The Automatic Earth

Last year, I wrote a series of articles addressing the theory of Freegold (Part I, Part II, Part III, Part IV, Part V), as it has been laid out by FOFOA on his website. This series was a comprensive attempt to debunk the theory by attacking its foundations, which range from Hegelian idealism to the (more concrete) marginal utility theory of value, and by replacing those foundations with what I believe to be more solid ones. Among these were Marx’s theory of capitalism, spanning his concepts of surplus value, rate of exploitation, over-production and realization of value, as well as the Fisher/Minksy theory of debt deflation (endogenous financial instability) and Dr. Steve Keen’s work, which ties many of these different economic strains together.

I realize now, though, that this was not the best way to go about attacking the theory for one simple reason – the concepts underlying the theory of Freegold are much too large to be addressed in any one series of articles, no matter how long they happen to be (and these articles were particularly long!). By trying to cram so many of my thoughts/critiques into this one series, I completely devalued the substance of what I was saying and made it very hard for readers to follow the logical progression of my argument. So, with that in mind, I’d like to take a much different tack over the course of this year.

Starting with a commentary in the next few days (perhaps tomorrow), I am going to hone in on a very specific concept incorporated into the theory of Freegold (herein referred to as “F-theory”) and present a specific critique of that concept. I usually have more than one critique of any given concept, but I will only present one at a time for the sake of brevity and clarity. These critiques will follow no particular order and will be sporadic – I will address a concept when I come across it or it is brought to my attention, I have some free time on my hands AND I feel like it should be addressed.

In addition, if I happen to come across a critique of Freegold/FOFOA concepts made by someone else (ones that I largely agree with), I will try to present those here as well (there aren’t many of those floating around, though). Some of you may be wondering – what’s the big deal with F-theory and why spend any time critiquing it at all?? In my mind, there are three primary reasons to do so:

1) FOFOA, the main advocate of F-theory right now, is a very astute student of economic/monetary history and makes very convincing arguments in favor of the theory. In fact, it is probably fair to say that I agree with 99% of things he writes about the setup of our current monetary system, but, nevertheless, I strongly disagree with his general worldview and most of his main conclusions about where we are headed.

 

2) FOFOA, in conjunction with F-theory, makes the most convincing case for near-term hyperinflation of the dollar that I have come across in the blogosphere, and I believe, like most people, that it is very important to discuss this issue and get a good sense of the most probable outcomes over the next 20 odd years.

 

3) F-theory presents a very interesting, unique and precise prediction for what comes after a financial/monetary meltdown, in terms of a new global economic paradigm. I am very DOUBTFUL that this prediction will turn out to be correct, for a variety of different reasons, and I hope to flesh out some of those reasons through these occasional commentaries.

DISCLAIMER: I am not an EXPERT on the writings of Another, his friend (FOA) or HIS friend (FOFOA), or on the theory of Freegold. Just like I am not an expert on the writings of any other economic theorist out there or their theories in general. There are a lot of economic works that I have not had the pleasure to read and a lot of ideas I have not considered in-depth, including those contained within the body of work that comprises F-theory. None of my descriptions of F-theory should automatically be taken as 100% accurate, and I welcome any and all challenges to my representations (this disclaimer will be re-posted with each commentary).

Remember, these critiques will jump around and will be sporadically-timed. This is primarily because I do not want them to take up all of my writing time for weeks straight like my earlier series did – there are many other important aspects of our current predicaments that I would like to spend time writing about. That being said, F-theory has earned enough of my respect that I am willing to devote a recurring commentary series to it. Right now, I will leave you with a link to and excerpt from a great article by FOFOA that first got me interested in his writing, which will hopefully peek the interest of others who want to better understand both the theory and well thought out critiques of it.

Freegold in the Proper Perspective

 

Freegold, in my opinion, is not a competing monetary theory. Nor is it a competing financial system. It is much more than these subjects of frequent debate. In my world, Freegold is a way to view unfolding events as they happen. It is a view of the valley below, as seen from a high vantage. It is a cipher for understanding what we see. It is not a description of what should be. Instead, it is framework, different from almost everything else you are reading, in which you can interpret unfolding events in a different light.

