Panic in the New World Order

For the first time in my career, I see the

international establishment, sometimes called the New World
Order, facing a crisis so large that its very survival is
at stake. For the first time, these people are scared.

There are not many of them. In his book, “Superclass,”
author David Rothkopf estimates that there are only about
6000 people at the top of the pyramid of world power and
influence. They are mostly males, and at least a third of
them have attended America’s most prestigious universities.
Most of the others have attended comparable universities in
Europe.

The crisis in Europe is clearly beyond anything that
this generation of establishment leaders has ever seen. The
last time that anything like this faced the European
establishment, it led to World War II.

During the entire postwar period, the United States
has been the dominant force in the West. The United States
government through the Marshall Plan wrote the checks to
keep the European governments afloat, and it funded most
of NATO, the mutual defense system that was set up to
constrain the expansion of the Soviet Union.

The United States is no longer in a position to bail
out anybody. It is running a massive trade deficit, and is
running a massive federal deficit. Europe realizes now
that, from an economic standpoint, it is on its own. If
there are solutions to the European economic crisis, these
solutions are going to have to be generated inside the
eurozone.

BANKS AT RISK

Today, the entire banking system of Europe is at risk.
The banks are highly leveraged, and they have made enormous
investments at low-interest rates in bonds issued by
governments that are technically insolvent. There is no
possibility that any of these bonds will ever be repaid.
They were never designed to be repaid. They were designed
to keep the taxpayers of all European countries in
permanent bondage to the banking system.

Now, in a complete reversal of fortune, the banks are
increasingly dependent on the governments. The governments
are now the lenders of next-to-last resort to the
commercial banks. The central bank, of course, is the
lender of last resort. But today, the European Central Bank
has moved into neutral. It does not want to take action to
bail out Greece, Spain, or Italy.

The PIIGS governments that wrote the IOUs to the banks
in northern Europe are technically insolvent. When Greece
defaults, which it will, there will be enormous losses
sustained by some northern European banks. When Spain
defaults, which it will, these losses will get far worse.
When Italy defaults, which it will, the entire banking
system of Europe will be busted.

The only things that can save the European banking system
today are the European Central Bank, which has the power to
create money out of nothing, and the taxpayers of Germany,
whose national leaders are relentless in their desire to
expand the power of the eurozone over all of Europe. These
politicians are willing to write IOUs on behalf of German
taxpayers in order to extend this consolidation.

A DAISY CHAIN OF DEBT

The problem is, the Northern European governments do
not have any money to serve as lenders to Greece, Spain, or
Italy. They are borrowing money at rates not seen before in
peacetime Europe. These governments are expected to
intervene and lend money to the Greek government. But every
northern European government is now faced with the
additional responsibility of being the lender of
next-to-last resort to the large commercial banks inside
its own borders.

Who is going to lend northern European governments
enough money to bail out southern European governments?
Which lenders think this is a good idea today? At today’s
rate of interest, not that many. That is why interest rates
are going to rise. But when long-term interest rates rise,
that will lower the present market value of all of the
bonds in the portfolios of the lenders.

So, on the one hand, investors have to pony up the
money to lend to the governments, and the governments need
the money to recapitalize the banks in their own borders.
This leads to the next problem: in order for the lenders to
lend money to a government, they have to write checks on
their bank accounts. What happens if their banks should go
under? Who will lend money to the governments?

In this daisy chain of fiat money, credit, and debt,
the European Central Bank is the lender of last resort. It
is the lender of last resort because it has the legal
authority to create money out of nothing. It can buy IOUs
issued by governments, and it can lend money to banks, so
that the banks can buy the IOUs of governments.

DAYS OF RECKONING

The entire political system that we know as the
European Union is dependent upon a system of fractional
reserve banking which has overextended itself, and now
faces a day of reckoning. Actually, it faces two days of
reckoning.

First, there is a day of reckoning in the PIIGS
countries, when depositors withdraw funds. The second day
of reckoning is going to be imposed by the insolvent
governments who have been borrowing hundreds of billions of
euros from the banks.

The arrival of a bank run threatens the ability of the
Greek government to borrow money from anybody. The Greek
government is dependent upon the Greek banking system to
collect taxes. If the Greek banking system goes belly-up,
the Greek government goes belly-up.

In this system, only the European Central Bank has the
authority to bail out the system. Every other potential
source of euros is dependent on the solvency of the
European banking system. But that is exactly what is at
risk today.

This is why all fractional reserve banking must
ultimately rest on the monopoly granted by government to a
central bank. The central bank, above all, is the guarantor
of the solvency of the largest banks. The central bank is
the economic agent of the owners of the largest commercial
banks. These owners are now facing bankruptcy. They hold
shares in multinational banks whose lending officers had no
understanding of basic economics. They wrote checks to the
PIIGS.

