We all know some 3 trillion euros of debt in Europe is uncollectible. So why isn't anyone talking about the one and only solution, which is writing off all that debt? Since nobody knows how much bad debt there actually is in the Eurozone--care to guess on the market value of all those underwater mortgages in Spain or the true size of Italy's debts?--that 3 trillion is just a guess, but it's probably a reasonable starting point.

Let's start with the most basic fact about all this uncollectible, impaired, bad debt: every euro of debt is somebody else's asset. Wipe out the debt and you wipe out the asset. That's why there's no willingness to accept the writedown of debt: somebody somewhere has to suck up 3 trillion euros of loss.

Can we please dispense with the fantasy "solutions"?

There is no way Europe is going to "grow its way out of this debt." How much of the eurozone's "growth" was the result of rampant malinvestment and risky borrowing? More than anyone dares admit. It won't take austerity to crash the euroland economy, all it will take is turning off the debt spigot.

"Restructuring" is a code word for writeoffs. Here, let me "restructure" the euro bond you bought at a 4% coupon yield. Now you're going to get 2%, and you're going to like it. Bang, your bond just lost half its market value, but everyone gets to keep it on the books at full value. Nice, until you have to sell it to raise cash. Oops, the euro has slipped in value so you lost more than 50%.

Printing euros to buy the bad debt is just a shuck-and-jive game of transferring the losses to unsuspecting holders of euros or taxpayers. Allow me to reprint a quote from yesterday's entry, The World Is Drowning in Debt, and Europe Laces On Concrete Boots: as Nobel prize winning economist Thomas Sargent noted: "There's a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on." (Source: BusinessWeek 11/20/11).

In other words, if the European Central Bank prints 3 trillion euros to bail out the banks and bondholders, holders of euros will suck up 3 trillion in lost purchasing power, or split the loss with taxpayers who have to pony up cash to give the ECB a threadbare sheen of solvency.

There is no free lunch. And since there's no free lunch, then we have to ask: who should suck the losses when 3 trillion euros vanish in a massive renunciation/writeoff? Answer: those who took the risk. I know this is a shatteringly obvious conclusion, but it reveals the central flaw in the global financial system: risk has been disconnected from return.

Those who made the risky bets have diverted the risk to others: taxpayers or the general public who holds currency. The gains from the bets are private, and theirs to keep, but all the losses are distributed to the public via government bailouts or money-printing. The first shifts the losses to the taxpayer, and the second shifts the losses to everyone holding the currency being devalued.

Not only has the risk been palmed off onto unsuspecting chumps, the returns have been concentrated into the few hands that control the big bets. This is the ideal setup for the stupendous gains and zero risk that characterize crony-capitalism: make the big bets with leverage and borrowed money, and skim the vast profits. Then when the bets sour, demand a bailout from the Central State, the ECB, the Fed, etc., which promptly socializes the losses and distributes them over the entire populace of taxpayers or holders of currency.

It works beautifully until the debt-serfs rebel. The EU's politicos are begging to start the printing presses, as that is the only way they can retain their power in the face of the debt-serfs' revolt. But at least one populace of tax-serfs (Germany) is rebelling against sucking all the losses via a massive reduction of purchasing power.

The apologists for bailouts always whine about poor Jacques Q. Publique, whose pension fund will take a hit if those 3 trillion illusory euros go poof. Here's reality: everyone with capital or responsibility in the wager has to accept their fair share of the risk and the return. J.Q. Publique risked some capital, even if he didn't control the bets being made with his money, and so he has to suck up his share of the losses.

Those who made the bets should rightly lose everything--yes, be wiped out. If risk and return are actually causally linked, then this is the only result of a big bet that sours: those who placed the bets should be wiped out. That includes money managers, bank honchos, bond-fund gurus, and everyone else who foolishly bought all this debt without investigating the risks.

Investors in banks made their investment to reap a return; as a result, they are exposed to the other side of return which is risk. They should be wiped out as well.

Who should not suck a loss are those who did not stand to gain: the taxpayers and holders of the currency. To repeat: the most basic fact about all this uncollectible, impaired, bad debt is that every euro of debt is somebody else's asset. Wipe out the debt and you wipe out the asset.

There is no way to avoid the 3 trillion in losses. the only question is who should absorb those losses: those who stood to gain, or the innocent chumps whose only crime was being a taxpayer or owner of euros? If there is any justice (or classical Capitalism) at all in Euroland, then those who made the bets and invested capital in the bets to reap a return are the ones who should absorb the losses.

Life will go on if the banks are wiped out and closed, pension funds and insurance companies take losses, etc. In fact, as I noted in The Collapse of Our Corrupt, Predatory, Pathological Financial System Is Necessary and Positive (November 5, 2011), the collapse of the predatory institutions which made all those bets would be a quantum leap forward not just in terms of justice but in the economic recovery everyone pines for.

Ideally, the dominoes will cross the Atlantic and take down the parasitic "too big to fail" banks and Wall Street leeches in the U.S. After all, they too made bets on euro-debt and they should absorb the losses.

If those who made the bets for their own private gain aren't forced to absorb the risk, then we don't live in either capitalism or democracy; we live in a financial-fascist tyranny.

My "On the Edge" interview with Max Keiser is now online. Fortunately for me, Max keeps the ball rolling and succinctly summarizes my rambling. Good fun in Paris--thank you, Max and Stacy, for the opportunity to spend some time with you.







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