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Smoke and Mirrors

Smoke and Mirrors

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Published by Ken Gibert
n May 10, 2010, in the early hours of the morning the news came out. The European Central Bank (ECB) and the International Monetary Fund (IMF) had established a line of credit for more than a trillion euros for countries struggling with debt. The markets went wild, and the Dow Jones Industrial Average, for example, rose over 4%. Here at last was the solution for the countries drowning in debt: blast them with a firehose of more debt. The only problem is that that did not save anything.
n May 10, 2010, in the early hours of the morning the news came out. The European Central Bank (ECB) and the International Monetary Fund (IMF) had established a line of credit for more than a trillion euros for countries struggling with debt. The markets went wild, and the Dow Jones Industrial Average, for example, rose over 4%. Here at last was the solution for the countries drowning in debt: blast them with a firehose of more debt. The only problem is that that did not save anything.

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Published by: Ken Gibert on May 13, 2010
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05/20/2010

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Smoke and Mirrors–Why the ECB Didn’t Save the World
On May 10, 2010, in the early hours of the morning the news came out. The European CentralBank (ECB) and the International Monetary Fund (IMF) had established a line of credit for morethan a trillion euros for countries struggling with debt. The markets went wild, and the DowJones Industrial Average, for example, rose over 4%. Here at last was the solution for thecountries drowning in debt: blast them with a firehose of more debt.That problem solved, the markets were free to resume their rise to the heavens, Obama was freeto turn his attention to the educational merits of video games, and everybody was allowed toforget about the tragedy unfurling in the Gulf of Mexico. Gold plunged as the hot money poured back into the equities markets.Just like the good ol’ days.Even while it was happening it lacked conviction. How could lending more money to countriesalready swamped with debt help them improve? And of course, as usual, the true beneficiaries of the money, the international banks, were never mentioned. Eventually people are going towonder why the banks, who make so much money by making such ill-conceived loans, shouldnever take a bath when the cows come home. Perhaps those concerns won’t reach the media untilthere are actually riots in more than one country.Under the smoke and mirrors, and behind the banking bailouts, are some problems that were notsolved by the ECB and IMF. The PIIGS (pronounced “pigs,” as they are derogatorily known)Portugal, Italy, Ireland, Greece and Spain are drowning in debt. On average their sovereign debtlevel is approximately 100% of their gross domestic product. The triggering factor for Greecewas that a significant quantity of their debts were due to be paid within the next couple of weeks.Of course it was never a question of Greece paying them off–sovereign debt is never paid off.Instead, it is “rolled over” into the next issuance of bonds. In other words, Greece was about toauction more bonds, and it did not look like anyone was going to buy them. That was going tolead to the catastrophe of sovereign default.And it would be–it will be–a catastrophe.This was deferred (and increased) by the addition of more debt. To this debt was attached thefirst of a series of demands for “austerity,” namely the reduction of government expenditure of all sorts. One could take a variety of positions on that, but anyone observing the situation wouldnot be surprised to learn that there have been riots already. And there will be many more if thegovernment actually does what it promised to do.The bigger problem was that the rest of the PIIGS were going to need the same slop coming upsoon. In order to prevent the problems from arising one after the other for the next six months,the ECB decided to solve it all at once. More hair of the dog that bit them. And in order to earnthe remedy, all these countries that have for the past ten or more years been living beyond their means are suddenly going to have to adopt austerity too. As I see it, the chances of that are slim, but if they did, there would almost certainly be large-scale riots. Because when the pensioners

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