It seems ironic that Greece, a civilization upon which all of western culture was built, influencing science, art, philosophy, language, and politics, now finds itself unable to keep from destroying all that was built upon its base. Modern Greece, a highly advanced country whose people work more hours than any other OECD country except South Korea, is now in imminent danger of sovereign default and on the brink of bringing down the world’s economy. How could it be that a country with less than a half a percent of the world’s GDP could create a Modern Greek tragedy that could harm every person on earth? The answer lies within the fallacy of our modern financial system.
Modern currency is created as a placeholder for future real value that will be created, and distributed to those who promise to create the real value and then give back the currency in more numbers than they originally received (principle and interest) How much more currency the value producers (borrowers) give back to the place holding currency providers (bankers) depends on how much the bankers demand. Quizzically, our modern financial system allows the creators of place holding currency to set the amount of additional currency that must be returned not by the value that is provided to the system by creating and distributing currency, but by how much the market will bear.
In the modern system, central banks regulate how much currency can be created by their fellow members and also have the honor of creating currency from thin air to give to their governments for spending. Elite (and not so elite) savers provide the system private seed currency, giving it to banks with the expectation of getting back more currency later. Having received seed money, private banks can then, by regulation, create more currency from thin air to satisfy needs of borrowers.
More recently, the market added a layer of insurance. For a fee, entities agreed to give lenders of currency an equal amount of currency if borrowers did not pay back their loans. Without any regulations governing who could make such guarantees and how they must back up their guarantees, many outlandish guarantees were given. So many guarantees were given that now $45 trillion in insurance covers $7 trillion in property.
In our modern system, real value creators agree to give governments, banks, and seed capitalists more currency back than they receive. Ultimately the additional currency they agree to give back must be taken from future borrowers who enter the modern financial system and agree to allow the banks to create more currency in an ordained, international Ponzi scheme.
This modern financial Ponzi, the granddaddy of all living Ponzis, can only work if 1) enough new borrowers enter the system to provide the interest demanded by the banks and seed capitalists, 2) if each borrower borrows only what they can pay back, 3)if governments, as agents of the borrowers, take only what they can skim through representative taxation from the value created by the borrowers, and 4) if the creators of the currency do not demand more interest from the system than it can generate through the debt of new borrowers less government skimming.
Greece is the foreboder of the breakdown of the EurAmerican dominated money system. As the first of western countries who may follow their path, Greece has simply broken more of the principles of our Ponzi financial system than most. These broken principles include: 1)the combination of the demographics EurAmerican post war baby boomers exiting the economy, being replaced by a smaller, post baby boomer, birth mitigating generation, plagued by a loss of jobs through globalization, created a lack of new borrowers to feed a financial system dependent on an exponential borrowing rate, 2)with deregulation of our financial system, those responsible to limit borrowing to what could be reasonably paid back, were incentivized to lend way more than could ever be paid back, 3)EurAmerican governments failed as agents of private borrowers, system-sociopathically lacking any sense of obligation to ensure that private borrowers could pay back what their governments borrowed “on their behalf”, and 4) fearing after the fact that governments and private borrowers disconnectedly borrowed too much, bankers knee jerkingly raised interest rates, that are designed to inhibit borrowing before the fact, on those who already did not have enough currency to pay back what they originally borrowed, precipitating a rise in defaults that instantaneously lower the money supply, and driving away future borrowers that could have provided the system some liquidity to partially pay back required interest.
In April, 2010, Moody’s sensed that the Greece government had borrowed too much from our modern financial system to ever skim enough from future earners to pay back what they had already owed. After Moody’s downgraded Greece’s bond rating, Banker’s raised after-the-fact interest rates to 15.3 percent, exacerbating their problem. Having joined the EU, Greece gave up a tool that sovereign nations use to slow the interest encroachment of our modern money system, that of persuading their central banks to print more currency to cover debts. Therefore, Greece was forced to agree to austerity measures of tax increases and spending cuts to receive a financial bailout package from the EU.
