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What Are The Elites Holding Over Us?

Bill Sardi

What is it that the elites hold over the average American citizen?

Answer: financial literacy

The elite class in America knows the language of finance, banking, currency and economics. Because American schools leave students financially illiterate, even after graduating from college, they cannot properly manage their money and must rely upon the often self-interested misdirection of financial advisors, stock brokers, and bankers.

For example, most financial counselors recently advised their clients against withdrawal of funds from their 401(k) tax-deferred accounts, given that there are penalties for early withdrawal. The result: most 401(k) accounts lost 30% or more of their money. Now withdraw your money from those tax-deferred accounts, taking a 10–20% penalty, and you have sliced your retirement fund in half.

Halt financial anxiety

Most investors have little gumption to stand up to their financial advisors because they feel they don’t understand how money management works. There is anxiety in the process of making an investment. One survey showed that investors often feel a level of anxiety equivalent to going to the dentist.

If young adults are being advised to invest in the stock market, they will not likely hear that stock markets are massively manipulated and represent nothing more than gambling parlor. The same goes for markets selling precious metals such as gold and silver, only the manipulation has served to vastly undervalue these shiny metals.

Financial advisors may recommend a certain stock, but may not inform you they are dumping that particular stock from their own portfolio and pushing it on you in a game of financial musical chairs. Certain mutual funds have taken management fees that are larger than what their investors made. In fact, counting for inflation and taxes, many mutual fund participants have lost money while the fund managers have made a killing.

Students graduating from high school, or even college, may have never learned how to balance a checkbook, estimate the erosion of their banked money due to inflation, calculate total interest on a loan rather than the monthly or annual interest (total interest on a 30-year home loan is about ~48%), know whether they should rent or buy a home, or have ever even read a home mortgage document prior to the day they signed one. (Notice how home buyers are not allowed a few days to read over their mortgage document before signing it.)

Interest on bank accounts: it’s a shell game

If only young Americans were educated how banks make money. For example, let’s say a bank offers 2% interest on banked money (it’s less than 1% today). So on a $1000 deposit the depositor will receive $20 a year in interest, while a 4% rate of inflation would have resulted in a $40 loss of purchasing power of that money, for a net gain of $20, less any taxes on that small gain.

At the Federal Reserve website they even have the gall to display a chart which pretends to show how 1¢ can turn into $5,368,709.12 after 30 years of compound interest, without ever calculating for inflation and taxes. How absurd. Thanks to designed-in inflation by the Federal Reserve, the true value of a 1913-dollar today is just 3¢.

On the surface it doesn’t appear that banks are gaining excessive profits off of their depositors’ money. In this example, depositors receive 2% interest, and the bank lends out that money at around 5% interest.

But that isn’t how the shell game works in banking. Unknown to most Americans, banks have the privilege of fractional banking – they make up 10-fold more money out thin air than the deposits they hold. So your $1000 bank deposit becomes $10,000 and the bank is supposed to keep your $1000 in reserve (they don’t even do that!) and loan out the remaining $9000. At 5% interest, the bank would make $450 profit, while the depositor makes just $20, and loses money after taxes and inflation are calculated.

Chart provided by the Federal Reserve showing how interest on banked money can produce a profit (notice the 10% interest rate, which is far greater than current interest rates offered by banks). The Federal Reserve doesn’t want to reveal to you how little you make on your banked money.

What is strikingly misleading is that the Federal Reserve Bank of the United States (the central bank that distributes the money supply to smaller banks), suggests American citizens follow a saving plan that would result in the enlargement of their banked money to hundreds of thousands if not millions of dollars over a lifetime. The problem is that the Federal Reserve (not a branch of the U.S. government, actually a group of private bankers that masquerade as a federal agency and even uses dot.gov on their URL) never mentions that depositors are capitalizing the banks for free and losing purchasing power on their banked money, while the banksters make huge profits! It’s a wonderful shell game practiced under false cover of an American government-backed institution.

How much did you say lenders make on a home loan?

