Some Simple Answers - As Requested
via Mark E. Grant, author of Out of the Box,
Rick Santelli at CNBC asked the question and he asked me for a
simple answer so I gave it to him. Rick wanted to know how Greece had
raised almost $5 billion in a Treasury Bill auction and I explained;
simply. The debt was almost entirely bought by the Greek banks, who are
bankrupt and funded by the government of Greece through the EU and the
ECB in various ways, and they pledged the Bills right back to the ECB
and they got their money back. It was a Ponzi scheme of sorts, which I
stated, which allowed the ECB to lend money to Greece through the Greek
banks. Greece is out of money and Germany is deciding what to do about
Greece so in the meantime the ECB funded the country. Rick went on to
state that “the game was rigged” and he is one thousand percent correct;
the game was rigged.
At least we didn’t have to listen to the Greek Prime Minister
calling it a great victory for Europe like we did with the Spanish one
but that may be the best thing that can be said for the situation. The
ECB violated their rules and strictures and did it at the behest of the
European Union you may be sure which only proves, once again, that the
ECB is about as independent as a three year old is of his mother. You
can say the three year old is his own person but I assure you that each
and every mother on the planet would roll her eyes at you. This then is
one of the main problems with Europe these days; there are laws and
regulations that are defined to be exactly what the EU wants them to
mean at any point in time so that there are in effect no laws and no
regulations and just political expediency.
Fraud
If IBM or GE or if Volkswagen or BMW did not include all of their
liabilities on their balance sheet, did not include their promises to
pay or their guarantees of other debt or their derivative contracts in
their financial statements then they would be tried and found guilty of
Fraud and the CEO and the CFO and the Board of Directors would all be in
jail. These corporations live under the Law and the Law is that you
have to disclose all of your liabilities and not just some of them. In
Europe, for the governments of Europe when publishing their debt and
their debt to GDP ratio’s this is not the case. They are not required
and they do not include all of their liabilities when they give the
public the data about their financial condition. This is why I keep
stating that the European numbers are phony and I have tried to provide
the real ones which is nothing more than counting what the Europeans do
not wish to count. In each instance I included the regional debt that
the government had guaranteed, the bank debt that the government had
guaranteed, the corporate debt that the government had guaranteed and
any derivative contracts that any government had taken on. I took all of
the data from official sources such as Eurostat and the Bank for
International Settlements. I then added up the numbers and divided that
by the government’s official GDP and reached the result. There is no
“Mark Grant’s opinion” in the numbers; I just counted what Europe does
not wish to count or be held responsible for and that was it. Here is
another case of “rigging the game” and it is accomplished by what would
be termed Fraud for any corporation.
“The man who is admired for the ingenuity of his larceny is
almost always rediscovering some earlier form of fraud. The basic forms
are all known, have all been practiced. The manners of capitalism
improve. The morals may not.”
-John Kenneth Galbraith
Apples to Apples
I am often asked about the United States and I am specifically asked about our future pension and Medicare payments.
When I have calculated the real balance sheet of the European countries
I have not included their corresponding pension guarantees or medical
payments so I can honestly say that it has been an apples to apples
comparison. The stated numbers for America are reasonably correct and
our official debt to GDP ratio is reasonably correct and while you could
make the argument perhaps about the debts of FNMA or Freddie Mac and
some other quasi-government bodies the data would not change much
because of the off-set of assets. Therefore, in my opinion, the official
numbers for America are basically honest while the official numbers for
Europe are not.
In assessing the official European numbers you are likely to reach
the conclusion that the European Union is in trouble. When assessing the
real numbers it becomes obvious not just that they are in trouble but
just how serious the trouble is now. Old debt is being replaced by new
debt and the new debts are far larger than the old ones as exemplified
by the calculations that I performed yesterday on Italy which will add
$141 billion to the sovereign debt this year. The Spanish banks are into
the ECB for record amounts while Greece with its massive borrowings at
the ECB, the IMF, their Target2 participation and their direct loans
from the Stabilization Funds is so far underwater that financially
Athens is now buried ten meters under the Mediterranean Sea. Whether
Greece is going to be handed another $50 billion in the next few months
or whether Germany is finally going to cut the cord is a political
question that is highly dependent upon the perceived reaction of the
German voters but one way or another, now or later, Greece will
eventually default because there is no other way out except debt
forgiveness and I see that as a political impossibility in many
countries.
Be Careful What You Wish For
Europe hates the ratings agencies. These companies have two
distinct set of Masters which are the debtors and the lenders or
investors. The ratings agencies have been cajoled, threatened and
debased but, in the end, they will arrive at ratings which will be
disastrous for Europe. This will happen because the economic data will
force it to happen and while it may be eventual; it will happen.
Any scheme such as Eurobonds or any other artifice that produces a
unified Europe where national boundaries fade away will result in an
average rating for all of Europe at “A” or maybe “BBB+” and the cost of
funding and standards of living will also revert to a mean for all of
Europe. This is why Germany is in such a perilous state because they
know this. You may disregard all of the rhetoric and the jargon; the
people in Berlin do not wish to live like the people in Athens and that
would be the certain outcome, over time, of blending the national debts.
The nations with the money would be forced to disgorge and the nations
without money would be the recipients and you would get a harmonized
Europe but at a huge price to the wealthier nations who would no longer
be wealthy. In the first instance money has rushed to Germany and a few
other countries as the safest of the European places to stash cash but
in the second instance money will leave all of Europe as influenced by
rising debt levels and uncounted liabilities that will become due and
severely weaken the national balance sheets and the balance sheets of
the European institutions such as the ECB. The ECB may well be forced to
print money or a number of other schemes could be employed but the cost
to Germany, for any of them, will throw that nation into peril as they
just do not have an economy that is large enough to support all of the
troubled nations in Europe which is a growing list with each passing
day.
This is why I stated yesterday on CNBC that Europe will have a
“Lehman Moment” and likely a number of them. The construct is a failing
enterprise as the available European capital cannot support the combined
debts and as real money investors pull their capital and stop lending
because of the continuing deceit. You may be able to “fool some of the
people some of the time” as Abraham Lincoln so succinctly put it but you
cannot fool all of the people all of the time as I humbly nod to his
sage wisdom.
Wise men are instructed in reason;
Men of less understanding by experience;
The most unknowing learn by necessity.
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