How's that for competitiveness? Jon Stewart's video on the Foxconn workers and more

Sorry for not posting during the last few days, but i had to deal with a medical emergency (my mother was in the hospital), so there was no time for me to write. I will resume writing about China, in the third and final post on the subject, where we shall discuss China's moves on the monetary plain, as it seeks to end the dollar's rain as the world reserve currency.

But for now, let's talk about something else - let's talk about my sick mother who went to the hospital and got better:

You see, if you get sick, you can (?) go to the hospital and get well. But what happens if you you have no or little money? Then you obviously or you are forced to carry this medical problem/injury for a long time, maybe even forever.

Not everyone is supposeed to make it - in fact the system relies on NOT everyone making it, as it tries to rationalize why a lot of people "should" die (mass murder) just because they were born in poverty, or because they just happened to be born during a war or a generalized capitalistic crisis.

The system has been very good at "rationalizing" this muss murdering process for a long time - in fact, there are many people who are genuinly surprised that the capitalist system is now leading them to their death or to mass poverty, as they don't even understand that this is not a failure of the system, but a necessary process for it to continue to function.


Think of it like monopoly:

Monopoly is a great simulation board game for the capitalist system, as it is based on the concept of private property (of course, the real thing is much more complicated than the board game).

In the early stages of the game, all the little squares of the board that represent streets, airports, the electric company, etc., are for sale. So, all the players can buy them. It's fun, isn't it?

But as game progresses, then sooner or later a few players (those who are luckier and/or better investors) will end up owning almost everything, forming powerful monopolies/oligopolies. As for the rest of the players, they end up going bankrupt one by one, as they own less and less, and they have to pay rent to the rich players on almsost every turn, as the rich players end up owning all the squares of the board. This is NOT a "failure" of the game, it is in fact its purpose. I mean, how can you play monopoly without bankrupting most of the players? It is simply not possible, and it is only a matter of time before it happens.

Real-life capitalism is of course a great system for creating new, better "squares" in order to replace the older ones, especially through technological advances (for example, M. Zuckerberg  created Facebook, an entirely new "square in the board" and he now earns a lot of money ("rent") as everyone wants to use it).

So, the real-life "board" is constantly changing, and it does provide opportunities for someone to create a new "square". This makes the real-life game much more "interesting", and it also helps in delaying the inevitable bankruptcy of a lot of people. But, especially it times like these, when there aren't a lot of new "squares" being created, the process of bankrupting a lot of players cannot be stopped. It is the nature of the game - a lot of players must go bankrupt, so that a few oligarchs can own everything.

Sure, there are plenty of squares to go around for everybody - in fact, this is what marxism is all about: Abolishing private property, as it is the only way for the working class people, the majority of the population, to actually be able to produce without having to live in poverty, when at the same time a few oligarchs are living like kings. And, surprise surprise, they seem to prefer it of the workers live in poverty, just like the oligarxhs of the past, the oligarxhs they once violently overthrew during the Frech Revolution. Capitalism has created a lot of wealth, enough for everyone - and we whould praise capitalism for this great achievement. But capitalism has also helped a tiny minority of the population to control almost all the squares of the board. So, most of us will have to suffer greatly, or we have to abolish private property, so that all the squares of the board are free for everyone. This will of course NOT go down well with the oligarxhs, who will never accept this. But if they are not aliminated by us, then a lot of us WILL be elimited by them. This is a process that is becoming increasingly clear as time goes by. And let's not forget this very important fact: In the earleier stages of the "game", the palyers that were eliminated were usually people from the poorer countries (Third world countries, etc.). But now that the global workforce also includes the Asian workers, there are a lot of Western people who are deemed "not-competitive". So, for the first time in years, a lot of the people that are going bankrupt are Westerners, not just "unimportant" people from "unimportant" places.

Let's take a closer look at what it takes for a worker to be "competivie enough" to stay in the game and not go bankrupt. After all, the capitalists want us to give them incentives to do business in the West, instead of Asia, right? So, it would be a good idea to check out what is it about the Asian workers that they like so much:

Cage dogs of Hong Kong: The tragedy of tens of thousands living in 6ft by 2ft rabbit hutches - in a city with more Louis Vuitton shops than Paris

Hong Kong, one of the world's richest cities, is abuzz with a luxury property boom that has seen homes exchanged for record sums.

But the wealth of the city has a darker side, with tens of thousands priced out of housing altogether and forced to live in the most degrading conditions.

These pictures by British photographer Brian Cassey capture the misery of people - some estimates put the figure as high as 100,000 - who are forced to live in cages measuring just 6ft by 2 1/2ft.

Unscrupulous landlords are charging around US$200 a month for each cage, which are packed 20 to a room, and up to three levels high. Cockroaches, wall lizards, lice and rats are common.

And if that isn't enough, you should definately check out Jon Stewart's latest video from "The Daily Show", about the Chinese workers at Foxconn:
How's 

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Fear Factory
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

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On 100 Year Anniversery of 'Bread and Roses' Strike, Many Draw Connections to Today's Hurdles

Repost from "Common Dreams":

Bread and Roses Strikers March

January 12, 2012 was the 100 year anniversary of the 'Bread and Roses' textile workers Strike in Lawrence, Mass. The dire conditions leading up to the strike remind some of the current socio-political climate and offer lessons for workers' struggles today.

The Boston Globe reports today:

The action, known as the Bread and Roses Strike, not only called attention to horrific conditions in the mills, but also to the concentration of wealth and power in the United States, an issue that 100 years later would spur protesters to Occupy Wall Street, Boston, and other cities across the country.

The essence of the Lawrence strike resonates loudly in today’s Main Street vs. Wall Street fight, with income disparities brought to light by the 1912 walkout reexamined through the lens of high unemployment, a shrinking middle class, and the view that most economic benefits have flowed to the wealthiest Americans. [...]

The desperation that drove poor textile workers to abandon their jobs for the picket lines is echoed in the frustration that drove people to camp out in financial districts across the country.

James Green, a labor historian at UMass Boston, sees similarities to the 1912 uprising in many recent events, not only in the Occupy movement but in the Tea Party, the aggressive tactics of striking Verizon workers last summer, and customers railing against new Bank of America fees.

Steve Early recently examined contemporary Lawrence for In These Times:

Lawrence remains a city of the working poor, better known for its sub-standard housing, high unemployment, political corruption, and troublesome street crime. Ninety percent of its public school students are Hispanic and few speak English as a first language. Although not condemned to factory work at an early age, these children struggle to learn under tenement-like conditions. A recent report by the teachers’ union describes “crowded classrooms and physical infrastructure in distress: leaking roofs, poor air quality, persistent mold problems, crumbling walls and rodent infestation.” Demoralized teachers have been working without a new contract for two years; student performance is so dismal that a state take-over the school system has been actively considered.

When worker solidarity prevailed over corporate power in the icy streets of Lawrence a century ago, it made the promise of a better life real for many. The Bread and Roses strike became a consciousness-raising experience, not only for textile workers and their families, but the nation as a whole. Nevertheless, at centennial events in Lawrence over the next several months, it will be hard not to notice that many immigrant workers there still lack “bread and roses”—in the form of living wage jobs, affordable housing, and better schools.

But that injustice will not be cured until U.S. workers and their allies, in Lawrence and elsewhere, find a way to make history again, not just celebrate it.

