Sunday, July 19, 2015

Stranded Expectations

 One of the birthplaces of civilization is having its cradle rocked again. Apart from the subjugation of women, children and slaves, Greece's beta version, going back 2500 years, was pretty cool – men in togas strolling though olive groves asking existential questions about life, the universe and all that. An updated version, without the wars, slaves and chauvinism, might not be half bad.

Today Greece is the European Union's current favorite whipping boy - the example to be made in order to keep all the other Ponzi'd patsies in line. It is no small irony that despite street protest bringing a new, defiant Syriza  (“from the roots”) government to Athens and a resounding No! Icelandic-style referendum placing Greece in technical default, the realities of needing a cash drip to keep pensioners breathing and buses running have given the upper hand to German, French and British banksters. 

The irony is compounded when one glances at the score sheet for total debt to GDP, with China at 250%, Germany 302%, Greece 353%, USA 370%, Britain 546%, Japan 646% and Ireland at an enchanted 1,000%.

Commented Dmitry Orlov:

The IMF won't lend to Greece because it requires some assurance of repayment; but it will continue to lend to the Ukraine, which is in default and collapsing rapidly, without any such assurances because, you see, the decision is a political one.

After the US-controlled International Monetary Fund acknowledged that Greece has no possibility of ever repaying its debts, the central bankers’ bank, the Bank of International Settlements, recently issued a very blunt warning

“[T]he world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crisis."

If neoliberalism has a Hall of Fame, surely China has a bronze bust somewhere near the entrance. Literally millions of Chinese, newly employed and making consumerist wages, have opened stock trading accounts. For them, its the Roaring Twenties. What changed? China took extreme measures to increase the liquidity in their financial system – precisely what the European Central Bank denied to Greece. 

Liquidity is what pays off the account holders in the event of a run on the bank, because in reality, banks don't store money or any other assets, they only record accounts of running debts. Liquidity builds confidence. Liquidity is what Ben Bernacke forced down the throats of the Wall Street cabal to staunch the bloodletting in 2008. When Europe pulled the liquidity backstop away from Greek banks, ATMs ran dry and depositors took a haircut on their holdings, but systemically, it was much worse than that.

Greece, Spain, Portugal, Italy and other debtor countries have been under the same mode of attack that was waged by the IMF and its austerity doctrine that bankrupted Latin America from the 1970s onward.
--Michael Hudson
Currently, the average USAnian's net worth is at a record high, but if you were to try to find that average person, it could take you quite a while. Seventy million US citizens are teetering on the edge of financial ruin. They’re one paycheck away from default on their mortgage or health insurance premium. How does one explain their record high net worth? (a) concentrations of extreme wealth at the top of the pyramid; (b) inflated real estate and other asset valuations; and (c) inflated valuation of the dollar, backed by nothing more than vivid imagination. Fantasy is infectious, so there has been a capital flight to Turtle Island on the expectation that it would be a bastion of stability, its deregulated regulators standing as a tall cliff over the tsunami about to engulf the world economy.

Hellenistic Greece "Diadochen1" by Captain_Blood - Own work.
Licensed under CC BY-SA 3.0 via Wikimedia Commons
The Greeks invented modern banking a couple millennia ago - credit based trade, hedge funds, options, foreign exchange, and so on. And, as we might expect, what's happening in Greece now is nothing new. Athens suffered a land and agrarian crisis in the late 7th century BCE and its citizens took to the streets, throwing bottles and protesting food prices. The Archon (city manager) Draco made severe reforms in 621 BCE ("Draconian" they were called), but these failed to quell the conflict. The crisis lasted another 27 years until the moderate reforms of Solon (594 BCE) lifted austerity while paying off creditors, with the added benefit of firmly entrenching the aristocracy.
The first financial crisis happened in Greece around 600 BC. Since then, Greece has defaulted on their loans more often than any other country in the modern world. In the past 200 years or so, Greece has defaulted about half the time.

Even though Greece has already received $284 billion in bailout money over the past five years, they still couldn’t get it together. One reason why was because most of that money went to financial institutions, and only a small portion went to the people.

Another reason why was due to their pension system. By now, everyone has heard the stories of the hairdresser example... That is, someone who’s worked as a hairdresser for three years, then retires around age 50-55 and receives nearly a full pension. Multiply this by more than two million pensioners, along with a whole lot of other financial problems, and you see why Greece is in such deep trouble.
-- Aden Forecast

Our spider senses tingle when we hear someone reading from one of Ronald Reagan's index cards about mooching welfare mamas driving a Cadillac. Those spendthrift pensioners! Originally the Greek debt was owed to French, Dutch and German banks but now is owed mainly to agencies like the European Financial Stability Facility, run on behalf of 19 governments, that most recently lent Greece (to kick the can down the road) 145 billion euros borrowed from the bond markets at high interest. Hmmm. Sounds a lot like the sub-prime market of, say, 2005, with European banks in the position of Countrywide and AIG.
Brian Davey writing for Feasta says:
If you kick the can down the road repeatedly you eventually run out of road. What should have happened much earlier in this process was an admission that the French, Dutch and German banks had made a mistake lending to Greece and they should have taken their loss. Perhaps Greek officials and Goldman Sachs, which helped to hide the fact that Greece could not pay, should have been prosecuted.

