Angela wants to Forge Closer Union

Off course Angela wants a closer union, she needs everyone to share the haircut that is about to take place, given that the European Banks are leverage somewhere north of 400 to 1.   And we thought it was bad in the United States, the banks thought that they were leverage between 16 and 20 to 1, when in fact they were leverage somewhere between 27 and 45 to 1.  It is my own observation that being leverage above 12 to 1 is approaching a rectal bleed.

In the United States it was all that toxic real estate paper.  In Europe for the most part (Except Ireland) it is all that toxic sovereign debt.  Much of this debt was gratefully acquired by the various banks in an attempt to be compliant with the Basel Conventions.  On paper it appeared better than holding cash reserves.

The mistaken assumption in the various Basel accords concerning Tier I debt.  You know the quaint thought that there no risk in sovereign debt, governments are rational, and they at least the European do not default on their debt, and the governments will not borrow money to support their life style, or operating expenses.  For we all know that modern responsible governments only issue debt to invest in infrastructure, and they have some form of levy to cover the expenses associated with the debt.

In the interest of fairness it was nice that the EU only required only the private banks to take the "Voluntary" 50 percent haircut on the Greek sovereign debt.  Remember dear reader that the Government of Greece did not institute this reduction, no it was done by the private creditors, the government creditor still expect and demand that they be paid in full.  The private creditors just have a few tens of thousands stockholders that are pissed, which is much better than have several hundred million voters pissed.

After all the management of the banks are safe, well as safe as anyone with their head in a guillotine is. Management typically controls enough stock in most occasions to control and keep their jobs.  Politicians on the other hand the situation is much more tenuous, they must remain popular typically with out regard to associated cost.  As evidence we provide Silvio Berlusconi.

There is an old saying that if you borrow a little money from the bank, the bank own you, but if you borrow a large amount of money from the bank you own the bank.

For sometime the Banks in Europe new that they were owned, and it took sometime for the bankers to convince the Politicians that the banks were owned by the debt that they held on their books.  And now it is time for the Politicians to break the news to the people.  This is really going to suck.

The Bankers think that they have an out, they can use the infamous "Nuremberg Defense" in that they were complying with the rules as provided to them by the various governments (Local, State, National, International)(Basel Conventions, local laws and regulations).   It did not work then it probably will not work now.

Pass a few conventions, laws and regulations and put the system on auto-pilot, or just not check on the baby from time to time, after all "All is Quiet on the Western Front".

To cite the title from a recent movie "There Will be Blood" it is only a matter of time.

Remember that all systems are self correcting, you just do not want to be around when they correct.


Angela just wants to spread all the pain around and she wants to be the spreader, remember that it more blessed to given than receive, the longer they wait the more the pain will be.

Take it to the Limit

This on going circus we call the United States of America is starting to sound like the refrain from an Eagles song.

“So put me on a highway
And show me a sign
And take it to the limit one more time”

As much as all of the crap that is taking place in Washington is turning my stomach, it is unfortunately obvious to even the most casual observer that the government will have to increase our debt limit.  But to the same observer it is also obvious that we (The People) cannot continue down this path of allowing the government to spend more than the government collects.

The following is a plot of Revenue and Expenditures per Person for the United States since 1980.  The curves are divergent.  The Great Recession of 2008 certainly did not help the situation all it really did was to accelerate the divergence between the two curves.

Real spending cuts must take place.  Real revenue increases must take place.  We the people have allowed our government collectively since 1981 to expend on average $1.20 for every $1.00 of revenue.  Some years have been much worse.

Source http://www.fms.treas.gov/mts/index.html

After the limit is extended, and the United States Debt offering is downgraded by the various rating agencies and the bond market starts to into the punishment phase of the market reaction.  This already appears to be baked into the mix.

How much of a haircut do we get to take?  It looks like 50 percent just to get to even, see the graph above.  So through some very arcane and macabre process we call the United States Congress, spending needs to be reduced, and revenue needs to be increased.  Is the gap closed by 50/50 split between expenditures reduction and revenue increases?  Is it a 75/25 split, or is a 25/75 split?  I have no bloody idea.  50/50 at first blush appears to be the fairest.

There are three things that we do know.  1. We will not close this gap via spending reductions alone.  2. We will not close this gap via revenue increases.  3. We will not be able to continue to fund this gap via the issuance of sovereign debt.

So Take it to the limit one more time, it might be our last.