 

FOA: I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future; grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the “gentleman” said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little “stacks of rocks” will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light.

As the possibility of Greece failing to establish a “pro-Euro” government and leaving the Union rises with every passing day, it is helpful to consider, to the best of our ability, the potential consequences of such an event. Business Insider has compiled a ROUGH guide to such consequences based on the past few months of analysis from various sources. I emphasize the word “rough” because none of these things are certain, and all of the “analysts” of this Greek tragedy are little more than curious speculators at this point (that includes me).

Still, it is very likely that at least a few of the following 14 things will come to pass in some way, shape or form. I chose to leave out three slides from the original article, but you can see them all by following the link in red. Here is Simone Foxman with the potential consequences:

GET READY: This is What Happens If Greece Exits the Euro

 

1) Greece passes exchange rate laws for a new drachma: “Grexit would effectively start with the urgent passage of a currency law through an emergency decree by the Greek government of the day,” explained Citi chief economist Willem Buiter. The move would stipulate that Greek currency is legal tender, and stipulate one or more conversion rates on assets.

 

2) Greece would have to pass laws preventing outflow of deposits: “In our view, it is highly likely that Grexit would be accompanied by the imposition of strict capital controls. True, the Treaty (Art. 63) forbids any restrictions on capital or payment flows between EU member states, but we think that an exiting country, facing massive disruptions in its international capital account transactions would need to impose strict capital and foreign exchange controls following exit if some semblance of financial order is to be maintained,” Buiter wrote in a note describing a Greek exit in February.

 

3) Mistrust in the new currency would also create a massive black market: Greeks already do an estimated 25 percent of their business outside the law so they do not have to pay taxes. eFXNews wrote that this will probably result in an exchange rate significantly different from the one the offered by the Greek Central Bank.

 

4) The new drachma would collapse in value against other currencies: “While currency devaluation provides long-term opportunities for Greece to increase competitiveness in global markets, it can also produce a short-term nightmare. Rapid inflation of prices will destabilizing Greeks’ way of life, as prices soar on even the most basic goods and the savings of a lifetime evaporate over night. The key to managing this is stalling the new drachma’s free-fall is a carefully managed money supply, but the allure of printing more cash to maintain government services could lead to hyperinflation.

 

 

5) Political unrest could ravage Greece: “The Greek Minister of Civilian Protection, Michalis Chrysohoidis said in an interview recently that Greece “will end up in civil war” if the country exits the euro. Sav Savouri, chief economist at the London-based hedge fund Tosca Fund, also told Capital.grthat a “collapsing civil society” in the wake of a euro exit could lead to a military coup: “In every instance where that΄s happened the military will take over the role of government.”

 

Greece has already been racked by violent protests in the wake of austerity measures, and an even sharper economic downturn could turn severe dismay into protests on the street.

 

6) Euro area national central banks and the European Central Bank would stomach big losses, threatening their solvency: The graph (below) shows the scale and maturity of ECB and NCB holdings of Greek debt. While it would be difficult to actually render the ECB insolvent, such losses would nonetheless alarm investors worried about its credibility. Further, NCB exposure to the Greek central bank via TARGET II transfers—which allow NCBs to fund bank withdrawals with money not currently in the country—will likely result in even deeper losses.

 

 

7) According to UBS Greece would see a 50% collapse in GDP: From a report published last year – “The cost of a weak country leaving the Euro is significant. Consequences include sovereign default, corporate default, collapse of the banking system and collapse of international trade. There is little prospect of devaluation offering much assistance. We estimate that a weak Euro country leaving the Euro would incur a cost of around EUR9,500 to EUR11,500 per person in the exiting country during the first year. That cost would then probably amount to EUR3,000 to EUR4,000 per person per year over subsequent years. That equates to a range of 40% to 50% of GDP in the first year.“

 

8) Fear (contagion) would spread across the eurozone, hurting banks and governments alike: An increasingly bearish private sector is already beginning to price in the losses it would take during a Grexit, with more and more analysts, investors, and even politicians beginning to believe this is inevitable. Even so, a Greek exit would probably be a prelude to another debt restructuring, as the country still won’t be able to borrow to pay off its debts. This is obviously a negative for banks.  

