–Is the great crisis of capitalism over yet? Well no. It’s not. And come to think of it, it’s not really a crisis of capitalism either. It can’t be. Why? Because a system where Big Business and Big Government make a Big Mess is not capitalism. It’s something else entirely.
–We’ll get back to the Financial Big Bang in a moment. But the week starts off with mixed signals from foreign markets. The non-farm US jobs report came out on Friday, and it was good. The American economy added 103,000 jobs. Happy Days are here again!
–Or not. Late in the US trading day, news came from ratings agency Fitch. It was bad news, if you’re either Italy or Spain. Fitch downgraded its credit ratings on both countries and changed its long-term outlook to negative. Meanwhile, ratings agency Moody’s downgraded a dozen or so UK banks.
–The two separate announcements reminded everyone of one singular problem: Europe’s banks are full of the debts issued by Europe’s governments, and Europe’s governments are bankrupt. This makes things complicated.
–If it was just a matter of letting the debtor – the government – declare bankruptcy, it would be easy enough. But when the debtor is the government, bankruptcy (or default) has a whole host of social and economic consequences. Most of them are not good.
–And then there’s the creditor, the banks. If the debtor defaults, the creditor finds his assets have suddenly become liabilities. And so Europe finds itself in the position of not being able to extinguish government debt without wrecking the Continent’s entire financial system. Hmmm.
–Enter the Franco-German power couple of Nicolas Sarkozy and Angela Merkel. The French President and the German Chancellor met over the weekend. They are the respective parents of Europe’s unhappy family. They are determined to work things out for the sake of the children (the Super state always treats everyone like children, or wards of the State).
–Enmity between France and Germany has been the source of European conflict for centuries. The whole purpose of Europe’s monetary union was to make political union inevitable. And the whole motivation for political union was to prevent Europeans from slaughtering themselves ever again. Twice in one century was enough.
–The parents are putting on a brave face. “We are determined to do what is necessary to guarantee the recapitalisation of our banks,” Momma Merkel says. “We will make proposals in a comprehensive package that will enable closer cooperation between euro-zone countries that will include changes to treaties,” Poppa Sarkozy adds.
–Proposals and plans are like drunken declarations of love or New Year’s resolutions: easily made and quickly forgotten. The Europeans are stalling for time and trying to increase the size of their bailout fund from $602 billion to a couple of trillion – without panicking the market.
–So are the Eurocrats bluffing? Well, the share market doesn’t think so. At least it didn’t think so last week. Aussie stocks had a torrid finish to the week. Yet as you can see from the chart below, the share market is right back to where it was 30 days ago. And Europe is no closer to a resolution to its seemingly intractable problem.
–Our view is that Europe is going through now what the United States went through in the first half of the 19th century. It’s tending toward financial and political centralisation. But its people and its politics are so different that the whole project is bound to fail. Not all of them know that yet.
–But we’ll see. In the meantime, a whole new protest movement has sprung up on the Internet and in the streets of cities around the planet. The “Occupy Wall Street” movement is a kind of open-source protest against…something. It doesn’t have a unified message yet. Maybe it won’t. Right now, if you’re against something, it’s probably the place to be.
–Someone had better explain to the protesters that capitalism is not at fault here. Big Money, Big Business, Big Government, Big Labour…they have all managed to create the regime of “the Big.” In the regime, the interests of the Big are looked after. Barack Obama is currently Mr. Big, but only at the sufferance of Goldman Sachs and those whose bidding he does (the same is true here in Australia).
–This brings us to the Big Bang. That’s where the entire system blows up. And here we’re pretty sure we have physics on our side. And there’s an Australian connection!
–Brian Schmidt of the Australia National University took home a piece of the Nobel Prize for Physics. Schmidt’s originally from the US state of Montana (the Big Sky state, ironically). But while at ANU, he did research which literally turned science’s understanding of the universe on its head.
–Before Schmidt and his co-laureates published their research, the common view of the universe is that its expansion was slowing and it was headed for a cold, slow, “heat death.” The inexorable force of gravity was slowly taming the violent energies unleashed by the Big Bang. Everything was tending toward disorder, or entropy.
–The trouble is, the date that Schmidt and his team compiled show the exact opposite. The Universe is expanding. And not only is still expanding. Its expansion is accelerating. Everything is flying away from everything else.
–Of course we’re not physicist, although we do fancy ourselves as an amateur cosmologist. All curious minds should be interested in the origin of things. All things. Including financial systems, which brings us back to the financial Big Bang. Stay tuned for more tomorrow.
for The Daily Reckoning Australia