Guest Post: The Three Ds: Delegitimization, Definancialization, Deglobalization

Tyler Durden's picture

Submitted from Charles Hugh Smith from Of Two Minds

The Three Ds: Delegitimization, Definancialization, Deglobalization

Two major trends are reversing, and trust in centralized institutions is eroding.

I tend to be years early on identifying trends, but three that will make a difference going forward are what I call "The Three Ds": Delegitimization, Definancialization and Deglobalization.

Broadly speaking, the global economy and thus globalization and its sibling, financialization, depend on the legitimacy of centralized institutions. These include nation-state governments, international organizations such as the IMF, central banks, the mainstream global media, and various Central State agencies tasked with reporting data accurately, for example the Securities and Exchange Commission (SEC) in the U.S. and equivalent agencies in other trading blocs.

By far the grandest experiments in legitimization of the past 20 years are the European Union (EU) and its common currency, the euro, and China's one-party rule combining a command economy with a quasi-free enterprise model, i.e. "Capitalism with Chinese characteristics."

The vortex of insolvency gripping Europe is rapidly chewing through what remains of the legitimacy of the euro and the EU institutions tasked with overseeing the financial sector. As the legitimacy of these agencies erodes, the rot spreads to the political institutions which have placed their legitimacy in the hands of bureaucrats and central bankers.

As for the euro and the EU's grand integration experiment, we can turn to George W. Bush's inimitable phrase for a summary: this sucker's going down. The subprime mortgage meltdown offers a cogent preview of Europe's future.

At the height of the credit/housing bubble, Mr. and Mrs. Flipper leveraged a $500,000 mortgage at a remarkably low rate of interest (i.e. a "teaser rate") with zero collateral (i.e. no down payment or "skin in the game"), zero documentation of income and a sketchy credit record.

Congratulations, Mr. and Mrs. Flipper! You're homeowners!

But of course the happy speculative couple owned nothing but an option on future appreciation of the underlying asset, the shiny new vinyl-clad McMansion in the middle of nowhere. They had no equity, and so neither did the lender. The lender's asset was solely the "owners" promise to pay the mortgage.

That promise was based on a questionable proposition: that the new "owners" would pay $1,000 a month on their interest-only, negative-equity mortgage for a year, and then suddenly start paying the true costs of $3,200 a month thereafter.

The lender then sold that promise for a hefty profit to Wall Street, which packaged that promise into a mortgage-backed security (MBS) and a family of derivatives based on that MBS, all of which were sold as nearly risk-free "safe" investments (AAA rating) for staggering profits to trusting investors around the globe.

This chain of transactions is the embodiment of globalization and financializtion.

Institutional legitimcy, financialization and globalization are the three essential elements of this chain of transactions. The credulous buyers of these instruments trusted the ratings agencies, Wall Street and implicitly, the oversight agencies of the U.S. government, to properly represent the risks buried in these instruments.

All three failed the investors, completely, utterly, totally.

Anyone with an ounce of skepticism and/or comon-sense would have questioned the foundation of this entire pyramid--a weak promise to pay by people with sketchy credit and no skin in the game.

Substitute Greece for Mr. and Mrs. Flipper and you have a pretty good understanding of the hopelessness of the "austerity" plan and all the rest of the charade. Mr. and Mrs. Flipper had stated their income was $8,000 a month, but it was actually $2,000 a month. Now their bank is demanding that they "tighten their belt" to scrape up the $3,200 a month mortgage.

Oops, there's a little disconnect between reality and the lender's expectations. By elimiating all non-essential spending the Flippers can make a payment of $1,200 per month.

Oh, and the house is worth at best $250,000 now.

Rather than write the mortgage down as impaired and take a stupendous loss it literally cannot afford due to its slim capitalization, the bank cooks up a new scheme: OK, pay $1,500 per month and we'll roll the old loan over into a new one with easier terms.

The bank is trying to accomplish the impossible: make an insolvent borrower and insolvent lender both appear solvent. The borrowers have no incentive to play this game, however, as they have nothing to gain from the suggested extreme austerity and much to lose.

Once again, substitute Greece for the unhappy debtor and you understand the complete hopelessness of the Euroland debt crisis. Austerity won't work because it offers nothing to the insolvent debtors and won't make the lenders whole, either. The debts can never be paid, because even extreme austerity cannot enable the debtor to service the vast debt. It can, however, undermine the real economy and the stability of the debtors.

The lender's game of rolling over the uncollectable debt into a "new loan" won't make the debt any more collectable. The "austerity plan" is in essence a public relations ploy, "extend and pretend," and thus a travesty of a mockery of a sham.

This reality has triggered a glacial reversal in globalization and financialization. The free flow of capital across borders is the essence of globalization, and leveraging what were once stable, accurately represented risk assets into free-floating instruments completely detached from reality is the essence of financialization.

As Europe's financial and political structures fray, then trust in the institutions which promised grand prosperity for all via globalization and financialization will fray and then break.

