MONETARY DERAILMENT (Part 1 of 2)
This time, rescuers will be investors and depositors, who had never thought that their money is nowhere less secure and vulnerable as it is in bank accounts – thoughts on financial repression
‘’You made people believe that, they and only they are guilty for the miserable economic condition of their countries, for corruption and, as a consequence, for their own suffering: because of their laziness, dishonesty, tax evasion and the inadequacy of their intelligence.
So people, instead of rebelling against those who oppress them, steal their property and make their lives miserable, choose to underestimate themselves and feel guilt – something that creates a generalized state of depression, which in turn obstructs people from taking action” (N. Chomsky with interventions. N. Chomsky is an American linguist, historian, philosopher, political critic and activist. He has been a professor at MIT for over 50 years).
Before we start with our analysis, it would be wise to point out certain facts first: In 1990 the U.S., as well as the 27 member EU, where responsible for 55% of global industrial production, for 57% of exports, for 59% of world GDP, as well as for 52% of investments – while at the same time also for 60% of the worlds consumption of goods and services.
Although this production-consumption relationship lasted until 2000, since then it has rapidly diversified. In 2010, the U.S. and the E.U. accounted for only 45% of the world’s industrial production, as well as for 47% of exports – while consumption levels remained the same (60%).
The reason for this, is that the large increase in production and investments in Asia, which reduced the market share of the west, was not accompanied by a similar increase in domestic consumption in the same continent – and because of that, globalization created two opposing poles of production and consumption. This situation is obviously unbalanced and unsustainable – dangerous.
If to that, we add that the global free flow of capital has made it possible for American and European consumers to borrow money from Asian producers, a situation that facilitated the creation of the two opposing poles, then we can fully understand the magnitude of the problem, as well as the underlying causes of western state and household indebtedness.
Simply stated, the countries that generate surpluses in their current account balance, i.e. those countries that export more goods and services than they import, lend their cash surpluses to deficit economies – which are using this borrowed money to finance the percentage of consumption that is not covered by their own production (Table I).
TABLE I: The top surplus and deficit economies globally, based on the trade balance – in million dollars US, for the year 2010
Table: V. Viliardos
Notes: The biggest savers (savings fund investments), are the citizens of the top surplus economies: China and Germany.
In this context, China for example, must finance the U.S. (in Europe, Germany many others). So in essence the Chinese producer finances the American consumer – a situation made possible by the free flow of capital and the globalization of financial markets.
Especially, as far as the global capital flows are concerned, in 1990 they were around 2 Billion Dollars per day – and had increased by 6000% or 130 Billion Dollars per day in 2008. During the same period, the financial sector became uncontrollable and worldwide, by far exceeding the growth of the rest of the economy – and as a result developed into the largest money machine the world has ever known.
This trend appears to be continuing today, and it is believed that 4-5 mega-banks will eventually dominate the entire financial system – the same ones that are currently being served by the political powers of the West. From Europe, the German Deutsche Bank and the British HSBC are among those that aim to dominate – while Goldman Sachs already seems to be the absolute emperor.
This position is supported by the fact that the predictions made by Goldman Sachs for the global economy, have in recent months been almost always successful – which means that it is not predicting it, but is rather taking place in determining it. This fact in turn, leads to the conclusion that the «interventions» of major financial businesses, as well as the interventions of central banks in the free market system can be extremely effective – without unfortunately knowing where this incredible manipulation will lead us.
To conclude our introduction, the real cause which underlies the syndrome of household and state indebtedness, are not the low borrowing rates and/or the various financial «tools» – the weapons of mass destruction, as they have been called many times, which simply facilitate the process.
The basic and true cause for indebtedness of households and states, are those loans that were «wasted» for consumption and not for investment purposes – although we already know that consumption expenses must come from generated income, while loans are extremely beneficial, let alone loans at very low rates, if used exclusively for investments.
Finally, as in the case of a household, where consumption should not exceed income, a country’s consumption should not exceed production as well – a rule which unfortunately has not been respected, not only in Greece or the European South (where consumption and production developed in diametrically opposite directions), but not even by the West.
