This week’s article is based on a piece I read by Michael
Hudson. He is a research Professor of Economics at the University of Missouri,
Kansas City and President of The Institute for the Long –Term Study of Economic
Trends. His writing is quite dense. I had his articles on one screen and
Mirriam-Webster’s online dictionary up on another. That being said, his basic
thesis is that the European Union’s design has allowed private banks to make
sub prime loans for individual countries’ internal development with little
thought as to whether they had the ability to repay them. Unlike our own sub
prime debacle, it is ending in foreclosure by the banks on entire countries,
instead of just individual houses. He calls this the, “sharecropper” model of
European lending that will create poverty stricken and dependent countries
within the European Union.
The first issue
he raises is with the globalization of the financial industry and its primary
purpose of collecting fees and generating revenue based on the maturation process
of the debt it services. Accounting processes in the last 10+ years have
evolved into a shell game. The idea, following Enron’s lead and supported by
major financial firms like Goldman Sachs, Chase and J.P. Morgan allowed private
banks to make loans large enough to subsidize governmental funding programs
like health care and infra structure loans by creating financial swap
contracts.
The swap contracts they created are basically like
adjustable rate mortgages with the addition of a second variable. Obviously,
the first variable on an adjustable rate loan is the future interest rate. The
second variable is the foreign exchange rate. The value of the loan is
calculated at the time it is made but the repayment value would vary based on
the relationship between the currency in which the loan was made and the
currency that it is repaid with. For example, in 2003, the Euro and the Dollar
traded at the same value. A loan made in Dollars to the European Union of
$1,000,000 would carry a swap value of the agreed upon interest rate
fluctuation plus an agreed upon currency exchange rate fluctuation. The Euro is
currently worth $1.45. Therefore, the current repayment value of the loan could
have been cut nearly in half based on currency fluctuation. Think in terms of
controlling the new crop seed money.
The swap contracts they created allowed private banks to
lend money to foreign governments, which would be repaid through national
lotteries, airport landing fees, toll roads, etc. The banks profited and debtor
countries, like Greece, remained within the European union’s 3% budget deficit
rule because cross currency swaps were not recognized as official government
debt. The reality was that the accountants at the large institutions found legal
but, covert ways around the European Union’s Maastricht Treaty. The Maastricht
Treaty made no provision for financing individual countries directly by the
Union. The unintended consequence was a shadow lending industry that went
completely unregulated and spiraled out of control. Imagine the U.S. sub prime
debacle on a scale large enough to finance Greece, Ireland, Iceland, Portugal
and Spain combined! Hudson equates this to a land grab of national revenue
producing assets.
The second issue that Hudson raises is the process by which
the debt that is created by the banks and squandered by the individual
governments is then transferred to the general population for repayment to the
original lenders. The borrowing governments use the money received to expand
their balance sheets, which in turn allows them to issue new debt on the open
market. This debt is purchased by the large French and German banks that now
hold roughly 35% of Greece’s debt and can’t afford Greece’s inability to pay.
Germany and France then use their political clout to
engineer a European bailout (QE1 & 2 in the U.S.) to protect the banks and
people of their countries but, in actuality, saddle their own productive
economies with repaying a less productive country’s debt. French and German
taxpayers, unwilling to cover the debts of an irresponsible borrower force
austerity measures on Greece to punish them. However, raising taxes to pay back
the loans does more to damage Grecian productivity than to curb spending. This
places Greece in an even deeper hole forcing them to seek more bailouts to fund
nationalized welfare programs like health care, garbage removal, infra
structure maintenance and so on. This, controls the labor.
Finally, the European Union, as opposed to individual
lending institutions, offers to buy or, lease national services and landmarks
like, the Parthenon or their airports and roadways that would guarantee long
term loan repayment revenue streams. The banks would keep their profits and
remain solvent while Greece gets their own spending habits under control.
However, this process would also strip Greece of their primary national
industry – tourism. Consider this the, “land” portion of the equation.
The spiraling cycle of forcing people to pay more while
making less through controlling the seed money, labor and land is why Hudson calls
this subsistence the, “sharecropper” business model of the Euro financial
institutions, which he believes will end in revolt just like it did here in the
U.S.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
