Be Careful What You Wish For

The Game is Rigged

By Mark E. Grant

Rick Santelli at CNBC asked the question and he asked me for a simple answer so I gave it to him. Rick wanted to know how Greece had raised almost $5 billion in a Treasury Bill auction and I explained; simply. The debt was almost entirely bought by the Greek banks, who are bankrupt and funded by the government of Greece through the EU and the ECB in various ways, and they pledged the Bills right back to the ECB and they got their money back. It was a Ponzi scheme of sorts, which I stated, which allowed the ECB to lend money to Greece through the Greek banks. Greece is out of money and Germany is deciding what to do about Greece so in the meantime the ECB funded the country. Rick went on to state that “the game was rigged” and he is one thousand percent correct; the game was rigged.

At least we didn’t have to listen to the Greek Prime Minister calling it a great victory for Europe like we did with the Spanish one but that may be the best thing that can be said for the situation. The ECB violated their rules and strictures and did it at the behest of the European Union you may be sure which only proves, once again, that the ECB is about as independent as a three year old is of his mother. You can say the three year old is his own person but I assure you that each and every mother on the planet would roll her eyes at you. This then is one of the main problems with Europe these days; there are laws and regulations that are defined to be exactly what the EU wants them to mean at any point in time so that there are in effect no laws and no regulations and just political expediency.

Fraud 

If IBM or GE or if Volkswagen or BMW did not include all of their liabilities on their balance sheet, did not include their promises to pay or their guarantees of other debt or their derivative contracts in their financial statements then they would be tried and found guilty of Fraud and the CEO and the CFO and the Board of Directors would all be in jail. These corporations live under the Law and the Law is that you have to disclose all of your liabilities and not just some of them. In Europe, for the governments of Europe when publishing their debt and their debt to GDP ratio’s this is not the case. They are not required and they do not include all of their liabilities when they give the public the data about their financial condition. This is why I keep stating that the European numbers are phony and I have tried to provide the real ones which is nothing more than counting what the Europeans do not wish to count. In each instance I included the regional debt that the government had guaranteed, the bank debt that the government had guaranteed, the corporate debt that the government had guaranteed and any derivative contracts that any government had taken on. I took all of the data from official sources such as Eurostat and the Bank for International Settlements. I then added up the numbers and divided that by the government’s official GDP and reached the result. There is no “Mark Grant’s opinion” in the numbers; I just counted what Europe does not wish to count or be held responsible for and that was it. Here is another case of “rigging the game” and it is accomplished by what would be termed Fraud for any corporation.

 “The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”

                                                       -John Kenneth Galbraith

Apples to Apples 

I am often asked about the United States and I am specifically asked about our future pension and Medicare payments. When I have calculated the real balance sheet of the European countries I have not included their corresponding pension guarantees or medical payments so I can honestly say that it has been an apples to apples comparison. The stated numbers for America are reasonably correct and our official debt to GDP ratio is reasonably correct and while you could make the argument perhaps about the debts of FNMA or Freddie Mac and some other quasi-government bodies the data would not change much because of the off-set of assets. Therefore, in my opinion, the official numbers for America are basically honest while the official numbers for Europe are not. 

In assessing the official European numbers you are likely to reach the conclusion that the European Union is in trouble. When assessing the real numbers it becomes obvious not just that they are in trouble but just how serious the trouble is now. Old debt is being replaced by new debt and the new debts are far larger than the old ones as exemplified by the calculations that I performed yesterday on Italy which will add $141 billion to the sovereign debt this year. The Spanish banks are into the ECB for record amounts while Greece with its massive borrowings at the ECB, the IMF, their Target2 participation and their direct loans from the Stabilization Funds is so far underwater that financially Athens is now buried ten meters under the Mediterranean Sea. Whether Greece is going to be handed another $50 billion in the next few months or whether Germany is finally going to cut the cord is a political question that is highly dependent upon the perceived reaction of the German voters but one way or another, now or later, Greece will eventually default because there is no other way out except debt forgiveness and I see that as a political impossibility in many countries. 

Europe hates the ratings agencies. These companies have two distinct set of Masters which are the debtors and the lenders or investors. The ratings agencies have been cajoled, threatened and debased but, in the end, they will arrive at ratings which will be disastrous for Europe. This will happen because the economic data will force it to happen and while it may be eventual; it will happen. 

Any scheme such as Eurobonds or any other artifice that produces a unified Europe where national boundaries fade away will result in an average rating for all of Europe at “A” or maybe “BBB+” and the cost of funding and standards of living will also revert to a mean for all of Europe. This is why Germany is in such a perilous state because they know this. You may disregard all of the rhetoric and the jargon; the people in Berlin do not wish to live like the people in Athens and that would be the certain outcome, over time, of blending the national debts. The nations with the money would be forced to disgorge and the nations without money would be the recipients and you would get a harmonized Europe but at a huge price to the wealthier nations who would no longer be wealthy. In the first instance money has rushed to Germany and a few other countries as the safest of the European places to stash cash but in the second instance money will leave all of Europe as influenced by rising debt levels and uncounted liabilities that will become due and severely weaken the national balance sheets and the balance sheets of the European institutions such as the ECB. The ECB may well be forced to print money or a number of other schemes could be employed but the cost to Germany, for any of them, will throw that nation into peril as they just do not have an economy that is large enough to support all of the troubled nations in Europe which is a growing list with each passing day. 

This is why I stated yesterday on CNBC that Europe will have a “Lehman Moment” and likely a number of them. The construct is a failing enterprise as the available European capital cannot support the combined debts and as real money investors pull their capital and stop lending because of the continuing deceit. You may be able to “fool some of the people some of the time” as Abraham Lincoln so succinctly put it but you cannot fool all of the people all of the time as I humbly nod to his sage wisdom. 

Wise men are instructed in reason;
Men of less understanding by experience;
The most unknowing learn by necessity.
Wise men do in the beginning what fools do in the end.