I want to return to a topic that I wrote a comment about a long time ago on the Guardian and was one of the few times I was deleted. I think it was felt I was treading a little close to shark-infested waters.
But snorkel in hand here I go again.
Money laundering you have all heard of. I want to talk about debt laundering. Last time I got in trouble for mentioning certain banks by name. This time I’ll keep it generic. But please feel free to imagine I have mentioned certain banks, that you might feel fit the bill.
OK let’s start with facts.
Greece owes €265 Billion (These are total debt numbers which including sovereign and commercial debts together)
Ireland owes €865 Billion
Spain – €1 Trillion
Italy – €1 Trillion
Portugal – € 280 Billion
These are rounded figures but from various sources one of which is the BIS. The total sums involved are less important than the next lot of figures which show the reciprocal, incestuous nature of the debts.
Portugal owes Spain €86 Billion.
Spain owes Portugal €28 Billion
Italy owes Spain €47 Billion
Spain owes Italy €31 Billion
The web encompasses almost all the rest of Europe but this suffices.
Now there are some legitimate reasons why governments buy each other’s debt, so let’s deal with those. They need to keep their money somewhere and not all in the sock draw. So they hold some cash, lend to their banks and buy debt (IE lend to another government). Government debt is considered the safest debt to own and each government further spreads what little risk there is, by buying debt form different countries. Debt buying is also how countries return cash to a country with whom they trade and whose currency they have accumulated and need to return. Fine.
The problem is that Spain doesn’t do that much trade with Portugal. Spain does not need €86 billion of Portugal’s debt. Nor is this in any way part of a sensible strategy for keeping Spain’s money stashed in safe places. Because Portugal is broke. How can I say that? Well Portugal owes €280 Billion it doesn’t have – that’s how.
Spain doesn’t have the Trillion it owes, neither does Italy nor Ireland. Yet all of these countries have bought the debt of the other insolvent countries. What we have, in fact, is a group of vastly indebted, bankrupt countries busy buying each other’s debt and owing each another other money that none of them has. Or has any chance of getting any time soon.
(OK that’s checked the equipment. Time to dive in with the Sharks.)
Why are they doing this? What are they getting out of it?
What I believe they are getting out of it is they are laundering each others debt. This is how I believe it works. It is closely related to check kiting.
I can’t sell my debt. you can’t sell yours. At least not enough and not at a decent rate. But if we agree to buy each others debt then we can both tell the world – we have buyers who want out debt – good for the credit rating. Plus we both now have an ‘asset’. You have my promissory note, I have yours. We are both banks so our credit is good – especially because neither of us seems to be having any trouble selling our debt – so we can legitimately count each others debt as good quality. In fact, because we are financial institutions who know about money – we can mark this ‘asset’ to model. Which means we can mark its value as anything the hell we want. – So we do – full AAA face value. Brilliant we were both broke, now we both have a valuable asset. Good for the balance sheet.
Now for many purposes this might be enough. For the first part of the financial crisis it was enough. Banks ‘rebuilt’ their balance sheets, looked healthier, and on the basis of that recovered health did business with the unwary and uninformed. But what happens if we need actual cash. Maybe we have some bad loans that need to be paid down.
OK if we want cash, we have a couple of options. First we can try to sell the asset to the unwary. That would be fraud if you or I did it. If banks do it its called er… being smart, I think. That worked for a while in this crisis. But eventually even the stupid people get wise. So now we have to find another patsy.
Let me introduce you to your nation’s Central Bank. We now take our ‘assets’ to the bank’s bank – our Central Bank. We deposit it and withdraw cash in its place. It’s that simple – as long, that is, as the Central Bank says yes. Which begs the question – why the hell would they say yes?
Surely they would know we are defrauding it? Well, if they are doing their job at all then they certainly do know what we are doing. After all most of board of the central banks were bankers like us at one point or another. We advise them!
Well, the first reason they might agree to do it, is they might consider it a lesser necessary evil than having to admit to the fact that we are broke, they let us get into this state, and they now have to deal with the consequences – both financial and political. Second we might all be personal friends. Same schools, family ties, professional loyalties. Maybe. Just possible. No names mentioned.