Delegitimization, Definancialization and Deglobalization have been unleashed, and they will only gather force as reality steamrolls artifice.

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hugovanderbubble's picture

How is possible Charles Hugh that CDS market doesnt take into consideration a CREDIT EVENT?


If not, ...ICE market , will dissapear. Cos the Insurance lost all legal force. (We have seen in the European French and German Banks with Greek Debt).


For me this is illegal.

And must be considered a CREDIT EVENT

NotApplicable's picture

Sorry, no credit event for you. TPTB will tell you if and when one happens. Your input is not required, nor desired.

Jalaluddin's picture

I thought the three D's were




oldman's picture


If there is no money then there is just NO MONEY!

The deal is done---it is all over----we here on this blog just keep trying to blow life into the corpse of the machine with all of our hot air.

Let's keep it light and enjoy the film----life is easy, brother

Mr Lennon Hendrix's picture

And deez....

......deez nutz!

Sorry, I had to.

topcallingtroll's picture

European banks hold debt at par that trades at a 50 percent discount. Even more amazing the European banks are still leveraged 30 to 1 on that mythical par value.

Why do Europeans such as Juncker and Trichet go on tirades about the inferiority of the American financial system?

Our 13 to 1 leverage looks good in comparison.

Rossalgondamer's picture

Mark Zandi, chief economist of Moody's Analytics...seems to favor JPMorgan Chase CEO Jamie Dimon, saying he'd be a "fabulous" Treasury Secretary.

NotApplicable's picture

What, did Goldman run out of candidates?

centerline's picture

Guess he figures the banks are going to win in the end and some slobbery dick sucking efforts right now might win him a spot as court jester in the NWO.

sgt_doom's picture's going to be Erskine Bowles -- he was an acolyte of Kissinger at Forstmann & Little, and has a bunch of private equity banksters' experience, and lies darn good....

zKeyserSoze's picture

The Man Who Shot Liberty Valance (1962) "When the legend becomes fact, print the legend."
Man Who Shot Liberty Valance, The - (Movie Clip) Print The Legend

richard in norway's picture

my god, i saw that movie last week, it was great. it got me thinking about how much our movie heros have changed


Long-John-Silver's picture

Dekeynesianism by default Bitchez!

AnAnonymous's picture


Deglobalization? At this stage?

The end of the Euro? Just after they showed they were able to play the game by the rules, knowing loopholes to exploit the system?

No end to the game before it can not be physically (not more physical inputs or not enough) sustained.

US world order.

zKeyserSoze's picture

dow is up 5 billion ponts today

yabyum's picture

Turned on the tube last night, Mr + Ms Flipper are buying houses in Panama. Like a fucking plauge on the land.

falak pema's picture

Right now the Oligarchs are in deep into D-cubed. They don't buy the 3 ds as Charles advocates. In the ruins of their global scheme will there be a FDR type to reign in the Oligarchs and build the new model?

Seer's picture

Sure they will try, but that doesn't mean that there's anywhere near the possibility that they can even come close to resolving anything.  The FDR era swam in physical resources, and enjoyed industrial conquest (after WWII wiped out competition); and then there's the issue of public and private debt...

VyseLegendaire's picture

I hope you're right.  This rollercoaster has been topping out for what seems like years now. 

Steaming_Wookie_Doo's picture

I agree. I was panicked in late 2008, thinking we'd look like the 3rd world by 2010. Nope, this is a very slow motion crash. Just keep going, reserving extra essentials (whatever you prefer--food, gold, lead delivery systems, etc). 

Rhodin's picture

It IS in slow motion, because the Powerz are delaying things until they are prepared and have fall guys to blame the crash on.  (Expect gold/silver owners to top the blame list.) Their prep process is about complete now, and their ability to slow things is waning.  Expect a "catch-up" crash and a resumption of downward momentum within weeks to months.

While stashing stuff is good and necessary, this crisis could go on long enough that you will need local means of producing and acquiring necessities.  These take time to set up, especially producing local food.  Best get started, ASAP if not there allready.

Seer's picture

Looks like you've been peering into my crystal ball.  Trenchant comments!

whiskeyjim's picture

"Broadly speaking, the global economy and thus globalization and its sibling, financialization, depend on the legitimacy of centralized institutions."

Smith begins with this premise. It is wrong. Marco Polo didn't need a centralized institution. Neither did Barclay's bank to do business in Argentina in 1810.

Sure, it is politicized centralized institutions that enabled the largest traders and financiers to leverage their assets beyond prudence (see the Basil Accords) and bailed out the losers. After all, only a politicized idiot would keep lending Greece money, and pretend finance is the answer to a structural problem.

Massive write-downs must come. TARP prevented that in the USA and stagflation is the result. Same with Greece.

It is time these centralized agencies go away. Wall Street would stop preying on stupid politicians and house owners or they themselves would go away. Reserves would rise and finance would become boring again, just like it should be.