Home buyers cannot fathom how much banks make on home loans. For example, a $270,000 home loan only requires a bank to come up with about $30,000 of their depositors’ money, held in reserve, which is the amount of money temporarily put at risk. The lender then turns that $30,000 into $300,000 via its fractional banking privilege (money made out of thin air), keeps the $30,000 in reserve, and loans out the remaining $270,000 @ 4.5% interest. The monthly interest payment plus property insurance and taxes is about $12,000 a year or about $1000 a month. It only takes the bank about 30 months to be made whole on its true investment ($30,000), and the remaining 27.5 years of a 30-year mortgage is pure profit. The only risk the bank holds is if the home buyer cannot make monthly mortgage payments, so the banks often sell these mortgages to other parties, completely negating risk. None dare call this usury, which is what it is. Usury was forbidden even in the Bible.

To make matters worse, most homes being sold today are overvalued and new home buyers are likely to hold a mortgage on a property that is underwater (more is owed than the house is really worth) from the outset. Naïve home buyers are still being sucked into these deceitful purchases.

Learn the language of finance

Your children need to learn about money at an early age. They can begin to be taught the language of finance and banking. Some simple definitions (make up your own) are:

  • Fiat money – printing money out of thin air, or what is actually counterfeiting.
  • Fractional banking – a privilege given to banks and lenders to make money out of thin air.
  • Derivatives – also known as swaps, futures or options, which are a financial instrument or agreement between two parties, which has a value based on its expected future price.
  • Assets – tangible valuables that can be converted to cash.
  • Mark-to-market accounting – true value of property rather than its value when purchased.
  • Money supply – there are three measures of money supply: M1 = currency, traveler’s check, demand deposits; M2 = M1 + demand deposits and savings accounts M3 = M2 + large time deposits, currency substitutes (stocks, bonds, etc.)
  • National debt – the amount of money the federal government, over and above taxes collected, that it had to loan from other parties or even print out of thin air.

Many parents, particularly immigrant parents, want their children to get an education they never had an opportunity to acquire, and to get a college degree. But, regardless of the grades that child achieves in school and the diplomas earned, if he or she is financially illiterate they will surely be another victim of the financial system. They will blindly sign home mortgage papers, start checking accounts, apply for credit cards, and never catch on to the many tricks of modern banking and finance. Since the government oversees and insures bank accounts and currency, naïve Americans cannot believe how closely politicians work with banksters to commit what amounts to hidden fraud.

Don’t trust financial literacy programs

There are a number of financial literacy programs for children and adults, but they are often sponsored by banking organizations or agencies or quasi-agencies of the U.S. government that deliver information that leads to the financial ruin of those who follow their advice. Most of these programs are designed to aid individuals who mired themselves in unpayable debt. In other words, how to keep making their bankers rich, making payments on loans they never should have qualified for.

Unless the next generation of young Americans becomes financially literate, they will see their earned money vanish, as their parents and grandparents are now experiencing. In the current scenario, Americans banked their money, had it loaned out to provide homes to people who were not creditworthy, and have not been told their banked money has vanished. The trillions of dollars of wealth that Americans worked to accumulate over their lifetimes as evaporated in an unprecedented collapse of banking and lending. The Federal Reserve, in its bailout program, has only replaced the lost 10% reserves, not the whole amount Americans had on deposit with U.S. banks.

Lack of oversight

Under the watchful eyes of the Federal Deposit Insurance Corporation (FDIC), Securities Exchange Commission (SEC), the Federal Reserve bank, and the Department of Treasury, lenders were allowed to keep less than their required reserves, allowed to pass risky mortgages off to quasi-government agencies that, in the end, shifted the risk back onto the public, allowed lenders to conduct phony foreclosures to free-up even more money to lend out, and then allowed banks to “cook their books” and declare the value of their real estate assets at more-than-market prices. Somebody should have gone to jail here, but politicians are largely above the law and are too close to the banking and finance industry to invoke adequate discipline and penalties.

Don’t allow your children to be as financially uninformed as you have been. Your children are lambs among wolves. Make them aware of the hidden fraud in banking, lending, and currency before they become financially impoverished.

Combating financial illiteracy: build a home library

There are good resources for parents to become financially literate first before they teach their children. When books by Ludwig von Mises, Henry Hazlitt, Murray Rothbard, Lew Rockwell and Ron Paul fill our family bookshelf, the banksters will not be able to get away with their crookedness.

Also there are online aids to help Americans to:

The American people are gullible. Even a university economics professor may have been deceived. Americans cannot rely upon government institutions to educate them out of their financial ignorance. Agents of American government and the financial community are far too chummy to begin a campaign that would essentially indict themselves of all this chicanery. Don’t let this go on for even one more generation. Begin now to teach your children how to wisely manage their money. Stop this ongoing “banks win, depositors lose” game that is now being practiced.


