Dead Cat

The box is open and the cat is dead. The mathematical theoretical physics behind the "no risk" financial market experiment has ended up killing it. Theoretically the possibility of a loss was insured out of existence.

For example;

• Bank A issued a financial instrument and took out a CDS with Bank B against a possible default or loss.
• Bank B took out another CDS with Bank C to cover the possibility of Bank A's financial instrument going bad.
• Bank A took out another CDS against Bank C if it had to pay Bank B if Bank B payed Bank A 
• Bank A gets both the original loss back from Bank B but also the same again from Bank C.
• Bank C took out yet another CDS with Bank D to remove the risk of having to pay Bank A
• Bank D took out a CDS against Bank A's original financial instrument with Bank A.
• Bank A then used the payment from Bank C to pay Bank D.
• Ad infinitum 

So which Bank loses money? Nobody knows, not even them - but somebody eats the loss. Seems the citizens of any country with a Bank eat it.

The problem we have here is that the same folk that created the problem are trying to solve it. No fresh thinking, no real change in policies - accompanied by the dictum not to let a good crisis go to waste. Using this, or any, crisis to inject more of the same that caused it doesn't, unsurprisingly, appear to work. Never mind, we'll keep going until the life is choked out of it.

Not unexpectedly Obama and Cameron have popped-up demanding a quick fix. Primarily because when, not if, it all goes to rat-shit their banks will topple along with the rest. London and New York are the places that most carcinogenic financial instruments call home.

Let's not forget that, back when all this started in 2007, the estimated value of financial instruments lurking about the world was somewhere between 100 and 300 trillion dollars. Even if only 10% of them go bad - a joke - more like 40% on present estimates - then somebody has to print between 10 and 120 trillion dollars worth of money and give it to the banks.  And these estimates are on the conservative side. As all these instruments are in US dollars that would be bad, bad, bad for them - hence Obama's deep interest in having Europe not fuck the US economy.

Inflation won't solve it. Given the present state of the world's economy the result of a sufficient increase in money supply will be Stagflation - which we are already seeing signs of. Eviscerating trust in money and the printing of 100,000 Dollar, Pound, Euro notes to buy a cup of coffee doesn't sound like one of the better solutions.

So a very, very big turd is about to drop into the fan. This has been constipating since International Accounting Standards, introduced in 2005, prevented companies from provisioning against potential losses before they actually incurred them. Which is, of course, why banks are only now announcing hundreds of billions of losses and looking for some more free cash. Those now looking for the money are the same folk that lobbied for the change to accounting standards in the first place - so they could artificially keep their profits up - even if they knew that a debt was going bad. Better for the share price and the bonuses.

Anyway, I get back to my contention that Globalisation contains the seeds of it's own demise. When there is too little or no domestic industry, manufacturing or production and the banks are making unprecedented piles of money that money has to go somewhere and it, by default, goes into real property as that is the only place left for it to go

Around the turn of the millenium the same lack of alternatives created the "Tech" bubble.

To absorb the fists-full of money spewing out of the banks house prices exploded, builders went on the rampage. When regulations wouldn't permit this path they were changed or new markets created outside regulatory oversight. Not only did the finance industry believe they had found an infallible way to remove risk but they also didn't have to admit that they had lost the money until the instrument was undeniably dead and the loss was taken onto the books. So they had a few years to record record profits and bonuses before they became too big to fail.

The original bail-out money they were given was used to maintain this fiction - now that it has all been spent either they get another round of bail-out or they go down. Any money going to Spain to prop-up it's banks will be used to extend and pretend. When the next 100 billion of property market bad debt pops up, or RBS needs another 40 billion to survive, it'll be another matter entirely.

Beware of gifts bearing Greeks

While the story line goes that it's all about saving the Euro it is really all about saving Banking. The ECB, with or without the assistance of other Central Banks, announces it has printed some fictional money and gives it directly to the banks exposed to Greek debt so they don't go bankrupt and the financial system doesn't collapse in Domino fashion. In order to pretend that this money is real they call it a loan to Greece and tell the Greeks they will have to pay it back with heaps of interest. This allows previous, unrepayable, Greek debt to be written down on the banks' balance sheets and makes them look healthier. It will keep going until the banks don't hold enough Greek debt to take them down along with the financial system when the inevitable happens. Then the Greeks will be allowed to default and leave the Euro. The Central Banks will by then own most of the Greek debt, write it off and invent more money to cover the gaping hole - they are the only ones that can do it. Until this happens the Greeks will continue to have the shit kicked out of them - austerely speaking - without getting so much as a sniff at the money. You'd be on the streets too.

