Bailouts, Austerity and Rage: Calm Like a Bomb, Part I - The Greek & The Irish

"Stroll through the shanties and the cities remain.
Same bodies buried hungry, but with different last names.
These vultures rob everything, leave nothing but chains.
Pick a point on the globe; yes the picture's the same.
There's a bank, a church, a myth and a hearse; a mall and a loan, a child dead at birth.
There's a widow pig parrot, a rebel to tame,
a whitehooded judge and a syringe and a vein.
And the riot be the rhyme of the unheard..."

-Rage Against the Machine, "Calm Like a Bomb"

Rage is deeply-rooted fear and frustration metastasized in the body of a global and institutionalized society; the natural result of economic disenfranchisement. It is one thing to advocate in the name of rage, another to predict that episodes of collective rage will occur and yet another to note that they are already occurring and accept them as a fundamental aspect of our lives. The former should be avoided as much as possible, while the latter two are required of the responsible analyst, in my humble opinion. "RATM" may not be a shining beacon of objective analysis in our world, but, at the same time, they are right.

People across the world are once again recording their "rhymes" as history unfolds. The debt-drugs were injected for years on end, so now the only question is how far down the revolutionary river our rage-filled, junkie mentality will carry us? Southern Europe (and Ireland), of course, are back in the cross-hairs right now, to the extent that poorer parts of the world ever escape them. Revolutions were all but manufactured by Western colonial/imperial powers in Latin America, Asia, Africa and the Middle East throughout the 20th century (see The Shock Doctrine and Confessions of an Economic Hitman), but now the chickens are coming home to roost.

The last time Greece had a true "revolution" (let's call it "a widespread uprising of the people which displaces or severely threatens the existing political order") was in the 1820s, Spain was in the 1860s, Italy in 1848, Ireland in 1916 and Portugal the most recent in 1974 (no shots were fired in this military coup). [1], [2]. In the case of France, Germany and the UK, the populations have generally suffered their own governments for much longer stretches with fewer internal uprisings. Now, in the span of just over a year, we have witnessed mass protests and/or riots in all of these countries, on multiple different occasions.

The trigger for this rage has largely been either the establishment and/or proposal of "austerity measures", as both conditions of EU "bailouts" or independent fiscal policy, or the subsidization of debtor nations by those belonging to Europe's "core". This situation in the EMU has created an extremely tense dynamic both within and between the respective populations of member states. So if we want to know the future of social unrest in Europe, perhaps we should look to the future of bailouts and austerity. To date, the two countries in the developed world that are facing the most severe austerity measures are, without a doubt, Greece and Ireland.

GREECE:

After the first round of Greek bailouts last year, its public bond yields were back to all-time highs as its economy had contracted from conditioned austerity and its finances remained dismal. The new plan concocted last week in the European "Leaders' Summit" has allowed Greece's 2-year bond yield to retrace about 1300 basis points (from above 40% to just over 27%), as it calls for further subsidization of Greek debt and "voluntary" bond swaps by private investors in Greek bonds. The latter, of course, will not be termed an act of "default" by any of the relevant institutions, except maybe the rating agencies (who would be surprised if they caved?), despite that being exactly what it is.

It is estimated that bondholders who participate in this swap program into longer-term bonds will take losses of up to 21% on the net present value of their current instruments. [3]. These alleged "haircuts" are not only a gigantic under-appreciation of Greek's insolvency, but will most likely still be subsidized by European workers and taxpayers, as investors put those "government guaranteed" bonds to the ECB as collateral. John Maudlin describes this dynamic in his latest E-Letter, Kicking the Can Down the Road One More Time:

"Here is what it [the latest EMU plan] really says: We are going to keep throwing good money after bad and work as hard as we can to transfer the debt that is on the banks to the ECB and European taxpayers as long as the voters will let us. This first tranche will be another €109 billion. That will last a few years, and Greece will only have to pay about 3.5% on that debt and the rollover debt, and people who expected to be repaid in that period will see payment extended to either 15 or 30 years.

You can call this what you like, and they call it “selective default,” but it is a default. There will be government guarantees on the debt, so the ECB can take it from the banks. Let’s see what the “voluntary” debt rollovers will look like and what the likely debt destruction will be. This is from Global Macro Monitor.

First, notice that the plan claims haircuts will only be 21%. But that assumes you can sell the new bonds at a 9% interest rate. If the interests rate demanded by the market are 15%, which is closer to reality, the haircuts are closer to 67%, after what appears to be an initial 20% cut. Will any institution not immediately try and get those bonds into the hands of the ECB? This is just ugly."

So how much will major bondholders really have to share in the losses on risky debt-instruments that they generated in the past, and how much of those losses will be immediately pawned off to the ECB under the new plan? Many of the details of this new "fiscal consolidation" of the EMU have yet to be ironed out, and it is still not clear whether it will be accepted as drafted by the relevant Parliaments. Ambrose Evans-Pritchard writes on this issue in The Telegraph:

"The terms overstep a resolution passed by the Bundestag limiting how far she [Merkel] could go in committing Germany to any form of transfer union or pooling of debts. The use of the EFSF as a fiscal fund without treaty authority further complicates a ruling by the German constitutional court on the legality of the bail-outs expected in September. Such changes to the EFSF will require ratification by each of the national parliaments. It may require an amendment to the Treaties, greatly raising the bar in Germany.

