EU Central Bank non-Sterilizing Bond Buying

OK, this one is a bit obstruse.

But first, a sidebar on obstuse: It’s one of my favorite words that I rarely get to use. It is an obscure and hard to understand form of abstruse; which means something that is obscure and hard to comprehend. Just love the self definitional thing… ;-)

So the European Central Bank (ECB) has announced an intent to maybe kinda sorta “sterilize” purchases while it buys Government Bonds from countries like Spain, Italy, Portugal, Ireland, etc. Why? Well, that’s a good question…

Central banks are notorious for saying one thing and doing another. For hiding their intent. This is reasonable, since $Billions can be made if you really know what way they intend to zig or zag; and in some cases that behaviour would do things counter to their intent. So it is imperative to listen closely to Central Bankers; but not trust them implicitly… The old “trust, but verify” seasoned with a bit of “And where are you hiding the truth today?”.

The first hurdle we have to get over is that “sterilize” word. Typically this is used to describe how a Central Bank buys Treasury Bonds, but takes some other action so that the act does not become a ‘creation of money’ and drive down the currency in the foreign exchange market. The Fed, for example, is the only Bank in the USA that can have an infinitely large balance sheet and can (thanks to the fractional reserve banking system) have any fraction of total assets backing what it buys. Essentially, they can create money out of nothing. (This leads to a smaller hurdle of understanding: “how do banks create money?”, so for those who don’t know, an added side bar is below.) For “sterilization” to work the bank has to not create money, but instead has to use existing money ( in a nutshell…).

This first definition below gives an idea, with their first usage being in the context of Foreign Exchange. Buying an asset in one currency and offsetting with another.

Definition of ‘Sterilization’

A form of monetary action in which a central bank or federal reserve attempts to insulate itself from the foreign exchange market to counteract the effects of a changing monetary base. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the forex market.

Investopedia explains ‘Sterilization’

For example, to weaken the U.S. dollar against another currency, the Fed would sell more U.S. dollars and buy the foreign currency. The increased supply of the U.S. dollar would lower the value of the currency. The Fed would do the opposite if it wanted to strengthen the U.S. dollar.

So The Fed might want to lever up the U.S. Dollar supply, but not have the value of the dollar drop against the Yen. They would buy some U.S. Treasuries (for example) and that causes more $US to be in the hands of government (thus being spent). At the same time, they could use some of their Yen reserves to sell Yen and buy dollars in the Foreign Exchange markets. Done properly, you get more total $US in circulation, and the value of the Yen is unchanged in $US terms.

In reality is it is more complex than this, since the Japanese Central Bank might also be trying to move the Yen… so Central Banks often try to coordinate their actions. What for you and me would be called “collusion” or “conspiracy to manipulate” markets is for them Standard Operating Procedure. They get “special” rules…

The wiki has a pretty good, if somewhat longer than needed, explanation:

Sidebar on Fractional Reserve Banking:

A bank takes in a deposit, call it $100. It then loans out that $100 to a customer, who deposits it into their checking account. So that bank has a new $100 deposit… that it can loan out to a customer who puts it in savings (creating another $100 of assets for the bank) so the bank can loan out another $100… repeat to infinity. That is the essential “magic” and “trouble” with banking that has no control on “reserves” or it’s evil twin “leverage”. To break this cycle, we require that the bank “set aside” some portion of every deposit as “reserves”. If that percent is 100%, you get no ‘expansion’ of the money supply. $100 gets deposited and ALL of it sits in the vault. Very secure, but not a lot of money being made… If the reserves requirement is 50%, the $100 gets deposited, $50 gets loaned out (and re-deposited) then $25, then $12.50, then $6.25, then $3.12, then $1.56, then… You get a doubling of the money on deposit. A typical “reserve” requirement is about 5% to 20%. This value is set by The Fed in the USA and by other Central Banks around the world. In any one country / Currency Zone there is ONE bank that is not subject to the reserve requirement: The Central Bank. They can multiply money to any degree (called ‘expanding the balance sheet’); but are encouraged to only do this during a Financial Crisis…

And the ECB Said?

So the news is that the European Central Bank is going to start buying Government Bonds issued by the various distressed countries (the PIIGS – Portugal, Italy, Ireland, Greece, Spain) to “assure the convertibility of the Euro”. OK…..

So I don’t think it is the convertibility of the Euro that is in doubt, but the credit rating of the PIIGS. Still, it’s only a tiny lie, as Central Bank Distractors go. So if the ECB buys those bonds, it can do it in a few different ways. It could buy them with Euros from deposits, put the Bonds in the vault, and call it done. But that would increase the supply of Euros, so be slightly inflationary while also depressing the Euro vs other currencies in Foreign Exchange.

It could sell $US reserves in the FX (foreign exchange) market for Euros and then buy the bonds. That would tend to hold the Euro up against the $US (but might have both the Euro and $US drop vs other currencies).

It could sell some other assets (like German Bunds or US Treasuries or Gold) from the vault and buy PIIGS bonds instead. That can be done in a very neutral way; but then their ‘balance sheet quality’ comes under discussion. Basically, they want to keep their gold and German Bunds more than they want PIIGS bonds… just like everyone else…

What they are doing instead is rather interesting, in an “admirable trick” kind of way…

They are having the various client banks hand over the cash to use to buy the bonds.

The European Central Bank Trick

So “Bank Of Italy” hands over 1 Billion Euros and the ECB uses it to buy €1B worth of Italian Government Bonds. The Bonds end up on the ECB Balance Sheet (but so does the €1 Billion from the Bank Of Italy as a liability) so no net creation of Euros and no dilution of their balance sheet (as they have cash to cover the bonds). One Small Problem…

The Bank Of Italy was just subject to a shakedown of €1 Billion from their “reserves”. So THEY would have to call in a load of loans (and have all that contraction of the money supply from a change of reserves in a fractional reserves system).

The ECB solution? Why, in true Central Banker Fashion, they propose to allow double counting the reserves… Yes, that’s right, the Bank Of Italy would be allowed to continue to count that “loan” to the Central Bank as part of THEIR reserves, even while the ECB is counting it as an offsetting ‘reserves’ vs the PIIGS Bonds. Gotta love it for creativity…

(Reuters) – The European Central Bank laid out plans to sterilize to its controversial government bond purchases on Monday, in a rapidly orchestrated move designed to quash fears the buy ups will lead to a surge in inflation.

The ECB also revealed 16.5 billion euros worth of bond purchases had been settled by last Friday, giving markets their first true glimpse of the ECB’s contribution to a $1 trillion attempt to resolve the euro zone’s debt crisis.

The ECB said it will start offsetting the purchases from Tuesday by taking one-week deposits from banks. It will offer an interest rate of up to 1.0 percent on any funds banks deposit, well above the 0.25 percent it offers on daily deposits.

“They should do another 70 billion to reach 10 percent of the total outstanding debt of Ireland: (82 bln) Portugal: (97bln), Greece: (258bln) and Spain (400 bln),” they added.

The ECB has kept details of its bond buying deliberately vague since it announced the plans last week, giving no hint on how much it will spend, how long the process could take or what type, or maturity, of bonds it is buying.

The move has received a mixed reception. Many analysts have welcomed it, pointing to the instant success it had bringing down yield spreads of trouble countries. However others, including ECB heavyweight Axel Weber, have criticized it for carrying inflationary risks.

As part of the new sterilization plan the ECB said it will allow banks to use the weekly deposits as collateral in its lending operations, a move that effectively gives them the option to reborrow the money again.

