EU Tries Herding Cats… Again, by Al Martin

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by Al Martin

EU Tries Herding Cats… Again

(10-26-11) An article called “New Euro 'Empire' Plot by Brussels” in the UK Telegraph reports that “European Union chiefs are drawing up plans for a single ‘Treasury’ to oversee tax and spending across the 17 Euro zone nations.

“The proposal, put forward by Herman Van Rompuy, the European Council president, would be the clearest sign yet of a new ‘United States of Europe’ -- with Britain left on the sidelines.”

It should be known that this Rompuy is a nobody and the position that he holds is almost a ceremonial position. The European Council has absolutely no power.

But what caused the rally in markets globally last Friday (Oct. 21) was that the IMF signed off on the most recent $8 Billion tranche of loans to Greece.

The concept of a United States of Europe is nonsense because it will never happen – but it should happen because it is the right idea. However it can’t happen because all the euro governments are so divided on the bailout issue.

You may have heard of the expression “herding cats” and that’s what the euro debt crisis is all about. To try to put 17 different governments under one economic policy roof is simply not possible even though all of these countries are all social welfare nation-states. You can’t them all under one roof so to speak because their individual national interests are still all different.

Sovereignty issues are invariably the political excuse that gets raised not to do anything because its sounds good to the Euro Unwashed, who are the Euro equivalent of our Working Class Republicans. They say -- we won’t agree to give up any of our sovereignty and that’s what we would be doing in order to have a single economic policy.

It’s the same issue everywhere, including in the United States. Establishing mechanisms, which are fiscally prudent, are always politically impossible. And that’s what Europe is finding out.

The emergency action plan announced by French president Sarkozy last week has now collapsed. The only reason he said it was to try to prevent equity markets from collapsing and continue to pull the wool over investors’ eyes and make them believe that the Eurozone could actually solve a crisis that it cannot solve.

Nobody wants to address one of the central problems. They have created a false sense of security in global equity markets and now even Nobel Prize winners are saying that global equity markets are now as overbought, relative to the planet’s economic situation, as they were anytime since 1929. The reason why they’re lying and they’re so desperate to kick the can down the road is to prevent global equity prices and related pricing in housing from falling further and ultimately falling back to reality. That’s what everyone is frightened of.

You may have heard about Sarkozy this weekend, when he nearly got in a fist fight with UK prime minister David Cameron about this issue of trying to hide from economic reality. Cameron was right because Merkel, Sarkozy and Berlusconi are effectively lying in order to prevent the onset of economic reality, which would result in global economic collapse, in order to prevent asset prices from falling to reflect the current reality.

So who are these investors that keep getting sucked into buying bad paper? It was the Northern European banks that keep buying Greek debt because their own governments kept telling them – don’t worry, the biggest haircut you’ll have to take is 21 cents on the dollar. That’s the plan they keep talking about which is now out the window. That’s the agreement they had, but all these agreements are meaningless now.

What’s propping up the market is that short sellers keep coming in – effectively waiting for things to fall apart. People need to understand that the Euro crisis is only going to get worse and is beyond any workable solution, a solution that is politically possible, in other words. Yet with every pronouncement, we’ve never seen such a market condition on the planet as we see now, where Euro news flows completely dictate the direction of equity markets – globally.

As we have mentioned on our daily trading line, every fresh piece of Euro news moves the S&P; 500 up or down 20 points. This is unprecedented. The markets are not responding anymore to how they have classically responded to news flows, economic calendar releases and earnings reports. This is normally what markets react to, but that has been hijacked by Euro news flows to which all the planet’s equity markets react.

But Joe Sixpack 100-Share Investor doesn’t understand. He thinks it’s absurd as Jim Cramer keeps trying to tell him on CNBC that the equity markets should be held hostage to what’s going on in Europe. But there is a reason for it -- because all the past economic collapses which have occurred on the planet in the past five centuries have started in Europe. It’s always been the tripwire.

Here it is in a nutshell. The only way the problem can be solved -- whether it’s politically possible or not – is through the formation of a European Superfund of about 2 Trillion Euros. That’s going to have to come from a cockamamie and absurd financing mechanism that would effectively create a super-senior layer of debt over all the individual European countries, over all the individual central banks as well as the ECB.

In other words, the EuroZone Super Fund would sel only Euro Bonds that would then be sold not only to public investors but back to European banks with some sort of underlying guarantee from the individual governments where these banks are located, Investors wouldn’t receive any guarantees; they’re just being told that they would.

There’s a new expression that we’re hearing from Nouriel Roubini (because the Europeans can’t even figure out what to call it) which he calls ultra super negative declining amortization of the same assets. Because the Europeans don’t have any money left.

So who would buy this stuff which sounds like more toxic worthless debt? Private investors globally bought up a variety of this stuff without even realizing it. That’s how the debt was sold. It was stealth debt that was put into money market funds who bought it up. Plus all types of US mutual and bond funds also bought it, unbeknownst to the investors that hold shares on those funds. Actually it wasn’t even stealth debt; it was stealth desperation.