EU officials hope that a debt rollover plan for Greece can be limited to a short technical default. The ECB has backed down on its threat to reject Greek bonds as collateral. The formula will not be extended to Portugal and Ireland. It is understood that rating agencies will hold fire for the sake of global stability. However, there is no disguising that a major taboo has been broken, even if French leader Nicolas Sarkozy continued to insist that Greece would pay "all its debts"."

So, it is still unclear to what extent the new "stability" mechanisms will be implemented across the EMU, but Evans-Pritchard is right to say that a major line has been crossed, regardless of the final details. There is no doubt that the Emergent Union, through its latest plan, has now decided to stick together until the bitter end, when death finally does them apart. We are talking about the unilateral decisions of political and financial officials, though, which are not even close to being reflective of what their populations want. Nowhere is that fact more true right now than in Greece.

At least 95% of the Greek people are suffering immensely to remain in a Union that fails to benefit anyone outside of the top 5%. The authorized plans for austerity and privatization of the citizens' assets continues unabated, and more ominous than ever. Any backstops of Greek debt in the future will still be accompanied by austerity measures approved by the Greek government earlier this month. Meanwhile, the government is still in the process of finding new "advisers" (investment banks) to pay hefty fees in return for advice on how to reduce their deficit via asset sales. [4]. Jeremy Warner from The Telegraph reports:

"Agreement on the package is one thing, deliverability is quite another. Once Germans realise that what is being proposed is a transfer union by stealth, you have to wonder what political future there is for the leaders who agreed it. Angela Merkel is staring election defeat in the face, rather in the way that agreeing to German participation in the euro was arguably what did for Chancellor Helmut Kohl back in the late 1990s.

The same might be said of the recipient nations. What future for political and social stability among the newly enslaved once it is realised the price that has to be paid is loss of fiscal sovereignty together with years of externally imposed austerity;

The agreement refers to a “European Marshall Plan” to restore competitiveness to Greece. This doesn’t appear to mean money. Instead it seems to refer to the provision of “exceptional technical assistance to help Greece implement its reforms”. In other words, someone else will be running Greece’s affairs."

So how will this hypocritically harsh plan of austerity and privatization sit with the people of Greece? The proposed austerity measures adopted by the Greek government foresee tax increases of about $9B over the next four years, with almost $8B (~90%) front-loaded in the next two. This includes a measure to reduce the income tax threshold 30% (from 12,000 euros to 8,000) and place a "solidarity levy" on households for 1-5% of income this year. What that really means is the average Greek worker will be paying substantially more taxes, while the wealthiest brackets continue to evade them with relative ease.

From Der Spiegel:

"Two-thirds of Greeks regularly pay their taxes as well. Indeed, "contrary to widespread views," as the Friedrich Ebert Stiftung study put it, these taxes are automatically deducted along with social contributions from the paychecks of Greeks employed in both the private and public sectors. It is mainly the small wealthy class that manages to cheat the authorities out of €40 billion in tax each year. That is the OECD's estimated volume of annual tax evasion. The Greek central bank puts the losses at somewhere between €15 billion and €20 billion.

These tax cheats have little to fear. As Panos Kazakos, an Athens-based professor of politics, puts it: "I have never seen a single person put in jail for tax evasion." Robolis adds that the government, which supposedly has no money available for social services, just published a list of companies that owe the state a total of €9 billion in social contributions -- but it does nothing to get that money.

This injustice is what is making people in Greece so angry..."

The plan also calls for about a $31B reduction in spending over the same four-year time frame, with a majority coming from a reduction in public salaries, social programs and health care spending. Taken together, these measures amount to more than 10% of Greece's GDP. Such cuts represent a systematic gutting of safety nets that the average Greek has become reliant on for any chance of solvency, and, even survival in some cases. Finally, the proposed plan aims to generate about $70B+ from sales of public assets, including the citizens' stake in sea ports, airports, highways, mining operations and various other property (such as land on the island of Mykonos [6]) until 2015. [7].

From UN News Centre:

“The implementation of the second package of austerity measures and structural reforms, which includes a wholesale privatization of state-owned enterprises and assets, is likely to have a serious impact on basic social services and therefore the enjoyment of human rights by the Greek people, particularly the most vulnerable sectors of the population such as the poor, elderly, unemployed and persons with disabilities,” said Cephas Lumina, who reports to the UN Human Rights Council in Geneva.

The UN is generally known for having a lot of opinions on "human rights" issues without ever really backing them up with concrete action, but the statement above still touches on a very important dynamic for the Greek people. More and more of them are entering the "most vulnerable" classification of neo-feudal society, as they are forced to join the ranks of the impoverished and/or the unemployed.

From Der Spiegel:

"This time, the fight for survival last exactly 29 minutes. At precisely 3 p.m., Father Andreas, a 37-year-old Greek Orthodox priest, opens the doors of the food bank in downtown Athens. At this hour, the line of hungry people stretches all the way across the large square outside and into the street. Needy people of all ages are waiting patiently -- pensioners, unemployed people, mothers with children, immigrants, asylum seekers. "We can't let these people starve," the priest says. "They are already suffering so much. They should at least not go without food.

...In recent weeks, the needs of such people have been keeping Father Andreas and his colleagues very busy. Almost all of the 400 parishes in the Archdiocese of Athens have opened food banks like the one he runs. City officials have opened some as well.

His food bank distributes meals three times at day. Up to 2,000 come at noon, another 1,200 in the afternoon, and about another 1,000 in the evening. The workers try to make sure that they don't always supply the same people. Such vigilance is necessary because "the number of needy is skyrocketing," says one volunteer who estimates that the figure has increased by 30 percent in recent months. "But we can't be sure it will stay there," she says."

