Europe On The Brink

After a week that saw $2.5 trillion wiped off global stock markets, European policymakers held a series of emergency conference calls on Sunday to discuss the twin debt crises in Europe and the USA that are causing market turmoil, and stoking fears that the Depression might actually affect some members of the plutocracy (e.g. bondholders).

Because Spain’s and Italy’s economies are in severe trouble (i.e. overloaded with debt), yields on Italian and Spanish debt (i.e. bonds) have soared to 14-year highs. That’s great for investors, but they hold $2.57 trillion worth of Italian bonds alone, which is 120 percent of Italy’s national output. Hence Italy is already bankrupt, and must inevitably default. Spain will too — in which case investors will end up getting less than they expected.

To continue servicing those bonds, Italy must pay out so much that Italy is due to run out of cash by the end of September. Italy’s funding requirement this year is larger than the entire stock of Greek debt. (England is also bankrupt, since its debt is three and half times its GDP, but England is not part of the EU monetary union.)

Therefore investors (bond holders) are demanding that the European Central Bank bail them out immediately by buying their Spanish and Italian bonds. (The media portrays this as “rescuing Italy,” but only bondholders get rescued. The Italian masses will be crushed.)

The ECB is in a bind. If it bails out investors by buying their debt, then the ECB will dump that debt onto the Spanish and Italian masses in the form of slashed social programs and mass privatization binges (i.e. “austerity”). The ECB is not sure it can get away with this. If the ECB goes too far in screwing the masses, it will crash Italy’s economy (the eighth largest in the world), which would threaten the entire EU monetary union. Four out of the 23 ECB governing council members, including powerful German Bundesbank chief Jens Weidmann, voted against the bond purchases. ECB chief economist Juergen Stark and the Dutch and Luxembourg central bankers also apparently dissented.

However, if the ECB does not bail out investors by buying their bonds, then that too could destroy the monetary union (and thus the ECB’s power) since Spanish and Italian bonds will become so down-rated that Spain and Italy would be locked out of the EU market.

In Germany, Angela Merkel may exhaust her remaining political capital if she throws more taxpayer money into buying European debt.

The ECB is not even sure it has the resources to bail out investors. To bail out the holders of Italian bonds alone, the ECB would have to pay them $2.57 trillion, plus interest. Doubts are growing in the German government that the European Emergency Fund can come up with that, even if the fund were tripled in size. The European Financial Stability Fund currently has 440 billion euros, but Italy alone is $2.57 trillion in debt (plus interest).

(The ECB could come up with the $2.57 trillion by printing money, but that would cause hyper-inflation, which again would threaten the EU monetary union.)

Italy’s Prime Minister Silvio Berlusconi has promised the ECB that he will screw the Italian masses with whatever “austerity” the ECB demands, no matter how savage. He says he will balance Italy’s budget by 2013, a year ahead of schedule.

This is absurd! Berlusconi is proposing to pay the ECB that $2.57 trillion (plus interest) within two years via “austerity,” but when he slashes social programs, lays off workers, and privatizes all, he will destroy Italy’s economy, making it impossible for Italy to ever pay back even a fraction of that $2.57 trillion (plus interest) to the ECB. Thus, default is inevitable.

So the ECB is desperately playing shell games and screwing the masses as it tries to buy more time. The ECB purchases more and more debt while imposing more and more austerity on the impoverished masses. Soon Europe will break.

The ECB enjoyed the godlike powers bestowed on it by the EU monetary union, but now it is having to buy so much debt, and impose so much “austerity” that the entire monetary union is verging on collapse. The Center for Economics and Business Research calculates that there is an 80 percent chance that the euro will not be in its current form in ten years’ time.

One possibility is that Europe will split into a two-bloc system with two different euros. Germany, the Netherlands and Finland will form one bloc, with all other EU members in the other bloc.

No matter how it shakes out, Wall Street will have to pay out trillions in insurance (e.g. credit default swaps) that it sold to investors. Those losses will be dumped onto the U.S. masses in the form of draconian “austerity.”

Hence we are only at the beginning of this Depression.  Even if Italy were to tell the ECB and bondholders, “Our debt is null; we’re leaving the EU,” the US masses would still be screwed, because US banks will still have to pay on insurance claims.

Western nations have accumulated too much private debt that cannot be repaid unless there is exceptional global growth – but there can be no growth with “austerity.”

As the Depression deepens, the only way that Western governments will be able to keep their nations together is via another world war, since this will allow Western governments to institute a command economy. During WW II the U.S. government took power over the Fed (sort of), ordering the bankers to create money as needed for the war effort. The bankers consented, since the war made them rich, and they knew that their loss of control over the Fed was only temporary. They put the USA into massive debt for the war, but after the war, the U.S, government still had enough authority to institute huge programs (e.g. highway construction) that created enough jobs for the government to pay back the bankers. As a result, the USA had a genuine middle class for 25 years.

Who will be the “enemy” in the next world war? Obviously Iran, Syria, and Venezuela will be attacked, but large-scale wars tend to take on a life of their own, such that it’s difficult to say whether Russia or China (or both) will be lumped together as the “enemy.” Moreover, the big military contractors have moved so many of their factories overseas that it’s difficult to predict how the alliances will shape up. And don’t get your hopes up that we will all get jobs in armaments factories. This will not be like WW II, when most US factories were in the US. 

We could avert all this by ending the wars and having a public central bank, and letting the investors / bond holders (i.e. big banks) eat their own losses such that they perish. But that won’t happen. We’re stuck on this ride all the way to the end, wherever that may be.

Don’t despair, though. That won’t change anything.