With a dull inevitability that portends
the sheer indifference of the rest of the world,
the sovereign debt crisis in Europe ripped out
another leaf from the Keynesian book. Breathtaking
only in its sheer delusions of grandeur, the
European Union decided that lobbing another 60
billion euro (US$86 billion) into the black hole
of Greece was just what the doctor ordered.
As if that amount could help to solve the
problem. Let us look at some math: 1. The
European Union along with the International
Monetary Fund (IMF) and other grandees lobbed 60
billion euros into a Greek debt extension barely a
year ago; 2. Since then, the amount of private
credit heading towards Greece has fallen
dramatically; 3. Private capital from within
Greece - as deposits in its banks and holdings of
Greek equities by Greeks - has fallen
dramatically. Put another
way, Greeks have been busy getting the heck out of
Greece; 4. The laughable stress tests of the
Europeans last year assumed there would be no
"haircuts" on Greek sovereign debt, based on which
assumption all European banks (barring a handful
who didn't know how to fudge) continued to hold
these assets and refused to hedge them; 5. The
European Central Bank (ECB) is the proud owner of
some 80 billion euros of Greek debt - some say it
is even more once you count the stuff that is on
repo from bankrupt banks - but itself has only 79
billion euros of capital. Thus a 50% haircut on
Greek bonds (which is where the market is trading
them) would cause the ECB to lose half its
capital.
If anyone around had bothered to
count the stuff up properly they would have
concluded that the sole purpose of last year's
bailout of Greece was to fund the expensive exits
of the rich and the famous from those beautiful
islands, leaving behind an even angrier populace
that would be rather keen not to quite give up on
the money train called the EU until every last
citizen has managed to get out with some funds
still in their bank accounts.
In effect,
Greece is bankrupt and likely to become more
bankrupt with every new bailout. I am sorry, but
that doesn't make sense in plain English - but you
need to know the banking jargon of the West to
pretend to understand this and nod sagely to the
tune of "yes sure, what else can they do".
In the annals of financial history, a lot
of bad things have happened because of and indeed
to central banks; even so, it is pretty rare for
an institution that can print its own balance
sheet (ie currency) to actually go bankrupt. Yet
here you actually have it - the world's first
purely bankrupt central bank that pretends also to
issue a "reserve currency" that supposedly vies
with the US dollar as the reserve currency of the
world.
You have got to be kidding me.
But no, there is actually more. Over on
the other side of the pond, the US government is
heading firmly towards a shutdown as the fight
over the debt limit gets more heated between the
two major political parties as some type of proxy
vote ahead of next year's presidential elections.
A shutdown of the US government if it approaches
the debt limit and cannot borrow would simply mean
that maturing tranches of US government debt will
actually not be repaid.
So, in all
probability or at least a realistic one, the US
government - issuer of the world's sole surviving
reserve currency and its supposed benchmark for
"risk-free" assets, ie the mighty US Treasury
bond, could actually default on its obligations in
a matter of weeks.
What do you do when the
unthinkable becomes just the inevitable bromide
besides sporting a sardonic laugh and moving on in
life. More to the point, what do you do when your
choices are Scylla and Charybdis; the wonderful
anchor of gold being essentially denied to you by
the same central bankers whose job it is to
protect your purchasing power.
This is why
one of the seminal events of last week was the
market's reaction to the ECB statement on a
possible rate hike in July - typically a currency
with a well-signaled rate hike would tend to
appreciate against its peers due the attraction to
savers of a rising interest rate. In contrast,
last week the markets sold off the euro in large
measure once ECB president Jean-Claude Trichet
made that asinine statement, as everyone (rightly
in my opinion) figured out that a rate increase
would consign Europe to the dust heap of history
by prolonging its current recession even as the
ECB itself went bust.
Would you buy the
currency of a place where the central bank is
bankrupt?
Then there was that other
"Gotcha" moment of last week when Big Ben (aka Ben
Bernanke, head honcho of the US Federal Reserve
and hence the "mother figure" of the US dollar)
suggested that an extension of the second round of
quantitative easing (QE2), already dubbed QE3 by
the ever-so-imaginative wags of Wall Street, was
not quite on the cards.
To the tune of
"who the heck asked him", all the bulls of the
stock and bond markets gave up the ghost on risk
assets and sent themselves to the naughty corner
from which to plot the next big up move for the
markets. Last time it was checked, the venerable
Dow Jones index was wheezing along below the
12,000 figure and the S&P 500 index looks to
be heading back to purgatory.
And then
there was the political grandee last week from
America who proudly opined that "the world needs
America now more than ever" and so on, effectively
calling for selective engagement of America with
its vassal states to expand their sphere of
influence. The only troubling thing about that
remark is of course that the last time I counted,
it was America that needed the world - to the tune
of some $1 trillion give or take a few billion.
That's $1 trillion per year, before you ask any
smart questions.
Way back in early 2009,
this $1 trillion was supposed to be a maturity
extension from the rest of the world , that would
be repaid easily because of America's rich
tradition of innovation; its ability to figure out
competitive advantages where none had existed
before and simply the resourcefulness of its
people.
All that may well be true, but
unfortunately for those of us who care about
things like hard facts and real numbers, the story
of America for the past three years has been one
of balance sheet expansion by the government that
is aimed at countering the effects of the
contraction being performed by households.
Government money hasn't been productive, which is
why the debt load has gone up but no competitive
advantages have crept in.
Last week's
economic data from the US was dire to say the
least. The payroll figures for May were poor, but
after that two seminal pieces of data also
pooh-poohed the recovery - firstly the Institute
for Supply Management index, which surprised
rather a lot to the downside, and secondly the
home price index, which showed a decline in prices
that gathered momentum.
And oh, did I
mention - falling home prices will mean that the
mortgage-backed securities that are currently
being helped in price terms by the QE2 program
will take two blows to the chin. firstly from the
end of QE2 and secondly from the worsening
fundamentals. Since many US banks own assets such
as second-lien mortgages that suffer more than
even the mortgage-backed securities do, this
arrangement in effect blows up the US financial
system. Again.
In effect, adding up all
the pieces gives me the simple notion that neither
the US dollar nor the euro is a worthwhile reserve
currency for Asians. Another simple
back-of-the-envelope calculation also shows me
that neither the US nor the European financial
system is solvent, much less capital sufficient.
Way back in 1992, when your humble
columnist still pretended to bound around like a
sportsman on occasion, there was a wonderful film
called White Men Can't Jump, starring
Wesley Snipes and Woody Harrelson, aiming at the
plight of the average American male in the
black-dominated sport of basketball. I am thinking
that now is the time for me to pop over to
Hollywood, sharpish, and ask them to make a
market-sequel that is tentatively titled the same
as this essay - "White folks can't count". Or
should that be "Don't" instead of "Can't", I
wonder.
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