The EU, dead man walking

The EU is dead, it just doesn’t know it yet. Chatting today to a friend who has been involved in the buying and selling of European banks. I asked him today about the situation of Deutsche Bank, he said it will be renamed DLB, (Deutsche Lehman Bank) Letting it fail would create a global financial meltdown. Germany will have to break every rule in the EU rulebook to keep Deutsche afloat. Then Italy will ask for the same treatment from the EU for its banking sector, which is also in crisis. There just won’t be enough money to go around and the result will be a political and financial fracture which will rip the EU apart.

The global system – broken beyond repair

It is a little difficult to know where to start as so much is happening and the year has only just begun. The global system can be viewed as having four different elements: Economic, Political, Military and Religious. They are all linked together but all have unique facets in how they impact the world in which we live.

Economic System

While not unexpected, the speed with which the global economy has hit the brakes in the first days of the year has been surprising. China, which is trying to re-engineer its economy so as not to rely on exports for growth to one of internal consumption, has hit severe turbulence, the last days seeing huge drops in its stock markets. In China, many shares are bought by private individual investors and have been wiped out by the losses which began last year and accelerated to such a point that trading had to be suspended twice already this year. These are the people the Chinese authorities need if internal consumption is to be the new economic model, instead they are all feeling much poorer and hesitant about making new investments and spending. To be fair the problem is not only China’s, globally, the worlds economy has never recovered since the financial crash of 2007. The only thing that has propped up the economic system since then has been the vast amount of almost free money that central banks pumped into the system. While company stock valuations soared over the years since the crisis the fundamentals have not changed. Companies have not been making the profits to justify their stock market valuations, instead of improving profits through growth they were cutting costs. While improving the bottom line it was covering up the fact that businesses have not been growing. Now the time of essentially free money is coming to an end the fundamentals are coming back into view and is the reason why global stock markets are having such a turbulent time. The emperor has no clothes and the central banks and governments have very few options left open to them. With global share prices still having a way to go before they reflect the actual values of global businesses it is going to have a knock on effect. Pension funds and property are going to be the big losers. People are going to start feeling poorer. When people feel poorer they spend less and this impacts business growth. The system is so broken that there is no way out of this feedback loop unless something fundamental about the system is changed. Do the central banks and governments have a solution, I think not.

Political System

Something that should amaze people is that in all the time of human history we have tried all forms of government, apart from global government, and not one of them has been successful, in the long term, of bringing about peace and security, helping all its citizens to have a dignified life. Instead they have abdicated more and more responsibility to the banks, trusting them to create the conditions for economic stability and therefore political stability. I often wonder what use our governments serve. All around we see crumbling infrastructure, cuts to health-care, the education system being run into the ground, increase in social instability as well as far fewer opportunities for social improvement. In the past there were far more opportunities for people to improve their lives, these opportunities are rapidly disappearing. If governments can’t deal with these fundamentals then what is the point of their existence? This is without going into global politics, all of the major powers in competition with each other, wanting to be top dog, but this situation leads to proxy wars, global instability, power vacuums and international terrorism. As the global economy shrinks the pressure is on for these countries to work even harder to protect their interests, creating yet another feedback loop. We will see an increase in nationalism and growing popularity of more extreme political parties as they promise only they can protect the interests of the population. In reality all that happens is increased polarization of populations, minority groups being blamed for the ills of the country. We are seeing this happening in many countries around the world and it will only spread as global conditions deteriorate. It will also increase the risk of conflict as relationships between neighbouring countries break down.

guns_suit_planets_fire_earthMilitary System

The only area of real growth now is in military spending, as we all know instability is good for the military sector. War is good for business. Morals have nothing to do with it, all is for sale, often to reprehensible regimes. The conflicts these weapons are used to pursue create displaced people, refugees and untold suffering. As the global economy teeters, the risk of conflict grows as competition between nations for a greater slice of the shrinking economic pie increases. Add to this the growth of ideological and religious differences between certain countries and the count-down to increased and new conflicts grows rapidly. Countries who have major weapons industries will rely on this sector for a larger part of their economic stability while trying at the same time to keep the consequences of these conflicts where the weapons are used as far as possible away from home.

