chorafas - sovereign debt crisis; the new normal and the newly poor (2011)

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CONSOLIDATION IN THE EUROPEAN FINANCIAL INDUSTRY
Dimitris N. Chorafas
SOVEREIGN DEBT CRISIS
The New Normal and the Newly Poor
Dimitris N. Chorafas
CAPITALISM WITHOUT CAPITAL
Dimitris N. Chorafas
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Sovereign Debt Crisis
The New Normal and the Newly Poor
Dimitris N. Chorafas
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© Dimitris N. Chorafas 2011
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First published 2011 by
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A slave is he who cannot speak his thought.
Euripides
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vii
List of Tables and Figures x
Preface xi
PART I FINANCIAL RISKS WHICH KEPT PILING UP
1 The World’s New Normal Economic System 3
Five forces promoting the next economic landscape 3
Cause and effect 6
The new normal defined 9
A historical precedent: the new normal at the end of World War I 12
Living at the edge of chaos 14
The importance of knowing the ‘normal’ conditions 17
2 The Newly Poor 22
Poor people’s recipe: falling deeper into debt 22
Property-owning democracies versus debt-laden democracies 24
Debt operates like a tax 27
‘I will be gone/you will be gone’ 29
Runaway public liabilities and the day of reckoning 32

Nobody is in charge of debt policy 35
Wealth in western nations dropped like a bribed boxer 38
3 The Salient Problem is Rights Without Responsibilities 41
The many heads of a debt hydra 41
What is meant by rights without responsibilities? 44
Entitlements 46
Pensions and the new normal 50
The middle classes’ broken dreams 53
What may follow the debt hydra? 56
PART II LOOSE MONETARY AND FISCAL POLICIES LEAD TO
THE DESTRUCTION OF WEALTH
4 Japanification 61
Japanification defined 61
Japanification’s after-effect: precarious public finances 64
Money thrown at the problem brings nearer the next big crisis 67
Financial discipline requires more than leadership 70
Governments, central banks and the 2010 Jackson Hole
Symposium 72
Correlation risk: Greece/Bear Stearns and X/Lehman 75
Contents
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5 Conventional and Unconventional Weapons in a
Central Bank’s Arsenal 79
Souk means both market and chaos 79
Black swans and the need for a new economic theory 82
Price stability and the central bank 84
The wall of liquidity 87
Quantitative easing 90
QE and competitive currency devaluations 92
‘Bad banks’, the Volcker rule and living wills 94

6 Fiscal Policies, Spending Policies and Conflicting Aims 99
The government takes its money out of its citizens’ pockets 99
The best solution is fiscal consolidation 102
Impact of fiscal policies on the financial system 105
Current account deficits 108
Sovereign debt and its consequences for the banking industry 111
Financial stability is one of democracy’s pillars 114
7 Restructuring Sovereign Balance Sheets 117
Deleveraging 117
Deflationary or inflationary risk? 120
Putting the carriage before the horses 122
Austerity is not that bad, after all 125
Budget cuts and B/S restructuring 128
‘Long-haired’ ‘solutions’ and monetary illusions 131
PART III EUROLAND’S FINANCIAL INTEGRATION AND
SOVEREIGN RISK
8 Woes of Euroland’s Financial Integration 137
Strong core and a weak periphery 137
Financial stability and economic integration 139
One-size-fits-all monetary policies are a dangerous game 142
The aftermath of asymmetries on the euro 145
Is a weak euro or a strong euro the better choice? 148
The message by credit default swaps should not be ignored 151
9 Sovereign Risk: Case Study on Greece 154
The Greek crisis is just the first episode 154
Wall Street helped the big spenders to hide debt 157
Textbook economics have no prescription for the current crisis 160
Events which led to the rescue 162
Going on strike against one’s own interest 165
As with swallows, EU money alone will not bring spring 168

