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by Al Martin

Collapsonomics (Part 6): Where Will Global Collapse Begin? The Same Old Place...

(3-28-13) As has always been the case in the past, global economic collapse will once again be triggered through a European event. Why? Because Europe, fiscally speaking, has never really recovered from the Dark Ages.

      It sounds strange to say that, but they never really have. European prosperity really peaked during the so-called Baroque Era, during the early times of the great Hanoverian trade guilds of Northern Europe. That’s what really brought back prosperity to Europe after the Dark Ages and into the Middle Ages.

      Unfortunately Europe has never been able to establish a real trading system that has been able to last amongst the various European nation-states. Also their constantly competing interests and their political need to protect their own nation-states has ensured their political, economic and military divisions.

      Actually these were city-states, but first they were Hanseatic and then Hanoverian guild that really brought prosperity for the first time to Europe because it was an organized trading system with a common currency. We forget but the “Euro” has been tried once before during the times of the Hanseatic guild, when everyone effectively came up with minting trade coinage of the same weight and same denomination in order to facilitate trade.

      The problem is that Europe has never had the ability to regenerate lost resources which have been lost through the endless wars that have been fought in Europe. And they don’t have the ability to generate trade amongst themselves that is sufficiently profitable to improve their fiscal situation. They have had to consistently rely on foreign trade, but the only two nation-states that have been successful in being able to rely on foreign trade have been France and Germany. None of the European nation-states have ever been successful because in effect, particularly in the Southern and Benelux states, they have never really mechanized and that’s true to this day.

      It’s true that the European nations became colonizers and builders of empire because that was the only way they could survive. But even as empires they were never particularly prosperous because they still attempted to rely on what’s called an imperial or close trading system. When that all fell apart in the last century, Europe was never in a position to compete in a global market – and still is not to this day.

      Also they won’t give up on the fantasy and therein lies the real problem, certainly in the last century and a half. They refuse to give up on the utopian fantasy of social welfarism.

      The reason why social welfarism is increasingly being strengthened is because Europe has fought more wars, since the greatest and bloodiest conflicts have occurred after the social welfarism dalliances. The Europeans have this belief based on their bloody history and the amount of suffering that their bloody history has caused that the Europeans have some “natural” entitlement to that 2000 Euro a month check.

      Why? Because a place that has had almost two millennia of uninterrupted warfare eventually reaches a point where the notion of some sort of utopian fantasy and politico-economic model becomes increasingly appealing. The problem is that their treasuries have never been able to support it.

      The genesis of the European problem is the same genesis of the problem faced by all countries in the industrialized world, namely the refusal to control population growth. If you do that and you want to sustain the socialist welfare system, then you have to make sure the system is funded and is not an unfunded system, which is what social welfarism is.

      The Europeans are still attempting to maintain this utopian ideal and it is something they cannot maintain endlessly because they have driven themselves into such debt. If you look at the EU in its entirety on a per capita basis, then the per capita debt of the EU exceeds that of the United States -- by at least three times. That’s because all of their social spending is essentially unfunded. This means that the money for it comes not from specific or segregated tax levies, but from the general tax levy.

      The problem of maintaining a high level of social spending from non-targeted or non-segregated tax flow and instead letting it all come out of general tax levies is that you’re forced to continuously increase general tax levies, as both the value of your currency declines, inflation increases and the total number of your population also increases. Why? Because social welfarism is nothing but a giant pyramid scheme.

      The principal difference between social programs in the United States and Europe is that in the United States, they are funded by direct taxation and by a direct and segregated flow of tax revenue. Social security for instance is funded by FICA. That system was not developed anywhere else on the planet. That idea of funding from segregated tax revenue streams for social spending has only been done in the United States.

      What makes every other social program on the planet ultimately unsustainable is that it comes from general tax levy, which is like a cyclone vortex slowly getting sucked into a bottomless abyss -- because you continuously have to raise taxes to support that system and when you raise taxes you deplete capital formation in your own countries.

      The reason why Europe had to have a strong central bank like the ECB (European Central Bank), which has much more sweeping powers than does the Federal Reserve or any other central bank, is because governments which are members of the European Union have to consistently turn to the ECB to borrow money.

      There is no such system in the United States, where the US government or the US Treasury Department continuously goes to the Federal Reserve to borrow money. That system doesn’t exist in the United States.

      That is the reason why every time a shoe drops in Europe, so to speak, the ripple effects are felt immediately in global markets. Yet you do not see that same impact when a US or Asian shoe drops. You do not see that immediate ripple effect. Why? Because everyone who trades every day is aware of history. In other words, if a cascade or domino effect is going to be created it has always been created in Europe in the past.

      Now there is no risk of contagion from Cyprus and there never really was because in the last analysis the Cypriot government had no choice but to give in to EU demands – which is effectively what they’ve done because they didn’t have anywhere else to turn. The Russian factor wasn’t ever really in play. It’s all about money. Russia was never interested in establishing a naval airbase in Cyprus and the Cypriots tried to play that as a card.