It is all part of the same financial Shell Game. The Central Bank lends other banks invented money at zero interest to buy Government Bonds and accepts bad, invariably worthless, investments as collateral for the loans - a toxic for good paper shuffle.  The banking sector looks to have solid(ish) Government Bonds as investments. The Government is charged less interest on it's Bonds for which there appears to be a market, hopefully resulting in a negative yield. It also works the other way round - the banks issue paper and the government, by one means or circuitous other, buys or provides the money for them, thus injecting liquidity - it has to be this way since the public won't stand for another bank bail-out.  By this sleight of hand the risk is taken out of the private banking sector and made public. The theory being that the present system can survive a near-death experience - until things get better. Extend and pretend at it's best. Unfortunately for this scenario Greece isn't the only problem. There are several more countries on the brink of default. The hope is that the Central Banks can extract the banking sector out of the bad national debt, one debtor country at a time, by printing money in controlled quantities that doesn't result in massive inflation. This is what they mean by a controlled default. An uncontrolled default is one where the banks are still nostril-deep in bad loans when a nation implodes - nothing to do with the manner of the country defaulting. There is only one way a country can default and that is neither controlled nor uncontrolled it is simply "Goodbye!"

The question is how long will the public go on letting this happen before they rebel. Something that politicians, bankers, economists, fuck-wits and the rest of the 1% don't seem to have asked themselves. Not as long as you'd need is the answer, despite assurances that it'll all get better just so long as you do what we say and don't argue. If the Greeks manage to bring down their own government and default before the next round of loans then the game becomes extremely difficult if not cancelled due to bad economic weather. "Pour encourager les autres" is the great fear of Greece defaulting. The Portuguese, Irish, Spanish, Hungarians and even the Italians might see this as a good idea when Greece is still there the next morning. Why spend years paying off debt for money that went directly to banks.

It all gets a bit more emotionally complicated because the Germans are in charge - never overly popular in Greece - so it is a pity they're telling the Greeks what to do and insist on running their country - again. Especially as Germany is the main beneficiary of the Euro - and plays a big part in the reason several countries are now in the financial latrine. Wehrmacht dressed as bankers to most Greeks.

As recent research has shown, the poorer you get the stupider you get the more right wing and religious you become - doesn't bode well. A quick glance at the USA will confirm this. What are the odds that the Greek Army will make a comeback; this time it won't be communism but finance as the excuse the US uses to support a Junta. Spain, Italy and Portugal all have histories of Juntas. Will the real revolution come onto the streets after Armies try to usurp power to save Liberal Capitalist Democracy? An interesting proposition.

Of course an aristocrat fed-up with the nouveaux riche might follow the example of the derided Marquis de Sade. A man capable of not only deviant writings but of both philosophical and political musings that point to him as a materialist atheist, rabid left-winger as well as a sadist. He is rumoured to have played his part in the storming of the Bastille. Will Robespierre ride again?

Destructive destruction

As opposed to the "Creative destruction" long heralded as Capitalism's (oxymoronic) driving force we appear to have met Capitalism's opposite and equal (possibly greater?) force - Destructive destruction. While elected politicians (or unelected technocrats) are furtively attempting to "manage democracy" in the quest for sovereign fiscal survival and implementing, brazenly political, social engineering - the financial institutions are betting against them succeeding in a knee-jerk quest for profit. Unfortunately, whatever the governments do the very financial institutions they are attempting to save will manipulate the outcome to their own short-term financial benefit even if this leads to their own eventual, predictable, economic downfall. Free-market theory demands that even when facing the distinct prospect that the world's economic system is collapsing nothing should or can be done to prevent it committing suicide.

Rather than Bulls and Bears what we have is a Mad Dog that won't let go of the bone. The same financial machinations that brought us to the edge of darkness are still out there Trading, Shorting, Hedging and generally trying to find a way to make money at someone else's expense right up to and until the lights go out. A sort of financial "Doomsday" scenario where they keep firing financial missiles until there is nobody alive to claim victory.

Lemmings going over the Free-market cliff.