10 Germany, France, Britain, Ireland and ‘Club Med’ 171
The German economy 171
The French economy 175
viii Contents
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The British economy 177
The Irish economy 180
Ireland, Iceland, Portugal and the uncle of Dubai 183
Down the Club Med way: Italy and Spain 187
PART IV THE NEW NORMAL’S EFFECT ON
THE WESTERN ECONOMY
11 The North Atlantic Similarities are Greater than you Think 193
Tales of the unexpected 193
Big deficits resemble a classic tragedy 196
QE2: poison or cure? 199
What went wrong with monetary policy and the
bank rescues? 201
American middle class and missing employment opportunities 205
The Dodd–Frank Wall Street Reform and Consumer
Protection Act 208
12 The EU’s Banking Industry and its Stress Testing 212
Profile of large and complex banking groups 212
Ultimately economies advance because their
institutions are strong 214
Banks do not know the risks they take with derivatives
and their IT is unhelpful 217
Stress tests permit crossing the river while feeling the stones 221
How different experts evaluated the stress tests by the
Committee of European Banking Supervisors 225
November 2010: four months after the test results

have been released 228
13 The Global Systemic Risk has been Programmed for 2014 232
Not only the economy, but also democracy is at a crossroads 232
The way to global financial stability is uncharted 234
Sovereign risks and contagion effects 237
European banks, American banks and the fight for
long-term funding 241
The former ‘poor’ are better off than the former ‘rich’ 245
Financial seismology and the slow-motion train wreck 248
Epilog 252
Notes 255
Index 269
Contents ix
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x
List of Tables and Figures
Tables
8.1 Cost of social contribution to social security as a
percentage of salary 145
Figures
1.1 Expected events and unexpected events are characterized by
two different distributions 18
10.1 German industrial output rebounded leaving other western
countries in the dust 172
12.1 The unbearable truth of a thermonuclear option with
derivative financial instruments 220
12.2 The normal distribution is a proxy valid only in connection
with low-impact events – the distribution of high-impact
events is not normal 223
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xi
Preface
The history of economics and finance is littered with the debris of once-
sacred theories. The ‘new economy’, whose promise of wealth and prosper-
ity was supposed to be the only possible course, is now in shambles. The
belief that theoreticians know so well how to manage the economy that
crises are banned forever is another fallen idol. And the hypothesis that
leveraging rescues people, companies and states from an existence of limited
dimensions proved to be an unmitigated disaster:
This book is about sovereign debt, fiscal deficits, the newly poor and the deceit
of the ‘State Supermarket’, with its endowments and cradle-to-grave care. The
issues confronting the global economy – and most particularly America,
Europe and Japan – are inseparable from the current lack of social and politi-
cal leadership as well as of a credible plan to deal with the mountains of debt
amassed by sovereigns, households and companies, particularly banks.
The text is written for people who need to know what the problem is
with the mountains of public debt, families’ deep indebtedness and finan-
cial institutions superleverage. It is not written for economists, analysts
and other technicians of the ‘dismal science’, to use John Maynard Keynes’
words. The many practical examples which it includes expose the situation
by which western society has cornered itself. Its constructive criticism gives
advice on how to come up from under, even if this means slaughtering:
unaffordable endowments,
unwarranted government rescues, and
other proliferating but unsustainable big-spending projects.
Largely due to weak governance, the United States and European Union
fell on parlous days. Public confidence is lost. Breaking trust can be done
very quickly; re-establishing it can take a long time. The aim of this book
is to provide an adult conversation on the risks of losing sight of past
failures and our society’s ability to solve its problems, with debt heading

the list.
Nowadays, with all liabilities taken into account, for every $1 of assets
there is $4 of debt. It is pure folly to think that such a huge amount of debt
will disappear on its own, or even be partially repaid if current policies
continue to prevail. Liabilities have the nasty habit of increasing with
time, particularly when people and companies have lost their individual
initiative and put all their hopes for the future in rescues by leviathan
sovereigns.
•
•
•
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Western sovereigns are struggling with colossal debt. Peacetime prec-
edents are lacking, the difficulties are so great and the debt hydra so fertile
that those supposed to know better are approaching the most vital issues in
ignorance. Certainty about the right thing to do in this most challenging
economic and financial situation is only expressed by people who either
dwell in a world of fantasy or do anything that hits their fancy, while the
economy around them falls apart.
‘We are living with an unsustainable hangout between our commit-
ments and our resources,’ said Timothy Geithner, US Treasury secretary on
October 13, 2010 in a Charlie Rose interview broadcast by Bloomberg News.
Geithner evidently knows what he is talking about because, together with
the Federal Reserve, the Treasury has become the big banks’ safety net and
universal fire brigade.
This is by no means a US phenomenon. Signs of distress are easily seen
all over the global economic landscape, but most particularly in the western
countries. From entitlements to the salvage of bankrupt institutions, the
State Supermarket – a creation of infantile leftism – has taken on respon-
sibilities which are unaffordable. Critics are right when they say that the