It now becomes clear that one cannot and should not under-estimate the revolutionary spirit of an extremely vulnerable population; one which has increasingly less to lose with every iteration of bailouts, austerity and privatization, as was clearly demonstrated by the Greek people at the end of June.

Der Spiegel:

"On Wednesday [June 29] afternoon, tear-gas fumes drifted through the city center. More than 200 demonstrators were reported to have been injured, most of them with eye and respiratory problems. The police union said at least 40 policemen had been injured, one of them seriously. A total of 30 people were arrested.

...On Wednesday, one protester, his face covered up, warned that the conflict would continue. "This is just the beginning," he said."

The anonymous protester was absolutely right - those events were only just the beginning of a fundamental and deepening trend for the people of Greece under their new regime of oppressive austerity.

Der Spiegel:

"For weeks, thousands of enraged Greeks have been holding anti-government demonstrations outside Greece's parliament building. They come with bullhorns and banners, and a couple hundred also bring stones and Molotov cocktails. Camera crews from around the world are always there to film them, but they never turn their lenses toward those in the dark back alleys of central Athens."

It is very difficult to look at the proposed austerity measures, in the context of the above developments, and conclude that the rage and riots in Greece will not get much worse. Last year saw its fair share of violence in Athens, and June 29, 2011 did as well, but there is also every reason to think Greece's economic/financial situation will continue to deteriorate as renewed austerity and privatization plans takes their toll. As reported above, that toll is especially pronounced in the "back alleys" of Athens where no one is looking. Instead, they choose to focus on sound bites from international institutions and national politicians who claim to be "saving" the country.

Der Spiegel again:

"Last week, Prime Minister Georgios Papandreou once again succeeded in getting a majority of Greek lawmakers to push through an austerity and privatization package worth €78 billion ($111 billion). In doing so, he was responding to pressure from the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission. Indeed, many economic experts see the package's measures as the only way to fend off an imminent national bankruptcy at the last minute -- and the only way to save the euro from an even worse fate.

But is Papandreou saving his country to death? Savas Robolis thinks he is. "People are afraid," the 65-year-old says -- they're afraid of an uncertain future."

This fear of the future will continue to strengthen the sociopolitical backlash against a political and banking system that has unequivocally expressed its disdain for the people of Greece. An increasing number of Greek people are protesting for their right to eat a decent meal every day, but the plans for severe spending cuts, tax increases and public asset sales continue on as if those protesters didn't even exist. In the meantime, European leaders meet with each other and figure out "clever" ways of tying themselves into a tight, inseparable knot of fiscal abandon. And for those two reasons alone, the modern world has yet to see the largest uprising that the Greek populace can produce.

IRELAND:

Like Greece, Ireland was also given a conditional bailout last year that has proven to be devastating for domestic economic growth. The new plan presented by EMU honchos says that Ireland will be able to borrow from the ECB at 3.5%, well below market rates (~5.8%), but it is not allowed to "selectively default" just yet. As a part of the conditions to reduce its budget deficit last year, Ireland had developed a budget for 2011 that was the most severe in its national history. Unlike the Greeks, however, the Irish people have so far kept relatively quiet in response to the ever-darkening clouds on their horizon. The Irish novelist Ed O'Loughlin has a theory for why that has been the case, as The Guardian reports:

"Dublin-based novelist Ed O'Loughlin says that perhaps one reason why the Irish are proving so docile is that for the first time in centuries the British can by no stretch of the imagination be blamed for their problems.

The author of the political satire Toploader adds: "The lack of clearly stratified classes – as they have in England – breeds insecurity, a fear of losing caste, of being pushed outward. To protest at the rules of this game would be an admission that you no longer have a hand to play in it; that you are a loser and a sucker."

At times of mass emigration, just staying in the country was felt to be a victory in itself, although often a pretty hollow one. "The fact that everyone's class system is centred exactly on themselves tends to make people, naturally, very self-centred. The Irish term for this is 'mé féin-ism', or 'myself-ism', a play on Sinn Féin, or 'we ourselves'. Mé féiners do not stand together for the common good. They are not good citizens."

It's an interesting theory that may demonstrate the power of a nation's political and cultural history to restrain the socioeconomic frustration of its people, but how long will this dynamic last for the Irish? Before getting to that question, let's first summarize what the people of Ireland are facing in the way of austerity measures. The current budget for Ireland includes spending cuts and tax increases, valued at about $8B, over the next year alone, or 4% of GDP. Most of the reduction in spending will come from cuts to welfare programs and public sector salaries/benefits.

The budget will reduce 4% of public pension expenditures by cutting benefits to retirees who are already being paid out. The tax increases will mostly come from income and value-added tax reform (lowering the income tax threshold and increasing VAT to 23% from 21%), although the top marginal income tax rate will be kept at 52%. The Irish government may also sell "non-strategic" public assets valued up to $3B over time, on recommendations of the "McCarthy Group". [8]. Meanwhile, the corporate tax rate will continue to be held at 12.5% (the lowest rate in OECD countries), which effectively serves to deflect the austerity burden from corporations generating massive profits within the country. [9], [10].

These large corporations paying a meager rate of 12.5% include the same financial institutions that were initially responsible for putting Ireland in a fiscal straight-jacket. It would be foolish to think that this tragic irony is being lost on the Irish people, who may soon be forced to further subsidize their financial industry through the Bank of Ireland, which is the only non-state controlled institution left (the state holds less than 50% of its shares). [11]. Right now, though, it actually appears that the British taxpayers, through the Royal Bank of Scotland, have taken on a part of that role:

From Irish Independent:

"In a statement, the bank [BoI] said it had raised the funds through two "bilateral secured term funding" trades; one yesterday and one at the end of June. The latest trade is believed to have been done with RBS -- itself nationalised by the British government in 2009. The funding, which is not covered by the banking guarantee, has an average duration of some 2.2 years.Although the lender would not comment on all the specifics of the fundraising, they did reveal that under the funding agreement's terms, they will pay 2.65pc above the three-month Euribor rate.