The hard working Greek people, who hadn’t stopped their government from overspending earlier, now were incensed that they must begin to pay the creditors more and begin receiving less governmental services. Their protests turned violent but nonetheless the Greek government instituted the austerity measures which then removed more currency from their modern economy, causing a greater recession.
In June, 2011, Greece received the lowest credit rating in the world after an EU-IMF audit required further austerity measures and Greek politicians could not agree on which austerity measures to take which caused riots to break out. Sensing the inability of Greek government to pay back the currency plus interest that they had previously borrowed, the bankers demanded more interest, raising the rate above 18 percent. Knowing that in this Ponzified game of financial chess, Greece is just a few moves from being check mated, Prime Minister George Papandreou did a razzle-dazzle with a re-shuffled cabinet, and asked for a vote of confidence in the parliament. Now the stage is set for our modern financial system to blink.
Our EurAmerican financial system requires that someone pays back loans with interest. Someone always has to pay. If the hardworking Greeks riot and refuse to pay their loans back, the banks are left covering the loans. Citizens will demand that the banks absorb the debt but the banks cannot because their assets are only guarantees given them from borrowers who have made promises.
So the banks will call in the swaps and the originators will be forced to cover if they can. However, the swap market recklessly grew so big that some large institutions will collapse under the weight of their swap obligations. Some governments will step in to make good on their institutions’ bets but the added debt obligations will thrust them into Greece like debt cycles. When government debts rise beyond their ability to pay, currency creators will demand more interest. Caught between rioting angry citizens and rising unbearable interest, governments will finally default en masse. This imploding world monetary system will evaporate money into thin air as easily as it was first created, precipitating a world depression.
Greece is insolvent and its coming default threatens to spark a fire of CDS demands. Even if its government could persuade its citizens to leave the streets and accept even more drastic cuts, its debt will rise above 160 percent of GDP. And behind Greece, the rest of the PIIGS are not too far off. Europe has thus far neglected to deal with Greece’s insolvency, instead extending the problem with bailout loans, forced fiscal austerity and structural reforms. Yet extending out the day of reckoning in hopes that Greece may someday pay its obligations is fruitless. For that to happen, Greece would have to turnaround its economy and collect more taxes. A turnaround requires deflating wages to restore competitiveness, which has already met with violent resistance and collecting more taxes would further lower consumption and would exacerbate Greece’s lagging economy.
Any solution that the EU finally commits must therefore restructure both Greece’s government and debt to reduce its ability to impact world markets. The EU will have to finally choose to either fully integrate its financial system to absorb Greece’s fiscal imbalances or to at least remove the PIIGS to allow the Greek government to more easily manipulate monetary policies to manage their crisis and to avoid further PIIGS defaults that will inevitably result from its faulty singular monetary policy.
A solution must be structured to avoid triggering a swap tsunami. Existing debt must be isolated and voluntarily restructured to create realistic debt principle repayments if the world is to avoid a death spiral of defaults and corresponding swap payouts. Where principle payments are too great, principle must be converted to share equity to avoid collapse of bank balance sheets. Underwater real estate should be restructured as shared equity plus debt that is set to existing market rates to maintain current values while creating realistic payment options.
Intervention must occur with both worldwide banking and government spending. Commercial banks must be reregulated and incentivized worldwide to provide credit evaluation without incentivizing them to make loans beyond value creators’ ability to pay. While perhaps a pipe dream without further crises, it is nonetheless critical for EurAmerican governments to quickly undergo political intervention to beat their addiction to deficit taxation. A controlled reduction of government will reduce the likelihood of uncontrolled removal of parties in power.
The solution must also mitigate the underlying problems of our modern financial system to avoid transferring the crisis to weakening nations upstream of Greece like the remaining PIIGS and the Great Hog, the United States. Ultimately, the EurAmerican financial system must be restructured so that currency is placed into and pulled from the system without an onerous Ponzi usury structure. The lack of new debt caused by a smaller post baby boom generation, a slow population growth, and globalization cannot support exponential growth of interest expense of the EurAmerican money system.
One response to “Building Block #2 – Skin the PIIGS Before They Make a Pigsty of the World’s Economy”
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