Surprise, surprise, the Euro Zone debt crisis is back. Or was it never gone?
As yields on Spanish and Italian government bonds are heading higher once again, I am reminded of the old saying, you can’t fool all of the people all of the time. Not even with a trillion euros.
I previously described the relationship between banks and states as that of two drowning sailors who desperately cling to one another, and I still think it is an apt description of the charade that is being orchestrated in Europe and that is already wearing thin. Here is the Wall Street Journal Europe from March 29:
The European Central Bank’s massive injections of cash into the banking system haven’t yet reached companies and households but have benefited governments…
Bank-lending growth to the private sector slowed to 0.7% in February compared with the year-earlier period, after rising 1.1% in January, unadjusted ECB data showed.
Thanks to the ECB funds, banks’ lending to governments grew at a 6% rate in February, up from 4.9% in January, though lending to other parts of the economy remained weak. Purchases of euro-area government debt by banks rose sharply, ECB figures show. Portuguese banks bought €4.24 billion of government bonds in February, up from €543 million in January. Greek banks purchased government bonds valued at €4.12 billion, after selling €128 million in January.
Italian banks bought €23 billion in euro-area government debt last month, even more than the €22.6 billion they bought in January in the immediate aftermath of the first LTRO. Spanish banks reduced their net purchases to €15.7 billion from €22.9 billion.
So bankrupt banks bail out bankrupt governments, which then bail out the bankrupt banks. All funded by the printing press. Hey, who needs those pesky savers or who even needs capital markets? We make our own prices!
But it was never going to last, was it? I would have given it a few more months but even that appears you have been too optimistic. Maybe the number of the hopelessly gullible and wilfully delusional is smaller than I thought.
No prize for guessing what the establishment wants. – You got it! More free money.
Alfredo Sáenz, chief executive of Spain’s Banco Santander SA, the largest bank in the euro zone by market value, called for ECB purchases of government debt, something the central bank has been loath to do except in small quantities.
‘The ECB has helped monetary expansion with its recent measures, but in my opinion, it should be more aggressive in the purchase of government and bank debt—that is, stronger European quantitative easing,’ Mr. Sáenz said at a banking conference.
But then, of course he would say that. Alfredo Saenz Abad is a member of Europe’s financial elite. In 2007, his total compensation as Santander CEO was €9,604,000.00. Well, you may say, that was in 2007 when Spain’s real estate boom was still in full flow and the country enjoyed a triple-A rating. That’s true, and indeed by 2010, Senior Saenz’ total compensation had dropped to €9,179,000.00. I guess his paycheck is doing precisely what Spanish banking is doing, that is, not deleveraging. And why should they? As long as the free money is gushing out of the ECB, let’s pretend and extend. Mr. Draghi, new chips please!
Unlimited and never-ending!
Poor ECB. On many measures, the Frankfurt-based central bank is already the most aggressive monetizer on the planet, its waistline expanding faster than that of anyone else. Yet, funding every dodgy bank in its jurisdiction and accepting even the old carpets with the beer stains from the last office party as collateral has not convinced its doubters that the ECB is doing its fair share of market manipulation. No matter how many euros are raining from the ECB helicopters, the Telegraph’s Ambrose Evans-Pritchard is perennially whinging about the ECB’s tightfistedness and suspects the sinister dealings of some nasty German Bundesbankers in the background. His latest column quotes Guy Mandy of Nomura who stresses that the ECB’s ‘long term refinance operation’
is entirely different from the stimulus of the Anglo-Saxon central banks. ‘There has been no transfer of risk to the ECB’s own balance sheet, which is what we think is needed to take away the tail-risk of another EMU blow-up.’
Ah, you see? The accumulated toxic waste on the balance sheets of nominally private banks – such as Mr. Saenz’ – not only should be funded at zero cost forever but should be socialized wholesale. All past errors must be forgiven, the cost to be borne by the masses of fiat-money-users, so that another round of lending can commence. Hooray, we are to borrow ourselves out of a debt crisis.
And here is David Owen of Jefferies Fixed Income in the same piece:
‘The ECB says its action is ‘temporary and limited’, and that is precisely the problem,’ he said. ‘They are making things worse with piecemeal measures’.
I get it. Printing ever more money is the solution. It just has to be never-ending and unlimited to really work!
Of course, this is complete economic lunacy. Economics is the science of how we use social institutions such as private property and voluntary exchange on free markets to make the best use of scarce resources. These alleged financial ‘experts’ want to do away with scarcity. For them the printing press allows scarcity to disappear. Money has to be ‘unlimited’ and ‘free’ for the economy to work but these are two words that have no place in economics.
We are in this mess because our financial system has artificially cheapened credit for too long. These ‘experts’ tell us the solution is to cheapen credit further and ever more aggressively. There is never too much old debt, only too little new money.
Be that as it may, Evans-Pritchard, Mandy, Owen and Saenz Abad will get their way. The money-printing will not end because it cannot end. Nobody wants to take the pain. This is why I do not believe the deflationary forces that undeniably exist and that many of my readers worry about, will be allowed to get the upper hand. We are on the road to complete monetary meltdown, and no, my friends, we do not have another 20 years.
The Paper Aristocracy
Coming back to Banco Santander’s Senior Saenz: I was somewhat reluctant to mention his compensation as it can easily and unfairly associate me with the many habitual banker-bashers out there, a group that is already heavily populated with the economically illiterate and the perennially envious and, what’s worse, the many statists who believe that the solution to all our ills is more government intervention, more regulation and more taxation. Nothing could be further from my position.
