What if there was a financial system that would eliminate the need for the federal government to go into debt, that would eliminate the need for the Federal Reserve, that would end the practice of fractional reserve banking and that would dethrone the big banks? Would you be in favor of such a system? A surprising new IMF research paper entitled “The Chicago Plan Revisited” by Jaromir Benes and Michael Kumhof is making waves in economic circles all over the globe. The paper suggests that the world would be much better off if we adopted a system where the banks did not create our money. So instead of a system where more money is only created when more debt is created, we would have a system of debt-free money that is created directly by national governments. There have been others that have suggested such a system before, but to have an IMF research paper actually recommend that such a system be adopted is a very big deal. At the moment, the world is experiencing the biggest debt crisis in human history, and this proposal is being described as a “radical solution” that could potentially remedy some of our largest financial problems. Unfortunately, apologists for the current system are already viciously attacking this new IMF paper, and of course the big banks would throw a major fit if such a system was ever to be seriously contemplated. That is why it is imperative that we educate people about how money really works. Our current system is in the process of collapsing and we desperately need to transition to a new one.
One of the fundamental problems with our current financial system is that it is based on debt. Just take a look at the United States. The way our system works today, the vast majority of all money is “created” either when we borrow money or the government borrows money. Therefore, the creation of more money creates more debt. Under such a system, it should not be surprising that the total amount of debt in the United States is more than 30 times larger than it was just 40 years ago.
We don’t have to do things this way. There is a better alternative. National governments can directly issue debt-free currency into circulation. The following is a brief excerpt from the IMF report…
At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims.
Why should banks be allowed to create money?
That is a very good question.
Why should sovereign governments ever have to borrow money from anyone?
That is another very good question.
Our current system is designed to enrich the bankers and get everyone else into debt.
And is that not exactly what has happened?
Taking the creation of money away from the bankers would have some tremendous advantages. A recent article by renowned financial journalist Ambrose Evans-Pritchard described some of these benefits…
One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.
The conjuring trick is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.
Specifically, it means an assault on “fractional reserve banking”. If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles.
So why don’t we go to such a system immediately?
Well, the transition to such a system would undoubtedly be a major shock to the global financial system, and most people try to avoid significant short-term pain even if there are tremendous long-term benefits.
More importantly, however, is that the bankers have a tremendous amount of power in our society today, and they would move heaven and earth to keep a debt-free monetary system from ever being implemented.
You see, the influence of the bankers is not just limited to the big banks. Our largest financial institutions (and the people who own them) also have large ownership stakes in the vast majority of the big Fortune 500 corporations. In essence, the big banks are at the very pinnacle of “the establishment” in the United States and in almost every other major country in the western world.
And the vast majority of all political campaigns are funded by “the establishment”. It takes an enormous amount of money to win campaigns these days, and most politicians are extremely hesitant to bite the hands of those that feed them.
So don’t expect any changes to happen overnight.
One proposal that has actually been put forward in Congress is to cancel all of the government debt that the Federal Reserve is currently holding. Right now, the Fed is holding more than 1.6 trillion dollars of U.S. government debt…
That would seem to make a lot of sense. That would immediately wipe more than 1.6 trillion dollars from the U.S. national debt without any real harm being done.
But “the establishment” would be horrified if such a thing happened, so I wouldn’t anticipate it happening any time soon.
Hopefully we can get the American people (along with people all over the globe) educated about these things so that we can start to get millions of people pushing for change.
A debt-free monetary system is superior to a debt-based monetary system in so many ways.
For example, if the U.S. government directly spent debt-free money into circulation, it could conceivably never need to borrow a single dollar ever again. If the government wanted to spend more money than it brought in, it would simply print it up and spend it.
Of course the big danger with that would be inflation. That is why it would be imperative for there to be a hard cap on what the government could spend. For example, you could set the cap on spending by the federal government at 20 percent of GDP. That way we would never end up looking like the Weimar Republic.
And the current federal debt could be paid down a little at a time using newly created debt-free dollars. This would have to be done slowly to keep inflation under control, but it could be done.
That way we would not hand a 16 trillion dollar debt to our children and our grandchildren. We created this mess so we should clean it up.
Theoretically you could also do away with the federal income tax if you wanted to. Personally, I would like to see the federal government be funded to a large degree by tariffs on foreign goods. That would also have the side benefit of bringing millions of jobs back into the United States.
