It doesn’t matter how much milk you spill, just so long as you don’t lose the cow.
~ Mark Guilbeau
“Fair is foul and foul is fair.” (Macbeth, Witches, Act I, scene i) The EU is the latest hero in the bailout bonanza. A paltry trillion dollars bought a rip-roaring short-covering rally on stock markets world wide yesterday. So why don’t I feel all better?
Once again, we are perpetuating a cycle that’s running in reverse. In a capitalist system, we’re supposed to reward success and let the failures fail. To use the forest fire analogy that I’ve used before in my discussion of the CMHC and Fannie Mae, we’re still holding up the dead wood and choking out new, healthy growth. If we continue to reward failure, failure is what we’ll continue to get.
Welcome to the Money Pit
“Welcome back my friends to the show that never ends. We’re so glad you could attend. Come inside, come inside!” ~ Emerson, Lake & Palmer (I have been unable to get this song out of my head since Sunday evening.)
Against their own rules, the EU has now joined the dubious cabal of nations printing money to buy their own bonds and keep borrowing costs for profligate sovereigns down. Fannie Mae and Freddie Mac in the States are going to need more money – lots of it. The current version of the U.S. financial regulatory reform bill does nothing to address Fannie, Freddie, or the multi-billion dollar money pit that they represent.
Swap lines have been re-opened by global central banks (including the Bank of Canada) to ensure liquidity in the currency markets. That’s great, but it’s a sign that the system is in crisis – again. Even with the gargantuan EU bailout, Greece will still be in worse shape 3 years from now. You cannot solve a debt crisis with more debt.
The Spilled Milk Cycle: Capitalism in Reverse
With the ever-narrowing time lag between financial crises and the shrinking number of solvent entities whose pockets we can pick for spare bailout change, it feels like this cycle of capitalism in reverse has got to come to a climax sooner rather than later. Here’s a simplified recap of the Spilled Milk Cycle:
1. Debt Levels Climb: Consumers, businesses, and/or countries take on more debt while a small group of doubters warns that this will not end well. These folks are ignored.
2. A heavily indebted company or country gets into serious trouble and can’t make a payment on their debt.
3. The public is both angry and worried: They are angry about using public (taxpayer) funds to bail out people who acted irresponsibly, but worried that allowing the failures to fail will bring down the whole system.
4. There’s no sense crying over spilled milk: Since we are on the brink of a systemic failure, there is no time to point fingers, assess blame, or figure out what caused the crisis. We are all victims of the crisis. Instead of addressing the root cause, we use whatever means necessary to mop up or cover up the problem. Trillions in new debt are issued and those responsible are heroes!
5. Hearings & Investigations Leading Nowhere: We make a half-hearted attempt to figure out what caused the crisis by holding endless hearings. Each hearing is but “a poor player that struts and frets his hour upon the stage and then is heard no more. It is a tale told by an idiot, full of sound and fury, signifying nothing.” (Macbeth, Act V, scene v)
6. Business as usual: Keep the debt rolling. More bonds (debt) are issued. Older bonds are rolled over into newer ones. Next, it’s back to Step 1 and the milk spills again! Now who could have predicted that?!
Bienvenue Chez Ponzi!
Welcome to the house of Ponzi! It’s very spacious, and built on a large lot with lots of room for expansion. It’s constructed entirely of playing cards, and it can be yours today for a low, low price, $0 down, and 0% financing!
In an earlier article, I mentioned Hyman Minsky’s Financial Instability Hypothesis. As part of the debt accumulation aspect, he identified 3 types of borrowers:
1. Hedge Borrowers: can make principal and interest payments from current cash flows.
2. Speculative Borrowers: cash flows cover the interest due, but the principal must be continually rolled over or refinanced.
3. Ponzi Borrowers: cannot make principal or interest payments. The only way for them to stay solvent is to rely on the appreciation of the underlying asset. (Sound familiar?)
Many borrowers across the globe, whether they are consumers or countries, have at least become speculative borrowers. A growing number are headed for the house of Ponzi. The U.S., the U.K., and the P.I.I.G.S. (Portugal, Italy, Ireland, Greece, and Spain) must also be included in the latter category. It could easily be argued that Greece is already there and it’s not a stretch to contend that the global economy as a whole is starting to resemble a giant Ponzi scheme.
Unfunded liabilities mount daily. Successive financial crises are “solved” by issuing debt on top of debt. This is no more sustainable than your classic Ponzi scheme and it’s only a matter of time before the house of cards collapses.
Somebody Please Pick Up That Milk Can
So here we are with another can of spilled milk in front of us. Will we continue the cycle by rewarding failure? Will we kick the can down the road yet again, hoping that our children will somehow figure out a way to clean up the mess we’ve left for them?
It looks like that’s the path chosen by our fearless leaders. We’re in danger of losing the cow. We need to finally cry over this spilled milk if we’re to truly fix the problem. Please – No more hearings. No more bailouts. No more dead wood. Don’t kick the can. Pick it up and figure out a way to keep from spilling it again.
The markets are celebrating. Hooray for spilled milk! We’re at Step 4. I’m waiting for the sound and fury of Step 5, but under my breath I’m mumbling “Out, damned spot! out, I say!” (Lady Macbeth, Act V, scene i).
Update: I just finished writing this and found these articles that seem to echo my sentiments (without Macbeth & Ponzi). The difference is that Danielle Park and John Hussman know way more about this stuff than I.