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Greece Debt Crisis and Bailout Market Volatility, What Just Happened?

Stock-Markets / Financial Markets 2010 May 24, 2010 - 01:21 AM GMT

By: Howard_Katz


Best Financial Markets Analysis ArticleThe events of the last few months have been far more important than I had originally given them credit for.  The bottom line was when a group of European nations, together with the International Monetary Fund, gave loans to Greece to pay off the rioters.  That very day Jean-Claude Trichet was in the financial markets buying bonds

Of course, Trichet was not buying bonds with his own money.  None of the political figures we read about in the newspapers and who parade about pretending to be full of love and generosity actually give their own money.  Indeed, even the European Central Bank did not give its own money.  Further, if we search through the countries of Europe, we do not find a single one of them with extra money to give to Greece.

Then what was this all about?  Why were markets rushing up and down?  Why were the newspaper headlines screaming?  Why was there violence in the streets, with people being killed?  Everybody wanted to borrow, and nobody had any money to lend.  That, of course, is the way of the world.  If you don’t like this fact, then I suggest you take it up with the Creator of the world.  If you don’t like the Creator you have now, then just change your religion and get another Creator.  No problem, human beings have been doing that for a long, long time.

So Jean Claude Trichet did not have any money to lend to Greece.  Where did he get the money to buy European bonds?  The answer is that he printed the money out of nothing.  That is, he counterfeited it.

Now Trichet is not the worst of a bad lot.  He is more like the best of a bad lot.  And that is the problem.  If Europe could not stand up under these pressures, they can not be trusted to stand up to similar pressures in the future.  And whenever someone in Europe in the future wants to spend more money than he has earned, this will be the “solution.”

Of course, the printing of euros will depreciate the value of the euro.  Thus, when the people of Greece go to spend their money, they will find that there has been a general rise in prices.  The printing of money does not create wealth, and they are just as poor as they were before.

There are two dramatis personae in this sad tale.  The first consists of the protestors.  These are mostly members of the Greek anarchist movement which dates from the protests against the Greek military junta in 1973.  These protests led to the fall of the junta in 1974 and its replacement by a democracy in 1975.

These people live in a world where there are only two political parties, a party of love/peace and a party of hate/war.  (Supporters of the second party prefer to call it a party of strength or practicality.)  The party of love and peace is called the left.  The party of hate and war is called the right.  These two parties are continually contesting with each other.  First the left wins.  Then the right wins, etc.  For example, Julius Caesar was on the political left during his lifetime (1st century B.C.).  But those who followed in his footsteps and called themselves “Caesars” morphed into the political right (Kaiser, Czar)

What characterizes the political left is their ability to explode into violence while still maintaining the self-image of love and peace.  The typical leftist will have the idea firmly fixed in his head, “I am a person of love” while he is throwing a bomb or murdering a fellow human being.  For example, Stalin was described in the media as a person of the left even while he was murdering his fellow Bolsheviks and killing millions of his own countrymen.  (Stalin killed, not only Trotsky, but pretty much all of the original Bolsheviks who made the 1917 revolution with him.)  Frequently, these leftists will switch over to the right (Mussolini and Hitler).  Then, a person of the right might feel remorse for his crimes and switch over to the left.  Both sides have lost the concept of a middle ground where human beings have rights and where everyone’s rights are respected.

This ability to twist one’s mind into a pretzel and believe what one wants to believe is very characteristic of both left and right.  The Greek protestors, you remember, were trying to get more wealth by rioting in the street, setting fires and killing people.  Yet these actions characteristically destroy wealth, not create it.

The second dramatis personae in this story is the paper aristocracy.  All central banks in the world today create money out of nothing.  This has a set of consequences which transfer wealth from one group to another, as follows:

The most important task of any central bank is the manipulation of the rate of interest away from its free market level.  Prior to the 1780s, charging interest was banned in all countries.  (In 1786-87, it was legalized in the northern U.S. and Britain.)  Since there are always many people who want to go back to the past, there is always a political force for zero interest rates, and it is the bias of all central banks to lower the (real) rate of interest below its free market rate (which was about 5% real for over a century during the period when the U.S. had little or no central banking).

The way it manipulates interest rates is by buying government securities, Treasury bills being a good example.  A one-year T-bill is redeemed at par (100).  It is issued at some price below par, and the interest consists of the difference between the issuing price (or current price) and par.  For example, a T-bill may be issued for 95.  It is redeemed at 100.  Thus the interest received by the buyer is 5/95 = 5.26%.  The current U.S. rate for the 1 year T-bill is 0.35%.

