European Bank Announcement is the Latest Step in Deleveraging the China Bubble from Debt to Equity

In 1979 when China opened its doors to prospectors, millions rushed in bug-eyed on the prize. They scurried for trillions of dollars of capital to plop down factories on their newly acquired claims. Those trillions first came from EurAmerica’s savings, that currency that had already been acquired through decades of previous achievements. When that was not enough to satisfy the frenzy, they buggered trillions more in future obligations of EurAmerica’s citizens on the promise that these glorious gold seams of the East would make EurAmerica rich beyond its wildest dreams.

And why not…EurAmerica had grown obese on other stakes plopped down around the world. We created equity from thin air to offset the obligations of third world and emerging countries and spent the arbitrage from our financial creations to feast in our homeland for decades. Yet none of these opportunities held a candle to China’s mother load. China would once again be the feast to engorge all our known senses with pleasure and reward. So EurAmerica indebted herself beyond all reasonable abilities to repay, knowing that this gold seam would pay off by its own merit.

But how could it pay off? Were not these same factories supplying EurAmerica with goods that their own citizens would have otherwise supplied? Were not these same factories paid for by the obligations of “EurAmerica’s citizens to work into the future to pay off the debts they had incurred in order to build these factories? And if these EurAmericans could not work to pay their debts to gain the riches they had hoped for from these factories, how could they buy the products that would eventually pay them the riches they had sought? It seems this time around, the door that was opened in China was the hinge of a Venus Fly Trap and EurAmerica was the fly.

Now that we have incurred this massive debt and our scheme for getting rich was found to be yet another Ponzi of get rich quick avarice to be piled on the heap of human foibles, it is now time to clean up the mess from the last three decades’ party. People will have to pay for this latest excess just as all in human history before us. Europe languished for 22 years after its 1871 financial extraction to fund America’s railroads. Some countries like Russia rose up from those excess in political system revolutionary defiance. Others chose military aggression while still others congregated in socialist shifts of wealth redistribution to deleverage the world from its dilemma.

We cannot yet predict the world shifting power struggle that will ultimately emerge from this great crisis. However, what started as Europe’s riots and later erupted into an Arab Spring in reaction to Wall Street’s grand foray was again played out in yesterday’s announcement by Europe’s leadership as another step in the unraveling puzzle. The information age has shifted the balance of power and bankers can easily see that 2011 will not be a repeat of 1871. Infighting will continue as EurAmerica sorts out who will pay the costs of financial obligations from this great extraction. But Europe’s announcement was a break through nonetheless.

European Banks will eat a distasteful sum. Their shareholders will pay the price as much as they can. Some banks will call upon the European Financial Stability Facility, which will in turn call upon governments, which will look for handouts and push for further austerity, which will in turn lower GDP growth, which will further exacerbate the debt crisis. In the end, a massive debt overhang will have to be managed by all of EurAmerica in a deleveraging and slower GDP growth, if not retracting, environment.

Banks only have so much in reserves and even those may be grossly overstated as a result of credit reserve requirement manipulations during the 1990s including bank reserve sweep accounts and parent/subsidiary loans that have as of now extended bank credits 1.1 trillion beyond bank deposits. EurAmerican governments could take all their reserves and destroy our international banking functions just as banks could take much of the housing stock, destroying millions of lives and our nation’s economic futures. Governments and central banks could print money throughout EurAmerica and destroy national economies for decades. And then what….

When a debt load becomes so excessive that it cannot be paid by the annual output of its guarantors, it becomes in essence equity. All of this past three decade Great EurAmerican Capital Extraction creditors, from our wealthy elite to retirees on fixed incomes, “own” pieces of the thousands of factories on the shores of the East. They may not have bargained for that outcome but that is what they got. Right now, rather than accept this eventuality, creditors are willing to shave their loan returns in order to keep their position of being first to be repaid rather than suffer what is amounting to an even greater uncertainty for equity shareholders. And thus we have the announcement from Europe’s banks.

In the end, accepting that their loan position is untenable and must be converted to equity will be the ultimate solution. That position is hard to swallow for many reasons just yet. European banks and governments had been playing a dangerous game of chicken, both refusing to budge on movement toward resolving this debt leverage. For now, the dangerous game of chicken stalemating any movement toward the final solution and putting the entire world in jeopardy has had a “great” move among many more to follow.

My solution for America’s turnaround: Convert debt overhang to equity. Clean up credit through credit amnesty. Put all unemployed people in domestic work opportunities through free market job voucher program. Turn on the switch and go.

Building Block #2 – Skin the PIIGS Before They Make a Pigsty of the World’s Economy

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.