“appears to be the most important net contributor to systemic risks…”

Of course Deutsche agues the standard ‘derivatives-aren’t-a-problem’ line, that this 42 trillion all nets out and their real exposure is a fraction of that vast figure. Which is fine as long as you think that in the event of Deutsche coming unstuck, 42 trillions-worth of derivatives contracts can be held in abeyance for the time it would take for all those contracts to be netted out.  As I’ve said before netting out is akin to getting a rowing boat full of people to all change places  without the boat overturning.

And now Deutsche has been threatened by the US DoJ with a $14 billion fine for its crimes for selling knowingly over-valued RMBS (Residential Mortgage Backed Securities) in the build up to the financial crash of 2007.

Deutsche cannot pay $14 billion without raising a great deal of cash. Deutsche has put aside $5.5 billion for paying fines. A mere 9 billion short. So could Deutsche go down? Financially yes it could. But politically, I doubt it. And it’s the tension between these two answers, between the parlous financial state and the huge political significance of Deutsche, that I find interesting.

Deutsche is Germany’s only G-SIB (Global Systemically Important Bank).   Deutsche is Germany’s financial flag carrier. It stands at the centre of Germany’s long held desire to have Frankfurt eclipse London as Europe’s financial centre. Although Germany also has Allianz as a G-SII (Global systemically Important Insurer), without Deutsche Bank Germany ceases to be a globally significant financial nation (G-SFN – OK I made that one up). Without Deutsche Germany would not sit at the top table of global finance. France would. France has three G-SIBs. The balance between France and Germany within Europe would shift. Maintaining that balance between France and Germany, at the heart of Europe, has been critical in European affairs since WWI.

Could Germany ever allow Deutsche Bank to go under?

Officially the global framework for G-SIFI resolution in bankruptcy has been laid down by the FSB and agreed by all. And interestingly, though they are touted as the result of new thinking since the financial crisis, they are not. I recently received an EU document marked ‘Secret’, entitled  “Overview of Financial Stability Resolution Issues” and dated Feb 2008 which describes pretty much what the FSB has now settled upon now. I mention this because almost every word in it was completely ignored once the crisis hit and each country viewed the imminent demise of their major, flag-carrying banks. Which leads me to wonder why I should believe it would be any different next time? I think this question is particularly critical to Germany because Deutsche is its only G-SIB. In the next massive implosion of debts, France could afford to let one of its G-SIBs go down and still have two seats at the top table. England could do the same.

How will G_SIBs  be wound down?

The not-so-new rules for how a G-SIB should be wound down begin by stating that,

Instead the dead parts will inflict losses first on share holders and then on bond holders in the time honoured order of unsecured first. And then those parts which are not completely dead and might be cut away to live again in a different body, are to be sold off by means of sale or merger.

In Part One I suggested that not only are the 1% well aware of this but that while they have been telling us how we must ‘save’ the present system and assuring us that any radical break with the policies of the past will result in catastrophe, they have in fact been working hard to engineer very radical changes.  We have all seen the decline in living standards and are all acutely aware of the changes which directly effect us. But I wonder if  the true significance of the changes, when taken together, has largely gone unnoticed? Certainly the Over Class has not made clear their real intentions. Why would they?  I believe the 1% know that to protect their wealth and power next time will require radical political dismantling of what is left of our democracy.  Necessarily much of what follows is speculative. But the speculation is, I think, rooted in and extrapolated from what we can already see happening today.

Some things about the present system must be maintained, others expanded and some new ones added. Taken together the changes, I think, amount to the beginnings of a Manifesto for the 1%. So here are some of the things, I think, our global Over Class would like to achieve and how they intend to achieve them.

As I have been writing this article it has grown, each section getting longer. I’m afraid I sometimes find it difficult to know where the sweet point is between, on the one hand – being too dense, and on the other – over explaining. So here is a outline of the sections so that you can see where I’m going and skip the sections that seem obvious.

Outline.

1) The Over Class must retain and consolidate their control over the global system of debt.

2) The power to regulate must be taken from nations and effectively controlled by corporations.

3) Professionalize governance. Democracy can be and must be neutered, and an effective way of doing this is to insist that amateur, elected officials MUST take the advice of professional (read corporate) advisors. Expand current law to enforce this.

4) The financial system badly needs un-encumbered ‘assets’ to feed the debt issuing system. A new way must be found to prise sovereign assets from public ownership. Such a new way is suggested.

5) In order to facilitate the political changes necessary, the public mind-set must be changed. National Treasures such as the NHS in Britain must be re-branded as evil State Monopolies.

6) Effective ways must be found to convince people that democratic rule is no longer sufficient to protect them.

7) An alternative to Democracy must be introduced and praised. That alternative must be the Rule of International Law as written and controlled by the lawyers of the 1%. People must be told that this is all that stands between them and an increasingly hostile and anarchic world. But that it can only keep them safe if it has absolute authority over democracy. People must voluntarily bow to it out of fear and its decisions must be as absolute and unquestionable.

In conclusion, I suggest that this amounts to a dystopian version of the old environmentalist idea of Spaceship Earth. A corporate version where we are just passengers who must pay our passage in a ship someone else owns. No longer inhabitants or citizens with the same inalienable right to be there and be heard as anyone else. 

And yet, dark as all this may seem, victory for the 1% depends on no one understanding what is happening. If we are already beginning to see the outlines of what the Over Class wants, then their victory is not assured. If our ignorance is their bliss, then our understanding is like sunlight on a vampire’s skin.

All is not lost, not by a bloody long way.

Towards a Manifesto for the supremacy of the 1%

1) Control of debt.

The 1%, through their ownership of the private banking system, must continue to issue and handle the majority of debt and have legal control over the payment of those debts. Power over the system of debt is critical to the 1% and one thing is paramount – there must be no democratic, nor public, control of it. That old saying, “give me control over a nation’s currency…” should now read, give me control over a nation’s debt. Debt trumps currency. Which in turn means the 1% must maintain custodial power over the money used to pay those debts.

At the moment, the largest custodial banks are those on Wall Street. Which means any dispute over what happens to that money gets settled in the Southern District Court of Manhattan. And that court has consistently interpreted international law in ways that have elevated the rights of private banks and bond holders over the rights of nations and entire peoples.  Two recent decisions in the US Supreme Court, which upheld the Southern District rulings regarding the Vulture funds Elliott Associates, NML Capital and others, forced the Wall Street custodial banks holding Argentina’s money, not only to freeze all payments but also to reveal all confidential information regarding Argentina’s assets. It is no exaggeration to say that these rulings favoured the Vulture Capitalists so decisively that it has changed the balance of power between private bond holders and entire peoples, in favour of the former. Even the UN wrote that the rulings were so sweeping that they,

…set legal precedents which could have profound consequences for the international financial system…

and which,

… will erode sovereign immunity.

Such is the power that the present arrangements give to the global 1% and their banks, that no group of emerging nations must be allowed to create rival custodial banks under a different court. Such would not only rival the mighty custodians of Wall Street but would stop the trend of enforcing US corporate law as de facto global law. If ever sovereign nations did not fund themselves by issuing debt, and if ever the 1% did not control where that debt and the ‘money’ to pay it was stored, and if ever the true sovereignty of nations was re-asserted against Vulture capitalism, then a great deal of the 1%’s power would evaporate. So none of that can be allowed to happen.

It is perhaps THE most important point of any for-profit, debt-based, currency or system (debt doesn’t HAVE to involve interest) that that debt must increase.  Not because it is a law of physics nor even that it benefits the 99% (largely it doesn’t) – it happens because it benefits the 1% to whom the interest is owed and more fundamentally because the entire value of the 1%’s debt-based, paper wealth depends upon there being a constant increase in debt. If debt didn’t increase then their wealth would become, first unstable, and then burn to ash. If that seems like I plucked this claim out of thin air I suggest that our present crisis and many others before it are the abundant proof. When the expansion of the global bubble of debt began to slow in 2007 it made the value of all the existing debt-based wealth first uncertain and then implode. Everything done since has been for the sole purpose of reflating the bubble of debt so that debt-based wealth could be said to have value. The 1% will never give up the power they currently enjoy to issue and control the inflation of debt, because their wealth would evaporate if they did.

2) Regulatory power.

One of the areas of power remaining to nations which act as an unwelcome hindrance to global corporate power is the power to regulate. This must be curbed and proposals are already on the table to do so. Such an effort is now enshrined in the multilateral trade agreements currently being agreed behind closed doors: the TPP, TTIP and the one which will remove finance from national control, TISA. These agreements all contain a new approach to regulation which we could summarize as “Our experts, Our data, Our regulations.” In a paper submited to the TTIP negotiations jointly by the US Chamber of Commerce and Businesseurope we find a proposal to adopt what they call “Regulatory Cooperation”. Which the paper says will,

“…put stakeholders [the corporations]  at the table with regulators to essentially co-write regulation.”  P. 4

The new philosophy, despite its coy claim to being about ‘cooperation’, puts corporations firmly in charge of setting the regulations for themselves and their products on the grounds that only they have the necessary experts, who have the necessary access to the data which is otherwise “confidential”. Or, to appropriate a phrase from the American revolution and use it for demanding more rights for corporations, “No Regulation without Consultation.”

The policy already being written in to the Trade Agreements and given specific teeth by their Investor State Dispute Settlement (ISDS) clauses, is not simply about who regulates what, it is the leading edge of a broad concern to remove any important decisions from democratic control.  The ISDS, in case you are not familiar with the jargon, is the clause first used in Bilateral Trade Agreements, now being incorporated into all Trade agreements, which gives corporations the right to take nations  to privately run arbitration at which they can sue the nations … and almost always win. And this, for me, is the key point. Disastrous as the Trade Agreements will be in and of themselves, they are a leading edge of this much more profound attack (see below) which I think we will see gathering pace in the next few years.

3) Neuter Democracy by Professionalizing Governance.

The Global   do not like democracy. In their less guarded comments this is beginning to show. Here is the EU Trade Commissioner, Karel De Gucht, quoted in a piece over at The Automatic Earth talking about the Scottish independence vote, 

 “A Europe driven by self-determination of peoples … is ungovernable … ”

One of the main ways the 1% can most effectively neuter democratic power (in a way that they can claim it is not their intent at all) – and the regulatory attack contained in the Trade Agreements is just one example –  is to advocate professionalizing governance. This has the advantage of sounding good on the surface. Who wouldn’t want professionals giving advice? In practice it will mean that although anyone can still be elected (that can be left in place) there will be a new insistence that they MUST – not ‘can’, but MUST, take the advice of professionals – corporate professionals. And as noted above a good step towards this has already been proposed for trade regulations in the corporate submissions to the TTIP negotiations.

The 1% and their media outlets will argue that Amateurism is no longer good enough. After all would you want an amateur heart surgeon, or an amateur nuclear engineer? No of course not. So why would you want amateurs to make decisions in any other sphere of governance? Elected officials are amateur. The experts whose ‘advice’  they, till now, “could” take, they from now on MUST take. And luckily there is precedence for this. Already when it comes to government ‘regulation’ of financial enterprises they use, retain, rely upon (you chose the phrase you like the sound of) the big 4 accountancy firms to do it for them. KPMG, not the government, inspects the books and signs to say that everything is tickety-boo and all the corporate bosses and their political friends then have to do is smile for the cameras. And it worked ‘really well’ in 2008 – in the sense that ‘The Regulator’ said whatever the 1% needed them to say at the time, until it was too late for anyone to do anything about it. That is precisely the kind of ‘regulation’ the overclass need going forwards.  Thereby, “No regulation without consultation” gets expanded to “No laws without consultation”. And of course that ISDS system of arbitration could be easily expanded to other spheres of government and used to stop any laws or changes to laws taken without or against ‘professional’ advice.