Or it could be that the central banks are doing it themselves and are therefore not in a position to get technical with us.
In their minds I am sure they see it is ‘spreading risk’ or standing shoulder to shoulder to stave off a crisis. The exact same crisis that every bankrupt crook feels when his hand goes into an empty pocket and his creditors refuse him credit and then start calling at his house for payment. That’s a crisis. An honest man pays the debts he can, admits he is bankrupt and starts again. A crook lies and steals.
In the end laundering or kiting is illegal, for a simple reason. Someone, in the end, gets stuck with the debt. The crook spends the cash, to stave off his crisis – maybe he even really intends on paying you back as soon as he can – but the empty check/asset/debt is still siting in some one’s account. Until that it, the day they try to cash it and find they have BEEN ROBBED.
Who do you think has been left with the dud check? YOU AND ME. The PUBLIC. Who arranged this THEFT? Our central bankers and our politicians.
A brief addenda for the interested.
First objection to the idea of debt laundering is that debt is usually thought of as the absence of money, so, how can you launder it? After all you lent your money out and no longer have it in your account. All you have is the debt agreement you ‘bought’. Good question. This is why banks pay accountants.
Accountants can show you that the debt you bought is in fact a promise of income. The person who borrowed from you (you bought his debt) has agreed to pay you. So there will be payments. Those payments are income. Voila – your debt is not an absence of money, it is a promise of income. Step one.
Step two – please note that any paper money says on it, “I promise to pay the bearer”. This is the promise of future income based on the tendering of this promissory note. Your debt is a promissory note – it says ‘I promise to pay’ on it. The person/nation to whom you lent, whose debt you bought, has promise to pay you both the interest and the capital sum. That is income. And since all money is the promise of income, your debt is also money. You can take that ‘I promise to pay the bearer’ piece of paper and spend it like all other promissory notes.
All you have to do is have a rating agency rate how good the promise on your note is. If they say its AAA good then its cash in your pocket. If they say it’s sadly not such a great promise worry not! Go to a friendly insurer such as AIG and ask them to insure your promissory note against the chance that the promise it bears might get broken. If you think there is the chance AIG might say no, then still don’t fret, – just put the paper into a sealed envelope, write ‘dark pool’ on the outside and ask them to insure it without looking. Believe me they’ll say yes. See above post (The Battle for Power ) for details and proof.
I was in Perth recently and it was odd to watch huge suburban expansion of homes and the Government making saving cuts (fearing a 20billion debt) and then utility bills increases announced on my penultimate day.
Do you have any suspicions as to why the Guardian deleted the original post? I read most of it, it seemed factual, reasoned and inoffensive, then it disappeared.
Normally I'm happy to just read but that hacked me off enough to post something along the lines of, 'why are the guardian deleting intelligent comment when there are posters on the forum calling each other C**nts that remain?'
Rather unsurprisingly my comments were deleted too!
Feeling charitable towards my chosen newspaper it could be down to their current worries about UK libel law but that's a pure guess…
Golem can you comment on this….
if countries are paying each other in debt then for the economies of such countries to grow, debt levels have to increase. And if debt levels are reduced an economy which uses said debt as promisary note will contract, because in effect the money supply is reduced.
Paying or writing off the debt in these terms would be like devaluing a currency.
How do you have economic growth without debt when debt is both the product and the payment mechanism?
How can all countries grow indefinitely without sucking the life out of the weaker economies?
ps
i seem to remember also that, in the same week in 1997 or 8 as Gordon Brown was making warlike noises to Iran over nuclear sites, Iran lent the 20 odd billion…
wonder how much we owed iraq when we declared war on them.
pps..
here's a nice link from CNBC…the top 16 holders of U.S. debt. I'm sure you know all this anyway but its a handy and well presented laymans guide for such as me, so i pass it on….
http://www.cnbc.com/id/29880401/The_Biggest_Holders_of_US_Government_Debt?slide=2
John,
I asked them. No real answer. They did return my post to me, so it wouldn't just cease to exist, which I was grateful for.
I have the same suspision as you – libel laws. I mentioned banks in teh body of the comment if I remember rightly and I think that just made them nervous.
