Buying Just a Little More Time
Yesterday the markets were up on the fabulous news that the Federal Reserve and other central banks were wading into the European sovereign debt crisis. Everyone was happy, the Dow was up four hundred points, everyone exhaled and figured that the time this effort will buy will be enough. Wishful thinking.
In addition to other techniques, we are engaging in what is called a currency swap. I say "we" because you and I are on the hook for this bailout, a bailout that will make TARP look like peanuts. Yes, you and I, our present and future earnings, are being used to bail out European unions, European pension funds, European bureaucrats, European cradle to grave welfare, to ensure that European workers can receive months of vacation time, years of unemployment and that all those Muslim immigrants don’t have to bothered with work while they plan the downfall of western civilization. How do you feel about that?
In a currency swap, the Fed sends dollars over to the European Cental bank (ECB) and the ECB sends an equivalent amount of Euros to the Fed. In the future, they agree to swap the currencies back at the same rate, regardless of what they may be worth. This can be the next day or three months from now. The ECB then loans these dollars to the troubled banks in Europe to improve their balance sheets. Why is this necessary? Why can’t the ECB do what the Fed did with our banks, simply print the money and distribute it? Because no one thinks the Euro is going to be worth anything in a week or a month or a year. That is why they want dollars, the supposed safe haven asset, the reserve currency of the world. So we are going to trade something that is worth a lot for something whose value is falling rapidly.
Look at it this way. You have a friend who is a chronic drunk driver. He has smashed his car several times and it barely runs, it will probably die at any time. He comes to you and asks to borrow your brand new Mercedes and will give you his practically totaled car as collateral, assuring you he will return your expensive car and take his back in three months. Would you do it? Especially if you knew that he was going to loan that car to a bunch of his drunken friends to do with as they pleased? You’d have to be nuts.
Yet that is what we are doing. The EU banking system was set up to fail and it needs systemic reorganization to become viable again. When the Euro was set up, the new European Union wanted to encourage sovereign debt markets so they adjusted the banking rules so that sovereign debt didn’t count as a risk based asset on a bank’s balance sheets. This was also the case in regard to other triple-A rated assets like US mortgages. This means that the banks didn’t need to set aside any reserves to cover any potential losses. This resulted in two mounting problems. First, banks could load up on sovereign debt and leverage it to loan even more money. The second was that countries could find ready buyers for their debt so they could borrow considerably more than the market and common sense would have thought prudent. Since everyone thought the countries would always pay, the system worked until someone didn’t. That someone was Greece.
When Greece got into trouble and its bonds were downgraded, all those banks that were holding Greek debt found their balance sheets drop precipitously. If Greek debt was downgraded by fifty percent, the banks lost fifty percent of a supposedly safe asset and since that debt was highly leveraged, many became insolvent. If little Greece is followed by Italy or Spain, there is not enough money to bail them out. The only way all this sovereign debt by all these bankrupt countries is going to be worth anything is if they cut spending; they already have pretty well maxed out their taxes and have shrinking or stagnant economies. Doing that, they risk the wrath of their populations. At the least, they will be voted out if they stop the gravy train. At worst, the citizens burn the whole place down. Unfortunately, if they do nothing, the banks collapse, the citizens lose everything, the Euro becomes worthless and they burn it down anyway. In the last few days, Britan has warned its citizens about this very possibility.
The collapse of the European Union would be horrible for Europe and bad for the rest of the world. However, it would not be the end of the world. These countries will survive, they will revert to their own currencies again, people will go back to work, life will get back to normal eventually. It would be the fitting consequence of a failed idea. Statists cannot abide such failure, however. A failed idea is just one over which they have not exercised enough control and on which they have not spent enough money. But the EU is not Solyndra or even Social Security. It is failure on a scale unheard of in modern history. We can’t let that happen now, can we? So since 2008 the Fed has spent or lent over seven trillion dollars on insolvent banks in Europe and around the world. Now we are trading dollars for worthless Euros in the hope that our dollar will not be destroyed by European irresponsibility that has shown no signs of abating. That is our money, they will be our losses, it is our children and grandchildren who will need to work to make it all up on top of everything else we’ve done.