If any of this is put in place then it has the wonderful effect of leaving the politicians effectively powerless, but still in place so as to be the focus of blame. The 1% will hold the real power but the politicians will always take the blame. Any time things go wrong it will be because they made a mistake or did not follow advice as well or as fully as they should. Nothing will ever be the fault of the advice or the advisors.

As long as the 1% make sure the politicians are well taken care of after office, then there will be plenty of takers for the jobs. How utterly empty would the pantomime of our democracy be then?

So far this has been about taking from us. What about giving to them? Let’s not forget they have needs too.

4) From bail-out-cash to assets-for-pledging.

We all know banks would have died if it were not for the Trillions (yes, it is now counted in trillions) in public cash we have pumped in to them since 2007, to replace the flow of cash their brilliant loans should have been bringing in but of course weren’t and never will.  And that flow of public cash in to the private banks continues. Despite yet more empty lies about the banks being fine and fixed, as I said above we are not fixing them we are feeding them. The latest feeding will be when the  ECB gives them another third of a trillion in TLTRO (Targeted Long Term Refunding Operation) which replaces the sad, plain old LTRO of the last few years which gave the banks a trillion or so and was supposed (both times) to be the definitive fix. Of course since the LTRO ‘fixed’ things two major european banks still had the ungrateful effrontery to collapse – Banco Espirto Santo in Portugal and Monte dei Paschi bank in Italy. Right now all the other European, ‘not-in-need-of-any-help-being-perfectly-fixed and fine-thank-you-according-to-several-official-and-therefore-absolutely-trustworthy-stress-tests’ banks are lining up to take another third of a trillion. This, we are told will not only fix them…again…not that they need it, but will also encourage them to lend in to the ‘real’ economy. Which, oddly, we were assured the previous half dozen fixes were also going to do. But necessary as this sort of direct cash bail out still is, there is another pressing need which the bail-outs do not address. And that is the on-going but now rather accute need for assets which can be pledged as collateral for loans.

The reason assets are in many ways more important than cash is that although cash keeps imminent death at bay, assets, pledgeable ones, are the key to profit.

Banks want assets. The kind they are looking for are physical assets which produce wealth – like factories, or frackable land, or electricity grids, or ports, or telecoms systems. Assets that, unlike money, cannot be so easily withdrawn, tapered or ‘tightened’. The kind of assets  a nation might have, funnily enough. The banks don’t want these assets in order to use them to produce wealth directly, but rather to use them as collateral for creating more credit and debt. To think of the value of an asset in terms of the wealth or profit it can produce by its productive nature, is to be so very last century. It’s akin to thinking the value of a stock or share is to hold it and watch it go up in price. The real value of the stock or share is in trading it up and down as fast as possible. Let some slow-poke sit and just watch it. Similarly the value of an asset is vastly greater when thought of as the means for expanding the system of credit and debt. In the real world of making stuff, an asset like an electricity grid or a factory only makes the profit it makes. But in the world of credit and debt the same asset can be pledged over and over to create more and more credit. I pledge it to you and get a loan. You pledge it to someone else and you  get a loan. The system has grown twice. Have a factory and you get the profit it makes from its widgets. Use the title to that factory as collateral to get a loan or extend a loan (if you are a bank) and you and the rest of us in the system can use the same asset over and over. You can create a loan based on its collateral value. Or you could hypothecate your claim on the asset to another bank who can re-hypothecate the same asset and so on. And everyone else can write derivatives based on its value going up or down. Till we are all rich in paper credit and debt.

Of course we all know that if the music should ever stop, it’s the factory itself and the slow old boring profit it makes from selling widgets that survives while the paper turns to ash. Which would make you think that the smart people would play the credit and debt game for a little while but then cash out and buy up the real stuff before the music stopped. And that is, of course what they all tell themselves they will do. The problem is that as soon as you get out of the endless creation of paper debt and credit and buy real stuff you are in effect leaving the fast lane and driving back in the slow lane. Those who stay in the fast lane a little longer will do better that quarter and make you look like a loser. No one in the financial world can survive long as a loser. So there is a terrible pressure to stay in the fast lane just a little longer. Which means they all do. No one wants to be the first to lose his nerve and get out too soon. This is the nature of bubble growth. It is always better to stay playing the bubble. It is the nature of a bubble that even the smart players, who know it is a bubble, will want to hold and trade bubble assets rather than the boring, low growth real ones it is all ultimately based on.  And that is why they always, without fail, get caught holding them in the end. And then demand we bail them out. Which is how assets beget debts which beget the crash which beget the demand for a bail out so it can all start afresh.

The question is how to get your hands on those assets for a good price? The old fashioned way would be to invest wisely and buy it. The new way is to try to buy them at fire sale prices from a debt burdened or defaulting sovereign who you are ‘advising’ on how to cut its debt or pay its bonds by selling state assets. Of course the obstinate problem is that sometimes people don’t want their governments to sell off their nation’s treasures and assets. As long a some tattered shreds of democracy remain, this can hinder the process of looting.

At the moment nations can still default and force bond holders to accept a ‘hair cut’ – meaning a loss on their loan. This is always portrayed by our loyal media as some sort of crime against nature and an evil plot by crooked politicians. Despite the fact that when you lend money (and buying a bond is just that) you do so knowing you are taking a risk which is precisely why you are paid interest on your loan. So the risk of a loss is known and agreed at the start. And let’s remember most of the money made on bonds is, in fact, from the buying and selling of the risk of default. The trade in CDS (Credit Default Swaps) wouldn’t exist without it.

Of course if a corporation should act unwisely, go bankrupt and force losses on their bond holders – pick your example – Chrysler, AIG, GM, the S&L’s there’s an endless number – this is seen as a perfectly normal, if unfortunate.  But it is clear that there is a push to put a stop to nations being afforded the same right.

At the moment the major victory, which I mentioned above, is by the latest Supreme Court rulings in the US in favour of the Vulture funds against Argentina making it harder for any government ( I am thinking or Ireland in particular) to put the good of its people above the good of the bond holders.  The rulings make it now very likely that more and more bond holders will refuse to engage in any sort of voluntary agreement to restructure sovereign debts. The problem is, this route, the Vulture route, can take a long time and requires specialist lawyers. Not every bond holder has that expertise. They, the majority, need another quicker, easier route to getting their hands on national assets.

Here is one way I think they could do it. If I am right, and if this is a viable way, then they will have thought of it already and should be busy working out the legal fine print and preparing the politicians to agree to it.

In a nut-shell, I think nations will be urged to issue a new kind of sovereign bond which would be the equivalent of a corporate Covered Bond or, as they are sometimes known, a Pfandbrief. Don’t be put off by the jargon it’s quite simple. Should the borrower default or go bankrupt, a normal bond gives you a claim on the general pool of the borrowers’ remaining assets. But all the other bond holders have the same claim.  So you must all wait for the auditors to sort out what assets there are to be shared out and who gets how much back. Then you all form an orderly line with those holding the most senior bonds at the front and those with more junior bonds at the back. If the pool of  assets runs out before you get to the front of the line, then you go away empty handed. I’m simplifying but that is the general way it works. Except for one group of bond holders – those who have Covered Bonds or Pfandbreif, because those bonds not only have general claim on the pool of assets but have a unique claim, written in when the bond was issued, on assets that were ring-fenced as the specified collateral for those bonds ONLY. Those bonds have their value ‘covered’ by a specified group of assets. 

Now at the moment when a company goes bankrupt what we mean by ‘assets’ is everything: Cash, investments and any and all physical assets,  which means buildings, land mines, oil fields, and equipment, from machinery to paper-clips. However, nations are not considered as companies (YET). The 1% has encouraged the talk of UK Plc but it is not YET a legal reality. Which means when a nation defaults it does so because it says it does not have the cash (from financial holdings and tax flow) to pay the bond which is due for repayment. Till a few months ago no one had the right to claim for themselves a nation’s assets in payment of a debt. Nor had they any legal authority to force a nation to sell assets to get cash to pay a debt.

But over the years this presumption has been eroded. The privatization programmes of Thatcher were a major step in governments claiming the power to dispose of the assets of the people, as that government of the day saw fit. The recent rulings in favour of the Vulture funds have been another important step in giving the corporations  new rights – under US law only so far – to seize sovereign assets wherever they could. Which, in effect, means. if they could get their hands on them without the use of an army – such as seizing assets held in a third party bank or another country which would comply with the order. Thus a private custodial bank might agree to give the contents of a  sovereign nation’s accounts to a Vulture fund. Or a country in which, for example, Argentina had moored a state ship might agree to impound that ship till the Vultures could swing by and pick it up.

BUT a Covered Bond would make life so very much simpler for the bond holders. If a nation was induced to issue a Covered Bond then it could be written in to the agreement at the start, which national assets – a train system or oil and gas fields – were the specified and pledged as collateral for this particular bond. The government in charge when the default happened could then say to its electorate, “We’re terribly sorry but its right here in the small print – you – via your government agreed to forfeit these assets if you failed to pay. This is international law which we must obey.” And THAT last phrase is the key which opens the door to the future the 1% want.  A future were International Law is held up as the new supreme, and completely non-democratic arbiter of right and wrong. International law would be the new god. And like god would be above the whims and breezes of merely popular wants and desires. People already see the law as somehow above democracy, forgetting that democratic governments wrote the laws and have the power to unwrite them if the people so direct them. This last point is the one will be overlayed and suppressed. I will come back to this.

But back to Covered Bonds. It would be a simple matter for a compliant government – an ably advised one of course – to issue such bonds in the people’s name. Will nations be stupid enough to go for  it? Well the ‘nation’ might well object but that’s precisely what politicians are for. Elected politicians would be willing to do it today – except for the fact they know they would be thrown out of office immediately. So what is needed is a major media campaign complete with paid-for experts and pundits all saying how the way forward for nations who are presently unable to access the bond markets is for them to issue Covered Bonds. Get experts from Germany to talk about the long history and success of the German Pfandbrief. Have them talk about how banks that have issued such bonds are considered among the safest. Link together in the popular mind the issuing of Covered Bonds with the general idea of safety and prosperity. Never mind the one doesn’t cause the other. Don’t mention what enormous rights they would be giving the corporations nor what a huge part of their sovereignty they would have signed away. Don’t let these things be mentioned. Then move on to suggest that issuing such covered bonds would lead to greater investment even for nations that are not having trouble issuing bonds. As soon as you have made this link between issuing these kind of bonds and ‘greater inward investment’ the job is almost done. It is this link to attracting greater inward investment which is being used to sell the Trade Agreements, Bilateral Investment Treaties and the Investor State Dispute Settlement mechanism, saying that it is only those nations who agree to them, who will benefit by attracting more investment. It isn’t true, (there have been several studies the first in 2002 by the World bank concluding it isn’t true)  but as long as we keep saying it is, who will argue? And people will eventually come to think it must be a good idea.

In the Covered Bond future a hideous inversion will take place. Once upon a time bonds were issued so that a nation could build up a wealth of essential infrastructure such as hospitals and roads, and to develop natural resources for the benefit of the entire nation. In the Covered Bond future those resources and national treasures would be pledged for nothing more than raising more debt and would, after another financial crisis and the deluge of new bail-out demands it would bring, undoubtedly hand over their ownership to the bond holders. And it would all happen without a Vulture having to stir from its perch and where any murmur of discontent would be met with righteous sermons about the sanctity of international law.

5) From National Treasures to State Monopolies.

