EURO CRISIS AND THE EMERGENCE OF SUB-CAPITALISM

EURO CRISIS AND THE EMERGENCE OF SUB-CAPITALISM

After the recent events in the crisis of the Eurozone, the following remarks can be made:

The creation of European Financial Stability Facility (EFSF) to help stabilize European countries is not the answer. The creation of a special purpose vehicle (SPV) that adds more debt and the ring fencing of sovereign debt crisis of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) is a mystification of a deeper problem. The crisis is not just a crisis of the PIIGS; it is a crisis of the Western capitalism.

The debt of Italy (3rd largest economy in Europe with 20% of the GDP) is bigger than anyone can imagine. In this crisis of the euro, the central issue is structural and politic: the European monetary union cannot survive with out political and fiscal union. This is the spirit of the treaty of Rome signed on 25 March 1957 by Belgium, France, Italy, Luxembourg, the Netherlands and West Germany.

In the case of Greece, either voluntary or non- voluntary, it will default on its debt. The default will create a “credit event” in the $ 30 trillions sovereign credit default swap (CDS) market. The Greek government bond market is $480 billion and the CDS on these bonds is $3.7 billion. With 50% haircut the payout should be $1.85 billion. Financial institutions will loose the other $1,85 billion. We know that 50% haircut will not be enough to save Greece, but the European leaders should not try prevent this payout for 2 raisons: it is small and a non-payout on Greece CDS will seriously hurt the credibility of the sovereign debt market.

Recapitalization of banks is another wrong answer. European banking system is over leveraged at 26-to-1. We are not far from a Lehman Brothers scenario. This former US financial institution was over leverage 30 to 1. It will be a disaster if asset prices drop at a small 4%. In a healthy economy, banks play a strict role of intermediation. The West and the world are in this economic disaster because banks moved away from the role of intermediation; this is why the wealth of human society is at risk. The West has a problem of wealth creation, but Banks do not create wealth they take it.

The severity of this crisis combine with the environmental issues is creating a new type of risk: The existential risk; symptom of the destructive character sub-capitalism. Capitalism is a process of construction. It is based on the respect and preservation of the environment, creation and accumulation of wealth not debt. Vast accumulation and impossibility to repay the debt is a symptom of the emergence of sub-capitalism.

The world is now divided in 2 categories: surplus nations and debt nations. The BRICS symbolized the surplus nations and 2 of the members are communist states: China and Russia. China bought close to $ 2 trillions of US government securities; it did not prevent the recession in USA. There is no reason why the result should be different if China buys the European EFSF.

The euro needs help from China, but the Chinese currency (Yuan or Renminbi) is not an international currency. The IMF Special Drawing Rights (SDR) is currently composed of the US dollar, British sterling, the euro and the Japanese yen, but not the Yuan. It is certainly time to restructure the international monetary system.

Italy is a debt-nation. With 2.63 trillions Euro in debt, Italy is the world’s fourth-largest debt-nation, behind the U.S, Japan and Germany. Italy’s 10 years note yield is excessively high at 7.41% and the spread on five-year Italian credit default swaps (CDS) is close to 600 bps. It could cost $600,000 annually to insure $10 million of Italian debt for five years. $200 billion of this country $2.63 trillion debt loads will mature in 2012 with a Debt/GDP ratio expected at 120% or more. After more than 30 years of debt-fueled boom and development of consumer market, it is time to repay the debt. But, Italy will not be able to pay its debt. It is not possible to repay a debt when revenues are not generated and wealth is not created.

The euro crisis is a structural problem and a failure of political leadership. The Persistence and the inability to resolve the European debt crisis displays all the symptoms of this new form of capitalism in USA and Europe: sub-capitalism. In both continents the austerity measures are made to pay back the same banks and private investors who are at the origin of this crisis. Austerity measures will lead us to one of the key symptom of sub-capitalism: cut-and-dry-privatization (CDP). In the capitalist society, privatization is an endogenous process, element of the organic creation and development of wealth in the complex fabric of human solidarity. The role of a healthy financial industry with strong ethic is very important in this process. Cut-and-dry privatization, symptom of sub-capitalism is a legal and political decision to transfer wealth to an individual or group of people and weaken the fabric of capitalist society.

There is a paradox in the austerity measures. For example, in USA Politicians, legislators and private companies are cutting employment, health care, education, social assistance…etc., but Tax loopholes for corporations and wealthy individuals are not affected by these cuts. U.S. multinational corporations avoid about $100 billion annually in taxes. In 2008, the tax subsidies for 280 companies was $61,4 billion, $76.2 billion in 2009 and $85.1 billion in 2010. In 3 years, we have a very big number: $222.9 billion. The people of USA and Europe must repay the debt, but not the corporations. This paradox created an imbalance and disturbs the stability of the American and European societies. Politicians and legislators can cut all they want to lower government spending, but it will not solve the crisis. The real problem is not government spending, it is excessive debt accumulation, lack of wealth creation or economic growth and deindustrialization.