Economics 101: Without the BS
Mike Mitrosky

(Editor’s Note: I’m sure our long time readers will agree, if there is one recurring theme, no, one constant theme, of the Silver Bear Cafe’s editorial slant, it is that all the problems of this country originate with the Federal Reserve. So at the risk of “singing to the choir” or “telling Noah about the flood”, I feel duty bound to post Mr. Mitrosky’s illuminating rant. If, through its accurate, yet simple explanation of “what’s wrong with this picture?”, we can wake up one more sheeple, who had, heretofore, been in denial, we will have gone a long way towards doing our work for today. – JSB)

Okay, I’ve seen enough chain letters discussing the cause of our economic woes, and they’re all incorrect, so I figured it was time to write one that addressed the real issues. I’ve written this in plain English and have taken out any technical mumbo-jumbo so people will be able to understand it clearly. So, even though I will be leaving out some details everything in this message will be fundamentally true.

Okay, if you want to understand the problem we have with money in this country, you’re going to have to understand 3 things:

1. Who makes our money.
2. How money comes into existence.
3. Inflation is nothing but a tax.

Let’s tackle the first part:

PART I – Who Makes Our Money?

Here are 2 different $100 Bills. One has a red seal, the other a green seal.

Notice the top of this bill. It says United States Note. That means it is a note issued by the United States.

Now notice the top of this bill. It says Federal Reserve Note. That means it is a note issued by the Federal Reserve. It is NOT issued by the United States at all.

Well, who is the Federal Reserve? Aren’t they part of the government you might ask? The answer to that is no. The Federal Reserve is a private company, just like Federal Express. And it is no more federal than Federal Express is.

Now both of these $100 Bills cost 4 cents to produce. In the old days the govt would simply print up a red seal $100 United States Note for 4 cents and spend the money on something it wanted. Not anymore. Today, the Federal Reserve gets to produce the $100 Bill for 4 cents and then sells the $100 Federal Reserve Note to the US Government for $100 Face Amount.

That bears repeating. The Federal Reserve (a private company) gets to produce slips of paper for 4 cents ($100 Bills) and then sells those pieces of paper to the US Govt for $100 Face Amount.

Now since the government doesn’t have any money of its own how does it buy these Federal Reserve Notes? It pays for them with debt: Treasury Bonds, Treasury Notes, & Treasury Bills. If you read the paper or listen to the nightly news you’ll hear the media say things like “The Fed injected liquidity into the markets…” or “The Fed is buying government securities…” All this means is that the Federal Reserve is literally creating money out of thin air and then selling this money to our government for its face amount. This is the true source of our National debt, and this is the reason our debt never goes down.

If you read an economics book this will be covered under the term “Monetization of government debt.”

Now some of you might be saying, “Why should I care about any of this?” I’ll tell you why.
You know all that income tax that comes out of your paycheck every week? Well your money is paying for this. Your income tax dollars do not pay for things like you think. The personal income tax does not pay for the military, roads, schools, or anything like that. It simply pays for the federal reserve notes with the green seal. In fact both the income tax and Federal Reserve were created in the same year – 1913. The income tax was created to finance the federal reserve.

Okay, pretty crazy right? Why in the world would our government pay a private bank for money, and then tax it’s own citizens to pay for it, when we could just issue the money ourself practically for free? There is a reason, and we’ll touch on it later. Right now we’re going to explain the next part.

PART II – How Money Comes Into Existence

This part explains why we have booms and busts in the economy.

We now know that the government buys it’s money from the private company called the Federal Reserve. And we know that the government pays for the money by issuing government debt. Because of this, the government doesn’t even own it’s own money, it only rents it. (A $100 United States Note issued in 1966 only costs America 4 cents. While a $100 Federal Reserve Note issued in 1966 costs America $100 + $5 a year in interest for a total of $315.00)

When the government buys one dollar from the federal reserve

The government automatically owes that dollar PLUS 5 cents in interest.


The problem with this is that although the dollar is created, the extra 5 cents in interest is NOT created. This means there is not enough money in the economy for the government to pay back it’s debt. After awhile it’s not even possible for the government to pay the interest on it’s debt unless the money supply is increased.

So out of necessity, the federal reserve & government will start a program of expanding the supply of money. The federal reserve will create more money to push down interest rates and the government will take on more debt to buy more of this money.