“With one hand you give and with the other you take, it’s not possible (to sterilize).. the result is still that the liquidity is there.” said ING analyst Carsten Brzeski.

The ECB said it will also repeat the operation next week and analysts now expect it to become a permanent feature.
(Reporting by Marc Jones, Krista Hughes and Sakari Suoninen; Editing by Toby Chopra)

So let me get this straight…

Instead of just creating Euros to buy the bonds, and calling the bonds assets on the balance sheet; they are BORROWING the Euros from the other banks, using that to buy the bonds and calling the bonds assets on the balance sheet: but with an offsetting liability of the other banks cash deposit; but that cash can be loaned back to the original bank (an offsetting asset) who can then continue as though nothing at all had happened?

And this is different from just creating the Euros because??…. Oh, yeah, it has a matched set of a Euro deposit and re-borrow liability and asset…

While it is an interesting bit of hand waving to hide what is really going on; I wonder how many folks will really believe this is anything other than the ECB doing a balance sheet expansion to buy PIIGS bonds? The cash still ends up in the pockets of the PIIGS governments, who will spend it, driving up demand for goods and services and increasing money in circulation (i.e. inflationary impact); and one can only hope there is enough offsetting deflationary stress from the economic slowdown that the two stresses balance… The client banks have “no net effect” other than a matched set of ‘loan – reborrow’. The ECB still has net Euro issuance (that ‘re-borrow’ OR the PIIGS bond buy, depending on which one you choose for the assignment) and their is still an increase in Euro Deposits.

At best, it puts the ECB on the hook for the PIIGS bonds instead of retail banks (i.e. it provides a customer for the PIIGS who can hold the bonds forever and doesn’t really ever need to cash them out as it can just create Euros as it needs them) and dilutes the ECB balance sheet quality. It can lower the cost of borrowing by the PIIGS (but raise the risk for those loaning to the ECB…) It swaps “good faith and credit” of the ECB for that of the PIIGS while having the various Euro Retail Banks entangled with the process as smoke screen.

I’m having a real hard time finding how this “sterilizes” the Euro vs any other currencies as it does not act in the FX markets and it does create more Euros (just depending on the various banks to ‘re-borrow’ rather than direct ECB issuance). It is, in effect, a reduction in the reserves requirements on client banks of the ECB (by the amount of the deposits at the ECB). That is typically thought inflationary and not an FX activity.

But it is a creative way to “change the definition”…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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68 Responses to EU Central Bank non-Sterilizing Bond Buying

  1. World leaders have deceived the public since 1945.

    The only solution is to “Reclaim Our Birthright”

  2. Petrossa says:

    The funniest part is that the PIIGS ‘reserves’ are destined to come out of the ESM. Which The PIIGS themselves are guarantor for. So when, not if. the whole ponzi scheme collapses you have the absurd situation where the countries that went bust have to fork up the money they proportionally guaranteed to the ESM.

    Which obviously isn’t going to happen.
    Interesting times ahead for the non-piigs countries and their inhabitants which when asked voted HELL NO! for the EU. No wonder they are so hysterically trying to hold the mess together.

  3. adolfogiurfa says:

    I have heard that the German courts will resolve an issue about not lending more to the other Euro countries this18th. If approved this will be the end of the Euro. Do you know more about it?

  4. Petrossa says:

    3 guesses what the outcome will be.

  5. E.M.Smith says:


    Good point! On Bloomberg they just called this the EU “Money Wheel” and stated that the banks were getting their capital from the nations that were issuing the bonds… so the money was flowing from bonds to banks to ECB to bonds to banks to… and asked: “Where does this end? Nobody knows”… (Round and round it goes, where it stops, nobody knows…)

    Technically this isn’t a Ponzi Scheme, as that depends on bringing in ‘new blood’ (and ‘new money’) where this is more the Shell Game (watch the pea closely!) game… Keep the money moving fast enough and it almost looks like it is in all three places at the same time… when in reality “The Pea Has Left The Building”… and is being palmed by the operator.


    As I understand it, the German Constitution forbids a certain class of lending; which is just the kind needed to keep the PIIGS happily flush with spending money. The courts are to decide how to wave that away, or not… (I think I need to find more details…)

    I think the ‘money quote’ is this one:

    They essentially argue that these treaties undermine German lawmakers’ constitutional right to decide on the budget and expose Germany to potentially unlimited financial liability for the ESM risks.

    The EU wants to be able to mandate, unimpeded by the will of the people or any particular parliament. The German constitution says their law makers must control their budget destiny.

    I’d expect the court to say “Yes, German Constitution rules. Now go vote to do it anyway…” either that or “Yes, the German Constitution rules. And you already voted to do it via ratification of {foo}.”

    Personally, I’d rather see them rule “We are a sovereign nation and can not have some unelected and unaccountable EU Parliament making laws for us. Go pound sand.” but there’s no way that will happen.

    But it would make a great precedent…

  6. BobN says:

    This looks like nothing more than deck chairs on the Titanic being rearranged – Good luck with that!

  7. @BobN You figured it out.

    The only solution is for each of us to “Reclaim Our Birthright”

  8. E.M.Smith says:

    Bloomberg just had a crawler go by that Germany had a ‘less than maximum’ subscription to the latest bond sale.

    I think that folks are beginning to notice PIIGS loading up the German Credit Card by proxy…

  9. Petrossa says:

    They are still roping in nations so it is a ponzi scheme in the sense that ‘fresh debtors’ are coming in ….Granted they are all pisspoor but except Turkey anyone is welcome now. Serbia is on the list. Great nation. Truly democratic. Fits in well. At least it brought down the price for an AK47 to the level that a 16 yr old kid can buy one. And as seen in France don’t mind emptying a clip in a policecar, snackbar or a school.

  10. E.M.Smith says:


    Oh, I see, you mean the EU in general, not just the ECB bailout scheme… OK.

  11. Turkey really wants to join the EU, of course, and France is trying hard to keep it out. Shame – Turkey is actually doing very well as far as I can see. It would be a plus for the EU credit card.

  12. KevinM says:

    There’s a piece of this you glossed over, small but important.
    “It will offer an interest rate of up to 1.0 percent on any funds banks deposit, well above the 0.25 percent it offers on daily deposits.”

    That’s 1 percent of up to a trillion, which is 10 billion in interest per year. Absolutely risk free. With money that used to be in the “can’t spend” bucket. Whatever big plans are contrived, they always include smallish pieces that create free money for the right people.

    The US fed does this too: It creates free money for the member banks that is not really free because it must be returned – and then pays the member banks interest on their unused portion, which is free money that does not get returned. Thus money is “created” for Joe Public by congress by spending vs treasury debt that COSTS interest, and separate money is “created” for Joe Banker by data entry that PAYS interest.

    If the money creation gets “unsterilized” enough, Joe Banker buys assets at todays price, but Joe Public must wait for trickle-down and buy at tomorrow’s price. That there is a wealth-transfer situation.

  13. BobN says:

    The 16 Trillion “loaned” out to the European banks by the FED will never be paid back. There is no way that they can pay this down. In my opinion the only solution is a Crash or another big time war, take your pick, they are both too ugly to contemplate.
    I think things will hold until after the election, then no matter who is President the bottom falls out. Everything will lose value and wealth for the average American will be destroyed. Going through such a hardship will finally wake up the average citizen. Out of the ashes will rise a new political party that finally addresses the peoples needs. Its arguable if the pieces will be worth putting together. I see even more dire happenings in Europe.
    My guess is the Municipal bond crisis will mushroom and will set off the mother of all depressions.