Of course it will not be quite that straight forward to prize a nation’s assets and wealth from its people’s ownership.  Other ideas will have to be changed as well. National Assets must be re-named as State Monopolies. Instead of talking about, for example, how efficient a national health system is, or what good care it provides per capita expenditure it must be referred to, darkly, as a State Monopoly and all the talk must be about how bad monopolies are. No attention must be paid, no reference ever allowed to studies by the WHO or this one by the Commonwealth Fund that have consistently found,

The United States health care system is the most expensive in the world, but…the U.S. fails to achieve better health outcomes than the other countries, and … is last or near last on dimensions of access, efficiency, and equity.

No mention of such studies must be made. Instead all talk must simply concentrate on how restrictive state monopolies must be and how they must limit ‘choice’ and allow inefficient and greedy public workers to burden everyone else.  And wouldn’t you know it, the effort is already under way. Here is a paper from the Fraser Institute in Canada calling state education a State Monopoly. The Fraser Institute is resolutely free-market and is funded by the likes of ExxonMobil and the Koch brothers.

The paper doesn’t claim, because it hasn’t any evidence to support any such claim, that the State school system educates badly or that for-profit schools are a better way to educate a nation. Instead it simply says how bad monopolies are. How they restrict choice.

Canadians rightly complain about protected industries – whether it’s dairy products, telecoms, banking, or transport – and the consequences in the form of less choice, poorer service, and/or higher prices….

The paper then begins to talk about education as if it were a ‘protected’ industry. Allowing it to elide the harm done by monopolies in the market, with free education.

 When government is the sole supplier of services, the options for consumers are extremely limited.

Of course in the case of the NHS in the UK where the government is the sole supplier and it is, therefore, a State Monopoly the result has, for several generations, been a health care system that is cheaper and better than the US free-market version in almost every single way.  You may hate the conclusion on ideological grounds but, in fact, all the actual evidence is on my side.

But evidence has never been the concern of the global overclass, has it?. Fear and greed is more their currency. And so the assets of every nation are to be denigrated along with those who work in them, as inefficient and staffed by greedy, lazy state-worker parasites bent on restricting everyone’s ‘choice’. If enough people can be taught to hate the teachers who teach their children and the doctors and nurses who care for their parents and if a general culture of hate-thy-neighbor can be engendered, then the Over-class will be significantly closer to asset stripping your nation – with your help. You might imagine an Orwellian slogan of “Give up ownership/Get more Choice!” Believe it at your peril.

This is speculation, of course, but papers like the Fraser institute’s make it not so much ‘groundless speculation’ but more ‘extrapolation from what already is’. There already is a firm intent to privatize education in those countries where state education is good, and a huge desire to privatize all the state health systems that DO WORK and DO deliver fantastic services, like the NHS in the UK, because they would be priceless assets to strip. And every nation has natural resources which, like the common land of centuries ago, the over-class would like to enclose using exactly the same argument they used to clear the Highlands and enclose the Common Lands of England – “Oh they’ll be so much more valuable and productive when accumulated in our private hands than if we leave them distributed among the unworthy commoners.

It warmed for them a few hundred years ago. They are hoping it will work for them again. We must stop them and not only do I belive we can, so do they.

Which is why discrediting democracy itself, above all else, must be the urgent task of the Over Class.

At the risk of your ire I am pausing again here. I hope that the argument so far has provided sufficient to disagree with, comment upon, refine and improve so that you will forgive me for holding back the last few sections.  It seemed to me better to get this much published, and give people a chance to comment rather than deliver it as one enormous lump. Anyway the last part will be finished soon and will follow shortly. Promise. 

They are an emotive topic. They divide people. Do they exist or are they a political scapegoat? I personally do not feel anyone is born undeserving. But some people achieve it. Some seem to take a cruel and degenerate delight in causing harm. Others become so out of weakness. They are faced with moral decisions in life and they take the easy  path of closing their conscience to the harm they do others. We have all seen them. It may not be politically correct to label them for what they are but I do not like political corectness.

So let us be honest. The feckless and irresponsible exist. They are people who think the state is there to look after them and clean up their mess. Who think nothing of spending other people’s money and then brazenly asking for more. They are people who make other people’s lives, honest and hard working people’s lives, a misery but laugh because they know the police can do little to them and the courts will just give them a slap on the wrist, if that, and then let them go. Free to walk straight back to do again whatever they feel like.

They are a plague. The State, however, not only does little to stop them, it takes money from the pockets of the deserving and the honest in order to give it to these people.

What I find oddest about the Undeserving is how the papers and politicians only ever seem to talk about the undeserving poor and never, ever the undeserving rich. Yet if we are keen to identify the one, then it is pure hypocrisy and worse, to not recognize the other.

If we are happy to talk in generalizations then let us do so equally.  The wealthy are quick to conjure up the feckless and irresponsible poor but what about their moral dopplegangers among the rich? What about the professional bankers who  set up bonus schemes in their banks to ensure that products were sold to people who could not affrord them or did not need them? What about those who complied – who took the morally easy route and sold bad products to people who could not afford them or didn’t need them? Were they feckless, and irresponsible?  And what about all the  traders who sold fraudulent securites and CDOs? They worked for Citi, and Deutsche, and Wells Fargo and RBS and the rest and they knew exactly what they were doing.

What about all the wealthy bankers, accountants, auditors and analysts who all helped the banks they worked for, to take on debts they could not afford and then expected others to clear up their mess and then shouted, “Oi, where’s my bonus. I know my rights!” Are they not loathesome, feckless, irresponsible, anti-social and vile?

If the undeserving poor exist and deserve to be despised, then so do the undeserving rich. If we should loathe and vilify the one group then we should feel free to despise the other. If we feel free to make generalizations about one group then no one should complain if we do the same with the other as well.  It cuts both ways.

I do not like generalizations because they are dangerous. They are a handy tool for bigots and haters. But I also do not like dishonesty. So I have to say I have met the undeserving poor. They are stupid and cruel, violent and full of hate. But I have also met people who looked just like them, who talked like them and acted like them, but who did so out of fear. They were perhaps weak, perhaps just realistic about the direness of their situation.  They were part of the problem but not its real cause. Not like those who had become so twisted that they were beyond my personal compassion.

I also taught their children for a little while. Some of them had already become cruel and hateful. But most had not. Most were frightened and unsure. They saw cruelty and want all around them and looked for guidance, for answers. The answers I saw them getting not only from  those around them but from the wider society who had already labelled them all as the undeserving, feckless underclass, gave them, and me, little hope.

Since then I have met the Undeserving Rich. They too are not born that way. And like their counterparts in the Underclass, there are different shades of undeserving in the Overclass. Some become vile and full of callous disregard very quickly. Others struggle with the moral dissonance of talking about caring while watching their parents not care. I have met many such children of the wealthy and they go in one of two ways. A very few cannot reconcile youthful idealism and their own privilege and refuse to join their parents. They do ‘good works’ and miss the warmth of the family who wil not accept their values. Others crack and become filled with a burning and self righteous anger at the very existence of the poor, who they blame for having caused their moral suffering. In my experience they are the ones who shout loudest about the undeserving poor and how, if anything, the poor deserve their poverty because they do nothing to rise above it. They tell others to get on their bike and rise above adversity when very few of them have had to rise above anything much at all in life.

Of course there are always the self made men who say, “I did it so those who didn’t are lazy.” They are often the most self-righteous. They are rarely willing to entertain the idea that countless circumstances can make one person’s decisions work out while for others something goes wrong. So let me offer another very obvious thought experiment to counter the self made man.

Take a packet of seeds and scatter half on lovingly tended ground, the other half among the stones. In the well tended garden even the weak seed will have a good chance of thriving. Among the stones, every gardener knows the odds are slimmer. Some seeds will still make it but the chances are not good. What kind of gardener would shout at the seeds he had scattered on untended ground as if it were their fault? Of course we are not helpless seeds. But the odds in favour of one group, against the  other remains true. Why do we accept this for seeds in a gardren but not for children in a city?

Everything that is levelled at the Undeserving Poor is true of the Undeserving Rich. The feckless and irresponsible exist in both. Both look to others to bail them out. Neither has any intention of changing. Both prey on the rest of us. But which of the Undeserving are the greater danger? Which causes the greater suffering? Which group laughs most at the burden they expect your children and mine to carry for them?

And most importantly which group has the power to change things but chooses not to? Is it the poor who have the power and wealth to transform their lot and yours, or the wealthy?

I would say this, if we are tempted to talk of the ‘Undeserved’ then let us do so fully. There are people who do not deserve the poverty they were born into. In fact I find it difficult to think how anyone could deserve to be born in to povery. Similarly there are people who do not deserve the wealth they were born into. Is this envy talking? No. I am more or less happy with my lot. We are arguing from first principles here. Neither group earned their lot in life. They inherited it. One group enjoys the fruits of their inherited but unearned and therefore ‘undeserved’ wealth and power, the other enjoys unearned and undeserved poverty.

If the notion that there could be undeserving rich bothers you then why does the idea of undeserving poor not bother you?

I know that officially it was supposed to be an edge of your seat, high stakes thriller about how much debt the US government can carry before some disaster strikes, and who has the authority to decide. But I think that behind the lumbering domestic stage show there was actually a different, larger battle, with different stakes, being played out. The debt ceiling debate was, to my mind, something of a proxy war. Real for those caught up in its angry rhetoric, but seen from further away, clearly just a local manifestation of something deeper, and something being directed by different people than those making speaches in the spot-light.

Actually I think the fight over the US debt ceiling is a proxy for who controls the world’s real reserve currency. And that currency is not the dollar. I suggest we would understand events more simply if we recognized that the world’s real reserve currency is debt -pure debt.  We should not be confused by the fact that debt, globally, is denominated in several forms. Much like the dollar comes in bills of ten and twenty,  so the debt currency comes in dollars, euros, Yen and Yuan. But they are not the currency itself they are just the different bills it comes in.

In Britain we have pound notes issued by the Bank of England but also by the Royal Bank of Scotland, Clydesdale and Ulster Bank, but they are not different currencies, they are all pounds no matter whose logo in on the notes. I think globally we are now in the early and perhaps not quite recognized days of a similar situation. It is debt which is globally traded and used to settle and value all deals everywhere. The problem is this global debt system is not yet fully formed. It is still umbillically tied to the old system of national currencies and their issuers. And like mummies everywhere the old issuers like to think they are in charge long after they no longer are.

If you are willing to accept this idea, at least for argument’s sake, then the domestic dramas in different countries over how much of this or that kind of debt backed note, with this or that logo on it, should be permitted, take on a different character. I am not saying that the domestic arguments over how many dollars or euros can be printed up, how much debt should be carried are unimportant. They are important and do have profound real life consequences for people and businesses. But I am saying that the driving logic is not domestic and nor is it controlled or even understood by most of the domestic players.

Think of the Vietnam war. In Vietnam it was North vesus South. But for the wider world North and South were just proxies for a much deeper conflict of Communism versus America. And the politicians of South Vietnam were not really in charge of very much. I think this is increasingly the situation of domestic politicans when it comes to finance, debts and currency. Only they don’t yet know this one vital fact. Thus we have the dis-spiriting spectacle of watching the fag ends of our representative democracy argue about things most of them do not understand. An endless stage show where the actors strut and fret, and deliver their lines with gusto, pulling with all their puffed-up might on the familiar levers of power available to them, expecting applause. Yet all the while their drama and the levers of power they squable over are less and less connected to the actual engines of change.

The Democrats and Republicans think they are arguing over who should control the amount of debt the Fed will take on. Not realizing that neither of them, neither Republican nor Democrat controls the matter over which they are arguing. Neither do they realize – not fully at least – that theirs is no longer a theatre of power, it is mostly just a theatre. Power, fundamental power,  has moved elsewhere.

What the debt-celing debate was about, I suggest, was a fight between those who think they control the Fed and the currency (because once they did) and those who do control it but would prefer we not quite realize this.

