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Guest Post: The World Is Drowning in Debt, And Europe Laces On Concrete Boots

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

The World Is Drowning in Debt, and Europe Laces On Concrete Boots

Three metaphors describe Europe: drowning in debt, circular firing squad and trying to fool the money gods with an inept game of 3-card monte.

The world's major economies are drowning in debt--Europe, the U.S., Japan, China. We all know the U.S. has tried to save its drowning economy by bailing out the parasite which is dragging it to Davy Jones Locker--the banking/financial sector-- and by borrowing and squandering $6 trillion in new Federal debt and buying toxic debt with $2 trillion whisked into existance on the Federal Reserve's balance sheet.

It has failed, of course, and the economy is once again slipping beneath the waves while Ben Bernanke and the politico lackeys join in a Keynesian-monetary cargo-cult chant: Humba-humba, bunga-bunga. Their hubris doesn't allow them to confess their magic has failed, and rather than let their power be wrenched away, they will let the flailing U.S. economy drown.

Europe has managed to top this hubris-drenched cargo-cult policy--no mean feat. First, it has indebted itself to a breathtaking degree, on every level: sovereign, corporate and private:



Germany, the mighty engine which is supposed to pull the $16 trillion drowning European economy out of the water, is as indebted as the flailing U.S.

Second, the euro's handlers have already sunk staggering sums into hopelessly insolvent debtor nations, for example, Greece, which has 355 billion euros of outstanding sovereign debt and an economy with a GDP around 200 billion euros (though it's contracting so rapidly nobody can even guess the actual size). According to BusinessWeek, the E.U. (European Union), the ECB (European Central Bank) and the IMF (International Monetary Fund) own about $127 billion of this debt.

Since the ECB is not allowed to "print money," the amount of cash available to buy depreciating bonds is limited. The handlers now own over 35% of the official debt (recall that doesn't include corporate or private debt), which they grandly refuse to accept is now worth less than the purchase price. (The market price of Greek bonds has cratered by 42% just since July. Isn't hubris a wonderful foundation for policy?)

In other words, they have not just put on concrete boots, they've laced them up and tied a big knot. We cannot possibly drown, they proclaim; we are too big, too heavy, too powerful. We refuse to accept that all these trillions of euros in debt are now worth a pittance of their face value.

When you're drowning in debt, the only solution is to write off the debt and drain the pool. The problem is, of course, that all this impaired debt is somebody else's asset, and that somebody is either rich and powerful or politically powerful, for example, a union pension fund.

Third, the euro's handlers have set up a circular firing squad. Since the entire banking sector is insolvent, the handlers are demanding that banks raise capital. Since only the ECB is insane enough to put good money after bad, the banks cannot raise capital on the private market, so their only way to raise cash is to sell assets--such as rapidly depreciating sovereign-debt bonds.

This pushes the price of those bonds even lower, as supply (sellers) completely overwhelm demand from buyers (the unflinching ECB and its proxies).

This decline in bond prices further lowers the value of the banks' assets, which means they need to raise more capital, which means they have to sell even more bonds.

Voila, a circular firing squad, where the "bulletproof" ECB is left as the only buyer who will hold depreciating bonds longer than a few hours, and all the participants gain by selling bonds before they fall any further. This is the classic positive feedback loop, where selling lowers the value of remaining assets and that drives further selling.

As many have noted, soaking up all the Greek debt--a mere sliver of the eurozone's impaired debt-- would essentially wipe out the entire EFSF "stability" rescue fund.

The "solution" to the cargo-cult crowd is "obvious"--print, baby, print, and use that new paper to buy 3 trillion in mostly-worthless bonds. But that is just another circular firing squad, as Nobel prize winning economist Thomas Sargent noted: "There's a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11)

The 3 trillion euros comes of somebody's pocket, one way or the other; there is no free lunch.

Even worse, debt is the only engine of "growth" left in the developed world. This chart shows how America's "growth" since 1980 has been fueled by debt that expanded by 136% ($30 trillion) beyond actual economic growth. The same is also true of Europe, where Italy, for example, borrowed 1 trillion euros over the past decade or so in return for essentially zero growth.



