Sodium Haze: UK will follow Greece into default

Sunday, 19 June 2011

UK will follow Greece into default

Europe stands on the brink of a financial collapse as Greece looks certain to default on its debt.

Like all countries, the Greek government relies on debt money to run its economy. The usual 'bust' phase that always follows the 'boom' phase of debt fuelled growth has collapsed its ability to service debt because tax revenues are falling just as welfare payments are rising.
It doesn't help that, in Greece, tax evasion is commonplace and pensions generous – but using public spending to try and grow out of the current global bust phase is what most large developed economies are trying to do right now (except the UK!)
Bankers have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back from Greece. As borrowing costs have risen, it has become impossible for the Greek economy to grow itself out of trouble. All totally predictable for followers of the roller- coaster that is Fractional Reserve Banking.
Credit rating agencies have downgraded Greek government debt to "junk" status (leaving many to wonder why they are so important), and this pushed the cost of borrowing so high that the country effectively had its international overdraft facility cancelled overnight. Fearing bankruptcy, Greece ran into the hands of mobsters like the ECB and the IMF – for up to 120bn Euros of new debt.
But IMF core orthodoxy always demands that ‘rescue packages’ (debt) come with strings attached (Mafioso asset stripping and grinding austerity demands)
This scenario is complicated by Greece's membership of the Euro. This means it cannot stimulate growth by devaluing its currency, and nor can it cut interest rates any further, which would help, because these are decided by the European Central Bank in Frankfurt. Instead, the public sector cuts that the IMF demands are almost certain to deepen the Greek recession, reduce tax revenues and making it impossible to service its debts in future.
Protestors are out on the streets in Athens around the clock determined that they and their children should not bear any more of the austerity demanded by the European Central Bank (ECB) and IMF.

The IMF is predictably screaming that no level of grinding poverty is too low for the Greek people to bear in order that bankers continue to be paid their interest and that any solution that involves the banks taking a haircut is unthinkable - they are also demanding that Greece be asset stripped by selling its public companies at knock down prices to foreign investors - all true to form.

The ECB is adamant that no banker should lose out as a result of the tragedy engulfing the Greek nation - not surprising as the ECB is its major banking creditor.

But how have we got things got so far - and what might be the implications for the UK and what comparisons can we draw between the Greek situation and our own?

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Well - the Greek situation has six main drivers:

(A) Economic decisions based on political ideology

The admission of Greece to the basket of countries that trade in the Euro meant an artificial cut in Greek interest rates and a political desire to have Greece succeed as a 'Eurozone' member no matter what the cost.

The role of the ECB is to promote 'price stability' and it was buying greek debt in order to prevent exactly what has now happened anyway - a collapse in market confidence that Greece can ever repay its debt and an almost inevitable default.

(B) Fractional Reserve Banking

Banks all over Europe eager to profit from Greek debt and the implicit public guarantee afforded by the ECB (and by extension European taxpayers) have loaned hundreds of billions of Euros into existence and sent them to Greece. As ever - this debt money has distorted the Greek economy, created a temporary debt fuelled unsustainable bubble of 'growth' (which encouraged still more lenders to throw loans at Greece) and has not resulted in any kind of actual solid economic growth with which Greece would have had any hope of repaying the loans down the line.

(C) Incompetent Management

Financial institutions all over Europe have managers and CEO's who are amongst the most highly paid specialists in the world - sadly for all concerned these people lack a perspective beyond the narrow confines of their own industry and are not in many cases sound mangers of staff or of risk. 

Their collective incompetence now has banks like Credit Agricole, BNP Paribas and many others facing massive losses and will once again need taxpayer funds (more debt) to bail them out. 

As ever the role of the hoplessly incompetent rating agencies cannot be ignored - their predictive models only wave red flags after the event -  they are never a reliable indicator of medium to long term risk and they have YET AGAIN contributed hugely to a financial disaster instead of averting it.

(D) Fraud

There now seems little doubt that companies like Goldman Sachs and others wilfully misled investors into buying a range of debt based 'securities' in Greece by massaging and concealing data. They did exactly the same during the US sub-prime mortgage crisis  and so no surprise to see them at it again.

(E) Political Incompetence and Corruption

The Greek government has blundered and squandered its way to disaster - it did exactly what the Labour administration here in the UK did and spent more and more money during the credit boom instead of putting money aside for when times were not so good. The debt money was not spent on productive capacity and so the seeds for this inevitable collapse were sown.

(F) Unrealistic Expectations

The Greek people themselves must accept some of the blame for this disaster - for many years they dodged paying taxes, awarded themselves high pensions, early retirement AND expected the credit boom to roll on forever - it could not. There are many innocent hard working Greeks who are now suffering - but also many greeks who wanted at least half of a free lunch.