In this scenario, the only way to save the system is
to risk destroying it. The only way to save the euro is to
risk destroying it. This is because there are only two ways
to save the largest commercial banks. The first way is by
hyperinflation. This will enable the banks to keep their
doors open, but the borrowers will be able to pay off their
loans by selling a handful of hard assets, which will raise
enough money to pay off the loans with worthless euros.

The second way to save the banks, which is what the
European Central Bank is attempting to do, is to avoid
hyperinflation, and to inflate the money supply only to the
degree that the largest banks can be bailed out by making
low-interest loans available to them. They in turn must
lend out the money, if they can find solvent borrowers, and
if those borrowers are willing to borrow.

If the European Central Bank adopts the second
approach, this is going to lead to a depression. The bank
has inflated. The commercial banks have lent money to
insolvent governments. These governments are going to
default if there is a recession, but by refusing to expand
the money supply, the European Central Bank will produce a
recession. The boom that it fostered in the Greenspan years
has blown up on European banks, in the same way that the
boom in the United States has blown up on America’s banks.

There is no equivalent of the FDIC in the European
banking system. There is no single government that has the
assets or the legal authority to lend to any and all of the
other governments. There is no common fiscal system, which
means that all the governments can run massive deficits.
This means that the governments are in constant competition
with each other to borrow enough money to fund their
deficits.

So, the system is stretched to the limits. The few
remaining lenders with capital who have enough money in
their banks to write checks to insolvent governments are
now refusing to write the checks. This is why Spain is
paying over 7% to get lenders to fork over their money.
Lenders who do this are going to wind up like the saps who
loaned money to the Greek government prior to 2010. They
are going to see the value of their investments collapse as
interest rates go to double digits in Spain, which they are
going to do unless the European Central Bank intervenes and
makes fiat money loans to Spain’s government.

WEEKEND SUMMITS

There is now at least one monthly emergency weekend
meeting of the political authorities, accompanied by their
bureaucrats from the ministries of finance. They come
together on a Saturday to talk about how they can save the
system. They issue a press release on Sunday. The press
release is always short on specifics. Within a month, the
crisis has escalated again, and there is another weekend
summit meeting.

Every time there is a summit meeting, the investing
public that has sufficient money to invest waits with bated
breath to see if there is some solution offered on Sunday
afternoon. There never is a solution offered, so the stock
market drops for the first day or two after the meeting.

It is clear by now to everybody that there is no
solution forthcoming. There is no agreement politically,
especially between Germany and France, as to who is going
to write the checks to bail out the next PIIGS government
to hit the brick wall.

I can remember almost 40 years ago listening to a
speech by a young hotshot economist at Yale, who informed
us that there would be a new currency system established in
Europe by the year 2000. This was an accurate forecast. It
was established in 1999. The hotshot later moved to
Harvard. He has generally disappeared from public view. But
it was clear from his enthusiastic speech that he was
convinced that this new currency system would create a
completely new economic order in Europe. Boy, was he right!

The new economic order in Europe is now
disintegrating. The establishment politicians, bureaucrats,
and spokesman are looking in horror as the system which
their predecessors designed to work permanently is
disintegrating. Not to put too fine a point to it, but this
is reminiscent of Adolf Hitler’s promise about the
thousand-year Reich. It lasted 13 years. This year, the
euro had its 13th birthday. So far, it has not had a happy
birthday.

NO FIREWALL

The leaders of European establishment have never had
to deal with any crisis on a scale like this one. They keep
talking of the need for firewalls. Until they have
firewalls, nobody is willing to yell “Fire!” Yet the fire
is now raging.

What kind of firewall can be created that keeps a
default by one government from becoming a default by
another government? What firewall is there for a large
multinational bank that has just lost half of the value of
the bonds that it purchased at a rate of 3%, now that the
interest rate is 7%? Every time the interest rate doubles,
the market value of the bonds decreases by 50%, minimum.

There is no firewall. The financial system of Europe
is interrelated by way of the euro. Everybody uses the same
currency in 17 countries. Everybody is dependent upon the
same central bank, and that bank is not exercising
leadership. The head of the bank keeps saying that the
governments have to step up to the plate and take
responsibility. Every time he says this, I am reminded of
what Ben Bernanke keeps telling Congress.

The heads of the two largest central banks in the
world keep complaining that the politicians have got to
take responsibility for solving the crisis. But this is
exactly what the politicians do not want to do. The
politicians have always understood that the central bank
would bail them out of their crisis, merely by creating new
money and buying the IOUs of the government. This has
always been the public justification of central banking.

The politicians seem blind to the real reason for the
existence of central banking, namely, to bail out the
largest commercial banks under its jurisdiction. The
European Central Bank faces an enormous problem: it has
under its jurisdiction the largest banks in every country
in the eurozone, other than Great Britain. It has to
intervene to save any large bank that is under its
jurisdiction, because if it does not, there will be bank
runs in that nation.