Writing for Common Dreams last week John de Graaf and David Batker remind us:

The strike is commonly referred to as the “Bread and Roses” strike, because some women were said to have held up a banner declaring, “We want bread, and roses, too!” [...]

Hearts starve as well as bodies.  We do not live by bread alone.  It’s an old message with wellsprings deep in our religious traditions, and one the Bread and Roses centennial calls back to our attention.  And it’s a message we should not forget.

***

Here's another interesting article from the "Washington Post":

Study: Americans believe conflict between rich, poor is growing

About two-thirds of the public now believes there are strong conflicts between the rich and poor in America, making class a likelier source of tension than traditional flash points of race or nationality, a study from the Pew Research Center found.

“It is kind of amazing,” said Richard Morin, a senior editor at Pew who authored the study. “This is people not only sensing conflict, but people sensing an intensity of these conflicts — that’s what makes it striking and politically important.”

 

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On China-Part 2: Is China a bubble? What about all those poor Chinese workers?

This is a "before and after" picture of Shanghai that we found via the Atlantic magazine. It depicts the city's extraordinary growth within the last 20 years (1990-2010).

When the Berlin Wall fell, a whole new world was assimilated by the capitalists: The countries of the former "Soviet bloc" and, of course, China.

We have already discussed how this process of "globalization" affected the West (here) - as John Stapleton, British M.P., argued back in 1873 "If China should become a great manufacturing country, I do not see how the manufacturing population of Europe could sustain the contest without descending to the level of their competitors".

But how did "globalization" affect China? The picture we posted above is a great example of how good capitalism is at assimilating other societies that are using inferior modes of production:

Today, there is much more wealth being created in China than ever before - but of course inequalities are also greater than ever before.

This is because capitalism is based on the exploitation of the workers by the capitalists. China was like finding a "goldmine" of cheaplabour. So they started exploiting this "goldmine", by off shoring production to China at an amazing pace.

In the early stages of this process, the Chinese workforce was not skilled, so the only companies that could go to China were companies that only needed manual labour and very little specialization from their workers (for example companies that were making clothes, shoes, etc.). We' ve all seen the documentaries and we' ve all read the
articles that talk about the conditions there (horrible for the workers - great for the capitalists), so there is no need for me to repeat them.

But as China started accumulating more and more capital, the government build new schools and universities, and now a part of the Chinese workforce is skilled and can perform (almost) anything that a western worker can (and at a lower "price" (wage) too...).

So, now even the "white collar" jobs are being off shored to China, and there are Chinese companies that are competing against the Western companies even in sectors of the economy like solar-power (China is #1 in that sector worldwide), or telecommunications (Huawai, a Chinese company, is now Ericsson's main competitor).

Here's an article from the BBC:

China attracts record foreign investment in 2010

The country attracted $106bn of foreign direct investment - which excludes investments in financial instruments such as shares - up 17.4% from 2009, according to the Ministry of Commerce. That was enough to more than reverse the 2.3% fall seen during the previous year caused by the global recession.

Over a fifth of the money went into China's property sector. The Chinese authorities have been trying - with limited success - to head off a perceived bubble in property prices. 

We shall talk more about this "bubble in property prices" soon. But for now, as capital continues to pile up in China, it is no wonder that the country has 3 of its banks in the top-10 of the world's biggest banks. Via The Economist:

Here are a few more of China's "accomplishments" - here are some infrastructure projects for example:

China to invest $106b in railways in 2011

China builds world's longest bridge

ANOTHER RECORD: China Is Now The World's Largest Shipbuilder

China, Colombia in talks over Panama canal rival
CHINA is in talks to build a 'dry canal' linking Colombia's Atlantic and Pacific coasts by rail, Colombian President Juan Manuel Santos was quoted as saying on Sunday.

And if you have keep getting bigger and bigger, then it obviously "makes sense" for you to expand, much like all the other the colonial/imperial powers of the past:

China beats out World Bank as biggest lender to Africa

As China increases its economic ties in Africa, has the continent entered a new era of colonialism?

And of course, as China grows into a great imperialist force, as any growing capitalist nation would do, they build up their military forces. After all, how can you become the world dominant force, unless you have a strong military? Who's going to protect your lands and investments? Who's going to fight for you, in order to gain control of
more lands and resources? Soldiers and weapons are necessary, as the imperialists have to "fight it out", as they always do, about "who gets what".

China Takes Aim at U.S. Naval Might
China is building a new class of ballistic missiles designed to arc through the stratosphere and explode onto the deck of a U.S. carrier, killing sailors and crippling its flight deck

China is even trying to end the dollar's rain as the world's reserve currency. This is pretty important, as the current monetary system is about to end, as we've mentioned in previous articles. But we shall discuss this topic in our next article.


So, let's get back to what we were saying for now, as China continues to grow and grow. It even surpassed Germany as the world leading export nation, and the USA as the world biggest consumer of oil.

At the same time of course, there are millions and millions of Chinese workers who are working incredibly long hours for just a few dollars/month, barely enough to keep them alive so that they can return to work the next day (after all, even if some of them don't
survive, who cares? There are plenty more workers that can take their place - in fact, it is a "good" thing for the capitalists if some of them die due to an accident or by killing themselves, because it helps keep unemployment levels down, and thus it is easier to control all the social unrest).

There are thousand of strikes each year in China, but "so far so good" for the capitalists, who don't even allow for "democratic elections", or for a free press in China. This is "great" for them, as it helps their authority to remain unchallenged.

An entire village (named Wukan) recentlyrevolted against the government's decision to take away the lands of the people, and of course everyone now knows about Foxconn, the Chinese company that makes all these gadgets we use, as it employs 1.000.000 workers who often commit suicide (or threaten to do so), due to the "ultra-competitive" working conditions.
Even as we speak, some of them are about to commit suicide, with Microsoft "investigating this issue", as they "had no idea" about the
conditions at this factory (in reality, of course they know, but who give a damn about the workers? After all, there are plenty more where they came from, right? So let's pay them 1$/day, and we'll make a fortune by selling them to the western consumers until they've run out of money).

Imagine if those 1.000.000 Foxconn employees would organize and revolt - they would form one of the largest armies in history! But they are "too poor" to realize their potential - and the same goes for almost all the workers in China. When you barely have enough money to eat, then it is not that easy to think about organizing a revolution, especially when your employer and the State are prepared to fire you or send the police and the army against you. Then again, when you barely have enough money to eat, then it is a good time to start thinking about a revolution, isn't? Unless the Chinese workers fight back against their oppressors, in order to at least improve their lives a bit, then not much can be done on a worldwide scale.

But there are "internal" problems as well: As we mentioned before, there are signs of a real estate bubble in China, and it seems to be a "hot" topic amongst the "investor's community", as some of them predict a "rosy" future for China, whereas others predict a huge crash because of this bubble. Here's a great piece on the subject:

China 2012: The Year of the Bull (Rogers) or the Bear (Chanos)?

Jim Chanos famously said that China's real estate market is "Dubai times 1,000 -- or worse." He's been saying that for over two years. Chanos points to a credit bubble, and says he's early and sticking with his short positions. Rogers insists "China is not in a
[credit] bubble," rather it's been in a price bubble in urban, coastal real estate, and to compare China to Dubai is a false analogy. Jim Rogers is bullish on China's long term prospects: "China is going to have many serious problems along the way as it rises, but 'Dubai 1000 times over'?!"

