2902 What Pisses Me Off About Greece's Debt Crisis
Did you know: 80% of the bailout money went to European Union banks that were Greek bondholders, and not the Greek economy. The Syriza party and its leader Alex Tsipras won last month's general election in Greece with a pledge to write off half of Greece's debt New Finance Minister Yanis Varoufakis said "too much time, hopes, lives" had been wasted by Greece's forced austerity program. Stefan Molyneux discussed the Greece debt crisis, the role of the banks in creating this mess, the possibility of an outright default, the danger of derivatives, the destruction of the euro and how a Greece default could set off a global economic meltdown.
Hi everybody, this is Stefan Molyneux from Free Domain Radio.
You, myself, and the media and anyone with their passing interest and expertise in the realm of economics and finance remains focused on Greece at the moment because this tiny country of 11 million people with 0.4% of the world's economic output Why
is everyone so focused on Greece at the moment?
Greece has the capacity to take down the financial system, and this is what everyone is so concerned about.
Just a very, very brief overview.
If Greece defaults on its debt, which it has to do, the debt is 174 or 175 percent of gross domestic products going to have to default at some level.
Then what happens is all of the European banks and banks around the world which hold Greek bonds will have to take what's called a haircut.
They would have to lower the value of their holdings.
Now, some of these banks are leveraged 30 to 1, 40 to 1.
Which means that they are two and a half or three and a bit percentage points away in terms of loss of assets from going under.
This is how fragile this thin edge of incredibly leveraged finances are.
So what happens is most of the European banks have a requirement That they have assets that are worth 6% of their exposures.
It used to be 8%, but not enough banks were passing that test, so then it went down to 6%.
So what that means is if for every, say, million dollars that they lose in value, they have to unwind 18 or 19 million dollars worth of holdings.
And so this is why there's this huge sweep, this massive sweep that can happen, a whiplash effect.
So if European banks have to lower their asset base or count that their Greek bonds are worthless, they have to ditch or get rid of or sell off a whole bunch of other financial instruments, which causes a vicious cycle, insofar as when they sell these instruments, the price of them go down, Which means that whatever instruments they have in reserve that are of the same type also have to be lowered in value, thus triggering them to sell more of these assets which further lower things in value.
And this is how this whole house of cards could come coming down from this small country.
Now, derivatives are basically financial instruments that have no intrinsic value, but whose value is derived as derivatives, it's derived from something else.
So if I'm a farmer and I'm going to grow 100 acres of wheat, I can have a contract which says you are voluntarily going to enter into that contract to buy those 100 acres of wheat from me at a fixed price in the future.
This hedges me against loss, means that I can borrow, it's an asset.
And, of course, if the price of wheat goes very high, that's good for you because you can buy it from me at a lower price, sell it on the open market at a higher price, and if the price goes down, it's good for me because you have to buy them at the existing price.
You can only sell them at a lower price.
Now, Warren Buffett, the Oracle of Omaha, one of the most famous investors in the world, has called these derivatives financial weapons of mass destruction.
And derivatives are massive, enormous, titanic.
The world's GDP is 70 to 75 trillion dollars.
The derivatives and other associated financial instrument markets have been estimated to be, I mean, it's really hard, 710 trillion dollars or 10 times the entire GDP of the world.
I've heard double that in some areas as well.
Deutsche Bank, of course, the German bank's derivatives exposure is the biggest in the world at 75 trillion dollars, 20 times the size of the entire German GDP. Now, when the housing bubble burst back in the nightmare year in 2007, the total notional value of derivatives contracts around the world was about Sorry, $500 trillion.
And according to the Bank for International Settlements right around now, the total notional value of derivatives contracts has ballooned to a staggering $710 trillion.
And that is really astonishing.
It has this exposure of 75 trillion dollars, and that's about a hundred times greater than the 522 billion euros in deposits, five times the entire GDP, and as I said, about the same, five times the GDP of Europe, about the same as the GDP of the world.
And its leverage ratio is 3.1%, which means that it has Cents in assets for every dollar it has in contracts, liabilities.
And this is really what has been happening in Europe.
Greece essentially went bankrupt in 2010.
It received $284 billion in bailout funds since 2010.
92% of those bailout funds went to Greek and European financial institutions.
Only 8% reached the people of Greece.
So basically, it is yet another bank bailout.
They're too big to fail.
People wonder why the disparity between rich and poor tends to be increasing.
Because we've got this too big to fail.