Our system of income tax collection is just so incredibly inefficient. It costs us mind boggling amounts of time and money. Just consider the following stats from one of my previous articles…
1 – The U.S. tax code is now 3.8 million words long. If you took all of William Shakespeare’s works and collected them together, the entire collection would only be about 900,000 words long.
2 – According to the National Taxpayers Union, U.S. taxpayers spend more than 7.6 billion hours complying with federal tax requirements. Imagine what our society would look like if all that time was spent on more economically profitable activities.
3 – 75 years ago, the instructions for Form 1040 were two pages long. Today, they are 189 pages long.
4 – There have been 4,428 changes to the tax code over the last decade. It is incredibly costly to change tax software, tax manuals and tax instruction booklets for all of those changes.
5 – According to the National Taxpayers Union, the IRS currently has 1,999 different publications, forms, and instruction sheets that you can download from the IRS website.
6 – Our tax system has become so complicated that it is almost impossible to file your taxes correctly. For example, back in 1998 Money Magazine had 46 different tax professionals complete a tax return for a hypothetical household. All 46 of them came up with a different result.
7 – In 2009, PC World had five of the most popular tax preparation software websites prepare a tax return for a hypothetical household. All five of them came up with a different result.
8 – The IRS spends $2.45 for every $100 that it collects in taxes.
For long stretches of our history the United States did not have any income tax, and during those times we thrived. It is entirely conceivable that we could return to such a system.
At this point, the wealthy have become absolute masters at hiding their wealth from taxation. According to the IMF, a total of 18 trillion dollars is currently being hidden in offshore banks. What we are doing right now produces very inequitable results and it is not working.
In many ways, inflation would be a much fairer “tax” than the income tax because inflation taxes each dollar equally. Nobody would be able to cheat the system.
But if people really love the IRS and the federal income tax, we could keep them under a debt-free money system. I just happen to think that the IRS and the federal income tax are both really bad ideas that have never served the interests of the American people.
In any event, hopefully you can see that there is a much broader range of solutions to our problems than the two major political parties have been presenting to us.
We do not have to allow the banks to create our money.
The federal government does not have to go into more debt.
We don’t actually need the Federal Reserve.
There are alternatives to the federal income tax and the IRS.
Yes, it is very true that no system would be perfect. But clearly the path that we are on is only going to lead to disaster. U.S. government finances are a complete and total nightmare, and this mountain of debt that we have accumulated is going to absolutely destroy us if we allow it to.
So somebody out there should be proposing a fundamental change in direction for our financial system.
Unfortunately, our politicians are just proposing more of the same, and we all know where that is going to lead.
The people out there that believe that the U.S. economy is experiencing a permanent recovery and that very bright days are ahead for us should have their heads examined. Unfortunately, what we are going through right now is simply just a period of “hopetimism” between two financial crashes. Things may seem relatively stable right now, but it won’t last long. The truth is that the financial crisis of 2008 was just a warm up act for the economic horror show that is coming. Nothing really got fixed after the crash of 2008. We are living in the biggest debt bubble in the history of the world, and it has gotten even bigger since then. The “too big to fail” banks are larger now than they have ever been. Americans continue to run up credit card balances like there is no tomorrow. Tens of thousands of manufacturing facilities and millions of jobs continue to leave the country. We continue to consume far more than we produce and we continue to become poorer as a nation. None of the problems that caused the crisis of 2008 have been solved and we are even weaker financially than we were back then. So why in the world are so many people so optimistic about the economy right now?
Just take a look at the chart posted below. It shows the growth of total debt in the United States. During the financial crisis of 2008 there was a little “hiccup”, but the truth is that not much deleveraging really took place at all. And since the recession “ended”, total credit market debt has gone on to even greater heights….
So what does this mean for the future?
Well, if a small “hiccup” in the debt bubble caused so much chaos back in 2008, what is going to happen when this debt bubble finally bursts?
That is something to think about.
Sadly, most Americans seem oblivious to all of this.
If you go out to malls in the wealthy areas of America today, people are charging up a storm. In all, Americans charged a whopping 2.5 trillion dollars on their credit cards during 2011. Way too many people have already forgotten the lessons that we all learned back in 2008.
