FedUpUSA

Archive for the ‘Sovereign Debt’ Category

Oh this is getting rich.

Bonds are getting bid hard here in the US and stock are in the toilet.

Why?

Europe, basically.

But it was all fixed, remember?

No, it was not fixed.  The LTRO didn’t fix anything.  It hide the stinking dead fish under the carpet, which are now growing maggots and have turned into a public health hazard.

Spain has a 20% unemployment rate and cannot solve its problems either.  Nor can Italy.  Nor can Portugal.

Why?

For the same reason we’re not solving ours.  All are refusing to admit that the government cannot spend more than it taxes in current time.

There’s only one solution folks.  It’s found there.  None of the political candidates or central bankers are talking about it because if they do then they have to recognize that fixing it in the US will cause an immediate deflationary depression as the air comes out of the bubble — the government is borrowing and spending close to 10% of GDP right now.  Any act that corrects that will instantly come out of both GDP and cause the liquidity-driven asset-price bubble to deflate.  This of course is called “bad” while stock prices going up due to nothing but hot air is called “good.”

That’s backwards, incidentally.

The market is doing what it always does.  It will let you pull this crap for a while, lead you on, think everything is ok, suck you back in, have huge rallies that then have every tout in the world on TV telling you how you’re going to miss a huge profit, and of course you’ll be late.

You bought into Apple at $600, the DOW as it crossed 13,000, the S&P as it crossed 1400, with riches dancing in your mind as you drift off to sleep.

What’s actually happening is that you’re chasing profits you believe will be but there will be no profits.  The liquidity-driven pump-and-dump game is one of the oldest on Wall Street.  As some say, high prices cause even higher prices and this is true when borrowing is free or nearly so — for a while.

But then someone realizes that what you’ve really seen is nothing more than multiple expansion.  One or two companies, or maybe three or four, or even a hundred that are going up a lot in their alleged “earnings power” and driving the stock market higher.

Then one of those “someones” has an “accident.”  In 2000 it was MicroStrategy, a little company that had gone up like a rocket ship and then announced an accounting problem.  Their stock tanked.  But shortly thereafter, people started to ask questions.

Lots of questions.

Inconvenient questions.

Questions like, “Is there really any actual earnings power behind these stocks or are we all selling to a new bagholder at ever-higher prices?  And by the way, are there any more bagholders around?”

The result was a horrifying crash.

I will note for everyone that we were at 1422 in the SPX just a few days ago.  Now we’re at 1366.  You do the math.

Is this a “big dip”?

No, not really.

Not yet.

Just wait until Apple cracks.  Take $50, $100, $200 off Apple and tell me where the Nasdaq 100 trades.  Sit down first.

Oh I know, it can’t happen.  It certainly can’t happen before the election because Ben won’t let it, right?  Except that it not only can, it always does.  It did in 2000 and it did in 2008.  You got warnings in 2008 too, just like we did this time.  Last summer and early fall were your warning, but you had to jump back in, right?  You bought all the way up — straight up, without any meaningful correction or consolidation, because trees grow to the sky.

I have one question for you:

How’s your base-jumping skillset look like, and oh by the way, is that a parachute or a knapsack on your back?

Well, it is official.  The restructuring deal between Greece and private investors has been pushed through and the International Swaps and Derivatives Association has ruled that this is a credit event which will trigger credit-default swap contracts.  The ISDA is saying that there are approximately $3.2 billion in credit-default swap contracts on Greek debt outstanding, and most analysts expect that the global financial system will be able to absorb these losses.  But still, 3.2 billion dollars is nothing to scoff at, and some of these financial institutions that wrote a lot of these contracts on Greek debt are going to be hurting.  This deal with private investors may have “rescued” Greece for the moment, but the consequences of this deal are going to be felt for years to come.  For example, now that Greece has gotten a sweet “haircut” from private investors, politicians in Portugal, Italy, Spain and other European nations are going to wonder why they shouldn’t get some “debt forgiveness” too.  Also, private investors are almost certainly going to be less likely to want to loan money to European nations from now on.  If they will be required to take a massive haircuts at some point, then why in the world would they want to lend huge amounts of money to European governments at super low interest rates?  It simply does not make sense.  Now that Greece has defaulted, the whole game is going to change.  This is just the beginning.

