Greek rescue more than everyday political monkey-business

May 13, 2010

Poof – above Europe, a trillion dollars just popped out of the air! The Greece bailout is even more impressive than the $700 billion that popped out of the air in September 2008, for the U.S. Wall Street bailout. It’s not just that politicians delight in distributing money like candy, knowing the invoice won’t come due until after they have left office. When gasp-inducing amounts of money pop out of the air, something more than everyday political monkey-business is at hand.

European Union nations decided they have an extra $1 trillion to spend because the Greek debt meltdown threatens not just Greece, but money itself. Currency, at heart, is a Ponzi scheme. Money has no inherent value. You can’t eat it or wear it: money is only good to the extent someone will trade you something for it. Nowadays most money can’t even be held in the hand, rather, exists entirely as numbers on electronic ledgers. If Greece failed financially, why should anybody believe government statements about money? That’s what had European governments spooked.

No gold ingots were offered to Greece, no satchels of unmarked bills — only some zeroes. “Your money problems are solved because we assigned you a bunch of zeroes:” that was the essence of Monday’s statement to Greece by the European Central Bank. The award to favored businesses of a bunch of zeroes was likewise the essence of the 2008 Wall Street bailout. Only by drawing ever-more people into an arrangement this nebulous can nations keep alive the notion that currency – digits on ledgers – holds great value. This is a Ponzi scheme on a scale that would make Charles Ponzi blush.

Three core powers sustain a modern state: military force, police power and the administration of money. Of these, money is most important. The United States Congress, and the legislatures of the European Union, quickly would be reduced to poorly run debating societies if they didn’t exert authority over money.

And money at the national-government level is a Ponzi scheme. Money that you trade face-to-face to a grocer or car mechanic is real enough, zeroes on government and big-corporate accounts are abstractions. The fear that big banks would be exposed as guardians of vaults full of zeroes caused Congress to throw $700 billion without protest in 2008; now the fear that sovereign purses would be exposed as stuffed with tremendous quantities of nothing caused European governments to throw $1 trillion.

Many commentators are pointing out that it is fundamentally absurd to respond to excessive debt, whether in Greece or on the part of U.S. homeowners who signed gimmick mortgages, by offering more debt. It is absurd. But this absurdity sustains the illusion of currency – it continues the Ponzi scheme. (See below on other unsettling aspects of borrowing-based bailouts.)

Political-elite fear must run deep in order for $1 trillion to be offered as a gift. When Congress bailed out American banks and mortgage-holders, at least the funny-money was flowing to constituents of the legislators making the decision. In this week’s European bailout, voters in Germany and France are being asked to sacrifice to sustain a spoiled, unproductive lifestyle in another nation, possibly in several. Why would Germans who work hard sacrifice so that Greeks can continue to work little, perhaps so that Spain and Portugal can take the afternoon off with pay?

Because money itself is at stake. German and French politicians are sure to be hammered by angry constituents who don’t like being compelled to subsidize Greece. But Germany and France benefit because at least the illusion of currency is sustained. That’s what is in the deal for the European nations providing the $1 trillion.

“We’ll just borrow more” cannot, logically, go on forever. But sustaining the notion that government-issued bonds are valuable allows today’s politicians to avoid hard choices, passing them along — with more problems added — to tomorrow’s politicians. And after handing out free money, the second-favorite activity of politicians is avoiding hard choices.

Before becoming Barack Obama’s budget director, Peter Orszag ran the Congressional Budget Office. At the CBO, an advisory agency, Orszag repeatedly warned against debt: since becoming a White House official, he has yet to meet a giveaway he didn’t like. In September 2008, in a little-noticed exchange on the PBS television show Newshour, Orszag the CBO director warned of an ultimate day of reckoning in which lenders stop lending. The subject of discussion was the $700 billion being thrown at credit markets:

ORSZAG: One thing we need to remember is we’re lucky that we have the maneuvering room now to issue lots of additional Treasury securities and intervene aggressively to address this crisis.

