Guest Post: Sorry, Bucko, Europe Is Still In A Death Spiral

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Sorry, Bucko, Europe Is Still In A Death Spiral

Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.

Sorry, Bucko--Europe is still in a financial death spiral. Friday's "fix" changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:

1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.

2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.

3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.

4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.

5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.

6. Interest rates will rise as investors question whether their capital will be returned in full or if it will be returned in depreciated currency.

7. Export-based economies will contract as China's expansion slows to a crawl. Future projections of national income are overly optimistic.

8. As income is bled off to pay rising interest, there is less money available for consumption or investment. Without investment, income declines. As taxes rise, there is less private-sector income available for either investment or consumption. This is the "austerity death spiral," and borrowing more for State malinvestment will not halt it.

The more money that is borrowed to maintain Status Quo consumption, the higher the future interest payments. This is a financial death spiral.

9. There is no collateral for more borrowing, but "growth" depends on more borrowing.

10. Transferring bad debt to central banks does not mean interest will not accrue: interest on the debt still must be paid out of future income, impairing that income.

11. Lowering interest rates does not create collateral where none exists.

12. Lowering interest rates only stretches out the death spiral, it does not halt or reverse it.

13. Centralizing banking and oversight does not create collateral where none exists.

14. Europe will remain in a financial death spiral until the bad debt is renounced/written off and assets are liquidated on the open market.

15. Anything other than this is theater. Pushing the endgame out a few months is not a solution, nor will it magically create collateral or generate sustainable "growth."

16. The Martian Central Bank could sell bonds to replace bad debt in Europe, but as long as the MCB collects interest on the debt, then nothing has changed.

The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe.

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SilverTree's picture

You must be at least this tall to ride this ride.



Financial_Guardian_Angel's picture

For centralized banksters, there is no good time to tell the truth. So, as always, lies are first, second, and third priorities.

Too bad truth tellers are extinct...

Zero Govt's picture

Europe default

this is going down like dominos

shame those dozies (Regulators) have done zero to address systemic risk.. another 'FAIL' in the long long list of complete failures Regulators have wracked up ..and not one success

Regulation and Regulators RIP

Fukushima Sam's picture

"The Martians would be extremely bent when they discovered there is no real collateral for their 10 trillion-quatloo loan portfolio in Europe."

This will cause the Martian invasion, which will end up being very good for the economy. 

So, all on target according to the Keynesian plan...

aerojet's picture

Hey, enough with the negative waves, man!  They just need to hold on a little longer until the ufo people show up with their space dollars and magic teleportation technology that removes all the constraints of finite resources on planet earth and then you will see their brilliance shine!  We're just a mote in god's eye, growth can be infinite if we just solve some of the fundamental problems of time and distance.

Imminent Crucible's picture

"Too bad truth tellers are extinct..."

Central bankers would like to tell the truth, but "When it becomes serious, you have to lie".

And somehow, things are always serious in Fiat World.

mrktwtch2's picture

well can europe please crash around september?? that way we can be sure to get rid of the messiah and put some mittens on!!

Biosci's picture

and this will be better because...why, exactly?

because fewer middle-aged white men steeped in the Goldman tradition will be placed in senior economic advisory positions?

because the GOP will enact and enforce regulations on Wall Street to protect small investors, and markets generally, from the predatory practices of large banks?

because once we have strong leaders of the same party in the White House and in both houses of Congress, well-thought-out economic policies will be implemented, unleashing a wave of prosperity upon the nation and the world?

please, help me understand why.

Dr. Engali's picture

Because the GOP stands for a smaller less intrusive government. Ha ha ha ha ha..I think I just pissed my pants from laughing so hard.

Lebensphilosoph's picture

And you'd prefer what? More 20-something African women steeped in the humanities faculty tradition?

aerojet's picture

Seriously, why even vote?  Romney isn't going to change anything, he's a bankster, too.

JeffB's picture

Well if we're going to potentially be dealing with a Martian invasion, those magic underpants could come in handy.


Cursive's picture

I don't argue with anything CHS writes in this piece except that the "fix" was probably mis-reported, so it's not even a "fix" at that level.

francis_sawyer's picture

 "Sorry "BUCK-o"?... Odd choice of words for this particular article...

LawsofPhysics's picture

Someone is dating themselves.  Sorry, happy days are not here to stay.


Clear the bad debt, prosecute the fucking fraud, nothing changes until then.

binky's picture

Confucius say...  

Martian who loan Europe 10 trillion-quatloo, get back jack-squatloo.

Jack Sheet's picture

Show me your collateral and I'll show you mine.

DeadFred's picture

Sshhh! Don't spoil their party, It will be that much better to short from 1460 rather than 1360.

Snakeeyes's picture

Graph comparing US and EU PMI points to ..... WARNING! STALL SPEED!!!!!!

And Obama and Hollande want to RAISE taxes during a stall!

JeffB's picture

I'm very much in favor of cutting the size of government but I think this economic flight is going to stall whether they raise taxes or not.

FWIW, Laffer made a fool of himself back in August 2006 when he debated Peter Schiff about whether the economy was headed for a severe recession:

He was a laugher in that segment, alright, but I think Schiff had the last laugh.

BTW, Laffer also renegged on that bet with Peter Schiff:


orangegeek's picture

Europe is in far worse shape than the US.


The Euro will likely slide as their member countries default on the debts.


US Dollar will move to the upside as a result.

falak pema's picture

Guest Post: Sorry, Bucko, Europe Is Still In A Death Spiral

Compare govt debt, deficits and private debts including off balance sheet, the death spiral is steeper for USA than for Euro zone, apart from reserve status. That is what protects the financial cannibals.

elwu's picture

Why exactly is this (mostly correct) analysis adresseing the Europe death spiral only, it is at least the same with the US?