This reveals the key dynamic of the past decade: the diminishing productivity of debt. What happens when an economy is so burdened by the friction of inefficiency and indebtedness that borrowing a trillion euros just keeps the economy barely above water? The next trillion won't even keep "growth" at zero, and the economy sinks beneath the waves.



The world has reached the point of debt saturation. Creating more debt no longer generates "free lunch" growth, even in China, though the central bank in China is still playing as if shifting debt off-balance sheet into a "shadow" system will fool the money gods. It won't.

Everybody in Europe is playing the same sort of games, hoping to fool the money gods and keep the "free lunch" economy "growing." While everybody focuses on the circular firing squad in Italy, untold billions of euros of impaired private mortgage debt in housing-bubble-popped Spain still sits on the books of Spanish banks at full value, lest a sneeze of reality send Spain's entire banking sector to Davy Jones Locker.

Though no official publicly admits it, nobody really knows how much debt there is in Greece, or who even holds it. Here's the fig leaf confession: "Scarce data makes estimates difficult." Yes, I'm sure it does. So the true size of Europe's debt is unknown because everyone with a stake in the charade is trying desperately to keep the true scope hidden. (Ditto in China.)

The debt will get renounced, and debt as the "engine of growth" will also be renounced.

Europe is an inept 3-card monte player attempting to swindle the money gods. The gods aren't fooled by such shallow shuffling games, in fact they are greatly annoyed that humans even dare to attempt such flimsy tricks. Their wrath is building, and human hubris will only make the reckoning worse.

My "On the Edge" interview with Max Keiser is now online. Fortunately for me, Max keeps the ball rolling and succinctly summarizes my rambling. Good fun in Paris--thank you, Max and Stacy, for the opportunity to spend some time with you.



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Mon, 11/14/2011 - 11:01 | 1875472 LuKOsro
LuKOsro's picture

European Union is going to be sooner or later a full-political union, with or without the perypheral countries. Meanwhile the still leveraged United States are at record low interest rates, at an interest service rate of 2.7 of its GDP and have yet to address the debt problem. Deleverage bithces! 


Mon, 11/14/2011 - 11:31 | 1875600 Zero Govt
Zero Govt's picture

be hard for the EU to be "a full-political union" when their politicians cannot agree on anything (had 14 meetings in 12 months but zippo agreed yet) and are fighting for their political survival with voters 

You wanna take a bet? ..i'm happy to take your money

Mon, 11/14/2011 - 11:45 | 1875660 He_Who Carried ...
He_Who Carried The Sun's picture

Exactly. This IS the time for change. Humans only learn by going through loads of pain and there will be a shitload of that. After all Charlemagne will be back! I could well do w/out that pain, but that is inevitable. Brace yourself and NEVER STOP!

Mon, 11/14/2011 - 11:58 | 1875724 kaiserhoff
kaiserhoff's picture

First, find someone who thinks of himself as a "European" rather than a Greek, a German, or a Swede.

Reminds me of Calvin Trillon, "Some things are so stupid, they could only be said by an intellectual."

Mon, 11/14/2011 - 13:24 | 1875998 He_Who Carried ...
He_Who Carried The Sun's picture makes the world go 'round and brains, usually lagging a bit, will follow...

Mon, 11/14/2011 - 14:12 | 1876139 kaiserhoff
kaiserhoff's picture

There is money to be made sharing a bank account with the Greeks, the mafia, the pope,...?,

Below Rome, down in the boot, 60% of the population is on "disability."  Damn fine work if you can get it.

Mon, 11/14/2011 - 14:57 | 1876286 He_Who Carried ...
He_Who Carried The Sun's picture

Who says they'd be invited to the party? Pain will force the weak out sooner or later... No quick fixes anywhere...

