How to Spend Money in the Western World

Well, well, well…the Eurocrats dusted off the “American Playbook” again this week, as they stepped up their efforts to contain the euro crisis. Chapter One of the playbook didn’t work: “Dismiss the Crisis as a Localized Problem.” Chapter Two also failed: “Deny Any Risk of Contagion.” Chapter Three didn’t work either: “Vow to Defend the Status Quo at Any Cost.”

At that point, the Eurocrats had no choice but to implement the tactics detailed in Chapter Four: “Announce a $1 Trillion Rescue Plan.” After announcing the rescue plan, the Eurocrats declared victory and checked the playbook back into the library.

But alas, victory over the crisis was not to be. So back into the Playbook we go with Chapters Five and Six: “Blame Speculators, Ban Shortselling,” and “Legalize Selective Fraud (for the benefit of ‘normal market operations’).” Chapter Six is a particularly potent weapon…and the recent American experience with this tactic offers some encouragement for the Eurocrats.

About one year ago, American regulators legalized the fraud that near-worthless mortgage-backed securities might actually possess some value. American regulators did not admit to encouraging fraud, of course, they merely suspended the imperative that banks “mark to market” all of their mortgage-backed securities. “Mark-to-model” would become the accepted practice. The problem is that models lie; markets never do.

Investors did not seem to care about the nuances between markets and models. The stock market has been rallying ever since “mark-to-model” became the new accounting protocol. This fact has not been lost on the Eurocrats. Since this scam worked so spectacularly in America, some European officials are reasoning that a similar policy could work in Europe. As yet, no official decrees have surfaced…only rumors. The rumors are that various banking jurisdictions in Europe would suspend mark-to-market pricing of sovereign debt. In other words, banks would not be forced to recognize their unrealized losses on their holdings of Greek, Portuguese and Spanish sovereign debt.

It’s just a rumor for now. But don’t be surprised if rumor becomes fact.

Such is the way of the Western World: “Extend and pretend.” The governments of the West are so busy devising ways to kick the can down the road that they can’t even begin to consider ways to stop playing this hopeless game.

The Western economies know better than any other how to make a buck. Unfortunately, the Western politicians know better than any other how to spend a buck…especially a buck they don’t have. The resulting system is a fraud, based on a mass deception. The resulting system promises an elaborate menu of services and benefits that tax revenues cannot possibly finance.

The “system” is an Easer Bunny…without the chocolate eggs. It is, in short, a lie.

Eric Fry
for The Daily Reckoning