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The European debt Bubble has burst, and the repricing of risk and debt cannot be put back in the bottle.

It’s really this simple, Europe: either rebel against the banks or accept decades of debt-serfdom. All the millions of words published about the European debt crisis can be distilled down a handful of simple dynamics. Once we understand those, then the choice between resistance and debt-serfdom is revealed as the onlychoice: the rest of the “options” are illusory.

1. The euro enabled a short-lived but extremely attractive fantasy:the more productive northern EU economies could mint profits in two ways: A) sell their goods and services to their less productive southern neighbors in quantity because these neighbors were now able to borrow vast sums of money at low (i.e. near-”German”) rates of interest, and B) loan these consumer nations these vast sums of money with stupendous leverage, i.e. 1 euro in capital supports 26 euros of lending/debt.

The less productive nations also had a very attractive fantasy: that their present level of productivity (that is, the output of goods and services created by their economies) could be leveraged up via low-interest debt to support a much higher level of consumption and malinvestment in things like villas and luxury autos.

According to Europe’s Currency Road to Nowhere(WSJ.com):

Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not.This explains at least part of the German export and manufacturing miracle of the last 12 years. In 1999, exports were 29% of German gross domestic product. By 2008, they were 47%—an increase vastly larger than in Italy, Spain and Greece, where the ratios increased modestly or even fell. Germany’s net export contribution to GDP (exports minus imports as a share of the economy) rose by nearly a factor of eight. Unlike almost every other high-income country, where manufacturing’s share of the economy fell significantly, in Germany it actually rose as the price of German goods grew more and more attractive compared to those of other countries. In a key sense, Germany’s currency has been to Southern Europe what China’s has been to the U.S.

Flush with profits from exports and loans, Germany and its mercantilist (exporting nations) also ramped up their own borrowing–why not, when growth was so strong?

But the whole set-up was a doomed financial fantasy.The euro seemed to be magic: it enabled importing nations to buy more and borrow more, while also enabling exporting nations to reap immense profits from rising exports and lending.

Put another way: risk and debt were both massively mispriced by the illusion that the endless growth of debt-based consumption could continue forever.The euro was in a sense a scam that served the interests of everyone involved: with risk considered near-zero, interest rates were near-zero, too, and more debt could be leveraged from a small base of productivity and capital.

But now reality has repriced risk and debt, and the clueless leadership of the EU is attempting to put the genie back in the bottle.Alas, the debt loads are too crushing, and the productivity too weak, to support the fantasy of zero risk and low rates of return.

The Credit Bubble Bulletin’s Doug Nolan summarized the reality succinctly: “The European debt Bubble has burst.” Nolan explains the basic mechanisms thusly: The Mythical “Great Moderation”:

For years, European debt was being mispriced in the (over-liquefied, over-leveraged and over-speculated global) marketplace. Countries such as Greece, Portugal, Ireland, Spain and Italy benefitted immeasurably from the market perception that European monetary integration ensured debt, economic and policymaking stability.Similar to the U.S. mortgage/Wall Street finance Bubble, the marketplace was for years content to ignore Credit excesses and festering system fragilities, choosing instead to price debt obligations based on the expectation for zero defaults, abundant liquidity, readily available hedging instruments, and a policymaking regime that would ensure market stability.

Importantly, this backdrop created the perfect market environment for financial leveraging and rampant speculation in a global financial backdrop unsurpassed for its capacity for excess. The arbitrage of European bond yields was likely one of history’s most lucrative speculative endeavors. (link via U. Doran)

In simple terms, this is the stark reality: now that debt and risk have been repriced, Europe’s debts are completely, totally unpayable.There is no way to keep adding to the Matterhorn of debt at the old cheap rate of interest, and there is no way to roll over the trillions of euros in debt that are coming due at the old near-zero rates.