Mon, 11/14/2011 - 15:58 | 1876589 kaiserhoff
kaiserhoff's picture

You have me at a disadvantage.  I always have trouble arguing with a great set of tits;)

Mon, 11/14/2011 - 16:40 | 1876849 He_Who Carried ...
He_Who Carried The Sun's picture

Do not chicken out, do NOT give up. Where would this end...?

Mon, 11/14/2011 - 16:49 | 1876881 kaiserhoff
kaiserhoff's picture

It will end, sooner or later, with a Nordic currency union, and the southern nations going back to their own currencies, and relative isolation.  No one is willing to pay for the endless credit card bills of the south.

Mon, 11/14/2011 - 21:24 | 1877777 He_Who Carried ...
He_Who Carried The Sun's picture

I agree.

Mon, 11/14/2011 - 11:02 | 1875473 LuKOsro
LuKOsro's picture




Mon, 11/14/2011 - 11:03 | 1875481 RobotTrader
RobotTrader's picture

Too much debt?

Are we seeing credit contagion?


1) Dump gold and oil

2) Buy stocks like CRM with a 620 P/E ratio

3) Buy TLT and TIP

Another day where "Paper" rules over "Hard Assets"

Mon, 11/14/2011 - 11:08 | 1875502 GeneMarchbanks
GeneMarchbanks's picture

'1) Dump gold and oil'

Yeah, who needs oil anyway?

Mon, 11/14/2011 - 11:16 | 1875532 Magnix
Magnix's picture

"Dump gold..." ??? That is so retarded!

Mon, 11/14/2011 - 11:19 | 1875549 SheepDog-One
SheepDog-One's picture

RoboTarder is just mad he sold his gold around $1,000 if I remember right, said that was the top, and has been a very bitter gold basher ever since.

Mon, 11/14/2011 - 11:49 | 1875677 Long-John-Silver
Long-John-Silver's picture

If I remember correctly he purchased Nexflix with his Gold sale.

Mon, 11/14/2011 - 11:27 | 1875584 Savvy
Savvy's picture

Yes. And??

Mon, 11/14/2011 - 11:06 | 1875487 RemiG2010
RemiG2010's picture

Wasser! Wasser! 1 ... 2 .... 3 ... Emergency!

Mon, 11/14/2011 - 11:05 | 1875492 Future Tense
Future Tense's picture

Elliott Wave has created the best summary for the world's impossible debt burden.  The current Central Bank printing is only a drop in the bucket for what is needed and they are already facing political backlash.

Look for one more major deflationary fall in all assets before the great reflation.

Mon, 11/14/2011 - 11:59 | 1875645 Zero Govt
Zero Govt's picture

you should take everything you read from Elliott Wave, and Rob Prechter, with a pinch of salt ...make that a truck load

Prechter waxes lyrical non-stop about others stupidity, ignorance and bad timing but has a sorry ability at introspection and his own diabolical and incompetent performance

Prechter and EW have been the worst predictors of Gold and Silver for 10 years. 2010 was a complete wipeout (for him, Steve Dickberg and Jim Morontenz) calling for PM's and stock markets to crash and a rally in the US Dollar. Wrong on all counts every week of every month for the whole year

Yet Prechter is still flogging his book on how to predict Gold and Silver on his EW website using his totally failed (a whitewash of failure across every investment sector throughout 2010) Elliot Waves.. this calamity clown is either taking the piss or a complete fraud

Mon, 11/14/2011 - 11:08 | 1875501 TheSilverJournal
TheSilverJournal's picture

Not to mention GDP way overstates true production in the US. The main export of the US is the USD.

Mon, 11/14/2011 - 14:35 | 1876216 nohweh
nohweh's picture

AT least it is backed by bombs and bullets.

Mon, 11/14/2011 - 11:08 | 1875504 spanish inquisition
spanish inquisition's picture

So I read it as a each new $1.00 of debt now produces $1.40 of debt. We are all gonna be really rich if they can keep this up for a while.

Mon, 11/14/2011 - 11:08 | 1875505 Dave Thomas
Dave Thomas's picture

Does anyone know when Chapter Two of Creature from Jekyll Island was written? Was that in the original 1994 edition? When I read that in 2008 it made almost clear perfect sense. Now it's so easy to see why the can is continually kicked down the road. It's all in chapter two!