  14. Cesar says:

    Um – you *do* realise that the quote in the middle of the piece is actually from an article referring to the SMP program … the article’s two and half years old!

  15. bruce says:


    maybe, but I am inclined to believe all the players at the table won’t call the bluff because they don’t want the game to end.

  16. E.M.Smith says:


    That is basically true, but don’t forget that the “Bankers” do not gain the benefit. That goes to the stockholders. The Bankers are just paid employees… So who owns most of the bank shares? It varies by bank, but I seem to remember a Saudi buying a load of Citibank… And Buffet (who keeps pushing these schemes) owns a whole load of Birkshire Hathaway that owns a whole load of bank stock, warrants, and debt…


    I have to wonder if Turkey is having a bit of a re-think on that desire to join… ;-)


    IMHO the “cross loans” are a deliberate ploy to get more folks vested in not letting the boat sink…

    I’d be more bothered if it was real money, instead of just pretty pieces of paper. If it’s not paid back, well heck, we can just print up some more … :-}

    @BobN, R. de Haan, Bruce:

    Try as I might, I’m just not seeing a decent “end game” out of this.

    THE fundamental problem is too many folks wanting too much stuff without working.

    This is even worse over time as the ‘demographic bomb’ goes off. Europe, China, Japan, and the USA all have the same problem. Load of “baby boomers” expecting to retire starting about now, not a lot of folks coming along behind them to do the work of paying for that retirement. Adolfo put his finger on it in a comment on another thread. With the baby boomers no longer booming, we’re short of kids to do the work.

    Lots of folks thought that they could “provide for their retirement” by a variety of financial means. Buying stocks and US Bonds. Buying annuities (that put an insurance company between you and the bonds / stocks). Buying foreign bonds (China is doing this, and Japan is up for about $1.4 Trillion ? or so too). In other cases, folks took “promises” from unions, companies, and increasingly, Governments; to pay for a pension.

    One Small Problem. If folks are not actually doing the work, the “stuff” of life is not for sale. Who will make the clothes, shoes, pots, pans, medicines, cars and gasoline? Who will change the bed pans and do the laundry? We’ve got more “obligations” than we have “stuff”, so even if we sold everything, there’s not enough to cover the expected consumption… That is to come from “new labor”. But where are the laborers?… The 20 somethings of today will hardly be able to care for themselves and 2.4 kids; forget carrying 4 grandparents, 2 government workers, 3 union retirees, and a few hangers ons too…

    So when the time comes to cash in all those bonds and all those retirement packages, there simply will not be enough stuff and labor to make stuff to cover. “Who, makes What, for Whom” breaks down. To many “for Whom”, not enough “Who”, so the “What” MUST come up short.

    Right now, the EU and USA have been living pretty good for about 20 years based on selling promises to Japan first, then China, and ever more to each other. The Governments have been issuing “promises to pay” for all sorts of things (including retirements and medical care) on the “Someday Credit Card”, and someday is now arriving.

    So how can there be any way out of that? SOMEBODY has to be badly disappointed.

    You can renege on the retirement packages. First companies were doing that via bankruptcy. In the USA that dumped them onto the Benefit Guarantee Corporation ( a quasi government agency). Then Obama pissed on that with the GM deal where instead of shedding the $2.5 K or so of retirement costs per car in bankruptcy, he screwed the bondholders and gave the company to the union (in large part). Time will tell how that works out, but it’s very clear that for many folks paying $2.5 K less and getting a car from Korea will be the better deal… I expect we’ll see GM back in bankruptcy in about a decade (or maybe less) as ‘reality bites’.

    Now local government is starting to ‘smell the coffee’ and heading for bankruptcy court. California has a law saying “no you can’t”, but we’ll see. It seems to be the fashion lately to just make up new law in bankruptcy… Governor Moonbeam seems to think that just raising taxes ever more (even in one of the highest tax places in the nation with business fleeing) will fix it… I think he’s a few marbles short of a bag… We’ll see what the voters say in November.

    In Euro Land, Greece has already hit the fan and can’t pay the bills. They want to just borrow it from Germany (where people do, it seems, still work some of the time). German voters are beginning to get that “something in my pocket grabbing things without my permission” feeling… Spain, Italy, etc. close behind. But worse. Due to the dumb non-profitable “green jobs” movement in places like Spain (along with a lot of other not very good ‘investment’) we have the NINI – Not In Employment Nor in Education. 50% of those young folks who are expected to carry all this load are not even AT productive work. It takes real, profitable, investment to make jobs that work.

    So, in short, there’s this huge demand for “free stuff” and for “free medical care” baked in the cake; and ever fewer folks signed up to provide it. I just don’t see any way to square that circle.

    Now add in Japan and China. On slightly different schedules, but they both bought over $Trillion of US Bonds expecting that to be used to eventually pay back in their old age. China has a ‘One Baby’ cliff where the workforce suddenly shrinks. Japan is already aging and with flat / stagnant economy. Very soon, they, too, expect to start cashing in those IOUs and spending for themselves. Who will make the stuff? Who will tend the old retired Japanese?

    Trying to “fix it” by printing ever more piles of Fiat Money and moving it through ever more Magic Boxes won’t do it. At some point, the currency lands in someone’s hands and they expect to spend it and ‘get stuff’. For Greece, that time is NOW. For California, it is November. For the USA at large probably about next January. For the EU writ large? Any day now…

    It all comes from confusing paper financial instruments with real wealth, that must be anchored in real productive profitable assets.

  17. BobN says:

    @bruce – I don’t think there is an option, the clock has run out on the global Ponzi scheme. It will happen regardless of what they want.

    @EM 0- I agree with your comments only I view things maybe a bit more dire.
    The US can not pay China and Japan back without ending the social programs in the Country. To do that they know there were be huge social unrest and all politicians will lose their jobs. The only way out is to crash the currency, pay the debt off in worthless money and start over.

    If it was just federal debt it might be salvageable but every facet of society has borrowed and over spent. Just look at Union contracts, totally unrealistic promises that can’t be paid. Municipal bonds are in huge trouble, too much outstanding debt with falling revenue. Florida is in as bad shape as California, as a mater of fact most states are getting close to the failing point.

    We have an aging population demanding resources, we have lost manufacturing and have 50% of kids coming out of college that can’t find jobs. We have an illegal problem that puts real strains on our schools, prisons and welfare system. Automation continues to take jobs away daily so job availability shrinks. The government just keeps growing and it adds no value, just eats tax money to keep it afloat. The top money makers pay disproportionately into taxes, but they claim it’s not enough, while the bottom half pays no taxes and receives money from the government.

    The system is at the breaking point and no one knows what to do. Whatever happens the masses will be hurt and there will be violence. When things crash and 50% of the people don’t get their government goodies it will erupt. When the food stores are empty it will get ugly. When the troops come to tell you what you can’t do to survive it will be very nasty.

    Would you follow a government that through mismanagement has allowed you to lose everything, possibly you and your families lives. That’s what the government fears.

  18. E.M.Smith says:


    Well, that is a more dire view ;-)

    One minor complaint: “That’s what the government fears” – Sadly, I don’t think that they are that bright. I’m fairly certain that “The Government” doesn’t think it’s a no-win situation. Break it down. The Government Workers think they just need to keep showing up and collecting a check. The Tax Collectors and Spenders are sure it’s just a matter of getting high enough taxes and that will let them pay everything. The Department Heads are sure if they just grow their department, everything will be fine for them and the rest is someone else’s problem. The politicians in charge are sure if they can just “kick the can” to the next election it will be “someone else’s problem” too. Besides, they have not clue how to do “operations”, that’s for The Fed and businesses. Their job is just to stay elected and hand out goodies to friends. The Fed knows that all they need to do is their “dual mandate” of stable enough money ( 3% inflation a year, meaning near zero value left over a lifetime) and enough unemployment ( 3% min, 10% max).