According to Rogers, China will have many set-backs as it grows, as did the U.K. and the U.S. He notes "the U.S.'s many Depressions in the 19th century, a devastating civil war, periodic massacres in the streets, and little rule of law, few human rights, and several military governments. As recently as 1907 the whole system collapsed just as the U.S. was on the verge of becoming the greatest success of the 20th century. Yet the U.S. did a good job for a long time."

This is a picture from one of China's "ghost cities". There are many cities (or malls and other infrastructure projects, etc.) in China that have been build, but the people don't have enough money to actually use/buy them.

This is the root cause of all crises: The capitalists are accumulating more and more wealth for themselves, leaving very little wealth for the workers. But the workers are not just creators of wealth, they are also supposed to consume some of it, otherwise the products will not be sold, and the shops that sell them will go bankrupt, then the factories that make them will also go bankrupt, etc.

The Chinese workers have almost no money to spend - so they cant afford to buy all these homes that they have built. The ruling class gave out a lot of loans and spent a lot of money in order to "keep the economy going", as the workers would have no jobs if there were no building/infrastructure projects. That would lead to even more social unrest, so they built "ghost cities" instead. The workers were relatively "happy", as they at least had a job, but now noone can afford to buy these houses (and the US real estate bubble shows us what happens when the bubble "bursts").

The Chinese government is aware of this, and they' ve been trying to give out less loans and "contain" the problem. They also decided to stop announcing home price data, in order to keep the whole thing as quiet as possible. But if they don't give out a lot of loans, then there is no growth, as you cant start a business if you don't get a loan. So, China is between a rock and a hard place, and banking lending is not really showing signs of any significant slowdown.

But, like Rogers says, China will face a big crisis, but it won't be "terminal". It will be more like the crisis the USA experienced before becoming the world's leading power. Even the Great Crash of 1929 didn't "kill" the USA - in fact, 15 years later, they were the Western world's leader. Of course, a lot of people suffered, especially the workers, as they went through 10 years of high unemployment and then they went to war, so many of them died (this is always how capitalists solve the "rising unemployment problem" if anything else fails).

Furthermore, the western consumer is "dying". The capitalists have been using a very effective model for maximizing their profits for the last 20 years or so: They would employ the cheaper Asian workers in order to actually make the goods, and they would sell them to the western workers, who spent all their money, and them some more through heavy borrowing (this is why the western workers are referred to as "consumers" instead of "workers", as this is their function in the world economy. If they don't consume, the world economy doesn't work).

As the age of the "western consumer" is coming to an end, who is going to buy all these products that are made in China?

The Chinese workers are "too poor" in order to do that. And the capitalists don't really like giving a raise to the workers, do they?

So, China has a big problem, as noone has the necessary "purchasing power" in order to buy the goods they export. This is after all the reason why trade is collapsing on a worldwide scale.

What can China do?

It can "create some consumers of its own". That is, to create a "middle class", so that there are some Chinese people with enough money to buy some of the things that used to be exported (these people must also have a "consumer-mentality", which is also very hard, as these people must be educated in such a way to "be addicted to shopping").

In order to do that, China must increase the wages of some workers (it is already doing so), either in a direct way, or in an "indirect" way (ie revalue the Yuan, its currency. This is also happening, but at a "slow pace". We will talk more about the Yuan in our next post)

Here's what Spiegel reported on the subject a while ago (Germany in very interested in this, because they are also a big exporting nation, and they are facing similar problems, as the western consumer is dying. So, the too want China to create a middle class that can consume their goods as well as China's. We shall talk more about China and Germany coming together in future posts):

How Beijing Plans to Turn the Chinese into Consumers

Exports fueled the initial stages of China's ongoing economic boom. Now, however, the government in Beijing is placing a greater emphasis on domestic consumption.

The arrival of Western chain stores symbolizes the beginning of China's next revolution. The country's rising middle class has embarked on a collective spending spree, at least in the affluent belt along the country's east coast, from Beijing to Shanghai and down to Shenzhen in the south.

The shift is a delight to Western brand-name companies. "Now is precisely the right time for us to enter the Chinese market," says Redmond Yeung, the head of the Gap's operations in China. Yeung plans to open another store in Shanghai and two in Beijing almost simultaneously. Competitors, such as the apparel retailers H&M and C&A, already have outlets in China.

China is becoming a promising market for Western corporations, particularly in light of the warm welcome they often receive from government economic planners. Consumption has become an acceptable form of patriotism. [LOL - it's amazing how the capitalists can name anything that suits them as "being patriotic" and force the masses into accepting it - my note] International experience, Vice Premier Li says, teaches us that "any major power's development process must be led by domestic demand."
[...]
"Many citizens of our city cannot afford the products that are on display, at least not yet," says one saleswoman there with a shy smile. "I can't afford them either." Most customers are high-ranking officials or business executives. "When they go shopping," she adds, "they spend 10,000 yuan or more, all in one go" -- more than she makes in an entire year.

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Work till you drop, so that we can become even richer

- THIS IS CAPITALISM: We don't need all of you, and we need need all of your children. We have many workers in Asia, who work longer hours for less money. And they teach their kids to do so, unlike the western workers who have the "audacity" to demand an 8-hour day, or a decent salary. So let the western workers starve, until they start accepting (much) lower wages and working conditions - here are some good examples:  

Greece's financial crisis has made some families so desperate they are giving up their children 

One morning a few weeks before Christmas a kindergarten teacher in Athens found a note about one of her four-year-old pupils.

"I will not be coming to pick up Anna today because I cannot afford to look after her," it read. "Please take good care of her. Sorry. Her mother."

In the last two months Father Antonios, a young Orthodox priest who runs a youth centre for the city's poor, has found four children on his doorstep - including a baby just days old.

Another charity was approached by a couple whose twin babies were in hospital being treated for malnutrition, because the mother herself was malnourished and unable to breastfeed.

"Over the last year we have hundreds of cases of parents who want to leave their children with us - they know us and trust us," Father Antonios says.

"They say they do not have any money or shelter or food for their kids, so they hope we might be able to provide them with what they need."

Requests of this kind were not unknown before the crisis - but Father Antonios has never until now come across children being simply abandoned.

- England: Pensioners 'will work into 70s'

A generation of "Wearies" - Working, Entrepreneurial and Active Retirees - could be forced to work into their 70s and beyond due to the looming pensions crisis.
It will result in the traditional image of the pensioner relaxing in old age changing completely as many will simply not be able to afford to retire, experts say.

 Unilever Workers Announce 12 Days Of Strikes Starting 17 January Over End To Final Salary Pensions

Workers at consumer goods giant Unilever are to stage a new series of strikes in a huge escalation of a row over pensions, it was announced today.

Unilver said: "We believe the provision of final salary pensions is a broken model which is no longer appropriate for Unilever.

"It is our responsibility to protect the long-term sustainability and competitiveness of our business, and to do so is in the best interests of our people.

Meanwhile, the working conditions in China are "great" (if you're looking at it from the side of the capitalists) - so there is growth there (for now at least - we shall discuss more about China in the next couple of posts):

Volkswagen Brand Sales Surge As China Demand Matches Europe's

China became as important a market as Europe for Volkswagen AG's passenger car brand in 2011, as Chinese sales rose 14% to a record 1.72 million vehicles, the German auto maker said Friday.

Volkswagen, Europe's biggest auto maker by sales, said it is also gearing up to increase production in China and India.