Mon, 11/14/2011 - 13:08 | 1875948 JR
JR's picture

I have the original 1994 version. Chapter Two is entitled: THE NAME OF THE GAME IS BAILOUT, complete with pictures of Nelson W. Aldrich, Henry P. Davison and Charles D. Norton, Abraham Piatt Andrew, Frank A. Vanderlip, Benjamin Strong and Paul M. Warburg.

Griffin describes the chapter as: “The analogy of a spectator sporting event as a means of explaining the rules by which taxpayers are required to pick up the cost of bailing out the banks when their loans go sour.”

Griffin’s book is prophetic, inspired if you will. As you say, he saw it coming…

Mon, 11/14/2011 - 11:12 | 1875506 bigdumbnugly
bigdumbnugly's picture

"Scarce data makes estimates difficult."

same reason i don't date women wearing burquas.

Mon, 11/14/2011 - 13:16 | 1875970 sgt_doom
sgt_doom's picture

The only two pieces of data necessary to fully comprehend everything:

(1) debt saturation

(2) labor deflation

Mon, 11/14/2011 - 11:13 | 1875516 Donlast
Donlast's picture

The gap between the calibre of the comment on this website and what runs in the mass media is an unbridgeable abyss.

On fears for social stability as one layer of reality after another is peeled away.  

I think this is what lies at the heart of Germany's stance - realism. They just do not believe in the solutions being proffered, most especially the ECB lender of last resort gimmick. 


Mon, 11/14/2011 - 13:21 | 1875990 sgt_doom
sgt_doom's picture

"...what runs in the mass media is an unbridgeable abyss.."

You mean the IMF's demanding that America do something about their Social Security (which has absolutely nothing to do with their national debt nor deficit spending)?

IMF target practise, anyone?

Mon, 11/14/2011 - 11:16 | 1875519 kito
kito's picture

Wrath? Did the author mention wrath? Where? I dont see it. I see the poor placated with generous public assistance and medical care, the unemployed getting 2 years of benefits, the 401, public pensioners and ira holders happy with stocks only 13 pct below all time highs, bond holders thrilled with treasury gains, gold holders thrilled with gains, underwater mortgage holders living free in their homes without fear of foreclosure, irish portuguese and greek citizens getting bailouts...what wrath??? Its a fucking joke

Mon, 11/14/2011 - 12:03 | 1875744 kaiserhoff
kaiserhoff's picture

True, all too true.  The only wrath is among the last few working stiffs paying everyone's bills.

Mon, 11/14/2011 - 13:23 | 1875996 sgt_doom
sgt_doom's picture

Those sane among us have to assume you are referring to North Korean slave laborers and those overworked types in China?????

Where they've shipped, and continue to ship (South Korean-American Free Trade Agreement --- tks, Prez Obama!) the jobs.....

Mon, 11/14/2011 - 14:15 | 1876149 BigJim
BigJim's picture

Central planning FTW! What could go wrong?

Mon, 11/14/2011 - 11:18 | 1875540 vegas
vegas's picture

Well said Chuck, and the image couldn't be any clearer than you made it.

great post TD.

Mon, 11/14/2011 - 11:25 | 1875576 slewie the pi-rat
slewie the pi-rat's picture

that first chart looks like a floating FX whack-a-mole game

are they beyond the 3-mile limit? 

can you imagine the fiat piles in that game? 

Mon, 11/14/2011 - 11:34 | 1875616 bill1102inf
bill1102inf's picture

"The world's major economies are drowning in debt--Europe, the U.S., Japan, China"


China has no debt , -1785

Mon, 11/14/2011 - 12:04 | 1875739 AbelCatalyst
AbelCatalyst's picture

Actually, the issue is there is little visibility into China debt...  Most of the debt is out in the provinces, in the shadow market, with very high interest rates.  I'm not sure the Chinese govt even knows at what levels the debt may be.  