THE FIRST PHASE OF THE CRISIS
Before the start of the crisis, European banks were financing both the deficits and the debts of their countries (as well as that of other countries), borrowing at low interest rates from the ECB and buying government bonds – very often earning «loan-shark» profits. So essentially banks were rescuing sates, while reaping enormous benefits.
At the same time, capital flows (loans) moved from the surplus North to the deficit South, via commercial banks – up until the start of the crisis, when commercial banks of the North ceased lending to their colleagues in the South, forcing the ECB to intervene in order to avoid a liquidity trap (which would cause massive bankruptcies of states and banks).
In this context, the ECB started to borrow, for example, from the German central bank, to lend money to the Bank of Greece – with the help of the Euro-zone settlement system (Target II). Ultimately, the claims of the Bundesbank in the ECB surpassed the amount of 700 Billion Euros – money essentially owed to the ECB (and hence to the Bundesbank) by Greece, Italy, Ireland and many more. Meanwhile, capital flows reversed – directed now from the South to the West.
During the first phase of the debt crisis, governments rescued their bankrupt banks – creating «bad banks», in which they «parked» their toxic assets, especially those coming from low quality mortgage backed loans of the U.S.
Europe, after at first foolishly assuming that the problem was only relevant to Anglo-Saxon economies, fearfully discovered that U.S. banks had «exported» 50% of the «waste» to their fellow «colleagues» in Europe – especially to German banks, as seen in Table II below:
TABLE II: Selected bad banks of the E.U., with the stored toxic securities at the time of their establishment, in Billion Euros
Table: V. Viliardos
As seen in Table II, only in the above selected banks, a hypothetical value of 1.022 Billion Euros of toxic assets are stored – a situation that depicts the horrifying size of the problem and increases the possibility of a bank megaton bomb explosion, that is placed in the foundations of the Euro-zone’s financial system.
Of this amount, 507 Billion Euros, approximately half the value calculated in Table II, concerns German banks – despite the fact that the biggest bank of the country, Deutsche Bank, is not involved. It’s of course impossible, that the bank has no stored «waste» in its balance sheet, while at the same time it is immensely exposed to other huge risks (derivatives, etc.).
THE SECOND PHASE
In the second phase of the crisis, the ECB together with some Euro-zone states, saved various other member states – primarily aiming at assisting banks, mainly of German and French origin, to retreat from dangerous grounds and avoid major losses or even bankruptcy. This tactic came to surface after the blackmailing of Cyprus and the fraud and crime that accompanied it.
Chart I below, the source of which are the official data announcements of the ECB, documents the massive withdrawal of deposits from Cypriot local banks, mainly by French and German banks – while the government of the island was either prevented from taking action, deliberately delaying in doing so or simply acted foolishly.
As seen from the path of the red line, European bank deposits in Cyprus increased sharply, mainly because of the high interest rates irresponsibly offered by Cypriot banks. Then, the «Europeans» suddenly fled massively – with everyone else, as seen from the other lines in the chart, i.e. those with no insider information available to them, maintaining a stable position-course.
Eventually, the «premeditated crime» was completed by the next government of Cyprus – which agreed with the «holocaust» of its economy’s most important pillar and handed over her homeland, without a fight, to the invaders.
Continuing, as we have already mentioned, the ECB contributed in the rescuing of both the states (by buying their bonds in the secondary market) and the banking system – mainly by supplying the commercial banks of the South with liquidity (ELA), which in the case of Greece, exceeded the amount of 100 Billion Euros.
Regarding Greece, additional contributors were commercial banks, private investors, pension funds and various public agencies – which were forced to accept a write off in their claims (PSI), creating a precedent for use in the future.
In contrast, in the case of Cyprus, the ones forced to contribute were bank shareholders, bondholders, as well as large depositors – creating a second precedent.
For France, the program STEP was chosen – certainly a quiet special and privileged treatment. As far as Spain is concerned, the «non-conventional» direct funding of its banks from the ESM was approved – a condition that helped the country to avoid the Troika, since Spanish banks used the ECB money to buy government bonds.
Finally, Ireland had too a respectively positive treatment – as well as Belgium, relating to its banks, while we are still waiting to see what will happen to the Netherlands, the country that is undoubtedly the new big problem of Europe. Cyprus though, seems to be the ultimate victim up until now, the weakest link.