Guest Post: The We-Fixed-Nothing Chickens Are Coming Home to Roost

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Submitted by Charles Hugh Smith from Of Two Minds

The We-Fixed-Nothing Chickens Are Coming Home to Roost

When the real problems are masked with fake "solutions," the chickens eventually come home to roost, and we wake up to the reality that the fake "solutions" have only made things much worse.

The reality that the global Status Quo has fixed absolutely nothing in four years is finally coming to roost in the global economy. Though there is an endless array of complexity to snare the unwary, the source of instability is both visible and easily understood: too much debt that will never be paid back. Making matters much worse, much of the money that was borrowed--by sovereign governments, local governments, households and private enterprises--was squandered on consumption or malinvestments, and so there are precious few assets or collateral underlying the debt.

Even when there is an asset--for example, a vacant house in a vacant development in Spain, or a Greek bond--the market value is considerably lower than the purchase price.

The reality is that trillions of dollars, euros, yen and renminbi in phantom wealth will disappear when the losses that have already taken place are finally recognized. Everyone in the world with exposure to the global economy will become poorer in terms of abundant money floating around buying goods and services as credit dries up and deleveraging wipes out trillions of dollars, euros, yen and renminbi of phantom wealth.

Deleveraging is the process of the market discovering the true value of the asset underlying the debt and the difference between the debt and the proceeds of the asset sale being absorbed as a loss. If an entity needs to liquidate liabilities and/or raise cash to pay bills and interest, then assets will have to be sold. If the market value is less than the debt, then a loss must be booked. If a house carrying a $200,000 mortgage is sold for $100,000, the lender has to absorb a $100,000 loss.

Credit will dry up for a number of reasons, but the basic dynamic is that lenders no longer have enough collateral to generate new loans (except for those guaranteed by Central States) and in a world where assets are being sold to raise cash to stay solvent (the mighty engines of deleveraging), then prudent lenders are wary of loaning money to purchase assets that are declining in market value.

The Status Quo has played a very risky game for four years: when private banks go belly-up from issuing risky loans on mal-investments, then the stupendous losses are transferred to taxpayers: the Sovereign State "nationalizes" the bank or "buys" the debt; whatever the mechanism used, the key point is the owners of the debt take no losses when the debt is transferred from private hands to the taxpayers.

The key dynamic is this: instead of the bad debt being written off so the owners of the debt must accept the losses that have already occurred, the owners of the debt (bondholders) suffer no reduction in capital as their losses are transferred to the Central State.

Bonds earn interest because there is a risk associated with any loan. When risk is disconnected from the return or gain, that is moral hazard: people who have no exposure to risk make much different choices than those who are exposed to risk and loss.

The transfer of private losses to the public "solves" the problem when the losses are modest; but the problem is the losses are not modest, they are so gargantuan that they are swamping the State's ability to pay interest (service the debt).

That triggers the "austerity" death spiral: as taxes must be raised to service the new debt, households have less money to spend in the economy or to invest. The State, meanwhile, must cut other expenditures to free up money to service debt, so the government spending that feeds the economy also shrinks. As credit and consumption both dry up, businesses must lay off employees to survive. That places more people on the State dole, which makes even less money available for productive investment.

Without productive investment, productivity declines and wealth generation ceases. As everyone becomes poorer, tax revenues decline and the economy contracts. The State, having promised to pay interest in perpetuity on the phantom assets, must raise taxes on the remaining productive taxpayers. These taxes eventually crush the life out of small enterprises, who lay off what's left of their staff, further shrinking the economy and the pool of taxpayers. The most mobile of the productive leave for less oppressive climes, and many others opt-out: either give up and go on the dole themselves, or shift their productivity to the black market.

Paying interest on debt that wasn't invested in productive assets and that has no collateral to back it is a fiscal black hole. Money that could have been invested in productive assets or at least in public-good consumption is now devoted to paying the bondholders who should have taken the losses but were protected by the Central State. That protection is the beating heart of crony-capitalism and the engine of eventual collapse: profits are private, losses are shifted to the taxpayers.

The zombie banks are now State property, but that doesn't mean credit is abundant: the zombie banks still don't have any collateral, as the assets on their books (the houses that underly all those defaulted mortgages, etc.) keep declining in value.

Who is dumb enough to lend money to uncreditworthy borrowers to buy declining-value assets? Only the Central State is that dumb. Here in the U.S., the Federal government continues to issue 3% down-payment FHA mortgages to risky borrowers, and as a result the default rate on FHA loans is rising so fast the agency will soon need a bailout.