Personally, I think China is a house of cards sitting on a hill with an approaching wind storm because there is a great deal of fear under the surface.  The culture seems to be one of high risk / high fear, which rarely ends well.  There also seems to be a lack of honesty, and corruption is fairly widespread, which also rarely ends well.  My guess is the culture does not handle shocks all that well, but we will not know until the tide goes out and we see what's just below the surface. 

Admittedly, I'm an outsider looking in and this opinion is not backed by actual numbers - in fact, there are no actual numbers on which to base any opinion, which is kind of the point.  

Mon, 11/14/2011 - 13:26 | 1876005 sgt_doom
sgt_doom's picture

I see, so you are suggesting they didn't offshore all those millions and millions of jobs (from the USA, Europe and Japan) to China because they AREN'T a super-rich nation?

Now, that is a good point.

Of course, since most foreign investment is focused on China, they must have SOME funds there, after all?

Mon, 11/14/2011 - 12:12 | 1875765 LibertyIn2010
LibertyIn2010's picture

...China has no debt , -1785

depends upon how much value you place on all those IOU's and foreign currencies they hold. 

Mon, 11/14/2011 - 11:40 | 1875643 kaiten
kaiten's picture

And so the printing orgy begins ....

Mon, 11/14/2011 - 11:46 | 1875665 PulauHantu29
PulauHantu29's picture

Hell Hole of Deflationary Downward Death Spiral....if I do say so myself.

Better start printing before it is too late.

Mon, 11/14/2011 - 11:52 | 1875695 prodigious_idea
prodigious_idea's picture

Perhaps the agenda (value?) of vague information and factless assurances by officials is an attempt to maintain an orderly market for disposal of investments.  Should the facts be revealed the sell-side of the market would swamp the other.  Not unlike the market dynamics that contributed to the rapid end-game destruction of LTCM.

Mon, 11/14/2011 - 12:01 | 1875733 common_sense
common_sense's picture
Mon, 11/14/2011 - 13:28 | 1876010 sgt_doom
sgt_doom's picture

Obviously, in a historically unique situation (after the ultra-leveraged run leading to the Great Crash of 1929, they didn't attempt another back-to-back run like they are now attempting), only a fool would dare to make a prediction.....

Mon, 11/14/2011 - 12:12 | 1875763 TheAkashicRecord
TheAkashicRecord's picture

Debt is a claim on future wealth stemming from future economic growth.  To the extent that the economy grows and this future wealth actually comes about, debt is not a problem (provided the amount of debt, the claim, can be matched by growth).  Problems arise when the claims exceed the ability of the economy to match the claim.  To mitigate problems and reduce business cycle volatility,  we have to stop claims on income (debt) from exceeding income. 

Because of biological and physical constraints, growth cannot continue ad infinitum, but debt does not, in and of itself, have constraints.  This creates a fundamental problem where the claims do not have a natural mechanism of contraint.  An interest rate which is not managed would play a part in creating a constraint; however, interest rate managment has become a political tool.  If anything, claims on future wealth are incentivized through things like tax incentives for debt financing, subsidization of "false growth" (debt-based growth) industry (ie. finance), and politicians who are incentivized over a very short time period.    

Ways to combat the problem -

  • end the tax incentives for debt financing (the "t" in WACC)
  • separate out economic growth from debt-based growth ("false growth")
  • end centralized management of interest rates
  • institute a 100% reserve requirement on demand deposits
  • ban all financial derivatives created that have a leveraged debt security as the underlying security

Many people accrue vast sums of money and political power through the "false growth" economy, so this will be a difficult to implement. 

Mon, 11/14/2011 - 13:29 | 1876018 sgt_doom
sgt_doom's picture

Sorry, dude, but the IMF permits no sanity.

Alas, I would submit the nationalization of the Federal Reserve, the top ten banksters in the USA, and reinstituting the financial transaction tax.

Mon, 11/14/2011 - 12:12 | 1875764 zonkie
zonkie's picture

It will be interesting to find out who holds all this debt, I hope the debt is also not circular - public -> banks -> sovereign ->.. 