Seer's picture

"Reserves would rise"

Based on what?

The growth curve is flattening out and will be falling over the edge.  I doubt very much that this projection (and velocity) can be tolerated by the System for very long, let alone for decades (not a chance for it lasting centuries).

Economies of scale in reverse.  One day people will get it, what impact this will have (had).

subqtaneous's picture

Throw increasingly more expensive energy and protectionism in this cocktail while you're at it.


ziggy59's picture

SHOULD be 4 Ds...the most obvious one, not just a River;
"Da Nile"

Dirtt's picture

Three D's and an I.

Impeach Trikky Dick and let John Boehner become POTUS 45 to finish out this term. I don't personally have any animosity towards Boehner. Seems like a very likable guy. He is a victim of circumstance.  ANYONE with any connections to the US COngress over the last several years share that same circumstance.


There is absolutely NOTHING LIKABLE about Trikky Dick. Sheriff Joe is not far behind. Sheriff? Does that make Charles Manson a pediatrician?

This nation will not make it to Nov 2012 without widespread permanent damage. We better slam the vault shut ASAP.  Before the 3-D's come to fruition the Impeachment Of Trikky Dick should precede.

Joe Davola's picture

this sucker's going down

I'd always attributed that to Clinton.

Steaming_Wookie_Doo's picture

Only when he spots Hillary naked

Joe Davola's picture

Good point, I guess Bill could have said it also.

Long-John-Silver's picture

Thanks for putting that in my head going into a Holiday weekend -NOT-.

P-K4's picture

SEC, IMF, IEA, EU, et al, - deez deliquents dote direliction of duties daily.  

Gubbmint Cheese's picture

Charles.. you forgot the last D


Raymond Reason's picture

De-fang the military... bitchez

Long-John-Silver's picture

You can't De-fang the military, you must De-money it.

centerline's picture

As long as history is not rewritten down the road, at some point people will look back at what happened and shake thier heads at the chain of events and how we failed so miserable to see the forest for the trees.  This mess is rooted in the most simpliest of concepts.  And those simple concepts seem to be so easily pushed out of view - as people naturally prefer to believe in unicorn mathematics because it "appears" to have been what enabled them to have that big-ass flat screen today.

Caviar Emptor's picture

I see the opposite trend happening: convergence on a grand scale. The US and China have been and continue to converge as a matter of mutual survival. As China has liberalized its economy toward more free enterprise, the US has progressed toward more central planning. Other parts of the world will follow suit. 

Bob's picture

Interesting.  So the "communists" will mock the "capitalists" and the "capitalists" will mock the "communists" while everybody does the same thing. 

And a common slavery for the masses whatever they call it.  


falak pema's picture

This is precisely where we are heading : World pseudo government-true private Oligarchy. Centrally planned. Marx's nightmare, Stalin's dream! (Which just goes to show the line between marxism and fascism is paper thin!).

Ghordius's picture

1984 Good book Same plot you are descibing

Seer's picture

The religious zealots and militia types will have none of it.  Besides, it's ALL about energy, and there ain't enough energy to maintain the necessary command-and-control system.  History demonstrates that BIG = FAIL.

NotApplicable's picture

I tend to be years early on identifying trends...

And at that point, I quit reading. I have no idea what ramifications of these trends are in this piece, but from his past articles, I'd say he's good at identifying false trends. Or at least, manufactured trends, parroting tomorrow's conventional wisdom.

For instance, he discusses delegitimizing (ok, so I skimmed the article) forces, yet makes no mention at all of the elite's primary, legitimizing counter-balance, war (or any other disaster that makes the sheeple rise up for protection).

He seems to think people are going to wake up. Like I said, he is good at identifying false trends. Those three Ds are really what will be used to put everyone into shock as the reality that everything is breaking does not fit into the herd's ideas of how it all is supposed to work.

The D he forgot about is Dependency. Upon it, all the rest are hinged.

Rhodin's picture

The wake-up will come when the dependancy fails.  When millions of SNAP, UI, SS, SSI, and fed/mil pensioners either are not paid, or payment is worthless, many who haven't paid attention before will get angry and active.  Sure the Powerz will try war again, but it is less likely to work for them this time.

Seer's picture

Agree.  And TPTB's meme won't be accepted in the (not-to-distant) future because TPTB won't b able to produce it.  Again I remind people to understand the concept of economies of scale in reverse: right now everyone is passified by iPods and other idiot devices, when these are no longer affordable (over 4 billion people cannot, or will not ever, be able to possess things such as this, This is reality) people will start to see that it's all been BS..

People can scoff all they want, but the reality is is that REALITY tells us what things WILL BE like.  We need only look at historical norms: we're currently operating several deviations away from the historical norm, a feat only made possible by cheap energy [slaves].

Rhodin's picture

duplicate, thx Microsoft

Missiondweller's picture

It would be nice to see this as a series or articles as these concepts progress.