The “restructuring deal” was approved by approximately 84 percent of all Greek bondholders, but the key to triggering the payouts on the credit-default swaps was the fact that Greece decided to activate the “collective action clauses” which had been retroactively inserted into these bonds.  These collective action clauses force most of the rest of the bondholders to go along with this restructuring deal.

A recent article by Ambrose Evans-Pritchard explained why so many people were upset about these “collective action clauses”….

The Greek parliament’s retroactive law last month to insert collective action clauses (CACs) into its bonds to coerce creditor hold-outs has added a fresh twist. These CAC’s are likely to be activated over coming days. Use of retroactive laws to change contracts is anathema in credit markets.

If a government can go in and retroactively change the terms of a bond just before it is ready to default, then why should private investors invest in them?

That is a very good question.

But for now the buck has been passed on to those that issued the credit-default swaps.  As mentioned above, the ISDA says that there are approximately $3.2 billion in Greek credit-default swaps that will need to be paid out.

However, that number assumes that a lot of hedges and offsetting swaps cancel each other out.  When you just look at the raw total of swaps outstanding, the number is much, much higher.  The following is from a recent article in The Huffington Post….

If you remove all hedges and offsetting swaps, there’s about $70 billion in default-insurance exposure to Greece out there, which is a little bit bigger pill for the banking system to swallow. Is it possible that some banks won’t be able to pay on their default policies? We’ll find out.

Yes, indeed.  We will find out very soon.

If some counterparties are unable to pay we could soon see some big problems cascade through the financial system.

But even with this new restructuring deal with private investors, Greece is still in really bad shape.

German Finance Minister Wolfgang Schaeuble told reporters recently that it “would be a big mistake to think we are out of the woods”.

Even with this new deal, Greek debt is still projected to be only reduced to 120 percent of GDP by the year 2020.  And that number relies on projections that are almost unbelievably optimistic.

In addition, there are still a whole host of very strict conditions that the Greek government must meet in order to continue getting bailout money.

Also, the upcoming Greek elections in just a few weeks could bring this entire process to an end in just a single day.

So the crisis in Greece is a long way from over.

The Greek economy has been in recession for five years in a row and it continues to shrink at a frightening pace.  Greek GDP was 7.5 percent smaller during the 4th quarter of 2011 than it was during the 4th quarter of 2010.

Unemployment in Greece also continues to get worse.

The average unemployment rate in Greece in 2010 was 12.5 percent.  During 2011, the average unemployment rate was 17.3 percent, and in December the unemployment rate in Greece was 21.0 percent.

Young people are getting hit the hardest.  The youth unemployment rate in Greece is up to an all-time record of 51.1 percent.

The suicide rate in Greece is also at an all-time record high.

Unfortunately, there is no light at the end of the tunnel for Greece at this point.  The latest round of austerity measures that are now being implemented will slow the economy down even more.

Sadly, several other countries in Europe are going down the exact same road that Greece has gone.

Investors all over the globe are wondering which one will be the “next Greece”.

Some believe that it will be Portugal.  The following is from a recent article in The Telegraph….

“The rule of law has been treated with contempt,” said Marc Ostwald from Monument Securities. “This will lead to litigation for the next ten years. It has become a massive impediment for long-term investors, and people will now be very wary about Portugal.”

Right now, the combination of all public and private debt in Portugal comes to a grand total of 360 percent of GDP.

In Greece, the combined total of all public and private debt is about 100 percentage points less than that.

So yes, Portugal is heading for a world of hurt.  The following is more about Portugal from the recent Telegraph article mentioned above….

Citigroup expects the economy to contract by 5.7pc this year, warning that bondholders may face a 50pc haircut by the end of the year. Portugal’s €78bn loan package from the EU-IMF Troika is already large enough to crowd out private creditors, reducing them to ever more junior status.

So why should anyone invest in Portuguese debt at this point?

Or Italian debt?

Or Spanish debt?

Or any European debt at all?

The truth is that the European financial system is a house of cards that could come crashing down at any time.

German economist Hans-Werner Sinn is even convinced that the European Central Bank itself could collapse.