Move Over Germany, China Is Now The Number 2 Market For Luxury Cars

Germany's luxury automakers are starting to shift more of their focus to the Far East.

According to Bloomberg, China is on track to edge out Germany as the second largest market for luxury cars. It is anticipated that 969,000 luxury models will be sold in China this year, while 914,000 will be delivered in Germany.

Here's why capitalists like China: Because they can keep all the profits for themselves, while the workers get nothing - this is the "most competitive" business environment the capitalists can find, but it is also the reason why the workers have a motive to overthrow them, as they are left to live (or even die) in poverty, while the capitalists are starting to look more and more like the feudal lords they once overthrew:

China Communist Party bureaucrats like their cars high end

A remnant of a decades-old Communist Party perks system, the luxe wheels are a conspicuous target of growing public outrage over the privileges of the elite. Angry Chinese have started posting photos.

Chinese officials love their cars — big, fancy, expensive cars. A chocolate-colored Bentley worth $560,000 is cruising the streets of Beijing with license plates indicating it is registered to Zhongnanhai, the Communist Party headquarters. The armed police, who handle riots and crowd control, have the same model of Bentley in blue.

And just in case it needs to go racing off to war, the Chinese army has a black Maserati that sells in China for $330,000.

"Corruption on wheels is an accurate description of this problem," said Wang Yukai, a professor at the Chinese Academy of Governance in Beijing, who has been advocating restrictions on officials' cars for years.

A remnant of a decades-old party perks system, the luxe wheels are a conspicuous target of growing public outrage over the privileges of the elite.

 

"Becoming like China" - a great way (for the capitalists) to "restore competitiveness". After all, we can't have the workers rallying against our policies, can we?

Obama Signs Bill Allowing Indefinite Detention of Americans

Obama signed the NDAA – including a provision allowing the indefinite detention of Americans - on New Year’s eve.

Obama issued a “signing statement” with the bill, which – at first blush – appears to say he won’t indefinitely detain Americans.

But a closer reading shows that the signing statement is just smoke and mirrors.

Specifically, it was Obama - not Congress – who originally requested that an exception for American citizens be removed from the bill. As such, his professed reluctance is wholly disingenuous.

Moreover, Obama signed a bill which would allow future presidents to indefinitely detain U.S. citizens, and his signing statement in no way limits their power to run roughshod over our rights.

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If only I had a dime for every time someone said "The Euro Is Dead"...

This was the cover of "The Economist" a few months ago, when concerns about the future of the euro had reached an all-time high, and the British (who of course never really liked the euro) were even talking about a British government's plan to help its citizens that have been "stranded" in in country that was part of the eurozone to get back to England!

But the euro didn't break up - not yet at least. And despite all the noise about its death (especially by the British/American media), the currency that is most in danger is...the dollar, as we've already discussed in a previous article. You see, the dollar is dying, as the world as about to reject it due to the continuous money-printing by the FED, and the euro is trying to become the "anti-dollar". After all, that was its mission when it was first launched, wasn't it?

Of course, the euro-system has many problems, and we shall discuss them in this article. So how can it become the "anti-dollar"? This is an important question, and we will try to answer it - but first we must discuss the flaws of the euro-system and remember a few things that we've previously mentioned when talking about the dollar.

The EU and the eurozone projects are proof that it is possible to have temporary agreements between capitalists and between states. However, we must never forget that in capitalism, each capitalist has to compete against the other capitalists, and each state has to compete against the other states. Europe is after all a continent that has hosted many battles between many nations, city-states, etc. for thousands of years.

In fact, the last few decades of relative "peace" are somewhat of a "paradox", as it is historically very rare for all those states to "unite" together for as long as they have, and history suggests that monetary unions in particular don't really last that long. The reasons for this "unification" were the following:

1) The European imperialists wanted to "counteract" the influence of the USA (and of other powerful states).

2) The stronger states (eg Germany, France) wanted a better way to exploit the weaker states.

In this article, we are not going to discuss about the EU, as we will concentrate on the euro-system of a common currency between all the member-states.

For each country to compete in the world market, they have a set of "tools" at their disposal, and one of them is monetary policy.

If for example a country's exports are not doing very well, then this country can devalue its currency, a policy that lowers the wages of the workers who are getting paid in that currency.

And if the labour costs are reduced, then the capitalists can sell the products at lower prices in the market, making them "more competitive". As the products become cheaper, more people prefer to buy them, and the country's exports start doing better.

In today's environment, all the western countries are more or less facing this problem, as they find it hard to compete against the cheaper Chinese goods. So, they all want to devalue their currencies - and they all do up to a point.

Furthermore, their economies are even worse than you think, as not only have the industrial capitalists fled to Asia, but the western nations have been "masking" this fact by using debt as a substitute, to keep their economies going. These debts cannot be repaid, so the banks that have given them out are now insolvent. So, the western nations want to "print money" and devalue their currencies not just to "screw the workers", but to "save the banks" as well (it's amazing how often these two objectives coincide).

This is the reason why the oil states are starting to reject the dollar, as they don't want to continue getting paid in a currency that is constantly being devalued. China and Russia don't like the dollar either. But what about the euro?

The theory is that currency unions work can work as long as the economies that are participating in them are “reasonably homogeneous”, i.e. they are almost "equals" in terms of how competitive they are, how much political and economic power each nation has, etc. This is known as an "optimal currency area".

Is the eurozone an optimal currency area? Obviously not. Didn't the politicians, the bankers and the corporations that are in charge know this? Of course they did (although few of them will publicly admit it - in fact, most of them will try to "play dumb"). But is suits their interests, so they did it anyway.

The eurozone was politically a creation of the Germans, and economically a creation of the bankers. It was relatively easy to get in (even Greece made it in - all it took was a little "creative accounting"), but it certainly isn't easy to get out.

Each state has different problems, in terms of debt and competitiveness. But the weaker member states have surrendered their right to devalue the currency they use. And the Germans don't want a lot of money-printing, as their economy is doing much better than the others (Germany is able to do well because labour costs are much higher than China's or India's, but the German workers are more productive and the products they produce have greater quality).

So, Germany can withstand a "strong euro", at least much more so than the rest of the eurozone members. So, they continue to do well, as their "eurozone partners" (competitors) are left to rot. This is great for the Germans, as they are become more and more dominant over them.

Everyone else is at their mercy, and the Germans are taking full advantage of this, as they ask for more and more "concessions" in exchange for devaluing the euro (it is obvious that they are pretty much in control of the ECB, as they are -by far- the strongest nation). Spiegel even went so far as to admit that Greece "has become little more than an EU protectorate" two years ago, and Germany is now on its way to do the same in Ireland, Italy and who knows where else. So, the Germans are quite happy to keep destroying the other nations economies - here's a German banker's response when asked about the implications of Germany's policy of not printing as much money as the others:

ECB Weidmann:Italy Can Cope W/Bond Yields Over 7% For A While

European Central Bank Governing Council member Jens Weidmann expects that Italy will be able to cope with interest rates on its government bonds of above 7% for a while.

In other words, let them suffer a bit longer, they can take it - and after all this suffering, they will have become even more desperate, so they'll agree to anything - even becoming a protectorate. This is also the reason why the Germans reject policies like the eurobond, because that would "share the burden" between Germany and the weaker countries. Why "share the burden", when you can dominate?