JEFFREY BROWN: Wait a minute. Explain that. Lucky in what sense?

ORSZAG: That people are still willing to lend to us. If in 20 or 30 years we continue on the same path, with rising health-care costs and rising budget deficits, we would reach a point where we wouldn’t have that ability.

Will it be 20 years until “people” – meaning Asian governments and oil-state sovereign funds – stop being willing to lend to the West, or will that moment come sooner? In 2000, the United States national debt, stated in today’s money, was about $7 trillion; now the number is nearly $14 trillion.

That is to say, adjusting for inflation, Washington has incurred as much debt in the last decade as in the entire prior history of the United States. Money can pop out of the air at such a prodigious pace if you’re running a Ponzi scheme — but all Ponzi schemes ultimately are exposed. How long until the United States and European Union want to postpone yet another problem by yet more borrowing, and no one is willing to lend?

WHY IS THE BAILOUT OF GREECE WORSE THAN THE BAILOUT OF WALL STREET?

The U.S. banks and Wall Street firms bailed out in 2008 had assets; Greece has only liabilities. So far about $370 billion of the $700 billion Wall Street bailout fund has either been repaid to U.S. taxpayers or never actually spent, and it is likely more will be recouped. However zany or ill-managed, the Wall Street bailout involved tangible assets that had a decent chance of recovering their value.

Greece, on the other hand, is a pure money pit. Suppose the European Central Bank offered you a loan to take Greece private. The asset side of the ledger – historical sites, Mediterranean vistas – would pale before the liabilities side.

The latter shows hostile public employees who shut down cities and commit arson as they demand two months’ of bonus wages for no work; a public pension system that offers full retirement at age 61 (in the United States, it’s 66); corrupt, spineless officialdom; and tax-evading millionaires protected by said corruption.

Greece’s productivity is low, its welfare costs high, its business climate poor – and try to name the last important economic innovation to come from this nation. There is little chance the Greek GDP will grow rapidly enough to pare debt. The best-case for the bailout (assuming austerity actually is imposed, which may not happen) is that it prevents debt from growing appreciably worse.

Reuters dispatch, Tuesday, regarding Greek government bonds: “Moody’s said a cut to the Baa range or even below investment grade was possible.” Is there one single person in the world who believes Greek national debt is an investment? Investments offer future yields. All Greece currently offers is ever-more demands for special handouts. That Greece may be the future of the West is more than a little disquieting.

BUT AMERICA ISN’T GREECE, RIGHT?

The sudden jump from $7 trillion to $14 trillion in U.S. debt is hardly the only scary sign. A year and a half ago, the CBO projected that Social Security outlays would not exceed revenue till 2017; instead this has already happened.

In 2009, the CBO said Social Security would run a roughly $150 billion surplus in the years representing a two-term Barack Obama presidency; now a $70 billion deficit is projected for that period. In 2009, a report from the trustees of the Social Security system said the United States has $107 trillion in unfunded future pension and health care liabilities – that’s about eight times present national debt. Not one thing is being done about the liabilities, while Congress expands health care entitlements and for three consecutive years has awarded bonus Social Security checks to pensioners.

All the current, undisciplined U.S. borrowing is happening before the main cohort of the Baby Boom retires. Debt loads have long been expected to increase at that point. Responsible administration of government would have entailed a concerted effort to pay down debt prior to the Boomers’ retirement party.

Instead in Washington under Obama and George W. Bush it’s been giveaway after giveaway, without accountability. Those projected billions in “savings” from health care reform? No specifics in the bill. Supposedly cuts will be imposed by an “independent physician advisory board,” but the board does not hold its first meeting until 2015. Cost controls on subsidies to the new insurance exchanges don’t begin until 2019, by which time Obama, Nancy Pelosi and most everyone else who backed the bill will have left office.

AREN’T WE ALL KEYNESIANS NOW?

