Betting with Trillions: Prison of Debt Paralyzes West

By Cordt Schnibben

Part 3: A European Depression and a Pending Japanese Disaster

Because governments are in disagreement, bodies are taking their place that are turning into ersatz governments: the central banks.

The ECB's decision to buy up unlimited amounts of the sovereign debt of European countries is a replacement for political solutions for which there are currently no majorities in the governments and parliaments of euro-zone countries. The decision by the American Federal Reserve Bank to inject hundreds of billions of dollars into the markets again to stimulate economic growth results for the inability of Democrats and Republicans to agree on a compromise between limiting debt and economic stimulus programs. Printing money -- or betting hundreds of billions once again -- is the last desperate response on both sides of the Atlantic.

What began four years ago with the bursting of a credit bubble in the mortgage market is being combated with trillions of new debt, thereby inflating the next, even bigger credit bubble.

The fresh trillions circle the world in the search for yield, but only a small part of the money flows into the real economy, where investments in new production plants produce lower returns. Instead, the trillions slosh back and forth, from one financial market to another, from the foreign currency market to the commodities market, and from the gold market to the stock market and back again.

Because these trillions are not reaching the real economy, the risk of inflation is currently smaller than Germany's central bank, the Bundesbank, and its president would have us believe. But every saver and everyone with a life insurance policy pays for the central bank's low interest-rate policy with low interest rates. When central banks keep interest rates close to zero for long periods of time, which they have done for years, they disadvantage ordinary savers and favor major investors, gamblers and banks, which can borrow at low rates and invest the money elsewhere at a profit.

Blaming the Banks

Who and what has gotten the world into such trouble, and how can it extricate itself again? Not surprisingly, former Chancellor Schmidt blames investment bankers, the managers and bankers who flooded the world with worthless securities and long speculated on the sovereign debt of crisis-ridden countries, and who hedged their risks, which were much too high, with far too little capital and therefore had to be rescued with taxpayer money. Banks are still the focus of all problems in the financial markets. They still have to be supplied with money, and they still pose a threat to the system.

And those who allowed them to become so powerful are all those politicians and governments that gave the financial markets so much freedom, often socialized the risks, incurred too much government debt, and allowed the municipalities, states and countries to become so irresponsible. "The market" is not some group of experts, nor is it the last resort of collective reason. It is an orgy of irrationality, arbitrariness, waste and egoism. "Democracy" is not some event involving citizens, or some celebration of altruism and far-sightedness, but rather the attempt to bundle diverging interests into decisions in a way that's as peaceful as possible.

Together, the market and democracy are what we like to call "the system." The system has driven and enticed bankers and politicians to get the world into trouble, or least one could argue that if they too weren't part of the system. And we could sweep it away if we had a better one.

Instead, we are left with an undisguised view of the system. One of the side effects of the crisis is that all ideological shells have been incinerated. Truths about the rationality of markets and the symbiosis of market and democracy have gone up in flames.

The Problems of Modern Capitalism

The European depression is only prelude, with the Japanese disaster waiting in the wings. The country's debt-to-GDP ratio is 230 percent, and the government is dependent on the opposition approving the issue of new government bonds. Lurking behind it all is the American abyss, the debt drama of the next few months, the showdown and duel between Democrats and Republicans over which party can blame the other one for a national bankruptcy.

And then, finally, we have a clear view of the three biggest problems in finance-driven, democratically constituted capitalism: First, how can a debt-ridden economy grow if a large part of demand in the past was based on debt, which is now to be reduced?

The second major problem of modern capitalism is this: How can the unleashed financial markets be reined in again, and how should the G-20 countries come up with joint rules for major banks, which are their financiers and creditors, and for markets, which punish and reward these countries through interest? How much freedom do financial markets need to serve the global economy as a lubricant, and what limits do they need so that banks, shadow banks and hedge funds do not become a threat to the system?

Third, how do governments mediate between the power of the two sovereigns, how do they reestablish the primacy of citizens over creditors, and how does democracy function in debt-ridden countries? How can politicians react without burdening countries with more debt, and how can they reduce that debt? In fact, how can they even govern anymore in this prison of debt? In the past, future revenues were mortgaged, in municipalities, states and the federal government. This now makes it difficult to structure the present and the future. Today only about 20 percent of the federal budget is truly politically available, as compared with 40 percent when Schmidt was still in office.

It is always only at first glance that the world is stuck in a debt crisis, a financial crisis and a euro crisis. In fact, it is in the midst of a massive transformation process, a deep-seated change to our critical and debt-ridden system, which is suited to making us poor and destroying our prosperity, social security and democracy, and in the midst of an upheaval taking place behind the backs of those in charge.