Furthermore, from a historical perspective, Germany experienced hyperinflation during the 1920's, and so they aren't very comfortable with this whole idea of "printing money out of thin air". But that's obviously not the only reason for their behaviour:

If there was no euro, the other countries would have been able to devalue their currencies and do a little better - so they wouldn't have to become "little more than EU protectorates". As for Germany, they would actually do worse, because their economy is doing well, so the Deutsch mark would rise, and that would make Germany's exports less competitive. But now, within the eurozone, Germany gets a slightly devalued currency (thanks to the PIIGS and some other state who are keeping it down), while the other nations get a revalued currency, which only worsens their competitiveness, and pushes them further into debt, as they "must" borrow money in order to "compensate" for their growing trade deficits (by the way, this is the reason why their bond yields are exploding higher, as the investors don't really believe that these nations can repay all these loans, especially when their productive base is being destroyed).

The best solution for these nations is to officially declare bankruptcy, but of course that would be a huge blow for the bankers, as they can't "absorb" all these losses (at least not now). So, no government is willing to do that until they've given enough "bailout packages" to the banks in order to keep them from going bankrupt when the weaker nations start defaulting on their debts.

Moreover, the austerity measures that are being implemented have the support of the big industrial capitalists of each country, as they reduce their labour costs, and eliminate some of their smaller competitors.

But what about the banks? Aren't they being bailed out? Sure they are. The ECB IS printing money. The Germans are delaying this process as much as they can, in order to make the others desperate/willing to accept their conditions. And they are trying to print as little as possible. But, after all, even the German banks are in trouble, so they have to choice but to print (a lot of) money and bail them out. Here's The Economist on the subject:

Is this really the end?
Unless Germany and the ECB move quickly, the single currency’s collapse is looming

Investors’ growing fears of a euro break-up have fed a run from the assets of weaker economies, a stampede that even strong actions by their governments cannot seem to stop. The latest example is Spain. Despite a sweeping election victory on November 20th for the People’s Party, committed to reform and austerity, the country’s borrowing costs have surged again. The government has just had to pay a 5.1% yield on three-month paper, more than twice as much as a month ago. Yields on ten-year bonds are above 6.5%. Italy’s new technocratic government under Mario Monti has not seen any relief either: ten-year yields remain well above 6%. Belgian and French borrowing costs are rising.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.
[...]
Can anything be done to avert disaster? The answer is still yes, but the scale of action needed is growing even as the time to act is running out. The only institution that can provide immediate relief is the ECB. As the lender of last resort, it must do more to save the banks by offering unlimited liquidity for longer duration against a broader range of collateral.

It is interesting to note however that the Germans are even "playing chicken" against the Americans, as the American banks would also be in trouble if Europe falls. So, by not printing enough money, the Germans are forcing the USA to print dollars in order to bail out European banks as well (via financing the IMF - the USA is the IMF's main creditor).

As for the people, they are starting to reject the euro (there is a rise of Euroscepticism in all countries, including Germany):

- The German people don't want to bail out "the lazy Greeks" (in reality of course, they are bailing out the bankers, including the German bankers, but it is so much more convenient for the elites to accuse all the Greeks of being lazy, and a lot of people buy into this sort of propagnada)

- The people of the other countries don't like the austerity measures, the endless bank bailouts, etc.

But the elites like the euro - especially the bankers. This is why they will try to keep it, even when -in the worst possible scenario- some countries fail or even if a two-tier euro-system is implemented, so that the weaken countries can use a weaker currency and not go into full-scale revolt (note: There is some talk of this two-tier euro, with the Euro of the North consisting of Germany, Holland, Finland, etc, and the Euro of the South consisting of the PIIGS, and possibly France).

But why do the bankers like the euro so much?

Click to enlarge - this table shows the world official gold holdings, and as you can see the combined gold holdings of all the eurozone countries rank as #1 on that list. The euro is the "least bad" major currency of the world, as it offers more gold backup that the dollar (which is its main rival).

Yes, I know what some of you might say? The world has been off the gold standard for years. And yet the banks keep hoarding gold, don't they?

And as the dollar's reign as the world's reserve currency is coming to an end, as we've discussed, the euro is the least bad option (apart from gold of course, which is already "making a comeback" in the hearts and minds of people as the world "truest" form of money).

For those of you who haven't read our article on the subject, here's the gist:

As the dollar -and the rest of the fiat currencies- are losing their value due to money printing, we are approaching a point where the world will simply reject them, and the West will not be able to have oil - at least not at "reasonable" prices by today's standards. We got a taste of that when Nixon first abolished the gold standard - the oil states demanded to be paid in gold instead of (inflated) dollars for their oil - thus the "oil crisis" of 1973.

This is why the USA "must" attack all the oil states who try to break free from the dollar, and start accepting other means of payment - because no mater how much it costs them to go to war, it will cost them a lot more if the world finally gets of the "dollar standard", and the value of the dollar goes to almost zero.

The main thing that prevents the oil states from rejecting the dollar right now is their fear of being attacked by the USA - if that fear goes away, then they will be free to choose what currency to accept as means of payment.

But, in the end,it is only a matter of time before the world "moves away" from the dollar. China, Russia, Iran, and even Japan have already signed various treaties, stating that they will use their own currencies instead of the dollar when they trade with each other.

When this happens, "gold will be king" - and the euro will be the least bad currency, as it has the most gold backing. This is why China is supportive of the euro, and of course Russia has great ties with Germany (Germany gets over 50% of its energy from Russia - we will talk more about how Germany is forming an alliance with Russia and China in a future post, as this is obviously an alliance that will upset the balance of power in the world).

The Euro-system even has a mark to market valuation of its gold - so when for example the euro falls, the gold holdings of the euro-system increase in value (and vice versa). The dollar system does not do that - the USA never change the exchage rate of their official gold holdings. In fact, they still value them at 35$/ounce, which was the original exchange rate between the dollar and gold that was set during the Bretton Woods agreement. In a nutshell, they don't want to officially accept that the dollar has lost almost all of its value since then.

The euro-system however can handle the end of the current dollar-centric monetary system. Not that it will do well, but will do "less bad" than the others. So, even if it destroys the lives of many people, even if entire European States fail, the elites like the euro-system, and they will fight to keep it running. 

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“From now on the bankers will rule”

After the July Revolution [of 1830], when the liberal banker Laffitte led his Compère, the Duke of Orleans, in triumph to the Hotel de Ville, he let fall the words: “From now on the bankers will rule”. Laffitte had betrayed the secret of the revolution.

It was not the French bourgeoisie that ruled under Louis Philippe, but one faction of it: bankers, stock-exchange kings, railway kings, owners of coal and iron mines and forests, a part of the landed proprietors associated with them – the so-called financial aristocracy. It sat on the throne, it dictated laws in the Chambers, it distributed public offices, from cabinet portfolios to tobacco bureau posts.

The industrial bourgeoisie proper formed part of the official opposition, that is, it was represented only as a minority in the Chambers. Its opposition was expressed all the more resolutely the more unalloyed the autocracy of the finance aristocracy became, and the more it imagined that its domination over the working class was insured after the revolts of 1832, 1834, and 1839, which had been drowned in blood.

[...]

The petty bourgeoisie of all gradations, and the peasantry also, were completely excluded from political power. Finally, in the official opposition or entirely outside the pays lιgal [electorate], there were the ideological representatives and spokesmen of the above classes, their savants, lawyers, doctors, etc., in a word, their so-called men of talent.