...BoI is facing a race against time to avoid joining the rest of the Irish banking sector under state ownership. After the results of the stress tests in April, it was told it had until the end of June to raise €5.2bn if it wanted to remain under private ownership. That deadline was pushed back to the end of this month with the firm trying desperately to raise the required funds."

If and when the BoI loses its race to stay private, it's the Irish taxpayers who will pick up the tab for an extra 2.65% interest on loans from RBS, along with any other obligations passed on by the private banking sector. Considering these developments and the ongoing effects of current austerity measures, it is difficult to see the Irish people remaining "docile" for much longer. There is only a certain amount of restraint that can be imposed by cultural perceptions before the reality of economic desperation sets in. They are now merely remaining "calm like a bomb", and the fuse on that device has been lit.

The Guardian article referenced earlier also includes the following assessment by John Kearns of the Irish Writers Centre:

"John Kearns, who went abroad in previous recessions and now works in Dublin's Irish Writers Centre, says it is too early to rule out social unrest. 'It's quite possible there will be Greek-style riots. The cuts are affecting people now. People are having their utilities cut off. I know of families, a mother of two, who had their electricity cut off. People can't take that lying down.

And there is still a mortgage crisis coming down the track with increasing interest rates that are coming later this year. I can certainly see social unrest ahead, although I don't see what can be achieved by it. It's strange that the main demonstrators so far have been pensioners and students rather than industrial workers. The workers so far have been far quieter,' Kearns said."

Indeed, there are strict limits to the amount of economic hardship a population can take before its "restraint" comes to be perceived by it as an exercise in futile despair. It appears that there is now very little standing in the way of fear and rage taking over the reigns of the Irish sociopolitical system. A recent survey found that the Irish people are beginning to agree with Kearns in massive numbers, whether they are truly aware of it yet or not.

From the Irish Examiner:

"In the last survey, 36%, or 428,000 people, did not see a future for themselves or their family in this country. However, this has now risen to 45% or 585,000. The iReach survey for the Irish League of Credit Unions (ILCU) found that 82%, or one million adults, fear about coping if further changes to income tax or welfare are introduced.

The survey found that 806,000 people feel they are living to work as opposed to working to live. However, the latest results have not factored in the July interest rate hike and in March one-in-five people said that a hike would have a serious effect on their ability to pay bills."

Well over half a million Irish people and families see "no future" living in their own country, and a solid million adults fear for their ability to make ends meet in the current climate of unaffordable private debt and public bailouts conditioned with severe austerity. That is quite simply a recipe for wide-scale protests, riots and uprisings in the near future. It is fundamentally impossible to predict exactly when such fervor will materialize, or what intervening factors will delay its development, such as Irish politics and culture, political/legal maneuvers by EU governments, financial maneuvers by the IMF/ECB, etc.

However, at the end of the day, these factors are only strengthening the population's future resolve. They are merely extending Ireland's exposure to the bailout structure of the EMU, and the numerous conditions that naturally accompany those bailouts. The fact that EU leaders are now planning to consolidate that structure under the modified ESFS, abandoning the haphazard process they had earlier, changes nothing for the Irish people. Eventually, they will need to write off a portion of the bad debts taken on by their government, just like the Greeks, and they will be forced to pay the price through further austerity and privatization.

I have noted before, in The Short Story of How We Lose, that the pain of losing is disproportionately more severe than the pleasure of winning. Similarly, the relatively abstract prospect of losing in the future is not nearly as painful as the act of losing itself. As the proposed austerity measures targeting the Greek and the Irish transform into implemented measures and real losses for their pocketbooks, we can expect the fear and rage to follow closely behind. Many of the remaining chords tying the people to their political structures will be severed. And, lest anyone tell you different, collective rage is largely a function of deeper socioeconomic trends; ones that are now common to the entirety of Europe and the developed world.

The Emergence of Europe as a Union

The European Monetary Union is the world's first example of an aggregation of "sovereign" nation-states into a single entity of economic exchange. Although there are many similarities between the EMU and the political aggregation known as the "United States", the latter only consists of one truly "sovereign" political authority. The U.S. Constitution provides that it, along with federal law, is the "supreme law of the land" in practically every sphere, while the EU Constitution only allows EU law to trump the laws of member states when the latter have explicitly agreed for the EU to legislate in those spheres.

The EU, therefore, illustrates the world's first "emergent property" of nation-states acting as an economic (currency) collective, without a very significant fiscal/political centralization of authority. Dr. Steve Keen, a renowned "Post-Keynesian" economist, recently published a presentation discussing the fact that prominent research in Neo-Classical economics has actually undercut the entire edifice of Neo-Classical theory currently taught in schools. [Video of Lecture].

Essentially, the research shows beyond a doubt that market demand curves cannot be modeled by aggregating individual demand curves which are subject to the "Law of Demand" ("all else being equal", demand for a commodity falls when its price rises and vice versa). While this law may hold for an isolated individual to some extent, it becomes little more than a coincidence at the macro-economic scale. Instead, complexity theory teaches us that when economic agents are aggregated to the macro-scale, the new collective is governed by novel, non-linear rules and exhibits "emergent properties".