biggest deficit the West has is in the fact that there is not enough leadership
around, and also those who govern either don’t know how or don’t care to
help the common citizen understand what the issues are.
Yet, in a democracy the people have the right to know why the economic
and financial conditions are so grim, what has engineered the most recent
deterioration and what kind of measures are needed to prune the system and
put it on a growth course; also, why the sovereign debt is on an explosive
path and what the next act of the drama will be if nothing radical is done
to bend the curve. Which leads to three other questions: what lies behind
the evolving economic environment known as the ‘new normal’ (Chapter 1)
and who are the ‘new poor’ (Chapter 2), and how can this trend be stopped
before it becomes irresponsible?
The book the reader has to hand examines these issues and explains why
nothing has changed so far – in spite of the deep economic and financial
crisis created by big banks through gambling with novel (and little under-
stood) novel financial instruments. The gamblers continue their good work;
the regulators are timid; and this means that conflicts of interest have not
stopped running down the state’s finances.
On June 25, 2010 CNBC, the financial network, revealed that derivatives
trades by American banks alone stood at 90 times the level of US gross
domestic product (GDP). This was no number picked out of a hat. A couple
of weeks earlier, a combined estimate of exposure by the US Senate and
House of Representatives had put the market valuation of existing deriva-
tives contracts at $1.2 quadrillion.
* * *
xii Preface
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Unprecedented sovereign debt in peacetime and a quadrillion in derivatives
is bad news for the economy of the USA, the EU and the global economy
as well. Ultimately economies advance because their institutions are strong.

Today they are on the sick list while governments are running after the facts,
doing what Montagu Norman, the governor of the Bank of England in the
1920s and 1930s said about the central bank action which preceded the First
Great Depression: ‘We collected money from a lot of poor devils and gave
it to the four winds.’
As the case of Ireland and of its ‘Anglo-Toxic’ Bank (Anglo-Irish) docu-
ments, the mismanagement of credit institutions and poor governance of
sovereigns strongly correlate. High risk, descent into the abyss and a fire
brigade approach is the course typically taken by the ‘unable’, who have
been asked by other incapables to do the unnecessary.
Like the First Great Depression, the economic and financial crisis in which
we are living – probably on our way to the Second Great Depression – has
not been an act of God. It is the direct outcome of dismal governance by
chiefs of state, monetary policy-makers, investment bankers and the com-
mon man in the street. In terms of cause and effect, some of the worst deci-
sions date back to the 1990s, while others saw the light in the first decade
of this century. The people who took these decisions:
were singularly unqualified to be at the helm of great nations and of their
central banks,
could not decide by themselves on what to do and therefore consulted
others who had conflicts of interest, and
giving in to social pressure, they crash-landed the western economies
through high leverage and unpayable debt.
Against all logic, large and complex banking groups (LCBGs) have been
offered, since late 2008, an unlimited line of credit by sovereigns, at tax-
payers’ expense. But the LCBGs’ wounds, due to their high gearing and
misdirected decisions, have been so deep that their financial performance
did not strengthen. Whatever money they got from central banks they used
to bolster their capital rather than lend.
In spite of trillions thrown at the problem, the American, British, euroland

and Japanese economies remained anemic. The result of throwing trillions
to the four winds was a disaster. Credit is the oxygen of business activity, but
sovereigns did not oblige banks that benefited from public money to extend
credit. Without credit companies cannot function, and this has become also
true of households. If banks cannot or will not lend, then the economy is
falling off a cliff.
It is wrong to believe that central banks can continue forever accumulat-
ing useless collateral while printing money non-stop. The Federal Reserve,
Bank of England and the European Central Bank (ECB) have been doing
•
•
•
Preface xiii
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so for more than a couple of years, but it cannot become permanent. Mid-
November 2010 the ECB indicated that there were limits to the short-term
assistance it could give to Ireland’s banks, which account for around a
quarter of the total liquidity offered by the ECB to all eurozone banks. The
same applies to Portuguese, Spanish and other banks.
Things got out of hand because there is a symbiosis in debt characterizing
relations between big banks and sovereigns. This is creating serious risks
for the longer-term sustainability of public finances. Together with entitle-
ments, it sees to it that efforts associated to the reduction of government
debt are half-baked. Tightening the belt has been always unpopular, and
politicians think of their re-election when deciding about measures that
need to be taken, forgetting that when the crisis becomes longer term tough-
ness is required as well as competence, and that the party that deserves to
win must craft a narrative and policy that creates opportunity out of disap-
pointment and chaos.
* * *