And the losses, of course, are simply transferred to the taxpayers' account.

The machine is now freezing up. Since assets are declining in value, collateral (if there is any at all) is shrinking, and the risk of loaning money to buy assets rises even as the return (the interest rate) is kept below inflation by central banks. Those twin forces dry up prudent credit, leaving only "dumb credit" issued by the Central State.

"Dumb credit" issues loans to uncreditworthy borrowers in the hopes that these marginal buyers will re-inflate asset bubbles (such as housing), as a reinflated bubble will enable the lenders to sell the defaulted homes at full value and thereby avoid staggering losses.

But alas, the debt load already carried by households is so crushing that the number of marginal borrowers is too modest to reinflate the bubbles. The number of people who are anxious to unload their assets far exceeds the few marginal buyers of assets: the number of debt-encumbered households who want to sell their house because it's worth less than their mortgage and the number of "pre-foreclosure" homes rotting in the capacious inventories of lenders can be counted in the millions.

This is a game the lender will lose, even when the lender is the Federal government, the European Central Bank or the Bank of China. Loaning money on assets that are declining in value to marginally qualified lenders can only generate more losses, and when these losses are transferred to the taxpayers, the rising debt service triggers an "austerity" death-spiral.

There is only one real solution: reconnect risk and consequence, and make the owners of the impaired debt absorb the losses that have already occurred.

It would be nice if these monumental losses were limited to the global financial Elites, but the phantom wealth is widely distributed. Trillions of dollars, euros and yen of phantom assets are held by pension funds and insurance companies; the interest collected on phantom assets funds annuities, pensions and insurance claims. When these phantom assets vanish, the public-union pension funds will be unable to pay their beneficiaries, insurance companies will be unable to pay claims, and so on: the 99% will also become much poorer as all the income streams they thought were permanent dry up.

As noted above: Everyone in the world with exposure to the global economy will become poorer in terms of abundant money floating around buying goods and services as credit dries up and deleveraging wipes out trillions of dollars, euros, yen and renminbi of phantom wealth.

A sense of outraged betrayal will become widespread. That will generate volatility and launch dynamics that will distribute nations along a critical spectrum of impoverishment and instability: some will become poorer and unstable, others will be poorer but remain stable. Poorer and stable is one thing, poorer and unstable is another entirely different thing. Becoming poorer is bearable if you retain some measure of social cohesion, predictability and stability; becoming poorer in chaos and instability is a much riskier situation.

Social stability is a complex web of cultural conventions, work-arounds, interactions and ever-changing dynamics; I devoted my latest book Resistance, Revolution, Liberation: A Model for Positive Change to an exploration of social and economic stability. In a nutshell, society is an ecosystem: the more features the society shares with monoculture, the more prone it is to fatal destabilization.

Though we cannot avoid the melting away of phantom assets, we could avoid destabilization by facing the real problem head-on and reconnecting risk to consequence.

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Mon, 06/04/2012 - 10:39 | 2491825 CvlDobd
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Good thing we are decoupling, eh Charles?

Mon, 06/04/2012 - 10:41 | 2491840 Silver Bug
Silver Bug's picture

It is QE to infinity and NOTHING else! They are too weak to take the right path. Hold tight your Gold & Silver.

 

http://silverliberationarmy.blogspot.ca/

Mon, 06/04/2012 - 10:44 | 2491861 fourchan
fourchan's picture

as long as it wipes out the kardashians im fine with it.

Mon, 06/04/2012 - 10:46 | 2491872 Widowmaker
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Don't you like sluts with big asses and bigger ego's?

Fuck the Kards, everyone else is!

Mon, 06/04/2012 - 11:48 | 2492152 DaveyJones
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the obvious solution is a genetically modified fixed nothing chicken

Mon, 06/04/2012 - 10:52 | 2491912 kridkrid
kridkrid's picture

Well, there is no right path, really.  The right path option was a fork in the road 40 some years ago (I would also accept 100 some years ago).  It's a blindspot that we have collectively... the belief that everything has a solution, if only we would (fill in the blank).  Our two party system supports this well... had we voted the last guy out sooner or had we made the other choice.

And I suppose it doesn't have to be QE to infinity.  The knowledge that eventually this whole thing will collapse... the ones who control the decision to QE to infinity do have control over the timing, no?  And when they stop, they make for good scapegoats, I would imagine.  I'm just thinking out loud.

