Engpasskonzentrierte Strategie

It would appear that we are all now expected to find work "fun" into our seventies to fulfil our mission as state unsubsidised (and progressively less healthy) consumers - even if there is no work available outside of a supermarket check-out counter - as most people trying to get a new job at 60 might confirm. And as these jobs are now staffed by recent university graduates there's not much of that about. To what end are we working then? The vast majority do it to get into and then out of debt - a microcosm of today's financial market model. The product of Politicians and their economic advisers that have read Ayn Rand (incomparable nincompoop) as non-fiction. And we've recently seen where that leads.

Economists are now spewing forth the should have, could have, would have insights that the whole resultant catastrophe was predictable using the very same indicators that they invented to create it in the first place. The commander of the 18th Panzer Division said, after the battle for Smolensk, that they were winning themselves to death. Free market economics have succeeded in doing just that. Not very surprising then that Goldratt espoused the "weakest link" theory by following on from the German Wolfgang Mewes' "power-oriented management theory " and his later "Engpasskonzentrierte Strategie" - both of which the Wehrmacht could, would, should have borne in mind when they got into but not out of Stalingrad. And that's the Germans and the Euro for you.

There is a geo-strategic phenomenon called the "Eurasian Funnel" that illustrates the inability of a given Western force as it advances East to saturate and control terrain leading eventually to the isolation, exposure and destruction of that force. The same could be said of Economic Globalisation. Unfortunately the cheerleaders for Globalisation didn't follow the first law of military success - Never invade Russia - or, indeed, never march East.

What we have in Goldratt is a Bottleneck theory that ends up as a Funnel - most, if not all, Growth theories do this. That all of this is blindingly obvious doesn't appear to have prevented numerous repeats - the result of over-imagination rather than a limited one. Which brings us to that other financial market chestnut - Risk. Risk is always used to explain why we lost not how we won. It is a weasel word. While banks and bankers thrive and corporations sit on a pile of money a large part of the population is told to expect to spend their old age behind a checkout counter or stacking shelves. Which is the logical conclusion of a finance/retail economy when Economics relies solely on a selfish Dogma.

Work, then, is so that you can buy things you don't need to impress people you don't like. Its the best marketed product in the world, unfortunately for the majority of workers, its not the best paid. Which brings us back to the fundamental Market Economy sine qua non of Supply and Demand. If there is no demand there is no supply so there is no work and thus even less demand- no amount of Goldratt can fix that.

The modern Olympic Games have yet again demonstrated that they are simply an expensive giant monopoly advertising campaign decorated with athletes wearing product. This is best illustrated by the 100m and 200m sprinters wearing wrist watches - what for? These folk shave off their arm and leg hair to go faster. It takes less than 10 or 20 seconds but as they get into their blocks the cameras linger on their arms and hands settling behind the start line. Product gets air time and the athletes get a few more bucks.

It cost NZ an estimated $4 million a medal in London (a rounding error in what it cost London to stage the Games) - a few hip replacements there - so there is very little justification to continue this sporting nonsensical extravaganza - when slashing every other budget. The Ugandans, Kenyans and Ethiopians won a few medals while millions of their fellow Africans starved.

A load of outdated Nation State bollocks that brought us 2 world wars. Move the games to Greece permanently (they really could use the money) and select the athletes on ability not nationality. Also get rid of all this French language waffle - slows the ceremonies down and confuses the Chinese.

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?

Financial Costa Concordia

There's a modicum of attention being paid to the apparent US economic resurgence in comparison to the UK et al. Attributed to the efficacy of assorted US economic policies. I want to get in early and disabuse you of such thoughts.

While, on paper, the UK's total debt burden is 5 times GDP as against the US's less than 3 times GDP and UK financial institutions have, on paper, 5 times as much debt as US ones - it is actually a load of bollocks. This is because the US banks are not marking to market by using access to cheap Fed money and are relying on Credit Default Swaps to deny and hide inevitable losses. Granted that US national coffers are benefitting from repatriated money and illusionary safe-haven status - as is the UK - but this won't protect either of them from a global financial collapse - France, Italy, PIGS and latterly the BRICs, Australia and Asia in general will succumb to fear.

When, not if, there is a default on a large national debt the CDS market will implode and there'll be a global Costa Concordia moment. The critical moment is when does the Captain leave the ship - Captain Greece, Captain Portugal and Captain Ireland are at the rail and Captain Italy, although a little behind them, could well accidently fall off on purpose. Captain France will go down with the ship while blaming Britain. Captain Germany, like the Captain of the Olympic, will not answer the distress calls.