Of course some Americans pay off their credit cards every month, but way too many Americans are not doing that. Today, Americans are carrying 793 billion dollars in revolving credit balances.
And student loan debt is an even bigger bubble than credit card debt is. As I have written about previously, total student loan debt in America is rapidly approaching a trillion dollars.
So it looks like U.S. consumers have not learned to stay away from debt.
That is not good.
Well, what about the banks?
Has the financial system learned any lessons since 2008?
No, not really.
Sadly, the “too big to fail” banks are now even bigger than ever. The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011. If they were to fail today, they would be even more of a threat to our financial system than they were back in 2008.
And our major banks continue to be very highly leveraged. In fact, major banks all over the world are absolutely swamped with debt.
The following statistics come from Zero Hedge….
The U.S. banking system is leveraged 13 to 1.
The Japanese banking system is leveraged 23 to 1.
The French banking system is leveraged 26 to 1.
The German banking system is leveraged 32 to 1.
These are insane levels of leverage, and they are just inviting another major financial crisis.
Do you all remember Lehman Brothers? The fact that they were leveraged so highly is what did them in back in 2008. When the value of their holdings declined by just a little bit they were totally wiped out.
Well, during this next financial crisis large financial institutions are going to be wiped out all over the world. Major banks all over the globe are going to be crying out for more bailouts when things take a turn against them.
They are making the exact same mistakes that they made before, and they are going to be expecting more government handouts when things go bad.
Will we ever learn?
So obviously the banking system has not learned any lessons.
What about the federal government?
Well, if you follow my blog regularly, you know that I love to write about how horrific U.S. government debt is.
Unfortunately, over the past four years things have gotten so much worse.
Back in 2008, the U.S. national debt crossed the 10 trillion dollar mark.
Just recently, it crossed the 15 trillion dollar mark.
So now we are in a much weaker position financially to respond to another major financial crisis.
Just check out the chart posted below. This is a recipe for national financial suicide….
During fiscal 2011, the Obama administration stole close to 150 million dollars from our children and our grandchildren every single hour.
At the moment, the legacy of debt that we are passing on to future generations is sitting a grand total of $15,351,406,294,640.49.
But keep in mind that it is going up every single hour.
Meanwhile, our ability to service that debt is declining. We are rapidly getting poorer as a nation.
During 2011, the amount of money that left the United States exceeded the amount of money that entered the United States by more than a half a trillion dollars.
This gap is called a trade deficit, and it is absolutely ripping our economy to shreds.
For a moment, imagine Uncle Sam standing next to a giant pile of money on a map of the United States. Then imagine a half a trillion dollars being taken out of that pile every single year.
So why haven’t we totally run out of money yet?
Well, it is because we borrow those dollars back. In order to maintain our false standard of living, our federal government, our state governments and our local governments have to go out and beg the rest of the world to lend us our dollars back.
Sadly, our government schools have “dumbed-down” the population so much that most of them don’t even know what a “trade deficit” is anymore.
Meanwhile, our economic infrastructure is being gutted like a fish.
Look, I know that I go over this point over and over and over, but it is absolutely imperative that we all understand this.
The half a trillion dollars a year that leaves this country every year could have gone to support businesses and jobs inside the United States.
But instead it is going to support businesses and jobs on the other side of the world.
The consequences of this are absolutely devastating.
According to U.S. Representative Betty Sutton, an average of 23 manufacturing facilities a day closed down in the United States during 2010. Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.
Even many so-called “American companies” have been bought up by the rest of the world. The following comes from a recent article posted on Economy In Crisis….
RCA is now a French company, Zenith is a Korean company. Frigidaire is a Swedish company. IBM’s Personal Computer Division—with its 500 patents—is now a Chinese company. Westinghouse Nuclear Energy’s major shareholder is Toshiba—a Japanese Company. Lucent Technologies, a former research division of AT&T, along with all the patents acquired from the beginning of the phone system, is now a French company. In 2008, Brazilian-Belgian brewing company InBev purchased the iconic American brewer Anheuser-Busch, makers of Budweiser. With the sale of these manufacturing companies, the future profit and technologies all belong to foreign entities.
We once had the greatest economic machine in the history of the world.
Now it is being dismantled and bought up by foreigners.
When America’s economic infrastructure declines, that means that there are less jobs available for all of us.
