The Truth About Europe: There Is No Solution Part 1

I like that title, The Truth About Europe: There Is No Solution. But I don't think it can all be summed up, the reasons why I mean, in one article. So I think I'll make it a running series. Still, whatever data we can look at, past, present and future, none of it will make an essential difference. The title stands: There Is No Solution For Europe. Period. All I can do is keep pointing to news and stats and data that confirm that. All of them do, so that should make it a lot easier, even if most voices out there never tire from pointing out the opposite.

Nor do I need to limit my topic to Europe; it's not as if the US, or Australia, or any other industrialized country, has any other fate to look forward to. This global debt deflation is truly global, the only thing that differs is the exact time the hammer comes down. Maybe those people are best off who never had much, though they will be sure to be squeezed ever harder by us, the declining rich.

On our travels, we repeatedly met/meet people who claim that "there is always a solution". I think that notion keeps people from understanding crucial issues, it looks more like a faith-based point of view to me than a realistic or scientific one. And no, for Europe there is no solution. In the same way that there is none for global debt deflation (keep an eye on that one!) in general. The latter is quite simply the former writ large.

It’s like people saying that if you're not part of the soluton, you're part of the problem. Sounds cute, but it's not exactly helpful when there are no solutions available. May be we should all be fed quantum mechanics in grade one, just so we understand the folly of "there is always a solution". I digress.

Well, then again, of course, everything will be "solved" one way or another in the sense that the sun will rise again tomorrow in various places (others will be cloudy on any given day) , i.e. time will run its course and something will come out of all this. That's a kind of solution too. But there won't be some clever man-made scheme that makes all the bad things go away. It simply doesn't work like that. Not this time, if ever. The ECB or IMF or Bernanke or whoever will not be able to stop the financial rut. The issue is more that they ain't even trying, but manage to make people believe they are.

What they can and will all do, however, is make everything worse. Much worse. For the man in the street.

Who is being told that he needs to have his wages and pensions cut and lose his home so the economy can recover. While his sparse remaining wealth is transferred to bankrupt financial institutions.

The future European situation, from the point of view of the man in the street, could be mitigated, made better, improved, enormously, though two simple measures. Which will not be executed. Because those who make the decisions don’t do so with the man in the street in mind. Quite the contrary. But still.

First, the ECB and the troika it represents (which all represent the financial institutions, but that’s another story) could treat their own claims on Greece – and, eventually – Spain, Italy etc., like they insisted private creditors' claims were treated. That is, take a 50-70-90% haircut on those claims. That would give Greece a lot of breathing space. And Spain too. Not even considered.

But much more than that, Europe should restructure its banks. And not in the way Spain tries to do with Bankia, by pumping $20-odd trillion into it. How that was ever labeled "restructuring" is beyond me, frankly. No, banks should be restructured in the "old fashioned" sense. Put their books on the table out in the open, see what debts there are, what assets, what liabilities, and if the ultimate count is negative, let it go under. Simple. Shave creditors, save depositors.

Europe, like America, could have used all those trillions in bailout money to guarantee their citizens deposits. Instead, both have opted to guarantee their banks' losses. A clear and simple choice. But also one that just about nobody seems to have understood.

There are tons of people, I read and hear them every day, who think that the extend and pretend phase can last for years more. After all, they argue, it's already lasted for four or five.

They miss the point. Or A point, a big one.

Which is that if and when bankrupt financial institutions (and they are bankrupt, or they wouldn't have needed those trillions) are saved with our money, there is a direct claim on our wealth. And even more importantly, there is a claim on our future earning power. Those trillions will have to be earned back, after all.

The problem is that there is a limit to our earning power. That limit is there today, and there is precious little reason to believe it's not going to be there tomorrow (barring divine intervention). And that means that the financial world will come to the conclusion one day that any additional funds derived from government guarantees based on our (yourself, your children and grandchildren) future earning power are losing credibility.

The European safety nets, the ESM and EFSF, are already – hilariously and only on paper, but still officially – relying on contributions from Italy and Spain. Which will not be able to comply. And will count on Germany to make up the difference. And there's a limit there too. So the bond markets will conclude some day soon that even if the EU sold all its children into unpaid slavery, they still couldn't possibly pay for all the commitments made in European societies. And there the buck will stop.

What we can learn from all this is that our money is used to prop banks, and the banking system, while at the same time our debt to those same banks, and that same system, rises. The ECB and the Fed lend money to banks, money "underwritten" by our present and future earning power, at something like 0.05%, money the banks use to either buy sovereign bonds which pay interest rates that are 5 or 10 or 20 times higher (depending on the country we live in), or to prop up their accounts at the central banks, which also earn them higher rates. Both options, again, are underwritten by our earning power.

Our money keeps our banks alive through a mechanism that makes our debt to them grow while we keep them alive. All our central banks need to do is make sure that bond yields are higher than the interest they charge banks on "emergency loans".

Oh wait, they can't even do that forever. Yields on US, German, Japanese bonds will fall mercilessly as investors seek safety. But hey, who's talking about forever? All they need is something that works today, and provides the time to think about an equally profitable scheme tomorrow. If you're too big to fail today, why not buy some Spanish bonds? Losses can always be transferred and profits pocketed.

Now you may say: the banks are bankrupt regardless, so why would a central bank or government pull these stunts? To answer that, you need to know who rules the banking system and the governments systems. And who votes for the latter. You.

To be continued.