Of course the bankers and their enforcers (ECB, IMF) would have the world believe that ALL of the blame lies with the Greek people and that THEY ALONE should suffer so that the ridiculous inequities and venal greed of fractional reserve banking can continue unchecked.

The Haze believes that the Greek people are right to rebel and wish them every success in standing their ground against the bankers who will happily enslave them otherwise.

Some UK banks have exposures in Greece and if they do default as seems likely then the subsequent European financial contagion will surely reach these shores. 

Many people are concerned by this and rightly so - but The Haze thinks that it would better serve us now to reflect on the profound similarities between the financial situation in Greece and our own here in the UK..

Here are the similarities:

(A) False growth fuelled by debt

The UK had many years of apparent boom growth - but what is now clear is that this growth was unsustainable and not built on an increase in productive capacity - but on the profits of the financial sector that was making the loans itself, a house price bubble, public sector spending and hugely overpriced projects funded via the con trick of the PFI initiatives   .

(B) No money saved during debt boom

The UK borrowed more money during the boom (instead of saving money) and now has a high ratio of net debt as a percentage of GDP (nowhere near the scale of Greece but still high)

(c) Annual deficit out of control

The UK has a year on year financial deficit that the current government is trying to reduce.

(d) IMF applauded austerity choking growth

The IMF wants the UK to impose austerity on UK citizens (and the government is complying)

(e) Citizens fighting back

The government is meeting resistance to austerity from outraged citizens who don't see why they should pay for bank inflated bubbles (or are against cuts without any particular rationale)

(F) Debt increasing as growth stalls

Austerity is not working as a way of reducing either the UK deficit or the UK total debt, as financial indicators pile up to suggest that the growth necessary to pay off the debt is not emerging.

(G) Fractional Reserve Banking as money supply.

The UK has the same broken system of money supply as everywhere else - fractional reserve banking where money is created as debt. No debt for A = no credit for B - debt that is paid off simply ceases to exist so... less debt = less money = less growth.

(H) High Debt/ Low Growth trap

The UK is caught in the same classic low growth / high debt trap as Greece - in order to even maintain debt at its present level the UK economy has to grow - but in order to grow more money needs to be in the economy - but as the government is committed to spending CUTS - this is not possible - and the level of private borrowing cannot increase either as people lose confidence and try to pay down debt rather than take on more.  

All of the pre-conditions that have led to a disastrous debt crisis in Greece, Ireland, Portugal and now potentially in Italy and Spain exist in the UK.

This is no surprise as we use exactly the same broken system of money supply as the rest of the world (fractional reserve banking) and led the world in de-regulating the markets that have caused these disasters. 

The UK was happy to transfer its wealth generation away from manufacturing to financial services, which NOW means that its growth is linked to a very volatile financial business environment that stands on the brink of collapse in Europe.

*** Haze Main Comment June 19th 2011 ***

The grotesque financial chaos that is currently engulfing Europe will toss millions into destitution; costing them their jobs, family homes and futures. This wave of disaster is surging towards the UK slowly but surely – and people all over Europe can explain to UK citizens that the ruin of Fractional Reserve Banking does not recognise national borders.

What can we do to make these financial booms n busts a historical curio rather than a present day nightmare.

It is only by a fundamental reform of banking and our system of money supply can this endless stream of financial disasters be ended.

We must adopt and expand on the proposals put forward to the Independent Commission on Banking (ICB)  by the Positive Money campaign, NEF (the New Economics Foundation), and Professor Richard Werner of the University of Southampton – that argue convincingly that a return to a 100% reserve requirements for banks is the only way to fix our broken system of banking and money supply.

The changes they suggest are modest and in many ways the opposite of radical AS WE CANNOT CONTINUE WITH THE STATUS QUO.

Fractional reserve banking affords privately owned banks a state subsidised and underwritten monopoly on the creation of money as debt – banks then only give loans to people and projects that give them quick profits. This process undermines democracy, ruins the economies of nations and transfers more wealth to already wealthy people who have done nothing to deserve such fortunes.

Banks have proved to be very poor judges of what healthily grows an economy – hopeless at self regulating their own crass self interested salaries and bonuses and dangerously unaccountable when their reckless gambling needs to be bailed out by yet more taxpayer debt.

Enough is enough – modern banking is unethical, unfair and RIDICULOUS.

The Haze urges readers to take the fight to the banks in any way they can.   

The people at the Positive Money Campaign are the best standard bearers we have at present – they are putting forward well thought out proposals to sort this mess out and all right thinking people should join their campaign – and force the ICB and the government to implement their core agenda for change.
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