A great bet is underway, a poker game with stakes in the trillions, between those who are buying time with central bank money and believe that they can continue as before, and the others, who are afraid of the biggest credit bubble in history and are searching for ways out of capitalism based on borrowed money.

Translated from the German by Christopher Sultan

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1. I warned about this in 1996 and 2007!
SHBasse 11/17/2012
It is difficult to get through with a understanding that differ widely from the "consensus reality”. One can of cause try to get a warning published as a ”sensational statement” but then the serious people will not take it into consideration, and it will be forgotten within days. The other option is to give a scientific explanation, but the social sciences are not very developed, and the existing scientific “schools” are inclined to dismiss anything that are not in accordance with their understanding and tradition. The third option available is to start from scratch building up a functioning "theory of science" system, thereby demonstrating that it is possible to come up with viable predictions within the social sciences, and then apply this understanding to the science of History. That is what I have done / published back in 1991 in the Danish treatise “Videnskaben, Historien og Fremtiden”, in english “Science, History and the Future”. (160 pages!) www.unifiedscience.blogspot.com Because my claim of a breakdown of our present old industrial economies were so “far out” (in 1991 – 1996 – 2007) nobody bothered reading the rather difficult reasoning that was needed in order to understand and especially accept a seemingly “negative” message! Furthermore said understanding also made it possible for me to come up with a solution to the problem – “The Idea Society”. Regrettably considering the end of the industrialized epoch (for the old industrialized economies) and a new flowering beginning is to most people of today more sci-fi than science! Here we are 21 years on and on the brink of a break down that eventually can lead to war between the "old industrialized countries" and the "newly industrialized countries" – an atomic war an electronic war - that might set the whole globe very far back. A very sad possibility when there in fact exists the possibility of a transition to a flowering new societal structure! http://unifiedscience2.blogspot.com/2011/02/single-algorithm-can-save-western-world.html The above article sets (for the first time) focus on the possibility that the crisis is not just a “business as usual” economic crisis but something very different and frightening new. http://unifiedscience2.blogspot.com/2011/02/deeper-causes-of-downturn.html Søren H. Basse Bornholm Denmark
2. "Elementary, Dear Watson!"
powermeerkat 11/17/2012
In the Western world politicians/governments who want to reelected have to promise a pie-in-the sky to a greedy electorates who never ask :'WHERE'S THE MONEY COMING FROM?" Since governments(unable to generate any weallth/jobs themselves) don't have any other monies besides thouse they manage to pull out of ther citizens' pockets - they have 2 options. 1. increase taxes (highly unpopular = no reelection) 2. increase DEFICITS. And that's what most WELFARE states have been doing for decades. Until, eventually, they've run out of OTHER PEOPLE's money. As a result, today we're finally seeing a RECKONING DAY!
3. Betting with Trillions: Prison of Debt Paralyzes West
KhanZubair 11/17/2012
Good to read thed etails. But to me writer also missed the crux of the matter. Unless interest and compound interest system which has totally infested all kinds of financial systems ( including capitalism) will not be replaced no remedy will prove effective in restoring the financial field. Setting aside the biases, hatred or differences why learned financial experts do not divert their attention at least to study the interest free financial system suggested by religion Islam. To my information Ahmadiyya Muslim Community has such details in a book titled, new world order" in different languages of the world. One can search for at "www.alislam.org"
4. "Why are democratic countries so pathetic when it comes to managing their money susta
aaallison 11/17/2012
See de Toquville (The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.), de Maistre (Every country has the government it deserves.)et al. Simply put, politicians in democracies, whether left- or right-leaning inevitably buy reelection with money they don't have.
5. Ponzi Scheme Financing
Durgan 11/17/2012
The whole article may be epitomized as one global Ponzi Scheme. Taking on debt by governments was/is considered as inconsequential by relying on growth to cover the shortfall.Growth is at a standstill and the recession has made income less, so the pundits have no choice except to feed the monster adversely increasing the necessity for more borrowing. Consumers are blindingly copying the same erroneous procedure thus increasing debt more. How long can the call of the piper be ignored? The consequences are obvious in many countries today. Misery for many and eventually social upheavals. For the uninitiated: A Ponzi scheme is a investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. If carried out by individuals or an investment house such procedure is considered a major criminal operation. But practised by government it is considered a legitimate financial vehicle. The sheeple are being hook winked and will eventually have to pay the price. Durgan
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