    Near as I can tell, not one part of Government even recognizes the problem exists. Just print more money and spend it as “stimulus” ought to fix it… that’s what they said in the one “Econ For Dummies” intro class they had in PolySci…

    There are a few individuals “with clue” who get it, but they are hardly even noticed by the Government Machine. (i.e. Ron Paul who is largely treated as the “crazy uncle from Texas”… and Ryan treated as the guy who wants to pee in the punchbowl.)

    I’d also like to pick an argument with your dire prediction of riots and violence…

    But looking at Greece and even France, the evidence is that any attempt to trim back the free ride does end up that way.

    One good thing: In the USA we don’t really have any neighbors with whom to have a war. We have to go overseas for that ;-) So I don’t see our government as able to push that as a solution here. We’ll have to wait for one in Europe (“third times the charm?”) and join in at the last minute… we’re good at that ;-)

    The other good thing is that folks will still have a very large stock of real, physical, capital. Houses, appliances, cars, “stuff”. In a true collapse, it doesn’t take long for folks to learn how to plant a “Victory Garden” and sew patches on shirts. We really don’t need 80%+ of all the stuff we buy; especially just to “get by”.

    So while there will be folks who march in the streets, break windows, and burn cars (as in Greece and parts of France a few years back), that’s a small part of the place and most of it will not be so afflicted. The other good thing is that as the money inflates away, the mortgage held on things (car payments, house) will evaporate along with the credit card debt. So folks in a house in a small town somewhere may mostly notice a gain.

    With all that said: I’m still rooting for a couple of places to implode fast and early so the results are clear and the rest of us can “wake up an smell the coffee”. Unfortunately, one of THOSE is California in November… so ‘one month and counting’… but I fear it will be just another round of ‘kick the can’ as we have a ‘race for the bottom’.

    The only way to really fix it, IMHO, is pretty simple:

    Cut taxes to about 18% of GDP Total.
    Cut corporate taxes to the global mean or less.
    Cut regulations to about 1/3 or less of present levels (and fire a similar percentage of the agencies.)
    Stop handing money to non-US governments and NGOs and the UN.
    Cut pay packages AND pension packages for governments to “industry match” or less.
    Cut welfare / medical goodies from government / entitlements to fit inside the budget.

    At that point you have about 5 years of hell as businesses ramp up / take off and then the tax receipts start rising very fast (as business are built) and it all takes off relatively OK. It is a ‘prime the pump’ approach to economic growth, but has a lag time for construction of factories…

    But I’m also certain that nobody will do that, not even in the USA (and the EU is just not even going to hear the suggestion…) What will be tried instead is more government, not less, and more tyranny, not less, and more taxes, not less, and more regulation, not less. Fewer work hours (on the theory that if folks can only work a 30 hour work week more folks will have a job) instead of realizing that less work also means less goods made for be consumed.

    Well, I started off trying to make it a positive spin comment ;-)

  19. E.M.Smith says:

    Oh, and I probably ought to add:

    Most of the folks in governments around the world seem to be mostly just “waiting and hoping” that things will just “pick up” and get back to the “good old days” as it is just a natural state of things and happens all on its own. Completely unaware that it doesn’t happen all on its own, but depends on a lot of folks working at industry to make it work… Profit and ROI are not accidental nor “natural”; and don’t just happen.

  20. BobN says:

    @EM – I agree with your assessment of government workers. Why should they think different. They have high salaries, big pensions paid by taxpayers and can’t be fired. Yup, just wait things out is their attitude. The problem being when the system crashes there will be no money to pay them, they will be out on the street like the rest of us. They live in a delusional world and won’t see reality till it hits them in the face.

    Yes, many will grow gardens and take care of themselves, but there are millions who have no idea how to do that. When there is no money and no food the first thing they will do is try to take, that will start in as soon as 3 days into the crash.

    Because of shortages, I expect small groups to organize for their mutual defense and sharing. Barter will be the way of life.

    The fixes you suggest sound great and as you have already stated will not happen, so the true crash will come and once that occurres, lowering the tax rate is immaterial, there will be no gains. Regulations will be meaningless, everyone is in survival mode. Start a business, why, there is no liquidity and no customers.

    People will have houses and cars that still have payments due. The numbers will make our present housing problem look like small change.

    I think a lot of the smarter politicians see whats coming and just will ride the good times till the end, the majority will just say, who saw this coming.

    I think we both agree on bad times coming, I just am a bit more gloomy as to how bad. I hope your view is right. I personally think its a 50 to 100 years to climb out of whats coming.

  21. E.M.Smith says:


    Yes, it’s a 2 year old quote as to ‘method’ of sterilizing. Unfortunately, I could not find one newer that talked to “method” they like to use. ( It would be nice, but so far it looks like they learned to just say ‘sterilize’ without saying how or the newer articles have not got the details yet).

    I also found one showing that they were continuing to use the method:

    somewhat less than a year ago.

    The ECB offsets, or “sterilizes,” its bond purchases at a weekly operation conducted each Tuesday in which it tenders for seven-day deposits. By doing so, the ECB ensures the bond purchases don’t add to euro-zone money supply.

    The tender saw 85 banks offer deposits, with the ECB paying a marginal rate of 0.62%.

    so I figured it was reasonable that they would continue the same method and rules now, 10 months later.

    This one from 2 months ago implies that the same method of ‘sterilizing’ is intended to be kept:

    With cat out of the bag, to sterilize or not to sterilize?

    By Peter Boockvar – July 27th, 2012, 4:39PM

    While the WSJ is now reporting that “many ECB members were surprised by Draghi’s comments suggesting new bond buys,” the cat’s out of the bag so now there is just the question of what they announce on Thursday. From the BN story earlier, the ECB is not close to agreeing to giving the ESM a bank license just yet so the focus will be on the ECB buying bonds in the secondary market alongside the EFSF/ESM buying bonds in the primary market, exactly what the French newspaper reported this morning. The ECB will then have to decide whether to continue sterilizing their bond purchases as they did with the 200b+ euros they’ve bought over the past few yrs or will they go the way of the Fed, BoE and BoJ and do full on QE. We don’t know which way Draghi wants to go on this latter point but the Germans certainly won’t agree to QE right now.

    So it sure looks like the “method” was set 2 years ago and the game is just entering a new round. I just chased back the “like they have before” to where it started to say “Oh, that’s the method!”…

    But if you can find a newer Sept 2012 reference showing that the above method is NOT the one they are still using and that they have changed the rules since then, well, I’d be happy to see it. I just ran out of patience after a lot of looking kept showing up the same thing every time… Recent articles pointing back to the ‘same method’…

    This article specifically mentions the same method as for the SMP.

    August 2, 2012, 9:43 AM

    All told, that appeared to be a pretty clear signal that the ECB would be upgrading its dormant Securities Markets Program, under which it has bought bonds timidly since the Greek bailout in 2010. Mr. Draghi specifically said the new bond-buying program would be “very different” from the old SMP.

    Most significantly, he said it may or may not be “sterilized.” Sterilization means that when the ECB spends euros to buy government bonds, it simultaneously withdraws euros from circulation through taking extra deposits. It has so far done that for the SMP, and Mr. Draghi’s predecessor, Jean-Claude Trichet, was adamant about it. By not sterilizing, the ECB is essentially creating money to buy government debt–that is a no-no for ECB hard-liners, but it means the ECB has a lot more firepower.