That's why speculative financial bubbles are even capable of endogenously occurring within a capitalist "free-market" economy. When the prices of U.S. and European real estate continued to escalate dramatically throughout the late 1990s and 2000s, demand did not fall off, but instead continued to climb as more irrational investors joined the ranks of an emergent herd. As mentioned above, the European nation-state herd is not quite like any other we have witnessed before, and "emergent behavior" is not necessarily a good thing for economic sustainability or productive growth.

The EU as a collective monetary union is the largest economy by nominal GDP in the world, exceeding the US by more than 10%. [1]. It has been clear for some time that all of the EU's member states, while retaining political "sovereignty" and diverse economic sectors, have become committed to preserving the value of any and all public bonds denominated in Euros. On the surface, there are various stirs about Germany or France not supporting further bailouts, or about Greece refusing the conditions of such bailouts, but it is the IMF, ECB and major bondholders who actually guide the herd.

The new rules governing this herd can be summed up in two words - austerity and privatization (a.k.a. wealth extraction). While the response of U.S., China, Japan and others to the global financial crisis has been marked by increasing levels of government support/intervention in private economies, the EU as a collective has rapidly evolved to the stage of large cuts to expenditures that benefit large swaths of people and the wholesale privatization of public assets.

REUTERS: GREEK REFORMS MUST MOVE FASTER, PSI IN THE WORKS: IMF

Reuters: "The IMF said on Wednesday private sector involvement (PSI) was fundamental to a Greek bailout and urged Athens to move faster on fiscal and structural reforms to avoid a debt default."

Greece has now graduated from public "stabilization funds" managed by the IMF and ECB, to a plan for "PSI" that requires fast-acting "fiscal and structural reforms" (i.e. continued gutting of the public sector), which will no doubt be micro-managed by the IMF despite its name.

"...Fitch said it saw contraction at 4 percent in 2011, followed by a weak recovery next year. It said asset sales in 2011 appear feasible but the privatization plan will be increasingly challenging.

The Fund praised the recent creation of a privatization agency to help rake in a targeted 50 billion euros in proceeds until 2015, and said the target was ambitious but achievable."

Despite (because of) the ongoing "bailouts" and austerity in Greece, Fitch tells us that its economy is contracting, and while the PSI plan is a good one, the Greek people will have to try extra hard to sell their assets and meet "the target" (on their backs).

..."The conservative opposition has opposed the bailout plan, saying it stifles the economy, but supports some state selloffs. A public resentful with austerity has staged almost daily protests against the measures."

The Greek population becomes more disenchanted with their economic situation and proposed "solutions" with each passing day, but the so-called "conservative opposition" gradually comes to support the PSI plan, which is fundamentally very much the same as austerity. Now, Greece was the first to reveal the emergent behavior of the EMU collective, but it will by no means be the last. As we get closer to the collective's center, the need to privatize national assets and keep major bondholders afloat becomes even stronger.

When discussing the massive exposure of French banks to the sovereign debt of Spain and Italy, which has recently come under market pressure, Ilargi at The Automatic Earth writes the following:

Ilargi:"Paris will -need to- step in to try and save its financial institutions. The first steps in that direction are already being taken. The International Accounting Standards Board (IASB) has advised Europe to implement their International Financial Reporting Standard 9 (IFRS 9), which is nothing but a sly and underhanded mark to fantasy trick posing as a "standard". Think the US' FASB 157. Basically, IFRS 9 allows investors to hold assets at cost as long as they don't try and sell them. That Greek haircut which is being discussed shaves off as much as 60% of debt value. But they may still appear on the books at 100%."

The first step is to make sure that, if the inevitable does somehow occur and one of the PIIGS technically defaults on their obligations, the major European bondholders (banks and institutional funds) will at least maintain some value on their books through fraudulent accounting. At the same time, however, the banks will need to "raise capital". That can be done directly through fiscal bailouts by their home countries, but those would also be very counter-productive to the underlying issue in the EMU - excessive public debts and deficits.

The more likely behavior is what we have already seen for Greece, Ireland and Portugal - an IMF/ECB sponsored public bond purchasing commitment. Another reason for executing this now standard European tactic is to protect against the trigger of CDS contracts that were taken out as default insurance. This issue is something Ilargi has written about extensively (see The Derivatives Pressure Cooker and Credit Downgrade Swaps), and it can only grow in importance considering Italy's 120% Debt to GDP ratio and the fact its 10-year bond is about 3% rich to Germany's. [2].

The plans for austerity, of course, have been in the works for some time, and the Italian Prime Minister will now present the "package" for passage this Friday, instead of its originally scheduled date in August.


ITALY TO BOLSTER AUSTERITY PLAN, PASS IT BY FRIDAY

AP: "Italy's finance minister says the government's package of austerity measures will be strengthened and passed in both houses by Friday.

Giulio Tremonti sought to reassure markets during a speech to a banker's association meeting in Rome that Italy would speed reforms and austerity measures that seek to balance the budget by 2014.

But he also said that the pressure on markets in recent days was not a problem "of a single country, but of the structure of Europe."

So, does anyone now think that Rome will not be submerged in extensive "privatization plans" in the near future? Perhaps a big fat "FOR SALE" sign will be stuck in the center of the Coliseum? It is, as Tremonti says, a function of "the structure of Europe". Personally, I would say that Europe has fully emerged as a monetary union, and it is now behaving as any collective of nation-states would. There is no "turning back", and there is no "sustainable" plan to keep the collective together. There are only games, tricks, cons and "private sector involvement"; and, then, there's riots and revolutions.