As I wrote about the other day, the employment situation in this country is not getting better and we have never even come close to recovering from the recession that started back in 2008.
During 2008 and 2009, the U.S. economy lost millions of jobs. Since the beginning of 2010, the percentage of the U.S. population that has had a job has remained very stable….
Normally, when a recession ends the percentage of Americans that have a job bounces back pretty dramatically.
So considering the fact that the employment situation has never recovered from the last financial crisis, what is going to happen when the next financial crisis hits?
And most of the jobs that have been “created” during this so-called “recovery” have been low income jobs. In fact, if you look closely at the employment numbers that were released last Friday, you will find that the vast majority of the “new jobs” were part-time jobs.
But you cannot pay a mortgage and support a family on a part-time job.
Sadly, the truth is that median household income in America has been steadily dropping over the past several years. Tens of millions of American families are deeply struggling and more Americans than ever are falling into poverty.
Back in the year 2000, about one out of every nine Americans was living in poverty. Today, about one out of every seven Americans is living in poverty.
All of this is causing a great deal of anxiety in America today. Large numbers of Americans know that something has fundamentally changed, even if they don’t understand the specifics. That is one reason why sites such as this one have become so popular. People want some answers.
And once people get some answers about what is really happening, they tend to want to prepare for the hard times that are coming.
In a few days, a new series on National Geographic entitled “Doomsday Preppers” premieres. The mainstream media is starting to take notice of the growing “prepper” movement in America today. It is estimated that there are at least 2 million “preppers” in the United States at this point. Of course people are “prepping” for a whole host of reasons, but the number one concern among most groups of preppers is the economy.
As the economy crumbles, more Americans than ever have decided that it is not a good thing to be 100% dependent on the system.
Back in 2008 and 2009, millions of Americans suddenly lost their jobs. Because they did not have any finances stored up, large numbers of them also lost their homes. Many went from being solidly middle class to being out on the street in a matter of months.
That doesn’t have to happen to you. Instead of blowing your money on frivolous things, do what you can to set something aside for the difficult times that are on the horizon.
A lot of those “in the know” are quietly making their own preparations. For example, legendary film director James Cameron (Avatar, Titanic and Terminator) has purchased more than 2600 acres of farmland in New Zealand and he is getting out of the U.S. for good apparently.
Unfortunately, most of us do not have the resources for something like that. But what most of us can do is we can change our priorities and start focusing on the things that will help us survive the hard times that are coming.
So are you ready?
As a result of the absolutely stunning 29-23 overtime victory by the Denver Broncos over the Pittsburgh Steelers, it seems inevitable that “Tebow Time” will become a household phrase all over America. The string of last second victories that we have seen Tim Tebow pull out this season is unprecedented and we will probably never see anything quite like it again. Unfortunately, miracles don’t always happen in real life when we need them. Right now it is “Tebow Time” for the U.S. economy, the U.S. political system and the global financial system, and things look really bad. So will we see heroes rise up at this time to snatch victory from the jaws of defeat, or will we see the biggest debt bubble in the history of the world implode and plunge the entire planet into a devastating economic depression? Most people have no idea how fragile the global economic system has become at this point. Global leaders are currently engaged in a frantic juggling act in a desperate attempt to keep all the balls in the air. One wrong move could unleash a financial panic that could potentially be even worse than what we saw in 2008.
It is Tebow Time for the global financial system.
Lately I have been spending a lot of time writing about Europe. Many Americans have not really been too interested in these articles because they only want to hear about what is happening in the United States.
But the truth is that what is happening in Europe is of the utmost importance. The EU actually has a larger economy than the United States does, and when the European financial system collapses it is going to dramatically affect the entire globe.
For those that have not seen my recent articles on Europe yet, you can find some of them here, here and here.
The euro continues to drop like a rock. As I write this, the EUR/USD is sitting at 1.2693. That is shockingly low, and in the weeks and months to come it is going to go even lower.
But I am not the only one warning about these things. Trends forecaster Gerald Celente recently told ABC Australia that he is more concerned about the global financial system today than he has ever been before….
“I would say, since I’ve been doing this work, over 30 years ago, I’ve never been more concerned than I am right now.”
Celente also told ABC Australia that many areas of Europe are already essentially experiencing an economic depression….