There is a Der Spiegel article that everyone out there should read.  It is entitled “Euro-Zone Central Bank System Massively Imbalanced“. It is quite technical, but if this German economist is correct, the implications are staggering.

The following is from the first paragraph of the article….

More than a year ago, German economist Hans-Werner Sinn discovered a gigantic risk on the balance sheets of Germany’s central bank. Were the euro zone to collapse, Bundesbank losses could be half a trillion euros — more than one-and-a-half times the size of the country’s annual budget.

So no, the European debt crisis is not over.

It is just getting warmed up.

Get ready for a wild ride.

The Economic Collapse

In this morning’s Cashin’s Comments, UBS’s Art  Cashin addresses what worries traders these days.

A Greek default has been on everyone’s minds lately.  But the traders  Cashin has talked to think that it’s just the tip of the iceberg.

The bigger fear is what happens in the credit default swap (CDS)  markets.  No one knows how big it is, who the counterparties are, and,  worst of all, whether the CDS contracts will actually trigger in what many would  consider a default.

Here’s an excerpt from Cashin’s note:

Is There More At Risk Than Greece In A  Greek Default – Recently, there has been a buzz building on trading  desks and trading floors that there may be a lot more at stake in a potential  Greek default than the media has been talking about.

As of now, most of the public discussion has  centered on potential contagion among the banks as most of the Greek sovereign  debit is held by the European banking community.

Traders, however, fear that the real risk is in  the area of credit default swaps (CDS).  They are insurance policies,  individually written, that basically say – if Greece defaults, we’ll pay you  what they should have.

Credit default swaps have grown exponentially  over the last decade.  Since they are individually written, there  is no clear visible record of how many CDS contracts are outstanding.  Also  unknown is who is involved.  The two parties obviously know who the  counter-party is but there is no public record that would allow a regulator or a  third party to find out who was involved. … No  one knows how much CDS exposure there is on Greek debt but is assumed to be a  lot.  Banks and others looked at the very high and attractive yields  on Greek bonds and began salivating.  But, what about that risk  – better buy some insurance. … Recall that, months ago, negotiators on the  Greek debt bumped into part of the CDS problem.  If the holders agreed to  take 50 cents on the dollar, would that trigger their CDS on that bond (paying  them the conceded 50 cents and making them whole).

At that  time, many contended that if the bondholder “accepted” the offer of 50 cents on  the dollar, that made the event voluntary and it would not “trigger” the CDS  payout.  That caused lots of folks to ask for a ruling from the ISDA (the  ruling group on CDS contracts).  If you “accepted” an offer with a gun to  your head, was it really voluntary? … But, traders fear a worse  outcome might occur if the CDS contracts do not kick in.  What  good is insurance that doesn’t pay off.  That could lead to the assumption  that all CDS insurance was useless.  That would stratify debt around the  globe.  Great credits could get all the money they wanted, but less than  great credit would be shut out because it could not be insured.  That could  make the future one in which “the haves” will have whatever they want and all  others nothing.  Welcome back to the Middle Ages.

Business Insider

Wall Street…who gave it a map of the future?

DOCUMENTS RAISE AWKWARD QUESTIONS FOR WASHINGTON, IMF & BERLIN

A written document giving firm dates and detailed actions for a planned Greek default has been in the possession of two top Wall Street bank currency trading bosses since the second week in January. The Slog has separate but corroborative sources affirming the existence of the document, and a conviction among senior bank staff that – at least at the time – the plan represented “a timetable, not a contingency”. The plan gives a firm date of March 23rd for default to be announced after the close of business.

Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical ‘orders’ about last use of the euro as a currency there. The revelation arrived at Slogger’s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources.

The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday march 23rd . At the weekend all Greek bank accounts will be frozen, with emergency measures detailed to prevent the flight of capital. Included in the paperwork is a list of very limited exceptions to the ‘no withdrawals’ order. All major banks ‘are instructed  not to deal with euro exchange  as of open of business in Greece on Monday 25th march. All Greek markets will close for one day ‘at least’.

As yet, I have been unable to establish the source of the documents. But one of my informants admitted, “I have strongly suggested to Greek business friends and clients that they sell up fast, do a sale and leaseback on property, empty bank accounts, and change to a hard currency.”