We are. The argument for increased government spending during cool economic periods is quite solid. But the flip side of Keynes is that when the economy is strong, government spending should decline, in order to retire bonds incurred during the cool period. With the global economy now bouncing back, is there any chance any Western government will respond by reducing spending? Giveaways justified in 2008 and 2009 as “emergency” appropriations will become the new norm, from which interest groups will demand further sweeteners. Benefits must go up because of the cloudy-weather crisis! The chocolate milk shortage! The bridge-abutment repair crisis!

AT LEAST INVESTORS STILL LOVE THE UNITED STATES, RIGHT?

Allan Meltzer of Carnegie Mellon University, author of the authoritative and ultra-ponderous “A History of the Federal Reserve” — Volume Two, Book Two was just released and only brings the reader up to the Reagan years – has noted that gimmicks are being used to mask the printing-money aspect of the last three years of Washington policy.

The Federal Reserve has been lending money to banks at token interest – in late 2008 and throughout 2009, the Fed charged banks half a percent, the rate now is .75 percent. (The average in 2007, the year before runaway federal borrowing began, was about 5 percent.) Banks draw funds from the Fed at almost no interest, then buy Treasury bills, or loan to clients who buy them; Congress spends the proceeds from the sales of T-bills; government goes further into the red using money that appears to come from investors, but actually comes from government issuing IOUs to itself.

Not only is this a bookkeeping swindle on a scale not even Fannie Mae dared contemplate, Meltzer believes such gimmicks will cause a round of ruinous inflation. Because there hasn’t been inflation in a generation, we forgot the lesson of the 1970s, which was that inflation is much worse for the average person than slow growth.

Further, inflation could trigger a feedback loop on debt. In the current fiscal year, Washington is paying about $200 billion in interest on federal borrowing. Even mild inflation could push federal debt-service costs to $700 billion annually – roughly the total expenditure for Social Security benefits last year. The only ways to service such high added debt will be higher taxes on the middle class, plus cuts in Social Security benefits and Medicare. Defense spending cuts and higher taxes on the wealthy would help, but cannot alone solve the kind of problem that rising borrowing costs would trigger.

Thus even with the improved tax revenues that economic recovery will bring, the U.S. debt situation may grow worse. Unless you think China is going to give the United States a $14 trillion low-introductory-rate, no-docs liar’s loan.

22 comments

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Dear Gregg
Kudos to you. There needs to be more voices like yours. I will respectfully add that creation of money from thin air does not only affects future generations. Inflation is the direct consequence caused by the dilution of money and it affects us now. Recommend you read “Creature from Jekyll Island”. I want to thank you for your brave attempt at educating the common citizen. Hope for all our sakes we pay attention.

Posted by usbychoice | Report as abusive

Gregg
From the perspective of an debt-laden island off the coast of Europe, this is a crackerjack piece.

Posted by nbywardslog | Report as abusive

..We should have stayed with the money = gold in the bank, system…by the way…where is all that robbed gold ?

Posted by kawasakiman | Report as abusive

The great thing about the initial money made available for the Greek bailout is that 10bil of it comes from Portugal, Spain and Italy! Now if my memory serves me right these countries have a spot of bother with debt themselves? So the EU robs Peter to pay Paul and hopes no one notices the conjuring trick. Just a little Ponzi scheme????

Posted by paulos | Report as abusive

To answer your question, no we are not all Keynesians. And no I do NOT believe that governments need to regulate the money supply.

I firmly believe that during the areas of paper money and central banks, we have had much less stability, more inflation (hurst lower classes), more corporate scandals, better regulating markets.

I could go into the history of Austrian economics, but since you are ideologically married to paper money and central banks, there is no reason too. I wouldn’t change your mind.

However, I think when the ponzi debt scheme collapses, most paper currencies hyperinflate and then we have delfationary global depression, Keynesian economics (mercantilism rebadged for a new century) will hopefully fade into the background at least for another generation.

Then the new generation will forget the lessons of their parents, and begin the ponzi anew. The investion of no-consequence, no-responsibility paper money is too irresistable for humanity to ultimately resist.

