It wasnearly one year ago when Wall Street began its
"attacks" on the debt-markets of Europeannations, which was dubbed by the
U.S. propaganda-machine the "euro debt crisis." While WallStreet piled-into the credit default swap markets, and made enormous bets
the solvency of various Euro economies, the propaganda-machine began ninemonths of around-the-clock fear mongering-- designed to create the largestcrisis-of-confidence possible.
The reasonfor this is that interest rates rise in tandem with fear, and everypercentage-point which interest rates rose made these nations less-solvent
made Wall Street's economic terrorism that much more profitable, via those
credit default swaps.
Let's beclear that there
a long-term eurozone debt crisis, as the solvency ofmany of these nations (notably the "PIIGS") is seriously at issue. However, the
"crisis" was entirely made-in-the-USA, with "crises" nowbeing one of the leading U.S. exports.
At the time,I put these matters into perspective by noting that any rational viewing of thefundamentals revealed the U.S. economy was experiencing a far
debt-crisis than the worst of the uurozonedebt-sinners: Greece.
Let me addsome new numbers here. Greek interest rates have been pushed up to
over 11%. If the same approach drove U.S.interest rates to that height, it would result in an extra $4 trillion per year just in
additional interest payments
-- on the U.S.'s $60trillion in
total public/private U.S. debt (not counting another $70trillionor so in federal "unfunded liabilities," which will soon also haveto be funded).
If the U.S.were forced to pay out that additional interest (equal to nearly 1/3 of U.S.GDP), on top of the existing interest it pays on its debts, it would be a merematter of weeks until the U.S. economy collapsed into a Soviet Union-like debtdefault or degenerated into hyperinflation-- as the only way to prevent defaultwould be to print-up countless trillions (more) in new Bernanke-bills, just topay interest on its debt.
With theU.S. debt problems being much, much worse than those of Greece, and with the U.S.economy being nearly 100 times as large, for anyone living in the real world,the
"debt crisis" currently facing the world is theU.S. In comparison, the debt problems of all other nations comprise nothing buta debt-nuisance.
Be that asit may, with Greek interest rates
artificially pushed-up to over 11% by Wall Street, that is clearly enough to make Greece's economy insolvent
due tothe excessive interest rates
. Similarly, it is only the
endless "quantitative easing" of the Federal Reserve which keepsU.S. interest rates artificially at 0% (propping-up the
U.S. bond-bubble) - allowing the U.S. government to
that the U.S. economy is still solvent.
As I havefrequently pointed out in previous commentaries (and the above example), themoment that U.S. interest rates are allowed to rise to their natural level, theU.S. economy is instantly insolvent. This is why the original "quantitativeeasing" by the Federal Reserve
did not end (and could not end). All that haschanged recently is that Ben Bernanke is temporarily
secret money-printing (i.e. counterfeiting) in which hehas been engaging.
Whether"artificial" or not, a crisis has been created in many euro debt markets (andeconomies). Equally obvious, with interest rates pushed to these punitivelevels, "austerity" alone cannot restore solvencyto these economies.
massive, structural unemployment-- which has led to 40 years ofsteadily falling (real) wages in Western economies-- our incompetentgovernments, and the ultra-wealthy aristocrats they serve have totallyhollowed-out our economies. As massive unemployment and falling wages haveimpoverished the middle-class, the inherent "theft" built into any/every
income taxation system has resulted in $10's oftrillions in wealth being transferred into the pockets of theultra-wealthy.
That massivepool of wealth (the largest in the history of our species) is simply beinghoarded by these greedy misers-- doing no one (and no economy) any good, atall. Thus, the only hope for
long-term solvency for these hollowed-out economies isto tax-back (over time) the $10's of trillions in "ill-gotten" gains for theultra-wealthy.
Sadly, thereis not even a glimmer of comprehension in any of our governments as to howincome taxation has hollowed-out (and destroyed) our economies. This means thetransition to a sustainable economic model isn't even being contemplatedby any of our governments. In turn, this means some "formula" is needed overthe shorter term to survive the current debt-crises-- until the inevitablereform occurs in our taxation systems.
back in February I pointed out the need for Westerndebtor-nations to create a short-term formula for restoring solvency: "benigndefault." Understand that there are only two "options" currently on the tablefor dealing with these crises.