So why are we engaging is this huge bailout? They will tell you that if Europe fails, it will negatively impact us because of trade and markets and other claptrap. While that is true to some degree, that is not the reason. European banks receive about a third of their capital from US money market funds which purchase sovereign debt, among other things. MF Global’s failure was a direct result of this investment, aside from the theft. US banks and money markets stand to lose billions and billions of dollars as Greek bonds and others are devalued. Therefore, what we have here is another bailout of Wall Street. They made bad choices-who would ever think that the bonds issued by a country that owes considerably more that its GDP, a GDP that has been falling by around 8% are a safe investment-and we, the taxpayers, are bailing them out.
The sovereign bond market around the world is only being held up by buying on behalf of central banks, the Fed being the biggest. European countries are broke and can’t afford to pay back debt at rapidly rising rates. The market knows this and even Germany has not been able to sell all its bonds. No one thinks we are going to get our fiscal house in order which is why the Fed’s been buying more than half our bonds, 70% under QE2. The only way all these western countries, including ours, are financing their exorbitant spending is through he creation of more and more money from nothing (counterfeiting) by their central banks. So where does all this lead?
What if these insolvent, irresponsible European banks lose the dollars the ECB gives them? What if all these bank execs see the writing on the wall and simply take the money and run? What if it is invested in more sovereign debt that turns out to be worthless? With what will the ECB pay back the Fed? Is the Fed simply going to write it off? Does it even matter? Does it seem to anyone but me that these central bankers in their ivory towers with no oversight or accountability are simply playing a game. Dollars, Euros, Yen, Pesos, none of it’s real. Its just paper or a number on a computer screen. Is the Fed simply sending a bunch of numbers to the ECB expecting the numbers to be returned whether there is anything real attached to them or not? When the Fed buys trillions of dollars in US treasuries, is it simply putting numbers into a computer with nothing backing them up? Of course. The Fed doesn’t have unlimited assets, but it has the ability to counterfeit at will. The only thing that keeps all this working is our perception that there is actually something real behind all the ones and zeros, that there is a trillion of something somewhere. It is hard to believe that we still accept that someone actually keeps track of all these trillions of dollars and Euros and yen and whatever. It isn’t real. Someday soon the balance will tip and everyone will see the emperor has no clothes.
In addition to other techniques, we are engaging in what is called a currency swap. I say "we" because you and I are on the hook for this bailout, a bailout that will make TARP look like peanuts. Yes, you and I, our present and future earnings, are being used to bail out European unions, European pension funds, European bureaucrats, European cradle to grave welfare, to ensure that European workers can receive months of vacation time, years of unemployment and that all those Muslim immigrants don’t have to bothered with work while they plan the downfall of western civilization. How do you feel about that?
In a currency swap, the Fed sends dollars over to the European Cental bank (ECB) and the ECB sends an equivalent amount of Euros to the Fed. In the future, they agree to swap the currencies back at the same rate, regardless of what they may be worth. This can be the next day or three months from now. The ECB then loans these dollars to the troubled banks in Europe to improve their balance sheets. Why is this necessary? Why can’t the ECB do what the Fed did with our banks, simply print the money and distribute it? Because no one thinks the Euro is going to be worth anything in a week or a month or a year. That is why they want dollars, the supposed safe haven asset, the reserve currency of the world. So we are going to trade something that is worth a lot for something whose value is falling rapidly.
Look at it this way. You have a friend who is a chronic drunk driver. He has smashed his car several times and it barely runs, it will probably die at any time. He comes to you and asks to borrow your brand new Mercedes and will give you his practically totaled car as collateral, assuring you he will return your expensive car and take his back in three months. Would you do it? Especially if you knew that he was going to loan that car to a bunch of his drunken friends to do with as they pleased? You’d have to be nuts.
Yet that is what we are doing. The EU banking system was set up to fail and it needs systemic reorganization to become viable again. When the Euro was set up, the new European Union wanted to encourage sovereign debt markets so they adjusted the banking rules so that sovereign debt didn’t count as a risk based asset on a bank’s balance sheets. This was also the case in regard to other triple-A rated assets like US mortgages. This means that the banks didn’t need to set aside any reserves to cover any potential losses. This resulted in two mounting problems. First, banks could load up on sovereign debt and leverage it to loan even more money. The second was that countries could find ready buyers for their debt so they could borrow considerably more than the market and common sense would have thought prudent. Since everyone thought the countries would always pay, the system worked until someone didn’t. That someone was Greece.