This Time It's Dilated

It's nothing new to say that we are living in a "black hole" economy, in which productive capital is continuously vacuumed up by speculative financial structures, as we continue spiraling down a path of fiscal stimulus, bailouts and central bank monetization, with little chance of those capital "influxes" ever reaching enough velocity to escape into the real economy anytime soon. As long as we continue operating under the same structures of economic organization, nothing we do will overcome that gravitational force and we will fall towards the center until we are wholly digested. Perhaps shreds of our former system will eventually radiate back into space, detectable to future generations, but its structures will be radically different for quite awhile.

On the other hand, you rarely ever hear the analogy extended much further than that. The productive economy is essentially being dismantled and vacuumed into another dimension, but how quickly will it happen? That question brings us to two related concepts that are frequently found in Nature, and a bit too often in modern human society - predicaments and paradoxes. As we are rapidly descending into the black hole of ponzi capitalism, a critical paradox involving time reveals itself. The closer you are situated to the event horizon of a black hole, the more gravitational force is applied (less gravitational potential) and the more time is dilated [1].

The equivalence principle in Einstein's theory of general relativity allows even stationary bodies with relative distances from a gravitational mass to be treated as having accelerated frames of reference with respect to each other. So we are not talking about an absolute measure of time, but its measure relative to other observers situated at different distances from the black hole. If observer A is closer to it than observer B, then a clock in A's possession will tick slower than one in B's possession, and both A and B will agree that A's clock is moving slower than B's.

From an absolute perspective, the gravitational force tearing at A's tendons is an extremely violent one, but, from the relative perspective, the time over which that force is applied is smoothed out towards infinity (as A's relative frame of reference approaches the speed of light). The clock in A's possession will continue to slow in relative terms, until an entire year in the life of B is just a few short ticks of the second hand, and eventually it will appear to B that A is barely aging at all (and to A that B has barely existed for any time at all).

To see how this time paradox applies to the global economy's black hole of speculative capital, we only have to look around us. Observer A could be represented by the largest economies in the world, hosting the largest financial/equity markets (U.S., China, Japan, Western/Central Europe, Canada, Russia), while observer B is represented by every other economy that is linked into the global financial system (this ranges from the economies of Iceland, Tunisia, Egypt and Syria all the way to those of Ireland, Greece, Italy and Spain). [2].

The biggest economies are closest to the event horizon of financial capitalism, since they have the highest levels of unproductive debt sitting on their private and public balance sheets. Their citizenry is being systematically poisoned by excessive debt, collapsing revenues, unprecedented bailouts, subsidies, taxes, regulatory oppression, unemployment, speculative inflation, etc., but it is also a very slow death. Relative to an Observer B, such as the Egyptians, Irish or Greek, the populations of these countries do not feel that their lives have significantly changed in the last few years or even decades, despite the changes most certainly taking place.

The time dilation effect has smoothed over these changes to make them appear much less drastic. Almost all asset markets in the U.S., Europe and China are now wholly subsidized by their respective governments/central banks, but the taxpayers fail to recognize that the bill was drafted in their names and will come due well within their lifetimes. Millions of people have lost their jobs, retirement savings and employment benefits in the West, but millions of them are also collecting welfare benefits such as food stamps, Section 8 housing, medicaid, medicare and/or unemployment insurance (or the equivalents in Western Europe).

Meanwhile, the clocks in North Africa, the Middle East, South Asia and the EU periphery are ticking much faster, as a new financial or sociopolitical "crisis" in those regions seems to erupt every other day of the week. While the size of their individual economies are relatively small and are capable of being partially backstopped with imaginary capital generated by the alchemy of Observer A, the rate at which their respective populations experience economic deterioration still renders it a very painful process. That is especially true when the pace is relative, and the people are forced to watch local economic and political institutions "age" much faster than their counterparts in larger economies.

The amount of suffering experienced by the average Tunisian, Egyptian, Libyan or Greek in one day generally equals the amount the average American, Canadian, Brit or German will experience in a year or more. The fundamental reasons we suffer do not differ, since we are all a part of the same economic system and are being consumed by the same black hole of debt, but the temporal schism makes that shared reality difficult to see. This dilation of time for the central economies of our world may not be fair or just, but it's a fact of our existence, and it behooves us to now use it to our advantage and the advantage of those we can reach.

For some, that might mean undergoing extensive financial and physical preparations and working towards 100% self-sufficiency, by learning how to grow/preserve food, access/purify water, generate renewable energy, use weapons for self-defense, develop community ties, etc. For others, it may not mean much more than getting out of debt, gathering knowledge and speaking their minds whenever others will listen. Regardless of one's specific strategy, it should be remembered that a dilated time frame does not mean the economy is recovering or the status quo will persist.

Our frame of reference may be relatively slower and more drawn out, but we are still being digested by the financial black hole of global civilization. In fact, we are positioned closest to its event horizon, and there will come a time when we can no longer afford to linger in the relative safety of its boundaries, but rather must cross over to the other side. When that happens, our relatively slow clocks will synchronize with all of the others and quickly make up for the time that was lost before. This time may be dilated, but, in the end, it's really no different.

The Future of Physical Gold (Part V - An Imperfect World)

"It is dangerous to be right when the government is wrong." -Voltaire

The first four articles in this series (Dialectic Foundations, The Evolution of Value, The Final Realization and Deflationary Canyons and Caves) used theories, facts, data and general observations to explain why the dollar price of physical gold would most likely take a significant hit over the next decade. It was also consistently argued that the global financial system would not be "re-capitalized" through the revaluation and monetization of physical gold reserves, as argued by the theory of Freegold. That, in turn, means that physical gold is very unlikely to reach valuations as high as $40-100K in current purchasing power per ounce, either in the near future or, for all practical purposes, ever.