    So basically that’s the quandary. Put up a recent link that just says “same way as before” and no details, or chase back to the start of the “same as before” events and see what the method IS, but have an older link.

    In short: Looks like it is their method of choice, articles show it is still being done just a couple of months back, and current articles say “more of the same”; so I think it’s the method being used. No evidence to the contrary either.

  22. E.M.Smith says:


    Most collapses are over in way less than 20 years, and often just a half dozen. Unfortunately, the recovery is often via some kind of tyranny… Take Russia: Tossed out the Czar, got a revolution and were on their way to rapid re-growth, then had that small problem of Stalin… Or Germany. From end of W.W.I to Nazi Empire was about 20 years, all told. (Then another crash… and recovery inside 10 years). England has had so many crashes over the last 1000 years it’s hard to sort them out. Most ended very fast. Latin America seems to have some country or other having an economic collapse about once every 50 years, per country. Over and recovered in about 10. And so it goes.

    The real issue, IMHO, isn’t the recovery speed; it’s the Tyrant that takes over during the chaos. (Vis how fast Russia recovered from the U.S.S.R. collapse, but how Putin is the new Czar for all practical purposes…)

    I also see two other mitigating circumstances:

    1) A whole bunch of places are much further down the road than the USA. So we’ve got plenty of folks preparing to act as dead canaries. From Greece to California to Spain to Bolivia to Argentina to several places in Africa to… and lots of news flow…

    2) The USA does not have much of a history of embracing tyrants. It will be very hard to ‘make the sell’ and there are a load of protections against a usurper. (Not the least of which is a large number of military and ex-military folks ‘with attitude’ about tyrants, and, that old 2nd amendment.) Heck, Obama just wanted to take our money and spend it for us on medical insurance and got a voters revolt locking up congress on him…

    Then there is that third thing… While more dilute now than in times past; America takes care of their neighbors and friends in hard times. During the Loma Prieta quake I saw it was still operational. Folks had “quake parties” and set up local services as needed. On the drive home, one lady in a business suit was directing traffic at one major intersection, a guy in bike rider spandex was running another. I came home to a “quake party” for some friends who needed a place to hang out for a while. The pancaked part of the freeway up in Oakland had “Joe off the street” entering rubble to save people. It’s just what we do… Oh, and after Hurricane Andrew, I read a story of one neighborhood that had been without power for most of a week that had elected their own armed guards to post at the borders and set up communal kitchens in the street with a sort of elected block coordinating committee. When some police eventually did show up, it was “no problem” and they went back to the places that were having issues. After another hurricane, a church here in California sent a delegation to Mississippi to rebuild and repair a sister church there, and take generators and food. ( I volunteered to drive and contribute an old generator, but was not needed as they were already oversubscribed by then.)

    So I”m not being a Pollyanna out of some hypothetical idea. I’ve got real world experiences showing what folks really did.

    (And yes, on the other side of the ledger is what happened in New Orleans where some of the cops were put on gun confiscation duty – and some quit because of that assignment – while the events at the Dome were just incredibly stupid; but largely government driven, not people driven. But I think we learned from that…)

    “The Problem”, IMHO, will not be with ‘coping’ with a crisis collapse by the folks, it will be if the event unwinds too slowly, government tries to cope by grasping power ever more closely, and the folks just give up on the structures of civilization… Part of why I’m hoping somewhere else goes “first and fast”… so more of us can see what not to do…

  23. BobN says:

    @EM – you have sound arguments that make sense. what you site are very transcendent events for small areas. With outside help coming in things bounce back quickly. I went through the Loma Prieta, hurricane Iniki and some of the worst blizzards possible living in South Dakota. Yes, people pitch in and help and in a mater of a week or two things pretty much return to normal.

    I’m thinking an all out crash will stop everything. No gas, not food delivery. There will be nation wide looting and killing over food and trying to stay warm. On top of that you throw on military martial law that will prevent people from doing what they want and you have a recipe for a very ugly standoff. If some unthinkable should happen and some crazy guy tries to seize power you have millions of Bubbas that will swing into action and it will turn into a revolution.

    Booting back up from that level of chaos will take a long time. No banks, no money and farmers will not get their crops done, no gas or seeds. The government will creat a new currency, bit no one will have jobs to earn anything.

    Will the rest of the world help, probably not as most countries hate us and my guess is that they will be in just as bad a mess as we are. I think the first world depression is about to hit, no one knows what that looks like, but millions will starve.

    I prefer your view of how it will go and hope your exactly right. I guess my glass is half empty.

  24. Petrossa says:

    It;s not only Spain with the dumb green jobs. Germany jumped in in such a big way their are bound for a nasty surprise.Well actually the surprise hit them already, it just needs to percolate through the thick green skulls in power.

    Germany’s Offshore Fiasco
    North Sea Wind Offensive Plagued by Problems

  25. Petrossa says:

    Simon, on turkey

    Turkey is only doing well on paper. All their ‘growth’ is based on exactly the same thing that did everybody else in: cheap money. That bubble is going to burst anytime real soon now. And anyroad, Turkey was/is pisspoor, so any growth percentage doesn’t mean that much.

  26. Petrossa says:

    Slovenia crashes and burns too, The EU spiral speeds up:

    The Slovenian government can pay their bills only for a few weeks more. Admitted Prime Minister Janez Jansa to in an interview published on Friday. “In October we will be facing insolvency if we do not manage to sell bonds,” Jansa said. Already, Slovenia can no longer finance on the capital market, said the conservative politician. The borrowing was “virtually impossible”.

    german, use your own translator

  27. Jason Calley says:

    @ BobN “The 16 Trillion “loaned” out to the European banks by the FED will never be paid back. There is no way that they can pay this down. In my opinion the only solution is a Crash or another big time war, take your pick, they are both too ugly to contemplate.”

    Traditionally, when a white-collar criminal has succeeded in committing massive fraud by cooking the books, the last step in the process is to burn down the factory so that all the accounting data is lost.

  28. Jason Calley says:

    Oh, just to clarify my last comment, I mean that metaphorically. Sure, some guys really DID burn down the factory, but for the most part the process is done on paper these days. The company goes bankrupt and the creditors settle for pennies.

  29. Pascvaks says:

    Thoughts –
    Global Economic Collapse and

    The impact on ‘Money’ – hard to imagine that if the dollar (any national currency) is suddenly worthless outside the US (respective country) that it would also be worthless inside, but I can imagine that our e/computer ‘money’ held by others (bank deposits, CU deposits, stock, bonds, checks, etc.) might be subject to suddenly becoming worthless or going “poof” in very short order. I’m guessing that any ‘money on account’ we have that is ‘held’ by others disappears in a flash, but the stuff in the matress is still going to be good for the time being. And… maybe it’s better to have $1’s, $5’s, and $10’s and some coin and not $20’s, $50’s, $100’s?

    Law and Order – Internationally, no change for a while. Nationally, no change for a while. States, big problem in high population metro areas, no problem in small towns. Cities will have less problems in middle/upper level neighborhoods if the people of these neighborhoods take independent and effective action to ‘protect’ their neighborhoods. Cops and firefighters will have lots of overtime in low income areas where people rely heavily on outside support and gangs are already engaged in border wars. Where gangs have total control, less chaos and arson likely.