I think the real battle going on is between the financial players led by the global banks, assorted funds and Insurers, all of whom are very much addicted to fiat debt-money, and a dwindling cadre of politicians who still think central banks control the currencies and elected officials decide how much debt is enough.

This latter group seemingly cannot understand why they can’t get the Fed or the ECB to do what they both said, ever since 2008, they would do, which is to ‘exit’ or to use the prefered term ‘taper’ the ‘extraordinary’ and ‘temporary’ measures they took in 2007, then took again in 2008 and again in 2009 and again in 2010 and 2011 and 2012 and 2013. Which is, let’s be fair to our puzzled politicans and pundits, a confusingly frequent use of ‘extraordinary’ and a long time for ‘temporary’. Hence their confusion.

What our politicians – most of them but crucially not all of them – seem reluctant to underdstand is that neither the FED nor the ECB nor any other central authority, can limit the amount of debt that is issued into the global markets. The banks issue the debt not governments. But that debt, conjured into existence by extending loans does then, particularly in periods of market uncertainty, ‘need’ – or rather or ‘demand’  – backing from a national currency. This creates a pressure on central banks to ‘issue’ more sovereign debt paper to provide the backing for the ALREADY created debt.

The big banks issue the reserve currency. It is a global reserve currency and replaced the dollar some time ago, only no one noticed becaue they kept the old brand name going. It’s not even as if it is just American financial intitutions which issue dollar debt which the Fed finds itself being forced to cover – foreign banks do it to. And anyone who issues dollar denominated debt has a hand on the strings which move the Fed around. Obviously the same is true for other major currencies and their central banks.

The governments and central banks can try to influence the creation of debt though interest rates or ‘stress tests’ and setting levels of ‘regulatory capital’ that must be held. But all of these can be and are gamed by the banks. And when gaming is not sufficient then a debt crisis can be brought in to play to force the reluctant politicians to do what they ‘must’. And that last ploy is the debt ceiling.

Once private debt has been created the central banks are under-pressure to create public debt with which to back it. They know this is how it works they are on record as saying so. But they are caught in a dilemma. The politicians and the public think the government and central banks are in charge and can tell the markets how much debt is enough. The central banks know they do not really have this power because in reality it is the markets not the central banks who are in charge and  decide how much debt is good for THEM.

What can the central banks do? Nominally they work for the government. The people even think they work for them (ho ho!) Whereas the logic which controls lies in the markets and the levers are in the banks. If the Central banks were to come clean and tell the government and the public who is really in charge, who they really work for, what would happen? So they don’t come clean, at least not in public, leaving the poltiicans to argue fatuously amoung themselves for our entertainment.

There are only a limited number of end games I think. The issuance of debt will go on despite the increasing drama of the decisions. The question for the banks will be how best to manage it with the minimum of fuss and least chance of the real situation becoming too clear too early.

Debt issuance will go on because the present economic system, fueled as it is by debt, requires growth above the rate of interest they are all charging each other. The Pension companies require more growth than that because they have long term obligations to pay out at a higher rate. In boom times growth takes care of itself. In bad time that growth ‘must’ be provided by ‘stimulus’ AKA public debt. The minimum growth they want for the headlines is 3%. Which seems reasonable till you do the maths and find 3% growth means a doubling every 17 years. Given the frequency of ‘busts’ built into the debt based system and how much they cost the public each time – (and they are built in – I explained one aspect of this in the last part of the Securitization series. (For completeness here are parts 1 and 2.)  This series is my take on the same logic than Minsky had of course already come to before and more fully) – it is clear how much ‘growth’ is going to be based on public debt. So the debt will grow.

But while it does, other parts of the economic system and their political friends will complain about the size of the debt. So there will continue to be a pressure to stop the debt ‘getting out of control’. How to sqaure this idiot’s circle? The answer is already here only in its infant form. Public Debt created to back private debts will be ‘required’ to grow. Public debt for other things will therefore be under pressure to be cut. So far what has been cut has been the easy and the small beer.

The sums ‘saved’ have been tiny in comparison with the sums created in order to ‘help’ the financial system, even though the misery created in cutting them has been huge. But who cares about miserable poor people when you’re a rich happy one? Nevertheless the sums saved through ‘austerity’ are not going to be sufficient over even the medium term of the next decade. The ‘savings’ need to be orders of magnitude greater. For that the only option is to target the long term, ‘unfunded commitments of health, state pension and long term welfare. These are what the bankers will target when people have been softened up and the next bust hits.

The option I think they will go for is complete privatization of health, welfare and state pension.

All these long term ‘unfunded obligations’ as they are called appear in public debt accounts as future liabilities, future debts. But as soon as the same obligations are shifted to the private sector they become future profits rather than future debts. No matter that people might not be able to pay for them – accountants are not paid to worry about such details. To you and me it might seem daft to think that by moving things from one column to another , from public to private that this will suddenly make things better. And of course it won’t. The private sector will argue it will be ‘better’ because they are so much more ‘efficient’. Believe that if you like.  But the main thing is the acounting exercise will make the number in the public debt column go down.

The important thing for any discussion of public debt levels, is that removing these ‘obligations’ from the public account suddenly cuts the future public debt. Freeing up all that now uncommitted future debt to be available for pumping into the private financial sector . Which it would suddenly make ‘good economic sense’ to help, given the now very buoyant future demand for private health, pensions and welfare provision.

Public debt is always seen by the financial world as a drain, an obligation. The same obligations re-cast as serivces are seen as a source of future profit. Thus I think we will see in the next few years an all out attack on every aspect of public service provision.  Libertarians amoung you might cheer at this point. I think you will not cheer when you see what is going to replace what you currently dislike.

I believe the era of the Nation-State is coming to an end not because of attack from outside enemies but because Nation-States are being dismantled from the inside – by the  State itself.  But the State has no itention of losing power. It is simply changing jobs and employer. The big welfare state is being dismantled but in its place is going to come an even bigger and certainly more repressive Corporate State.

But the End of the Nation-State and the emergence of a global system of  Technocratic, Managed rather than democratic Corporate-States is a larger discussion I am still writing.

When trying to fathom the causes and consequences of this crisis back in 2008, I was openly exploring various avenues of explanation, many of which lay outside mainstream economics. There was the Austrian Economics approach and the Marxist view of Capitalism in crisis, to mention but two. Each of these avenues seemed to contain elements of plausibility, but most of them failed to provide a holistic narrative of the crisis, and why it was happening at this point in time.

That changed when I set aside a few hours one evening in late 2008 and watched Chris Martenson’s “Crash Course” (http://www.peakprosperity.com/crashcourse). As anyone who has watched it will acknowledge, it’s not an academic treatment, but it does provide a framework based on common sense that situates the current crisis as a series of unsustainable trends: the enormous build up of debts as claims on wealth which can’t all be honoured, and our reliance on energy and material resources which are suffering from diminishing returns.

This instantly made sense, as the concepts of limiting factors and dynamical growth patterns are quite common in the natural sciences. So time to revisit the social science of mainstream economics and see what they had to say on these subjects. Firstly, the role of money is assumed away, as merely a veil over barter, so nothing to see here folks. And secondly, we don’t need to worry about energy as this is merely a small fraction of GDP, and besides humans have infinite ingenuity and resourcefulness. There are no limiting factors declares economics, and no awkward dynamics to model. Problem solved, right? Well, only if we are happy to accept a further set of anomalies:

1) Given that we have a society of money worshipping individuals, why do we have an economic framework that omits the role of money?

2) Given such a highly materialistic society, why do we presume a purely psychic basis of wealth?

Oh, and of course that slight issue we mentioned earlier about a theory that can’t predict crises, predominantly because nothing is unsustainable in its eyes!

So what does economics study, then, if not money or material resources? And could the omission of these two vital aspects possibly be related to it’s failure to predict the crisis?

The intellectual edifice of economics stood resolute, confident that its models of the world, without an actual representation of money or material resources, could accurately explain how we had obtained such abundance of money and resources. Nevermind these bothersome paradoxes and anomalies, they declare, their theories alone held the key to future prosperity.

It would take another few months of exploratory background reading until I came across the works of Frederick Soddy. What struck me was that a Nobel chemist writing in the 1920s had also drawn attention to these paradoxes, and had offered accompanying solutions. Here was a more weighty treatment of the subject than Mr Martenson, using logical propositions carefully assembled one upon the other. For me, the veracity of Soddy’s argument was there for all to see, yet his views were considered highly unorthodox at the time, and for the most part still are.  But why is that?

Money as debt

The first pillar of Soddy’s argument surrounds the very nature of money. Everyone uses money, yet few people truly understand what it actually represents. The extent of monetary relations back in Soddy’s day is probably a lot less frequent than now, as many transactions and means of subsistence probably lay outside of market transactions. However, Soddy gave a cogent explanation of money:

“We thus come to look upon money – quite irrespective of whether it is specie or paper – as a token certifying that the owner of it is a creditor of the general community and entitled to be repaid in wealth on demand.” Wealth, Virtual Wealth and Debt (1926) p134

Money is more than just a more advanced substitute for barter, declared Soddy. In barter, all transactions cancel each other out, but with money, there must at all times be someone left holding tokens, rather than real goods or services. Money is therefore a form of negative inventory. As negative objects are not physically possible, we must be dealing with a fabricated construct. A holder of money forgoes actual ownership, instead deferring his purchasing power. It will then require a further social arrangement for this token to get converted back into real goods. Up until it is handed over, it is not a real asset at all, but wider society’s liability. As Soddy quipped:

“Money is the nothing you get in return for something, before you can get anything”.

Therefore, it is not a harmless veil over barter. It is a token of indebtedness, and a claim over the real inventory of goods and services in society. Standard economic models on the other hand declare that the money system is completely neutral. In their worldview society’s mutual indebtedness cancels itself out. If that is the case in their economic models, then why can’t the debts be cancelled out in practice? Mainstream economists refuse to contemplate this very obvious logical contradiction. To them, the money system is absolutely essential for a functioning economy (i.e. it must be preserved at all costs) yet at the same time is unneccessary to model!

No standard macroeconomic model takes into account the burgeoning balance sheets of individuals, banks, companies or Governments. They are obsessed with liquidity, for sure, but have no interest in the liquid!

Soddy, however, was also perceptive enough to understand that the source of most circulating money was through private bank credit creation. He was highly critical of this unearned priviledge, as in his eyes a bank undertook no genuine forfeiture when creating a loan [1]. In reality the debts are simply an accounting entry. But far from harmless, they help to enforce a power relation within society, and Soddy was well aware of this situation citing a 19th barrister and expert on the subject of credit:

“The merchants who trade in debts – namely bankers – are now the rulers and regulators of commerce; they almost control the fortunes of states.” H.D.MacLeod quotation in Wealth ……. p77

Confusion between debt and wealth

Equally importantly, Soddy went on to warn of the dangers of prolifigate debt expansion:

“You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt, against the natural law of the spontaneous decrement of wealth” Cartesian Economics (1922)

To Soddy the problem lay in the misunderstanding between debts and genuine wealth; one can be endlessly accumulated (social arrangements permitting!), the other cannot. Which leads us onto the second pillar of Soddy’s economic treatise; the acknowledgement of a real and practical basis to the concept of wealth:

“The essence of wealth is not power over men, but power over nature” Wealth ….. p100

As was discussed above, money and debts are a reflection of power over others, but this doesn’t automatically make it the same as wealth in an absolute sense.  To mainstream economics, the money system is the measurement basis of wealth, so the more money we have circulating (controlling for price level, of course), the more wealthy we are. However, Soddy declared it a highly unsatisfactory measure of wealth, because the relative power over other members of society can change up or down, regardless of the real goods and services in supply. Not only is the measuring stick highly elastic, but we mustn’t confuse the stick with that which is being measured. Soddy uses the following example to highlight the confusion:

“A ham merchant working on what he is pleased to call a 10 per cent basis of profit, may buy ten hams for the same sum as he sells nine. He may be pleased to think he has made a profit of one ham, but he certainly has not made a ham.” Cartesian Economics

Genuine wealth, Soddy argued, is that which provides us with a high standard of living. It is an ability to do real physical work, over and above that which we can achieve with our hands. And the source of this is any form of “embodied useful energy”. It is no coincidence that the rapid increase in living standards that commenced about 250 years ago was accompanied by a plethora of mechanical innovations, the majority of which require energy inputs to function. Economists and lay people alike admire the spark of human invention, but conveniently overlook the actual fuel that powers them.