I'd also like to steer the proletariat towards understanding that overpayment of CEOs and Bankers is a symptom not a cause - a few billion is neither here nor there in the present catastrophe. And that it's present high profile is just a ruse to divert attention away from the real problem - that the system itself is beyond fucked.

Incredibly, for example, General Motors, a company that never made a car worth owning, is claiming to be back in profit. In the usual manner they have achieved this by lending cheap money to purchasers to buy their products and then counting the money they've borrowed then loaned as profit. Even you and I can see the flaw in this as would a blind man on a galloping horse. Bearing in mind that there is no remaining ecosystem to support, never mind grow, manufacturing as the route out of recession. There is no supply chain outside China, nor are there enough low-wage workers; so celebrating the survival of a company based on lower wages and benefits to support more consumer debt doesn't appear to solve anything.

Your belief that one can - with generous public cash donations of course - Innovate out of the abiss is counter to all accepted business methodology. If a widget can be made in China for $8 or made in the UK for $80 then how many UK workers will benefit from the $250 profit made on the widgett? Answer: none. How many CEOs? Answer: one.

Stoking my higher than usual level of Outrage are the Hedge Funds that bought Greek debt for cents on the dollar that now want paid out at face value before agreeing to any deal. They bring to mind the last thoughts of the Mr. Black Husband spider when he asks Mrs. Black Widow "How was that for you"?

Debt, Banks, Growth - pick any two

Your scenario of a new 2 speed European Economic Union of is wholly dependent on it creating growth - as in economic expansion permitting debt to reduce as a proportion of GDP. Unfortunately a return to assorted devalued national currencies will achieve the opposite as historical sovereign debt will still be measured in Euros and exports from the few remaining Euro countries (especially Germany) will be too expensive and trade will shrink not grow. The knock-on effect on China's exports would be significant - spreading the grief.

You can tackle sovereign debt, bankrupt banks and growth only by picking two of them to tackle at once not all three. There isn't enough money. Especially as regulation permitted European Banks to loan to European Community countries at leverage rates of up to 250:1 under the now miasma of "they couldn't default". Meaning banks are incapable of surviving either a default or a devaluation of currency by any of it's debtor nations (the equivalent of default). So given a choice of two out of the three the logical pick is to tackle sovereign debt and adopt policies for growth not austerity and let the Banks go under. Government then will have to cover the lost customer deposits up to a fixed value and not assume leveraged debt of untold trillions. This could be between 40 to 250 times cheaper than bailing out the banks. The retail divisions of the Banks would be nationalised to keep the branch doors open.

Alternatively, you could just run the printing presses and inflate your way out. This would, of course, destroy the personal wealth of the elite which is why we'll hang-in with the present fallacy as long as possible while they sort out a plan B. Primarily time to move their wealth into something or somewhere less likely to evaporate. Taxpayers will be milked to extend the transfer period of their wealth to a safer haven.  France will not be one of those havens - nor, probably, would it be a first team selection to remain in the new Euro given it's bank's exposure to Italy et al. The Irish, Portuguese and Greeks will sensibly default on their debts immediately they are relegated to the second division of Europe. This leaves you with Spain and Italy as the lead weight around the neck of Europe - sadly no matter what stroke they adopt the rest of Europe is likely to sink with them unless they cut them free.

However you cut it there is no elegant solution. The unpalatable fact is that we're in a Depression - a creeping one. Country by country until the tilting point is reached. Why anyone is surprised by this astounds me. We knew when the Global Financial Crisis struck that hundreds of trillions of debt were out there in the form of CDO and CDS and other assorted toxic, exotic, financial instruments conjured-up by banks looking to increase leverage to historic (lunatic) levels in the pursuit of profit and bonus - recklessly stoked by the Fed's cheap money window. Now we're looking to leverage sovereign wealth to historic levels to bail banks out of their atrocious bets, aka investments. Seeing that countries are vilified for debt at 1.2 to 1 then their ability to leverage at up to 250 to 1 to cover their banks' debt is less than nil. As is the belief that the solution to gargantuan quantities of debt is yet more debt. Pay off your credit card with another credit card.

Globalisation has exacerbated all this as with Lehman Brothers. Everybody cheated, either by borrowing more than they could repay or lending more than they could expect to get back. The choice is clear. Accept that the present financial structure has imploded and needs colonic irrigation or drown in an ocean of debt. Whatever the outcome we're not going to avoid walking around shoulder deep in shit for a long time to come. Although this may be more palatable than the present position of standing on your head in knee deep excrement.

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