    Sharing with others (Day Zero – 3 Months) –
    International trade will take a BIG beating and likely stop for 3 months; bybe-bye WalMart. Nationally, shortage of everything grows daily, Feds will probably make a bigger mess of things for at least the first 3 months (or longer;-), don’t bet on the come. States, see national. County, see states. Cities, see counties. Small Towns, with good people they’re probably better off than most everywhere else. Neighborhood, DitY! (Do It Yourself, join a local church, make friends with the people you’ve been living next to.. ah.. what’s their name?) Katrina events are local and the expectation is that ‘they’ will save us. Global economic collapse is global and the more we hear that ‘they’ ain’t gonna’ save us, the tighter we get with our food and other assets. Groups will come together locally if the locals come together quickly and instill as sense of order and safety. The longer order and safety are missing, the less likely folks are going to trust anyone and the faster hopelessness grows. Neighborhoods need to get together fast and set up their own security and government, the cops, firefighters, utilities folks, teachers, and other ‘outside’ workers who come in to the neighborhood M-F may be tied up elsewhere, etc.

    PS: Something to think about, curious what you think. Oh.. what is gold? Is one ‘gold’ better than another? Would it be smart or dumb to have real ‘gold’ in the mattress? Might a case of “Vienna Sausages” be as good as gold? (yuk!)

  30. BobN says:

    @pascvaks – Gold and silver have been going up because it retains value and is a tradable unit when the money collapses. Ammunition will be a very tradable unit of exchange. Seeds for growing things will be very good units. Many household products will also be good exchange units. A can of Coffee may have a high exchange value.

  31. Pascvaks says:

    TV just reminded me. Talking heads lately have been pointing to the stock market numbers and saying how ‘good’ they are and that they’re ‘indicative’ of an economy that’s ‘sound’ and ready to ‘take off’ and we’ll ‘soon’ be out of this little ‘blip’ of a ‘recession’. What happens to THE Global Stock Market, or just any old national stock market, (and all those pretty numbers) when the little boys and girls at the Fed, and EU, Japan, China, and everywhere else start jumping out their windows, and everything suddenly comes to a bone crushing stop?

  32. BobN says:

    More hand waving from Europe!,0,2200584.story

    The stock market likes it and takes off. And just what are the banks buying these bonds with.

  33. R. de Haan says:

    It’stime to ask the people what they think! Unfortunately the people are brainwashed by pro europe propaganda garbage:

  34. KevinM says:

    Chief says:
    “One Small Problem. If folks are not actually doing the work, the “stuff” of life is not for sale. Who wll make the clothes, shoes, pots, pans, medicines, cars and gasoline? Who will change the bed pans and do the laundry? We’ve got more “obligations” than we have “stuff”.

    You are talking about a deficit of stuff created by a dearth of willing and able labor. I agree with the premise that work = stuff. I disagree that there has been or will be any lack of willing and able labor. Instead I think that there is an oversupply of willing labor, even in places like Spain with its 50 percent youth UE rate. With modern technology, it does not take the labor of 7 billion people to feed, clothe, house and entertain 7 billion people. An increasing number of people are “unnecessary”.

    e.g. One of the biggest issues coming upfor the US is the age-out of the boomer generation. It will leave us a frightening number of sickly old humans lying in beds with severely diminished mental capacity consuming tremendously expensive bags of prescription medication. The cost of these well preserved vegetables will be in the trillions, something like a third of GDP.

    But what is the cost _really_. I’d argue that most of the cost is artifficially imposed by government regulation and cultural issues. What should require the same space and energy as a heated self storage facility with the staff of a jiffy lube now legally and culturally requires the same space and energy as a luxury hotel and the staff of a university hospital. And the medication! All of the charged cost is in IP – the cost of mass production is sometimes near nothing.

    Queue the “those medication costs fund the development of new medications” talk. Those medication costs are funding an entitled class of smart, good hearted, hard working middle aged humans at about $250k a year for light office work and golf on Tuesdays. Again youth UE in Spain is 50 percent. You tellin me zero of those kids is willing and capable of clean, quiet intellectual work? Statistically a number of them are geniuses.

    THis rant goes several pages in several directions but I’m supposed to be working. My thesis is that we don’t have a lack of productive capacity, we have an economic system that does not fit the mechanics of our situation.

  35. KevinM says:

    I mean really, do we think its getting hard to find someone on earth to make clothes! Indian girls lined up for five miles to get into that factory.. (drop the keyboard… now).

  36. Jason Calley says:

    @ KevinM “My thesis is that we don’t have a lack of productive capacity, we have an economic system that does not fit the mechanics of our situation.”

    Yes! I agree, and if I understand E.M., I think he agrees also. The problem is not that we are not willing to produce, or that we are unwilling to build new factories or businesses; the problem is that the current fiscal and regulatory system makes even those who are willing, unable to implement their plans in a rational or predictably profitable way. You are very correct about the cost of health care (see and how it could be more cheaply and efficiently provided — but hospitals could not change if they wished because the legal system would have them broke and in jail. There are much better, stronger ways to build homes — but do they meet current building codes? Same with nuclear power, same with cars, same with everything, almost. The nice thing about regulatory costs is that at least some of us see their effect, but there are other effects which are harder to see. You point out cultural costs. I would add that perhaps the biggest is the cost imposed by fiat currency and the manipulation of both money supply and interest rates.

    We have the technology to make a near-paradise on Earth; we do not have the cultural or political system that allows us to do so.

  37. Jason Calley says:

    @ Pascvaks “I’m guessing that any ‘money on account’ we have that is ‘held’ by others disappears in a flash, but the stuff in the matress is still going to be good for the time being.”

    You make a lot of sense, especially when I try to remind myself of the enormous, mind boggling, makes-an-oil-tanker-look-puny amount of inertia in a nation. Most of us will still get up and go to work even if the paychecks only show up ten days late of have an occasional missing payout. Inflation at 100% per year is difficult to consider now, but people all over the world have coped with it. We change our expectations, we change our habits. We bike instead of drive. As E.M. points out, we eat oats instead of hamburger. We cope. It is only when we see extreme change that we make extreme adaptations. No paycheck at all? Not now, not likely this year? Yeah, I am not going in to work then. Hyperinflation of 500% per day? No, I do not want your dollars, but trade me some eggs.

    No one knows what the next few months or few years will bring, but the best investment is always the same. Silver, gold, ammo, food, land — all nice to have, but secondary. The best? Your family, your friends, your neighbors. Befriend a Doctor. Meet a lawyer (yuk!) or even a Judge (double yuk!) in some social setting. Find some pretense to meet the mayor.Join a church. Join a garden club. Learn to cultivate other people.

  38. Pascvaks says:

    @KevinM – (Don’t Respond, Know You’re Busy, This is an observation, of sorts;-)
    “My thesis is that we don’t have a lack of productive capacity, we have an economic system that does not fit the mechanics of our situation.”

    Interesting, as I read I thought: “Hummmm.. or is it that we have an economic system that is totally divorced from reality and is seperate and apart from our poor human and corporate situations and that fact is why we lack for productive capacity at home and jobs for our mechanics of all kinds?” and then I thought again: “Hummmmmm… damn politicians, damn lawyers, damn Soros and all his kind, damn ’em all, damn, damn, damn!” And then I thought once again: “Something’s gonna’ hit the fan, real soon!”

  39. adolfogiurfa says:

    What if the power elite has overplayed the game and now they are being confronted with the same harsh reality which appears in every bankruptcy: the loss of value of assets?; if this is real then NY stock exchange and almost all stock exchanges all over the world may suddenly collapse….provided if a few among the players, manage to set up a convenient crisis, where they could salvage some assets remnants.