Never mind actually paying down debt, sovereign, corporate and private–the repricing of risk and debt mean even the interest payments are unpayable. Consider this chart of one tiny slice of total EU debt:

There is no way to push the repricing genie back in the bottle, and so there is no way to roll over this debt and add to it–and to support the high-cost structure of Euroland’s welfare-state governments and their astounding debt, then debt must be added, and in staggering quantities.

Austerity won’t put the repricing/bubble burst genie back in the bottle.A funny thing happens when more of the national income is diverted to debt service (making interest payments and rolling over existing debt into new higher-interest debt): there is less surplus available for investment and consumption, which means that both productivity based on investment and consumption based on debt will plummet.

This leaves the nation with lower productivity and lower GDP, which means there is also less tax revenues being collected and more bankruptcies as companies and individuals accept the reality that their debts cannot be paid.

The repricing genie responds to this decline in national income, surplus and taxes by repricing risk of default even higher, and so the interest rate is also repriced higher. This makes servicing the mountain of existing debt even more costly, and so even less national income is available for consumption, investment and taxes.

This is called a positive feedback loop: each action reinforces the other, i.e. a self-reinforcing feedback loop.Debt and risk are repriced higher, the burden of debt service reduces national income available for investment, consumption and taxes, which further reprices risk higher, and so on.

So you see, Europe, there is only one choice:either accept the endless debt serfdom of ever-rising interest payments and lower income and productivity, or rebel against your pathetic lackey leadership and renounce the entire mountain of unpayable debt. Grasp the nettle and renounce the euro as the fundamental cause of your fantasy and collapse, and revert to national currencies which enable the market to discover the price of your underlying productivity and ability to borrow money.

Renouncing the euro does not mean renouncing the freedoms of the European Union: the two are only bound at the hip in the minds of your enfeebled leadership, who are in thrall to the leveraged-26-to-1 banks that are poised on the edge of insolvency.

Let the banks implode in bankruptcy, clear the worthless “assets” of debt from the books, and let the market price currencies and everything else.The only other choice is debt-serfdom.

All the other schemes and proposals are simply variations of one single fantasy: that the feckless leadership can fool the repricing genie with parlor tricks. They can’t.Everybody with any understanding of the situation knows that the debt bubble has already burst, and risk and debt cannot be repriced back to fantasy levels.

That repricing has already occurred, and cannot be revoked or shoved back in the bottle. The Great European Debt Bubble has already burst, and so now it boils down to a simple choice: debt serfom or open rebellion against the banks that profited so handsomely from the euro-fantasy.

There is no middle ground, as the debt cannot be repaid, not now and not in the future. It cannot be reshuffled, masked, or hidden; it can only be renounced.

It’s your choice, Europe; choose wisely.If you want a model for sanity and growth, look to Iceland. They renounced their unpayable debts and debt-serfdom, and let the market reprice their currency, debt and risk. The nightmare is past for them; they chose wisely. Now it’s your turn to choose.

The debt-serfdom will fall to you, not the banks or your Elites.

Charles Hugh Smith – Of Two Minds

Wow, now we have “more complete” data…. and of course the revisions always go the same way…

The “second” estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $15.0 billion, lower than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to nonresidential fixed investment, and to personal consumption expenditures that were partly offset by a downward revision to imports.

In other words we were entirely too optimistic in pretty much all the things that mattered.

This should not surprise, of course….. just like we see the same pattern with the jobless claims every week that are virtually always “revised up” later on, making the current week report look better.

What happens to a debt-dependent economy when it hits the wall of debt saturation? The job market and the very nature of work will change.

What is the future of work in a debt-dependent economy that no longer responds to more debt?  In a word: bleak.

Given the “recovery’s” stagnant job market and the economy’s slide toward renewed contraction, it’s a timely question. To answer it, we must first ask, What is the future of the U.S. economy?

In broad brush, the Powers That Be have gone “all in” on a bet that this  recession is no different than past post-war recessions. All we need to do to get through this “rough patch” is borrow and spend money at the Federal level, and the household and business sectors will soon recover their desire and ability to borrow more and spend it all on one thing or another. We don’t really care what or how, because all spending adds up into gross domestic product (GDP).