At the same time, worrisome sovereigns—in particular, Italy, Spain, and Portugal—are likely to have even more difficulty in finding investors willing to purchase their bonds.

 

9) The ensuing fear could cause a major outflow in deposits in Italian and Spanish banks: Societe Generale analysts predicted that a Grexit could cause a 20-30 percent outflowin already hard-hit Italian and Spanish banks if the ECB doesn’t take drastic measures – “Absent a major intervention by the ECB, the Italian and Spanish banks will then have to (i) de-lever their balance sheet to offset the reduced deposit availability, (ii) de-lever further to a 110% loan/deposit ratio to mitigate the continued drought in the wholesale funding market and (iii) offer materially higher rates on the remaining available deposits in the market. We assume for the purposes of this analysis that the Italian and Spanish banks will not repay the LTRO early and that the ECB will prolong the LTRO from 3 years to 5 years.”

 

10) But managing a Greek exit could prompt the ECB to adopt measures that move towards fiscal integration of the euro area: The Eurasia Group’s Mujtaba Rahman suggested in a recent note that dealing with a Grexit could force the ECB to take important steps towards financial integration, the very steps it has refused to take so far, in order to maintain euro area stability – “In such circumstances, our view is that the ECB would essentially undertake a two-pronged strategy: in the first instance, it would support the Greek banking system while also undertaking large scale SMP interventions in other at-risk sovereigns (the potential for an OSI down the road on the ECB’s SMP could also be contemplated to overcome the problem of subordination). The financial support to at-risk sovereigns would also be complemented by a political statement that commits the ECB to an explicit lender of last resort function (given it would be necessary for the market to attach credibility to the ECB’s actions). However, in order to support Greece in this way, the ECB’s governing council would look for some form of guarantee that Greece’s exit is-to the extent possible-part of a managed process. Indeed, while such a situation could also merit the introduction of joint and several Euro bills for issuing short term debt for all countries bar those in a program (for example countries have access to a fund that issues short term debt as long as they comply with SGP norms), this would most probably still be unlikely.”

 

11) Rescuing the European banking system will likely involve spending more money on Greece: From a recent column by economist Nouriel Roubini – “Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.”

 

12) Other analysts are skeptical that EU leaders will take the necessary steps to stop the effects of the crisis from affecting the rest of Europe: A Greek exit would just affirm that “EA creditor countries undoubtedly view the cost of providing unconditional and/or unlimited or open-ended fiscal and financial support to fiscally vulnerable EA countries as a price not worth paying to keep a single non-performing EA member state in the club,” wrote Buiter last year.

 

Although the ECB has the power to take some action, the massive liquidity measures it undertook earlier this year only prove that throwing money at the eurozone’s problems only goes so far.

 

13) The euro would also devalue in the short-term, although by much less than would the new drachma: A Greek departure from the euro area would immediately drive investor fears that more countries could leave the euro area. That, and the likely inflationary consequences of ECB action, are likely to devalue the euro against other major currencies in the short-term.

 

“Heightened risk aversion (including, at least temporarily following Grexit, an increased fear of future more wide-spread EA break-up) and some flight to safe- havens outside the EA, as well as likely additional easing measures by the ECB in a Grexit scenario imply that the euro would likely fall relative to the dollar and other safe-haven currencies, such as the Swiss franc, the Japanese yen or even Sterling,” wrote Citi’s Buiter.

 

14) Another Greek Default could result in protracted legal battles with foreign lenders: Greece’s failure to pay off its debts could result in decade-long legal battles, particularly if it decides to pay some creditors and not others.

 

So-called “vulture funds” which specialize in speculating on troubled sovereign debt and then sue when they don’t get paid are likely to instigate legal battles to make sure that Greece meets its commitment. Dart Funds, which recently received approximately €390 million ($95 million) in maturing Greek debt it purchased on the cheap, is still embroiled in a legal battle with Argentina after the country defaulted in 2002, according to the New York Times.