Obtained from Gold: The Ultimate Un-Bubble (FOFOA)

Much of this series has focused on the Federal Reserve, U.S. Treasury and the U.S. Dollar as THE key influences on future monetary developments in our global financial system. Freegold advocates would take issue with this focus, because they believe the "rest of the world" (ROW) will be much more instrumental in leading the physical gold-based re-capitalization process, such as Europe, the Middle East, China, Russia and India. The problem for them is that such a conclusion is not supported by either sound theories of complex systems' evolution (i.e. evolution of the global economy) or straightforward empirical evidence. Let's return to a passage from Part IV:

[Deflationary Canyons and Caves]: We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

A complex and dynamic system relies on "central hubs" to keep itself functioning at anything close to its current scale, and therefore the "peripheral" branches of the system are more flexible and can deteriorate much faster. Accordingly, fiat currencies existing in the "periphery" of our global economy should be expected to fall first. For example, Belarus recently experienced the initial stages of HI as their currency lost 36% of its purchasing power in one month. However, the value of alternative mediums of exchange within the economy (i.e. dollars, gold, silver) can be suppressed in spite of such events as long as there are significantly bigger countries (currencies) willing to backstop the smaller ones, which will be Russia in this situation (with conditions of privatizing national assets, of course). [1], [2].

The countries on the periphery of the EU are in a somewhat similar position, but the Euro, as an accepted and stable currency, is obviously much more important to the system than the Ruble of Belarus. Even as the PIIGS continue to repeatedly experience public financing problems, the Euro has managed to maintain its value through various financial and political charades by the national governments, IMF and ECB (i.e. sovereign bond monetization, "credible" austerity plans, the prospect of labeling a default as "voluntary reprofiling", etc.). At every juncture, however, it became more clear that these efforts had increasingly less impact on public bonds and derivative instruments tied to their value.

At the end of every excruciating day, there must be a white knight in shining armor waiting in the shadows, ready to spring to action and prevent a complete European financial (Euro) implosion in the event of a PIIGS default. Countries such as Russia, Japan and China are simply not big enough to provide any credible backstop to the entirety of Europe, so we once again return to the operations of the U.S. Treasury and the Fed. In addition to various USD-Euro swap programs, it was revealed just yesterday by a report on Zero Hedge that almost all of the dollar flows generated from the Fed's QE2 Treasury monetization program have gone directly to European banks (~$600B to date).

The Federal Reserve Building in D.C.

Implication #3 explains why the US dollar has been as week as it has since the start of QE 2. Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD. [3].

It conveniently turns out that major financial institutions in the Western world, whether technically classified as "American" or "European", repeatedly stop at the U.S. Treasury and USD markets and collect their "Go" money. The abridged reason is that the world has been flooded with dollar-denominated debt over the last few decades, and that debt, unsurprisingly, gives the institutions of dollar hegemony extreme leverage over the ROW when the liabilities come due and there is very little cash to go around. That has been a central theme of this series from the very beginning, and when you understand that, you start to understand what can happen to the value of physical gold.

The point has always been to maintain power structures of the system by transferring larger and larger amounts of resources and capital to its central hubs. When the PIIGS inevitably default on their sovereign bonds, EU citizens will realize that they were forced to sell their precious assets (including gold) for pennies on the dollar, while the major creditors who initially put them into debt were largely "re-capitalized" by the ECB/Fed and are set to absorb initial losses on any remaining debt-assets with ease. The Euro will experience a major sell-off relative to the U.S. dollar, when investors realize that the ECB is nothing more than a shell subsidiary of the Fed.

Gold may benefit a bit from capital flight out of Euro-based holdings over the next few months or year, but it will be difficult for it to maintain any marginal increases in value as financial contagion spreads and massive debt obligations come due. The latter are typically not payable in physical gold due to the system's evolutionary design, and so it will merely serve as a temporary and relatively illiquid repository of wealth for many investors. The debt-dollar system of "cash" and liquid bonds, on the other hand, will greatly benefit from capital flight, and that will also serve to suppress the value of gold on international exchanges.

Towards the end of Part IV, however, I explained that the shell game between the USD and Treasury markets cannot last forever. After a prolonged period of dollar appreciation and relative gold devaluation (~10 to 15 years), the central hub institutions would have concentrated and centralized too much wealth for their own good, just as predicted by Marx well over a hundred years ago. What both Marx and predictors of Freegold (Another and Friend of Another) really failed to understand, though, was that the complex global economy would not quickly rebound after this period with a drastic shift in property relations or systemic re-capitalization via physical gold.

In stark contrast, physical gold will become valuable mainly because it serves as a convenient and accepted medium of exchange in certain locations after the global financial architecture has crumbled into tiny bits and pieces. Ironically, the central hubs that were most dependent on that architecture will witness the most dramatic reversal, during which physical gold becomes a very important constituent of survival. For example, private communities in U.S. states have relatively small amounts of physical gold compared to those in Latin America, Africa, Asia and Europe. This lack of general availability will help to elevate its value in trade, as well as physical silver to a lesser extent.

