We get the fiscal Stick

Discussion in 'Financial Cents' started by overbore, Dec 10, 2008.

  1. overbore

    overbore Monkey++

    We have all heard this expression and now with the printing of trillions of unbacked paper political promises called money, here is a brief accurate history of how this scheme has developed into the international hoax called securities ( government and other ) with their resultant market collapse:

    It was one of the greatest heists in history.
    The scene? London, 1660. The perpetrator? King Charles the II...of England. The loot? All the gold he could con out of the country's goldsmiths, bankers and businessmen in a lifetime. The tool?
    A stick. A Tally Stick. Tally Sticks were a brilliant invention. But they were also insidious, as they formed the foundation for the fiat currency systems we still have today. One where the root of a currency's value is in a promise from a faceless institution, and not in the actual value of an object. Sound vaguely familiar?

    Put into use about a thousand years ago, they were a common sense solution for a young, "gold and goods" economy where gold was scarce. By the time of the heist they were used in everyday transactions.
    [​IMG] Here's how it worked. When a loan was made, the debt was carved in a standard fashion on the surface of a small (preferably hazel-wood) stick, and then the stick was split in half through the center of the carving. The longer end of the IOU was given to the purchaser, and its handle was called the ‘stock'...the root of the word's use in today's markets.
    Even a mostly illiterate public could read the amount scratched into the wood, and the stick would only fit perfectly with its original other half. That way, when the debtor returned with the money (or goods) owed, the sticks would be matched and the debt would be ‘tallied.'
    In that fundamental use, they worked perfectly. But of course - as is governments' way - the King was tempted to stretch those bounds.
    The public was uninformed as to the false base this system generated--

    Charles II ruled at a time when royal power was still based on a ‘divine mandate'. His government and institutions - and indeed he himself - saw the King as a "Chosen One." ahem

    Which was a real shame for him, because it bound him to the laws of Christendom. And Christianity at the time still forbade lending or borrowing with ‘usury' (interest). So he had trouble in terms of "living like a king" and financing several failing wars against various neighbors.
    Instead he turned to the trusted tally...and the keen idea of selling his (government) tallies (debt) at a discount. That way he could allow his lenders to profit without charging interest...it's the basis for government debt being sold at a discount today.
    And he could issue advance tallies for ‘emergency spending'...an idea that proved all too tempting. He sold the tallies collected by his Excheqeur (tax collector) from the country's Sheriffs, essentially trading future tax receipts to the country's goldsmiths (bankers) for quick cash.
    The tallies were receipts for taxes to be paid later in the year...and this is a crucial part of the story.
    They weren't trading on the value of the objects being traded, but on the cost of waiting for a return and the government's ability to collect taxes & keep honest books. If the government is not honest, this is an outright Ponzi scheme...one where new debt issue could theoretically pay for passing bills. For a while.
    The King realized that he'd stumbled onto something big. He could wage all the war he wanted and pay his bills with the gold he got for hazel-wood. The King spent and spent, and the goldsmith's vaults filled up with more and more sticks.

    But didn't the goldsmiths get wise?

    Well, yes and no. Yes, they did get wise - which we'll talk about shortly - but they also had a reason to play along.
    As we discussed, goldsmiths were handing out certificates for fractional gold reserves and inflating the young economy in a con all their own. And since the King played along with their early building of a banking system, they played along with the ‘sticks-for-gold investment strategy.'
    But as mentioned above, they did get wise. At least the market did. Buyers started attaching larger and larger discounts to the King's debt to offset the perceived risk in loaning money to the King. The discounts prompted the King to issue even more tallies, promising out more future tax revenues just to meet his short-term spending desires. But remember only the discount was changing here. So the mountain of taxes to be redeemed in order to pay off his debts grew in comparison, soon overwhelming the King's income.
    By the time the whole Ponzi scheme came to an end, the King's sticks were trading at a 10% discount (to put that into perspective, short-term T-Bills are currently trading with discounts of one-tenth of one percent or less). The payments on his newer issues trading at that discount soon outmatched all the Kingdom's tax revenues, effectively bankrupting his Excheqeur and threatening to put the monarchy in the poorhouse.
    So with the stroke of a pen, the King simply declared those debts illegal and ceased payment.
    With that single stroke he stole a huge amount of the country's gold - having already spent it - and forced the young economy to fall flat on its face. The King's various creditors ended up on ‘the short end of the stick' (again, this is the source of that expression) and all credit in the country evaporated pretty much overnight.

