Wait, We’re Up ~6% In A Day On THIS?

Who isn’t paying attention here?

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.

“The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution),” he said.

“There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people,” he told newspaper Frankfurter Allgemeine.

Oh I see.  So the expansion of the EFSF, including the “re-purposing” to turn it into a giant SIV which can then lever itself up to €2 trillion or more, isn’t legal from a German perspective without a formal vote of the people?

Yet Thursday, the markets believe, will mark the day this happens.  The Euro is soaring this morning and the futures have been on a relentless march since midnight when Europeans woke up “over there” and started trading among themselves.

The problem with leverage is that it magnifies losses as well as gains.  There is never a free lunch in finance just as there is not in thermodynamics – you can trade one thing for another, but never is there a move that is free of risk, and just as in thermodynamics loss is also an inescapable part of the equation.

I have to be cynical on this one.  Should the EFSF actually “pass” the immediate result is likely to be a credit downgrade for both France and Germany, and this assumes that implementation can be put forward.  I don’t see it.

The problem is that thus far we’re not seeing what has to happen to actually fix the problem be proposed: Reduction of debt to sustainable levels and a removal of systemic leverage.

The reason this isn’t being proposed (here or there) should be obvious: Doing so means an end to the “vote us some more free shit and then write a new and larger rubber check to cover both it and the previous rubber check that Joe’s trying to present over there so it doesn’t bounce!”

This is a losing formula for economic stability just as taking another hit off the crack pipe to “solve” your withdrawal from the previous night’s binge doesn’t work either.  Oh sure, it stops the shakes – for a while.  But every hit you take weakens your heart and deepens your addiction.  Eventually you run out of either money (for most of us) or margin in your cardiovascular system (if you’re a rock star) and turn to crime or fall over dead.

The politicians of the world are acting like the addict who has run out of money and rocks – they’re sniffing the carpet looking for the one little piece they dropped last night during the height of their binge, desperate for another hit.  Our economy has $53 trillion in debt outstanding against $15 trillion in GDP; at a blended 5% interest rate that’s more than $2.5 trillion in interest payments, or one dollar in six that does no useful “work” in the economy but merely shifts around who gets the benefits.

Many people decry “wealth disparity” but in point of fact this sort of slavery is self-inflicted and no amount of legislation to “redistribute” fixes it.  The solution is simple: No more shifting of risk to the taxpayer and sheltering people from their own stupidity.

The only solution that actually works is to default that which cannot be paid and allow those who wrote these bad loans to eat them.  This will bankrupt many of those “rich” who knowingly lent money to people who can’t pay – whether they be governments, businesses or people.  It will cause a gross contraction in GDP on a temporary basis.

If you have a serious desire to see “wealth disparity” addressed this is how you do it.  Those who are paper rich will get trashed in such a correction, but it’s not only the appropriate means to address the problem it’s the only sustainable way you can address it.  The Deutsche Banks and JP Morgans have to be told to stuff it where the sun doesn’t shine, be forced to perform honest accounting of their asset values and when shown to be insolvent, be closed with their bondholders and shareholders absorbing the loss.  Let the directors and executives of these corporations stand before the shareholders and pensioners who own their bonds and shares (indirectly in most cases) and stand trial in a very public court of the “angry mob” for their sin of excessive abuse of leverage.  The threat of having to face those who got shafted might cause them to seek trial in an ordinary criminal court instead, as at least in prison they can find some modicum of security.

At the same time we must stop the capital drain that our unbalanced and idiotic trade policies have put in place, we must neuter the so-called “Fed 2% inflation mandate” and enforce the written law of stable prices, and we must resolve our energy problem here at home as this is responsible for about half of the trade deficit issue.

I don’t believe for a minute that Greece is going to successfully avoid default.  Rather, they’re going to do what we’re doing – they will play along, lie and cheat right up until the rug gets pulled out from under them.  And why not – it’s worked thus far, and addicts only fix their addictions when they either die or hit rock bottom – from where there is nowhere to go by upward toward recovery.

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