This would be a layer of super-negative amortized debt to leverage up Europe. It should be remembered that the European financial mechanism of individual European nation-states have always been more highly leveraged in the post-war regime than has the United States or Japan’s balance sheet.

The reason why this tremendous leverage is necessary is because of the root problem, namely that social welfarism is a losing proposition. Median financial leverage among the 17 EU nation-states is 70:1. Remember that’s what got the United States in trouble in 2008 at the end of the speculative bubble. But 60 or 70:1 leverage is very normal in Europe. The reason they can do this is because of their ability to nationalize collapsed financial entities.

So why can’t this be done in the United States? Because we don’t have, under law, the types of mechanism necessary to act quickly to purchase collapsed financial entities. Of course this was done with Lehman Brothers but they had to jump through hoops in order to get that done. Furthermore it is an anathema to Americans who still believe in capitalism, even though it’s really more like corporate welfarism.

The bulk of the American people, the Great Unwashed, believe that the United States operates on a model of capitalism and free enterprise which they support. That’s what the majority wants and that’s what they have always been told and that’s what they have always believed. They are dead-set against any mechanism to nationalize assets.

Even though there’s social welfarism in Europe and corporate welfarism in the United States, it doesn’t make any difference to people what reality is. What’s important is what people believe reality is and what the people’s desires are. This is what makes it politically impossible.

Why is it that all these news-entertainment shows on Fox, CNBC, CNN, etc. that Working Class Republicans who have been hit the hardest by the collapse of the speculative bubble and the unwinding of the United States as it were. They are still believers in capitalism. They don’t understand that there’s not, as Ronald Reagan said, a trickle down mechanism, but there’s actually a trickle up mechanism. They just don’t understand that. That’s why you see the approximately 2 million Americans who are now living in tent cities called Bushvilles. Why? Because this belief system is actually a religion of the Unwashed and it has been part of the psyche since the formation of the nation.

The BOVOBS (Burned Out Victims of Bushonomics) don’t understand what’s happened to them, that Bushonomics has caused them to lose their home, lose their medical care etc This isn’t the fault of capitalism; it’s someone else’s fault. The Occupy Wall Street protesters are just using Wall Street as a focal point but they don’t understand reality.

But the only way this Euro Super Fund can be created and be workable is if you take all the leverage of all the different European nations (the EU) their median balance sheet leverage is let’s say 70:1. That has to be leveraged up because these nation states can no longer expand economic growth enough to service any more debt. Therefore you have to create a pan-confederated super debt entity above the 17 nation states that can issue more debt and that can leverage up that 70:1 by a multiple of five.

The problem is that the EU doesn’t have a mechanism to do this. That’s what all these Euro-machinations are about – the creation of a super-debt super negative debt issuance organization that could issue a whole new separate layer of debt under the guise of EuroBonds.

The reality of the Euro situation is that France and Germany are really the only two countries that matter, despite the talk of equality between all the Euro peripheral states Why? Because they are the only ones who have the ability to service their own debt and still service some debt of the other 15 Euro nation states.

The reality of the EU is that they’re trying to herd 17 cats.

The absurdity of it is they’re trying to create a 2 Trillion Euro Super Fund. So how do you raise 2 Trillion Euro, when you have 15 out of 17 nation-states who have economies that can not service their debt?

You create a Super Euro Debt Selling Agency above the 17 nation states that has the ability to issue its own Super Euro Bonds. Those bonds would then be guaranteed by all of the 17 members, even though 15 out of those 17 members can not service their debt. The guarantee would really be useless.

Then this debt or Super Euro bonds would be sold back to the European banks who would be the principal buyers of about 70% of it. The rest of the world would buy the rest. This is what they always do even though the individual investors who buy that debt, who are typically Joe Six Packs owners of some mutual fund, bond fund or money market fund don’t even know they’re buying that worthless debt.

Then this super debt selling agency would sell another 2-3 Trillion Euro in bonds. This has then effectively taken the 70:1 leverage of the 17 members. Multiplies you then have a 350:1 leverage of this new debt. That’s what would be necessary to create a 2-4 Trillion Euro super bailout fund.

This would mean that even a change of one-third of one percent of the underlying net asset values of those 17 Euro nation-states would mean that all of that debt would be technically worthless.

It’s all a grand fraud, but the only way that Europe can keep itself from becoming a collapsed financial entity is to perpetrate a fraud. It doesn’t have any other choices.

Actually it has one other choice, but that choice is politically impossible. That other choice is for all the European governments to tell their populace that they have followed a politico-economic model, namely social welfarism, which is fiscally corrosive and can not be maintained – and that they knew that from the beginning. They just sold this concept to the European people under the British concept, as Tony Blair used to say -- it’s not socialism; it’s just capitalism with a kinder face.

That’s nonsense. Europe has been trying to avoid economic reality You’ve got to have a population that’s poor and that’s the way it is And that’s the way it’s got to be. And the top 10% have to control the 90% of the wealth. That’s the way it works on Planet Earth.

The good news is that it continues to work even in an economically collapse environment because it can still be maintained.

It’s not that it works well. It’s a politico-economic model that works in all environments. And it will continue to maintain the planet even ion a post economically collapsed work. That is a successful economic model…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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