“If you live in Greece, you’re in a depression; if you live in Spain, you’re in a depression; if you live in Portugal or Ireland, you’re in a depression,” Celente said. “If you live in Lithuania, you’re running to the bank to get your money out of the bank as the bank runs go on. It’s a depression. Hungary, there’s a depression, and much of Eastern Europe, Romania, Bulgaria. And there are a lot of depressions going on [already].”
Yes, things are stable (and even slightly improving a bit) in the United States right now. But it won’t be long before the financial tsunami that is sweeping Europe hits us as well.
It is Tebow Time for U.S. consumers.
We should all be thankful that the employment situation in the U.S. has stabilized, but things are not as good as the mainstream media would have you to believe.
Instead of 8.5%, the “official” unemployment number put out by the federal government should be about 11 percent, and the “real” unemployment number is somewhere around 22 or 23 percent.
And if you take a long-term view of things, there is no reason to celebrate at all. The truth is that the middle class in America is being systematically destroyed and we won’t see much permanent improvement until this country fundamentally changes direction.
Right now, there are tens of millions of Americans that can’t find a decent job. A lot of people are sitting at home as you read this staring blankly at the television as they wonder why nobody will hire them.
Once in a while, a little bit of this despair leaks into the mainstream media. The following comes from a CNBC article that was posted on Saturday….
Despite an upswing in hiring during 2011, the jobs crisis could last many more years as millions of Americans struggle to find work.
In Orlando, Florida, Brenda Solomon lost her retail job last May at a department store and was unable to find even temporary work during the holiday season.
“I’ve tried and tried and tried,” Solomon, 58, said on Friday while visiting a job center.
As they struggle to make ends meet each month, millions upon millions of U.S. consumers continue to run up even more debt as an article posted on CNBC recently detailed….
During the third fiscal quarter of 2011, U.S. consumers added $17 billion in new credit card debt, wiping out what remained of a $33 billion first-quarter pay down and putting us on pace for a $64 billion net gain in credit card debt during 2011, according to a Card Hub study.
It is Tebow Time for the Republican Party.
America desperately needs a fundamental change of direction, but right now a candidate heavily backed by the Wall Street banks is threatening to run away with the Republican nomination.
Mitt Romney is a politician in the worst sense of the word. He just wouldn’t be a bad president. He would be an absolute disaster. In fact, if Romney gets elected, it will basically guarantee a Democratic victory in 2016 (could be Hillary) and the Republican Party will be so damaged that they may never have another shot at turning this country around.
When it comes to evaluating Mitt Romney, do not listen to what he says. The reality is that what he says changes a little bit every single day. His flip-flopping is legendary.
No, when it comes to evaluating Mitt Romney, it is absolutely imperative to look at his record.
And when you look at his record (what he has actually done), it quickly becomes clear that he is basically just a more experienced version of Barack Obama.
When the mainstream media says that Mitt Romney has the best chance of beating Barack Obama, that is because they feel as though he is the candidate that is most like Barack Obama.
If it is Barack Obama vs. Mitt Romney in the general election, we are basically guaranteed four more years of establishment rule. Yes, there will be some minor changes, but everything will pretty much continue running the way that it is now no matter which one wins.
And please don’t believe that Mitt Romney will get government spending and government debt under control. According to a recent article in the Washington Post, the Romney tax plan would add 600 billion dollars to the federal budget deficit in 2015.
Mitt Romney is not going to fix any of our fundamental problems. If he was a master at “job creation”, then Massachusetts would not have been 47th in the nation at creating jobs while he was governor.
If Mitt Romney gets the nomination, it will just be another indication that the Republican Party is bought and paid for by the establishment.
Just check out who is giving money to Romney. Did you know that Goldman Sachs is his biggest donor? The following numbers come from opensecrets.org….
Goldman Sachs $367,200
Credit Suisse Group $203,750
Morgan Stanley $199,800
HIG Capital $186,500
Kirkland & Ellis $132,100
Bank of America $126,500
EMC Corp $117,300
JPMorgan Chase & Co $112,250
The Villages $97,500
Vivint Inc $80,750
Marriott International $79,837
Sullivan & Cromwell $79,250
Bain Capital $74,500
UBS AG $73,750
Wells Fargo $61,500
Blackstone Group $59,800
Citigroup Inc $57,050
Bain & Co $52,500
But the numbers above are nothing compared to the money being poured into the “Super PACs” that are backing Romney. The financial elite are dumping tens of millions of dollars into these “Super PACs”, and these “Super PACs” are playing a huge role in this campaign.
