Thursday, May 17, 2018

Italy collapse: not if but when

Debt based growth is never sustainable because debt is nothing more than the pull in of future consumption.  As long as you can find suckers to fund this it seems to be a great way to live a better lifestyle than is deserved relative to your own ability to produce value.  But sooner or later someone has to pay the piper.  Either the debtor must face austerity and consume less than they produce in the future in order to pay off past debts OR the debtor must default on past loans.  In the case of the former, the future is bleak because you don't even get to consume what you make in real time; you already consumed tomorrow's dinner yesterday and so today you work but you go hungry anyway.  In the case of the latter, once you default you become unloanable.  You might get to keep what you earn today going forward (assuming your creditor does not use military force on you to repay) but you will not find any creditors to help you over rough spots in the future and if you have gotten used to living a nicer than deserved lifestyle based on debt, all that will evaporate and it will feel like austerity anyway even though it is no worse than you actually deserve.

This is why debt should be avoided in any way possible.  Now, during the start of a debt cycle, those who do not take on debt will not grow as fast as those who do.   This is a damned shame because it encourages everyone to behave irresponsibly else the next guy will do it and he might use the influx of fake money to put you out of business.  But the last laugh in this matter is reserved for those conservatively run businesses which can survive the tilted/distorted playing field that temporary artificial wealth known as debt generates.

It is common knowledge that Italy was "saved" from sovereign BK by massive money printing at the EU level.  "Saved" is in quotes because nothing was saved; the collapse can was simply kicked down the field a bit.  Mish has been saying for years that one day a new political entity will arise in Italy which will promise to default on Italy's debt to the EU and that party will get elected.  And then Italy will default.

Mish's prediction is taking another step toward fruition of late with two new right wing populist parties growing in visibility and power over there (Five Star and Lega).  They recently made a deal between themselves to leave the EU and are threatening to demand a massive 250bn Euro debt forgiveness from the EU (i.e. from Germany and France).  Debt forgiveness by Germany and France is never going to happen because if Italy gets it, everyone will demand the same.  So if Italy wants to stop paying then it will just have to default.  One day, perhaps not this month or this year, but one day, that is exactly what they will do.

As a short reminder on the larger con game in play here, Twas a time when all the countries of Europe had their own individual fake money. They would borrow what were essentially overpriced goods from the producers of Europe (Germany and France) and denominate the debt in their own fake currencies.  When the debt got too high to pay they would simply inflate the currency in order to keep up with payments.  The producers therefore never received the buying power that had been originally agreed upon in repayment of goods thus delivered.

In order to try to fix this, Germany and France created the Eurozone and the EU.  With a single currency, they believed, debtors could not longer get out of full repayment using the scam of soft default via inflation.  In other words, they thought that they had their trading partners by the balls.  But the old school soft defaults via inflation were not done willy nilly; what could not be repaid simply could not be repaid.  Just changing the currency unit does not change this!  All it does is change the mechanism of default.

If we step back and look at this from the big picture, Germany and France took on massive debt in order to create big production capacity that it used to create exports.  But its customers could not afford the exchange rate that GerFrance was demanding for their goods and so a massive trade deficit was created.  This meant that Italy and others racked up huge debt to GerFrance.  But since that debt is unpayable it will not be repaid and so what is actually happening is an after the fact reset of the exchange rate between GerFrance and its customers.

At the end of the day, GerFrance and spit and holler but it needs its PIIGS debtors as much as the PIIGS need GerFrance.  If this were not the case then GerFrance would tell the EU to go pound sand and instead of exporting the goods they create they would consume them internally.  GerFrance thinks it has all the power in this relationship but that is a fantasy that will be exposed in the coming years.  When the PIIGS collapse, so will GerFrance.  Everyone in the world will be amazed, present company excepted of course.

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