State of denial
State of denial

It’s a mad mad world. People are being driven mad by the expropriation of national treasure, basically their future taxes, to pay off financial vested interests. France of course averts its eyes from the insanity in front of its face to focus on the future of a “Europe” most of its citizens voted not to bring into being:

French say firm ‘No’ to EU treaty: French voters have overwhelmingly rejected the European Union’s proposed constitution in a key referendum.

Naturally Europe’s elite maneuvered their way around the law and the will of the people by agreeing to a treaty rather than a constitution. Heaven forbid that democracy should get in the way of a “progressive” project. Leaving Sarkozy to claim it would be madness to threaten this Union by withdrawing from the Euro:

Sarkozy tells nation leaving euro would be ‘madness’: “Do not believe, my dear compatriots, those who suggest that we leave the euro. The isolation of France would be madness. The end of the euro would be the end of Europe,” he said in a message broadcast on television.”

Sarkozy’s comments reminded me of the Yes Minister episode in which Sir Humphrey explains to cabinet minister Jim Hacker that you can never be certain that something will happen until the government denies it. In that spirit Barry Ritholz posted this marvelous series of quotes:

Its All Greek to Me!

1. “Spain is not Greece.” Elena Salgado, Spanish Finance minister, Feb. 2010

2. “Portugal is not Greece.” The Economist, 22nd April 2010.

3. “Ireland is not in ‘Greek Territory.’” Irish Finance Minister Brian Lenihan.

4. “Greece is not Ireland.” George Papaconstantinou, Greek Finance minister, 8th November, 2010.

5. “Spain is neither Ireland nor Portugal.” Elena Salgado, Spanish Finance minister, 16 November 2010.

6. “Neither Spain nor Portugal is Ireland.” Angel Gurria, Secretary-general OECD, 18th November, 2010.

I am not sure who exactly Sarkozy thinks France and Europe are or are not. I am almost past the point of caring about the prattling of Presidents and Prime Ministers. There is a surer way to gain insight into them and their institutions:

Ye shall know them by their fruits. Do men gather grapes of thorns, or figs of thistles? Even so every good tree bringeth forth good fruit; but a corrupt tree bringeth forth evil fruit. A good tree cannot bring forth evil fruit, neither can a corrupt tree bring forth good fruit. Every tree that bringeth not forth good fruit is hewn down, and cast into the fire. Wherefore by their fruits ye shall know them.”

We are overdue for a mighty large bonfire.

As for the future of the European Union, I stand by this post:

Sovereign default: there are too many countries with too many arms which would be better off defaulting for EU forces to step in successfully. The European Union is too lacking in legitimacy to overrule them peacefully. They do not have the forces to override the desires of its composite states. In any event, the merest hint of civil war would probably initiate the credit event they are trying to avoid.

Given the magnitudes of the debt and the likely domino effect of chain defaults the world will be rocked by the financial system. This time it will occur when governments have much weaker balance sheets, thanks to their choice to intervene in the way in which they did.

Essentially the last round of government interventions achieved nothing except more time. This was bought at the cost of a considerable increasing of public debt as they bailed out private debt holders. The decline in sovereign balance sheets limits their ability to meet any future expected event.

They also gave the appearance which may reflect the reality of being captured by vested interests related to their financial system. It is hard to see how their behavior differed to that of a kleptocracy.

While the unraveling will be rapid once it really gets going, the lead up always takes longer than expected. It took years for the Weimer Republic to experience its bonfire. The EU could also take years to reach its tipping point. The exact timing is not possible to determine. Nor is the exact nature of what replaces it. Europe has so many problems in so many areas that it is hard to know what will dominate. Or even if there will be a serious attempt to rectify things before countries fall into the abyss.

What we can say is that there is too much debt. Countries can not meet their past and future commitments. Excessive realized past commitments take the form of debt. Future commitments are often promises that have not been payed for. But people have made life choices based on believing their governments promises. Miserable health care, pensions and other government benefits will be seen as a betrayal. As will the inevitable write-offs, hair cuts and inflationary reduction in the value of private and public debt. There are tough times ahead for the developed world. This will be the case whether or not you are Greece, Ireland, Spain, Portugal….etc.



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