  40. Pascvaks says:

    Note to Self: Get the printer fixed or replaced, hard copy EM’s “How to Survive Anything” posts, get map of city, locate all wild growth Kudzu within 5 miles of house, say hay to doctor down street, buy case of Vienner Sausage and bucket, practice kicking bucket…

  41. Petrossa says:

    Well, in the end my view is that it’s all virtual money in a computer game. 16 trillion debt is not a number anymore that bears any resemblance to an actual value of something. A large part of it is owned by china anyway. Maybe follow through on the old idea of switching currency from the dollar to the americo as was proposed a while back.

    Do a 10 cent to the dollar exchange rate and suddenly you only have 1.6 trillion debt which is much easier to handle.

  42. Petrossa says:


    It’s come to the time i now buy a new inkjet printer when it runs out of ink. The nozzles are mostly clogged anyway unless you print continuously and it only costs 20$ more then a full replacement cartridge pack.

  43. BobN says:

    The world economics interaction is broken and has been for a long time. The US has taxed business and regulated them out of the country and pretty much the same for Europe. China steps in and has become the manufacturer of the world. All the countries say that’s fine we will do the value added things that are high paying, so we will be fine, let China make all that daily stuff.

    The problem with all this is we allowed our schools to be dumbed down and society get used to getting everything for free, they deserve things. The government in an effort to give homes to everyone forced banks to give sub-prime loans to people who couldn’t afford them. Once the banks saw that the government was pushing this they said ok lets make some money and sell the heck out of these loans. The banks came up with the bundling idea and sold them to everyone all over the world. What could go wrong, house prices always go up. Well we saw what happened with that, we now have way more loans than the banks can cover, but everyone is trying to say its fine, they temporarily stopped the bleeding, but the debt is still there and the house of cards are poised. The housing derivatives were working so well that all kind of derivatives were bundled with basically the same result.

    On top of the stupid bank debt governments allowed society to spend more than they could afford. Unions negotiated pensions that are unsustainable. Not to worry, the tax payer will cover everything. The welfare state has expanded to the point that 50% don’t pay taxes. Everything is free, the government will provide. Just look at the free cell phones they give the poor. Some people are applying for and getting up to 30 cell phones each and the program has jumped from trying to extend a life line to the poor to a grab and money making side business. Cities and states have done the same thing, government pensions that also are not sustainable.

    The whole system has run out of other peoples money and its time to end the over spending. We all know what happens when you try to take things away from people that feel entitled. Riots and god forbid, they vote out the politicians. The politicians, most anyway, understand the severity, but have no idea how to fix it, so they just keep kicking the can waiting for total collapse.

    Total collapse means money is worthless. The government will have no money. Teachers, police etc will not be payed. Businesses will have no customers and money to pay employees. Everyone will be out of work. No money value the trucks don’t run, resulting in no gas or food distribution. The grocery stores will be empty in 4 hours when the crash hits, from that point on your on your own for food. No gas, you can’t even get out of town to some place that may be safer. Within days people will come looking for food and will kill to get it. Neighborhoods will organize into protective groups and will turn away outsiders.

    The government will try marshal law, but people will be so desperate that they will ignore the orders and armed conflicts will result.

    How do we reboot 300 million people from a government everyone hates and does not want to support – beats me.

  44. Petrossa says:

    “. Just look at the free cell phones they give the poor.”
    Nothing struck me a as a more abject picture of humanity when after the big earthquake in Jamaica the pictures showing homeless pisspoor people huddled around a carbattery where they could charge their mobile phones for a a payment. The battery had about 20 phones hanging from it. And pretty doubtful celltowers were functional anyway since the electricity was obviously out for the count.

    Sure, what else would you do after you’ve lost everything and you have nowhere to go and nothing to eat?

  45. Pascvaks says:

    Some comments made me think about time, distance, scale, etc. IF, note big if, and when, the Global Economy goes bust I have a feeling that we’re all going to be mighty surprised at how BIG the world has suddenly become again and just how far a mile really is and how long it takes to walk 5,280 feet. But, people are very resilent and adaptable, if we weren’t we wouldn’t be here. Those who fill the voids with strong, local neighbor groups, community (village) councils, or even church/temple cliques, and work together will probably be OK; those who go it alone and don’t even have a partner or two will probably not last long. The police and judicial systems will revert to their former, strong arm methods. Business will really get cut-throat, and folks will once again be at the mercy of employers who have lots of hands to choose from and doesn’t play by the old fashioned labor laws of yesteryear (pre-Bust Days). Local Schools will definitely be ‘local’ and if not supported by the neighborhood won’t exist probably — remember the local school board is out of money, and out of power too. If people don’t revert and make the best of it, and protect what we have from all comers, they won’t find anything greener or better over the next hill among complete strangers who will be mighty suspicious of riff-raff.

    Of course this is all ‘medium-case’, it could be a lot better, it might be a lot worse. Time will tell. But as uncontrolled and haphazzard as things seem to be, it does look like there’s a sea-change coming and there’s no way it’s going to not get here soon. Who knows! Maybe the goppers will win AND actually do something to prevent the inevitable. But as The Man says, “Hope is not a plan!”

    PS: Remember the old saying “There are no atheists in foxholes.”? There aren’t many during global depressions either. People will ‘join’ together to work together to survive and be mighty helpful if newbees are sincere and local. If you need help, join with those who believe in helping.

  46. adolfogiurfa says:

    @BobN: All that has an immediate cure, and every economist knows it: It consists in make a sudden and deep devaluation so as to achieve equilibrium. This is by far preferable than to hide your heads under the sand. This has been made in several countries, as Peru in 1990. If you speak frankly to the people they will accept it and no riots will happen, it must be done from one day to the other, as it was did here. The secretary of the treasure (Minister of Economy) appeared on national TV, when everybody was at home, and announced the measures to be effective from 00 hours.

  47. Adolfo – this problem seems to be pretty world-wide. Even Saudi Arabia has government debt. If everyone devalues, then nothing changes. You only get the benefit of a devaluation if the others don’t.

  48. Jason Calley says:

    @ Simon Derricutt “If everyone devalues, then nothing changes.”

    I would respectfully disagree (and some of you brighter-than-me sparks out there please correct me if I am missing something here) for this reason; normally the devaluation process consists of creation or borrowing of money. And yes, if everyone did the same percentage increase the relative values of various national currencies would stay the same. You are right that that part would not change. Still, any change in total money supply does not instantaneously diffuse throughout the entire world. Those favored banks, companies and individuals who have the earliest access to the new money gain more than the later users. Even though the currency exchange rates would stay the same if everyone devalued at the same time, you would still have a transfer of wealth from the average person to the well connected because of the time lapse of devaluation.

  49. BobN says:

    @adolfogiurfa – If the money gets devalued all your wealth takes a hit with it, but if you get hyper Inflation then you can pay off existing loans like homes and cares with inflated dollars. If its deflation you lose big, but if its inflation you can at least pay of loans with the cheap money. I guess the best advice people could give is to buy everything they can get their hands on and then pay it all off with the cheap money. It all depends on deflation or Hyper inflation as the end result. Its a crap shoot, everyone gets a roll.

  50. adolfogiurfa says:

    Currency should correspond to goods. Reality cannot be virtual and at the end of the day someone has to pay for the lunch…or the consequences.

  51. Petrossa says:

    It should but it doesn’t. Every bank in the world has the right to create money out of nothing due to reserve ratio. As EM explained above, each dollar can be given out X times according to the ratio. Which i believe at present is 1:8.

    So banks give out loans to 8 times their actual cash reserves. So 7 out of each 8 dollars don’t have a counter value. As long as everybody plays along there is no problem, but if for example China takes their around 6 trillion dollars and go the exchange them for gold at the federal bank there will be a slight problem.