    But wait til you hear what happened to the sticks...

    The sticks were still in use for over a century afterward...the Bank of England even had some on their books when they opened in 1694. But in 1834, Parliament ordered all the sticks to be destroyed and the system to finally be retired.
    The men at the furnace were happy to comply...and so too - apparently - were the sticks themselves. The fire overwhelmed the Parliament building's basement furnace and burnt the building to the ground.
    I'm not kidding. You think that might've been a sign?

    This is the history of government debt. And it's important to remember that even government debt is not risk-free. Governments have been known to default on debt. Russia, Ecuador, Chile...and many more have defaulted just in the last century. hint , hint

    Why don't you hear about it? Why are government bonds always called "risk-free" or "Inflation-Protected Securities"? Why don't they come out and tell you that government debt has a reckless - even disastrous - past?
    Because it's bad for business

    And it really kills the Ponzi scheme. If a government is facing serious trouble, it's almost a universal truth that they need (or desire) more money. But if they're honest about their troubles, the market might affix a greater discount to their debt...leaving them with less money.
    So it's best for business just to tell them that everything's okay. Just tell them you're "fundamentally sound," or "well-capitalized." Unless you're Hank Paulson, Ben Bernanke or George W. Bush that'll do the trick.
    What else aren't they telling you? Are the 'Spendocrats" to be trusted to tell us the total truth? Are they competent to make sound business decisions? Are they going to stop profligate spending?[peep]

    Do you know that one trillion dollars is a stack of $1,000 bills 26.9 MILES HIGH? Spendocrats have just pi--ed away about 8 trillion dollars or about 215 MILES HIGH!!! paper obligations that this scribe thinks will eventually be defaulted upon following any SHTF scenario.[shtf]Hard assets will be highly valuable then. My benchmark for trouble is when gold is about $900 per ounce for one week or more.


    Greek fighting: the eurozone's weakest link starts to crack

    Posted By: Ambrose Evans-Pritchard at Dec 10, 2008 at 07:47:15 [General] Posted in: Foreign Correspondents , Business
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    Economics, EU, Euro, Eurozone, Greece, Greek fighting , riots