In other words, we’re going to “grow our way” out of stagnation and over-indebtedness, just as we’ve done for the past fifty years.

Unfortunately, this diagnosis is flat-out wrong. This is not just another post-war recession, and so the treatment—lowering interest rates to zero and flooding the economy with borrowed money and liquidity—isn’t working. In fact, it’s making the patient sicker by the day.

The best way to eliminate the signal noise of official propaganda (“The stock market is rising, so everything’s great for everyone!” etc.) and the high keening wails of Keynesian cargo cultists is to construct a model of the underlying fundamental forces that will shape the future.

The best way to do that is to glance at a few key charts.

Let’s start with debt.  Clearly, the “growth” of the U.S. economy since 1980 is debt-based. Debt has exceeded growth by 136%. If debt had risen in tandem with GDP, then total debt would be a mere $22 trillion instead of $52 trillion.

The next chart reflects how every incremental increase in debt has had a diminishing effect on growth. Where $1 of debt once added 70 cents to GDP, now it adds basically nothing, or even reduces GDP.

We hear a lot of euphoric babble about households “deleveraging;” that is, paying down debt and thus setting the stage for the next ramp-up of household debt. But the reality is not quite so euphoric. Compared to the explosion in household debt since 1980, which we might term the debt elephant, the recent “deleveraging” reduction in debt is more like a mosquito.

Next, let’s look at jobs and employment. To make sure we’re getting the full picture, let’s look at several measures of employment as a reflection of the underlying economy.

This first chart looks like a steady onward-and-upward trend of job growth. The “jobless recovery” appears to be a modest bump in the road of ever-rising employment.

By other measures, however, employment hasn’t hit a bump in the road; it’s off the road and sinking into a bottomless bog. Here is the civilian participation rate, which measures how many folks in the civilian population are participating in the labor market in one way or another.

By this measure, the labor market has retraced to the level of the 1981-82 recession thirty years ago.

Next, let’s look at another, perhaps even more telling metric: private payrolls per capita, which is basically a measure of how many jobs there are per capita in the economy.

What this means is that beneath the glitter of a “rising GDP” and “rising stock market,” the economy is producing far fewer jobs per capita.

If we look at the total number of civilians and the total number of jobs, the chart looks even uglier. We are back to the levels of 1970s stagflation, just as women began entering the workforce en masse to compensate for declining household purchasing power.

This next chart is civilian employment per capita, which is similar to the previous chart of private payrolls per capita, but includes all jobs, including public-sector/government employment. Once again it shows that the economy is back to the levels of the mid-1980s, even including the rapid expansion of local and state government payrolls.

Another way to measure the real performance of an economy is capacity utilization — how much of the potential capacity of the economy is being used. In good times, capacity is added because the existing capacity is running full-tilt. In recessions, there is not enough demand to use the economy’s full capacity, and therefore no reason to add to capacity with business investment.

I’ve drawn some lines to clarify what happened during each primary phase of the post-war era. During the stagflationary 1970s, capacity utilization see-sawed between growth and recession, tracing out a series of lower lows and lower highs. This downtrend reflected the reality that the economy wasn’t growing; it was stagnating, hitting new lows with every downturn, and never reaching its previous high-point during recovery.

After finally hitting bottom in the 1981-92 recession when Federal Reserve Chairman Paul Volcker vanquished inflation by jacking up interest rates to 18%, the economy entered a 30-year cycle of financialization (deregulation of the banking sector and the rise of debt as the engine of growth), globalization, and technological innovation that fueled a multi-decade trend of rising productivity.

The wheels fell off the financialization and dot-com boom in 2000, and the Federal Reserve and federal government created an even more extreme version of financialization that inflated a gigantic debt/real estate bubble. Like all financial bubbles, this one burst, and once again the Fed and federal government scrambled to inflate another debt bubble.