    Even the dutch couldn’t get their gold back which was stored in the feds vaults, so they got an offer they couldn’t refuse, literally because there was no option, get the countervalue in dollars.

    Which they accepted, and the US graciously took away the bloody horsehead from our beds.

  52. BobN says:

    @adolfogiurfa – In a collapse money may have little value if any and the value placed on goods will be skewed by their immediate survival value. I big screen TV may have zero value while a carton of eggs may be worth a $1000 dollars. I think value is relative.

  53. How much would a goat be worth?

  54. Petrossa says:

    I once got offered 12 camels for my sister. Maybe you can do a calculation from that.

  55. BobN says:

    Another fact that may help. I worked with a guy from Southern Mexico that was offered a sack full of Apples for his sister. He thought it a good deal and closed the deal. It took the father 2 days to find the daughter and reverse the transaction. It does set a price so maybe it will help in the calculations.

  56. Petrossa says:

    12 camels or a sack of apples. My sister was a natural blonde maybe that made the difference.

  57. E.M.Smith says:


    I think that a large supply of vitamin pills and a perpetual water filter (ceramic with silver coated element) along with some tobacco plants in the yard will leave one pretty well set… Folks can bring dirty water and run the hand pump themselves, for a fee… Vitamins cure a lot of things that their lack causes, so become quite valuable too. (And on vitamins and water, most any gross calorie source means you survive.)

    Knowing how to get lye water out of ashes means you can start making soap. Folks bring their ashes and some used grease, swap them and some “stuff you want” for soap. After a while folks will pay a lot for soap… So a large soap kettle and some know-how goes a long ways.

    Oh, and salt. In a breakdown, preserving food becomes very important and ‘drying and salting’ become quite valuable too. So a few drying screens and some bags of salt are worth a lot. As I live just a few miles from where they made salt for decades, I’m not that worried about salt. But in a real social breakdown, many places will rapidly become desperate for it. If inland a ‘long ways’ from the ocean or salt lakes / deposits, having a water softener full of it and a couple of spare bags in the garage is cheap and easy insurance.

    Tobacco seed is not viable for long and is hard to get started (needs UV exposure; on the dust sized seeds, but they can’t be deep nor can they be let dry nor blown away nor… ) But once established they seem to self seed OK. Makes a nice “trap” for leaf miners around the rest of the garden. In a ‘breakdown’, you can make ‘tobacco tea’ as a pesticide AND sell leaves to the desperate looking for anything to fix their withdrawal symptoms. I have a “robusta” type that is smaller than the normal, but has about 10x the nicotine. Taste is crappy if smoked, but has kick… As I don’t have much dirt, concentrated is better. I’ve not learned how to properly cure it (slow drying in a moist warm place) but hanging to dry under the awning on the back patio makes something that is tolerable to chew (per a friend who has done so) if not particularly desirable. For my purposes (natural insecticide and emergency trade goods) that’s “good enough”. I figure someone who really cares will be willing to ‘cure a batch to keep a pouch’ if it comes to that.

    For now I’m just really happy with the way it has substantially eliminated the leaf miner problem that had been giving me loads of chewed chard leaves… They lay eggs on it, and the nicotine kills the eggs. Some tiny white spots under some of the leaves that just never develop…

    At any rate, that’s my “plan” for valuables / trade goods. “Stuff folks really need and want” and that can become more longer term production if needed.

  58. BobN says:

    @ Petrosa – You make a good point, I heard the apple story second hand from the guy doing the selling. Never saw a picture or specifics, so it looks like we have a data point that may be suspect.

    @EM – I’m glad you mentioned salt, I have been hoarding things for the crash and for some reason Salt was not on our list. We make Deer Jerky all the time, but it slipped through on the list.
    Growing tobacco is an interesting idea, but I live in eastern Oregon so I don’t know if the summers are long enough. ‘ll bounce it off my wife and daughter, they ran a garden center and did all their own growing. A couple of the people are smokers, can’t imagine life around them without the tobacco, this is a high priority investigation!

    I live on a farm and have my own well water and am trying to find a hand pump in case power goes out.

    For green houses they used to turn lady bugs lose and they would eat the aphids and things that were problematic.You might try a handful of them to help any bug problem.

  59. R. de Haan says:

    Eurocrash: Fooling the markets time after time:

  60. Jason Calley says:

    @ Petrossa “I once got offered 12 camels for my sister. Maybe you can do a calculation from that.”

    I tried setting up an equation based on respective number of humps but was stymied by lack of data.

    It’s just a joke! Just kidding! :)

  61. Petrossa says:

    It was a real event. My sister wasn’t amused, rather slightly scared since it was in some shady corner of old jerusalem some 35 years ago. I doubt she’d fetch 1 dead camel now. :)

  62. adolfogiurfa says:

    There are some groups out there who are in favor of the total disappearance of money in favor of a barter system where the world government would give each of us a virtual plastic, or any equivalent like an intrinsic value to your personal IP address, so people would forget about implicit greed. My suspicion is that the “Nomenklatura” would have special privileges as they would consider themselves our “leaders”/ initiated masters thus deserving a bigger share.
    Not kidding: Just dig into it.

  63. Pascvaks says:

    There seems to be no end to people with idealistic “bright” ideas, their numbers seem to explode when things start to turn the slightest bit sour either individually for the group they identify with. Have you also noticed? There’s not much originality in their ideas either, and they usually tend to subscribe to some off-world idealistic civilization peopled by folks who really aren’t very human. I’m really not sure where that genetic trait came from. Maybe, long ago, some alien did land on Earth and fool around; indeed, we seem to have more fools than ever these days.

  64. pouncer says:

    Petrossa says:
    Well, in the end my view is that it’s all virtual money in a computer game. 16 trillion debt is not a number anymore that bears any resemblance to an actual value of something. A large part of it is owned by china anyway.

    In the novel of “Paper Moon” — later made to the movie with Ryan and Tatum O’Neil — had the con artist Moses Pray steal a batch of tags from a cotton mill, and a fistful of raw cotton off a bale. A few strands of cotton fiber, tied to a tag, was supposedly representative of a bale of cotton at the specified mill. So Pray ran up and down the state selling tags that had no more cotton connected to them than the strands physically attached. And became quite emotional about various valuations of his “harvest” when one or another buyer, evaluating the sampled strands, rated the cotton of lower quality …

    Anyhow, I thought of Moses Pray when reading this last week, about empty maple syrup barrels .. — is the syrup “missing”, or did it ever have any more existence in the first place than Pray’s cotton?

    Then, today, I see this about Chinese Steel.

    The claim is that the “mills” of commodities markets and banks trade “tags” so often and so far that nobody actually knows the number and quality of cotton bales are in which mills. where. If any, at all.

    This before we even get into question of carbon credits ….

    All very distressing.

    In the food markets there is the concept of loco-vore-ism. Eat what you know and grow, locally. Is there a comparable market in “trade commodities” where the gold, or cotton, or stores of value, are close enough at hand they can be visually inspected from time to time by the traders who rely upon stuff “being there”? And if not, now — should there be, really damn soon?

  65. Petrossa says:

    In the 80’s there was a nice trade going on in grain in the the EEC.(European Economic Community) Due to the trade agreements VAT paid in one country could be reclaimed in the other country upon sale.

    At a certain point more grain was being traded then was physically possible which (finally) woke up the customs and they discovered that bonafide traders sold grain to each other but only on paper. It went from one trader to the next in another country without ever leaving the original traders warehouse.
    They collected billions in VAT returns.

    Nothing new under the sun.

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