Greece and the New Colonial Endgame

Baltimore, Maryland
July 1, 2015

Dear Reader,

Glimmers of resistance shine from the cracks in the Hellenic Republic. “Greek entrepreneurs,” reads one report, “rally together to help Greece’s startups through the financial crisis.”

We’ll get to that in a second. But first… stocks are up. Gold’s down. Treasury prices are down. And Greece defaulted on its loan from the IMF.

At the risk of sounding like a broken record, we repeat Jim Rickards’ refrain: “There will be no ‘Grexit.’”

That said, you can see how 19 EU governments using a single paper currency that none of them is able to print leads to problems. Even better, by watching Europe, you can imagine how financial reckoning day in the U.S. will manifest itself.

As soon as “the euro was introduced, it did not take long for imbalances to develop and accumulate,” explained Professor Philipp Bagus to us in 2012. We had the good fortune of making his acquaintance at the Mises Institute in Alabama.

A young, thick-accented fellow who hails from Germany, teaches economics in Spain and has authored two books: Deep Freeze: Iceland’s Economic Collapse and The Tragedy of the Euro, he’s well-versed on EU dynamics.

Bagus related how euro creation worked in the Old World pre-2008. As with any paper money system, he who got the new money first benefited most. “But the only way to get new euros,” he added, “was for a country like Greece to issue more government bonds and give them to the European Central Bank as collateral.”

Issue Greece did, its creditworthiness, of course, never in question, as evidenced by the 2007 “Sovereign Borrower of the Year” award.

“That led to increased government spending, deficits and debt because of the demand for bonds. A country like Greece benefits by having higher deficits than the other countries.” For reference, Greece’s budget deficit tripled from 5.2% of GDP in 2006 to 15.7% in 2010.

“The wealth redistribution through different rates of money production,” ventured Bagus, “brought on a culture of decadence.”

“Among other things,” chronicles James Dale Davidson in his latest Strategic Investment newsletter, Greek politicians used “the proceeds to lavish generous salaries and even more generous pensions on Greek voters. Although Greek wages were mostly lower than those in Germany, Greek pensions were considerably higher. In most cases, it took only 35 years of work to collect a full pension in Greece, as compared to 45 years in Germany.

“But Greeks who labored in ‘strenuous’ occupations,” Davidson continues, “could retire after 25 years of work on full pensions at age 55. Among those ‘strenuous occupations’ -- Greek hairdressers. On the whole, Greeks retired earlier than their European colleagues, on pensions that averaged 80% of wages, as compared to 46% in Germany.”

Hmmnn. That brings us back to the resistance we teased at this reckoning’s start...

“The bloated public sector,” explains a Telegraph article dated June 20, helpfully, “has been in the firing line of the efficiency drives demanded by Greece's bailout chiefs.

“Unlike their parents and grandparents, the current crop of young Greeks no longer have the option to spend their working lives as salaried employees of the state.

“The bloated public sector has been in the firing line of the efficiency drives demanded by Greece's bailout chiefs.”

The Daily Reckoning Presents: The nasty result of extending mass amounts of credit to those without access to capital…

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Greece and the New Colonial Endgame
By Charles Hugh Smith

With the bankruptcy of Greece now undeniable, we've finally reached the endgame of what I call the “Neocolonial-Financialization Model.”

We all know how old-fashioned colonialism worked. The imperial power takes physical control of previously independent lands and declares its ownership of the region as a newly minted colony.

What's the benefit of controlling colonies? In the traditional colonial model, there are two primary benefits:

1.The imperial power (the core) extracts valuable commodities and low-cost labor from its colony (the periphery).

2.The imperial power sells its own high-margin manufactured goods to the captured-market of its colony.

This buy low, sell high dynamic is the heart of colonialism, which can be understood as one example of the Core-Periphery Model.

The book Sweetness and Power: The Place of Sugar in Modern History is an excellent history of how this model worked for Great Britain.

The tensions this model generated in the colonial elites of America are brought to life in Tobacco Culture: The Mentality of the Great Tidewater Planters on the Eve of Revolution.

This traditional model of colonialism was forcibly dismantled in the 1940s-1960s. Former colonies established their political independence, a process that diminished the wealth and global reach of former colonial powers.

In response, global financial powers sought financial control rather than political control.

In Neocolonialism, the forces of financialization are used to indenture the local Elites and populace to the financial core: the peripheral "colonials" borrow money to buy the finished goods manufactured in the core economies, enriching the Imperial Elites with:

A.the profits made selling goods to the debtors

B.interest on credit extended to the peripheral colonies to buy the core economies' goods and "live large," and

C.the transactional skim of financializing peripheral assets such as real estate and State debt.

In essence, the core banks of the EU colonized the peripheral nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the core extracted enormous profits from this expansion of debt and consumption.

Now that the financialization scheme of the euro has run its course, the periphery's neocolonial standing is starkly revealed: the assets and income of the periphery are flowing to the core as interest on the private and sovereign debts that are owed to the core's central bank and its money-center private banks.

Note how little of the Greek "bailout" actually went to the citizenry of Greece and how much was interest paid to the financial powers.

This is not just the perfection of neocolonialism but of neofeudalism as well. The peripheral nations of the EU are effectively neocolonial debtors of the core, and the taxpayers of the core nations are now feudal serfs whose labor is devoted to making good on any loans to the periphery that go bad.

Neocolonialism benefits both the core's financial aristocracy, national oligarchies and kleptocracies.

With the bankruptcy of Greece now undeniable, we've finally reached the endgame of the Neocolonial-Financialization Model. There are no more markets to exploit with financialization, and the fact that the mountains of debt are unpayable can no longer be masked.

At this point, the financial aristocracy has an unsolvable dilemma: Writing off defaulted debt also writes off assets and income streams, for every debt is somebody else's asset and income stream.

When all those phantom assets are recognized as worthless, the system implodes.

Regards,

Charles Hugh Smith
for The Daily Reckoning