March 18, 2014

Elite have us living in a fool's paradise

Posted in Economic History · 45 comments ·
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In the summer of 1787, determined to show foreign ambassadors the might of Russian power in the newly subjugated Ukraine and Crimea, Catherine the Great organised a boat trip down the Dnieper past modern-day Kiev.

Her trusted field marshal, and her lover at the time, Prince Gregory Potemkin, organised a series of mobile villages to appear as soon as the imperial barge, stuffed with innocent and gullible foreign dignitaries, came into view.

When the riverbank came within earshot, the villagers would break into a spontaneous, sycophantic chorus of praise for the Empress, giving the perplexed foreigners the impression that not only had Russia pacified Ukraine, it had also managed to win over the local peasantry, which was no mean feat in the 18th century.

As soon as the imperial barge turned the corner the villagers would dismantle their villages and rebuild them overnight further downstream, with a view to performing the same malarkey the following day.

This continued each day for over two weeks. The overwhelmed foreign dignitaries then reported back to Berlin, Paris and London on the marvel of the Russian conquest and pacification of Ukraine. Thus was born the ”Potemkin village approach to economic and political progress.

Over the years, the Russians have perfected this approach of half-truths, misinformation, disingenuous analysis and obfuscation. Russian governments perfected the art of identifying culprits on whom to pin the blame for their own failings: Jews, Poles, profiteers, priests, intellectuals, kulaks, enemies of the revolution and so on.

Typically, if there is a problem, a few culprits are rounded on and grandiose decrees are announced to fight the evil, whether it is economic, social or political.

Along with the entirely ”made up triumphs of the five-year plans, the Soviets deployed the Potemkin tactic to pretend that they were more powerful than they actually were.

The West believed the Potemkin villages and that is why no one foresaw the overnight implosion of the Soviet Union, despite the billions spent on so-called ”intelligence. Although there are good arguments to suggest that even if the CIA doubted Russian strength it wasn’t in their interest to tell the truth because the US government would have cut the defence budget if the other superpower was nothing but a Potemkin village with inter-continental ballistic weapons.

This week, I thought of Potemkin villages, not just because Ukraine and Crimea are in the news, but because of what is happening to our government’s favourite indicator of economic success: the Irish bond rate.

As this column has been pointing out until it is blue in the face, the fall in Irish bond yields is because of European Central Bank president Mario Draghi’s promise to ultimately buy peripheral bonds if he has to in order to prevent another euro debt crisis. This is not only the case with Ireland, it applies for most of the eurozone from Greece to Italy, Portugal, Spain and even France.

The game that Draghi is playing is nothing more than lending money to bust banks that lend this money to bust governments.

This pushes down bond yields and pushes up bond values, implying that the balance sheet of the banks looks better and the credit worthiness of the governments also looks better, but nothing has changed in reality.

It is a sleight of hand, which temporarily makes the banks look a bit more stable and temporarily makes the government look more robust.

For the banks, this temporary increase in the asset side of the balance sheet works wonders ahead of a stress test. Passing the stress test is dependent on having enough capital. However there is really no such thing as a quantum of bank capital.

Bank capital – the new target for the ECB – is actually a residual, not a target. It is what falls out when you subtract a bank’s liabilities from a bank’s assets. Therefore, anything that raises asset values (such as government debt on the asset side) and anything that reduces liabilities (such as loads of bad loans, which haven’t been written down properly as is the case in Ireland, on the liability side) will raise bank capital. As you can see, not only is bank capital a moving target, dependent on other bits of jiggery pokery but the lads on the inside can also influence bank capital.

The bankers could overstate assets and underestimate liabilities to boost the capital in order to pass the stress test. Do you think such a thing is beyond these guys?

Yet in the real economy this week we saw that GDP – the government’s preferred figure when it is going the right way – actually fell in 2013. Also we learned that inflation, as measured by the CSO, is actually falling too. Of course, the government brushed off the fall in GDP because it doesn’t suit them and hardly commented on the inflation rate.

If the rate of inflation is falling at a time of unresolved debts, it means that the debt burden will actually rise not fall. If the price you charge for your goods that you sell is falling, it means your income is falling and if the legacy debts from the boom are not falling or being written down, your debt burden is rising.

This is exactly what is happening here in Ireland as the debt burden creeps ever upwards which means more risk, while the bond yield falls, which means less risk. One of these things has to be wrong, they can’t be both right!