Let me say right off the bat that I have quoted/referenced the work of Telegraph-columnist Ambrose-Evans Pritchard quite a few times in the past, and I will continue to do so as long as he provides genuine insights into what’s happening in Europe. That being said, the man really goes off the deep end in his latest article. It starts off as an article about the potential costs to Germany and France (i.e., German and French banks, i.e. German and French taxpayers) if Greece were to exit the Eurozone, as estimated by the IESG School of Management in Lille, France.

I am very skeptical of such guesstimates by obviously conflicted institutions in the first place, as they usually amount to little more than propaganda designed to keep the Europeans in shackles to their bankers out of fear of the alternative. Doesn’t sound much different than what the Mafia would do, does it? Nevertheless, I will give these guys the benefit of the doubt and assume their estimates are somewhat accurate (€66.4bn losses for France and €89.8bn for Germany), because that’s really irrelevant for the purposes of this commentary.There is no doubt that the economic and sociopolitical costs of Greek exit will be severe (yet incalculable).

Now , with that out of the way, I’m just going to skip right on over to the particularly horrendous conclusions reached by Ambrose after he looked at these potential costs:

Appetiser cost of Greek exit is €155bn for Germany, France: trillions for meat course

 

This nonsense can of course be stopped in ten minutes if the EU:

 

1) announces that it will equip itself with a real central bank (a lender of last resort) that takes all risk of sovereign default off the table — with conviction and overwhelming force, with no ifs and buts, and no ambushes from the Bundesbank.

 

2) announces EMU debt-pooling, fiscal union, a joint EMU budget and tax system, and an EMU government as a counterpart for the enhanced the ECB.

 

Yes, this means rewriting the German constitution, and in effect means the abolition of Germany as a functioning sovereign nation.

 

My sympathies to the German people. This is what your leaders got you into (without asking permission). It was the elemental implication of monetary union.

 

We at the Telegraph screamed from rooftops in the early 1990s that EMU was a destroyer of nation states, and democracies. So did the brave German professors. Nobody would listen.

 

My guess is that German citizens will not accept this implication. If so, we are all stuffed.

Fortunately, Ambrose’ guess about the German citizens is probably right (and we are not “all stuffed”), but that does not excuse him from serving as a shill for the centralized elites who want to eliminate national sovereignty and literally enslave the masses through economic and political institutions (i.e. to a much greater extent than they are already enslaved). First, a “real” central bank that takes “all risk of sovereign default off the table”, such as the Fed, is the absolute worst outcome for the European people.

Everyone should know by now that the Fed is the quintessence of private banking interests taking over complete control of a society’s civil institutions through opaque, unaccountable monetary policy. As regular TAE commenter TheTrivium4TW likes to say, the Fed is the harbinger of “debt-dollar Tyranny” with a capital “T”. Why would any of the common European folk across the Continent want to emulate that Tyranny in their own societies, through the ECB? They wouldn’t – only the elite bankers and corporate execs who comprise the 1% would. That’s why Ambrose is being a huge shill here.

Similarly, a fiscal union with “debt-pooling”, joint budgets and tax systems would amount to the ultimate centralization of power/wealth/control in a few private and malicious interests. This fact should be self-evident by now, and especially when considering the next sentence written by Ambrose: “Yes, this means rewriting the German constitution, and in effect means the abolition of Germany as a functioning sovereign nation.” Yes, I realize that this isn’t the first time Ambrose has made such foolish remarks/implications, but now he is really taking this shit too far and in very dangerous directions.

Ambrose is allegedly of the mind that there is NOTHING worse than a break-up of the EU, so therefore the Europeans must now relinquish their sovereignty and their freedoms to elite bankers, politicians and bureaucrats for all of eternity. He admits that the Germans were placed into this position “without their permission”, but then goes on to argue that they must accept their “fate” anyway. He also seems to think that his initial outcries against the EMU now justify his reckless suggestions to take the experiment to its logical extreme, which is, in fact, very EXTREME.

