The price of everything

Clownish

“We’re trying to save life on this planet as we know it today.”

 

-       Nancy Pelosi, Minority Leader of the US House of Representatives.

 

Adventures in Capital Markets Part 3,684. Depending on exactly what has transpired amongst the no talent ass clowns masquerading as US politicians this weekend, you may be reading this commentary in the warm, peachy glow of a freshly derisked market environment in which all is sweetness and magic moonbeams. Or you may be peering at this commentary in the guttering, eerie glow of a torch made from twigs, whilst fending off predatory marauders with a baseball bat.

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Continental Drift

“I’m counterfeiting euros. If I’m caught I’ll plead insanity.”

 

-       Matt cartoon, The Sunday Telegraph.

 

The latest Greek bail-out changes nothing, other than accelerating the pace at which euro zone tax payers have their funds flushed down the toilet, redirected to the banks, or both. (They may be the same thing.) European politicians appear to be struggling to accept the underlying reality: Greece is insolvent, so simply throwing €180 billion more of other people’s money at the problem doesn’t improve matters, in the same way that violently injecting ever greater doses of adrenaline into a corpse doesn’t change the outlook for the corpse. The package announced last week was admittedly more dramatic than the markets had anticipated, but its confidence-boosting impact will probably have evaporated by the middle of this week, not least because other sovereign insolvencies are quietly biding their time on the sidelines, oozing poison into the markets. €180 billion doesn’t buy you much of a rally these days. Bullishness is terrifically expensive.

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The surgery was a success, but the patient died

“We hear that in the future we’re going to have a better economy and everybody hopes so, but it’s hard for me to believe because I look back on our past three years and what Congress has done and what the Fed has done is literally injected about $5.3 trillion and I don’t think we got very much for it. The national debt went up by $5.1 trillion; real GDP grew by less than one per cent; unemployment really hasn’t recovered – we still have 7 million people that have become unemployed.. one statistic that is very glaring if you look at the charts is how long people are unemployed. The average time used to be 17 weeks – now it’s nearly 40 weeks. Nothing there reassures me.. Also, when we talk about prices, we’re always reassured that there’s not all that much inflation, and we’re told that they might start calculating inflation differently with a new CPI.. of course, we changed our CPI a few years back. There’s still a free market group that calculates the CPI the old-fashioned way. They come up with a figure – despite all this weak economy – that prices have gone up 35%, 9.4% every year, and I think if you just went out and talked to the average housewife, she might believe the 9.4% figure rather than saying it’s only 2%.. So I would say what we’ve been doing isn’t very reassuring with all this money expenditure.. Spending all this money hasn’t helped. That $5.3 trillion didn’t go to consumers, it went to buying bad assets, it went to bailing out banks, it went to bailing out big companies.. lo and behold, the consumer didn’t end up getting this, the consumer lost their job, their houses and their mortgages..”

 

-       Congressman Ron Paul addressing US Federal Reserve chairman Ben Bernanke, Financial Services Subcommittee on Monetary Policy, July 13, 2011.

 

Banks, said Murray Rothbard, are always inherently bankrupt. Because “they issue far more warehouse receipts to cash (nowadays in the form of ‘deposits’ redeemable in cash on demand) than they have cash available. Hence, they are always vulnerable to bank runs. These runs are not like any other business failures, because they simply consist of depositors claiming their own rightful property, which the banks do not have. ‘Inherent bankruptcy’, then, is an essential feature of any fractional reserve banking system.”

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Ask the ECB

“No credit event, no selective default, no default.”

 

-       Jean-Claude Trichet, president of the European Central Bank, 7 July 2011.

 

“The European Central Bank will continue to accept Greek debt as collateral for loans unless all big three credit ratings agencies it uses declare it to be in default, said a senior finance official..

 

“The ECB would rely on the principle of using the best rating available from the agencies – Standard & Poor’s, Moody’s and Fitch – the official said. The comments came after S&P on Monday became the first agency to warn that a plan, pushed by France and endorsed by Germany, for banks to roll over their holdings of Greek debt into new bonds would constitute a “selective default”.”

 

-       Financial Times, 5 July 2011.

 

“I have to say that I and others have noticed that the ratings agencies are in this European issue much stricter and much more aggressive than they have been in similar cases in, for instance, South America.”

 

-       ECB Governing Council Member Ewald Nowotny, 4 July 2011.

In a brand new column launching this week for the News of the World, the paper’s freshly appointed ‘agony aunt’, the European Central Bank, answers your questions.

Dear European Central Bank,

A few hours out of Southampton and my brand new passenger liner with over 2,000 aboard is holed below the waterline, listing alarmingly and taking on water. We can’t get everyone into the boats, and we didn’t have enough boats to begin with. My engine room is flooded and she’s sinking by the head. Do you have any advice ?

-        Captain Edward J. Smith, RMS Titanic.

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The Greek Miss

“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology.”

 

-       Dr. E.O. Wilson, biologist, Harvard University.

Greece has been an interesting diversion this past week, but the “successful” passage of austerity and reform bills through the Greek parliament changes nothing. The country is just as likely to default at some point in the near future, particularly if the mood of its rioters is any guide. All that the EU has bought, with its next tranche of bail-out money, is a bit of time. Procrastination comes very expensively these days. Here in the UK, the last week brought a more orderly degree of protest on the part of public sector workers who have failed to grasp the underlying reality: a generation of citizens aboard a bus of entitlement – to free healthcare, to wide-ranging benefits, and to universal and generous state pension provision – is shortly going to run headlong into a brick wall of disappointment and fiscal inevitability.

Kevin Phillips and Dr. Michael Hudson christened it the FIRE economy, indicating the extent to which the (United States’) productive economy had become subservient to the forces of Finance, Insurance and Real Estate. As Eric Janszen points out in his masterful study, ‘The post-catastrophe economy’ (Penguin, 2010), the sandy foundations of the FIRE economy comprised debt-based economic growth. So what happens if the western economies have essentially allowed accumulated debts to grow to such a level that they can never realistically be paid back ? Well, we are about to find out, and investors in Greek bonds will probably find out ahead of anyone else.

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