In the domestic economy we’ve seen modest falls in unemployment indicating some demand out there and retail sales have been stronger. However, Ireland is now a cash economy. There is no credit and with no credit, projects – even very good ones – don’t get financed and there is no vibrancy.

In such an environment where the cake isn’t getting any bigger but is actually getting smaller, the insiders (those with a stake and influence on both the left and the right) move to ensure that they get their share. Meanwhile, the outsiders (those without a stake, influence or ”pull) remain shut out, surviving day to day.

All the while the elite, the state, the ECB, the EU, the institutional bond market and much of the media, focus on the fall in bond yields and the exit from the bailout; these are the Potemkin villages of the 21st century. Like the Russians of old, we are so concerned about deceiving others that we end up deceiving ourselves.

 

David McWilliams writes daily on international economics and finance at www.globalmacro360.com

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      • Morning John, looks like one of your wobbles took care of that Malaysian airliner.

        A mate of mine who studies Ayurvedic medicine says there are two eclipses coming up soon – something which he views as ‘challenging’.

        All that stuff is Potemkin villages (I’m on topic David!) to me.

        • I am glad you share it . This day three weeks 8 th April , is the one I fear the most as it will be the 7th day before the next Moon Wobble . Full Moon , Blood Moon and Feast of Passover ….15th April …….all that week will be …I hate to think of it .

    • David used the nearest metaphor and a very good one …better han Rusian Doll .

      • Deco

        A bailout, that is then fits inside another bailout. Which then fits inside another bailout. Which in turn fits inside another bailout.

        Is that Russian ? Or would that be a Greek model ?

        Greece got bailed out queitly again. We cannot upset the almightly markets.

  1. ‘One of these things has to be wrong, they can’t be both right!’

    Can both of them be wrong ?

  2. I fear the underlying problems are far worse then even you suggest. Banks are now,in large part, vessels of the government. We owe more money now that at the start of the crisis. The capital transmission mechanism; savers to investors via the banks is kaput. Money is being debased and savers penalised. Should the credit and capital transmission system be fixed Ireland will shoot out of the gates, having weaned itself, albeit forcefully, from easy credit. I do not think the political classes have the expertise or the courage to make this happen.

  3. pauloriain

    Never forget what is being done right now. Do everything in your power to hold back as much as you can from the elite. None of this makes sense and we can only deduct that total collapse will be necessary to actually deliver change to a proper system of income distribution, which is not corrupted by the lecherous sleeven hoop jumping talentlessly bureaucratic.

  4. michaelcoughlan

    Hi David,

    I have satisfied myself as to whether we have inflation or deflation. It’s worse than just deflation David. We have Biflation;

    http://inflationdata.com/articles/2013/04/04/biflation/

    Michael.

  5. Tull McAdoo

    Well David,
    it seems as if the Germans have spotted the Potemkin Village ruse but in true pragmatic terms do not see the ECB facade causing any problems for their Bundestag facade…..lets all extend and pretend…

    http://www.independent.ie/business/world/german-court-confirms-legality-of-euro-zone-bailout-scheme-30102707.html

    • michaelcoughlan

      Hi Tull,

      Where do these people think “Growth” will come from? It’s very perplexing.

      Michael.

      • Tull McAdoo

        Hi,
        I suppose it would be fair to conclude that the Germans would settle for growth at 2% approx, inflation 2% and interest rates at 2% plus some cost margin. The problem for those countries new to Europe is that they depend on higher growth figures in order for convergence to take place with the stronger German economy. Convergence cannot happen if you take a one size fits all policy approach, as this only re-enforces inequality.

        Austerity needs to be tailored to reduce funds from ineffective and inefficient projects, but not be used as some sort of sledge hammer to”fix” peripheral economies and others in some unbalanced elliptical orbit around the centre in Frankfurt.

        • ps200306

          Actually, an elliptical orbit is a great analogy for the peripherals. The velocity and the potential can vary wildly up and down, but the total energy never changes.

  6. Yes Tull,

    I am not one who believes that the Germans are anything but pragmatic when they need to be…and right now, they need to be!

    Best

    D

    • Tull McAdoo

      I always think back to the 0-0 draw that they played out with the austrians when they both qualified as a result….fairly brazen that was ;)

  7. Pat Flannery

    The Potemkin village analogy applies most threateningly in the pension fund area. This is where most of these low-interest high-value bonds end up, causing the greatest economic distortions. The lack of income on pension investment portfolios is resulting in ever-growing unfunded actuarial liabilities in pension funds worldwide. These fund’s assets are correspondingly overvalued at “market” rate.

