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European Union, A Flawed Foundation, But Brilliant Strategy?

Politics / Euro-Zone Jun 01, 2011 - 06:06 AM GMT

By: Gordon_T_Long

Politics

Diamond Rated - Best Financial Markets Analysis ArticleIt was the perception of getting something of value without any meaningful sacrifice that initially fostered the EU Monetary Union. Though the countries of Europe were fiercely nationalistic they were willing to surrender minor sovereign powers  only if it was going to prove advantageous to them.  They were certainly  unwilling to relinquish sufficient sovereignty to create the requisite political union required for its success.


After a decade long trial period it is now time to pay the price for Monetary Union.  I suspect that the EU membership is unwilling to do so. Though they likely will see the price as too high to do so, the price to not do so has become even greater.  They have unwittingly been trapped by a well crafted strategy.

Never has a monetary union functioned without a political union with which to control Fiscal Policy. This was well understood by the strategists but not the salivating sovereign leaders looking for cheaper money to finance election candy and avoid unpopular, pressing economic realities.

It was expected that the obstacle of political union would  inevitably give way when the pre-ordained and unavoidable political crisis forced the issue. We are presently at the cusp of this crisis in Europe.  As we just experienced the Arab Spring we are about the experience the European Summer on an unavoidable path to the American Autumn and World Winter in an unfolding "Age of Rage'.

The initial resolution of sovereign debt defaults by the bailouts of  Greece, Italy, Ireland, Portugal, Spain (GIIPS) will eventually be the creation of a Eurobond, in my measured opinion.  It is the next move on the strategic chessboard being carefully orchestrated.

A Eurobond will allow the ECB to issue debt. With the ability to issue that debt, the obligatory abilities to pay for it will come. Paying for a Eurobond will mean giving up gradually increasing levels of sovereign taxation.

The current political impediment to political union is that never has a ruling political regime been willing to surrender the golden jewels, specifically public taxation. But this will happen because it is the hidden strategic goal now operating in Europe.

To understand the real European Strategy you need to appreciate the history of Europe and its cultural diversity. Ever since the Roman Empire and Charlemagne, leaders have dreamed of a single Europe. No one in modern times from Napoleon to Hitler has been successful.

The one thing the European nations understand and for a time were successful at, was Mercantile Colonialism. They were the ones that invented it.  When I say 'they', I refer to Kings and their financiers. The Kings may now be gone, but the financiers are even more powerful today than ever before.

The colonies are no longer on the other side of foreign seas to be conquered, but rather part of the Euro zone.


The essence of Mercantile Colonialism is to create a need for debt, then finance that debt and eventually exchange that debt for the collateral assets that are the underlying wealth producing assets.

In the Austrian School of Economics, this exchange of printed paper for real assets, is called the Indirect Exchange.  It is well understood and well documented but like usury is avoided in polite conversation. Eventually the colonies worked as slaves to pay the debt to their European masters.

Gold is the Money of Kings, Silver the Money of Merchants and Debt the Money of Slaves

The European banks are slowly but surely, through a tactic of Financial Arbitrage, moving more and more sovereign debt to the ECB and EU. Someone must pay for this debt and that will eventually be the entire European taxpayer base. That is the goal.

In the initial stages of the Euro dream everyone was benefiting.  Like an initial user of drugs the early stage is euphoric before the issues associated with the addiction surface. This stage fostered tremendous growth in debt - never ending Corniche housing villas in Spain and Portugal, embarrassing pensions and social benefits in Greece, tax advantages for off shoring corporations in Ireland or unjustifiable and hidden local government spending in Italy.

It has been a captive market for the Asian Mercantile Strategy and a financial retail market boon for US financial instruments created from the never ending supply of freshly minted US fiat paper.

I was living in Europe during the debates on the viability of a European Union. I remember only too well what everyone eagerly wanted and fantasized gaining from a European Union.

Citizens: 

  1. They saw and wanted employment. The EU meant they could  go anywhere the jobs were.
  2. It meant cheaper goods because tariffs were to be removed,
  3. It meant cheaper cost of financing because of a single currency with as Germany the 'anchoring credit'.