This causes malinvestment, which means:

People are encouraged to make wrong decisions because of false signals they are receiving from the marketplace. Businesses will tend to over expand when they shouldn’t and over produce certain goods. (build too many houses for example.) Consumers will feel richer and so will wind up buying more cars, homes, etc. when they really cannot afford to.

This is where programs like the Community Reinvestment Act come into play as well as agencies like Fannie Mae, Freddie Mac, etc. Anything that encourages expansion of the money supply (like people borrowing to buy homes) will be done, and it doesn’t matter whether the Republicans or Democrats are in power. They know they need to keep the supply of money growing. If they don’t then this whole unstable system comes crashing down.

But since this system of money IS unstable it has to come crashing down anyway: Eventually the areas in which this money is put will form a “Bubble”. It might be a Stock Market bubble or a real estate bubble, just to name a few. Eventually these bubbles will burst because they have been artificially created and are unsustainable. Inflationary booms are always followed by deflationary busts as a normal cleansing mechanism of the marketplace.

Now while this bubble is happening, the government can step in through taxation and confiscation and grab enough dollars to pay for the interest on its debt. (Income Tax). When the stock market bubble burst, they replaced it with an even bigger real estate bubble. Now that the real estate bubble is bursting they are trying to replace it with an even bigger “bond market/dollar bubble”. The dollar bubble being formed now IS inflation, and will result in prices going up for everything. But like all bubbles, the dollar bubble will eventually burst and when it does the value of the dollar will be destroyed.

PART III – Inflation is a Tax (And that’s all it is)

Okay, so far we have talked about two types of money, United States Notes and Federal Reserve Notes. But I have to be honest. Neither of those are actually money, they are only currency.

Here’s the difference.

In 1950, you could buy 4 gallons of gasoline for ONE DOLLAR.

A paper dollar bought 4 gallons of gasoline.

A silver dollar bought 4 gallons of gasoline

Now let’s fast foward to 2009

A paper dollar will NOT buy you 4 gallons of gasoline. You cant even buy ONE gallon of gasoline with it.

But a silver dollar will still buy you 4 gallons of gasoline. (The silver content is always worth the price of 4 gallons of gasoline.)

Here’s another example:

In this picture the price of oil is calculated from the year 2000 and priced in Dollars, Euros, and Gold. In dollars, the price of oil went up 350%, in euros it went up 200%, but in terms of gold it didn’t go up in price at all.

Question: Why do commodities like gasoline and oil not go up in price when priced in either gold or silver?

Answer: Gold & Silver are real money. They have intrinsic value. Gold and silver cannot be printed out of thin air the way paper dollars can, and so they retain their value.

When the federal reserve prints paper dollars and sells them to our government, the government is able to go out and buy whatever it wants at current market prices. But as that money circulates throughout the economy, the increase in paper dollars causes prices to rise. By the time the money gets to you and me, the price of a loaf of bread or a gallon of milk has already gone up. This is how inflation taxes us. The government who gets to use the newly made money first, steals our purchasing power through inflation. The end result is that we are taxed without even knowing it. But we all know we work harder and harder just to get the same things in life we had before. That is the invisible inflation tax in a nutshell. This tax affects middle class and poor people the most. And it is the reason we hear people say “The rich get richer, while the poor get poorer.”

If we used gold or silver money, the gov’t would be stopped from stealing our purchasing power through inflation.

Why don’t we use gold and silver for money anymore? We’re supposed to. It’s the law.

The United States Constitution: Article I, Section 10:

No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

The founding fathers experienced massive hyperinflation during the Revolutionary War where the only way the country had to raise revenue was by printing paper money. Imagine having a pickup truck filled with paper money, scarcely being able to buy enough groceries to fill up your truck. It’s happened before in America.

“A wagon load of money will scarcely purchase a wagon load of provisions”. – George Washington, 1779.

Now this doesn’t mean we have to walk around with bags of gold and silver. We can still use paper money, checks, debit cards, and electronic banking that is backed by silver and gold.

Let’s take a look at how our $100 Bill is supposed to look. Unlike “Notes” which are not real money, “Certificates” are indeed real money because they are redeemable for the actual gold or silver at any time.

PART IV – Why Does Our Government Do This?

Earlier, I told you I would explain why the government does this. And the answer is because it makes it easier for politicians to get re-elected.

Under our Constitution and a sound money system like a gold standard, the government would have to tax the citizens with what’s called a direct tax.

