Author : John E. Charalambakis
Date : May 24, 2012
I love dogmas (our first D). I know that in politically correct terms, dogma is an antiquated term that should die. However, dogmas are like the oxygen. You may not be able to see the oxygen with the naked eye however you cannot live without it. There are some economic dogmas that serve like the law of gravity. One of them has to do with balances (such as trade, fiscal, etc.). Consistent violations of such balances misallocate capital, destroy wealth and incentives, increase risks, while (and this might be the worst) distort the ability to think and judge matters objectively using standard tools and logic. All in all, the abolition of some standard dogmas leads to the degradation (our second D) of moral, ethical, and intellectual capacities which in turn convert the landscape into wasteland.
Hence we abandoned the anchor dogma for our money, and we cheapened our currencies converting them into zombies. I do not like zombies. Now, we are trying to inflate our way out of the mess that we have made with derivatives (our third D) and credit creation, while the banking system needs shoots of QEs in order to survive. It’s time for disintegration (our fourth D). Any seed needs to die in order for the fruit to come out. Edmund Burke would have taught us today, that our moral imagination has faded while all signs point to the fact that some special form of dispensation is needed in the EU, in order to be saved from herself. We have been stating for a few months now the need for such disintegration of the Euro project that was ill-conceived and ill-executed with the absence of a political, fiscal, and lender-of-last resort identity. The EU tried to create a currency de novo without respect to fundamental values, dogmas, and reasoning. Once the fetish was created, it used its propaganda machine to teach the useful idiots that they cannot live without it. Prosperity bought on credit – without effort, real wealth creation, and without moral imagination – does that to people, i.e. converts them into useful idiots.
Understanding economic dogmas is the pedigree, the patrimony, and the hereditary foundation of financial success. How can we look forward to posterity unless we look backwards to the a priori presuppositions we make about the future? When you think wrong, you act wrongly (e.g. thinking that third-party liabilities are AAA assets!). Everything starts with the mind, and a distorted mind due to distorted presuppositions and lack of education (please do not confuse true uplifting wholistic liberal arts education with training), will lead the people astray, and will make them useful idiots. Monies circulated have to be part of an anchor and not the anchor itself. In that sense, the anchor is the ultimate money. The EU leaders these days, true to their utilitarian philosophy, view people as instruments to achieve their narrowly-defined vested interests, and the useful idiots go along and support them. The prejudice of the fetish called Euro has become the superstition that forces the land into deflationary depression. It’s time for liberation and reverse integration.
Several times I have played in the classroom Bob Dylan’s song titled Series of Dreams. Let’s review some of the lyrics (recommend that you play the song while reading the lyrics):
I was thinking of a series of dreams
Where nothing comes to the top
Everything stays down where it’s wounded
And comes to a permanent stop…
Like in a dream when someone wakes up and screams…
And there is no exit in any direction
Except the one you can’t see with your eyes…
Wasn’t falling for any intricate schemes…
And the cards are no good that you ‘re holding
Unless they are from another world…
In one, the surface was frozen
In another, I witnessed a crime
In one, I was running, and in another
All I seemed to be doing was climb
I have already gone the distance
Just thinking of a series of dreams…
Let’s now review the potential consequences of a disorderly Greek exit from the Euro zone.
• First of all, in the absence of a well-prepared anchor (even temporary) that can sustain a plan B for Greece, a bank run can take place in Greece which may coincide with an exit from the Euro zone. (However, we believe that the EU will think it twice before it forces Greece out of the zone, due to the side-effects that will herself suffer).
• Second, the bonds of countries like Spain, Italy, Portugal, Ireland, Belgium and probably France will take a hit, with rising spreads (against the German Bunds). It should be noted that the exposure of EU-wide banks to those countries’ bonds, exceed $1.7 trillion.
• Third, as the Greek economy contracts into a depression phase with its banking system collapsing, the contagion effects will affect other countries’ banks, with deposits flying out of the “dangerous” countries.
• Fourth, the euro system of central banks will be exposed to significant and probably insurmountable risks. The mitigation of those risks will be impossible at that stage, and the Target 2 program will show a big hole, with central banks in countries like the ones mentioned above unable to meet their obligations. Those obligations could well exceed $700 billion, with the central bank of Germany carrying the greater risk of all.
• Fifth, as countries start falling deeper into recession with rising unemployment and social unrest, the contagion will spread beyond the Euro zone, with the eastern-front of the EU suffering tremendously.
• Sixth, unless the ECB commits to unlimited cash (that has to freely flow and not just register as electronic payment/credit in to the banks’ balance sheets i.e. much higher inflation) to the EU-wide zone and to targeting the yields of member-countries’ bonds, it will be impossible to sustain the Euro.
• Seventh, the US and China may see the Euro project as no longer viable and refrain from swap lines. England, Canada, Switzerland and Japan will follow, and hence the Euro will fold. (Recalling that “there is no exit in any direction except the one you can’t see with your eyes…”)
The Euro disintegration is the necessary ingredient for the EU unity. The deprivation of monetary autonomy that countries have suffered is leading to the deprivation of sovereignty that is unhealthy and dangerous. The absence of a common Treasury and of a true lender-of-last-resort were guarantees for disequilibrium in trade, finance, and social/political cohesion. Hence, the unfolding of the Euro will stop these disequilibria and the hemorrhage of disunity, and thus by definition will become a stepping-stone for improvement. The design of the Euro was done in such a way that the direction of capital flows distorted production, incentives, and investments in productive capacities.
As the crisis was unfolding, the only answer the EU leaders were able to identify was more debt! It was like assigning the deed/title of your house to someone, and letting him insure it for an extraordinary amount. Cui bono? Now, that they see that debt is not an answer, they recommend internal devaluation, a.k.a. the effort to add through subtraction, without consideration to the social inequalities and inequities that these measures are creating, let alone that the only certainty out of such futile exercise is uncertainty. And then, they ask the useful idiots to vote for those who will implement those measures.
The ultimate consequences of a disorderly disintegration would be devastating for the EU with the average country’s GDP dropping at least 11%. Therefore, it is to the benefit of everyone to start planning a strategic controlled disintegration of the dream that made us scream.