Mon, 06/04/2012 - 11:50 | 2492084 Dr. Engali
Dr. Engali's picture

I was thinkig about our conversation we had last week, about whether or not there would be an election if there was a false flag. A thought came to mind about our states being  incubation areas for ideas. Well if you remember during 911 Giuliani tried to hold off the transition  to Bloomberg for a period of time and the sheep didn't seem to mind. If the people with New York were fine with it then under the appropriate false flag the sheeple might let them get away with it on a national level.

Mon, 06/04/2012 - 12:52 | 2492396 XitSam
XitSam's picture

It would seem to me that New Yorkers are not representative of flyover country. Is there an "appropriate flase flag" that would convince enough sheeple? How would the non-sheeple react?

Mon, 06/04/2012 - 16:38 | 2493425 Diogenes
Diogenes's picture

It doesn't have to be convincing. It only has to be sold by the media. Enough people will buy in to make it work. There will be a few doubters but who cares about them? They can easily be laughed off and marginalized. That is how they do it every time. I will not insult your intelligence by citing examples. You know them as well as I do.

"ain't we got all the fools in town on our side? And ain't that a big enough majority in any town?"

-Mark Twain

Mon, 06/04/2012 - 13:20 | 2492516 kridkrid
kridkrid's picture

I think you are missing my point slightly (or I'm not stating it well).  If you hold the belief, as I do, that politics is a distraction... that the our two parties are really one party with staged disagreements over meaningless topics, and that the true power controls both major presidential candidates, why would you go through the trouble of not having an election?  Heads they win... tails... they win.  The only reason I can conceive of as to why they wouldn't want an election... to provide a pretense for civil unrest.  And I could support that as a theory.  What I don't believe... I don't believe that the intent for cancelling an election would be a consolidation of power around any one individual.  There is no need for for that, as far as I can see.

Mon, 06/04/2012 - 10:41 | 2491836 resurger
resurger's picture

Dear Ben,

QE the fuck up.

 

 

 

 

Mon, 06/04/2012 - 10:41 | 2491839 Buckaroo Banzai
Buckaroo Banzai's picture

Maybe fixing nothing is The Plan.

Mon, 06/04/2012 - 11:06 | 2491980 TaxSlave
TaxSlave's picture

Meanwhile, you can get a real good deal on a house in Detroit.

 

Mon, 06/04/2012 - 12:10 | 2492237 Offthebeach
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This is the plan, and it's been great for the transnational elite. A world wide Reichstag fire, letting no opportunity go to waste for their increase in power and wealth. The funny part is the conditioned sheeple, like hostages look to their abusers with love, hopium and affection. Lap dogs, cattle, estrogen males fattening on sugar beer like Kobe cows and watching corporate sport products that stimulate some long lost genitic memory of when being a male meant something more than being a cubicle tax gerbil ......a " solid citizen ".

Mon, 06/04/2012 - 12:18 | 2492260 Offthebeach
Offthebeach's picture

This is the plan, and it's been great for the transnational elite. A world wide Reichstag fire, letting no opportunity go to waste for their increase in power and wealth. The funny part is the conditioned sheeple, like hostages look to their abusers with love, hopium and affection. Lap dogs, cattle, estrogen males fattening on sugar beer like Kobe cows and watching corporate sport products that stimulate some long lost genitic memory of when being a male meant something more than being a cubicle tax gerbil ......a " solid citizen ".

Mon, 06/04/2012 - 10:46 | 2491841 Mercury
Mercury's picture

Soros says the Euro itself is a bubble and we have three months left to do something about it: http://www.businessinsider.com/george-soros-speech-goes-viral-2012-6

It’s amazing how this guy can dissect and identify all the key components of a complex problem, neatly separate areas of scientific and mathematical certainty from the distortions of human perception, reference Newtonian physics this and Karl Popper that …then come home from work and throw tens of millions of dollars at every rainbow and unicorn political activist he can find.

Mon, 06/04/2012 - 10:52 | 2491906 Seize Mars
Seize Mars's picture

Mercury: When you say "It’s amazing how this guy can dissect and identify all the key components of a complex problem, neatly separate areas of scientific and mathematical certainty from the distortions of human perception, reference Newtonian physics this and Karl Popper that …"

He's not that smart, neither was Henry Kissinger. Soros is simply executing a play drawn up partly by design, partly by happenstance. In my view it wasn't drawn up by himself.  Like Kissinger, he's just a hitman who works for the real bosses. So part of his job is to stand out front and bark about Newton and Popper. Let's face it, it's distracting. So it works. He's just a sort of Warren Buffet.