I have little doubt that such a critical path analysis leading to default in Athens can be easily brushed aside as contingency planning. But this is not the impression Slog sources were given: and its existence is bound to further raise suspicions in ClubMed about the real intentions of ‘EU Nord’, Washington and the Troika – especially the IMF. In particular, the alleged creation of the document both supports (and/or coincides closely with):

1. Washington going cold on further IMF funding

2. IMF intervention in the Athens debt talks

3. Persistent rumours surrounding Wolfgang Schauble’s plans

4. Evidence previously assembled by The Slog  concerning Americo-German coordination

5. A string of delaying tactics by senior EU and Troika officials since mid January.

Reviewing the timeline of the Greek Debt Marathon, the back end of it is pretty obviously one of persistent sabotage from Berlin, Brussels, and the IMF:

1. It’s the second week of January 2012, and the bondholder deal is a few small steps away from lawyers crossing t’s and dotting i’s. Enter Schauble saying the haircut is nowhere near short enough. Bondholders’ leader Charles Dalloran walks out.

2. The Troika barges into the Athens/Bondholder talks, and they turn into chaos, then grind to a halt.

3. FinMinCom meets in Brussels and several encouraging noises are made about progress towards a deal ‘over the weekend’. Enter Merkel bearing demand to fire the Greek Government and replace it with an EU commissioner. This produces four more days of circular delay, following which Nicolas Sarkozy declares that the German demand was never a demand.

4. Lucas Papademos gets personally involved and strikes a deal with Dalloran. Then he extracts the support of all Party leaders for the deal. We’re almost there. Enter Schauble and Brussels saying no, your economy’s worse than we thought – we need a closer haircut and more savings.

5. The troika is now talking direct to the bondholders with Athens outside the loop. The creditors feel on the back foot. They agree to a lower percentage rate for the new bond issues and a 70% haircut. Venizelos meanwhile focuses on finding additional savings. Papademos intervenes again with leaders and creditors. We are now ‘hours away’. Mario Draghi says no, the haircut is too close for the ECB, and not enough for everyone else.

6. Draghi relents a little, the bondholders say they are “tentatively flexible”. We’re two small steps away from a deal. Enter Schauble moaning about £325m of savings unaccounted for…a thousandth of the total Greek debt.

6. Tempers get inflamed back in Athens. Greek leaders start muttering about doing what they have to do, getting the deal signed, and then having elections. Berlin and FinMinCom demand that all Greek Party leaders sign a document ordering them to stick to the deal regardless of election results. This loses another two days….but the bondholders are still keen to sign.

7. The German Bundesbank leaks a story to German newspaper Handelsblatt saying the Greeks will not be able to satisfy bondholder demands, and thus technical default is now a certainty. The story is traced back to the office of anti-bailout hawk Jens Weidmann.

8. Deutsche Mittelstands Nachtrichen runs a story claiming another 2.5 bn euro hole has been found in the Greek budget proposals. The story is deconstructed by The Slog and others and turns out to be complete bollocks. But the FinMinCom meeting in Brussels is postponed, and replaced with a conference call.

9. Merkel says she doesn’t trust New Democracy leader Antonis Samaras. Athenian leaders must now sign another pledge after the additional 325m euros of savings have been found and agreed. They all sign (Wednesday morning – yesterday – 15th February).

10. Yesterday afternoon, the EU finance ministers’ conference call begins to talk about cutting its losses. A firm proposal is tabled – by Berlin, it seems – to divide the next bailout tranche into smaller slices. The next Com meeting is put off for six days.

11. Schauble describes the Greek debt as “a bottomless pit”. Merkel joins the fray by suggesting the bailout be put back until after the April elections. This clearly makes no sense, as from March 16th Greece will be in technical default without more money. But Schauble adds that indeed, Greece should postpone its elections…..and “install a technocrat government similar to Italy’s.”

12. Wen Jiabao makes nice noises about what a fine place Europe is to visit, but van Rompuy and Barroso come away predictably empty-handed.

13. Thursday dawns with everyone wondering where we are. Venizelos accuses “forces trying to push Greece out of the eurozone”. German government spokesman Steffen Seibert calls this “false” and adds, “I can state quite clearly on behalf of the federal government that Germany has taken no such decision.” Nobody said you had, Ducky. Berlin briefs on amphetamines about Angela Merkel being ‘resolutely opposed to default’. A majority of market opinion leaders and bondholders think the EU is bluffing, reports the FT. But a French source tells The Slog earlier today he thinks Germany “is talking from a position of strength. There is no doubt in our minds [in the Elysees] that Berlin has the necessary plans in place.”