Religious System

I’m grouping all the main religions together here because they are all equally corrupt and are all equally responsible for the deaths of millions through the ages. Today, religion is used as an excuse to kill, to dominate and to keep the masses quiet in the face of increased hardship, all often in collaboration with various governments. The tension between Saudi Arabia and Iran is based on religion. Jews and Palestinians is religious conflict. The Russian Orthodox church telling ordinary Russians they should prepare for greater hardship while it is the greatest benefactor of grants from the Russian government. There is a link to this because it left me speechless russian-patriarch-kirill-does-not-see-tragedy-in-the-economic-crisis In India there is increasing Sikh extremism with the permission of the government. The Vatican, possibly the richest organization in the world sees itself as some sort of supranational government but instead of using its wealth and influence to help people is more concerned with getting richer, milking its followers and only offers prayers when people need real practical help. It consorts with political leaders around the world like a courtesan believing she is a queen who sits above her people. How long will it be until politicians around the world get tired of all religious meddling and trouble making. Particularly as the global economy gets worse and they see just how rich these religions have become. I am curious to see what will happen when the governments are broke and they then look at the religions and all their wealth and see the religious system acting as if it is untouchable.

This is the year when finally it will be understood the global system, in all its parts, is beyond repair. Maybe it is time people started thinking about the New System.

Global GDP vs Global Debt. What is really going on?

I’m no economist but I am pretty good at understanding concepts. There are so many things about the global economy and all the talk about government debt that don’t make sense, well for me anyway and if anyone has any feedback I would like to hear it.

What it comes down to is this: In 2012 global GDP (Gross Domestic Product) that is the monetary value of all the finished goods and services including financial, produced in 2012 was about 70 Trillion Dollars. On the other hand the value of global debt (government, business and household) in 2012 was about 223.3 Trillion Dollars. That is a difference of 313% of global GDP. So my question is who are the creditors? Who is all the money owed to?

On the other hand, in theory, this level of global debt shouldn’t be a problem. For example, lets say you have an annual salary of $100k with no other debts and you take a mortgage to buy a house worth $300k, nobody would say that you can’t afford the house. The house could rise or fall in value but the debt itself remains the same. That is essentially the same situation with the ratio of global income to debt as exists now.

What is happening that is creating such a political storm in many countries, particularly in The USA and Europe, about government debt and spending? As I said before I’m not an economist but I am trying to find out for myself what is really happening. As part of trying to discover what is going on I want to look at the debt situations of two countries. The USA and Japan.

I have been looking at to get the raw facts and figures and it poses some interesting questions. In Japan the ratio of government debt to GDP is 211%. This is the same as the person with the $100k salary taking a mortgage to buy a home worth $211k. In The USA the ratio of government debt to GDP is 101.6 %.

What is going on here? It seems like The USA government is the person with a $100k salary taking a mortgage to buy a home worth $101.6k, yet politically it is creating a storm that doesn’t exist in Japan, which has more than twice the level of government debt. What is the fundamental difference between these two countries?

I am going to quote directly from I came across their website in my research for this post and they put into words what I want to say more concisely than I can. The original article, written in September 2012, is here

“Japan’s massive government debt conceals massive benefits for the Japanese people, with lessons for the U.S. debt “crisis.”

In an April 2012 article in Forbes titled “If Japan Is Broke, How Is It Bailing Out Europe?”, Eamonn Fingleton pointed out the Japanese government was by far the largest single non-eurozone contributor to the latest Euro rescue effort.  This, he said, is “the same government that has been going round pretending to be bankrupt (or at least offering no serious rebuttal when benighted American and British commentators portray Japanese public finances as a trainwreck).”  Noting that it was also Japan that rescued the IMF system virtually single-handedly at the height of the global panic in 2009, Fingleton asked:

How can a nation whose government is supposedly the most overborrowed in the advanced world afford such generosity? . . .

The betting is that Japan’s true public finances are far stronger than the Western press has been led to believe. What is undeniable is that the Japanese Ministry of Finance is one of the most opaque in the world . . . .