Mon, 06/04/2012 - 10:57 | 2491932 Mercury
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Well he has a better track record than Kissinger...

Mon, 06/04/2012 - 10:58 | 2491936 Dr. Engali
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You are right , he is put out there as a boogie man to some and a hero to others But  he is nothing but a distraction so that the people won't look for the man behind the curtain.

Mon, 06/04/2012 - 11:31 | 2492104 eclectic syncretist
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Stanley Druckenmiller made Soros a huge chunk of his money.

Mon, 06/04/2012 - 10:44 | 2491857 mendolover
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Yes and Jabba the Hut aka Larry Summers wants the US to borrow more $$.  Sick and getting sicker out there!

Mon, 06/04/2012 - 10:47 | 2491863 Widowmaker
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This bullshit is far worse than chickens.  It's a "fix" alright.

Ken Lewis lies to shareholders and Obumfuck gave all the fucking liars in Fraud Inc. retroactive immunity.

http://www.nytimes.com/2012/06/04/business/bank-of-america-withheld-loss...

No one saw anything!  No one will see anything and nothing will ever be fixed unless by design.

Get a clue ZH, string them up. That will begin the fixing. 

 

Mon, 06/04/2012 - 10:51 | 2491899 LawsofPhysics
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I agree.  Underlying everything is the moral hazard and lack of trust because there has not been any real consequences for bad behavior  AT ALL LEVELS.  Public execution of John Corzine would do more for the "markets" than any QE right now.

Mon, 06/04/2012 - 11:06 | 2491976 ThirdWorldDude
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You go hang Corzine, I'll aim at those who let him go free.

Mon, 06/04/2012 - 11:06 | 2491977 Bob
Bob's picture

Giddens is pretending to care about MFGlobal customers:

http://dealbook.nytimes.com/2012/06/04/trustee-report-details-last-days-...

Mon, 06/04/2012 - 10:45 | 2491868 El Viejo
El Viejo's picture

Yeah but they are fisin to get ready to think about forming a committee to plan to make another plan to possibly sovle the problem.

Mon, 06/04/2012 - 10:46 | 2491873 mrktwtch2
mrktwtch2's picture

wrong..they will build a better chicken coup..

Mon, 06/04/2012 - 10:51 | 2491900 UP Forester
UP Forester's picture

My chickens always return to the coop to roost.

Now, if I could only find the fucking eggs, I'd be golden....

Mon, 06/04/2012 - 11:33 | 2492111 Winston Smith 2009
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"wrong..they will build a better chicken coup.."

Correct.  With everyone elses money but their own.

Mon, 06/04/2012 - 12:09 | 2492236 NotApplicable
NotApplicable's picture

They don't have any of their own, unless you count their counterfeiting/counterfiating operation.

Mon, 06/04/2012 - 10:47 | 2491879 duo
duo's picture

$52 trillion in debt, but only $1.1 trillion in M0.  We're going to need to expand M0 by 10x just to come close to stopping default.

Here's what you do Bernanke.  One night, add an extra zero to all bank savings, checking and CD's account balances.  Put a years worth of benefits on the EBT cards.  Then sit back and watch the fun.

Mon, 06/04/2012 - 10:47 | 2491880 Cranios
Cranios's picture

"The machine is now freezing up. Since assets are declining in value..."

The solution is to make the value of money fall even faster.

CUE THE HELICOPTERS!

Mon, 06/04/2012 - 10:51 | 2491882 LawsofPhysics
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For a long time now, the path to wealth has been confiscation (via financial "products" regulatory capture and fascism/crony capitalism) and not production.  FAIL.  Until that reverses, nothing changes.  And with all the capital and resource misallocation/malinvestment that has occured and is occuring, plus the refusal to repudiate the bad debt, I don't think things will change anytime soon.

Mon, 06/04/2012 - 11:11 | 2491996 Vince Clortho
Vince Clortho's picture

I would add legalized counterfeiting by the CBs as another "path to wealth".  It fits in well with your theme since nothing of value is produced.  But maybe that it what you meant ...

Mon, 06/04/2012 - 11:34 | 2492112 Winston Smith 2009
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"I don't think things will change anytime soon."

Until the whole rotten game comes crashing down.  But who the hell knows when that will be...

Mon, 06/04/2012 - 12:12 | 2492246 NotApplicable
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You can bet that somebody does. They know they cannot prevent the crash caused by their monetary cancer, so they break out the old "controlled collapse" playbook to work it to their benefit.