The book divides into four parts. Part I brings to the reader’s attention the
financial risks which have been piling up for nearly 30 years, as well as their
aftermath. It outlines the succession of errors which has lead to a situation
known as the new normal, the economic, financial and social conditions
which (by all likelihood) will characterize the next two decades.
The text brings the reader’s attention to the fact that western societies are no
more the globe’s wealthy inhabitants. Their overleveraging and poor growth
prospects have turned them into new poor, while less developing economies
are moving up the ladder at a fast pace – aiming to be the new rich.
Part II provides documentation on the loose monetary and fiscal policies
in the West, those followed over too many years on both sides of the North
Atlantic. In recent times, such misdirected decisions were first made by
Japan in the early 1990s, and they brought the former industrial dynamo to
a state of coma. Hence, the term ‘Japanification’, describing where America,
Britain and continental Europe are heading.
This thesis is supported by both qualitative and quantitative evidence. It is
proper to inform the reader that in using statistics to document statements
being made emphasis has been placed on accuracy and not on precision. It
has been a deliberate choice to employ only the two or three most significant
digits of numbers and ratios (depending on the issue) with emphasis placed
on trend and on order of magnitude.
The theme of Part III is case studies in economic failure, starting with
euroland’s lack of success in financial integration, as well as its reasons.
This is followed by a discussion on what went wrong in the case of Greece.
Germany, France, Britain, Ireland and the so-called ‘Club Med’ provide
xiv Preface
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some other interesting examples on how economies are being managed by
sovereigns.
By way of conclusion, Part IV brings to the reader’s attention the new

normal’s effect on the western economies – including the one which used to
be the most vibrant: the United States. Several financial analysts said that
Greece is like Bear Stearns, the investment bank whose failure preceded
Lehman Brothers’ bankruptcy. By late November 2010 Ireland became Bear
Stearns ‘bis’. In search of a candidate for the Lehman role, some experts
mentioned America, while others said Britain.
* * *
What we forget today is to learn lessons from history – economic, financial,
political and social. If we don’t understand what has been behind the suc-
cesses and failures of our predecessors, then we condemn ourselves to repeat
the same mistakes. Decisions leading to misdirected risks are often taken as
a result of misquoting and misinterpreting what people of better knowledge
have said or done.
John Maynard Keynes, for example, is often used by leftist economists as
the patriarch of big-spending policies by the State Supermarket. Apart from
the fact that this is less than half true, Keynes had the power to express his
opinions without compromises, and he is quoted as having said: ‘When the
capital development of a country becomes the byproduct of the activities of
a casino, the job is likely to be ill-done.’
* * *
I am indebted to a long list of knowledgeable people, and of organizations,
for their contribution to the research which made this book feasible; also
to several senior executives and experts for constructive criticism during
the preparation of the manuscript. Dr Heinrich Steinmann and Dr Nelson
Mohler have been among the most important contributors.
Let me take this opportunity to thank Lisa von Fircks, for suggesting this
project, Renee Takken, for seeing it all the way to publication, and Keith
Povey and Joy Tucker for editing the manuscript. To Eva-Maria Binder goes
the credit for compiling the research results, typing the text, compiling the
index and making valuable suggestions.

