Commentary By Ron Beasley
Doug Mataconis asks: Why Do We Let Politicians Get Away With Lying? The answer is simple - they are telling us what we want to hear. Lets look at the economy and the future. If Romney or Obama told us the truth it would not be what we wanted to hear and they could not get elected. Both Romney and Obama are intelligent men and they know the good old days of the 50's, 60's 70's and 80's are not coming back. Charles Hugh Smith explains why: The Global Economy: It's All About Increasing Leverage.
If we look at the global economy with unclouded eyes, we reach this conclusion: "This whole thing is about leverage." If leverage doesn't increase, the system implodes. But since collateral is disappearing from the global economy like sand castles in a rising tide, and disposable income has stagnated, there is no foundation for more leverage.
Like a drug addict needs more and more drugs our leveraged economy requires more and more leverage. You eventually reach a point where that can't be sustained - growth becomes impossible.
The only way to "save" an over-leveraged system is to increase leverage and lower interest rates. If we claim phantom assets as real and increase leverage from 25-to-1 to 50-to-1, we have enabled a doubling of loans. All that wonderful new money will flow into the economy as spending, fueling "growth."
This explains why the State/finance Empire in Europe keeps lowering reserve requirements for its insolvent banks. If the reserve requirement is 10%, then you need 100 million euros on deposit in cash to support 1 billion euros in loans. If you lower the reserve requirement to 1 euro, then the contents of a child's piggy bank supports 1 billion euros in debt.
The other game is to claim phantom assets have market values that justify their substitution of cash. Let's say a bank owns a villa in Spain since the mortgage went bust. The market value of the villa is 100,000 euros and the bank's mortgage was 300,000 euros. If the bank sold the villa, it would have to absorb a 200,000 euro loss.
Yikes. Absorbing losses that exceed the net increase in reserves from profits would lead to the lender's insolvency being recognized. The "work-around" is to keep the villa on the books at 500,000 euros. Not only does the 200,000 euro loss go away, the bank now has 200,000 in capital to leverage into more debt. (500,000 in assets minus 300,000 in mortgage leaves 200,000 in phantom assets/capital.)
That's why we have zombie banks - the living dead too big to fail banks. But there is a limit as to how long this can continue and we are nearing the collapse point. That is why the central banks are not able to stimulate growth.
That is also why the good old days of growth won't be coming back. Both Romney and Obama know this but they also know they can't tell you and get elected. They can't tell us what we don't want to hear.