It is up to those of us who carry the torch of responsible economics to remind others of our theories, diligently watch the central bank and government industries that engage in defauding their people of their wealth, and come back into the forefront when the system reboots itself yet again yet again.

Maybe next time we can call it Obamanomics since Keynes will likely be relegated to the trash heap of economic hacks.

Posted by redrob25 | Report as abusive

Yes.

Posted by russdward357 | Report as abusive

[...] This post was mentioned on Twitter by Denia Anderson and Ray, Siddharth Agarwal. Siddharth Agarwal said: Nice Article… WHY IS THE BAILOUT OF GREECE WORSE THAN THE BAILOUT OF WALL STREET? http://tinyurl.com/3yc5nlf [...]

Very good article. It supports my comment 12 months ago to the question; How much money is their in the world?
There is as much money in the world as people think there is.

Posted by Banker123 | Report as abusive

[...] over one Trillion dollar put into Greece and Europe this week. The immediate results seem positive, but for One Trillion dollars, what are Europeans actually getting for their money? Greece’s GDP only amounts to $340 billion and Portugal’s GDP is $230 billion as of 2008-2009. [...]

Finally the Ponzimonium is getting coverage by the main stream press.
BUT

you say

“The U.S. banks and Wall Street firms bailed out in 2008 had assets”

You call that garbage, of which 600 trillion exists, assets? Abacus was an asset?

Anyway the 700 billion TARP is one part of it, how about the two TRILLION the FED printed and gave to the very same crooks that detroyed the country?

Posted by Nomorekoolaid | Report as abusive

This is an interesting article that skirts around the main questions regarding the money supply. Obama is not in control of the money supply, the none Govt Federal Reserve is. So, the Govt receives less money in Taxes than the Govt is spending on wars, SS and the rest. The Treasury calls the Fed and says they have no money in their checking account, the Fed then, on a computer screen, adds some of those zeros this article talks about above and then promptly asks for the Treasury to send over some interest baring bonds to cover the amount being put into the Treasury’s account( I’m sure this is also electronic though). I’m not sure of the exact details, but these bonds are offered on the open market for Foreign Govts and institutions to buy. If no one buys or not enough is bought the Fed takes the remaining amount. This is why it’s fiction when the media say that all these foreign Govts hold the 14 Trillion in US debt, it’s actually held by the Fed (actually they hold about 11T the rest by Foreigners). So, who do we pay the nearly 200 Billion in interest to (and with inflation $700B in the above article)? The Federal Reserve Bank.My question is, who ownes the Fed and what do they do with all these interest payments by the Taxpayer? If the Federal Govt got into difficulty (either by sheer spending too much or high enough interest rates) would they have to pay the Fed its interest (assuming that there would be no default on foreign Govts etc)? The last time I looked foreign Govts are owed approx the following (Japan 860B, China 836B (Down from 1.1T!!!), UK 486B etc Total Foreign about 3T). So, this turns out to be more of a shell game than most people think. As far as going back to the gold standard, that just wouldn’t work at all, I don’t fancy going back to the great depression every time something goes wrong. No we’ve moved on to a more civilized monetary system, one that doesn’t destroy countries. On the other hand, it might be time to think up a different system from the current one that hands over 100′s of billions in wealth to faceless people.

Posted by WhatDebt | Report as abusive

I think the European Govts, in particular Germany, are hoping that most of this 1T is not actually going to be needed. They just have to convince the speculators that they mean business and that they should move on to another target. I’ve observed the Mexican Central Bank doing the same thing over the last 12-18 months (with help from the USA and IMF). Now there’s a real house of cards. If the Mexican CB was so convinced of the strength of the Peso, why are they buying dollars like crazy when the Peso gets stronger? They’re trying to build up there reserves to fight the speculators when they realize the peso is really worth nothing.

Posted by WhatDebt | Report as abusive

Excellent article!