      With Russia it was pretty simple. There are two groups of Russian mobsters. There’s Uncle Vlad (Putin’s) chums and Uncle Vlad’s enemies. That’s the way to look at the Russian mob. Now all the Russian mobsters who were Uncle Vlad’s friends already had their money out of Cypriot banks. The only Russian mobsters that still had what turned out to be about 30 billion Euros in deposits in Cypriot banks were enemies of Uncle Vlad. Now they’re going to take a 40-70% haircut.

      All of the mobster friends of Uncle Vlad who had gotten all of their money out about two weeks before this all happened because they got the word from Uncle Vlad.

      It’s just like being a member of the Bushonian Cabal. If you’re a member of the Cabal you get that phone call every time there’s a Bushonian pump and dump stock deal. It’s no different with friends of Uncle Vlad. They get the phone call too. But those who aren’t the friend of Uncle Vlad – they don’t get the phone call. So why should the Russians pour more money and spend more Russian state funds to bail out people who are not friends of Uncle Vlad?

      The only thing the Russian government got invested in Cyprus is the 2.5 billion euro that they lent the Cypriot government about five years ago – which the EU is now going to have to guarantee. So the Russian government gets out of it with the whole skin. Russian mobsters who are friends of Uncle Vlad get out with the whole skin and those who are not friends with Uncle Vlad get a haircut. It was a smart political move and a good message to send, reinforcing the concept that if you’re a Russian mobster, it’s better to be a friend of Uncle Vlad. Just as like when you’re a wealthy Republican, it’s better to be a friend of George Bush.

      This is the reason markets get roiled every time a shoe gets dropped because if there’s going to be a contagion effect, it’s going to come out of Europe. It’s not going to come out of United States or Asia.

      Europe will be the most likely tripwire that will be the final straw that breaks the camel’s back as they say, said camel being the global economy. Europe is still in recession. Its GDP is still declining and will decline again in 2013 and will decline again in 2014. Its population growth is also declining, something which it can ill afford to do wherein its social spending is effectively a pyramid scheme.

      The problem is that Europe cannot really compete in the world of high-tech production or exports. They can’t generate the internal capital formation necessary to sufficiently modernize their plants and industry and to run it as a cost effective structure.

      Another problem with social welfarism is that the inordinate rules and regulations that are heaped on top of business and industry are such that business and industry are uncompetitive which is largely what’s happened in Europe.

      Germany is often touted as being the Euro export power house, but it should be remembered that 70% of German exports go to other European states, which have to have subsidies to be able to afford those exports.

      In conclusion keep watching Europe. The Cyprus bailout is done for now. It’s just crossing the t’s and dotting the i’s. The next to come – probably by the end of 2013- is that Slovenia will collapse and Croatia will collapse. The real question then becomes – how far can the ECB stretch its balance sheet in playing this endless shell game?

      What effectively collapsed the Cypriot banks is when the ECB put the arm on them to buy Greek bonds that weren’t worth anything. Thus the ECB is playing a giant shell game. In order to continuously expand their balance sheet, they have to make sure that there is a market for Euro Bonds, ECB Bonds, and Bonds of the individual euro sovereign state etc.

      That external market for that debt is diminishing, falling at the rate of about 10% per annum. Those buyers have to be replaced. The European citizenry themselves won’t touch the Bonds because they know that they’re probably going to be worthless. Therefore what you do is get the remaining members of the EU that are still solvent to buy sovereign bonds that you know are going to become worthless. Then that takes Country A down the tubes, which then has to be bailed out. And how you bail them out is by issuing a lot more bonds that now you’re going to get Country B and C to buy, which will also in a year’s time be worthless.

      It’s a race to the bottom because they have no choice. The Europeans are attempting to hold together something that can not be held together, something that is fiscally corrosive and unsustainable, to wit, social welfarism.

      Europe will collapse unless they are prepared to give up social welfarism because it doesn’t work. They have to admit the truth but it’s politically impossible for European governments.

      The reason why there are riots every time a country falls apart is because the Europeans have come to believe that social welfarism is some sort of entitlement but entitlements have to be paid for and that’s something that’s never been done. If you’re going to provide a 2000 Euro a month social security check to everybody 62 or 65 or whatever in Europe, then throughout their working lifetimes, you have to have a 6-7% withholding for that in order to pay for it. The system for funding social spending by making the recipients of those social benefits pay for it throughout their working lifetimes through segregated tax revenues has never been done.

      If you’re going to fund everything through general tax levies, then every 35 years, income tax rates have to double. In order to prevent that from happening, what the Europeans have done is they’ll try to increase taxes on fuel, liquor, and tobacco because they know nothing sticks out in people’s minds and nothing hits people in the face like an increase in general taxes on income.

      Look to Europe for what will trigger the collapse because it has always been so in the past.

    * 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," ( 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, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

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


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