Let’s say the government wants to spend money on some programs and it’s going to cost $300 Billion more than they are going to take in, in revenue. That means they are going to run a deficit of $300 Billion. With roughly 300 million citizens in America that results in a cost of $1,000 per man, woman and child. So now you get a knock on your door from a tax collector and are told that your family of 4 will have to immediately pay the government $4,000 in a direct tax so the government can spend money on these programs. What would you do? You would call up your congressman and bitch. You would tell him that if he doesn’t fix the problem he will be out of a job.

You would take an active role in politics, and that’s the last thing politicians want. They just want to get re-elected without all the hassle. So instead of taxing you honestly, they purchase money from the federal reserve, make our national debt go up, and devalue our money through inflation. And since the effects of inflation are delayed anywhere from between 6 months to 2 years, by the time gasoline or food prices go up, it can be blamed on war, greedy arabs, or bad weather, and the politician [and federal reserve] can escape the blame, even though they are the ones responsible. So the next time you hear that oil prices are higher because of a hurricane; remember it’s not true.

PART V – How Do We Fix The Economy?

We got into this mess because we over spent, over borrowed, and over consumed.

So we need to do the opposite, which is save our money, pay back debt, and not consume as much.

But wait, I hear some of you say consumption is good for the economy. The nightly news tells us that the American economy is 2/3 driven by consumer spending. However, that is just another fallacy.

Production is the true measure of an economy not consumption. Anybody can eat an ear of corn, but before you can eat the corn, somebody had to grow it. Anybody can buy a new pair of jeans, but before you can buy them, somebody had to make the jeans. Somebody always has to produce before some other person can consume. And saving and spending work the same way. You have to earn and save your money before you can buy things. Here are two “fancy” economic terms and my common sense definitions for each. You should make sure you understand these because you will hear them more as the economy worsens:

Keynesian Economics: Economic theory that basically says, “Spend all the money you have. When you run out of money, borrow all you can and spend that too. When nobody will loan you anymore money, just print the money and keep spending.” This is the policy our government follows. The gov’t spent all our money, borrowed all we can from other countries, so now the final resort is printing even more money (and paying the federal reserve even more)

Austrian Economics: Economic theory that basically says, “If you want to buy something, make sure you have the money first. If you don’t have the money then save up your money, and when you have enough, buy what you want. Pay your credit card balances in full every month and only go into debt if it’s an emergency.

The Solution:

We need to let the free market function. Let the depression happen. If we let it happen, it will be over in about a year. If we drag it out with spending plan after spending plan the depression will last for 10 years or more. [Everybody has heard of the depression of 1929, but most people never hear about the depression of 1920-1921, which was actually worse. The difference was, in 1920-1921 the government didn’t intervene with spending programs. Failed companies were allowed to go bankrupt, and bad debt was eliminated. After a year, the economy took off. The depression of 1929 was met with one government stimulus plan after another. The depression didn’t end until after WWII, in 1946.]

Not only do we, as Americans need to cut back, but we need to produce goods and export them to other countries. We need to produce goods in America again. We need to promote jobs here and stop the outsourcing of American jobs overseas.

But in order to do this we need to decrease the size of government and increase personal liberty. We need to completely eradicate the Federal Reserve and Income Tax, and cut government spending by over $1.3 trillion a year. (which is how much the government collects each year from the personal and corporate income taxes). Basically, if we just follow the United States Constitution we can fix our problems.

Imagine the trillion dollars collected each year from the personal income tax no longer in the hands of the government but in everybodys’ hands. That’s a trillion dollars more people will have and they will spend their money alot more wisely than government does. Most of the time when government spends money it goes for wasteful programs and everytime the government wants to bailout somebody they wind up just bailing out their buddies.

Imagine with no more corporate income tax, how many companies would be coming back to America to open up shop here again. There would be so many companies coming here to open up shop and creating jobs, we would probably need illegal aliens to work them.

We need to bring back personal Liberty. That can be best summed up as you should have the right to keep 100% of the fruit of your labors (no income tax) and spend your money anyway you want. After all, it’s your money. But with Liberty comes responsibility. If you get a paycheck on Friday and spend it all foolishly on Saturday, you can’t run to the government because you have no money for food for the rest of the week. You instead will have to turn to your family, friends, and religious leaders or charity to help you. Eventually, you will learn to be responsible. In turn society benefits because the more responsible and productive our people are the better off the country will be. And as an added bonus there will be less idiots out there trying to sue McDonalds for making them fat or burning them with “Hot” coffee.