D
IMITRIS N. CHORAFAS
Valmer and Entlebuch
Preface xv
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Part I
Financial Risks Which Kept
Piling Up
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3
1
The World’s New Normal Economic
System
Five forces promoting the next economic landscape
In the ‘go-go’ years which followed the 1994 crisis of debt instruments,
Alan Greenspan, then chairman of the Federal Reserve, coined the term
‘New Economy’. This he defined as defying the laws of gravity by producing
more and more wealth, practically forever. We now know that such talk was
a chimera, while the tandem of bubbles it produced in 2000 and 2007 were
real. Their origin was not difficult to detect:
a highly accommodating monetary policy,
free reign to leverage and other excesses, and
scant attention by supervisory authorities paid to watch over systemic
risk.
These causes of economic and financial troubles tend to correlate among
themselves, amplifying their impact. Therefore, the disaster which
followed was not totally unexpected. One of the outstanding consequences
of the major global downturn, which started in 2007 and whose effects

are still widely seen, has been the enormous increase in government debt
in western countries. Spending by sovereigns rose very rapidly to both
keep alive big banks and other ‘strategic’ companies, some of which were
zombies, and offset the contraction in private sector spending, as millions
of households confronted unemployment as well as uncertainty about the
future.
1

In the USA the public deficit jumped from 2.8 per cent in 2007, first year
of the most recent economic and banking crisis, to 11.2 per cent in 2009. In
the EU government deficits varied widely: from over 14 per cent in Greece to
a little less than that in Ireland, 11 per cent in Britain, 9 per cent in France
and 6 per cent in Germany. The big spenders at the governments’ ivory
towers have had a ball – and that’s anathema to public confidence.
•
•
•
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4 Financial Risks Which Kept Piling Up
As Demosthenes, the ancient Greek orator, said: Business is built on
confidence. Any waning of it, particularly at the time economic fortunes seem
to start timidly rising, is counterproductive. Consumer confidence is crucial
to western economies as it represents up to 70 per cent of spending; a figure
amplified by industrial production which nearly always cruises along. ‘The
real devils today are the states not the bankers,’ says Dr Heinrich Steinmann,
a former vice chairman of UBS.
Scared of the long-lasting effect on the economy of these deep red
numbers, by the second quarter of 2010 several western governments –
including Britain, France, Germany, Italy, Spain and Greece but not the
USA – announced rather significant austerity measures to reign in their dete-

riorating fiscal situation. This led some economists to express concern that an
austerity policy amid an ongoing recession will make matters worse, warning
how fragile the early signs of an upturn still are (see also Chapters 5 and 7).
Other economists, however, have taken precisely the opposite stand,
pointing out that the unprecedented 2008–11 economic easing – which went
in full swing with the Lehman Brothers’ bankruptcy and near bankruptcies
of AIG, Fannie Mae, Freddie Mac – has turned western economic history
on its head by creating an unsustainable flood of money (see Chapter 4
on the many heads of the debt hydra). These economists also emphasized
that business confidence will wane if the market sees no signs of restraint in
keeping the printing presses busy.
While the two aforementioned economic theories are diametrically opposed
to one another, they also share the same basic weakness. No economist,
on either side of this gulf of opinions, has come up with a clear and well-
documented definition of the cause and effect that characterized the ongoing
crisis (see the next section). Which is the primary cause? Is the salient issue:
1. the accumulated huge amount of debt per se?
2. or, is debt the consequence of the current structure of world finance and
its institutions?
3. or, is the structure of world finance the consequence of entitlements and
globalization, and therefore of unsustainable policies?
4. or, is it the classically poor regulation at government levels, which allows
greed and irrationality to carry the day?
5. or, are these reasons closely intertwined, and therefore acting on one of
them affects all the others with dismal results?
In my opinion, the most likely fundamental reason for the current malaise
is the fifth alternative which integrates all others, making both the
problem and any serious approach to its solution tremendously complex.
Yet, our efforts must be focused. Searching for a holistic approach which
simultaneously attacks every cause will be like trying to unscramble