Owing to its financial straits, the July Monarchy was dependent from the beginning on the big bourgeoisie, and its dependence on the big bourgeoisie was the inexhaustible source of increasing financial straits. It was impossible to subordinate the administration of the state to the interests of national production without balancing the budget, without establishing a balance between state expenditures and revenues. And how was this balance to be established without limiting state expenditures – that is, without encroaching on interests which were so many props of the ruling system – and without redistributing taxes – that is, without shifting a considerable share of the burden of taxation onto the shoulders of the big bourgeoisie itself?

On the contrary, the faction of the bourgeoisie that ruled and legislated through the Chambers had a direct interest in the indebtedness of the state. The state deficit was really the main object of its speculation and the chief source of its enrichment. At the end of each year a new deficit. After the lapse of four or five years a new loan. And every new loan offered new opportunities to the finance aristocracy for defrauding the state, which was kept artificially on the verge of bankruptcy – it had to negotiate with the bankers under the most unfavorable conditions. Each new loan gave a further opportunity, that of plundering the public which invested its capital in state bonds by means of stock-exchange manipulations, the secrets of which the government and the majority in the Chambers were privy to. In general, the instability of state credit and the possession of state secrets gave the bankers and their associates in the Chambers and on the throne the possibility of evoking sudden, extraordinary fluctuations in the quotations of government securities, the result of which was always bound to be the ruin of a mass of smaller capitalists and the fabulously rapid enrichment of the big gamblers. As the state deficit was in the direct interest of the ruling faction of the bourgeoisie, it is clear why the extraordinary state expenditure in the last years of Louis Philippe's reign was far more than double the extraordinary state expenditure under Napoleon, indeed reached a yearly sum of nearly 400,000,000 francs, whereas the whole average annual export of France seldom attained a volume amounting to 750,000,000 francs. The enormous sums which in this way flowed through the hands of the state facilitated, moreover, swindling contracts for deliveries, bribery, defalcations, and all kinds of roguery.


The defrauding of the state, practiced wholesale in connection with loans, was repeated retail in public works. What occurred in the relations between Chamber and government became multiplied in the relations between individual departments and individual entrepreneurs.


The ruling class exploited the building of railways in the same way it exploited state expenditures in general and state loans. The Chambers piled the main burdens on the state, and secured the golden fruits to the speculating finance aristocracy. One recalls the scandals in the Chamber of Deputies when by chance it leaked out that all the members of the majority, including a number of ministers, had been interested as shareholders in the very railway constructions which as legislators they had carried out afterward at the cost of the state.


On the other hand, the smallest financial reform was wrecked through the influence of the bankers. For example, the postal reform. Rothschild protested. Was it permissible for the state to curtail sources of revenue out of which interest was to be paid on its ever increasing debt?

The July Monarchy was nothing other than a joint stock company for the exploitation of France's national wealth, whose dividends were divided among ministers, Chambers, 240,000 voters, and their adherents. Louis Philippe was the director of this company – Robert Macaire on the throne. Trade, industry, agriculture, shipping, the interests of the industrial bourgeoisie, were bound to be continually endangered and prejudiced under this system. Cheap government, governement ΰ bon marchι, was what it had inscribed on its banner in the July days.

[...]

Since the finance aristocracy made the laws, was at the head of the administration of the state, had command of all the organized public authorities, dominated public opinion through the actual state of affairs and through the press, the same prostitution, the same shameless cheating, the same mania to get rich was repeated in every sphere, from the court to the Cafι Borgne to get rich not by production, but by pocketing the already available wealth of others, Clashing every moment with the bourgeois laws themselves, an unbridled assertion of unhealthy and dissolute appetites manifested itself, particularly at the top of bourgeois society – lusts wherein wealth derived from gambling naturally seeks its satisfaction, where pleasure becomes crapuleux [debauched], where money, filth, and blood commingle. The finance aristocracy, in its mode of acquisition as well as in its pleasures, is nothing but the rebirth of the lumpenproletariat on the heights of bourgeois society.

And the nonruling factions of the French bourgeoisie cried: Corruption! The people cried: ΐ bas les grands voleurs! ΐ bas les assassins! [Down with the big thieves! Down with the assassins!] when in 1847, on the most prominent stages of bourgeois society, the same scenes were publicly enacted that regularly lead the lumpenproletariat to brothels, to workhouses and lunatic asylums, to the bar of justice, to the dungeon, and to the scaffold. The industrial bourgeoisie saw its interests endangered, the petty bourgeoisie was filled with moral indignation, the imagination of the people was offended, Paris was flooded with pamphlets – “The Rothschild Dynasty,” “Usurers Kings of the Epoch,” etc. – in which the rule of the finance aristocracy was denounced and stigmatized with greater or less wit.

[...]

The eruption of the general discontent was finally accelerated and the mood for revolt ripened by two economic world events.

The potato blight and the crop failures of 1845 and 1846 increased the general ferment among the people. [...] The second great economic event that hastened the outbreak of the revolution was a general commercial and industrial crisis in England. Already heralded in the autumn of 1845 by the wholesale reverses of the speculators in railway shares, staved off during 1846 by a number of incidents such as the impending abolition of the Corn Laws, the crisis finally burst in the autumn of 1847 with the bankruptcy of the London wholesale grocers, on the heels of which followed the insolvencies of the land banks and the closing of the factories in the English industrial districts. The after-effect of this crisis on the Continent had not yet spent itself when the February Revolution broke out.

The devastation of trade and industry caused by the economic epidemic made the autocracy of the finance aristocracy still more unbearable.

[...]

Public credit and private credit were naturally shaken. Public credit rests on confidence that the state will allow itself to be exploited by the wolves of finance. But the old state had vanished and the revolution was directed above all against the finance aristocracy. The vibrations of the last European commercial crisis had not yet ceased. Bankruptcy still followed bankruptcy.


Private credit was therefore paralyzed, circulation restricted, production at a standstill before the February Revolution broke out. The revolutionary crisis increased the commercial crisis. And if private credit rests on confidence that bourgeois production in the entire scope of its relations – the bourgeois order – will not be touched, will remain inviolate, what effect must a revolution have had which questioned the basis of bourgeois production, the economic slavery of the proletariat, which set up against the Bourse the sphinx of the Luxembourg? The uprising of the proletariat is the abolition of bourgeois credit, for it is the abolition of bourgeois production and its order. Public credit and private credit are the economic thermometer by which the intensity of a revolution can be measured. The more they fall, the more the fervor and generative power of the revolution rises.

[...]

The financial embarrassment of the Provisional Government was naturally not lessened by a theatrical stroke which robbed it of its stock of ready cash. The financial pinch could no longer be concealed and petty bourgeois, domestic servants, and workers had to pay for the pleasant surprise which had been prepared for the state creditors.

It was announced that no more money could be drawn on savings bank books for an amount of over a hundred francs. The sums deposited in the savings banks were confiscated and by decree transformed into an irredeemable state debt. This embittered the already hard-pressed petty bourgeois against the republic. Since he received state debt certificates in place of his savings bank books, he was forced to go to the Bourse in order to sell them and thus deliver himself directly into the hands of the Bourse jobbers against whom he had made the February Revolution.

The finance aristocracy, which ruled under the July Monarchy, had its high church in the Bank. Just as the Bourse governs state credit, the Bank governs commercial credit.