Further Reading, References, & Links

“The Creature From Jekyll Island” by G. Edward Griffin. You can download a complete audio mp3 of this book at the link: http://www.spielbauer.com/JekyllDownload.htm, burn it on a CD and after 1 hour you will know everything about the federal reserve that the government doesn’t want you to know.

“Money, Banking, and the Federal Reserve” – 42 minute video. Complete history of money and banking. The first 7 minutes or so is reminscient of a high school educational video, but after that it gets very interesting. Watch it here:

You Tube

Learn more about “Austrian Economics” at the Ludwig Von Mises Institute. Plenty of free mp3 downloads from various economists at http://www.mises.org

You can also Google or YouTube people like: “Ron Paul”, “Peter Schiff”, and “Jim Rogers”, to get an honest evaluation of the economy and how it relates to current events.

Tune into http://freedomwatchonfox.com/ every Wednesday at 2pm Eastern Time to watch Judge Andrew Napolitano’s internet program “Freedom Watch” where he always has new guests who explain the real deal within our government.

And sometimes it helps to talk to somebody who already understands these things. If you ever have any questions feel free to visit http://www.ronpaulforums.com. Most people at the forums are familiar with all the facts in this email and can probably help you answer any questions you might have.

And don’t forget to read the Constitution and Declaration of Independence every now and then to give yourself a refresher course on Liberty. If you’ve never read either, then there is no time like the present to start. You’ll learn a lot from these truthful and wise documents.

By Mike Mitrosky

The Tidal Forces Ripping Europe Apart

Gonzalo Lira

Comet Shoemaker-Levy, after Jupiter’s tidal forces ripped it apart.

In July of 1994, a comet named Shoemaker-Levy 9 crashed into Jupiter – it was quite a sight. According to astronomers, Shoemaker-Levy was a comet that was captured by Jupiter’s gravity twenty or thirty years before it was discovered. As the comet circled Jupiter, at one point it passed the Roche limit – the line around a large mass where its gravity will rip apart a smaller mass by way of tidal forces.

By the time Shoemaker-Levy crashed into Jupiter, tidal forces had had their way with the comet. As the picture shows, it was no longer a single comet – it was a string of small lumps of rock and ice.

Tidal forces are pulling the European Union apart.

On one end, European governments have taken on debt and liabilities – both public and private – which they cannot possibly meet. These debts and liabilities are near-term enough that there is only one way to characterize many of the smaller European states: They are insolvent.

On the other end, Europe is unwilling to carry out sovereign default of any one of its member nations. Indeed, there is a sense that – constant drumbeat of the Germans aside – Brussels is unwilling to even contemplate the very notion of sovereign default and debt restructuring. Brussels and the European Central Bank believes in bailouts, not default, because they believe that the entire European project rests on the non-default status of all the EU members. They believe that all EU debt is backed by the entire EU, no matter how irresponsible the EU country that issued the EU debt.

As we watch Europe get closer and closer to the Global Depression, we are seeing as these two opposing forces – insurmountable debt vs. unwillingness to default and restructure – pull the continent apart as surely and relentlessly as tidal forces.

Let’s first look at the debts and responsibilities the Europeans have taken on, which they cannot fulfill.

American wags claim that its been the socialist policies of the Europeans that insure that the countries will be insolvent – and while the commitments required to fund the European social safety nets are indeed huge, this isn’t even half the story.

Certainly the member states of the Eurozone are over-committed as to pension and medical coverage, especially as the demographic bulge of the post-War baby boom starts to retire en masse, grow old, and require more and more health-care. Countries with demographic time-bombs, like Italy and Spain, are sure to suffer most.

But more than their social programs, it was really the European governments’ willingness to back-stop the private sector banks which did in European sovereign balance sheets.

I’m with the journalist Wolfgang Münchau, who very accurately pinpoints the moment when the Irish government decided to fully back its banks – September 30, 2008 – as “the most catastrophic political decision taken in post-War Europe.” As Münchau points out, it wasn’t that just the Irish decided to fully back their insolvent banks – their decision obliged all the European governments to back their insolvent banks too.