A BANK RUN

Depositors can go down to their banks and have money
transferred to a bank outside the country. Usually, this is
going to be a German bank. Legally, the recipient bank can
refuse to take a deposit, but what bank would dare not to
take deposits? Any bank that would say that it was not
taking deposits from any other bank would be sending a
signal to the media that the other bank is bordering on
insolvency. That is the last thing that any bank in
northern Europe wants to do with respect to any bank in
Greece, Spain, or Italy.

The European Central Bank is sitting on a powder keg.
The fuse has already been lit. That fuse is connected to
the Greek banking system. If the Greek banking system blows
up, by which I mean implodes, that will light another fuse.
The other fuse leads to Spain. I could be wrong. There may
be two fuses, one leading to Spain, and the other leading
to Italy.

There is no firewall. The only firewall would be for
banks in northern Europe to refuse to take new accounts
from people who were closing out there accounts in southern
Europe. But if they do not stop the bank runs from taking
place in Greece, the Greek government is going to default
on its debt and pull out of the eurozone. It will have no
choice. If its banks are collapsing, how will it be able to
fund its debt? How will it be able to collect taxes?

You can see what is at stake here. A small-scale bank
run has been going on for at least a year in Greece, and it
is now threatening to escalate into a full-scale run.
Northern European banks could refuse to take new deposits
in euros from existing depositors in Greece. But they would
all have to do this at once. If only one or two major banks
in northern Europe refuse to accept new accounts from
Greeks, this will send a message to all the other Greeks:
“You had better get your money out of your bank, fast, and
get it into a northern European bank that has not yet
closed off new deposits.” The bank run escalates.

Because not all of the banks are under the same
banking laws, and because no regulatory agency can tell
them what to do, Europe has a system in which depositors in
PIIGS nations can create massive bank runs against the
banks in their own nations.

There is no firewall against this. The bank runs have
begun in Greece. Banks outside of the eurozone can refuse
to take on new deposits, but banks inside the eurozone
cannot do this without threatening the survival of the
entire banking system. Furthermore, if they do not create a
firewall, the collapsed banks of Greece, Spain, and Italy
will lead to the bankruptcy of their respective
governments, and that in turn will lead to massive losses
in northern European banks.

You do not see a detailed discussion of this in the
mainstream press, for very good reason: the mainstream
press is afraid of being blamed for triggering a bank run
out of Greek banks. Everybody in authority knows a Greek
bank run has begun, but this is not front page news. It is
certainly not a story on the evening television news shows.
Maybe “The PBS News Hour” will bring in two or three
experts to discuss it, who will offer rival views, but the
network news will not talk about the Greek bank run until
it is in its terminal stage.

So, the people who run the new European order sit
there, helpless, completely dependent upon decisions made
by depositors in Greek banks. At any time, a wave of fear
could spread through Greece, and a majority of depositors
will start lining up to get their money.

If they take out their money in currency, this
collapses the local bank, which has to sell assets to buy
the currency from the European Central Bank in order to
hand the currency to the depositor. That kind of bank run is bad
for a single bank, but usually depositors spend the money.
When a depositor spends the money, the business that
receives the money redeposits the money in its bank. So,
a bank run into currency is not a huge threat to the Greek
banking system as a whole.

In contrast, however, is a bank run in the form of the
transfer of digital money out of the country. All of the
Greek banks are facing this threat today. Once the euros
leave the Greek banking system, they are not redeposited in
the Greek banking system.

What we are seeing is the collapse of the Greek
banking system. Unless the European Central Bank intervenes
again, by the end of the year, there is not going to be a
Greek banking system. All of the banks will be busted.

There is nothing that the Eurocrats can do about this.
The only agency that has the power to stop this is the
European Central Bank, which can do whatever it wants to
do, ultimately, which means lending money to Greek banks
based on any collateral they want to put up, especially
IOUs issued by the Greek government.

CONCLUSION

Angela Merkel can scream, yell, and hold her breath
until she turns blue, but ultimately she has no power over
the European Central Bank. Ultimately, no politician has
any power over it. No politician really wants power over
it. Why not? Because that politician would then be
responsible for coming up with the money that the European
Central Bank was about to come up with, but which was
stymied by the politician.

This is why the European Central Bank is going to
inflate, inflate, and inflate. The head of the bank can
make all the comments he wants about the responsibility of
politicians to intervene to keep the structure going, but
he is ultimately the bagman of the system. He is the guy
who has control over the printing press. He is the only
person, along with his colleagues, who is in a position to
keep the system afloat.

There is no firewall. There is only the ability of the
European Central Bank to create money, and to do so by
lending it to commercial banks or directly to governments.
It does not matter what kind of rules and regulations are
in place that were supposed to prohibit this back in 1999.

In the midst of a conflagration, nobody in power is
going to point a finger at the European Central Bank when
the bank intervenes to bail out a government that is about
to default on its debt. The reason is clear, or at least is
clear to me: no politician wants to be responsible for
coming up with the money to bail out the largest banks in
his country, all of which will be threatened with
insolvency because of the default of Greece and Spain,
because that will produce a domino effect by all of the
PIIGS governments.

Source: http://thepoog.com/?p=2603