Zombie Banks in Europe? Say It Isn’t So!


Oh, and we don’t have (by implication) zombie banks in the US?

Germany’s regulator balked last year when the European Banking Authority conducted stress tests on financial firms, objecting to the agency’s definition of capital and allowing one state-owned lender to withhold some results.

The refusal to go along with the European Union regulator reflects an aversion by governments to ceding control to a central authority that may doom talks about creating a banking union and thwart plans to shift the burden of bailing out Spanish and Irish lenders to other euro-area nations.

So let me guess — the definition of capital is like Clinton’s redefinition of the word “is”?  Or is that the definition of the word “sex”?

This would be laughable if it weren’t so serious.  The simple reality is that this is not so much about “zombie banks” as it is about zombification of the economy.

When you allow an economy to exist on a pyramid of counterfeited currency through the bogus emission of credit instruments of various sorts, unbacked by capital, you turn the economy into a joke.  The simple mathematics of exponents guarantee that once this paradigm gets entrenched there is no exit possible without economic depression because each credit dollar so-created comes with interest attached and thus you not only have the requirement to pay back the principal from tomorrow’s earnings you must pay back more than the original principal, and those funds become unavailable for spending in the present tense.

Credit, backed by capital in some form or fashion, is nothing more than a time-shift.  That is, if I buy a car today on credit and the lender puts up only the value of the vehicle at any point in time, then the asset’s capital value has been impounded and liquified.

This is the salutary impact of credit in the economy.

But when credit is unbacked by capital it is dilutive to the value of every other unit of credit and currency in the economy, because it does not impound capital to balance out the credit so-created.  That is, it is not a time shift.

We all hear about “printed money” from central banks but in point of fact this is what was “printed”:

Starting in the early 1980s the spread widened between debt and GDP and today still stands at 75% above historical (and sound) levels.  In 2004 and again in 2007 net credit issuance was more than six times that of GDP expansion.

What’s particularly galling is that this phenomena was not just a 2000-era thing. Indeed in the 1980s we also added a ridiculous multiple of debt compared to GDP in one quarter — 1985Q4 added approximately $385 billion in debt but only $60 billion in GDP, or 6:1.

Those who argue that we have had “low inflation” are simply lying.  Asset prices count and all you have to do is look at stock indices to figure out “where it went.”

We will never restore economic balance by stealing from one person to give to another.  Politicians use this sort of “class warfare” weapon all the time, but none will speak to this issue, and the reason is simple — if they do their own ability to deficit spend disappears.

Wake up America and indeed the entire western world.  Economic balance requires stability of the currency.  Business can only invest with some reasonable expectation of outcome when the principle of stability in the economy is honored.  All business people inherently take the risk that comes from public acceptance of their products and services, but when unbridled credit creation occurs you are adding the certainty of destruction of the consumer’s purchasing power into the mix and thus adding a “use by” date to every business person’s product mix.

This may feel good much as does taking that first drink or first dose of some drug, but the hangover is a bitch and can only be avoided by refusing the drink or dope in the first place.

Fraud is never free, and unbacked credit emission is fraud.  All you need to know to validate that premise is that governments and banksters both do their level damndest best to obfuscate their balance sheets and “protect” their zombies — creatures of their own creation that have been bled dry and are sapping the vitality of the economy as a whole.

Discussion (registration required to post)