Posted by yr2009 | Report as abusive

Gregg, a trillion dollars out of “thin air”? Hardly. The real question is…are Joe and Betty America (together with those hard working Germans) really financing the average Euro civil servant’s night out drinking ouzo in Greece, a week of Spanish fiestas, painting classes in Portugal and work stoppages in Italy? Looks like it. The media chose to ignore the Federal Reserve’s late night announcement this past weekend (literally at the same time as the European announcements) that it was reactivating its emergency dollar swap lines for European and Japanese banks. Could it be that the swap lines deliver newly-created-out-of-thin-air U.S. dollars (backed by Joe and Betty and their great grand childrens’ ability to pay taxes forever) to the same foreign banks that just announced their newly-created-out-of-thin-air trillion dollar euro-bailout? Seems so. Could it be that all Joe and Betty America get in return for keeping the party going is a mere promise by the foreign banks to redeem the U.S. dollars at a specific time in the future, a couple of bucks in interest and some kind of questionable collateral? Appears to be true. Could it be that Joe and Betty America together with all other U.S. taxpayers are financing these foreign banks’ ability to hedge their own balance sheets in light of their promise to embark on their trillion dollar guarantee (to the purchasers of new bonds in Euros mind you) with money that they do not have(as you rightly point out) and have to create out of thin air (c’mon somebody has to provide the guarantee, otherwise the paper money two-party “acceptance” system doesn’t work does it? And darn it – Iceland said no!) Does the Federal Reserve balance sheet increase with the use of this swap facility. Seems so. It does not decrease. Are these loans from the U.S. taxpayer to foreign banks. Seems so. (Hey, U.S Senate – It does not matter if the collateral pledged to the U.S. taxpayer by the foreign banks are U.S. Treasuries in the definition of a “loan”.) Is the U.S. taxpayer assuming the risk that the foreign bank may not be able to buy back (i.e. “re-purchase”) their collateral at some point in time and deliver “same-value” dollars back to the Federal Reserve with real money? Seems so. (Hey, U.S. Congress – foreign banks unlike the Federal Reserve are unable to print their own U.S. dollars!) So Gregg, let’s follow the money and find out who really benefits from all of these zeros created out of thin air (that you so rightly describe!!!). Could it be that the owners of bonds, owners of stocks in banks, owners of mutual insurance companies, owners of equity in real estate – owners of “real-assets” (you know, the rich)… simply – don’t want to be poor? Cause that’s where all of this make believe money (“name a bailout”) has been delivered to regardless of whether it’s the U.S., Europe or Asia. The illusion of real money is maintained for the wealthy by transferring the promises and hardship to the class that works in servitude and their descendants. “You gotta admit – It’s great to be the King.

Posted by jimfin | Report as abusive

To WhatDebt – There is no “Federal Reserve” entity. This is a common misunderstanding. There is only the “Federal Reserve System”. This “system” – generally speaking – is an association of member banks. Member banks, generally, are owned by shareholders. Mr. Bernanke is Chairman of the Board of Governors of the Federal Reserve System not an actual bank. The Federal Reserve System is the exclusive concessionaire (i.e. fiscal agent or dealer) to the Government of the United States for the creation of “money”. The role of the Federal Reserve System beginning in 1913 and again in the early 1930′s under Roosevelt has been questioned by many as to whether its role is constitutional given that many argue that only Congress has the power to create “money” in the U.S. The Federal Reserve System creates “new money” every single day (including the way you described) and imputes new “promises” on the U.S. taxpayers – currently – without any oversight by a representative elected by the people.

Posted by jimfin | Report as abusive

[...] 1. Money is a Ponzi scheme. [...]

Greek economy is toast. Say goodbye to the Ouzo!

http://storyburn.com

Posted by STORYBURNcom2 | Report as abusive

A trillion here a trillion there. To help put Gregg’s excellent narrative into perspective:

It takes a clock 32,000 years to tick 1 trillion seconds. Google it if you want proof…

Are we in the crap or what?