I have absolutely no problem with people earning a lot of money, even millions or billions. As I have explained elsewhere, I am an advocate of 100-percent capitalism, of what Hans-Hermann Hoppe calls a private law society, in which the same rules apply to everybody (no legal privileges and no state authority) and where everything is based on voluntary, private, contractual cooperation.
In a free market, there is only one way to make money and to keep your accumulated wealth, which is to produce and keep producing something that your fellow citizens voluntarily spend money on. Bill Gates, Steve Jobs and Mark Zuckerberg didn’t steal the billions that made them rich (at least not to the best of my knowledge), and they did not and could not rely on ‘government stimulus’ or the backstop of a lender-of-last-resort. Like thousands of other and less well-known entrepreneurs and capitalists out there, who keep our economy going and who create the real wealth that makes our high living standards possible, they earned money in the marketplace by serving the ever-fickle consumer with his constantly changing tastes and desires, and if they had gotten it wrong at some step on the way, they would have potentially lost everything – and that can indeed still happen. They did not take from us. We, the consumers, made them rich by buying their products. And if you want to be rich yourself you may want to take a close look at their example and create something that many people want – and if you want to be really rich, that hundreds of millions of people want.
Of course, most of us do not have it in us to be entrepreneurs. We contribute by working for entrepreneurs or investing with them. And by doing so, we play our part in bringing about a striving, wealth-creating economy.
Our financial system, however, has little to do with capitalism. This is what the banker-bashers don’t get: our financial system is not bankrupt because we’ve got bad bankers. We got bad bankers because of a corrupt financial system. The unholy alliance between states and banks that has brought this crisis about, and that will make it still worse, is the direct result of our fiat money system. Under a state-fiat-money franchise administered by lender-of-last-resort central banks that are tasked with cheapening credit through constant monetary debasement, banks cannot be capitalist enterprises subject to the controlling forces of the marketplace. In such a system, banks are essentially extensions of the central bank. They are conduits for monetary policy. Of course, the banks happily play this role as long as possible because their participation in the money-creation process is profitable to them, and it comes with an extra safety-net that all truly capitalist firms have to do without. But this monetary socialism only lasts until it chokes on its accumulated imbalances. That is when the overleveraged banks and debt-addicted governments finally stare into the abyss.
To call our fiat-money-based financial system ‘capitalist’ is not only incorrect, it is a dangerous misrepresentation. It gives capitalism a bad name. We should not let those who benefit from the fiat money privilege adopt the label ‘capitalists’ for themselves. So what should we call them?
The late Howard S. Katz coined the phrase the ‘paper aristocracy’ in his book of the same name. He wrote it in 1976, five years after Nixon closed the gold window and ushered in the period of unlimited money creation. Katz proved prophetic:
The mild evils we know today (1976) are all the effect of a specific cause. For the past generation that cause has been operating in a mild form. But in 1971 a fundamental change was made so that the cause is now operating in a most virulent form. Unless those decisions, made between late 1970 and late 1971, are reversed, we are going to see our society collapse about our heads.
What is happening in America today (1976) is that we are seeing the formation of an aristocratic class – a new power structure which will be to the America of the future (if indeed our descendants of the 21st century live in a place called the United States of America) as the ancient king and feudal lords who ruled society at that time were to the Dark and Middle Ages.
An aristocracy is a small elite who, through control of the government, have obtained special privileges in law and are thus enabled to live as parasites on the labor of others; by means of this exploitation they amass large amounts of unearned wealth. By this definition there is already an aristocracy in existence in America. But it has not yet consolidated its power and does not yet dare to come out in the open.
In the early 21st century there still is a place called the United States of America but I doubt that anybody in the mid-1970s, maybe not even Howard S. Katz, would have guessed that millions of ‘free’ Americans would be lining up at airports to be searched and x-rayed by members of a giant, 216,000-employee strong Department of Homeland Security.
Americans are supposed to believe that all of this will protect them from Islamist terrorists and ensure their freedom. But I reckon that this organization could come in handy for other domestic emergencies once the fiscal house of cards comes crashing down and America does a Greece – and given the country’s by now well-established fiscal trajectory of $1-trillion-plus federal deficits per annum, mainly funded by the Fed, that is only a question of time. Pointedly, the Department of Homeland Security has recently ordered 450 million new rounds of ammo to protect a domestic population of 313 million.
Already Americans are subject to de-facto capital controls. If you are an American and you don’t believe me, try opening a Swiss bank account. And with FATCA coming up – the Foreign Account Tax Compliance Act, by which the US government arrogantly co-opts the entire global financial system into the service of the IRS – it will get harder to open an account anywhere in the developed world. And by the way ‘they’ are already working on new laws that prohibit you from travelling abroad if you owe money to the IRS.
These trends are not confined to the US but can be detected everywhere in the developed world. As the state fiat money system approaches its endgame, the state and its lackeys in the media are doing everything to blame the mess on the wealthy in general and on too much freedom. More controls, more state power, more restrictions – the recipes are the same everywhere. It is just that we libertarians understand what America once stood for and we naively still hold it to a higher standard, as indeed America did herself once.
In the meantime, the debasement of paper money continues.
This article was previously published at Paper Money Collapse.