    All this is being deliberately hidden by governments and corporations by simply keeping “actuarial liabilities” off the books. There is no government accounting standard in place requiring that they be shown as “contingent liabilities”, which is what they are. The reason is simple: putting them on the books as real debts would bankrupt just about every public agency in western market economy countries.

    Far from recognizing these actuarial liabilities as real, or even contingent, liabilities, the Harvard MBA geniuses have recognized the mesmerizing value of the “actuarial” concept and applied it to CDOs and other investment instruments. Thus they have taught western economies how to hide real liabilities behind actuarial concepts.

    But you can’t hide the truth forever. The lack of earnings in the traditional investment instruments of pension funds, viz. bonds, is an unmistakable sign of the crisis to come.

    Right now we are all Potemkin villagers. We eagerly run to the next passage point of the royal barge and shout out our faith in the fantasy. As modern Potemkin villagers we are terrified that when our time comes to retire, there will be no royal barge on the river.

    • michaelcoughlan

      Hi,

      “the Harvard MBA geniuses have recognized the mesmerizing value of the “actuarial” concept and applied it to CDOs and other investment instruments”

      I know. McWilliams had a piece about intellectuals in the Fed and their theories being some sort of “new paradigm” solution to fix the problems. That and the fact that all of the failed institutions were run by chartered accountants. God help us all.

      Michael.

    • Deco

      MBA = Management Bull5ht Accreditation.

      How many MBAs are there in the pillar banks ? How many were there when they went wallop ?

      Morgan Kelly’s recent scepticism about declining standards, and the dumbing down of the intellectual aspect of our country come to mind.

      Irish third level – another potemkim village.

  8. The fools paradize we live in is that controled by the cenral banksters and their shadowy elite.

    Libya is a prime example of the duplicity we live with. The west bombs the shit out of the most progressive country in Africa. Debt Free and no central baking system controlled by BIS and the Boyz.

    The first thing the rebels asked for was a central bank and before they controlled a quarter of the country.

    http://financialnewsnetwork.tv/?p=393

    I despair of David addressing the real issues of our times as he flies around the world consorting with the very bastards enslaving us all.

  9. Deco

    Well, the article ie excellent.

    We in Ireland don’t have to go looking for Potemkim villages. We need only listen to the Six One News, from Pravda, concerning the deep respect that is showered upon the deeply suspect.

    And the Pillar Banks are the top of the list with regard to Potemkim Villages. Especially the largest bank in Ireland. The one that John Allen told us about many many moons ago. 99% state owned and PAYE taxpayer funded. It should be renamed An Bord Scandaill. (missing a fada on the second “a” there). Yep. Because it is not really a bank. It is just a transitionary body that sells stuff into that bad bank that is known as NAMA. We had six bad banks, but FF (plus extras) still felt an overwhelming desire to create a seventh.

    So there you have it folks. The unmagnificant Seven. With Baldy Noonan playing the part played by Yul Brynner. Play the music there, for Ireland’s Potemkim bankers.

    Then we have the “recovery”. It is built on another tech boom, that is backed by lose monetary policy. The jooker in the pack has to be Facebook – it’s market capitalization is now equal to twice the market capitalization of Europe’s largest car company. This is what is sustaining Dublin’s housing “mini-boom”.

    Then there is the state borrowing ponzi racket. Because Angela Kerins thinks that “I’m worht it”. So do all the other busy body bosses in the oversized, expexpensive, overextended institutional state that grew in a cancerous manner under Bertie the Man U fan.

    In present day Ireland, if we were to have an official business model, it would be a throw up between the Potemkim village business model, and dirty tax dens where all sorts of carry one exists, and never gets reported – Las Vegas on the Liffey.

    Excellent article – compulsory reading for anybody in this country who wants to know what is really going along, alongside the blog site of Constantin Gurdgiev.

    • Deco

      There will be a social media sector share price plunge. Dot Com Crash 2.0. The paralells are striking. It used to be out about “hits” – now it is about “likes”. It was about business models, and now it is about interaction models.

      It is used to be about projections, and it is once again about projections.

      This is one plank of Dublin’s property boom. The other is the overly generous Irish insititutional state, with it’s hundreds of quangos, and what else. Debts are rocketting, GDP is highly suspect, and the real estate valuations are creeping upwards.

      Because Ireland’s institutional state needs real estate to creep upwards, in other to make the Potemkim bank look cheerful.

      the whole thing is about to taken down in a stock market crash. The imbalances have reached absurd levels. The downside risk is now massive.