The following comes from an article posted on Economic Policy Journal….
The New York Times reports that New York hedge-fund managers and Boston financiers contributed almost $30 million to “Restore Our Future” before the Iowa caucuses. And “Restore Our Future“‘s faux independence has allowed Romney to publicly distance himself from them, their money, and the dirty work that their money has bought.
More than anyone else running for president, Mitt Romney personifies the top 1 percent in America — actually, the top one-tenth of one percent. It’s not just his four homes and estimated $200 million fortune, not just his wheeling and dealing in leveraged-buyouts and private equity, not even the jobless refugees of his financial maneuvers that makes him the Gordon Gekko of presidential aspirants.
It’s his connections to the epicenters of big money in America — especially to top executives and financiers in the habit of investing for handsome returns.
The way the political game is played in America today, the candidate with the most money almost always wins.
Mitt Romney and the organizations that are supporting Mitt Romney are sitting on gigantic mountains of cash.
Can any of the other Republican candidates overcome that disadvantage?
History would tell us no.
That is why it is Tebow Time for the Republican Party.
It is late in the game and things look desperate.
And if we don’t turn the country in a different direction in 2012, we may not get another chance.
Right now, the U.S. debt crisis is getting worse by the day. To get an idea of just how bad the U.S. national debt has become, just check out the infographic that is posted right here.
If we do not get our financial house in order and fundamentally change our economic policies, we are absolutely doomed.
If Barack Obama or Mitt Romney is elected in 2012, that is pretty much going to seal our fate.
Before you cast a vote this year, please read “The Top 100 Statistics About The Collapse Of The Economy That Every American Voter Should Know“. That article covers dozens of our economic problems and it shows why we are at such an important junction in American history.
2012 is going to be a huge turning point for us.
Right now, it looks like we are going to make a wrong turn.
It truly is Tebow Time, and we really need a miracle.
What happens when you attempt a cold shutdown of one of the biggest debt spirals that the world has ever seen? Well, we are about to find out. The politicians in Europe have decided that they are going to “take their medicine” and put strict limits on budget deficits. They have also decided that the European Central Bank is not going to engage in reckless money printing to “paper over” the debts of troubled nations. This may all sound wonderful to many of you, but the reality is that there is always a tremendous amount of pain whenever a massive debt spiral is interrupted. Just look at what happened to Greece. Greece was forced to raise taxes and implement brutal austerity measures. That caused the economy to slow down and tax revenues to decline and so government debt figures did not improve as much as anticipated. So Greece was forced to implement even more brutal austerity measures. Well, that caused the economy to slow down even more and tax revenues declined again. In Greece this cycle has been repeated several times and now Greece is experiencing a full-blown economic depression. 100,000 businesses have closed and a third of the population is living in poverty. But now Germany and France intend to impose the “Greek solution” on the rest of Europe. This is going to create the conditions needed for a “perfect storm” to develop and it means that the European financial system is heading for an implosion of historic proportions.
The easiest way to deal with a debt spiral is to let it keep going and going. That is what the United States has done. Sure, “kicking the can down the road” makes the crisis much worse in the long run, but bringing the pain into the present is not a lot of fun either.
Europe has decided to do something that is unprecedented in the post-World War II era. They have decided to put very strict limits on budget deficits and to impose tough sanctions on any nations that break the rules. They have also decided that they are not going to allow the European Central Bank to fund the debts of troubled nations with reckless money printing.
Without a doubt, this is a German solution for a German-dominated Europe. Germany does not want to pay for the debt mistakes of other EU nations, and so they are shoving bitter austerity down the throats of those that have gotten into too much debt.
But this solution is not going to be implemented without a massive amount of pain.
In fact, this solution is going to make a massive financial collapse much more likely. The following are 17 signs that the European financial system is heading for an implosion of historic proportions….
#1 As noted above, when you reduce government spending you also slow down the economy. We have already seen what brutal austerity has done to Greece – 100,000 businesses have shut down, a third of the population is living in poverty and there is rioting in the streets. Now that brand of brutal austerity is going to be imposed in almost every single nation in Europe.
