22nd May 2012

Buyers Of Worthless Debt Keep Government Afloat

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Greece was bailed out yesterday. Or so the headlines blare. In reality all that will be happening at some point in the near future is that the European governments will give Greece enough money to pay back the European banks a portion of the money Greece owes those banks.

In exchange Greece agrees to retrench its public sector and raise more money from everyone else. As if that will ever happen. In other words this is nothing more than a public relations sham.

The secret to understanding what really is going on is to figure out who benefits from the movement of money. In this case it is the European banks. The European banks and their good buddies in their governments are hoping to keep alive the game of make believe, particularly the part where Portugal, Spain and Italian government bonds owned by the banks are not worthless.

What makes a governments debt worthless? If a country has a negative cash flow, meaning it spends more than it takes in taxes, and it looks as if that negative cash flow will continue in perpetuity, that country’s debt is obviously worthless. That debt will never be repaid except via printing more paper. What would you call debt that will be never repaid, except worthless?

Almost all of Europe other than Germany has a negative cash flow. That means that almost all of Europe needs to borrow more than it is generating in tax revenue.

As for yesterday’s deal, there is no benefit to Greece. The only thing I can see Greece getting out of this deal is that the Greek bankers and politicos are saving their butts at the expense of the rest of country.

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That brings us to the United States. The U.S. government is also spending more than it makes. This fiscal year the deficit will rise from $1.2 trillion to $1.3 trillion.

The current administration again wants us to believe that while the deficit will be up this year, next year it will drop. Of course, they have been saying this every year since the first explosion of money printing at the end of 2008. Since then the U.S. has created $5 trillion in new debts.

I personally do not blame government officials for doing what they are doing. If I could print money and use it to pay my bills I would do it too.

The real blame for delaying real change in the U.S., Japan and most of Europe goes to those who keep buying the phony paper being printed by central bankers. Only when the enablers stop buying worthless government debt can the economies of the U.S., Japan and most of Europe really reach bottom and we are all forced to restructure the way our governments work.