The West should go back to the capitalism of the industrial revolution and reform the current financial industry. The industrial capitalism of 19th and 20th century is at the origin of the economic success of the West. The current economic crisis is a failure of the new financial capitalism in this period of complex globalization. Cut-and-dry-privatization is a consequence of this failure and neutralized human solidarity and the humanism of capitalism.

Aboubacar Sissoko

EURO CRISIS AND CUT and DRY PRIVATIZATION (CPD)

EURO CRISIS AND CUT and DRY PRIVATIZATION (CPD)

Expanding the EFSF (European Financial Stability Facility) to a size of 440 billion euros ($590 billion)) will not solve Greece crisis and the Eurozone debt. If the European political leaders do not have the courage or the will to transfer part (or all) of their national sovereignty to a single European political authority, they should explore a solution to this crisis in term of realpolitik. One of the many options available is a 2-step process: 1- Structuration of a flexible mechanism of an orderly exit from the Eurozone for all 17 European nations. 2- Creation of the “EUROS”: a basket of European currencies.

Austerity with a policy of “cut-and-dry-privatization” (CPD) will only weaken the fabric of Greece society and make more complicated the process of wealth creation. The economy of Greece will shrink 5.5 percent in 2011 and the government must reduce the public workers by 30,000. In the next 4 years, more than 6 billion euros will be cut from social security. The people of Greece will pay more taxes and the country debt to GDP ratio will be more than 170%.

As a legal transfer of wealth to an elite or group of people, Cut-and-dry-privatization (CDP) eliminate jobs and create disequilibrium in capitalism. The ultimate goal of this strategy is profit and reimbursement of creditors. Wall Street exposure to the Eurozone is $ 2,7 t or more. Debt nations are defined by “cut-and-dry-privatization” (CDP). The phenomenon is more accentuated in the United States as an ideology of the republican-Tparty. We are on the hedge of sub-capitalism.

Capitalism is a process of creation of wealth and abundance of resource. It is a mine of job creation in which Privatization is the tool.

Aboubacar Sissoko

END OF THE EURO

END OF THE EURO

Without political union and common fiscal policy, it will be very difficult for the Euro to survive. The humiliation of the people of Greece, Spain or any other European nations with austerity and privatization is not a solution. In this type of complex economic crisis “cut and dry privatization” is not a solution. “Cut and dry Privatization” is not a process of wealth creation. It is a legal transfer of property to an elite or group of people and a limitation to free market.
Greece debt is 345 billion euros ($483 billion) with a Debt to GDP ratio at 144%. After 3 years of recession, unemployment at 16.3% (1) and failure of the restructuration of the Greece economy, it is time for this country to default on the debt(2). A default from Greece or any other country in the Eurozone will create a credit event. The European political class would like to avoid this situation at all costs. A default will triggered a pay out in credit default swaps (CDS) and challenge the solvency of European bank and make this crisis worse. On September 20th 2011, five-year credit default swaps (CDS) on Greek government debt rose to 6000 basis points. This means it costs € 6 m to insure €10m of Greek 5 years bonds. France CDS is 197 bps and 95 bps for Germany. In France the two largest banks: BNP Paribas SA and Societe Generale SA are in trouble. BNP Paribas Credit-default swaps increase to 306 basis points and Societe Generale CDS jump to 443. The total net exposure of French and German banks to Greece debt is $ 87 b ($53 b and $ 34 b respectively) (3) or maybe more than $100b.
The solution to the euro debt crisis is not to add new debt to old debt, or clean up banks balance sheet and inject new capital in the banking system. The financial industry does not create wealth. The industrial revolution is at the origin of the prosperity of Western Europe. This historic period of capitalism was defined by wealth creation, accumulation, and an optimal diversification of flow of wealth in multiple channels. Wealth creation is a product of human solidarity. The capitalism of the industrial revolution was not a process of debt accumulation.
The Eurozone crisis is a problem of Wealth creation and re-organization of national institutions and social structures. The financialization of European economy has transformed European nations to a collection of debt nations. It's not a surprise to observe the intervention of BRICS nations in the resolution of the Eurozone crisis. The BRICS nations are surplus nations. The conjunction of effort between surplus nations and debt nations could be a very good solution. The BRICS nations have low debt to GDP ratio and are now drivers of world economic growth. We are in a moment of historic shift of global power from the West to emerging nations. This is a precedent, poor nations coming to the rescue of rich nations.
The Eurozone is a monetary union of 17 European nations. This monetary union represents 17 different fiscal policy, political systems, cultures and economies.
The Eurozone will be effective only if the European political elite can manage the diversity of the European nations with a single political authority and stop the fiscal imbalance. The foundation of the Euro is a political project of unification of European nations: The European Union. The signature of the Treaty of Rome (25 March 1957) between the 6 nations (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany) was the beginning of the process of European political unification. But, in the last 3 decades, the European leaders put all their energy in the construction of the Euro, leaving behind the political union. The UK was right not to join the euro and it will not be a surprise if Greece leaves the Eurozone.