#2 As the economy slows down in Europe, unemployment will rise. There are already 10 different European nations that have an “official” unemployment rate of over 10 percent and the next recession has not even officially started yet.
#3 Before it is all said and done, the EU nations that are drowning in debt will likely need trillions of euros in bailout money just to survive. But at this point Germany and the other wealthy nations of northern Europe are sick and tired of bailouts and do not plan to hand over trillions of euros.
#4 The European Central Bank could theoretically print up trillions of euros and buy up massive amounts of European sovereign debt, but this would go against existing treaties and most of the major politicians in Europe are steadfastly against this right now. But without such intervention it is hard to see how the ECB will be able to keep bond yields from absolutely skyrocketing for long. In fact, without massive ECB intervention it is hard to see how the eurozone is going to be able to stay together at all. Graeme Leach, the chief economist at the Institute of Directors, said the following recently….
“Unless the ECB begins to operate as a sovereign lender of last resort function, with massive purchases of eurozone public debt, the inexorable logic is that the eurozone will break up.”
#5 European leaders are hoping that the new treaty that was just agreed to will be ratified by the end of the summer. In reality, it will probably take much longer than that. German Chancellor Angela Merkel has made it clear that the solution to this debt crisis is going to take a long time to implement….
“It’s a process, and this process will take years.”
Unfortunately, Europe does not have years. Europe is rapidly running out of time. A massive financial crisis is steamrolling right at them and they need solutions right now.
#6 Sadly, the cold, hard reality of the matter is that none of the fundamental problems that Europe is facing were fixed by this recent “agreement” as Ambrose Evans-Pritchard recently noted in one of his columns….
There is no shared debt issuance, no fiscal transfers, no move to an EU Treasury, no banking licence for the ESM rescue fund, and no change in the mandate of the European Central Bank.
In short, there is no breakthrough of any kind that will convince Asian investors that this monetary union has viable governance or even a future.
Germany has kept the focus exclusively on fiscal deficits even though everybody must understand by now that this crisis was not caused by fiscal deficits (except in the case of Greece). Spain and Ireland were in surplus, and Italy had a primary surplus.
#7 Nobody wants to lend to European banks right now. Everyone knows that there are dozens of European banks in danger of failing, and nobody wants to throw any more money into those black holes. The U.S. Federal Reserve and the European Central Bank have been lending them money, but a lot of European banks are already starting to run out of “acceptable forms of collateral” for those loans as one Australian news source recently explained….
“If anyone thinks things are getting better, they simply don’t understand how severe the problems are,” a London executive at a global bank said. “A major bank could fail within weeks.”
Others said many continental banks, including French, Italian and Spanish lenders, were close to running out of the acceptable forms of collateral, such as US Treasury bonds, that could be used to finance short-term loans.
Some have been forced to lend out their gold reserves to maintain access to US dollar funding.
So will the U.S. Federal Reserve and the European Central Bank keep lending them money once they are out of acceptable collateral?
If not, we could start to see banks fail in rapid succession.
Charles Wyplosz, a professor of international economics at Geneva’s Graduate Institute, is absolutely certain that we are going to see some major European banks collapse….
“Banks will collapse, including possibly a number of French banks that are very exposed to Greece, Portugal, Italy and Spain.”
#8 Not only does nobody want to lend money to them, major banks all over Europe are also dramatically cutting back on lending to consumers and businesses as they attempt to meet new capital-adequacy requirements by next June.
According to renowned financial journalist Ambrose Evans-Pritchard, European banks need to reduce the amount of lending on their books by about 7 trillion dollars in order to get down to safe levels….
Europe’s banks face a $7 trillion lending contraction to bring their balance sheets in line with the US and Japan, threatening to trap the region in a credit crunch and chronic depression for a decade.
When nobody wants to lend to the banks, and when the banks severely cut back on lending to others, that is called a “credit crunch”. In such an environment, it is incredibly difficult to avoid a major recession.
#9 European banks are absolutely overloaded with “toxic assets” that they are desperate to get rid of. Just as we saw with U.S. banks back in 2008, major European banks are busy trying to unload mountains of worthless assets that have a book value of trillions of euros. Unfortunately for the banks, virtually nobody wants to buy them.