Please don’t listen to this nonsense from Ambrose. He is wrong, wrong, wrong – a million times over. There are other alternatives to full-fledged subjugation and destitution for the European people, and no one is saying that these alternatives will not come at a heavy cost. They will be very costly to the European people, but they will also be COSTLY for the malicious European bankers and politicians who have forced everyone else into this dreadful situation. What was that phrase from Patrick Henry that we Americans like to quote so much when referencing the need for revolution against Tyranny? Oh yes… “Give me Liberty, or give me Death!”

There was a rumor over the weekend that the Troika may be willing to relax the terms of the dreaded memorandum for the Greek government if it formed a “pro-European” coalition government and avoided new elections. This rumor is ridiculous on both fronts – 1) the Troika and Germany would NEVER make such a concession for fear that every single penny pledged to peripheral nations would become contingent on the outcome of national elections and, essentially, a gift with no conditions attached (something that would pit the German people against their crony, bankster-run government once and for all), and 2) the left-wing Syriza party in Greece would NEVER commit itself to the Euro while it continues to gain popularity each day before the new elections.

Last year or the year before, such extend & pretend tactics may have actually worked. The Eurozone was still officially out of recession, the people were relatively docile and unaware of how bad their economic situation could get and everyone still had a modicum of faith in the conventional wisdom that bailouts and austerity measures, drawn out over time, could work. Back then, the “fringe” anti-establishment political parties in Europe still had a steep hill to climb before they could credibly threaten those holding the reigns of power. Now, not so much. The tide of popular resistance seems to have turned much too fast for even the most powerful among us.

These elections in Europe are no joke. The Eurocrats will bring everything they can muster to co-opt the platforms of those who have emerged with support and/or maneuver around the snowballing anti-austerity momentum, but it should be painfully clear by now that some things are simply outside of their control. The party leaders of Syriza continue to defy any and all attempts to be seduced into a “Unity Government”, knowing full well that, as soon as they accept, the entire party will be rendered irrelevant. Maria Petrakis, Natalie Weeks and Marcus Bensasson report for Bloomberg:

Syriza Says It Won’t Join Greek National Unity Government (Update 1)

 

Greece’s biggest anti-bailout party, Syriza, said for the second time in as many days that it won’t join a unity government, pushing the country closer to new elections that have sparked concerns about a euro-area exit.

 

“Syriza won’t betray the Greek people,” leader Alexis Tsipras said in statements televised on state-run NET TV after a meeting brokered by President Karolos Papoulias between the party and the leaders of the New Democracy and Pasok parties. “We are being asked to agree to the destruction of Greek society.”

 

Papoulias began a final bid to coax the three biggest parties into a coalition today after a week of talks which failed to deliver on mandates to form governments. He will meet later today the leaders of the four other parties to probe the likelihood of forming a national-unity government. If Papoulias’s efforts fail, new elections will need to be called.

 

Greece’s political impasse since inconclusive general elections May 6 has raised the possibility another vote will have to be held as early as next month, with polls showing that could boost anti-bailout Syriza to the top spot. The standoff has reignited concern the country will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since May 2010, and, ultimately, leave the euro area.

 

…

 

Under the terms of the bailout, a new government will need to spell out how it will save 11 billion euros next month.

 

Fitch Ratings said in a report on May 11 that the outcome of another election would be “unpredictable” and “make it doubtful that Greece could comply with the EU-IMF’s end-June deadline to propose further medium-term austerity measures.”

 

While Greece would probably be granted an extension to that deadline, any attempt to significantly renegotiate its program would be unacceptable to the so-called troika of the European Commission, IMF and European Central Bank, Fitch said.

 

“The impression from this week’s unfruitful negotiations on the formation of a new government is that Greek political parties have taken the view that new elections in June are the only way out,” Riccardo Barbieri, chief European economist at Mizuho International Plc said in a note to investors on May 11. “If new elections are called, they will indeed amount to a referendum on staying in the euro.”