Like their American counterparts, the Eurozone bureaucrats lacked the political will to implement the Sweden ‘92 solution: Nationalize the insolvent banks, liquidate the shareholders, give buzzcuts to all the bank bondholders, and clean up the banks’ balance sheets of all the crap debt, before sending them back out into the world, smaller but healthier.

Instead – for perverse political reasons and blinkered short-term-ism – the Irish and then the rest of the Eurozone governments took up as their own the burden of the insolvent European banks.

Take the Irish case: It was bad enough that they went and allowed Allied Irish Bank and Bank of Ireland to grow to be as big as they did – at year’s end 2008, AIB had total liabilities of €172 billion and Bank of Ireland total liabilities of €181 billion, while the total GDP of the Republic of Ireland was €164 billion.

But when the Global Financial Crisis happened in 2008, what did the Irish government go and do? They nationalized the banks’ losses! Prime Minister Brian Cowen in September of ‘08 went and threw a blanket-protection over the Irish banks – banks whose liabilities were twice the gross domestic product of Ireland! Cowen went and guaranteed the private debts of the Irish banks – effectively socializing the bank losses.

And not just the Irish – just about every European government basically did the same thing: All the teetering banks have all been back-stopped by their respective governments.

So what in 2008 was a banking insolvency issue was turned into a sovereign insolvency issue because of terrible decision-making.

Now, two years later, Europe is feeling the pain – should anyone be surprised that European sovereign liabilities are greater than any of them can comfortably pay? Or pay at all?

The UK is the only European nation doing anything serious about the issue of over-indebtedness by really and truly trying to slash spending and raise taxes – but then again, the UK is not in the Eurozone.

The rest of Europe? Slashing spending? Raising taxes? Hardly. They’re all making noises in that direction, but in truth, the rest of Europe is counting on the ECB to bail them out – with good reason.

Comet Shoemaker-Levy, before tidal forces ripped it apart.

As I write this (Thursday, 11/11/10), 10-year Irish bond spreads over German bunds are at 7.20% – up from 6.47% this morning, and 5.72% yesterday (Wednesday): A crash of Irish debt is imminent.

However, what is Brussels going to do? Why, it’s practically been announced: The ECB is going to save the Irish with “liquidity” – that is, propping up Irish debt by buying it.

First it was Greece last spring, now it’s Ireland. If we go by the spreads over the German bunds, up next is Portugal, then Spain, then Italy – is the European Central Bank going to save all of them with additional bursts of liquidity?

In a word, yes – and herein lies the problem, the basic contradiction of these tidal forces:

The weaker European nations are insolvent – but rather than have these countries default, and then restructure their debt, Jean-Claude Trichet and the European Central Bank want to expand liquidity: A dose of Quantitative Easing, European-style, is what they see as the only way to save all these insolvent countries –

– but the Germans won’t go for this

Euro debasement hurts the Germans to the same extent that it helps the PIIGS – and Ze Germans are making serious noises about this issue. Just yesterday, Jürgen Stark of the ECB said that European recovery was almost self-sustaining – which is bullshit, of course, but a clear sign that the Germans want higher interest rates, and soon: Something that would kill the Club Med countries, in their current state of insolvency.

The Germans know this. So with that peculiar self-righteous arrogance that does seem to be a national trait, Germans propose that the Club Med countries restructure their debt and have these countries go through austerity measures. You can almost hear the relish, whenever a German political figure raises the issue.

The PIIGS won’t go for those levels of austerity – their economies are already too weak. All of the PIIGS have double-digit unemployment, Spain’s clocking in at 20%: Politically, such austerity measures as the Germans propose are impossible.

So the European Central Bank is caught between “accomodative” money policies and sovereign bailouts on the one hand, and German opposition to a weaker Euro on the other, and instead arguing for debt default and restructuring which Trichet cannot allow, as it would mean that non-German Euro debt would forever be suspect – not to mention impossibly expensive.

These are the tidal forces tearing the European Union apart

The only way this impasse can be solved and still preserve the status quo of the “big tent” European Union is if the Germans are somehow bribed into letting the ECB devalue the Euro.

What would the cost of such a “bribe” be? Easy – more German control of the EU’s purse strings, up to and including approval of the internal budgets of the EU member states, in exchange for bailing out the other insolvent countries.
This is the price the German electorate would demand, in order to bail out the PIIGS – and it is a cost the other EU nations would never agree to, not in a million years.