Directly threatened not only in its rule but in its very existence by the February Revolution, the Bank tried from the outset to discredit the republic by making the lack of credit general. It suddenly stopped the credits of the bankers, the manufacturers, and the merchants. As it did not immediately call forth a counterrevolution, this maneuver necessarily reacted on the Bank itself. The capitalists drew out the money they had deposited in the vaults of the Bank. The possessors of bank notes rushed to the pay office in order to exchange them for gold and silver.

The Provisional Government could have forced the Bank into bankruptcy without forcible interference, in a legal manner; it would have had only to remain passive and leave the Bank to its fate. The bankruptcy of the Bank would have been the deluge which in an instant would have swept from French soil the finance aristocracy, the most powerful and dangerous enemy of the republic, the golden pedestal of the July Monarchy. And once the Bank was bankrupt, the bourgeoisie itself would have had to regard it as a last desperate attempt at rescue, if the government had formed a national bank and subjected national credit to the control of the nation.

The Provisional Government, on the contrary, fixed a compulsory quotation for the notes of the Bank. It did more. It transformed all provincial banks into branches of the Banque de France and allowed it to cast its net over the whole of France. Later it pledged the state forests to the Bank as a guarantee for a loan contracted from it. In this way the February Revolution directly strengthened and enlarged the bankocracy which it should have overthrown.

Meanwhile the Provisional Government was writhing under the incubus of a growing deficit. In vain it begged for patriotic sacrifices. Only the workers threw it their alms. Recourse had to be had to a heroic measure, to the imposition of a new tax. But who was to be taxed? The Bourse wolves, the bank kings, the state creditors, the rentiers, the industrialists? That was not the way to ingratiate the republic with the bourgeoisie. That would have meant, on the one hand, to endanger state credit and commercial credit, while on the other, attempts were made to purchase them with such great sacrifices and humiliations. But someone had to fork over the cash. Who was sacrificed to bourgeois credit? Jacques le bonhomme, the peasant.

[...]

Whereas the Revolution of 1789 began by shaking the feudal burdens off the peasants, the Revolution of 1848 announced itself to the rural population by the imposition of a new tax, in order not to endanger capital and to keep its state machine going.

There was only one means by which the Provisional Government could set aside all these inconveniences and jerk the state out of its old rut – a declaration of state bankruptcy.

[...]

By honoring the bills drawn on the state by the old bourgeois society, the Provisional Government succumbed to the latter. It had become the hard-pressed debtor of bourgeois society instead of confronting it as the pressing creditor that had to collect the revolutionary debts of many years. It had to consolidate the shaky bourgeois relationships in order to fulfill obligations which are only to be fulfilled within these relationships. Credit became a condition of life for it, and the concessions to the proletariat, the promises made to it, became so many fetters which had to be struck off. The emancipation of the workers – even as a phrase – became an unbearable danger to the new republic, for it was a standing protest against the restoration of credit, which rests on undisturbed and untroubled recognition of the existing economic class relations. Therefore, it was necessary to have done with the workers.

[...]

The workers were left no choice; they had to starve or let fly. They answered on June 22 with the tremendous insurrection in which the first great battle was fought between the two classes that split modern society. It was a fight for the preservation or annihilation of the bourgeois order. The veil that shrouded the republic was torn asunder.

[...]

The Paris proletariat was forced into the June insurrection by the bourgeoisie. This sufficed to mark its doom. Its immediate, avowed needs did not drive it to engage in a fight for the forcible overthrow of the bourgeoisie, nor was it equal to this task. The Moniteur had to inform it officially that the time was past when the republic saw any occasion to bow and scrape to its illusions, and only its defeat convinced it of the truth that the slightest improvement in its position remains a utopia within the bourgeois republic, a utopia that becomes a crime as soon as it wants to become a reality. In place of the demands, exuberant in form but still limited and even bourgeois in content, whose concession the proletariat wanted to wring from the February Republic, there appeared the bold slogan of revolutionary struggle: Overthrow of the bourgeoisie! Dictatorship of the Working class!"

- Karl Marx, “The Class Struggles in France, 1848 to 1850”

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What might history tell us about the "Greek crisis"?

We haven't talked about the euro yet in this blog - and this is something that we will have to remedy soon. But for now, we will focus on the "Greek crisis", as more and more analysts, banks and investors are preparing for a debt restructuring and/or a default.

There are plenty of articles on the subject - however, we will repost an article written by Michael Pettis two years ago, as he probably explains the situation better than everyone else.

When the crisis first started, all the banks were completely against any form of debt restructuring, "haircut", or default. They claimed that this would be disastrous for Greece (i know, i was there, as I am Greek, so i witnessed the events first hand). In reality, the banks knew that Greece is bankrupt, but they also knew that if Greece was allowed to officially declare bankruptcy, and stop paying making payments on its loans+interest, then they (the bankers) would also go bankrupt, as they couldn't absorb these losses.

 So, they decided to lie about it, scare the population into thinking that a default would be disastrous, and present us with a "solution" that would only increase Greece's debts (The IMF was called in to implement this solution along with the troika and the Greek government, and even according to the IMF's own projections, the Greek debt will only rise after this "solution"). The bankers however liked the plan, as they would receive a lot of bailout money (they are the recipients of those, not the Greek people), and they would also have more time to get rid of all those bonds of the PIIGS nations that cannot be repaid.

But as the bankers are getting all that money and their balance sheets are improving, they are now becoming capable of withstanding those losses. So, they are starting to admit that "a Greek debt restructuring may be necessary after all". Some banks can now withstand a 50% haircut, so they propose a 50% haircut. Some other banks can withstand a 75% haircut, so they propose a 75% haircut, etc. In the end, when they are ready, they will even admit that Greece is bankrupt (100% haircut), but that will only happen when they've received all the bailout money they need to withstand this kind of losses. Until this time comes, their goal is a gradual and controlled bankruptcy.

Here is Michael Pettis on the subject (Jun 24th, 2010):

What might history tell us about the Greek crisis?

The Greek crisis may in many ways seem unprecedented, but of course it isn’t. I think by now everyone already knows that Greece has spent much of the past 200 years – more than half by some counts – in default or in one form or another of debt restructuring, but in fact there are plenty of other periods of sovereign default and restructuring that can tell us something about what is happening and what will happen. I would suggest that there at least five things we can “predict” with some degree of confidence from looking at historical precedents:

1. The euro will not survive in its current form.

We should always have been skeptical about the survivability of the euro. There is a history of currency unions from which we can draw two reasonable conclusions. First, without fiscal integration such as occurred in the US after the Civil War or in the German Customs Union under Prussian dominance, currency unions are no more permanent than other forms of monetary integration, such as adherence to gold or silver standards.

Without robust mechanisms to absorb imbalances that emerge in different parts of the economy, and Europe embodies many very different economies, countries normally are forced to rely on monetary adjustment [the not-so-competitive economies devalue their currencies - my note] . The European currency union eliminates this type of adjustment mechanism, leaving countries with only two, brutally difficult options for adjustment besides opting out – sovereign default or long periods of deflation and unemployment.

So along with very high levels of capital mobility (which Europe possesses to some extent) and labor mobility (of which it has much less), Europe also needed to assign a substantial amount of fiscal sovereignty to some entity. I have already explained elsewhere why I think this was always very unlikely. Difficult as it might be, opting out of the euro is likely to be much less unpalatable for many countries than sovereign default or long periods of high unemployment.

