debtonomy which needs the waste to justify its existence: economic thrift is an un-debtonomic catastrophe.

It is different this time: the decline of the fuel price means there is less fuel made available to waste, that the high cost variety is off the market. Low priced fuel means there are no businesses with credit. Lower price fuel is worth more than any enterprise that uses it, the lowest possible price means the industrial scale fuel waste enterprises are ruined, both producers and consumers.

So much for innovation.

The decrease in the dollar price of crude is ipso facto the market repricing more valuable dollars.’ The lower bound is where dollars become a proxy for crude and are hoarded. At that point all things are discounted to the dollar because the dollar traded for crude is more favorable than a trade of anything else for crude, that includes dollar-denominated credit.

Just like the upper bound where a dollar is worth less with each increase in fuel price, the lower bound represents a dollar that is worth more because of its price in crude. A low crude price has a dollar that is worth too much to be used for carry trades or interest rate arbitrage which is the primary business activity within the debtonomy.

The lower bound is reached when currencies are discounted to dollars. A reason for this is the universality of the dollar. Because the US has been for so long the world’s consumer of last resort, goods that were sold for dollars in the US are tradeable elsewhere for the same dollars. The dollar purchases of the past and dollars in circulation now are the purchasing power of the future.

The dollar is also the world’s reserve currency, dollars settle trade accounts. The trade of goods between countries whose currencies are illiquid may have foreign exchange risks that exceed the worth of the goods trade. The exchange of the currencies for dollars bypasses the risks because the universal dollar is a liquid substitute for third-party currencies. Reserve status of the dollar and its universality provide leverage that other currencies do not possess.

The trade of dollars for crude sets the worth of the dollars rather than do the central bank(s), this trade takes place millions of time a day at gasoline stations all over the world.

Motorists determine the worth of money, central banks are irrelevant. In their futile attempts to assert some sort of relevance the central bankers and policy makers set money rates to zero, they ignore moral hazard and bail out their clients. They seek to reduce the worth of money relative to other money. In doing so the bank surrenders what small fragments of policy-making ability which remain to it. Bankers can set interest rates to zero but no further, can whitewash the accumulation of risk but cannot set the money worth of petroleum except to make it unaffordable which precipitates the catastrophe the bankers are desperate to prevent.

The catastrophe the bankers are desperate to prevent is the destruction of demand, where fuel falls into strong hands and dollars are hoarded because they are proxies for scarce petroleum, energy in-hand.

Because of the widespread propaganda that crude is plentiful there is little incentive to ‘reserve’ it by gaining and hoarding dollars. People believe in inflation and the magic of central bankers. As the perception of fuel scarcity takes hold access to fuel is gained by way of holding currency. The scarcity of funds lowers the fuel price, increasing currency worth which in turn provides even greater incentive to hoard it.

Extreme revaluation is preference for the dollar above other currencies including those of producer countries. The dollar holders buy fuel by purchasing fuel producers’ currencies in foreign exchange markets. if currencies are swept from F/X markets the discount against the dollar is taken in producers’ home markets. This particular dynamic may not be underway in Iran but the discounting rials for dollars is.

Extreme revaluation is preference over producer currencies: consumer goods are available for sale in dollars rather than in the local currencies. Consequently, dollars are bid for strongly in native currencies as is underway in Iran.

Inflation in non-dollar currencies is a consequence of dollar preference. Producers reject third-party currencies that do not trade in international currency markets or are volatile or illiquid. The freely-traded dollar is always available, the fuel purchaser trades his currency at a rapidly expanding discount to dollars.

The third-party euro is not in short supply within the reserve accounts of the European Central Bank! Mario Draghi doesn’t buy fuel with the spare change, those who would buy fuel with the euros have no access to them. The market shrinks along with the ability to pay, the result is strikes by truck drivers in Greece and Italy: conservation by currency means.

A preference is for cash over credit because the cost of credit even with negative real interest rates is greater than the cost of holding cash: this is deflation.

Dollars are preferred over euros if for no other reason than the questions about whether there will be a euro.

Dollar preference also takes hold when fuel subsidies in local currency are eliminated, the price of fuel in dollars is a better deal for consumers than in local currency. As monetary authorities react the result is more local currency in circulation and hyperinflation. Remember, inflation is always a currency arbitrage, to sell the currency you are stuck with to gain the currency you need.

Dollar preference is when a local currency vanishes from circulation such as the euro in Greece. A dollar black market will give the Greeks cheap fuel and penniless Greeks or hyperinflated fuel prices that Greeks cannot afford fuel with inflated wages. Here is the arbitrage again: either the drachma against the euro or drachma against the dollar.

Dollar preference effects net energy which is consumption taking place in energy producing countries. This consumption is entirely dependent upon consumer goods that are affordable because of high fuel prices. Iranians produce automobiles and other Iranians buy them because the national oil company is able to sell its product for $110 per barrel. The price subsidizes both Iran’s debts and her energy waste. Ditto for the energy consumption of Saudi Arabia, Russia, Kuwait, Iraq and all the rest. When energy prices fall so will energy consumption in producer countries if only because lower priced oil production will be too scarce to waste.

At $10 per barrel, Iran will produce very little fuel, only from the cheapest and easiest to produce fields and will trade it for hard currency only. Domestic sales will take place in black markets for dollars or gold, few Iranians will have dollars and those that do will hold onto them for emergencies. Hard currency earned by the export of crude will be used to buy food and medicine, not luxury automobiles and television sets.

Diminishing net exports depends on high prices which are in turn dependent upon constantly expanding credit. When cash is preferred over credit there is nothing to support the high prices or fuel waste. Cash is hoarded and credit is evaporated.

The end-game of dollar preference is crude-driven dollar deflation as took place in the US in 1933. Dollars were held as ‘gold in hand’ and business in the country was the buying and selling of currency to obtain gold. The deflationary impulse was ended when the world’s governments ended specie and fixed convertibility, cutting the currency links to gold. The need will be for the US to end the dollar’s convertibility to crude, to go ‘off crude’ as countries went ‘off gold’. The alternative is for dollars to vanish from circulation and cease to be a medium of exchange. Local currencies emerging in the dollar’s place will be of little use in the obtain of fuel imports, the country will be limited to the petroleum that can be sustainably produced on its own soil.

Dollar preference is self-limiting. Dollar preference in 2012 is the demise of the euro, its unraveling illuminates euro mismanagement. Doubts about currency regimes take root. The 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 dollar other than a military machine that is debt-dependent and failure-prone. Dollar preference condemns the euro which starts the clock on the ultimate death of the dollar.