Tag Archives: Greek debt

The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa.

The above is an English translation of German physicist Werner Heisenberg’s Uncertainty Principle, the chief implication of which is that the position and the velocity of an object cannot be measured exactly, at the same time. One or the other can be measured, but not both simultaneously.

Governments and central banks can control one, but not all variables in a multi-variable system.

The above is American writer Robert Gore’s Command and Control Futility Principle, the chief implication of which is that regardless of what variable or variables a government or its central bank attempts to control, all variables cannot be controlled exactly, at the same time. A corollary of this principle: due to the impossibility of controlling all variables, they will usually lose control of even the variable or variables they have attempted to control. The more they try to control, the less they will ultimately end up controlling.

The principle is playing out; the inability to control all variables is becoming increasingly evident. Total global debt has reached a saturation point, it no longer produces positive economic returns and economies are weakening under the burden of debt service. The reduction in demand and price deflation has hit heavily indebted commodity producers, who must continue to produce as long as their revenues cover cash costs. Commodity prices have crashed although the world economy is saturated with central bank created liquidity.

Commodity producers’ reduction in revenues and lower prices pressure both governments and their central banks. Heavily indebted governments receive less in tax payments, and the deflationary impetus of lower commodity prices increases the real burden of their debt service. Central banks must suppress interest rates and buy governments‘ debts to promote governments’ financing efforts, while trying to increase inflation to reduce the real burden of debt service. However, central bank balance sheets are relatively puny compared to the deflationary potential—now being realized—of the massive debt overhang (total US debt, in all sectors is over $59 trillion, Federal Reserve assets are around $4.4 trillion), so central bank efforts are ineffectual. Governments issue debt and central banks promote it, but they cannot control diminishing marginal returns from debt nor the toll debt service and debt deflation exact on economies.

The Swiss National Bank was trying to keep its currency undervalued by pegging it to the euro. However, that obligated it to buy vast amounts of euros with newly created Swiss francs, and with the European Central Bank actively promoting further euro depreciation through its quantitative easing program, the Swiss bank was looking at potential losses on its euro position that would have wiped out its capital. So it dropped the peg, imposing sometimes ruinous losses on speculators (and mortgagors and their creditors in several Eastern European countries), who had borrowed Swiss francs believing they would never be revalued (the Swiss franc’s value increasing against other currencies). The revaluation will also hurt Swiss exporters. The Swiss controlled their currency’s price against the euro, but could not control the amount of euros on its balance sheet, and its inability to control the latter led to its loss of control of the former.

The governments of the European Union and their central banks have become the Greeks’ primary creditors. Although the stated terms of the debt they hold are controlled by contractual agreement, they cannot control the willingness of the Greeks to repay it, or the value financial markets may assign to it. The recent Greek election signals the average Greek’s unwillingness to continue abiding by the terms of agreements with the IMF, the ECB, and the EU. That unwillingness almost certainly means that there will be a loss on that debt. The recent fall in Greek debt prices indicates that financial markets are anticipating that outcome. Creditors will not exercise control over the apportionment of losses on debt whose terms they thought they controlled.

Regardless of the outcome of negotiations and the ultimate resolution of the Greek debt problem, it is yet another sign of governments’ and central banks’ inability to control all variables. Per the corollary of the Command and Control Futility Principle, the variables they have been unable to control are undermining their ability to control the variables they have heretofore sought to control (e.g. stock prices and performance of their economies). Or to put it in the vernacular acronym: we are reaching the point where TSHTF.

FREEDOM, THE ALTERNATIVE TO COMMAND AND CONTROL

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