    The last time I visited Greece, I was caught in the middle of a tear-gas charge by police in Thessaloniki - a remarkably unpleasant experience, if you have not tried it. My eyes were in screaming pain for an hour.
    Protesters throw stones at police in the Greek city of Thessaloniki
    Protesters smashed up the shops on the main drag, broke the windows of my hotel, and torched a few cars.
    So the latest four-day episode in Athens and other Greek cities comes as no great surprise. The Greeks are a feisty people. This is meant as a compliment - broadly speaking - just in case any Greek readers should take it the wrong way. Hitler was so impressed by Greek bravery that he accorded Greek soldiers full military honours, almost the sole example among captive nations in the East - or at least professed to do so at first.
    That said, these riots are roughly what eurosceptics expected to see, at some point, at the periphery of the euro-zone as the slow-burn effects (excuse the pun) of Europe's monetary union begin to corrode the democratic legitimacy of governments.
    Note two stories in Kathimerini (English Edition)
    "Athens riots spin totally out of control"
    And an editorial: "Greece has gone up in flames and the concept of democracy and law and order has been eliminated"
    Without wanting to rehearse all the pros and cons of euro membership yet again, or debate whether EMU is a "optimal currency area", there is obviously a problem for countries like Greece that were let into EMU for political reasons before their economies had been reformed enough to cope with the rigours of euro life - over the long run.
    In the case of Greece, of course, Athens was found guilty by Eurostat of committing "statistical achemy" to get into the system - ie, they lied about their deficits.
    Be that as it may. Greece's euro membership has now led to a warped economy. The current account deficit is 15pc of GDP, the eurozone's highest by far. Indeed, the deficit ($53bn) is the sixth biggest in the world in absolute terms -- quite a feat for a country of 11m people.
    Year after year of high inflation has eroded the competitive base of the economy. This is an insidious and slow effect, and very hard to reverse. Tourists are slipping away to Turkey, or Croatia. It will take a long time to lure them back.
    The underlying rot was disguised by the global credit bubble, and by the Greek property boom. It is now being laid bare.
    Greece has a public debt of 93 per cent of GDP, well above the Maastricht limit. This did not matter in 2007 when bond spreads over German Bunds were around 26 basis points, meaning that investors were willing to treat all eurozone debt as more or less equivalent.
    It matters now. The credit default swaps on Greek sovereign debt were trading around 250 today (compared to 52 for Germany, 62 for the US, 120 for the UK, and 178 for Italy). It has moved into a class of its own.
    This is potentially dangerous because Greece needs to tap the capital markets for 40bn euros next year to roll over debt and fund the budget deficit, as well as 15bn euros or so in bond issuance by banks under the state's new guarantee. This is a lot of money.
    The Greek government will need budgetary discipline to convince markets that it has matters under control. But governments facing riots and imminent defenestration are not good bets for fiscal discipline. There is a general strike in any case on Thursday.
    While the violence was triggered by the death of a 15-year old boy, the underlying motives of the protest obviously run deeper. The hard left can mobilize demos because the youth unemployment is endemic and because the goverment is being forced by economic constraints to adopt a hair-shirt policy at a very bad moment. At some stage a major political party - perhaps PASOK - will start to reflect whether it can carry out its spending and economic revival plans under the constraints of a chronically over-valued currency (for Greek needs). Then there will be a problem.
    I am a little surpised that the riot phase of this long politico-economic drama known as EMU has kicked off so soon, and that it has done so first in Greece where the post-bubble hangover has barely begun.
    The crisis is much further advanced in Spain, which is a year or two ahead of Greece in the crisis cycle.
    My old job as Europe correspondent based in Brussels led me to spend a lot of time in cities that struck me as powder kegs - and indeed became powder kegs in the case of Rotterdam following the murder of Pim Fortyn, and Antwerp following the Muslim street riots (both of which I covered as a journalist). Lille, Strasbourg, Marseilles, Amsterdam, Brussels, all seemed inherently unstable, and I do not get the impression that the big cities of Spain and Italy are taking kindly to new immigrants.
    The picture is going to get very ugly as Europe slides deeper into recession next year. The IMF expects Spain's unemployment to reach 15pc. Immigrants are already being paid to leave the country. There will be riots in Spain too (there have been street skirmishes in Barcelona).
    Hedge funds, bond vigilantes, and FX traders will be watching closely. In the end, a currency union is no stronger than the political will of the constituent states.
    No doubt events will be ugly in Britain as well. My comments are not intended to suggest that British behaviour is better. Far from it. But I am certain that the British people still feel that the authorities who set economic policy are ultimately answerable to Parliament and to the democratic system.
    Will the Greeks, the Spanish, the French feel that way about the European Central Bank and the Stability Pact when the chips are really down?????
    "What then for them and us,US???" added by Overbore
  2. Sly

    Sly Monkey++

    Interesting, Thank you.
  3. overbore

    overbore Monkey++

    Since I am older than most and a tad younger than dirt, I have the advantage of "been there, seen or done that" and as a student of history, we students learn that "the past is prolog to the future" or we will see this again because we do not want to learn from the mistakes of the past. This basic axiom is within the Bible---" a dog returns to its vomit--" meaning that just as Spendocrats got into power by spending, they will continue to spend until the day of fiscal reckoning; our national sickenss. The Bad Day at Black Rock Bank just may come about from the law of unintended consequences or,---- they caused money to be spent without limits, then the money became worthless then people got unemployed, then they go hungry, then they started rioting, then the government became unstable, then a "psuedo-savior was elected, then we lost our stability , our money and our rights. Germany 1930's. Argentina 1970's, Greece now; 'Comin round the bend again; the 40 year cycle of stupidity=== Overbore
  4. CraftyMofo

    CraftyMofo Monkey+++

    Thanks, OB, great post...
  5. Tango3

    Tango3 Aimless wanderer

  6. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    [do-it] the people, while the central bankers say [finger]
  7. Seacowboys

    Seacowboys Senior Member Founding Member

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