There is theapproach currently being pursued by the "PIIGS" (Portugal, Ireland, Italy,Greece, Spain): "austerity." And there is the approach of the U.S.: lying aboutits debts, while engaging in a stealth-default on those debts viahyperinflation. Neither "approach" can succeed in doing anything but
destroyingall of these economies
"Austerity"cannot work, for the reason I have already given: you cannot "squeeze blood outof a stone." The Western middle-class is already squeezed-dry. Trying to makeeuro economies solvent through massive economic "sacrifices" from millions ofpeople who were barely surviving before the crisis started is nothing less than
economic suicide,which will end in devastatingdebt-defaults.
As bad asthat scenario is, it's still much better than choosing the "American solution"of hyperinflation. Hyperinflation also inevitably leads to a debt-defaultscenario. The difference being that taking the currency to zero (first)effectively
wipes-out all of the wealth of an economy, while in a straightdebt-default there are still large pockets of wealth remaining.
Moreimportantly, both scenarios explicitly guarantee massive losses forbond-holders. This is what makes the greedy demands of bond-holders to be"fully repaid" totally idiotic. By attempting to insist on 100% repayment, allthey do is guarantee that they will end up with a tiny fraction of that amount.
Conversely,if bond-holders take a "hit"
, sufficient to restore solvency tothese economies, then the orderly repayment of these scaled-down debts can takeplace -- producing a much, much better long-term result for all parties. Icoined the term "benign default" for this process (being the governmentequivalent of a structured bankruptcy).
The key hereis to focus upon the root-cause of insolvency: compounding interest on thesemassive debts. It is not repaying the "principal" which inevitably bankruptsdebtors, but rather the compounded interest on the original debt. Thus, allthat is required for benign default to be successful is either for dramaticallyscaled-back interest payments, or total "forgiveness" of all interest payments.
What thismeans is that bond-holders
, in that they get theirprincipal returned to them. Let us also not make the mistake of consideringthis "charity." The
by greedy bond-holders to lend-out thesevast sums of money-- without ever considering whether those debts couldactually be repaid is both grossly reckless and negligent.
Surrenderingonly the interest payments they hoped to receive on these ill-advised loans toinsolvent governments is clearly no worse a fate than they deserve, given theirown irresponsibility. It is also tremendously important to set a virtuousprecedent here. Imposing a "haircut" on bond-holders today will be thefastest/easiest way to prevent more irresponsible borrowing/lending in thefuture.
Bond-holderswho understand that they will
be subsidized/bailed-out byimpoverished taxpayers will learn to lend-out money competently. What thistranslates into is realistic interest rates-- as opposed to the fantasy worldof "free money" which the banksters foisted upon us, with their recklessmoney-printing and even more reckless credit-expansion (at near-zero interestrates).
Clearly,some of the eurozone governments are beginning to
"see the light" here. Indeed, German ChancellorMerkel and French President Sarkozy recently announced their joint position onthis subject: in all future bailouts or debt-restructuring, bond-holders musttake a haircut. In the words of Bundesbank chief Axel Weber, "Next time thereis a problem,
bond-holders should be part of the solution, not part of theproblem."
Keep in mindthat in the private sector, such a basic principle of shared responsibilitygoes without saying. When a private company is about to "go under," rationaldebt-holders readily agree to a new schedule of reduced payments anddebt-forgiveness. It is only the greedy/reckless lenders to insolventgovernments who can't be bothered to engage in "due diligence" in lending-out trillionsof dollars-- simply because they arrogantly assume that taxpayers will beforced into involuntary bailouts.
Those daysare gone. Even if governments
to punish their own citizens forthe reckless greed of bond-holders, "the people" are broke. For thebond-holders, it's either accept less, or end up with nothing. This is whatmakes "benign default" genuinely benign, in that it results in an optimalsolution for governments, bond-holders, and the perennially-abused taxpayers ofthese nations.
It is alsoan antidote to U.S. economic terrorism. The "games" (i.e. crimes againsthumanity) that Wall Street is playing in euro debt markets become irrelevant--once governments and bond-holders settle on a fixed repayment schedule.
Given thechoice between "benign default" or total, economic Armageddon in the Westernworld, there is obviously no "choice" at all. Governments must create afeasible path back to solvency. Bond-holders must learn an important"lesson" about lending money. All other considerations are secondary.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.