Soddy was appalled at the overtly supernatural basis of wealth employed by neoclassical economists. This can be traced back to the influence of Jeremy Bentham and his concept of utility. But the notion of utility is a purely subjective phenomenon that occurs in the minds of people, not in the real world. Economists chose to define wealth by wants and desires alone, as measured by the market price. If this were true, then wealth would only be constrained by human willpower, as the mere act of creating desire can generate wealth. This may sound appealing to us, that we humans have enormous internal powers of creation, but Soddy rightly declared this to be logically absurd, counter to experience and in contravention of the laws of physics [2]:

“Real wealth rots and rusts, whilst debts multiply by the laws of compound interest”.

Chrematistics

What baffled Soddy most was why, with the advent of scientific progress, debts were actually growing, and wealth was not more widely distributed:

 “Has progress provided for the redemption of debts, or the multiplication of it?” Wealth….. p101

This was symptomatic of some very obvious flaws in economics. Soddy rightly argued that the study of economics had been reduced to little more than the subject of trading, hence he frequently described it as Chrematistics (see http://en.wikipedia.org/wiki/Chrematistics), rather than flatter it with the term economics. This was because neoclassical economists had avoided and obfuscated the main responsibilities of economics, which was to explain the origins of absolute wealth, and to debate its fair distribution. Topics which once were the focus of classical economics (or political economy as it was known back then), but which were waylaid, even before his time. Soddy was quick to point out that holders of monetary claims only have purchasing power to acquire real assets as a result of social conventions. Real wealth cannot be stored in the same way that money can, so there is no guarantee of these claims being honoured.

To Soddy, real wealth has to obey the laws of physics whereas money and debts are merely important social constructs. Paradoxically, neoclassical economics seems to inhabit a parallel universe where wealth can be created at will, money is irrelevant, yet debts are a tangible reality!

On both the origins of wealth and the nature of money, his perceptiveness is timeless and still stands as a severe critique of neoclassical economics [3]. I don’t claim that Soddy pioneered all these views, as many of his theories were clearly influenced by early economists such as the Physiocrat movement and the social criticism of John Ruskin (especially “Unto this last”). There are also echoes of American economists Henry George and Thorstein Veblen too. But he did synthesise a lot of critiques into one coherent framework. His impact on the mainstream has been minimal though, with only obscure pockets of heterodox economic schools following his line of thinking. So what went wrong?

Playing the man

Unfortunately for Soddy his foray into economic matters appeared to have prompted some vitriolic responses, with his obituary describing him as a crank and a heretic. It was rare for any coherent or plausible critique to be levelled at Soddy’s arguments:

“It was indeed a revelation to the author, accustomed to think of the battle for liberty of thought in scientific matters as having been fought and won centuries ago at the time of Galileo and the Inquisition, to find that in economics, as distinct from physics, it has not yet been won at all… If economics were really a science, it would not need to protect itself from criticism by a conspiracy of silence. A responsible criticism would in any scientific subject be met with instant response, and not by the ostrich policy of burying the head in the sand in the hope that that will thereby choke the ears and throw dust in the eyes of the pursuer also.” Wealth…..p292

Instead he suffered a similar fate to that of Nicholas Georgescu-Roegen, an establishment economist in the 1950s and 1960s who appears to have been excommunicated from the neoclassical priesthood in the 1970s for adopting similar theories of economic production grounded in physical reality. In both cases the response from the establishment was either to be ignored, or subjected to personal insults. But tellingly, never a direct attempt to critique his theory through logic or evidence.

This is a cheats method of debating, known in polite circles as Ad Hominem rhetoric, or in more down to earth language as “playing the man, not the ball”. This was nothing short of intellectual cowardice and downright bullying. Hardly the conduct of a mature scientific profession. It has been almost five years since a much clearer and plausible explanation of this crisis has been opened up to my eyes, yet it still feels like a constant battle to get these ideas accepted in academia, the media and the wider public. When I first saw the Crash Course series, it made a lot of common sense and was logically consistent and coherent. I could understand why the mainstream may not have heard of Chris Martenson, given his relative obscurity. But why was this same message, delivered some 90 years ago by a respected Chemist (the closest Britain has probably had to an Einstein) ignored and ridiculed?

The ultimate heresy

Perhaps Soddy’s ultimate heresy was to challenge the inherent power hierarchy of society. He argued that society should control money, not be controlled by it, and that humans should respect nature’s gifts and not overly exploit or squander them.  Those were the absurd paradoxes of economics that Soddy did his utmost to try and correct. He cautioned us about our arrogance and explained that our energy dowry, ultimately from sunshine, was the root of our wealth. Finally he dedicated his later life towards promoting a basis for money that didn’t render people as blindly subservient to it.  As Ruskin had warned beforehand, to the effect “Now, as he was sinking, had he the gold? Or had the gold him?”.

Soddy’s message delivers some uncomfortable truths about who we are (we are subservient to nature, not omnipotent), and what we can aspire to (we can’t build an economy on get rich quick schemes, so forget about flipping that house, winning the National Lottery, or trying your luck on TV Talent shows). He had clearly pointed out the absurdity of everyone trying to live off the interest from savings. Certainly one group could achieve this, but it would be foolish to think that a whole society can expand its purchasing power in aggregate by the same method. Perhaps most of us are hardwired to believe in the fairytale of perpetual profit and infinite growth. Not only were Soddy’s views deeply unpalatable to the existing power structure of society, but they probably cut against the grain of human instinct, too.

The cult of economics

Economics purports to be an objective and purely neutral science. Yet it clearly fails on both counts. It certainly is not an inclusive subject (outsiders are regularly shunned), nor is it a true science in that it rarely provides testable hypotheses. Even more disconcertingly it actually operates as a Trojan Horse for justifying morally reprehensible decisions and outcomes (e.g. the privatisation of public assets, austerity policies that disproportionately affect the poor, tolerating rising income inequality, etc.). It is in fact an illogical and deeply immoral cult acting as a propaganda machine for certain (already) wealthy interests. The fact that it preys on our inbuilt desires and weaknesses to sneak these insidious theories past us, suggests an even greater deviance. We have trusted them with managing vitally important aspects of our society, and they have wholeheartedly abused that trust.

As Soddy poetically decried:

 “We had kings of nations and captains of industry. The captains and the kings depart, leaving us emperors of debt, rulers and regulators of commerce, controllers of the fortunes of States, for whom the one world is too small, and the whole universe capable of assuaging only for a moment an infinite thirst.” Wealth….. p100

Sadly, the ability of this earth to satisfy that infinite thirst is diminishing. Which leaves us with the final paradox of economics. It could know better; and it should know better. The story of Frederick Soddy’s foray into the realm of economics highlights how the central canon has been repeatedly warned of its flaws. But not by chance or incompetence did it ignore these criticisms. The reason it keeps its head in the sand is because the current dogmatic worldview serves specific individuals’ interests. Economics has a lot of dirty secrets, and one by one they are coming home to roost.

————

[1] This topic was taken up in the post Money Makes Our Heads Go Round (https://www.golemxiv.co.uk/2012/11/money-makes-our-heads-go-round-guest-post-by-hawkeye/) which gives a detailed exposition of this stance, and it’s slow but steady acceptance within certain areas of academia and regulatory practice.

[2] The post Slippery Grip of Growth (https://www.golemxiv.co.uk/2013/03/the-slippery-grip-of-growth-guest-post-by-hawkeye/) provides an extensive overview of why the neoclassical basis of growth is flawed. Limitations are constrained by physical resources, no matter how much human ingenuity we have, if there is nothing that can be exploited at an energetic profit, then we’re not going to continue our recent (200 year) good fortune.

[3] For more detail on the economic writings of Soddy, there are some very good articles. This NY Times Op-Ed by Eric Zency was one of my first tastes of Soddy’s economics:

http://www.nytimes.com/2009/04/12/opinion/12zencey.html

This piece by Herman Daly is quite detailed:

http://billtotten.blogspot.co.uk/2009/07/economic-thought-of-frederick-soddy.htm

And his inaugural lectures on economics, entitled “Cartesian Economics” are transcribed (although with Typos) in this link:

http://habitat.aq.upm.es/boletin/n37/afsod.en.html

This is the currency of power today. Fiat truth.

We are not allowed to have any secrets any more.  And yet those who insist they must know the truth about us, who spy upon us to extract our secrets, tell us in return, only lies.

It is a dangerous, corroding imbalance of power, because lies, like debts, compound.

Living the lie

We all know the famous Goebbels quote,

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it.

From Sadam’s weapons of mass destruction and missiles that could hit us in just 40 minutes of sexed up bullshit, to the stress tests that show us every bank is perfectly solvent and however many billions they launder they are never guilty and no one goes to gaol because they are too big to fail and too connected to even question.

The eye of providence looks out and approves of what is done – Annuit cœptis.

But who does the all seeing eye, that sits atop  the pyramid of power on the mighty dollar bill, work for now? Is it really you and me?  That is what we are told to believe. But is it true? I think there are too many secrets but few of them are yours and mine.

The private dealings of the ordinary citizen are considered suspect and must, we are told, be rooted out. The secrets and outright lies of the corporate and governmental worlds, however – they are confidential. They are protected – behind razor-wire threats of  legal action and closed door tribunals of hand picked experts.

A few weeks ago I sat and listened to the former leader of the Conservative party, now an elder statesman of British politics, Michael Howard, tell an audience that governments need to lie. He is a clever man. He quoted Goebbels and then gave this carefully chosen example.

Imagine, he said, that a Chancellor knew that he was going to have to devalue the currency. The evening before the appointed hour, he is asked by a journalist if he is going to devalue. If he tells the truth and says yes, there will be a run on the currency and great damage will be done. So he lies. “No”, he says, “I have absolutely no plans to devalue at all.” And then next morning he devalues as he had planned.

“Was this not”, Mr Howard asked, “the right thing, the only thing to do?” And all agreed it was. The unspoken lesson that everyone seemed to accept was stability is more important than the truth.

I find this a very frightening notion.

But Mr Howard presented his lie well. He went on to quote the next, less well known line from the Goebbels quote.

The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie.

And this, he said smiling at us, is what protects you. The chancellor’s lie only needed to last a few hours. The nation only lived inside his lie overnight.

But now think of the lies we have been told since 2008. Our banking system and the  banks in it, we were told, were basically sound just suffering from a shortage of liquidity. And yet, in reality, it was not a problem of  liquidity, it was insolvency.

The liquidity lie had to be rolled over and the interest on it, paid. So another lie, that  bank assets were not worthless just ‘impaired’, had to be told and maintained. And to do that the truth had to be hidden, off balance sheet, in mark to model and offshore.

Our governments have spent trillions maintaining their lies and have forced us to live those lies for five years now. But there are costs. Living a lie is morally and politically corrosive, not to mention expensive.  Just this week, as reported in the FT, the Italian Treasury ‘uncovered’ a nest of lies. It appears that the Italian government, in the run up to joining the euro,  paid at least one of the big banks to help it hide the true extent of its debts by agreeing  derivative swaps. Greece used similar swaps to massage its debts. The now infamous Titlos agreement with Goldman Sachs being the best known.