We’re but an hour into the working day EU time (1hr ahead of GMT) and already the main EU players are busy installing further roadblocks. Boss of radio Luxembourg Jean-Claude Juncker said, “Further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of programme implementation and to ensure that priority is given to debt servicing.” An intention as vague as that could take forever to fulfil….or until March 23rd.

A senior German official quoted by Reuters has added: “Questions remain that are very important to Germany and other member states about the sustainability of the programme.”

Ultimately, not even the Germans can see into the future: this is get off the pot time….but only if you’ve been devious for some time about being on the pot in the first place. The Slog’s recent profile of Angela Merkel demonstrated beyond too much doubt that the Fuhrerine in Berlin is more than capable of being devious.

In the last three weeks, several EU officials have pumped out the line – over and over again – that Greek default is no longer the bogeyman people thought it was….or to be more precise, they told us it was. “It would have led to a credit crunch immediately and hurt us all,” said a senior eurozone official. “Now, the odds [of such a catastrophic impact] are something like 10-20%. It’s still possible, but it’s not a certainty.”

First of all Draghi pumps money into the banking system, then the Troika/Berlin axis slows everything down. Now awkward facts come to light about the existence of ‘a plan’ which would protect America – by dumping the Greek contagion – and help the eurozone by concentrating  the bailout cash available to save the bigger players: Italy, Spain and France. An unpleasant phrase is doing the rounds in Brussels at the moment: ‘amputate and corterise’. It’s certainly beginning to look like that. And without doubt, that’s the way Mario Monti sees it.

Were I Greek, Portuguese or Irish, I’d be a worried man this morning.

The Slog

Don’t be fooled folks, the Greek “tragedy” is nothing more than arm-waving and the people of Greece have already voted on it — from the streets.

“There is no cause for major relief: In effect parliament only decided not to denounce further aid payments at this stage,” Commerzbank foreign-exchange analysts said in a note Monday. In particular, the analysts worried whether there would still be the political will to follow through on reforms when Greece gets a new government after fresh elections, which could come as early as April.

No such thing (follow-through) will happen. 

Simply put, the politicians are unwilling to have the same honest discussion and debate with the citizens there that we must have here in the United States.  The root cause of the problem is the same, the debt trajectory we are on is identical to that which caused Greece to blow, and not only are we not facing it, neither are they.

Olli Rehn, the European Commission’s head of economic and monetary affairs, said Greece has been living beyond its means for a decade and must undertake demanding reforms.

Yeah yeah.  We ought to re-write that:

Olli Rehn, the European Commission’s head of economic and monetary affairs, said Greecethe entire Western World has been living beyond its means for a decade and must undertake demanding reforms.

Reform = you cannot spend more than you take in via taxes.

Period.

So when will we see actual reform?  The fact of the matter is that since GDP = C + I + G + (x – i) when “G” decreases (government spending) by cessation of deficit policies GDP will inevitably contract, at least on a temporary basis.

This is why nobody is serious about doing it, but the longer we take to do it the worse it gets as the compounding of artificial demand builds into the system capacity that there is no organic requirement for, nor can the employment and standard of living that goes with it be supported.

The argument is always and forever that we must “grow” out of the mess.  The fact is that we never have.  In each and every case since 1980 there has never been a time when we have in fact “grown out of the recession.”  Note that this includes Presidents Reagan, both Bush I and II and Clinton.

Not one quarter folks, up until the crash, and then only because debt defaulted so fast that it fell below GDP’s rate of change.  The paradox is that while this was being decried and the screaming reached a fever pitch it was actually good from a perspective of sustainability!

In other words the exact opposite of what people claimed “should” be done was the correct path — do nothing, allow the corrective process to run its course, and in doing so allow sustainability to return.  Instead we are desperately trying to prop up the bubbles we blew over the last 30 years.

David Walker was on CNBC this morning again claiming that we “lost our way” over the last ten years.  He’s lying.  What we have here is a geometric series and I’m going to prove it.