Since the household sector was tapped out and its primary asset, the family home, had lost a third of its bubble value, the Federal government borrowed $6 trillion to bail out the banking sector and spread trillions of dollars around as stimulus and giveaways like “Cash for Clunkers.”

Unsurprisingly, this injection of trillions of dollars did boost capacity utilization. Roughly 11% of the entire GDP is borrowed and spent every year now by the federal government. But just as in the stagflationary 1970s, the decline reached a new low and the subsequent rise never got close to the previous bubble high of 2006.

Now that the economy is rolling over again, capacity utilization is also declining.

None of this reflects a healthy economy. What it does reflect is an economy that has depended on ever-greater amounts of debt to power a diminishing trend of growth, and an economy which creates fewer and fewer jobs with ever-greater mountains of debt.

This is not a bump in the road; it is the exhaustion of the entire model of  growth that we have depended on for the past 30 years. Once the debt saturation point has been reached, adding more debt subtracts from the economy rather than adds to it. This is reflected in the decline of employment by every metric: total number of jobs, civilian participation, payrolls per capita, and employment as a percentage of the total population.

We are past the point of debt saturation, and so we need a new model of employment, and indeed of “growth” itself. Sadly, as discussed in a recent report, the Status Quo financial witch-doctors have only prescribed more debt and more unproductive friction.

Unfortunately, as the above charts abundantly illustrate, the patient (the U.S. economy) hasn’t been cured; rather, its condition has gotten worse. The stock market is like a sort of makeup that has been slathered on by the Fed to give the appearance of health, but the internal measures of jobs and income (both declining) show that both the “health” and the “recovery” are illusory.

So, the key question to ask ourselves is, Where will the demand for work be in a post-debt, post-”cheap oil” economy”?

In Part II: The Future of Work, we tackle this critical question and provide a framework for potential job seekers/switchers to use in positioning themselves for meaningful and dependable employment in this coming era.

Click here to read Part II of this report (free executive summary; paid enrollment required to access).

This article was first published on Chris Martenson.com as “The Future of Work.”

Charles Hugh Smith – Of Two Minds

What do we have here?

“We can’t rely on monetary policy. We can’t solve the international imbalances with monetary policy, but people don’t know that yet,” warned Hoenig, who oversees banks in Colorado, which is part of the Fed’s 10th District based in Kansas City, Mo.

The core problem is that the United States has consumed more than it has produced for 20 years running. Consumers and governments in the developed world have piled on too much debt.

Uh, 30 years running.  Remember this chart?

Hoenig goes on to admit that The Fed built the asset bubbles with inappropriately-low interest rates!  That is, he makes one of my central points: It must always cost money in real terms to borrow.

What’s even better is what I’m hearing today in the Bernanke testimony on The Hill.  For the very first time I heard a Representative state clearly that Bernanke’s rate policy is enabling the drug binge of deficit spending in Congress!

Now, Congress, take the next step.  Come to the understanding that we must pay for each and every program we want to have with current tax revenues.

Yes, there will be market consequences from removing the stupidity of past acts.  But that’s unavoidable, just as you cannot avoid the fact that once you smoke crank for months or years your teeth have already rotted and will not grow back!

We still can stop further deterioration in our choppers, and we must – even if we go through a nasty round of withdrawal.

It was all over CNBC this morning, among other places.

The common mantra: The way out of this problem is economic growth.

My blunt response:

Here’s the problem from a historical perspective, looking at GDP growth .vs. debt growth:

In other words we didn’t “grow output”, we bought it by borrowing more and more money.  If you prefer it in “incremental dollars” rather than total outstanding, it’s here:

Now it is true that one might try to economically grow out of debt. 

But in order to successfully do so you must grow the economy while NOT growing the amount of debt outstanding! 

Here’s the ugly reality – since 2000 GDP has grown, on average, by 4.2%.  But debt has grown by 7%, again, on average.