scrambled eggs.
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The World’s New Normal Economic System 5
We might, but only might, have a better chance by establishing priorities
and subsequently attacking these causes indidually – provided we don’t lose
sight of the total picture, or forget the underlying interdependencies among
the causes of the current state of world affairs and their effects (see below).
In addition, to untie the threads of this knot we would need to use practica-
ble rules like those we employ to organize our lives, promote our businesses
and confront our obligations.
Talking of priorities, the overriding obligation at this moment is to control
the exploding debt at all levels of society. And because it is famously hard to
govern debt, this is going to be the issue to which the present book addresses
itself. It is not normal that every $1 in production corresponds to $4 in
debt. Such an ‘unstoppable’ debt inflation has to stop before it becomes
irreversible.
But the other causes should not be forgotten. Looking at them in reverse
order to that presented in the preceding list, there has been, indeed, a huge
amount of greed which amplified the economic and financial debacle of
2007 and the ensuing years significantly. In a Charlie Rose interview broad-
cast by Bloomberg News on April 26, 2010, Michael Lewis, the author, put
the blame on both the market players and the instruments they have been
using, stating that:
Real corruption is behind new financial instrument design.
This problem is widespread; Goldman Sachs cannot be the only bank
which designs debt-based securities aimed to fail.
All sorts of tricks embedded in instruments have been accompanied by
misrepresentation to clients – which under current laws is illegal.
Regarding the structure of international finance and its contribution to
the crisis we have been going through, its reorganization and control was

thought to be the mission of the G-20 heads of state. But international tour-
ism aside, the G-20 meetings have so far been met with no real success and
it is a deliberate decision not to dwell on their remit in this book.
Allow me also to add that, as if to make matters worse, within each
jurisdiction the prospects for a significant and deep-rooted regulatory
initiative are not good. The slimmed-down Dodd-Frank Act in the USA is a
lightweight (see Chapter 12). In his deposition to Congress, Paul Volcker,
the respected former chairman of the Federal Reserve, insisted that the
essential flaw in regulatory proposals and measures being adopted is that
they leave the structure of banking unchanged. This is a pity, because
if culture and structure remain the same, then so does the ultimate
systemic risk.
Risk-taking is a basic ingredient of progress but it must be matched by
risk control. Watching one’s exposure is not an option; it is a requirement
of sound governance of a person’s, company’s or state’s fortunes – while
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6 Financial Risks Which Kept Piling Up
paternalism towards the homegrown banking industry is a most serious
error.
Cause and effect
Virgil, the Roman poet, said: ‘You must know the causes, to draw the right
conclusions.’ What are the causes of the crisis we are going through in
2007–11? The answers most often heard in my research have been lax lend-
ing practices, the real estate bubble and subprime mortgages. While these
have been, indeed, important factors, they were the triggers of the debacle
rather than fundamental reasons. The real causes are:
massive increase in debt, at all levels of society,

excessive risk appetite, amplified by exposures risk-takers don’t under-
stand,
a shadow banking system, with its dubious debt instruments, still fund-
ing risks,
limitations of financial engineering and serious mistakes in model-based
estimates, and
totally substandard risk management at all levels, totally inappropriate
in a world where derivatives are the most popular and lucrative trading
instrument.
2
Largely engineered through leverage, and therefore by ‘funny money’, this
massive increase in debt has become a western culture. By no means a
random event, it is the culture of ‘borrow now, pay later (maybe)’ which
pervades all levels of western society – and which must now change to: save
now, so as not to starve later on, for an improvement in fortunes of peo-
ples and states. There have been many false prophets who prompted public
spending through misplaced statements, and helped in creating this attitude
to spending.
‘The future appears brilliant,’ wrote Thomas Lamont of JPMorgan a short
while prior to the ‘Black Tuesday’ of late October 1929, moreover assuring
that ‘air holes’ due to a ‘technical condition’ had developed in the market
but that the situation was ‘susceptible to betterment’.
3
With hindsight we do
know what followed in the decade after the First Great Depression.
Clear minds expressed the opposite opinion. ‘We have involved our-
selves in a colossal muddle, having blundered in the control of a delicate
machine, the working of which we do not understand,’ John Maynard
Keynes wrote in December 1930 in his article ‘The Great Slump of 1930’.
The same words can be used today without changing a syllable in regard

to what the Federal Reserve, Bank of England and (to a slightly lesser
extent) European Central Bank have done to the western economies in the
2008–11 timeframe.
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The World’s New Normal Economic System 7
Other warnings, too, were unheeded and relegated to the wastebasket of
economic history, even if they came from people who could see further than
most. Friedrich Engels (1820–1895) – whose work and foresight extended
beyond economics – identified in the mid-nineteenth century certain social
happenings that lead to a dismal future:
people tending to live beyond their means,
4