1-Roubini Global Economics
2-History’s first sovereign default came in the 4th century BC, committed by 10 Greek municipalities. There was one creditor: the temple of Delos, Apollo’s mythical birthplace (bloomberg.com, Simon Kennedy and Maria Petrakis-Sep 23,2011)
3-FT.com, June 15th, 2011

ABOUBACAR SISSOKO

The “TRIFFIN DILEMMA" and QE2

Tuesday, June 7, 2011

The “TRIFFIN DILEMMA" and QE2

When a country issues the world single reserve currency, it takes the risk to run huge deficit and go bankrupt. Robert Triffin first articulated this observation in 1947.The “Triffin Dilemma” was born. Robert Triffin was a Belgian-American economist at Yale University (1951-1977) and a member of the Federal Reserve Board, serving as chief of the Latin American section of the Board of the Federal Reserve System from 1942 to 1946. In October 1959, as a strong critic of Bretton Wood system, Robert Triffin testified in Joint Economic Committee of US Congress. He explained that as the global economy expanded, demand for reserve assets will increased, the United States will issue a lots of assets: government bonds. The more bonds it issues, the less likely it will be able to honor its debts.

From surplus nation, the USA is now a deficit nation with a debt evaluated at $14.294 trillion, $128,886 per taxpayer and $55 trillion in unfunded obligations for programs such as Social Security, Medicare and Medicaid. In this multipolar world, the Obama administration is challenged by 2 problems: le world financial crisis and the “Triffin dilemma” or “Triffin Paradox”. The U.S government hit the debt ceiling on May 16th, 2011 and by August 2nd, 2011 the United States will no longer be able to pay its bills in full if congress do not raise the country debt ceiling. The debt-to-GDP ratio is an excellent indicator of a country's economic health. The U.S. debt to GDP ratio is about 98%. We are 3^rd in the 10 nations with the biggest GDP in the world. Japan is 1^st with 225.9%, Italy is 2^nd with 118.4%. China, the second largest economy in the world has 19.1 %. The US is not far from Greece (130.2%) and Iceland (115.6%).

The Financial crisis of 2008 must be a catalyst for a profound reform of global financial system. Author of the book ““Gold and the Dollar Crisis: The Future of Convertibility” (1960) and many other books, Robert Triffin was a critic of the Bretton Wood system and a strong supporter of a reform of the International monetary system. On this subject, he said:“ Ideally, from a world point of view, we should base the system fully on the SDR* or, preferably on reserve deposits with the IMF because the SDR is still too dependent on the dollar”. In November 1960, he continued his thought: "A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. Dollar." John Maynard Keynes has theorized this concept of supranational currency in 1940-1942. He called it: Bancor.

In a report dated April 13, 2010: “Reserve Accumulation and International Monetary Stability”, the IMF follows Keynes recommendation with the adoption the world global currency “Bancor”: “A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.” (Supplement 1, section V). The market for SDR-denominated assets will be huge in the new world international monetary system.

The fall of the Berlin Wall in 1989 was a defining moment in the shift of the world economic center of decisions. The model of a world dominated by one super-power was not viable. We are now in a multipolar world where world economic growth and wealth creation are constantly moving from the West to the Economies in Convergence (EIC). At the beginning of the new millennium, many countries and international institutions like China, Russia, The United Nations, called for an alternative to the dollar as a reserve currency. Economic growth in the EIC’s is creating more demand for reserve currency. The satisfaction of this demand by a massive outflow of US reserve currency weakens the value of the dollar. Today, many countries are using The EURO, YEN and YUAN as reserve currency. The strategy is a protection against the declining value of the US dollar. This is a fundamental element of the “Triffin Dilemma”: the disequilibrium in the world single reserve Currency inflows and outflows.

President Obama came to power in a moment of maturation of the “Triffin Dilemma”, 52 years after Triffin warning to the US congress: The US dollar is losing value, and the conflict between the US short term economic objective and long term economic objective is exacerbated. QE2, The Federal Reserve's second round of "quantitative easing" is very good for Wall Street paper wealth and investors, but not good for the big majority of the American families. Unemployment is at 9.1% and in May 2011, employers add just 54000 to payrolls. Moody's says it may downgrade US debt if the debt limit isn't increased and a double deep recession is a possibility. We are one year from the presidential election of 2012.It should not be a surprise if the Republican Party and the Tparty refuse to raise the debt ceiling to score a political point against Obama. The USA will then default on his debt and the world economic crisis will be more complicated. The boomerang effect of the republican political thinking and action will help Obama win a second term in 2012.

In the interest of the United State of America and the rest of the world, a new International Monetary System is the best solution to the world financial crisis. The “Depoliticization” of money and credit will be key in the new international monetary system. The real value of money and credit should not be determined by partisan political opinion and ideology; it is a recipe for instability and lack of efficiency.

"Providing reserves and exchanges for the whole world is too much for one country and one currency to bear."
(
Henry H. Fowler
U.S. Secretary of the Treasury - 1965–1968 - Participated in the 1967-68 in the creation a new international monetary reserve system called "Special Drawing Rights”.)

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*Special Drawing Rights: New World Reserve Currency created in 1969 by IMF. SDR is fully convertible since September 2009.

Aboubacar Sissoko

newworldcapitalinc@gmail.com

Los Angeles