So what can the Eurocrats possibly do now to keep this torturous freight train from running off the rails? Despite (because of) all of the meetings and summits held, all of the “agreements” reached, the bailout tranches released, the austerity measures imposed and the debt “voluntarily” restructured for Greece, the Eurocrats have failed to keep one of their tiniest members in tow. Now, the German publication Spiegel is even speculating on the possibility of simply giving the Greek government pledged funds after they exit the Eurozone, with contributions coming in from “all 27 EU Member States”. Here is the translation, courtesy of Zero Hedge:

Greece To Get European Aid Even After It Exits, Speculates Spiegel

 

Greece is to SPIEGEL information even in case of egress expect further € billion bailout from the European EFSF. The European rescue package is designed by the Federal Ministry of Finance therefore emphasize only those amounts that go directly to the household of Greece. Those billions, with which the bonds will be served, which took over the European Central Bank (ECB) as part of its rescue measures should, however, continue to flow.

 

This is to the consequences of a possible €-egress will be mitigated. This could be prevented with the central bank losses, hit by the end of the budgets of the Member States.

 

Further consideration of the House of Finance Minister Wolfgang Schäuble (CDU) provide, according to Spiegel, that the Greeks, even if they get no help from the rescue more pots of the euro countries, not to be left alone. Greece remains a member of the EU, they are entitled to assistance from Brussels, as are accorded to other EU countries with its own currency in trouble. These would be funded not only by the countries of the Euro-zone, but by all 27 EU Member States.

 

After the elections of last Sunday and so far unsuccessful attempt to get a government concluded in Athens, is in the black-yellow coalition government talked more openly about the possibility of a Euro exit – resentment is growing. An Athens exit from the euro would be “not the end of the euro nor the end of the EU,” said CSU head Horst Seehofer: “We need to get Germany’s economic strength, which is more important than a stay in Greece in the Euro zone.”

Talk about scraping the bottom of the barrel and floating proposals that have absolutely no chance of going through. Even if this did occur, would the bond markets actually believe continued support for Greece will counteract all of the negative economic, financial and social contagion effects from a Greek exit? Not a chance. And how would the German people react to the fact that they are facing hard-line austerity proposals from Merkel’s government, while also being forced to GIVE away money to a country that is no longer even in the monetary union? Perhaps in a similar fashion to the French, who just ousted pro-austerity puppet Sarkozy from office? Stephen Brown of Reuters gives us a pretty clear answer to those questions:

Merkel’s party routed in big German state

 

Chancellor Angela Merkel’s conservatives suffered a crushing defeat on Sunday in an election in Germany’s most populous state, a result which could embolden the left opposition to step up its criticism of her European austerity policies.

 

The election in North Rhine-Westphalia (NRW), a western German state with a bigger population than the Netherlands and an economy the size of Turkey, was held 18 months before a national election in which Merkel is expected to fight for a third term.

 

She remains popular in Germany for her steady handling of the euro zone debt crisis, but the sheer scale of her party’s defeat leaves her vulnerable at a time when a backlash against her insistence on fiscal discipline is building across Europe.

 

According to first projections, the centre-left Social Democrats (SPD) won 38.8 percent of the vote and will have enough to form a stable majority with the Greens, who scored 12.2 percent.

 

The two left-leaning parties had run a fragile minority government for the past two years under popular SPD leader Hannelore Kraft, whose decisive victory on Sunday could propel her to national prominence.

 

Merkel’s Christian Democrats (CDU) saw their support plunge to just 25.8 percent, down from nearly 35 percent in 2010, and the worst result in the state since World War Two.

 

“This is not a good evening for Merkel,” said Gero Neugebauer, a political scientist at Berlin’s Free University.

 

“The SPD is strengthened by this election, which will stir things up in Berlin.”

 

The blow comes only two days before France’s new president, Socialist Francois Hollande, is due to visit Berlin and press Merkel for a shift away from austerity and more emphasis on growth-oriented measures in Europe.

 

Other big countries like Italy also want Merkel to take a more balanced approach to the debt crisis and an election in Greece last week showed massive public resistance to tough austerity.

From the South to the North, East to the West, Periphery to the Core, the EU experiment of economic and political union is being ripped apart at its seams. The latest bouts of disease-like democratic elections are serving as the catalyst for this fatal reaction within Europe, but the truth is that it never really stood a chance. You can only impoverish and enslave the people of a society so much and for so long before VERY NASTY things start to happen within it. Where exactly we go from here is difficult to say, but we can be quite sure that the Sun has nearly set on the days of “extend & pretend”.