Posted by Stev | Report as abusive

Between all its logical fallacy and shopworn mythology, it’s hard to know where to begin to criticize the above article. But it needs doing, so:

German industriousness – myth, verging on ethnological infatuation
Greek laziness – legend, but not necessarily true at all times
Ponzi schemes – always illegal unless the government’s doing it, in which case doing it can become policy. Anybody else does it (incl. banking corporations, the Federal Reserve which is Federal in name only, etc) they’re still outlaws, so don’t trivialize Ponzi activity by random convolution
Elements of a modern state, you say… total rubbish, your priorities
Sources of economic deficit: social security? Nope, that’s taxpayer money, not the State’s and certainly not for privateers to gamble with. So-called Defense, subsidization of and enslavement to the private pseudo-money, pseudo-asset-based banking system – now There’s A Deficit To Write Home About…
Money a bunch of zeroes – possibly, but only governments can issue money not private banks, which is what makes the parasitic state-within-a-state Wall Street slash Fed serial scam that led to the US TARP Ponzi worse than anything the alleged sinners of Europe have committed at this time, or are likely to.

Which brings us back to your conclusion: if money’s just a bunch of zeroes, none of this really matters at all then, does it? But carry on, anyway.

Posted by HBC | Report as abusive

Jumfin, apart from the name, “The System” is some what a secret society answerable to no one. I know Bernanke goes and explains things to committees once in a while, but I was surprised to know from last weeks news that they basically don’t have to say exactly what they are doing in any detail, ergo, the calls for an Audit. Wonder how far that will go? It’s a traditional answer you give regarding the ownership of the Fed Reserve “System” that some “Association of Member Banks” might own it and be the recipients of the 200+ Billion in interest payments. Some have speculated that Chase might be one of the banks, others have speculated that Foreign banks might make up the association. But, no one knows.

Incidentally, something of what Congress codified as being the fed Reserve in 1913 existed from the Civil War years. I guess that’s why I’ve herd that we are still paying on Civil War bonds to this day. But, again, it’s a secret society and we don’t know for sure.

Posted by WhatDebt | Report as abusive

SOURCE: Greg Easterbrook Feb 10, 2009, Tuesday Morning Quarterback: Here’s my prediction: in October 2009, the one-year anniversary of Cramer’s “get out now” declaration, the Dow will be above 10,000 and gold will be below $875.

Greg,
Understand Austrian Economics
Understand The Secrect Private Bank – Federal Reserve
Understand HR1207 S604
Understand Gold/Silver
Understand the Plunge Protection Team and the Presidents Working Group on Financial Markets
Understand that the stock market has been bailed out several times over
Understand the Medical Industrial Complex
Understand the Military Industrial Complex
Understand the War on Drugs
Understand the Educational Industrial Complex
Big Gov’t, small individual.

I like your Tuesday Morning Quarterback. I like you, but I need to know what you would do in this economic climate.

Posted by kc6404 | Report as abusive

Gregg, you say that money is meaningless. It is a generally agreed upon means of exchange. If you haven’t studied economics and can’t think rationally please stop spreading this asinine diatribe. It serves only to confuse unintelligent people.

You cannot call money a Ponzi scheme- I can get what I want for a price that is agreed upon by two parties. Gold, silver, and money has value because people WANT IT TO HAVE VALUE. Because these things are rare and a useful means of exchange. We would still be living in primitive societies if money hadn’t been invented.

Stop writing articles before you think them through.

On a side note, bailing companies or countries out is a bad precedent and will cause a good deal of economic and societal issues that will take years to unravel. Probably, a large decrease in the value of money, which is what happens when you print too much of it.

Anyone who has taken a first-year economics class has more insight into the value of money than you.

Gregg, shame on you. This is the second time tonight I have found serious problems with your journalism.

You are lazy. Journalists who write this type of meaningless garbage should lose their jobs.

Posted by pillowattack | Report as abusive

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