None of which have turned out to be as advertised by those wanting the EMU  
(except cheap goods which they don't have the jobs nor disposable income now to afford)

Governments:

  1. To the sovereign governments it meant cheaper debt since they effectively received German Mark backed debt.  Like free liquor to an alcoholic or free drugs to an addict, the politicians couldn't sign up fast enough as long as they kept sovereignty over precious taxation.
  2. To make the deal happen, countries were allowed to maintain fiscal sovereignty, though everyone quietly understood that separated Monetary and Fiscal Policy was a flawed concept and eventually would doom anyone attempting it.


Government spending & brazen consumption masquerading as GDP started exactly with the retail launch of the Euro.
Financiers:   

  1. As pushers of debt, the banks  acquired a whole new cadre of addicts.  
  2. The EU financiers understood only too well that with the free flow of Labor & Capital, came the free flow of Credit and Financialization.
  3. T o the financiers it was the creation of an immensely profitable fixed currency regime with a known outcome.


"The way to make a lot of money is to invest in a known & predetermined outcome. "
Joseph P Kennedy, (father of President JFK and one of the richest self-made prohibition bootleggers in America).

It was obviously a flawed approach where Monetary Policy would be disconnected from Fiscal Policy. It was expediently swept under the carpet as something to be avoided and left for future political operatives to craft the public response.

Question:  "Why would we implement a flawed system?"

It is exactly the same question as why did US banks make liar loans?

                                         Answer 1:  Someone else would carry the liability.

 .... and the tax payer has.

Answer 2:  Because there was a lot of money to be made!

.... and it has been made.

Prior to Greece exploding and knowing the strategy in play,  I was prompted to initiate writing two series of articles laying out the levels of hidden debt being rapidly and insidiously created in Europe

 EURO EXPERIMENT Series:  Detailed the flawed underpinnings of the EU.  An experiment that would foster:

a - Extensive use of SWAPS to hide public debt at all levels of government,
b - The broad use of Off Balance Sheet Contingent Liabilities,
c - The epidemic use of PPP-Public Private Partnerships

"All of which is NOT discussed in these public viewed bailouts."
                                                 
SULTANS OF SWAP Series:  Detailed the financial game of Regulatory Arbitrage.  A strategy of passing debt to taxpayers through:

a- Bailout,
b- Guarantees,
c- Monetization of Private Losses,
d- Sweetheart, Crony Capitalist deals

 PLUS
a- Extensive use of SWAPS to hide public debt at all levels of government,
b- Broad use of Off Balance Sheet Contingent Liabilities,
c - Epidemic use of PPP-Public Private Partnerships

"The EU is built on a FLAWED FOUNDATION but a brilliant STRATEGY ……
…. Unfortunately the People own the foundation & banks the strategy!
       
Like Colonial Mercantilism the real money in Europe KNEW going in what the debt strategy was.

They also had another card up their sleeve. They knew there was a structural advantage that would predetermine the eventual outcome.

They knew that the core countries, where the financiers were resident, had a competitive structural advantage over the GIIPS that could not be overcome or at least would highly unlikely be overcome.    

The core countries had:   

  1. Higher Export Volumes (a size advantage)
  2. Higher Productivity (Labor & Capital Advantage)
  3. Dominant Banking Control  and therefore cheaper cost of capital

The flawed EU experiment was more like a family father who is responsible, but his kids have unlimited use of Credit Cards and the hapless father is not allowed to police them. The outcome is perfectly predictable.

Do you really believe that major banks would put themselves in a position where they lent endlessly to the kids knowing they would  be left holding the bag? They knew the outcome and who was going to be left holding the bag. 

It was certainly not going to be those with an army of lawyers, lobbyists, campaign contributions and most importantly, a strategy.

Now the EU has hit a wall. The gig is up.

It is time for the next phase of the Mercantile Strategy, the demand for collateral and the family silver.

As is currently being exposed in Greece, the financiers will now demand the ports of Piraeus and Thessaloniki, Hellenic Transportation, the Greek Telephone company, the Greek Power company, the Gambling  ...... and eventually the Parthenon and Acropolis, if the people don't refuse and take a stand similar to the people of Iceland.

There is an old ADAGE that;
When you owe the bank a $100,000 and can't pay it you have a problem.
When you owe the bank a $1 Billion and can't pay, the bank has a problem.

The message here is that at some level the bank is responsible for having made a serious lending error - after all, assessing RISK  is the raison d'être of their business.

Though I believe Greece should never have been allowed into the EU, their debt never been accepted by the ECB as collateral and should have been sent to the IMF much sooner, I need to say, what I am now witnessing is what I effectively see as the 'Date Rape' of Greece.