So long as there is a spread between debt growth and GDP growth, and debt is growing faster than GDP (through the entire economy) you cannot “grow out of the hole” – all you’re doing is making the problem worse.

This is the underlying issue with the so-called “economists” who argue this position – they’re raising a true argument but predicated on a false premise – that we can and will grow the economy while either holding the amount of debt across all sectors (private and government) steady or contracting that total amount.

If and only if that takes place – that is, the blue line in the above chart is below the red line and stays there, then one can make this argument.

If not, and history says it is not, then any such claim is a fraud.

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the “Twist” is already guaranteed, as is an IOER cut, per Goldman’s “predictions” and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman’s hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of “credit money.” Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke’s choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America’s TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama’s second term goodbye.

As the two charts below demonstrate, the economy’s ongoing inability to create any growth in the shadow banking system, primarily as a result of the complete shut down of the securitization machine, has been and continues to be, the biggest threat to the Fed. Specifically, after hitting an all time high of $20.9 trillion in March of 2008, this all too critical source of “credit money” has collapsed by a whopping 25%: since the peak $5.5 trillion of credit, and not just any credit, but shadow, and thus non-regulated credit, has evaporated! And as Q2 demonstrated, after almost bottoming in Q1 following a decline of just $57 billion, or the smallest Q/Q decline since Q2 2008, the drop has picked up again, with a one year high $278 billion plunge in Q2.

Among the liability components of the Shadow Banking system’s credit money abstractions, we look at:

• Money Market Mutual Funds: at $2.6 trillion, a decline of $41.6 billion Q/Q
• GSE and Agency Paper: at $6.5 trillion, a decline of $73.8 billion Q/Q
• ABS Issuers At $2.2 trillion, a decline of $80.4 billion Q/Q
• Repos at $1.2 trillion, a decline of $49 billion Q/Q
• Open Market Paper at $1.1 trillion, a decline of $50 billion Q/Q
• and these declines were offset by a tiny increase of $17 billion to $726 billion at Funding Corporations

Altogether, added across this amounts to a massive $278 billion in the second quarter, and explains why GDP, when the manipulation from the Census Bureau is eliminated would have probably declined. What is worse is that should this decline continue without an offset, there will be no economic growth guaranteed.

So where can said offset come from? Well, just as there is a shadow banking system, so there is a traditional commercial bank system with listed liabilities. To be sure, for the duration of collapse in the shadow banking system, this has been the only offset, although granted one that is not nearly doing a good enough job. Specifically, total liabilities of Commercial Banks in Q2 were $13.4 trillion, an increase of $238 billion in the quarter. Alas, this is nowhere near enough to offset the decline in Shadow Banking, having grown by “only” $2.6 trillion since Q2 2008, even as shadow liabilities declined by double this amount. Yet there was a brief saving grace came in Q1 when the spike in Traditional liabilities more than offset the drop in Shadow, as the cumulative total rose by $337 billion, the most since 2008. Too bad, however, that adding across these two categories (second chart below), we once again witnessed a decline in Q2, amounting to $40.1 billion. This explains not only why QE2 could only do so much, but why GDP growth has rolled over and is now almost certainly negative.

What is most important to keep in mind, is that Traditional Commercial Bank assets only grow courtesy of QE. And with Shadow banking continuing to implode, Commercial Banks have to pick up the slack or else… Which in turn means Bernanke has to keep pumping reserves. Whether banks use these to lend out, or to buy shares of Netflix is irrelevant: remember – America, and the entire developed world, is a credit driven system. Take away credit growth and it is game over.

Which explains why tomorrow’s decision is a formality: Bernanke has no choice but to continue offsetting the relentless contraction in shadow liabilities, which as of Q2 collapsed at an annualized rate of over $1 trillion. Incidentally this, +$1, is the very minimum that Bernanke
will have to bring into reserve circulation to offset the relentless deleveraging of the once biggest contributor to American growth, which ironically is now the biggest adverse factor.

That reversion to the mean sure can be a bitch.

ZeroHedge