When Greece got into trouble and its bonds were downgraded, all those banks that were holding Greek debt found their balance sheets drop precipitously. If Greek debt was downgraded by fifty percent, the banks lost fifty percent of a supposedly safe asset and since that debt was highly leveraged, many became insolvent. If little Greece is followed by Italy or Spain, there is not enough money to bail them out. The only way all this sovereign debt by all these bankrupt countries is going to be worth anything is if they cut spending; they already have pretty well maxed out their taxes and have shrinking or stagnant economies. Doing that, they risk the wrath of their populations. At the least, they will be voted out if they stop the gravy train. At worst, the citizens burn the whole place down. Unfortunately, if they do nothing, the banks collapse, the citizens lose everything, the Euro becomes worthless and they burn it down anyway. In the last few days, Britan has warned its citizens about this very possibility.
The collapse of the European Union would be horrible for Europe and bad for the rest of the world. However, it would not be the end of the world. These countries will survive, they will revert to their own currencies again, people will go back to work, life will get back to normal eventually. It would be the fitting consequence of a failed idea. Statists cannot abide such failure, however. A failed idea is just one over which they have not exercised enough control and on which they have not spent enough money. But the EU is not Solyndra or even Social Security. It is failure on a scale unheard of in modern history. We can’t let that happen now, can we? So since 2008 the Fed has spent or lent over seven trillion dollars on insolvent banks in Europe and around the world. Now we are trading dollars for worthless Euros in the hope that our dollar will not be destroyed by European irresponsibility that has shown no signs of abating. That is our money, they will be our losses, it is our children and grandchildren who will need to work to make it all up on top of everything else we’ve done.
So why are we engaging is this huge bailout? They will tell you that if Europe fails, it will negatively impact us because of trade and markets and other claptrap. While that is true to some degree, that is not the reason. European banks receive about a third of their capital from US money market funds which purchase sovereign debt, among other things. MF Global’s failure was a direct result of this investment, aside from the theft. US banks and money markets stand to lose billions and billions of dollars as Greek bonds and others are devalued. Therefore, what we have here is another bailout of Wall Street. They made bad choices-who would ever think that the bonds issued by a country that owes considerably more that its GDP, a GDP that has been falling by around 8% are a safe investment-and we, the taxpayers, are bailing them out.
The sovereign bond market around the world is only being held up by buying on behalf of central banks, the Fed being the biggest. European countries are broke and can’t afford to pay back debt at rapidly rising rates. The market knows this and even Germany has not been able to sell all its bonds. No one thinks we are going to get our fiscal house in order which is why the Fed’s been buying more than half our bonds, 70% under QE2. The only way all these western countries, including ours, are financing their exorbitant spending is through he creation of more and more money from nothing (counterfeiting) by their central banks. So where does all this lead?
What if these insolvent, irresponsible European banks lose the dollars the ECB gives them? What if all these bank execs see the writing on the wall and simply take the money and run? What if it is invested in more sovereign debt that turns out to be worthless? With what will the ECB pay back the Fed? Is the Fed simply going to write it off? Does it even matter? Does it seem to anyone but me that these central bankers in their ivory towers with no oversight or accountability are simply playing a game. Dollars, Euros, Yen, Pesos, none of it’s real. Its just paper or a number on a computer screen. Is the Fed simply sending a bunch of numbers to the ECB expecting the numbers to be returned whether there is anything real attached to them or not? When the Fed buys trillions of dollars in US treasuries, is it simply putting numbers into a computer with nothing backing them up? Of course. The Fed doesn’t have unlimited assets, but it has the ability to counterfeit at will. The only thing that keeps all this working is our perception that there is actually something real behind all the ones and zeros, that there is a trillion of something somewhere. It is hard to believe that we still accept that someone actually keeps track of all these trillions of dollars and Euros and yen and whatever. It isn’t real. Someday soon the balance will tip and everyone will see the emperor has no clothes.
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