So clearly, a political decision is coming up, which has to be answered by the nations of the European Union:
Either preserve the Union at all costs, which would mean having Germany – which will be the one to bail out the rest of the EU – dictate economic policy and controlling member states’ domestic budgets –

or . . . end the European Union experiment altogether, and have each nation go back to its own currency and its own debt, and sort themselves out as best they can.

– or . . . have an orderly withdrawal of the weaker states from the European Union, and reduce the EU to its key members: Germany, France, Belgium and Holland, with maybe Austria and Poland thrown in for good measure. Call this reduced and streamlined version EU-redux.

If the European Union is to be saved, then this EU-redux that I’m positing would seem to be the only way ahead – and its something everyone who cares about Europe should want: The EU is essential for Europe’s long-term peace and prosperity.

One has to remember the original rationale for the Common Market, which underlines the rationale for the European Union of today: To bind Germany closer to France, and thereby prevent internicine aggression, and the possibility of another continental war.

See, for all their patina of civility, culture and civilization, the French and the Germans are at heart a couple of barbarian tribes who have hated one another since before Roman times. They still hate one another, truth be told. It’s why they have fought one another so relentlessly over the centuries. You see that level of deep-seated hatred bubbling over into periodic, startlingly violent wars in either North, Central or South America? No you do not. But the French and the Germans? No different from African tribesmen – only with nukes and pretentiously refined table manners.

The EU is how France has managed Germany, and therefore how both countries have been able to save on wasteful military spending to protect against one another.

If France wants to continue to have a manageable Germany, then France has to stay married to Germany in the EU. Therefore, the EU cannot be dissolved. The EU has to be saved.

Therefore, the only solution that will preserve the core function of the EU – id est, keep Germans and French from killing each other – is the following:

The marginal Eurozone members – the PIIGS, basically – will have to exit the Euro in an orderly fashion, go back to their own old currencies, and devalue against the Euro. At the same time, their Euro debts will have to be restructured. A likely scenario would be for the PIIGS’s Euro debt to take a haircut, but then be guaranteed by Germany/France/EU-redux in the unlikely case that the PIIGS defaulted on the restructured debt – which would of course happen within five years. This “guarantee” would be the price EU-redux would be willing to pay, if it meant ditching the insolvent Club Med.

If the weaker EU members are not kicked to the curb – if they are allowed to politically overwhelm Germany and use the EU’s political structure to get bailed out scot-free – then Germany will leave the Eurozone unilaterally.
This seems absurd – until you think about it:

The only way European insolvency can be fixed at this point without default or debt restructuring is by currency devaluation – something Germany will not stand, ever. Aside from historic phobias going back to the Weimar Republic, the Germans’ short- and medium-term position would be killed: They would rightly interpret a devaluation of the Euro as a tax on them, to pay for the Club Med spendthrifts.

They wouldn’t stand for it. Politically, the German leadership couldn’t stand for it. If this Euro devaluation were shoved down their throats, then the Germans will leave – guaranteed.

You have to keep in mind: After Ireland, the EU economies that need bailing out are all big. Spain and Italy combined are ten times larger than Greece. Hell, Spain and Italy combined are larger than Germany.

Look at the mess the Greek bailout turned out to be. If and when Spain and Italy go down the tubes, it’ll be a geometrically larger crisis than the one last spring.

Yet the Germans cannot tell Club Med to leave the EU – it’s politically impossible. Therefore France is the only way to save the EU.

France has to be the member that voices the opinion that ditching the Club Med nations is the only way forward for the EU. France has to join the Germans, in calling for Club Med to leave.

Retrospectively, it’s obvious that such a promiscuous, orgy-like European Union such as the one that exists today was a mistake. The weaker countries benefitted from Germany’s and to a lesser degree France’s credit, and went on a shopping spree. Greece is the prime example, but all the smaller economies to an extent did the same.
Now that the bill has come due, it’s obvious that the PIIGS killed the party: If they hadn’t been this irresponsible, the EU wouldn’t be in the situation that it is in.

Only France can save the EU – and of all the countries on the continent, France has the most to gain, by preserving a smaller but stabler EU-redux. What does it gain? A manageable Germany. Something everyone – and not just the French – very much want and need, long term.

Therefore, the EU must be saved, in spite of the tidal forces pulling it apart. If that means losing the PIIGS and the other smaller countries so as to preserve the Franco-German partnership, then so be it: The short-term prosperity of the marginal European countries would be a small price to pay for long-term European stability.