#10 European bond yields are still incredibly high even though the European Central Bank has spent over 274 billion dollars buying up European government bonds.
Up until now, the European Central Bank has been taking money out of the system (by taking deposits or by selling assets for example) whenever it injects new money into the system by buying bonds. That makes this different from the quantitative easing that the U.S. Federal Reserve has done. But at some point the European Central Bank is going to run out of ways to take money out of the system, and when that happens either the Germans will have to allow the ECB to print money out of thin air to buy bonds with or we will finally see the market determine the true value of European government bonds.
#11 Bond yields are going to become even more important in 2012, because huge mountains of European sovereign debt are scheduled to be rolled over next year. For example, Italy must roll over approximately 20 percent of its entire sovereign debt during 2012.
#12 Once the new treaty is ratified, eurozone governments will lose the power to respond to a major recession by dramatically increasing government spending. So if the governments of Europe cannot spend more money in response to the coming financial crisis, and if the ECB cannot print more money in response to the coming financial crisis, then what is going to keep the coming recession from turning into a full-blown depression?
#13 Credit rating agencies are warning that more credit downgrades may be coming in Europe. For example, Moody’s recently stated the following….
“While our central scenario remains that the euro area will be preserved without further widespread defaults, shocks likely to materialise even under this ‘positive’ scenario carry negative credit and rating implications in the coming months. And the longer the incremental approach to policy persists, the greater the likelihood of more severe scenarios, including those involving multiple defaults by euro area countries and those additionally involving exits from the euro area.”
#14 S&P has put 15 members of the eurozone (including Germany) on review for a possible credit downgrade.
#15 The stock prices of many major European banks are in the process of collapsing. If you doubt this, just check out the charts in this article.
#16 Bank runs have begun in some parts of Europe. For example, a recent article posted on Yahoo News described what has been going on in Latvia….
Latvia’s largest bank scrambled Monday to head off a run among depositors who were gripped by rumours of the bank’s imminent ruin.
Weekend rumours that Swedbank was facing legal and liquidity problems in Estonia and Sweden sent thousands of Latvians to bank machines on Sunday, with some lines reaching as many as 50 people.
The Greek banking system is literally on the verge of collapse. According to a recent Der Spiegel article, the run on Greek banks is rapidly accelerating….
He means that the outflow of funds from Greek bank accounts has been accelerating rapidly. At the start of 2010, savings and time deposits held by private households in Greece totalled €237.7 billion — by the end of 2011, they had fallen by €49 billion. Since then, the decline has been gaining momentum. Savings fell by a further €5.4 billion in September and by an estimated €8.5 billion in October — the biggest monthly outflow of funds since the start of the debt crisis in late 2009.
#17 There are already signs that European economic activisty (as well as global economic activity) is really starting to slow down. Just consider the following statistics from a recent article by Stephen Lendman….
In November, French business confidence fell for the eighth consecutive month. In October, Japanese machinery orders dropped 6.9%, following an 8.2% plunge in September.
South Africa just reported a 5.6% drop in manufacturing activity. Britain recorded a 0.7% decline. China’s October exports fell 1.7% after dropping 3.8% in September.
Korea’s exports are down three consecutive months. Singapore’s were off in September and October. Indonesia’s plunged 8.5% in October after slipping 2% in September. India’s imploded 18.3% after being flat in September.
Are you starting to get the picture?
Europe is in a massive amount of trouble.
The equation is simple….
Brutal austerity + toxic levels of government debt + rising bond yields + a lack of confidence in the financial system + banks that are massively overleveraged + a massive credit crunch = A financial implosion of historic proportions
Unless something truly dramatic happens, the economy of Europe is a dead duck.
There is no way that Europe is going to be able to substantially reduce the flow of money coming from national governments and substantially reduce the flow of money coming from the banks and still be able to avoid a major recession.
Look, I want it to be very clear that I am in no way advocating government debt in this article. It is just that under the debt-based monetary paradigm that we are all operating under, there is no way that you can dramatically reduce government spending without experiencing a whole lot of pain.
An economic “perfect storm” is developing in Europe. All of the things that need to happen for a major recession to occur are falling into place.
So does anyone out there disagree with me? Does anyone think that Europe is going to be just fine?
Please feel free to leave a comment with your thoughts below….