Sean Corrigan Explains The Rules Of The "Multi-Trillion Shell Game" And What To Expect Next

Tyler Durden's picture

Diapason's Sean Corrigan does a succinct review of how the "multi-trillion" ponzi has progressed, where we are now (a point where even intellectually challenged anchors on CNBC gasp in wonder that entire countries are failing merely to save a few not so good bankers), and where we are headed: "under the rules of this multi-trillion
shell game, the sovereigns guarantee the ECB which funds the banks which
buy the government debt which provides for everyone else's guarantees."
All in all, nothing that should surprise our readers (as should none of the things that are "suddenly" headline news), but still one of the better summaries of how and why we are now at a point where even the second biggest economy in the world (the EU) is unable to stop the unraveling. It is only fitting that America is today demonstrating to the world the apogee of its consumerist orgy, even as the austerity belt is tightening for yet more hundreds of millions of people all across the world, and where resentment toward America is once again reaching unprecedented levels. At this point it is just a matter of time before said unraveling crosses the Atlantic. One year from today the media will be running amused retrospectives how a deranged bubble chasing hedge fund world was buying NFLX and AMZN at triple and quadruple digit forward multiples. But until then the insanity has just a little longer left to run.

From Material Evidence

Though he later recanted his belief in its message, Lionel Robbins' near-contemporaneous treatment of events in his 'Great Depression', remains one of the most cogent and lucid expositions of what went wrong in that dark decade and also of what kept it in a state of 'wrongness' for such an unconscionable length of time after the initial crisis.

Among its many, telling comments, the following stands out by way of its relevance to the turmoil taking place in Europe today and so is worthy of an extended reproduction here:

"...The boom was remarkable, not only for the proliferation of fashionable fraud; it was remarkable, too, for a change in the methods of straightforward financing.., by a conspicuous increase in the proportion of public investment which takes the form of fixed debt rather than participating ownership. This tendency was bound to accentuate the difficulties of any period of depression. In part, the change was due to... increased participation by banks in the financing of all kinds of enterprise created a market for bonds where equities would have been unacceptable...The big insurance companies, moreover, through whose agency so large a proportion of the savings of the poorer and middle classes are invested, had a preference for this kind of investment..."

"But in part it was due to the increased economic activity of States and governmental bodies. The most intractable and disastrous masses of fixed debt which have obstructed recovery in the slump have been debts of this sort... Of the total amount invested in Germany in the years 1924-1928, it has been estimated that at least 40 per cent was on account of governmental bodies. Much of this was spent on the carrying out of works such as the construction of swimming-baths, the financing of housing schemes and so on, which had little prospect of being financially remunerative... Much of this money is irretrievably lost. But, because it was borrowed by government bodies, recognition of this fact is slow to come and liquidation has thus been delayed. Paradoxically enough, economists who have urged that this sort of thing has not proved its worth in practice, are often called by their opponents, 'deflationists'..."

Is it so hard to see that, when the crisis broke, the Irish authorities should have restricted themselves to guaranteeing banking deposits up to some fairly modest ceiling amount and then left bank shareholders, bondholders, and wholesale depositors to negotiate over the division of whatever small residuum their ill-advised investments had left them?

By extension, if and when those creditors themselves were sufficiently embarrassed as a result of their folly, the authorities in their own jurisdictions — whether German, Dutch, French, British, or whatever — should have applied exactly the same salutary treatment to them in their turn. Losses would undoubtedly have been substantial, but the foredoomed attempt to disguise them has not only not made these any lesser, but has prevented anyone from embarking upon the process of working to put right the shocking loss of wealth they have entailed in the interim.

Yes, there would have been considerable disruption and a highly regrettable hardship would have been imposed not just on the few, highly-visible 'Rich' but also on the many, nameless, less well-off — but can anyone say that today's consequently pressing need to throw the engine of government debt accumulation violently into reverse will not occasion at least equal amounts of suffering in a far more protracted manner and without even the merit of fairness and equity in making the malefactors' willing business partners bear the first (and probably the largest) portion of the losses?

As it is, the Irish 'rescue' looks like it has only served to underline how perilously entwined the fortunes of sovereigns and their banks have become. As we have noted before, under the rules of this multi-trillion shell game, the sovereigns guarantee the ECB which funds the banks which buy the government debt which provides for everyone else's guarantees. No wonder scrutiny is switching back to Spain and Eurobank stocks are sagging, once more.

And to think that the former UK Prime Minister used to boast that he had 'saved the world' when he set the standard by being the first to rush to conclude a similar pact of mutually-assured destruction into which the hosts of cherubim and seraphim, surely, would have feared to tread.

As if this were not enough for markets to try to rationalise, there is just the risk that it travels back to the US - whether via the 'putback' of dodgy mortgage loans to FNM/FRE and/or the banks, or via a possible Muni implosion when the Build America Bond programme expires at year end.

Bigger yet is the threat posed by China's inflationary outbreak. Although we derided its crude attempts to suppress prices and boost welfare payments - and while the market was briefly relieved that the PBoC did no more than hike reserve ratios for the umpteenth time - it does appear as if something a little more draconian may be coming down the track, possibly after the Central Economic Work Conference has discussed any such measures in three weeks' time.

Certainly, if we are to take the China Daily at its word, we should be reducing risk exposures where we can: -

"...The latest move to contain excess liquidity and the forceful measures that the central government has taken to stabilize prices show the determination of Chinese policymakers to fight inflation. Though these moves may not be enough to tame inflation once and for all, they are a good start before more aggressive actions become necessary to battle inflation that is unlikely to end anytime soon, as debt-laden rich countries keep flooding the world economy with their newly printed money."

Well, if Ben can blame it all on Zhou, he is surely entitled to give a little of it back, but the main point is that the former's indulgence in QE might just be about to run into the latter's switch to QT. We know which we think will carry more weight in setting commodity prices.