Fingleton acknowledged that the Japanese government’s liabilities are large, but said we also need to look at the asset side of the balance sheet:

[T]he Tokyo Finance Ministry is increasingly borrowing from the Japanese public not to finance out-of-control government spending at home but rather abroad. Besides stepping up to the plate to keep the IMF in business, Tokyo has long been the lender of last resort to both the U.S. and British governments. Meanwhile it borrows 10-year money at an interest rate of just 1.0 percent, the second lowest rate of any borrower in the world after the government of Switzerland.

It’s a good deal for the Japanese government: it can borrow 10-year money at 1 percent and lend it to the U.S. at 1.6 percent (the going rate on U.S. 10-year bonds), making a tidy spread.

Japan’s debt-to-GDP ratio is nearly 230%, the worst of any major country in the world.  Yet Japan remains the world’s largest creditor country, with net foreign assets of $3.19 trillion.  In 2010, its GDP per capita was more than that of France, Germany, the U.K. and Italy.  And while China’s economy is now larger than Japan’s because of its burgeoning population (1.3 billion versus 128 million), China’s $5,414 GDP per capita is only 12 percent of Japan’s $45,920.

How to explain these anomalies?  Fully 95 percent of Japan’s national debt is held domestically by the Japanese themselves.

Over 20% of the debt is held by Japan Post Bank, the Bank of Japan, and other government entities.  Japan Post is the largest holder of domestic savings in the world, and it returns interest to its Japanese customers.  Although theoretically privatized in 2007, it has been a political football, and 100% of its stock is still owned by the government.  The Bank of Japan is 55% government-owned and 100% government-controlled.

Of the remaining debt, over 60% is held by Japanese banks, insurance companies and pension funds.  Another chunk is held by individual Japanese savers.  Only 5% is held by foreigners, mostly central banks.  As noted in a September 2011 article in The New York Times:

The Japanese government is in deep debt, but the rest of Japan has ample money to spare.

The Japanese government’s debt is the people’s money.  They own each other, and they collectively reap the benefits.

Myths of the Japanese Debt-to-GDP Ratio

Japan’s debt-to-GDP ratio looks bad.  But as economist Hazel Henderson notes, this is just a matter of accounting practice—a practice that she and other experts contend is misleading.  Japan leads globally in virtually all areas of high-tech manufacturing, including aerospace.  The debt on the other side of its balance sheet represents the payoffs from all this productivity to the Japanese people.

According to Gary Shilling, writing on Bloomberg in June 2012, more than half of Japanese public spending goes for debt service and social security payments.  Debt service is paid as interest to Japanese “savers.”  Social security and interest on the national debt are not included in GDP, but these are actually the social safety net and public dividends of a highly productive economy.  These, more than the military weapons and “financial products” that compose a major portion of U.S. GDP, are the real fruits of a nation’s industry.  For Japan, they represent the enjoyment by the people of the enormous output of their high-tech industrial base.

Shilling writes:

Government deficits are supposed to stimulate the economy, yet the composition of Japanese public spending isn’t particularly helpful. Debt service and social-security payments — generally non-stimulative — are expected to consume 53.5 percent of total outlays for 2012 . . . .

So says conventional theory, but social security and interest paid to domestic savers actually do stimulate the economy.  They do it by getting money into the pockets of the people, increasing “demand.”  Consumers with money to spend then fill the shopping malls, increasing orders for more products, driving up manufacturing and employment.

Myths About Quantitative Easing

Some of the money for these government expenditures has come directly from “money printing” by the central bank, also known as “quantitative easing.”  For over a decade, the Bank of Japan has been engaged in this practice; yet the hyperinflation that deficit hawks said it would trigger has not occurred.  To the contrary, as noted by Wolf Richter in a May 9, 2012 article:

[T]he Japanese [are] in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation—as opposed to the 27% inflation per decade that the Fed has conjured up and continues to call, moronically, “price stability.”

He cites as evidence the following graph from the Japanese Ministry of Internal Affairs:

How is that possible?  It all depends on where the money generated by quantitative easing ends up.  In Japan, the money borrowed by the government has found its way back into the pockets of the Japanese people in the form of social security and interest on their savings.  Money in consumer bank accounts stimulates demand, stimulating the production of goods and services, increasing supply; and when supply and demand rise together, prices remain stable.