Over 20 years, from 1980 to 2000, the slope of the line of debt accumulation was approximately 12 degrees.  From 2000 to 2008, or approximately 9 years, it was 26 degrees (more than double the slope over less than half the time) and from 2008 to today it was 64 degrees or again more than double the slope over less than half the time.  Note that this is just the public debt — the problems in entitlement programs (internal debt) are even worse!

This is a chart of a runaway geometric series.

There is no solution that comes from “slowing it down” — you must stop this right now.

I recognize that nobody wants to talk about it, say much less do it.  But mathematical relationships do not care whether you want to talk about them or not.  They just are, and Walker is trying to put this into some sort of perspective that aims at Bush and Obama.

He’s full of crap.  The problem goes back to 1980 when we crossed beyond fiscal sustainability.  Every President since that time and every Congress has been part of a gigantic Ponzi Scheme that will inevitably blow up unless we act to stop it now.

I asked frequent contributor Zeus Yiamouyiannis to comment on the coming Greek default. Here is his insightful response.

Greece is the epicenter of a drama that threatens to unwind with all the intrigue and  subterfuge of ancient Greek myths and tragedies.As with the legend of Icarus, big, and  now bigger, transnational banks provoked the gods with their wax-and-feather financial  fabrications to create the appearance of soaring wealth. Now that they have flown too  close to the sun and their wings have melted, these banks are being brought to earth by  the obligations and consequences imposed by their fabrications.

Rather than take responsibility, these banks seek to appease the gods by sacrificing taxpayers. In fact, if one looks closely, these banks aspire to be gods themselves.  They clothe  themselves in their indispensability and shield themselves from accountability with tales  about how many innocent citizens will be hurt if they don’t get their next bailout.  It  is as if they say, “We are above the law… We are the law.”  Mathematics, legal enforcement, restraint, humility all must fall under the sword of their hubris.

In the end, just as with a Greek tragedy or a Yeats poem, this center cannot hold and things fall apart. When one abuses the laws and principles of mathematics and capitalism,  claiming to be a faithful servant, consequence and accountability eventually catch up.  The breaking point inexorably nears.  Citizens are beginning to think, voice, and act: “We can do without the false idols that call themselves banks.  In fact, we need them  to be dissolved for us to survive and thrive.”

Reality is the revenge of the gods.

Not just about fairness: Everything unwinds

This is not just about fairness anymore; it is about the exposure of central, global  illusions that affect everyone, not just banks.  For the last three plus decades, debt-fueled “growth” has instilled a life sense that everyone gets rich, values always go up, and no one has to pay.  If those illusions evaporate than those citizens complicit in this failed  fantasy may actually join forces with the realists (those who knew it was a scam all along)  to produce unified citizen revolt.  Hell hath no fury like the people spurned and lied to,  even if many had some responsibility in welcoming and fanning those lies.

The implicit deal was this:  We will collude so everyone gets rich going forward.  We will  collude so no one has to pay if there is any unwinding. (But, hey, it’s a new era, and that’s not going to happen!)  Open default breaks the illusion, and austerity breaks up the  collusion.  This is why default has to be hidden, deferred, restructured.  It is not just  about chaos around party/counterparty risk (in particular, cascading claims that are not  backed by anything).  It is not even just about finance.  It’s about all the other things  that will unwind, culturally, politically, and psychologically, if Greece defaults and sets  into motion the necessity of someone actually paying up. In short, recognition of reality  has disastrous consequences for the status quo and its control myths.

The infinite growth meme unwinds:  The cancerous economic obsession with infinite growth in a finite world is already unwinding, but will hit full force with cascading defaults.   It is one thing to have a “slowdown,” and another to have your economic brakes lock up on  you and your gears slammed into reverse.  About the only thing that seems to be growing  currently is the number of people partially employed or permanently unemployed.  As a  humorous aside, the situation is getting so pronounced that quality of life might actually  have to replace quantity of possessions as the cultural indicator of the good life,  and what would that do to the economy?