The Italian agreements – there were several amounting to around €36 billion in value – would have been known to Mario Draghi who was at the time of some of the agreements at least  (1998-9) Secretary of the Treasury. Shortly after this (2002) he left the government and joined Goldman.

It now turns out the terms of the agreements were such that the Italian tax payer could face billions in losses. Of course those who will be forced to pay, were never consulted, not even told of the agreements. They were …confidential of course. Commercially sensitive and politically secret – so often bedfellows aren’t they? Kept secret from those who would be required to pay the bill when it came due.

Our leaders, our liars, haven’t bothered to protect us from the consequences of the lies at all. Too expensive. So austerity, disparity and stagnation are everywhere around us. Forced on us by those who suffer none of them, insulated as they are by wealth and power and privilege. Consequences are for little people, not their Betters.

Our ‘Betters’ have found Goebbels was wrong. You don’t have to protect the people from the consequences of the lies you tell them, as long as you can blame those consequences on someone else. On unforeseen global economic forces, on conniving foreigners who devalue their currency, or terrorists or whistleblowers. Or even the people themselves for taking on debts they couldn’t afford or on ‘necessity’ and ‘precedent’ – the bond holders cannot be made to pay – it goes against international precedent.

We, the people, need to strike back at the secret deals done between the elites of  the political and financial revolving door, and make it clear that we will not pay for anything about which we were not told.

Once the cry was, “No taxation without representation”. Today the cry must be, “No debt without consultation.”

Suppressing the Truth

What Mr Howard did not quote is the next line from Goebbels.

It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

But again Goebbels has been superceded. Repression is so last century. Why repress when you can simply drown it out. All it takes is for the media outlets to be owned by a few powerful and like- minded friends. A few media moguls and corporate giants, whose plastic pundits raise their voices while the dolly bird presenters flash their thighs. It’s all so full throttle and frantic, and charged with desire and greed.

Anyone who disagrees is a conspiracy theorist. Anyone who breaks ranks is a whistleblower and whistleblowers are domestic terrorists, dysfunctional loners with personality problems and axes to grind.

When the truth is vilified, hunted, gagged and goaled, then the State has chosen to go to war with the nation.

We are at war.

Cyprus Bank Deposits to Be Taxed in $13 Billion Bailout

What this means is that 6.75% 0f the money in any account up to €100 000 and 9.9% of any amount over that has already been frozen in the account and will, if the plan goes ahead, be removed from that account and given to the banks.

It also means the Cypriot government’s depositor protection scheme is worthless. It was a lie. It also means that since this has happened once, it can happen again.  Only a complete fool would leave their money in a Cypriot bank.

If you leave it there you are betting that it’s all sorted and under control now and anyway they would never think of doing this to you again. The question you have to ask yourself is “Do you feel lucky? Do you think you can trust them?Well do you?”

Not only that, but now that it has happened in Cyprus it can happen in any other European country. Of course our governments will say ‘this is a one-off’, ‘exceptional circumstances’ etc, etc. but that assurance is worth as much as the promise that depositors would always be protected. How sure do you feel  that this could just never ever happen in Portugal, or Italy or Greece?

What the EU is trying to force onto the Cypriot people is not a ‘tax’ as per the headline, nor a ‘levy’ as they refer to it in the body of the article. It is a Collective Punishment.

People in Cyprus who have not done anything wrong, who have broken no law, have not lived beyond their means or taken on debts they could not pay, will be punished, by having their money taken from them. And that money will be given to the banks who did break the law, did take on debts they could not pay and they will not be punished.

This is being done at the barrel of a gun. According to Cypriot President, Nicos Anastasiades, quoted in another Bloomberg article,

“We faced decisions that had already been taken,” Anastasiades said in a statement yesterday. He said the European Central Bank would stop providing liquidity to one of the country’s banks on March 19, leading to its collapse if his government didn’t accept the rescue package.

This is the gun he will now put to the heads of Cypriot members of Parliament telling them they must vote in favour of ‘Collective Punishment’ or the ECB will allow a bank collapse.

You might object to the use of the term ‘collective punishment’ especially given Germany’s role in pushing for this solution, and the resonance ‘collective punishment’ has in recent Germany history. But this is what it is.

Germany has made it clear for months it was against any EU bail out of Cypriot banks on the grounds that such a bail out it would put German tax payers’ money into the hands of Russian tax avoiders and criminals. And they are quite right. It  would.

I have spent the last three months researching accusations of money laundering by Russian criminals in Cyprus. I have now oevr a hundred of pages of documentation from bank transfer records to court records. What it all says is that money has been laundered through Cyprus. What it also says is that it was not just Cypriot banks but banks from other nations that have been involved.

But worse it also says that this was known years ago. The Russian authorities themselves, since at least 2009,  have known for years that Cyprus has been where wealthy and sometimes corrupt Russians have put their money in order to avoid taxes.

While as far back as 2008 the Cypriot police had been given information, which I have seen, which if they had pursued it at all would have led them to question certain banks, companies and individuals in Cyprus and in other countries, about money laundering. But of course no one wanted to then and certainly no one wants to do so now.

No one wants to sort out the criminals from the innocent because that would be to admit there were criminal acts taking place in Cyprus involving Cypriot professionals and banks. It would lead to questions about the rule of law in Cyprus.

And once you ask those questions in Cyrpus how long would it be until someone started to pull on the string and find links to banks and companies in other European countries? The countries so keen to punish Cyprus and who love to talk about other peoples’ criminals but not their own?

The fact of the matter is that no one wants to find a criminal in Cyprus and certainly no one wants to find the bank or company which was servicing them. Because absolutely no one wants any major bank to be accused, let alone ever found guilty of ‘criminal’ behaviour.

What this on-going bank crisis has shown over and over, is that no regulator, no parliament, no country will allow any of its systemically important banks to be found guilty of a crime. Again and again massive wrong doing that would in any other circumstance, done by any other person or organization, be very clearly criminal, has been re-branded and spun from Criminal to “unfortunate regulatory failure”. Citi and HSBC did launder titanic amounts of money, much of drug money. But neither of them were guilty of any criminal act. Repeat after me, they were not guilty. NOT GUILTY.

And this is the necessary re-branding because if it is not done then the banks might be found guilty of criminal behaviour and that would kill them. SO NO ONE will allow that to happen. No one will allow that to even be talked about as a remote and theoretical possibility. Far better to draw a curtain over any facts and details that might pull the guilty, especially the wealthy and powerful guilty,  from their hiding place among the innocent, and instead impose a blind and collective punishment on all, and call it a tax.

Governments, right thinking people insisted,  had to be less in debt. And yet those same right thinking people also felt it was very fine, if not desirable, for both banks, businesses and ordinary people to get in to more and more debt. People ‘taking on debts’, that a generation earlier would have been seen as far too high a proportion of their incomes, was not only encouraged by lenders, it became a vital and explicit part of the almost universally accepted economic and political model. The consumer had to consume. And since wages were not shooting up, debt had to instead. We personally got into deeper and deeper debt. Mostly to the banks who themselves increasingly issued and carried more and more  debt on less and less capital.  Think about RBS.  For a century it was s small, rather staid Scottish bank. How did it go from that to a globe bestriding behemoth in a little over a decade?  The answer is debt. RBS was the poster boy for using the debt markets for funding.

It is the simultaneity of the two convictions – that government debt is bad and those who don’t or won’t see this are misguided, even dangerous, socialists, statists or worse, Keynesian! While those who advocate the free flow and use of private debt are thrusting,  financial geniuses – that makes me wonder.

When governments print up money there is a chorus of disapproval. Yet when banks leverage more lending and debt into the financial system, there is hardly a murmur. If anything is said it is usually along the lines of, ‘Isn’t it good to see bank lending recovering’. People seem to be encouraged to see these two actions, government printing and bank leveraging, as quite different.

Are they?  It seems to me they not. I see them as almost the same. Certainly one prints money the other creates debt. But both ‘money’ (government printed money) and credit/debt (issued by private institutions) are both ways of increasing the supply of “tokens of credit” in to the economy. Both kinds of ‘money’ can be used to purchase goods and services, both can be used as collateral to get either cash or more credit. Both are held by banks and are regularly exchanged one for the other. Government’s print money. Banks print credit/debt. Government debts are analogous to bank leverage. Both are ways of talking about the ratio of debt to underlying ‘capital’ or productive, profit making capacity.

It seems to me, the main difference is who issues them. One is public the other is private. And therein, I think, lies the real ideological battle of our time.

When experts from the financial world warn darkly about the dangers of governments printing up money, what are they really saying?  They would claim they are simply speaking out, trying to protect us from weak, stupid or power hungry politicians who will ruin our economy with their incontinent money printing. But given that these same financial experts are often drawn from banks who we now know spent a decade incontinently printing up credit/debt, one has to question their honesty or their understanding, or perhaps both.

I think it might be helpful for us to wonder if, when bankers complain about governments printing, they are merely trying to talk down the actions of their main competitor in the money printing business. The real argument between government and market, isn’t about how much is being printed – after all the banks are terribly keen for money to be printed whenever they need some government hand outs – no, the real argument, I think, is over who should control the printing – governments or banks. Public or private. What we are really talking about is a battle over the privtization of the money supply and who has the power to control it.

In the era when the bulk, or at least a very large percentage, of the over all money supply was made of government printed ‘money’ and privately created credit/debt was, by contrast, relatively small, governments controlled the money supply and thus the macro-economic conditions of the economy. They were in charge. The modern, neo-liberal, free market era from Thatcher and Reagan onwards to today, has challenged if not actually changed this.

It has been an article of free-market faith that governments and politicians cannot be trusted to manage the economy because they cannot be trusted not to print willy-nilly, for the buying of political popularity and to enrich their in-group friends at the expense of the rest of us who have to suffer their currency printing and debasement. The flip side of this belief is that the Free-market, of which the banks are a major and controlling force, can be trusted to ‘print’, ( create and leverage credit/debt) sensibly and for their ‘printing’ to be for the  greater good of the market and all those who sail in her.

Of course, I fail to see any actual evidence to say that the private sector/ markets/ banks are any better, or any more disciplined about printing up credit than governments are about printing money. The Great Depression was very clearly the result of ‘the market’/ the banks printing up far too much credit. The Great Depression the US was not the result of the government of the day having printed up too much money. The banks had created too much debt/credit and allocated it unwisely. Ourn present crisis was precipitated by the exact same creation of too much credit, too poorly alloacted and all too often granted fraudulently.

However, we are not talking about proof and logic here. We are talking about ideology and the struggle for power. The fightis between the ‘old’ order of supreme power being vested in government along with the ideal (even an unrealized ideal has value) of democratic accountability and control of those governments, and supreme power being moved to the market which is not democratic and in which we, as people, have no controlling say at all.

Leaving the facts where they are traditionally left – in the ignored margins – the free-market world view says Governments will not allocate for sound economic reasons but always for shallow reasons of self interest and maintaining their own power, while the market/banks will allocate for growth and prosperity for all. If you believe this then it does make sense to try every way you can to reduce the size and role of governments and to diminish the importance of their ability to create and allocate the money supply, and to turn this function over to the markets as far as is possible.

That means to run the markets on their own currency with as little recourse as possible to government money. This was done. The shadow banking system and debt markets are the result. It means removing from government as many funding powers as possible and turning these over to the markets. What this means is that instead of a government funding the building of lets say a hospital in the way it might once have done, by printing up government money to pay for it, the government no longer prints but now goes to the markets to ‘borrow’ money – which means the banks create the money supply in the form of credit/debt. The banks print not the government. Only they call it elverage as if this makes it all right. Nasty dirty government printing. Nice clean, powerful and profitable bank leverage. See how wonderful the new one is and how grubby the other?