Second, when currency unions are successful, it is almost always during periods of rising global liquidity and expanding international capital flows. No currency union has been able to survive the great monetary contractions that spell the end of a globalization period. The 19th Century’s Latin Monetary Union and the Scandinavian Monetary Union, to take the most obvious examples, were both once considered great successes, but were forced into retreat when global monetary conditions turned sour.

So when will countries opt out of the euro? Ernest Hemingway once described the process of going broke as “Slowly. Then all at once.” That is not a very precise description, I know, but I would guess that support for the euro will erode very slowly until suddenly it seems inevitable and then the process will happen breathtakingly quickly.

2. This is the big one

One of the myths that we often hear repeated is that financial crises have been occurring with increased frequency in the past one or two decades. I think we only believe this because we remember the big crises of the past, which seem to occur every twenty to thirty years, and then look back all crises of the past two decades – Mexico in 1994, East Asia in 1997, LTCM and Russia in 1998, Brazil in 1999, the Internet Bubble in 2000, the Sub-Prime crisis in 2007, and Greece in 2010 – and conclude that there are an awful lot more crises nowadays.

But in my book, The Volatility Machine, I made sure to distinguish between the short-term liquidity crises that occur within globalization cycles, of which there are a lot and seemed to occur every two or three years, and the long-term liquidity contractions that spell the end of each of the major globalization cycles. The former can be brutal, but they are usually short-lived and the overall market recovers very quickly.

So, for example, although most of us know that the world experienced a deep and long-lasting crisis in 1873, which began a long period of contracting international trade, reduced capital flows, and the massive bankruptcies of the high technology companies of the period, including most notably the railroads, very few people seem to know about the Overend Gurney crisis of 1866, which seemed pretty horrific at the time but from which the markets recovered fairly quickly. Likewise the great and well-known LDC debt crisis beginning in 1982 was preceded by several smaller crises, most importantly I think in 1976 by a Mexican peso crisis, which two years later had all but been forgotten by the market.

In my opinion the current set of crises, beginning with the sub-prime crisis in the US and spreading throughout the world, is not a short-term liquidity crisis like LTCM, the Asian Crisis, or the Mexican crisis of 1994. I think this is likely to be one of those big events, one that represents a major re-adjustment in the world during which time the massive imbalances that had been built up during the long globalization cycle that started around the late 1980s and early 1990s are finally worked out.

Not only will Greece, in other words, get worse, but it is by no means the end of the crisis. A lot more countries in Southern Europe, Latin America and Asia are going to be caught up in this before it ends.

3. The European crisis will be accompanied by a trade shock.

In the early 1980s Latin America countries were suddenly cut off from funding during what was subsequently called the LDC Debt Crisis, or the Lost Decade. These countries had been running large current account deficits, and of course current account deficits require capital account surpluses. These surpluses were financed by the the huge petrodollar recycling of the 1970s, when commercial banks around the world made staggeringly large loans to many developing countries.

Of course after 1981-82 it became clear that the loans exceeded the repayment capacity of the borrowing countries, and suddenly financing dried up – almost overnight. What’s worse, the debt crisis had already been preceded by flight capital, so that when financing dried up, a capital account surplus quickly became a capital account deficit. Of course once Latin America began to experience capital outflows, its trade deficit necessarily had to become a trade surplus. This is exactly what happened.

The deficit countries of Europe, whose combined trade deficits are nearly two-thirds the size of the US trade deficit, will also be forced into a rapid contraction in their trade deficits for the very same reasons – they are going to find it hard enough simply to refinance themselves, let alone receive net capital inflows. Without a capital account surplus, however, they simply cannot run current account deficits. This contraction must, one way or another, be absorbed by the very unwilling rest of the world. I describe what this will entail in a May 19 entry.

4. The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors.

Preceding every sovereign default is the fiction that the obligor country is simply facing a short-term financing problem, and that with a lot of discipline and a little bit of good will it will be able to work its way out of the crisis. During this period a number of restructuring “solutions” are proposed – all of which involve increasing debt, and often in the most financially destabilising way – which inevitably make the final resolution of the crisis much more difficult and which sharply raise financial distress costs. The most notorious recent example of these terrible “solutions” was Argentina’s disastrous debt swap in 2001, in which it dramatically increased the country’s total obligations while it desperately tried to maintain the fiction that it could somehow grow its way out of its impossible debt burden.

Greece, and probably two or three other countries, simply cannot repay their outstanding debt amounts. Ultimately they are going to default, and then in the restructuring process they will receive enough debt forgiveness that allows them to return to a sound footing and with a reasonable repayment prospect. But as long as they maintain the pretence that they can and will repay the full outstanding amount, and struggle with the burden, the resulting distortions in the economy will mean that businesses will disinvest and the country will not grow.

Historical precedence makes it clear that as long as the sovereign borrower is forced to struggle with an unrepayable debt burden, it will not grow. Eventually, as has happened in nearly every previous case, creditors and borrowers will acknowledge reality and will work out a debt forgiveness plan that will allow the economy to return to growth. Until then, expect weak growth, high unemployment, and constant battles over debt.

How long will it take for the world to recognize the inevitable? That leads us to the fifth thing we can learn from historical precedents.

5. Greece’s insolvency will not be recognized for many years.

When most of the obligations of an insolvent sovereign were widely dispersed among a wide variety of bondholders, market forces acted relatively quickly to force debt forgiveness. Defaulted bonds trade at deep discounts, and it is a lot easier for someone who bought the debt at one-quarter its face value to agree to 50% debt forgiveness than for someone who made the original loan.

But things are different with the current crop of insolvent European sovereign debts, as they were with the sovereign loans of the 1970s. They are heavily concentrated within the banking system, and the banks cannot recognize the losses without themselves collapsing into insolvency.

That cannot be allowed to happen. The LDC debt crisis of the 1980s raged on nearly a full decade – a decade of stopped payments, capital flight, and agonizingly low growth – before creditors formally acknowledged that most struggling borrowers could not repay their debt and would need partial debt forgiveness. The first formal recognition of debt forgiveness occurred with Mexico’s Brady Plan restructuring in 1990. Growth returned to most countries only after it became clear that they would receive debt forgiveness.

Why did it take so long? Were the banks stupid? No, banks knew full well that they weren’t going to get their money back as early as the mid-1980s, but to have acknowledge this would have required them to set aside more capital to absorb the losses than most of them possessed. The recognition of the obvious had to wait nearly a full decade so that banks could build a sufficient capital cushion to absorb the losses.

So too with the European crisis. Much of the Greek debt is held by European banks, and they simply do not have enough capital to absorb losses on Greek debt, let alone if Greece were to be joined by Portugal, Spain and others. The banks will need first to rebuild their capital bases before they can admit the obvious, and this could take several years.

So we are condemned to spend much of the next decade postponing a resolution of the crisis while banks rebuild their capital base. Until they do, we will all pretend that Greece isn’t insolvent and that other European countries will not face a crisis. Meanwhile none of these countries will be able to grow.

Odious debt - from Wikipedia:

In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack,[1] a Russian émigré legal theorist, based upon 19th-century precedents including Mexico's repudiation of debts incurred by Emperor Maximilian's regime, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime.

According to Sack:

When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders' knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler. 

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