Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.
Sorry, Bucko–Europe is still in a financial death spiral. Friday’s “fix” changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:
1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.
2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.
3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.
4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.
5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.
6. Interest rates will rise as investors question whether their capital will be returned in full or if it will be returned in depreciated currency.
7. Export-based economies will contract as China’s expansion slows to a crawl. Future projections of national income are overly optimistic.
8. As income is bled off to pay rising interest, there is less money available for consumption or investment. Without investment, income declines. As taxes rise, there is less private-sector income available for either investment or consumption. This is the “austerity death spiral,” and borrowing more for State malinvestment will not halt it.
The more money that is borrowed to maintain Status Quo consumption, the higher the future interest payments. This is a financial death spiral.
9. There is no collateral for more borrowing, but “growth” depends on more borrowing.
10. Transferring bad debt to central banks does not mean interest will not accrue: interest on the debt still must be paid out of future income, impairing that income.
11. Lowering interest rates does not create collateral where none exists.
12. Lowering interest rates only stretches out the death spiral, it does not halt or reverse it.
13. Centralizing banking and oversight does not create collateral where none exists.
14. Europe will remain in a financial death spiral until the bad debt is renounced/written off and assets are liquidated on the open market.
15. Anything other than this is theater. Pushing the endgame out a few months is not a solution, nor will it magically create collateral or generate sustainable “growth.”
16. The Martian Central Bank could sell bonds to replace bad debt in Europe, but as long as the MCB collects interest on the debt, then nothing has changed.
The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe.
Charles Hugh Smith – Of Two Minds