Myths About the “Lost Decade”

Japan’s finances have long been shrouded in secrecy, perhaps because when the country was more open about printing money and using it to support its industries, it got embroiled in World War II.  In his 2008 book In the Jaws of the Dragon, Fingleton suggests that Japan feigned insolvency in the “lost decade” of the 1990s to avoid drawing the ire of protectionist Americans for its booming export trade in automobiles and other products.  Belying the weak reported statistics, Japanese exports increased by 73% during that decade, foreign assets increased, and electricity use increased by 30%, a tell-tale indicator of a flourishing industrial sector.  By 2006, Japan’s exports were three times what they were in 1989.

The Japanese government has maintained the façade of complying with international banking regulations by “borrowing” money rather than “printing” it outright.  But borrowing money issued by the government’s own central bank is the functional equivalent of the government printing it, particularly when the debt is just carried on the books and never paid back.

Implications for the “Fiscal Cliff”

All of this has implications for Americans concerned with an out-of-control national debt.  Properly managed and directed, it seems, the debt need be nothing to fear.  Like Japan, and unlike Greece and other Eurozone countries, the U.S. is the sovereign issuer of its own currency.  If it wished, Congress could fund its budget without resorting to foreign creditors or private banks.  It could do this either by issuing the money directly or by borrowing from its own central bank, effectively interest-free, since the Fed rebates its profits to the government after deducting its costs.

A little quantitative easing can be a good thing, if the money winds up with the government and the people rather than simply in the reserve accounts of banks.  The national debt can also be a good thing.  As Federal Reserve Board Chairman Marriner Eccles testified in hearings before the House Committee on Banking and Currency in 1941, government credit (or debt) “is what our money system is.  If there were no debts in our money system, there wouldn’t be any money.”

Properly directed, the national debt becomes the spending money of the people.  It stimulates demand, stimulating productivity.  To keep the system stable and sustainable, the money just needs to come from the nation’s own government and its own people, and needs to return to the government and people.”

End of article from Global Research

So the fundamental difference seems to be that in Japan the people are beneficiaries of government debt whereas in the USA the banks are the beneficiaries and it is the people who have to pay. When the financial crisis hit back in 2007 and the world went into recession I remember thinking that surely it would be more useful for the governments to use QE (Quantitative Easing) to give money directly to the people. If that had happened then the economy would have been truly stimulated. Using average figures, the US government bought bank debt of about $1.7 trillion to fend off collapse of  the financial system. All that has happened with the money the banks received is that they have lent it back to The Fed and are earning interest on it. Basically the government used taxpayers money to bail out the banks. The banks are now earning interest on this money as they lend it back to the government. How perverse is that?

If instead the government had used this $1.7 trillion and divided it up between the people of the USA then there would have been enough to give every individual, from baby to pensioner over $5,600. Let’s be more practical and say the money would have been better distributed on a household basis. There are just under 115 million households in the USA, if the money were divided equally then each one would have received about $14,782. Can you imagine the stimulus this would have given to the real economy as people used the money to buy goods, pay off debt or to use as a deposit on a home. The real economy would have recovered from recession rapidly.

If the government had done this then the entire banking system would have failed, or would it? I’m not so sure. All the banks were so indebted to each other that after seeing a few big banks go down they would have realized that the only way to stop a total collapse would have been to cancel out each others debts. The effect would have been dramatic, the financial sector would have shrunk enormously in value but it would still exist, the only difference being that all the artificial money and speculation would have vanished. This is what they meant when they said the banking system would collapse, all the derivatives and other financial instruments that are based on plucking numbers from the air would no longer be. Banks would have to go back to dealing with money that actually exists.

We need banks, they offer a very valuable service, they lend us money to buy our homes, they help business to grow. In this context banks are invaluable. The problem is they are now only interested in enriching themselves and they are doing it at the taxpayers expense.

It is ironic that Japan with its huge debt is also the country that lends the most to the USA yet the effect of debt on these two countries could not be more different. For Japan it is borrowing from itself and its people and pays back to itself and its people. The USA borrows from abroad to prop up a perverse banking system and in addition takes money from its people to do so.