Mon, 11/14/2011 - 12:16 | 1875775 flattrader
flattrader's picture

It is circular.  The questions are:  "Who will be left holding the bag when the music stops?" and "Who will the bag be thrust upon at gun point?"

Mon, 11/14/2011 - 12:14 | 1875772 panda
panda's picture

Anything from Japan?  What's the holdup?

Mon, 11/14/2011 - 12:16 | 1875774 mess nonster
mess nonster's picture

This is all a prelude to totalitarianism. Ultimately, there are only two solutions- smaller and more autonomous units, on the level of a German state, or a single giant, global State Socialism Central Planning Economy.

Hmmm, I wonder which way it will go? Small would work like this- European Unipn dissolves, then Germany, Italy and UK dissolve, back to original city-states and national units, (ex: Saxony, Florence, Wales).

Then US Fed Central Bank crumbles, federal power wanes, and States, even if still nominally part of a Union, exercise almost complete autonomy in internal matters.

The same happens for other continental-sized nations, Russia, Brazil, China.

Solutions to write off debt and restructure happen on small scale and in idiosyncratic ways, according to local customs and or political trends.

Bigger: The facade of democracy is crushed as European Union gains complete economic power over individual national units. "Occupy" movements in the US and elsewhere accomplish their "October Revolution" agenda- to topple national governments, traditional constitutions, and hand over power to a Communist Central-Planning Commissariat.

Debt is written off by Central Banks in return for guarantees of welfare for the masses administered by central planning bureaus in Washington, Brussels, Moscow, Rio, Delhi, Johanesburg, Canberra, and Bejing.

Any nation that asserts its independence will be bombed into submission. One global currency, one (very low) standard of living, and cradle-to-grave slavery for all, forever, or at least until the centrally allocated energy completely runs out, thus depriving the Global Communist Monster of its ability to survive.

Mon, 11/14/2011 - 12:28 | 1875813 koot
koot's picture

Chart 1 above lists 9 countries, the financial G9.  Every one of these countries have political governments and financial authorities hand chosen by self appointed Illuminati of Western Banking and Industrial Cartels.

This will end in collapse of course, collapse of empires like many before in history.  But this time it will be world wide and like Nial Ferguson correctly says "In my view, civilizations don’t rise, fall, and then gently decline, as inevitably and predictably as the four seasons or the seven ages of man. History isn’t one smooth, parabolic curve after another. Its shape is more like an exponentially steepening slope that quite suddenly drops off like a cliff."

America's 'Oh Sh*T!' Moment

Mon, 11/14/2011 - 14:37 | 1876221 OutofEQ
OutofEQ's picture

Where did he get his data from?   I think he is underestimating total US debt as a % of GDP.  If wonder if he is including intra governmental debt, state and local government and non financial non corporate business debt.  This would bring US debt to GDp to over 350% of GDP.   It would be useful to have his sources and the methodology: different debt analyses often use different methods that produce different results.

Mon, 11/14/2011 - 15:25 | 1876412 koot
koot's picture

Can't say where Mr. Smith got his data, but let us look at information from here:

Total US assets is about $78 trillion.  Divide that on all its liability and obligations both public and private and we get $15 trillion Fed treasury + $130 trillion US unfunded (SS, Medi, Prescription etc.) + $16 trillion personal debt + State $1.3 trillion + $1.7 trillion local debt = $164 trillion but not including Corporate or other debt. So percentage is 164/78 X 100 = 210%.  It is probable to believe that Corporate debt which includes banks is considerable, but not included.  Of course this number is not Total debt to GDP but instead Total Debt to Total assets, but just ask the question are assets in the US increasing?  Are debts Increasing?  So in all probability Mr. Smiths numbers are likely very low.

Of course the US could sell Yellowstone, State of California or perhaps the White House providing the new owner could evict current tennant, but no matter what kind of basic accounting used, the US has been swindled into bankruptcy and is finished.


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