Data from IMF World Gold Report

In addition, at even smaller scales, black markets for trade in specific goods will inevitably become entrenched within "first world" countries over time as more and more people are displaced from the broader currency system. That trend is already prevalent in many poorer regions of the world, and it will simply expand to encompass those in the former "middle-class" who are living in densely-populated communities. For example, relatively poor neighborhoods in cities such as Detroit, Chicago, Los Angeles, New York, etc. will likely develop such markets over the next 20 years. Physical gold and silver, along with various other barter items, will become quite valuable in these locations.

It is also true that communities in the developed world have significantly less ability to sustain themselves through local food production, water procurement/treatment (more negatively impacted by shortages and impurities), efficient energy utilization, cooperative organization, ethnic/racial tolerance, etc. All of these physical, political and social deficiencies make it more likely that people will need to engage in extensive and reliable (trusted) trade to procure the things they need to survive, protect existing wealth and maintain bearable standards of living after HI occurs. Once again, this fact speaks volumes for the value of both physical gold and physical silver in the future.

On the other hand, locations with a lengthy history of gold or silver-backed currencies may find themselves re-instituting those monetary systems in the future at relatively smaller scales. States in the Indian sub-continent are a good example of those which may adopt a "gold standard" as the Rupee falls apart, and that would mean holders of gold are likely to gain a considerable increase in purchasing power. Alternatively, communities in Latin America may have a stronger affinity for silver-backing due to their historical paths of economic development. It is also possible that bimetallic currency standards are adopted at relatively small scales of organization in some parts of these regions.

It is perhaps most important to remember that a prolonged period of dollar deflation will be an extremely destructive process for general confidence in the global, regional and national structures of human society. Capital investments and revenues in every field of industrial economic activity will dry up in this self-reinforcing process, and that will in turn affect every aspect of our lives, including our ability to obtain adequate food, water, energy and shelter. By the time the central structures (the U.S. Dollar) of our system completely give out, the value of any official or unofficial monetary system will be constrained by the basic needs of people to survive in many regions.

Instead of hoarding physical gold for purposes of securing wealth or trading in a hyperinflationary environment, then, one may be better served by skipping directly to physical preparations that satisfy such needs. That is especially true in the developed world, where a relatively liquid and available means of exchange still exists and critical supplies are still somewhat affordable, but where self-sufficiency also requires a lot of effort. Once you are comfortable with your specific level of preparation, then you should begin looking for places to store excess currency wealth long-term. There is little doubt in my mind that physical gold is the place that generally towers above all others.

Some readers may feel that this article series has not delivered what it "promised", in so far as they were expecting an extremely detailed account of physical gold's future. While there was certainly no intent on my part to deceive, the series was organized to place significant emphasis on the role of complexity and uncertainty in our global economy as financial structures deteriorate. It is much more feasible, and therefore more important, to understand the broader foundations of how we got to this unique point and how the value of our wealth is likely to evolve from here. As explained in Part IV and above, the latter heavily depends on our localized circumstances of existence.

There is a well-known saying by Voltaire that "the perfect is the enemy of the good", and it's one of those cliches that should probably be tattooed on the palm of one's hand. Some people recite it as "we should not let the perfect be the enemy of the good", and that may be true, but it's just not as comprehensive as the original quote. The perfect is the enemy of the good, always. Perfect knowledge, perfect information, perfect monetary systems, perfect investments, perfect theories, perfect arguments... these things are all our enemies. What made me think of that quote was the following comment from a reader of the articles posted to a recent comment thread on FOFOA's website (emphasis mine):

"Anonymous": I offer profound thanks to FOFOA for giving me better insight into the economic events unfolding. I have become pretty much convinced about Freegold and hyperinflation.

But I have wished for an intelligent critique of FOFOA's writings because you can never be sure of a perspective until you understand the good arguments against it. So I thank Ash too, and look forward to reading the next installments of his series on the future of physical gold, at TAE. Perhaps it will undermine my tentative conclusion that FOFOA is right. Perhaps it will only lead to a more tempered version.

Reading all this stuff is a hard slog, especially when I have to work, and maintain a family. It is always a struggle to see the world aright.

I can only hope that other readers also find my series good enough to stand as a critique to the ever-insightful arguments of FOFOA and Freegold. Advocates of the latter would be the first to tell you that it is not meant to be predictable with certainty or a perfect monetary system by any means, but one cannot help but wonder if it's vision still flirts with perfection way too much. Even those who initially "exposed" the alleged trail towards Freegold (A / FOA) are depicted as the modern-day Messiahs of global finance; the Insiders among insiders who, sometime in the 1990s, managed to crack the code of financial elites around the world. That code was, of course, inked and cast in physical gold.

They wrote about their "revelations" from 1997-2001, during which time they preached the near inevitability of the global capitalist system being enveloped by a Freegold monetary paradigm. I could have trimmed around the edges of Freegold with quoted analysis/opinions, financial market data and/or questions about "why it hasn't happened yet", but that would not have been the way to critique such a fundamental argument about where we are headed. Instead, I believe this series has firmly established a well-researched argument that Freegold's foundations of socioeconomic evolution and its views of economic "value" in our global financial system are deeply flawed.

The empirical evidence to back up those theoretical arguments was later provided in the form of economic data and analysis of that data. It then follows that Freegold's strict predictions against prolonged dollar deflation are very questionable, as well as its views regarding the ECB (and the ROW) and its implications for the purchasing power of physical gold in the near future. This series was obviously not designed as a general argument against investment in physical gold. I simply ask that readers remember there is usually a vast chasm in our minds between owning physical gold and understanding the influences guiding its potential future. The time to narrow that chasm is right now.

"Doubt is not a pleasant condition, but certainty is absurd." -Voltaire