rapid urbanization under stressful conditions, and
short-term policies of governments, adopted because of their lack of cour-
age to lead in shaping society’s future.
Engels wrote, in 1844, that the centralization of the population in great
cities (the cause) exercises of itself an unfavorable influence (the effect):
‘All putrefying vegetable and animal substances give off gases decidedly
injurious to health, and if these gases have no free way of escape, they
inevitably poison the atmosphere.’
5
Urban dwellings in crowded cities, which are rapidly replacing rural life
for large chunks of the world’s population, may range from palaces to shanty
towns, but what they have in common is the strained way of life – full of

uncertainty and anguish. This is the new normal, in social terms, and Engels
described it in a prophetic way nearly 17 decades ago. (The definition of the
new normal in terms of the economy is given in the next section.)
In cause and effect, there are similarities between the social and economic
definitions. The way people live and work (the cause) has a great deal to do
with economic after-effects because – from autos and house appliances to
exotic vacations – the twenty-first century’s proletarians have been enjoying
an increasing standard of living paid through debt. The mountains of leverage
were supposed to be taken care of by the ‘future generations’ but, as the deep
crisis of 2007–11 has shown, they have already become unsupportable and
unsustainable by this generation.
The easy way for politicians is to promise what they know they cannot
deliver and make the people pay for it. George W. Bush came to office in
2001 and engineered the largest ever US peacetime deficit (the cause) –
promising security and plenty of other goodies in exchange. In terms of
security the effect has been practically nil. Instead, what the American peo-
ple got is another layer of bureaucracy in Washington and an explosion of
public deficit.
Barack Obama compounded all of the Bush mistakes. Among them, the
two conceivably worst presidents in the history of the American Republic
brought another calamity which will haunt the USA in the coming decades:
the new poor (Chapter 2).
For reasons quite similar to one another, two megarisk events are likely
to compete with one another during the coming years. One is that the
economy implodes as sovereigns, companies and families restructure their
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8 Financial Risks Which Kept Piling Up

balance sheets. The other megarisk is that the economy explodes as debt
reaches for the stars. (Both the reasons and the consequences will be
brought into perspective in the last chapter of this book.)
A preview of events to come would see the specter of horribly indebted
countries which scare the hell out of their partners. For all the brave talk
about solidarity among euroland’s member states, their taxpayers don’t wish
to put on the table the money which might keep their badly behaved and
undisciplined neighbors afloat. Not without reason, they believe that this is
not their cause and that the nations which misbehaved should pay for the
effects by themselves.
This has been behind an overwhelming 69 to two vote by the Slovakian
parliament, in the week of August 8, 2010. A crashing majority of Slovak
deputies rejected taking part in a European Union aid package for the trou-
bled Greek economy (Chapter 9) – and they had good reasons not to care if
both the Brussels-based European Commission and the German government
criticized the Slovak parliament’s decision.
‘All member states committed themselves politically to assistance for
Greece,’ said a spokesman for Chancellor Angela Merkel. ‘Every member
relies on solidarity; solidarity is no one-way street.’
6
That’s true, but the
prerequisite to solidarity is self-discipline.
The Slovaks, who said they would not pay for other peoples’ ‘twenty-
first-century lifestyle’, know that their country has a gross domestic product
(GDP) per capita of $21,200 at purchasing power parity (PPP), while Greece
has a per capita GDP of $32,000 – nearly one and a half times greater. Slovak
taxpayers have been asked to put a4.4 billion on the table ($5.9 billion) for
something they say was not their fault. Moreover:
Slovakia embarked on a bout of painful economic reforms in 1998, that
transformed it into one of the EU’s top economic performers.

By contrast, Greece, Spain, Portugal and other EU countries piled new
debt over old debt, rather than taking the tough decisions necessary to
restructure their economy and labor market.
This cause and effect, the most significant cross-border difference in
economic management, is another way of showing that the accumulated
huge amount of debt is, per se, a real and present danger. The recent crisis
made it highly visible, and one cannot blame those people who don’t
wish to pay for other peoples’ mistakes, even if they belong to the same
community.
The bigger countries in euroland had additional reasons for those of
Slovakia, when they decided to salvage Greece.
7
In fact, for these reasons, in
June 2010 they put together a war chest of a750 billion (about $1 trillion),
enhanced by a unique supply of liquidity from the ECB and aimed at arrest-
ing the Damoclean sword of a reignited financial crisis.
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