Modern central banks have no capital of their own (although historically central banks started out as ordinary banks and then got special privileges from the government).  The only way that a modern central bank gets money is by printing it (although this is usually covered over with a collection of lies.  For example, modern American money contains the words “Federal Reserve Note.”  But a note is a credit instrument.  It certifies that one party owes money to another, and all notes specify the interest rate which the borrower has agreed to pay to the lender.

It can be proven in economic theory and has been the case in every society in which money has circulated that notes (or other credit instruments) cannot circulate as money.  This is because people will not use them as money.  When a person has both a note and ordinary money and wants to buy something, he decides to keep the note (because it pays interest).  He pays for his purchase with (non-interest bearing) money.  Thus, it is the non-interest bearing instrument which circulates and acts as a medium of exchange.  In other words, a “Federal Reserve Note” is not a note.  And calling it a note was simply one of many lies which emanated from the group around J.P. Morgan at the time they slipped over the Federal Reserve System on a country which had regressed badly in its knowledge of economics.

In modern central banking, pieces of paper, which have been printed up by the central bank (emblazoned with all kinds of fancy words and symbols to impress the ignorant), are declared to be money by the government (in what is known as a legal tender law).  This says that you must treat this fancy paper as though it had more economic value than similar pieces of paper.  The original paper dollars issued by the Federal Reserve in 1933 were required to be treated as though they had the same value as 1/20 oz. gold.  This value does not come from it being a note or a security.  It comes because the government has “blessed” this piece of paper with the words “legal tender.”

It should be noted that, although the situation may differ from country to country, here in the U.S. the legal tender enactments by Congress are illegal, hence null and void.  This is because we have two levels of law in the U.S.  There is the government’s law, imposed on the people.  And there is the people’s law, imposed on the government.  The people’s law is the Constitution.  This is the supreme law, and any statute law which conflicts with it is null and void.  (Those interested may read the debates of the constitutional convention, Aug. 16, 1787, in The Madison Papers.  The authors of the Constitution were very hostile to the paper money which had been issued during the 1770s and early 1780s and intended to ban it.  The vote to ban paper money in America was 9 states to 2 states, and this has never been changed.)  Thus, our current government is illegal.  This is not a laughing matter because the Coinage Act of 1792 imposes the death penalty for debasement of the currency, a fact which should give Ben Bernanke, Alan Greenspan and Paul Volcker serious pause.

“SEC. 19. And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be… every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.”

Our current U.S. money has not only been made worse as to the proportion of gold therein contained.  It has been made zero.
As the central bank buys Treasury Securities with its printed money, it forces their price up, and, as we have seen, this forces the interest rate down.  But low interest rates are beneficial to borrowers (which are primarily the nation’s large corporations).  They are harmful to savers (who are primarily the middle class).  In this regard, the central bank is stealing enormous amounts of wealth from the nation’s middle class and giving it to the very rich.

As noted, as a side effect of the lowering of interest rates, the central bank acts like a counterfeiter, printing money out of nothing.  This causes all prices to rise.  However, they do not rise equally.  The wages of labor rise more slowly than the prices of goods.  Thus real wages go down.  Because of this, real wages have been declining in this country since 1972 (one year after Nixon completed the abolition of the U.S. gold standard).  Since real wages are declining, real corporate profits go up.

I call the people who benefit from the printing of money and easing of credit the paper aristocracy.  The paper aristocracy always wants more paper money and is trying at all times and in all countries to urge the central bank to issue more money.  To accomplish this, there have to be a continuous series of crises (real or imagined) to serve as an excuse.

So behind the Greek protestors are the paper aristocracies of the world stirring up the media into a hysteria.  The paper money Trichet is now issuing will raise prices throughout Europe, including Greece, and the Greek protestors, instead of getting richer (as they think) will get poorer (in real terms).  Trichet’s claim that he will sterilize the money he is now creating is a standard central bank lie.  I have heard that promise many times, but I have never seen it kept.

That is what is going on in the world today: a group of stupid and venal people who think they can get something for nothing by throwing a tantrum and acting like children and a group of sophisticated and shadowy rich people who manipulate these fools behind the scenes and use them to steal from the ordinary people of our time.

This may be the end of the attempt to make the euro into a semi-sound money, which started so auspiciously a decade ago.  The idea of a paper currency bound down by rules now appears as a failure.  The only money which has prevented the depreciation of the currency in world history is gold or silver, and this is the only system which has brought prosperity to mankind.

I invite interested readers to subscribe to my fortnightly (every 2 weeks) newsletter, the One-handed Economist.  This applies my general theory of economics to specific stocks and commodities, making recommendations as to what to buy and what to sell.  You may subscribe by visiting my website,, and pressing the Pay Pal button ($300) of by mailing a check for $290 ($10 cash discount) to The One-handed Economist, 614 Nashua St. #122, Milford, N.H. 03055.  Thank you for your interest.

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