If you reach this Elysium state of Ragnarokian, titanic impregnability, then you have, as the government or the central bank, whether it's the European Central Bank or the Fed or other central banks, they are the lender of last resort.
They will backstop, and therefore you're too big to fail.
When you're too big to fail, You enter into risks you otherwise would never have entered into.
And imagine if you're at a casino and all of your gains go into your pocket and all of your losses are covered by some shadowy entity at no risk to you, are you going to increase your bets or decrease your bets?
Of course you're going to keep increasing your bets, which is the central reason why this whole insane mushroom cloud of a financial system has grown this huge.
So, the bond bubble is $100 trillion in size.
Remember, it's a $70 trillion GDP for the world as a whole.
And the sovereign bonds, these are the ones that the EU doesn't want to restructure, are used as the senior most collateral, backstopping the big Eurozone banks' derivative portfolios.
The $12 trillion in collected EU nation sovereign debt is backstopping over €100 trillion in derivatives trades on the banks' Balance sheets.
And so that is pretty horrendous as a whole.
The reality is that the moment that the government...
Gains control of the currency, whether that's a local government or a geographical government like the United States or the European Central Bank.
The moment that the government is decoupled from the need to raise taxes to pay for services, in other words, the moment that the government can print money or massively borrow money and so on, The people are disconnected from the government, and the government can then promise whatever it wants and kick the can down the road and defer and defer and defer, which is exactly what has happened in the Euro and, of course, in America.
We keep getting promises of all this free stuff and free hell for those overseas, as in the American wars in Iraq and Afghanistan and police actions or whatever you want to call them in other areas as well.
Everybody's cheering and setting off the fireworks of nationalistic mad dog enthusiasm because they're not being sent a bill for the war.
If people were told, well, we want to start this war, we're going to send you a bill for $20,000, I bet you a few of those bottle rockets would find their way into the sewers rather than lighting up the sky in a mad abandonment.
An orgy of human destruction.
So the fact is that the government is able to promise all these things and kick the can down the road.
This, of course, is especially true when it comes to government union contracts and retirement plans, social security, and other kinds of backstops for human frailties, such as not saving.
But the moment that the government takes over the currency, it can print and it can borrow and it can defer...
And then it becomes beholden to the banks.
And this is horrendous.
This decoupling of democracy, responsibility, and accountability between citizens and governments is the foundation of what has happened in the EU. And that is horrendous.
There has been a 35% increase in suicides in Greece.
There are people going hungry.
There are over a million and a half people living below the poverty line in a population of 11 million people.
It is horrendous.
Of course, if Greece had been allowed to go bankrupt in 2010, which is actually what happened, then they would have had to restructure at the time.
It would have been internalized.
If they had been a Grexit, if they'd left the Euro, then they would be facing austerity imposed by their own government rather than externally, as they perceived by this Troika.
And they would have had their own sovereignty and their own decisions to make and people would have been scared from lending, scared about lending or scared off from lending to the Greek government for maybe half a generation or a generation, which would have been healthy!
It would have been hard, but it would have been at least relatively self-determined and the temptation to continue to lend would have been diminished.
And this is so important to understand That the European banks, by lending money to Greece, were propping up the value of Greek bonds, which protected their own asset base and therefore protected the entire financial house of cards, which is becoming more and more rapidly a mathematical and almost physical impossibility.
I think this is really, really important to understand.
I am not a...
I'm a terrible foe of fiat currency systems.
They take away all accountability.
Look, if you want government services, pay your taxes.
That's how it's supposed to work.
Don't kick the can down the road.
Don't sell off the unborn to foreign banksters.
Don't inflate the currency.
And in particular, that hurts the poor most of all.
And to a large degree, now that...
Europe is engaging in what used to be called counterfeiting and then was called inflationary money printing.
Now it's been called quantitative easing.
That, of course, those euros hit the north first and then hit the south later, which means the south gets the brunt of the inflation.
What is going to happen now is anybody's guess.
Everybody has been backed into a corner by a ridiculous and escalating series of entirely rational in the moment, like smoking your next cigarette and having your next heroin hit, entirely rational in the moment, but entirely destructive in the long-term series of decisions.
Will there be a purge of the financial system?
Will a delusionary species of Western Europeans and North Americans and others around the world End up returning to the fold of mathematical and physical reality and approximating the human necessary important goal of living within your means?
Well, that's going to happen sooner or later.
The question is, do we hit the ground with the landing gear down or nose first?