Mon, 06/04/2012 - 13:33 | 2492591 Arnold Ziffel
Arnold Ziffel's picture

The "Status Quo" has taken home record high bonuses for three years now, Charles. I suspect they are not overly concerned with 'fixing' (aka, changing) anything.

Mon, 06/04/2012 - 10:49 | 2491888 q99x2
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If I were a country and I had an insolvent bank in me I'd close it down and lock up the crooks that ran it and begin printing my own currency. Done deal and if the banks threatened to get rid of my president I'd do it by referrendum. That's right create the bank of United States by referrendum. Then I'd walk around handing out pamphlets to let all the other countries know how to get rid of the banking parasites that they've been infected with.

Mon, 06/04/2012 - 10:49 | 2491890 Dr. Engali
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It's all good Obama is going to give us all $3,000 to my thingamajigs.

Mon, 06/04/2012 - 10:51 | 2491901 q99x2
q99x2's picture

He's already given to much of himself. He can take that thingamajig and shove it up his ass.

Mon, 06/04/2012 - 11:00 | 2491945 CommunityStandard
CommunityStandard's picture

I thought that's what thingamajigs are used for.

Mon, 06/04/2012 - 11:43 | 2492130 Winston Smith 2009
Winston Smith 2009's picture

"It's all good Obama is going to give us all $3,000 to my thingamajigs."

And that is fine by me.  Since we're not fixing anything by constantly bailing out with my money those who should have long ago gone bankrupt (banks and countries) give me something from that national credit card for a change.  Nothing I can do is going to change policies, so I might as well get some scratch from this game before it all goes to hell.  It comes to the point where it's "if you can't beat them, join them."  Amerikans are too clueless to insist upon the right course, so why constantly yell at the top of my voice at idiots watching American Idol.

Mon, 06/04/2012 - 11:49 | 2492143 DosZap
DosZap's picture

It's all good Obama is going to give us all $3,000 to my thingamajigs.

It's simply a GRASP at getting re-elected..................too little too late Kenyan mulatto.

Mon, 06/04/2012 - 10:59 | 2491944 Victor Berry
Victor Berry's picture

From a commoner's viewpoint, I agree that global debt will never be paid off.  It seems the only way to reduce the debt with minimal economic damage is for the world's central banks to buy each other's sovereign debt to the maximum extent practical then they zero out the balanced amounts.  For example, the ECB and BOJ zero out their U.S. debt holdings to match the Fed zeroing out their EU and Japan debt holdings.  The big problem is that China and its PBOC will get screwed royally unless they've issued substantial debt themselves.  Unfortunately, this reset of debt will probably encourage countries to restart deficit spending all over again.

Mon, 06/04/2012 - 12:19 | 2492269 NotApplicable
NotApplicable's picture

They have no desire to ever balance the books in such a way, as those debts represent leverage over other individuals under the thumb of their respective overlords. They've worked for far too long creating this system to ever intentionally remove it. Also, as you've stated, to try and do so creates even more imbalances, which isn't "fair."

So, they will take all of debt and make it the base of the next global debt currency (much like the Eurobond discussions of today). What has to happen first though, is to inflict enough pain that even the unfair outcome feels better than the torture now underway.

"Manufactured consent," as has been said.

Mon, 06/04/2012 - 11:00 | 2491946 DormRoom
DormRoom's picture

"Deleveraging is the process of the market discovering the true value of the asset underlying the debt and the difference between the debt and the proceeds of the asset sale being absorbed as a loss. "

Why Central Bankers will not allow price discovery to function.

 

Mon, 06/04/2012 - 11:00 | 2491947 kurzdump
kurzdump's picture

A sinking ship can't be fixed. The bulkheads failed to limit the flooding, and the vessel begins to sink. Time has come to look for rescue boats.

Mon, 06/04/2012 - 11:09 | 2491990 fnordfnordfnord
fnordfnordfnord's picture

"At least I have chicken."

- Leeroy Jenkins, ca 2006

Mon, 06/04/2012 - 11:12 | 2492001 Shizzmoney
Shizzmoney's picture

But wait, I thought these men saved the World?

http://www.thegoldstandardnow.org/images/stories/Time_Cover_Greenspan.jpg

Mon, 06/04/2012 - 11:17 | 2492026 Fix It Again Timmy
Fix It Again Timmy's picture

Apparently, there will be slumlords and the rest of us, unless ??? happens.....

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