Davies goes on to draw the crucial link between energy and economy:

[W]hile Greece (and Spain and Italy and Ireland) was growing there were good reasons to send money to Greece – to invest in the building of holiday hotels for example, or in the building and civil engineering companies that built the hotels and the roads to the resorts. This was not buying and importing Greek goods – but it was putting money back into the pockets of Greeks in the form of investment in the business activities of a growing economy. If deficit countries are growing then mechanisms will exist to recycle purchasing power internationally. Once growth stops then there is no reason to send money to deficit countries and they are in trouble – as has happened throughout southern Europe and Ireland. I think that this is the most plausible way of seeing things. And the reason that growth began to fall off was rising energy prices because of depletion, because we are reaching the limits to economic growth. Because energy enters into all economic activities this undermines growth because people and companies struggle to service their debts AND pay the higher energy prices. That’s the ultimate reason that interest rates had to come down through quantitative easing.
Looking at a historical chart of US debt, one sees that it remained virtually unchanged from first ill-fated settlement in the 16th century, showing only slight bumps with each major war, until approximately 1970 when it went ballistic. What happened then? Gold bugs will tell you it was Nixon taking the dollar off the gold standard, unleashing the beast of fractional reserve banking and fiat currency. Rather, we find it more plausible that 1969 was the year US oil production peaked and, like their Greek counterparts, US companies began to struggle to service their debts AND pay the higher energy prices.

The US trashed Bretton Woods when it took the dollar to the oil standard by getting Saudi Arabia and other producers to sell their oil for dollars only. If you wanted to buy oil you needed dollars, and so dollars flowed back into the US, favorable trade balances masked the dollar's inflation (and the massive debt to sustain cheap energy) and American banks laughed all the way to the voting booths.

Meanwhile, life in Greece goes on, amid the financial wreckage. As Jan Lundberg, who has been trying to revive commercial sail transport in the Mediterranean (to replace more than four million fishing and small cargo vessels now spewing oil smoke and bilge) reports:

The jump in homelessness, many of the housed doing without heat in winter, and foregoing improvements in life that people had grown accustomed to, are well known. So it is no wonder that money is almost universally seen as the problem and the solution. The once hopeful consumer population has been ravaged: 1.3 million people, or 26% of the workforce, are without a job (and most of them without benefits); wages are down by 38% since 2009, pensions by 45%, GDP by a quarter; 18% of the country’s population unable to meet their food needs; 32% below the poverty line. Almost 3.1 million people, 33% of the population, are without national health insurance.

The ECB could solve Greece’s problem with a few computer keystrokes. The effect would actually be to stimulate the European economy.

Instead, Greece remains a whipping boy to keep the rest of the periphery in line. If either side decides to reject the latest deal, we could see an exit from the European Union, and a return to the drachma. This would likely be good for Greece but not for the EU, which could then see so many countries exit that the central currency tumbles into obscurity.

If Greece switches to drachmas, the funding possibilities are even greater. It could generate the money for a national dividend, guaranteed employment for all, expanded social services, and widespread investment in infrastructure, clean energy, and local business. Freed from its Eurocrat oppressors, Greece could model for the world what can be achieved by a sovereign country using publicly-owned banks and publicly-issued currency for the benefit of its own economy and its own people.
 Jan Lundberg says:
There are two kinds of people, whether in Greece or elsewhere: those who welcome or understand that fundamental change and discontinuity are inevitable, perhaps on the way too soon for convenience, and, those who fervently want the level of income and consumption of the past — regardless of economic and ecological realities. Fortunately for Greeks, they have a continuous and ancient society under the surface of the unstable transnational corporate state.

Summer in Greece often brings wildfires and this year is no different, although climate change doesn't help. In 2007 one fire covered 25.000 hectares north of Athens and as we write this flames are again creeping towards Athens from the North and the government has called out the Air Force and Army to help fight 34 separate fires. Isn't it lucky they still have organized fire departments and emergency responders there? They have come very close to not having that.

Greece is retracing its steps back through the ascent of Western Civilization to an earlier era when the best hedge was a good olive press. Many there, as elsewhere, cannot imagine losing the perks of advanced civilization. Stranded expectations - whether in Athens or Brussels - cloud peoples' thoughts. We are all Greeks. Harder lessons are coming. 

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