We're facing a somewhat stark choice. Democracy, Liberal Democratic Capitalism or Managed Democracy, State Capitalism. The present trend is towards the latter duo. Certainly the present Merkel/Sarkosy manifestation of a Euro solution is anything but Democratic and an attempt to save themselves and their banks by denying others their right to choose. By inflicting austerity upon the less fortunate they imagine they'll be able to avoid the same fate themselves. For this the others will pay. Those with the most money to lose will set and impose the rules and woe betide those that don't obey. Somehow I don't think this is going to work. Aren't they missing something here? Haven't they got this backwards? Isn't it those who must obey that can spoil the plan by just saying no more surrender of democratic rights and ask for the UK model - in the EU but out of it. Sadly if the errant, fiscally irresponsible nations (who loaned them the money in the first place?), chose to go for a UK model they'll take the UK down as a result - banks and all.  If you were looking to set up a brilliant "can't win" position this is it - a lose/lose situation.

So here we are entrapped by a system that we're trying to save whose very tenets prevent us doing just that - an oxymoron indeed. Or is the true oxymoron "Moral Hazzard"?

And whose fault is this mess?

When I said hide I actually meant dig.

It appears I was out several trillion dollars on global stock markets' losses in the past week and a bit. And the only way out according to those tasked with our salvation, but abjectly failing to provide it, is more of the same. The fiction of Perpetual Financial Motion - I borrow from you to buy what you sell me - or in the case of countries, borrow from you to pay you back. Wasn't this something like what Global Crossing went to prison for?

I wish to reiterate yet again - it is the Banks. As their stock prices collapse (diminishing their capital reserves below required limits) we find that the financial origins of the GFC never went away - the chasm of debt remains. This inter-bank debt far surpasses the inter-country one which in itself is no small number - European Nations have lent huge amounts of money to each other – Italy has lent Spain $31bn, Germany has lent $238bn to Spain and Italy has borrowed $511bn from France. The UK has loaned Europe $200 billion. Now while countries can print money (leading to devaluation and inflation) the private banks can't. So unless countries do a Bank bail-out round two with fictional money - as in quantitive easing - they'll have to nationalise their failing banks - and that includes the USA. So the greater worry here is not that the odd country defaults but that in doing so the world's banks go crashing down carrying an estimated 100 trillion of assorted toxic financial instruments (CDO, CDS) with them. Quantitatively Ease yourself out of that one.

Anyway, the existing plan - austerity - isn't looking too sharp. The underclasses of London, Birmingham and Liverpool are showing the way. Not only are we seeing a fundamental financial meltdown but also a catastrophic social one. In an ever more unequal society once government threatens to, or actually does, remove the medical, unemployment, education and the rest of the social safety net then the peasants will revolt. So the present circumstances on the streets should come as no great surprise. Spouting tax breaks for business as the route to salvation in a jobless recovery isn't advisable when those presently helping themselves to free sneakers and TV sets - and the odd McDonald's - aren't included in the scope of the plan. Explaining this away as simple criminality is missing the plot. Even the Israelis are on the streets protesting the result of decades of stagnant wages and low taxes for the rich.

So it would seem that the message - "what is good for the rich is good for you" - hasn't caught on quite as well as Conservatives would have wished. When you operate a system that guarantees inequality then it behoves you to toss sufficient scraps to the dispossessed to keep them calm and allow you to keep making money without much inconvenient interference from them. Not doing so is enough to give Capitalism a bad name.

Now, while the British unwashed have turned to riot and robbery the great American unwashed have chosen the path of stupidity. In their ardour for small government they've dismissed the fact that government is the only thing with deep enough pockets that might, possibly, get them out of this mess. According to the Republicans, whose adhesion to Dogma rather than reality is seriously alarming, the solution is to remove government, slash spending, reduce taxes and the system will cure itself. This based on an laissez-faire economic theory that has recently proven unable to run itself never mind fix itself.  Also missing from this Cloud Cuckoo Land is the reaction of the people to perceived economic injustice - unfortunately in the USA this may mean arming yourself to the teeth and heading for the hills with a year's supply of Twinkies.

So we can either pretend that it'll all be right in the end if we just have "confidence" or we can do something about it before we're all living under the Chinese model - for as long as that lasts - and I wouldn't buy any shares in that either. There are none so blind as those that will not to see