It is not just a matter of Greece being forced to surrender their most precious assets which belong to future generations of Greek children. It is about assets being sold by a Belgium centered fund - whose interests are those of the financiers, not the Greek citizens.

This is the equivalent of having your house sold by the potential buyer's real estate agent with you just seeing the accepted deal. Or maybe more appropriately, the same way a repo happens when they just take it and sell it - you may or may not get any residual equity back. In the case of Greece, they may or may not get what they thought their asset were worth. It is highly unlikely it will be anywhere near the expected price and highly likely to be an exceptional bargain for the politically powerful and connected.

This is the old tried and tested Mercantile Strategy that European financiers know so well.

While Americans are turning to "Strategic Defaults" in waves in the US, if I was living in Greece I would be demanding my government default.  It is time for Greece to strategically default like the hapless American homeowner stretched beyond their means and crushed by a shrinking disposable income. This is a direct result of the money printing that is flowing to the banks to engineer this racket that the Gambino's and Gotti's would have simply called a 'lawyered'  version of loan sharking, extortion and racketeering.

It must never be forgotten that the banks create their money from your money.  It is only time, therefore before as  in a children's monopoly game, they own the whole board.

Also it must never be forgotten that this is why banks fight so hard against Tier 1 Capital requirement changes. This is the money they have previously extracted that is now actually at risk.

Be aware that the mercantile financiers are so opposed to risk that operating as the secured bond holders of the banks they make the profit from the banks - not the shareholders. The financiers get first distribution of profits and are always kept whole.  The public typically attacks the bank owners, not those who insidiously control and profit from its operations - the senior secured bond holders.  It is the  senior secured bond holders who must take the Greek 'haircut' but as part of the strategy they have their political mouthpieces vehemently opposing it.

Maria Damanaki, a European Union commissioner and a Greek said publically that “the scenario of removing Greece from the euro is now on the table”.

Forcing the Greeks to sell all that's left of the family jewels is now seen as a key part of the political solution. But who will want to buy them when there is every possibility of Greece leaving the euro?  

Capital is already fleeing Greece as fast as it can; what's the chance of attracting it for Greek assets?

Someone is going to get real fire sale prices.  

It's easy as a bookie to make money on a sure thing when the horse race is fixed!

Listen to FREE Global Insights audio, 3 times a week at www.GordonTLong.com Global Macro Issues for non-mainstream listeners looking for the truth.

Gordon T Long   gtlong@comcast.net   Web: Tipping Points Mr. Long is a former executive with IBM & Motorola, a principle in a high tech start-up and founder of a private Venture Capital fund. He is presently involved in Private Equity Placements Internationally in addition to proprietary trading that involves the development & application of Chaos Theory and Mandelbrot Generator algorithms.

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

© Copyright 2011 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Brisbanite
04 Jun 11, 22:45
European Union, A Flawed ...
The economic collapse is happening at a rapid rate. Most citizens live in a economic situation they neither comprehend nor gain from. The reality is speculators sowed the seeds of their own downfall by bidding up asset values using unsustainable leverage and easy credit -- a way of life that become entrenched in culture until every idiot out there was certain asset prices can't drop back to past levels, for example, pre Property Price Bubble when average wages could afford average homes. Governments have a woeful record in providing fair asset markets. Some European countries have better models that operate more equitably for everyone, yet even still, those Euro countries must still bail out their banking systems. Anyway, the moral is no one gains from asset price inflation in the end, because bubbles always pop. Sure, we hear claims from the spruikers that prices will rise forever, but when most people are priced out of the market then something has got to give. Now the ponzi scheme is finally collapsing (it was inevitable), and so today's underclass will have the last laugh when asset values do drop up to 50%, which is happening already in many places around the world. Sometimes it’s hard to believe this ponzi kept going for as long as it did. It should have popped last time but a round of unprecedented stimulus forced a last gasp of air into the bubble. All they did was kick the can down the road and now the collapse will be even worse. Posters on www.AustralianPropertyForum.com have been predicting this outcome for some time, and now the scale of this coming collapse will surprise the majority of commentators, in the same way the GFC surprised most economists. Of course, there will be revisionists who will claim they predicted it all along but the truth is the majority of economists are blind optimists who couldn't see a coming train before it plows into them! Brisbanite

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