And if you also privatize ‘health’ itself, turning it from a government service, a vertiable drain on productiveity, and turn it  into a pofitable, market industry – of course call it a service industry for the sake of sounding ‘caring’ – and viola what was once a ‘drain on the markets’ is now a porfitable part of those markets. It’s a win, win win. Down comes taxes, shrivel goes the state and up goes the stock markets as more businesses make more profits. And behind the scenes the market now not only has captured the power to create the ‘money’ it also has a far greater influence of how much gets allocated and spent where.

This is not economics. it is politics and ideology. It is a struggle for power. Specifically for power to be removed from government and governance and put instead into markets and management. Voter power is to be eclipsed by consumer power. Sound reasonable? “Express yourself in the market place.”  How much power do you have? How does one dollar one vote sound?

Having achieved much of this ideological and actual shift in the last few decades, the next logical step is to import this logic and the people who believe in it, in to the ‘enemy’ camp – IE government. A difficult step. But fortune smiles upon the determined and the present crisis has had several silver and gold linings. One of the most threatening, to my mind, is the invention of the idea of the ‘Technocratic government of national unity.”  A new vocabulary to allow new forms of power to slide in with as little friction as possible. What is a technocratic government? Is it elected? No it is not. Is such a form of government democratic? No it is not. Of course it is only temporary. Of course. But will such ‘temporary’ ‘governments’ become regular, ‘temporary’measures, each time something ‘difficult’ or unpopular ‘as’ to be forced through?  A precedence has been set.

Who will deicide when the next ‘technocratic’ government is essential? Will it be you? No. By definition it will not be you. ‘Technocratic’ means putting hand picked rulers in place ‘temporarily’ when democratic voting does not seem to be coming to the decisions the markets deem essential and desirable.  How long do you think till the next crisis and the next technocratic interregnum it will surely ‘require’?

A concluding thought.

Credit/debt backed ‘money’, the type which banks ‘print’ and control makes up the bulk of the present global money supply. This is power. As it was before the great Depression so it is again today. It is power that thought it was ascendant. Until the brittleness of their debt backed model of fiat, free-market debt backed money, imploded in on itself in 2008-09.

The crisis made one thing clear – debt backed, market fiat money, is not yet robust enough to survive without a central bank to issue national money in times of crisis of market confidence. Or to put it another way the markets – mainly the big financial players, the banks, funds and insurance companies  – suddenly realized that what their system, their currency did not have but in times of crisis badly needed, was a system of central, back-stop banks.

Well they have them now.

One way of looking at event of the last two years is to see the role and allegiance of the central banks changing. Ask yourself – who do the central banks work for? Is it you and your welfare that they concern themselves with primarily? Or have the central banks come to see their role as defending the integrity, profit and power of the system of banks which preside over the markets and the market’s debt backed wealth?

I suggest it is at least worth considering who ‘our’ central banks now work for. I personally think they no longer work for us, for the nations and peoples whose names they still carry, but are now increasingly a part of a non-national, global system. Is this so ridiculous? Well who runs the central banks? How many of them are former employees of the big banks? Are the central banks and those in them controlled by elected governments or have they become increasingly ‘independent’?

Such a useful word ‘independent’. We are encouraged to think it means independent of any outside influence. An impartial, Solomon-like force. Sadly that is clearly not what our central banks are or how their independence was initially conceived. Their ‘independence’ was ‘independence from’ governments. Think back, ‘indepedence form governemtn’ was what was trumpeted. Nothing was said about their relation to the markets was it?

The global banking system now, has was it lacked in 2009 – a system of central banks to back-stop it.

I know Basel III is supposed to change it all. WAKE UP! They are already gutting it. Weakening collateral and capital rules even before it comes in to force.

I know there are new proposals for how to wind up big banks that might fail. I have read those proposals. They are hollow. I will write about them soon

These are, as I said in the title – just thoughts. Small and incomplete ones. Thoughts in progress. I offer them in hopes they might be useful spurs to better thoughts and provide a starting place for those better informed to offer correctives and alternatives. I look forward to reading them

I have thought more about what I wrote in The Humiliation of Greece and have come to the conclusion that I was, in part, wrong. So I would like to offer a sincere an unreserved apology to all those who read it

I would also like to offer an explanation of where I went wrong and finally an amendment to the argument.

An Explanation

The bulk of the article and its main argument, I think,  still stand. I think the argument about the Bond swap is fine. But where I went wrong was in regards of the proposed new law. In a nut shell my mistake was that I assumed  the proposed law giving up all rights to assets and immunity from prosecution, was a law which would be applied generally. I assumed the proposed law would apply to any default on any debts to any sovereign creditors. I think this is not the case.

I would like to say that one reader ballymichael did try to point this out to me but I was very slow to realize what he was saying. I picked a bad time to be obtuse and I would like to say both thank you and sorry to him in particular.

If I now understand ballymichael’s point it is that this law would apply to loans made by the Troika but not to other loans made by other nations or lenders.  Thus were Greece to default on bonds it had sold to China let’s say, then Greece would be able to default as would any other nation.

The knock on effect of this is that the final part of my article – which I did say was speculative – is wrong. Even if the private debts were counted as Sovereign as I suggested they could be, this would not trigger the proposed law. Thus this is not a way of recapitalizing private Greek banks and saving them from their debts. That will still have to be done by the means employed so far.

Embarrassed as I am that my specualtion was wrong I am also glad. The betrayal is not as foul as I had specualted it might be.

However, it is still pretty bad.

An Amendment

The new law would pertain only to those loans made by the Troika. The Troika being the European Union, through its various agencies including bail-out funds such as the EFSF and the ESM, and then the ECB and the IMF.  The problem for Greece is that the Troika is not really just one creditor among many. It is now Greece’s most powerful and main creditor. What this means is that because the central bulk of its debts cannot now be defaulted without the new law laying Greece open to being gutted like a fish, this essentially prevents Greece for defaulting on any of its debt no matter who the creditor was. Greece could default on debts owed to lets say the BoE or China but such a default would not clear enough of the nation’s debts ot make it worth while.

The more loans Greece ‘accepts’ from any Troika bail-outs the more this will be the case.  The ability to strip Greece in the event of any default confered by the proposed law makes lending to greece via the bail out funds such as the EFSF and ESM the ‘safest’ way to lend by far. If Germany wants to lend to Greece it can now chose to do so via the bail out funds rather that as nation to nation.  Other lending will still happen because it is clear the new law pins Greece down and makes any default almost unworkable.

Thus although my original argument was, as I have said, wrong, in many ways the new law still has many of the same wider effects as I had originally thought, just by a more round about way.

As for the speculation about Greece’s private banks and their private debts – as I said my speculation was wrong. Those banks and their debts will continue to be protected by the method used so far – Troika funded bail outs.

I hope you will accept my apologies.  It is a shitty way to end the year. But at least it was no one’s fault but mine.

I do realize that the currency of any blog is how trustworthy people feel it is. I hope this blunder has not shaken your confidence irrevocably.

There is always a danger – which I am very aware of – of getting out of one’s depth when trying to write about issues which depend upon technical aspects of finance and law. The worry of getting out of my depth is never far from my mind.  But the alternative is to go back to accepting the platitudes and bland assurances of those ‘smartest men in the room’, who have always claimed to know better and who would like nothing better than  for us to stop trying to understand and to stop asking questions.

I cannot bring myself to do that even when I find I have embarrassed myself so publically.

I hope 2013 brings you and yours rude good health and joy.

At the behest and on the authority of Prime Minister Samaras and President Papoulias, an amendment to Greek law was drawn up last week. There was no debate in parliament, the vote is still to be purchased. But unless this amendment is challenged or changed, the change it will bring in will alter the future of Greece and its people every bit as much as the day Greece joined the Euro, perhaps even as much as the day Democracy was re-instated after the long rule of the Generals. Only this change will be a giant step away from Democracy and towards subservience to an unelected elite.

You can read the law in its original here. Here is a translation of the key part.

«The Beneficiary Member State, the Bank of Greece and the Hellenic Financial Stability Fund each hereby irrevocably and unconditionally waives all immunity to which it is or may become entitled, in respect of itself or its assets, from legal proceedings in relation to this Amendment Agreement, including, without limitation, immunity from suit, judgment or other order, from attachment, arrest or injunction prior to judgment, and from execution and enforcement against its assets to the extent not prohibited by mandatory law».

The law says, should any future Greek government try to default in any way on its debts – by setting up a debt commission or by any other means, even one accepted by international law and precedent, then Greece chooses to relinquish all claims on the assets of the Greek people and the nation and equally relinquishes all legal protections from its creditors/bond holders. In other words, if a future Greek government tries to default, Mr Samaras and Mr Papoulias have guaranteed that the Greek people will forfeit and lose any and all rights to their nation’s assets including its national companies and natural resources and the law will not protect them. All those assets will be open to seizure by Greece’s bond holders. The vulture funds, vulturecrats and all the bond holders have been handed a loaded gun and a license to loot.

No nation has ever done this. The question is why are Greek politicians trying to do it and why now?

For the last two years two questions have echoed round and round Europe and occupied the elite who rule/own it – how to stop Greece defaulting and how to recapitalize its banks – so that neither can pull down the things Europe really cares about – Germany’s and Frances’s banks?

I believe passing the above law is an important part of the answer to both those questions. In fact, if passed in to law, it will, I think all but complete a Troika formulated policy begun with the much talked about but little understood, partial Greek default and bond swap, that was the first station of Greece’s cross. What is that policy?

Stop Greece from Defaulting.

There has been and continues to be much talk about ‘helping Greece not to default’. In actual fact there is very little real ‘help’ at least not for the Greek people. The intent of Troika’s policy for Greece has been far more directly to simply ‘stop’ Greece defaulting no matter what harm it does to Greece or its people. The policy has actually been to crucify Greece if necessary, and to deny her, no matter what, the release of default.

I believe this new proposed law is intended to put beyond all reach the release of default.

But first lets clear this law is not a one off. It is a continuation of a policy that the bond swap began. The bond swap dealt with only one part of Greek debt closing off only one potentially open door to default. The present proposed law closes off all the other exits in one stroke.

So let’s start by clearing away some of the misdirection that the mainstream media has so helpfully piled in our way concerning the debt swap that Greece undertook in March 2012 and about which so much has been written. First the debt being swapped was purely Sovereign debt that was held privately. I. E. by banks. So it did not cover sovereign debt held by other nations or central banks, nor any private debt, such as that issued by Greece’s banks. Only sovereign debt held by banks and other financial institutions.

Needless to say the debt/bond holders of those institutions have used every column inch they could buy or influence to tell the approved story of how they, the ‘wealth-producers’ of the world, as they like to style themselves, have been robbed by a nation of feckless, work-shy,’socialistic’, tax-avoiding, recidivist crooks. What actually happened is nearly the opposite.

Certainly, Greece did default/restructure this debt. So on the face of it it cannot be denied that the bond holders took a loss.  But as I have pointed out before, private companies default all the time. Default is not a crime against business, it is part of it. Neither restructuring debt nor defaulting it is  a crime.  Let’s look at the case of Chrysler – again. The management simply did the mathematics and knew that unless they could reduce their burden of debts they would not be able to get out from underneath them in order to make a profit going forward. Given that situation the management (Who by the way were the culpable ones for piling up that much debt) simply said – if we do not reduce this debt then the business is dead. Better to default some of our debt and allow a business that can make money to emerge.

That is all default is. A sensible way out of a disastrous situation.

Now when Chrysler defaulted they forced a settlement on their creditors of 29 cents on the dollar. According to the BIS (Bank for International Settlements)

In February 2012, the Greek government launched an offer to exchange €206 billion of bonds held by private sector investors for new bonds with a face value of about €100 billion.