Politicians’ power of the purse unwinds:  Greek politicians, like many other Western  politicians, will do almost anything to get re-elected.  The easiest way to do this  is to pay people off, particularly government workers and constituents, in the form of generous benefits or pet projects.   What happens if your tax base will not support this?  You sell your political soul, defer, and/or hide the true costs of your largesse behind  undisclosed derivative deals with Goldman Sachs that eventually put your entire country’s  sovereignty in jeopardy.    As a result, Greece’s former prime minister, George Papandreou,  is now out after a very short term in favor of a unity government.   Shady deals funded  unsustainable perks that not only inflated popular expectations but created catastrophic  debt and risk.

Guaranteed entitlements unwind:  So now that the illusion of infinite growth is being exposed, the corresponding ballooning entitlements that enticed the larger public to become complicit in the illusion are becoming unglued.  It would take almost a decade of gross national  product to pay off the U.S. unfunded liabilities for Social Security, Medicare, and Medicaid, which exceed the staggering sum of 100 trillion dollars.

Retirement and health benefits cannot be paid out of fake prosperity and “notional” (i.e.  imaginary) values.  They require real services and products and an accepted public medium  of exchange.  (I will leave off the argument as to what constitutes “real” and “accepted” since even fiat currencies are dubious in this regard.)  People will be forced to adjust  their expectations and adapt their realities.  With public and private pension plans also complicit in derivative scams to fund benefits, it will be no surprise if many pensions  simply declare themselves bankrupt in the next decade.

The maximum profit mandate unwinds:  We have reached such heights in our hysteria about  growth and our psychological addiction to more-more-more, that we have seen stock prices fall, even with record revenues, if the corresponding company doesn’t meet expectations of even higher growth and revenue.  It is getting to the point where a company cannot  simply have a solid year and just pay out its dividends and maintain its good health.   Instead companies have to be ever hopped-up on economic steroids and cost-cutting (i.e.  shipping jobs to virtual slave labor in China) so as to not fall short of expectations.

These steroidal practices are destroying the companies and the means by which consumers  can afford products and services.  A relentless short-term focus serves no one in the end. “Maximum” less and less corresponds with “optimum,” because present assets can be  cannibalized or revaluated to give short-term boosts to numbers, creating  medium- and long-term systemic and foundational deficits that destroy the health of a company and its surrounding society.  Hopefully the idea and practice of optimum profit will replace maximum profit as the Great  Unwinding continues.

The central question:

The central question, obscured by all the hand wringing and crocodile tears is simply this: Why should public citizens who have no stake in private enterprises, who received no  profits or dividends, who had nothing to do with creating losses, be forced to pay for  private losses?  The only legitimate answer is, “They shouldn’t.” Period.  Anything that does not acknowledge this tenet is not functioning capitalism, and if it is functioning capitalism  it cannot violate this tenet.

Yet we witness apologist expert after expert excusing this fatal breach in capital practice as “regrettable but necessary to save the system.”  They seem not to have noticed that the system has already killed itself by violating its own foundational laws and principles.   If anything, current conventional practice might be accurately described as an all-out  anti-capitalist assault on democratic free enterprise.

So now the follow-up question is easy to answer: “Why are we paying for something we did  not buy and had no hand in creating?”  The answer: We no longer have functioning capitalism.  Call it what you want— corporate socialism, crony capitalism, cancer capitalism, plutocracy, kleptocracy, oligarchy, neofeudalism— the system we have now is the equivalent of an individual going up to a complete stranger on the street and shaking that stranger down for  “protection money” to pay for the individual’s underwater house mortgage.

As this simple fact grips the population, and people wake up to the present economic reality, there will be increasingly organized moves toward civil disobedience and alternative economy.  “Cannot pay” will merge with “will not pay” since the only way to re-establish health and  integrity in a corrupted economic system is to starve the cancers that have taken it over.  This has already started with Occupy Wall Street, strategic defaults, and riots in Greece.

So if someone asks you, seeking to appeal to your fear, self-interest, and need for approval, if you are willing to “be responsible for bringing down the global system,” your answer should be an emphatic, “Yes.”  “Are you asking if I want to bring down fraud, theft, abuse and the cancer that global finance has become for me, my neighbors, my children, and my  children’s children?  Are you asking me if I want to replace the current broken system with something that serves actual people?  Not only, ‘yes,’ but ‘heck, yes.’”

By Zeus Yiamouyiannis – For Of Two Minds