“I’ll gladly pay you Tuesday for a hamburger today” ~ J. Wellington Wimpy
The problem with fiat currency is it has no intrinsic value. We have a world economy based of fiat currency and it’s catching up with us. James Howard Kunstler explains that the catch up is being played out in Europe now but the rest of the world will not be far behind.
Nobody knows what will happen next in the struggle to wring some kind of debt repayment promises out of poor Greece. Without “restructuring” — a virtual national bankruptcy proceeding — there can be no plausible promises of repayment. Both sides seem to have exhausted their abilities to juke their way out. The European Union and its wing-men at the European Central Bank (ECB) and the International Monetary Fund (IMF) can only pretend to kick that fabled can down the road because it has turned into a cement-filled 50-gallon drum. The Greek government can only pretend to further dismantle its civil service and pension systems lest angry citizens toss it out and replace it with a new government, perhaps an ugly and pugnacious one made up of Golden Dawn party Nazis.
In the background, Spain, Portugal, Italy, Ireland, and perhaps even France wait without peeping to see if Greece is allowed to restructure, because you can be sure they will demand the same privilege to debt relief. But that’s hardly possible because the ECB has been engineering a shift of debt-holding away from the big corporate banks — which made all the stupid loans — to the taxpayers of their member states, especially Germany, which stands to be the biggest bag-holder when a contagion of serial default seeps across the continent.
This implies, of course, that along the way to that outcome something sickening happens to the price of all the bonds that the debt is embodied in. Namely, its value craters for the simple reason that the threat of non-payment makes interest rates shoot up to reflect the actualization of risk. That would certainly set off the booby-trap of derivative interest rate swaps and credit default swaps that have been laid into history’s greatest financial minefield. Thus, the big banks that were supposedly shielded by the ECB shell game of Hide the Debt Pea Somewhere Else, will blow up in a daisy-chain of unpayable obligations.
Of course this is just the beginning – The United States, China and Japan wont be far behind. Wimpy’s I’ll gladly pay you Tuesday for a hamburger today pretty well sums up the world economy. Fiat currency along with excessive leveraging was always a recipe for disaster. Yes, it was seasoned with a healthy amount of greed and foolishness. The idea that real estate values could only go up so borrow money now to buy a house or two today and then pay back the loan on Tuesday with the profits. Of course in the real world that’s not the way it works.
That shocking social and political bankruptcy has, so far, acted as the sinkhole for all America’s financial degeneracy and the entropy it generates. The financial class (the 1 percent who own 40-plus percent of the financialized economy) must think it’s immune to the consequences of its activities, namely racketeering of one kind or another — criminal misconduct and accounting fraud in the service of money-grubbing. They must truly believe that risk has been offloaded into the ring-fenced concentration camps of capital: the derivatives pools. But risk, like rust, never sleeps and can’t be so easily contained. The obstreperous claims of debt only die down with the acknowledged disappearance of wealth, as when a bottom-feeding collection agency attempts to collect a few cents on the dollar of a car loan gone bad.
The US Federal Reserve, like the European Central Bank, sits atop a vault of bonds representing a colossal aggregate promise to repay debt that can never be repaid. Their loss of value will come to be seen for what it is: the disappearance of national wealth. We’ll have our moment, too, when the 50-gallon can full of cement can’t be kicked down the road another inch. It might come when Europe sets the example for a loss of faith in a system run to crime and rot.