      Make sure that your pensions are not invested in social media shares.

    • michaelcoughlan

      “We had six bad banks, but FF (plus extras) still felt an overwhelming desire to create a seventh”

      Terrific stuff. Absolutely hilarious.

  10. Adelaide

    I’d like to add one more item to the Potemkin analogy list: A Job.
    It does not pay to work in this country. As for commuting long distances, yikes! Employment isn’t what it used to be. Approach with Caution.

  11. Colin

    The best way to escape the perverted elite is to emigrate. Do it, it feels good. Dump the mythology about the old sod being the best place in the world to bring up kids – it comes from Dr. Goebbels School of Propaganda.

    Ireland is a very dangerous place to be. Psychopathic rapists and murderers are on the loose, ready to wreck someone’s life any moment. Don’t think justice will prevail – the judges side with the offenders everytime. Our gardai are lazy and inept. Our nurses are hungry for tea breaks, sickie days and holidays. Our teachers don’t really care about anything except their terms and conditions. Our retailers are gombeens. Our bosses at work are often bullies. Our farmers demand the highest standard of living a peasant could ever dream of, and get it too.

    • Reality Check

      @ Colin Nail on the head.

    • Pat Flannery

      Colin: the usual rant of a bitter unionist. No doubt if we re-entered your beloved UK all the evils of our Irish independence “experiment” would disappear – into the bigger mother county’s “psychopathic rapists and murderers” milieu and that would solve it for you.

      Please Colin work on your Brit accent over there and don’t tell anybody you are Irish. Thanks.

      • Colin

        I’m free, to do what I want, any old time,
        I’m free, to do what I want, any old time,
        I say, love me, hold me, love me, hold me cos I’m free!
        To do what I want any old time.

        Come on Paddy Flannery, let your hair down….

        http://www.youtube.com/watch?v=ZVGf3ePIO0I

        Nice to be free…..don’t be afraid of your freedom!

      • Colin

        My accent is fine as is my diction, as some posters here can verify, as well as our host. I speak clearly in a soft oirish brogue so I do, and everyone in London understands me clearly without needing to say ‘pardon’ or ‘excuse me’.
        So sorry there old chappy, no Cockney infiltration there. And sure aren’t I the spit of yer man James Bond, that Pierce Brosnan fella from Meath, so people see my Irishness a mile off before they even here my brogue, so I can hardly deny it now Paddy.

        May I enquire if you have a Hollywood Irish accent yourself? Do you coach dem filum stars like Tom Cruise and the like?

        …now you’re listening to newstalk breakfast 106-108 fm, over to ian guider our business editor….
        ‘dis tursday, we are expecting shares in the tree banks to fall, aib is down tree and a turd percent already, while boi is down turteen and a turd percent and permanent tsb is down two and tree quarters percent’

        • Pedro Nunez

          +1
          and the female newspresenter who after the Italy game said BOD could become a sports ‘pundent’ (on newstalk?) Vicky Pollard or what.

  12. “Russians do not mince their words. When ex-Kremlin advisor Alexander Nekrassov said last week that the Irish people are ‘great’ but that they are ‘fu*k*d and brainwashed’ by the EU, he was being a little impolite. But he may have been right.

    http://businessetc.thejournal.ie/readme/damien-kiberd-irish-not-eurosceptics-1349282-Mar2014/

    After the madness of Paddy’s Day, back to reality. The madness is, other than a few like Damien Kiberd, no-one seems to care about the absorption of a Sovereign Country into a Franco-German economic and legal quagmire, yet Gilmore has the nerve to stand up and offer his 2pence halfpenny over Crimea. As if Putin gives a toss.

    Excellent article and metaphors. Russian dolls? Inside Gilmore is there a Drahi? Inside Enda, a Barroso? [banish those images from you mind as NSFW!]

  13. TODAY

    It is the 20th March , 2014 .

    Today next year we will witness an Eclipse between the Moon & SUN that marks the middle of the two year Blood Moon Transition Period .

    Today is also the Beginning of this heavenly movement that will last until end of next year ….only four in the past 500 years .

    No Fools Paradise will survive this journey .

    Be Ready …..your footprints commence …marked on sand where all memories will be erased ….only the pure in heart will survive …be determined ….Be Ready.

    Read Genesis .

  14. [...] couple of quotes on bank balance sheets. First, customer loans are bank liabilities: Bank capital – the new target for the ECB – is actually a residual, not a target. [...]

  15. [...] Ireland: Elite have us living in a fool’s paradise [...]

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