So Greece offered very nearly 50 cents ‘on the dollar’. To me that’s a bail out in all but name because it is above what the bond holders would have got had they been selling in the open market. The Greek government made no attempt to get the best deal for their people, but instead offered the open hand of generosity for their banker friends while beating down on ordinary Greeks with a closed fist.

But the settlement with the bond holders was never simply about money ‘now’, it was perhaps even more about altering the future. This was a ‘restructuring’ with one purpose – to make future default or restructuring impossible. The bond holders got paid 15% of the face value of their bonds in cash up front. The important point, however, is that the rest of their 50 cents on the dollar came in the form of new bonds issued to replace the old. The important point, perhaps the main point of the exercise was that the old bonds, which were ‘Greek Law’ bonds were replaced by ‘English Law’ bonds. The difference between Greek law and English law bonds is important and valuable to those holding them.

In Greek law bonds there can be are what are called Collective Action Clauses which allow the government to impose on the bond holders an agreement which is binding on them all so long as a majority votes in favour. Thus in a restructuring the government can dictate terms and as long as a majority of the bond holders agree, however reluctantly, the rest have no choice but to acquiesce. This is what Chrysler did. This is exactly what the Greek government did to debt it had issued under Greek Law. In English law these clauses do not appear. Which means that individual bond holders, of debt issued under English law, can hold out against imposed restructurings and refuse to settle. The effect is to make it very difficult for a government to force a settlement on bond holders. Hold-outs can always block it and force a higher price.

What the Greek government did, with the blessing of the Troika, was use the collective settlement not only to offer the holders more than they would have got in the market – which mean as far as the markets were concerned that the banks were better off after the default than before – but to replace all the Greek law bonds which allow restructuring with new English law bonds that make it impossible. The deal made this restructuring the last Greece would be able to do.

So while the mainstream press obediently peddled the ‘poor bondholders being forced to accept default’ story – the real story was that thanks to English law bonds for the old Greek law ones, no future Greek government that was not convinced of the merits of destroying Greece for the sake of Europe’s big banks, or wanted to re-negotiate – like a possible left wing, Syriza government –  no such government, no matter what it promised those who voted for it, could ever again impose a collective default settlement upon the new debts.

The bond settlement was not just about giving to the bond holders it was about taking away from the citizens of Greece. Taking away from them their ability to chose certain futures.

Foreclosing the future 

Now let’s look forward to what might happen if the present coalition were to lose the next election and Syriza were to gain power. The Syriza leader, Mr Alexis Tsipras, has already called for a debt commission, and in any election that call or something similar, will be a central promise of Syriza to the Greek electorate.

But now consider what the chances would be of making good on any such promise. If Syriza were to take exception to the generous deal given to the bond holders and if they tried to change that deal in any way, it would be a technical default and the English law clauses would prevent any new deal being forced on the bond holders. The clause would stop any attempt by Syriza to reduce Greek debt by that route. That avenue was closed when the present government signed its generous restructuring deal.

So much of the ‘poor bond holders’ story. But the bond story only dealt with one part of Greece’s debt. It left untouched the part of Greece’s Soveriegn debt held by governments, central banks like the ECB and Fed, and by other international funders such as the IMF or the various European bail-out funds like the EFSF etc., and did nothing to ‘save’ Greece’s banks from the mountain of bad private debts they still held or which they had pledged as collateral to the ECB. These debts are what new law is for.

The New Law.

On the surface the new law pertains only to the debts of the Greek state and its institutions. And on their debts the proposed new law is rather clear. It says, should any new future Greek government, no matter the mandate given to them in an election, try to default on any of Greece’s remaining sovereign debt, now held mainly held by other governments, central banks and international financial bodies, then the Greek state and the government of the day would have no protection in law against suits brought against them nor even against injunctions served to restrain their assets prior to an actual judgement. This means a Greek government would not even be able to fight such a case because while they were trying to fight, all their sovereign assets would already be frozen.

IF a Greek government tried to default not only would it not be able to force a settlement on its English law bond holders, but nations and central banks to whom it owed money would simply be able to claim and then seize Greek national assets. They could start with those already held by them, such as Greece’s gold held abroad, but also claim ownership of any other asset such as Greece’s infrastructure of roads, rail, power, water, oil and lands.

In one fell swoop the new law would radically alter the situation of those institutions, such as the ECB, who are sitting on billions of Greek government bonds pledged as collateral by Greek banks. Up till now a default would have left the ECB, like everyone else, holding worthless paper and heading for the nearest court to file suit in the hope of eventually getting a judgement in their favour. Whose court and what judgement  no one has been clear about. In short the EBC and everyone else were holding debt that was not secured against any specific claim against Greece’s assets. They were, in effect, unsecured bond holders. The ECB would not like to see it that way but I think that is how it is.

The new law changes this. And I think the European poweres are well aware of this and it is why they insisted on this law being written. For let us be clear this law was created by the Troika for the precise purpose I have outlined. The law, or the idea of it, was there in the 400 pages of the memorandum that was drawn up to govern the Greek bail out back in February. The eventual adoption of the law, is there in the fine print as one of the preconditions for the bail out to be fully released. And now the Greek quislings have done their master’s bidding.

Because if the law is adopted, then suddenly, in a default, every one of the Troika institutions could point to Greek law and say, by your own sovereign law the Greek bonds/debt we are holding are secured against your national assets. Any default and the ECB could claim whatever it wanted to cover the value of the bonds it held. My guess is the ECB might fancy Greece’s financial sector, thus making the running of Greece’s economy from Frankfurt much easier than it is now.

Of course a Greek government would not have to roll over and agree. A Greek government could still alter the law and say we are still ‘the will of the people’ and we will not surrender any assets no matter what your claim. But in return Greece’s gold would be seized as would any other Greek sovereign assets held abroad. Greece would also find suits imposed on any banks that tried to do business with them. The suits would all be based on the new, proposed law.

Taken together the earlier bond settlement, replacing Greek law bonds with English law bonds, plus the as yet to be voted upon new law would make it almost impossible for an any future Greek government, to ever again default or restructure sovereign debt. Together they are, I think, how the Troika plans to stop, prevent, and outlaw Greek people determining their own future..

This is how the Troika intends to crucify Greece.

But as if this wasn’t enough I want to suggest one more deeply unpleasant thought that came to me when I was thinking about the purpose of this new law. This is speculation because it is based upon an interpretation of the law and I am not a lawyer. But I want to put it to you because if I am in any way correct it makes the actions of the leaders like Mr Samaras an even more horrid betrayal.

Private debts in Private Greek Banks.

What I have not yet looked at is the immense pile of bad private debts held by the insolvent Greek banks.  This would seem to be outside the scope of the proposed law. And this is a problem, because if those banks collapsed, the ripples of the event could spread and to where no one is quite sure: Commerzbank, Deutsche Bank, Unicredit, The Bundesbank itself, Credit Agricole, Soc. Gen. No one quite knows. No one wants to find out. And what of the elite of Greece? The elite families of Greece, and there are only a few, who own its banks and its oil companies, and whose sons have provided Greece with her Generals as well as her Prime Ministers  would face ruin if the private debts in their banks were to implode.

Of course this should be a private affair and nothing to do with the government and its debts. But, since 2007 we all know that such private debts have been made government business. That is the new world we have been brought to. Greece’s banks will require further assistance. Everyone is clear about that . So what if a future government decided, while it might not be able to restructure its sovereign debt, it could at least refuse to take on any more debt for the sake of ‘saving’ the private banks? A more left wing government could still allow banks to default. It could clear their debts, force their bond holders, whoever they were, to suffer the losses, and then nationalize whatever assets were left, and at least Greece would have a clean banking sector. Good for Greece. Not so good for the families whose wealth and power would have just burned down.

But now think what this new law would have to say about that. On the surface nothing you might think. So might Syriza. Private banks defaulting on private debts . Nothing the government could be sued for, even under the new law,

Sadly I think the new law is there to make sure the government could be sued even for allowing private banks to default on their private debts. How?

Think of how a bank, a systemically important bank, one large enough to cause a domino effect, has to be wound up. You cannot simply let it fall apart. That would be what is known as a disorderly insolvency. What has to happen, is an orderly insolvency that ensures the bank still fulfills its socially necessary functions as a bank for ordinary people and other businesses.

In an orderly insolvency, like Chrysler’s. or Northern rock’s,  auditors must be appointed whose job it is to sort out the parts that are still viable from those that are not. The viable ones are put in one business and allowed to emerge from bankruptcy while the dead parts are put in another financial entity which is overseen by trustees while its affairs are wound down.  For most companies this happens as an entirely private matter. A company like Chrysler simply stops making cars for a while until the legal and financial sums are done. But for banks it is different. People have to have access to their money. And for big banks their operations need to continue for the sake of lots of other businesses which rely on them. So in the case of banks the government usually steps in. In the case of Northern Rock or Bradford and Bingley in the UK or the Caja in Spain or hundreds of banks in America, the government takes over the failed bank. It becomes the temporary owner and the bank’s debts appear on the government accounts. AND THERE is the key.

For as soon as a bank failed and the Greek government stepped in, as it would have to, to make sure the default was done in the orderly fashion that would protect ordinary people and the wider economy, then the bank and its debts would become sovereign. And as soon as that happened I think any sharp lawyer, expert in corporate and international law, would be able to argue that the default was ’caused by’ or at least ‘overseen and controlled by’ the government and, as such, was a sovereign default.

If the government chose not to ‘save’ the bank and its debts but instead allowed the bank to default, then the new law would empower the banks former owners and its creditors to seize sovereign assets.

It might seem incredible, and it surely is, but if I have read the law properly I think there is a very good chance it would also be the case. Just think of the way the law allows Vulture funds to sue nations even for losses on loans the Vulture fund never had any interest in until it bought them up specifically so it could sue. Tell me my scenario is impossible.

If think there is a horrible chance that the proposed law would mean that any future Greek government would have no choice but to keep bailing out the private banks. It would makes the Greek private banks and those whose wealth and power is tied to them, invulnerable. They could not be allowed to default. the proposed new law, combined with the ‘English law’ bonds would prevents any future government from being able to do anything at all to change the debt burden of the Greek people.

This law, if passed, and I think it will, would make the wealth of the 1%, untouchable even in default. The law would says either they are bailed out or they have the right to take whatever assets they wish in lieu.  The new law, could, if I am correct, be used to recapitalize a defaulting bank by simply plundering the assets of the nation.

If this speculation, and this is all it is, is correct in any way, then one of the elite, Mr Samaras, framed this law knowing it would protect his fortune and power and that of his family and his friends and their families. A law by the elite for the elite. And one that would spell the end of any meaningful democracy in Greece.

It also means this. If the Greek people vote for Syriza and the promise of reducing their burden of debt and austerity, this law and the Bond changes will ensure those promises are all broken. If that happens the voters would turn against those who promised and failed. The Left will be seen as worse liars and rogues even than those they replaced. Many Greeks might then swing violently from left to right, in to the arms of far right nationalists.

And that would be the perfect excuse for suspending democracy and bringing in a ‘technocratic’ government, a dictatorship by another name, perhaps of outsiders, backed by the military if necessary. A bankers paradise. A paradise of the elites. Vote left, swing right. The future of Europe.

This law is the end game. It must be stopped. And it can be. The Greek parliament can, and in my opinion must, vote it down decisively. If not then any incoming government seeking to turn away from enforced austerity, examine the nations debts, to reject that which was found to be odious and to restructure the rest, would find the steel jaws of a carefully constructed trap snapping closed upon them. At which point the only option would be something very close to revolution.

But it would be that or and end to democracy and economic crucifixion.