Fair enough.
ppps i poked about abit but i could not/did not have knowledge to construct a similar table of how much uk owes other countries VS how much those same other countries owe UK.
can you be bothered?
i would also like to add that the ps above posted two years ago was also immediately removed from guardian website as a bad thing to say.
Dear Mr. Golem, your response to my comment on "The Battle for Power" hurt.
"How could I be so stupid as to believe that an insurer has to asess the risque on a contract beforehand in order to calculate the insurance premium? I must be getting too old, losing touch with modern society's ways. "
After having considered it more closely, and enlightened by some of your later posts and comments thereupon, I see now that AIG is in part a Ponzi scheme (I had a notion already when they became main sponsors of MU), and that the Ponzi business model has been taken up by both banks, central banks and nations.
I think the old way of writing insurance was better for all.
Having been ivolved in many litigations concerning Ponzi schemes, and having seen the misery caused, I'd like to see this evil rooted out once and for all.
I despair, because it seems to me the only line of defence is knowledge, and the Ponzis have already employed all the best communication people to sell people on the idea of fast profits out of nothing and with no risk. Reason struggling with greed, desire and hope, I fear for reason's chances.
Dear Mr Eirik,
I am appalled that my response was hurtful.. i meant it to be tongue in cheek.What I should have written is – Idiotic as it may seem to you AND ME. I agree it IS idiotic and I agree that it is SO idiotic, that it seems not believable to people like us. That is what I meant.
I am terribly sorry and apologize whoel-heartedly to you.
I detest people who write hurtfully and in snide ways to undermine other people. Please accept my apologiy and assurance that I will be more carefull how I phrase things when I try to be funny in future.
And of course you are 100% correct that the 'old' way of writing insurance is in fact the ONLY way.
Let us, you and I and the others who care to come here, – let us all put out reason to work, together, to struggle together, against greed and ignorance.
No problem, no offence taken, my 'hurt' "was a little tongue in cheek" too, upon learning about this later time development in the insurance business that had escaped me.
Tell me, how much is the present situation possible to understand like a Ponzi scheme, in your view?
There seems to be the same obsession with bringing in the liquidity, taking up new loans at any cost if necessary to make the scheduled payments, just to preserve everybody's confidence in the system's ability to honour its obligations for as long as possible – ignoring the total debt and the possibility of paying it all back, until one day the promised payments can no longer be met (total payments too big, further funding is no longer available), and somebody (the tax payer) is left with a huge black hole of IOU "assets" but noone to pay them and collateral bringing in just small fractions of nominal value. Before the tax payer, all the partcipants in the scheme escapes with principal and interests.
Dear Mr Eirik,
Glad I had not offended.
Bringing in the liquidity to cover the minimum cash flow to cover payments IS ALL we are doing at the moment and for the last two years.
The global economy is Madoff write gargantuan. Neither the capital invested nor any income to pay for withdrawals exists. All that sustains it is new cash most of it coming from bail outs and share price ramping/inflating.
It will collapse unless a truely gargantuan amount of public money can be funelled into the financial system over at least 5 years. To do this will require the wholesale dismantelling of public servies, welfare and pensions.
Such 'cuts' would be far above the necessary and painful changes that do have to be made to pensions. These we cannot avoid. But what is goingt to be done in order to save the Financial 'ponzi' as you call it – are far more brutal.
If such were to be acheived it will be the reversal of every civilizing idea of the last century.
Dear Mr Golem, I found you at long last. Obviously I was looking for a totally different thing but now that I know where you are I look forward to seeing what you are thinking on a more regular basis.
On the notion of debt laundering and the actual status of money as embodied as a promissory note I was amazed to discover that the federal reserve was created (1913)In response to the stock crash of 1907 after a short squeeze scheme to corner the market on US Copper failed. This fiasco wiped 50% off the market and precipitated a series runs on the banks involved. There were dubious financial manouvers by the US treasury. The value on the paper has to be backed up by something we all agree on, but why is gold worth so much ?
Because it's pretty ?
I have no amswers but it seems our current predicament seems to be one of long standing and of a long and sad track record of structural failures and bungled greed.
It's all so sad. As a kid I thought we'd sort all this out by the millennium. Alas it is not so.
Thanks for sharing your perceptions on this.