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Fiction, Fantasy and the Euro

Posted on Dec 6, 2011
Dennis Skley (CC-BY-ND)

By William Pfaff

The American rating firm Standard & Poor’s warned 15 European nations on Monday, including Germany and France, that unless they solve their currency problems this week, to the satisfaction of S&P, a business corporation, this company will “downgrade” them, with the effect of increasing the interest they must pay on their sovereign debt and on foreign funds placed on loan to their economies.

S&P, like the other rating firms at work today, is a company operating to make profits for its managers and stockholders. It has no public mandate, and indeed, if it acted under an assumed public-interest mandate, it could find itself sued by its stockholders, whose interest is to profit themselves, not the public.

These “ratings” of companies and nations lack any objective authority or validated qualification. The company sells opinion (like journalists; but nations and central banks very sensibly do not base their decisions on what journalists write). The potential link of unqualified or biased ratings to market speculation is obvious, but nonetheless accepted on the international markets, despite proven instances of past rating agency malfeasance, including the AAA-rated securitized junk mortgages responsible for creating this world financial crisis.

The extent to which the economic policy of nations is made on the basis of misinformation or wishful thinking is not generally recognized. Even when error becomes established as part of the conventional wisdom, it rarely is challenged because of the price usually inflicted upon public dissenters.

Consider how many years Anglo-American corporate and academic economics operated on the transparently implausible assumption that markets are perfectly informed and automatically self-correcting.


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Consider the present all but universal policy of imposing austerity on nations, automatically creating unemployment and depressing consumption, making impossible the growth without which the victim nation can never pay its debts.

Consider, for that matter, the assumption underlying the creation of the euro. One of the implicit conclusions reached Monday at the Paris meeting between Angela Merkel and Nicolas Sarkozy was that European governments of varying size and sophistication (from Greece to united Germany) have difficulty coordinating national budgets in a manner that can sustain a common currency. This was said (here and elsewhere) at the time the euro was created, but the objections were disregarded in the belief that good will and luck could carry the day.

They failed to do so, and a door has now been opened for the weak to abandon the euro, suggesting that it may survive as a somewhat less than common European currency, for fewer than 17 members. In that case, it would be a more stable currency than it could ever be for 27 EU members. Whether, or how, the euro will survive is unknowable. I personally think it will survive, but it now is in jeopardy. (It has hardly been out of jeopardy since last summer.)

The outcome will theoretically be produced by officials at conferences, but those conferences take place against background concern that the matter will actually be decided by “the markets.”

Who are the markets? A mass of honest citizens searching to place their savings where they will be secure? No. The market consists of professional traders largely indifferent as to whether the euro is “rescued” or not. They place their own bets on how official actions will affect the euro’s assessed value, and their interest is to win their bets (and bonuses). The bets really are on what the majority opinion among speculators will prove to be, thereby causing the euro to rise or fall in value (for a time). This is not a matter of indifference since it causes the sovereign debt of the euro-using nations to rise or fall.

Here lies the problem. As currency possesses real rather than fiat value in the minds of those who use it to buy other things possessing intrinsic value, the outcome of market speculation has real consequences in national economies and for society. But for the speculator, the market provides a horserace, with no redeeming social value. A horserace improves the breed.

Why do governments allow speculation to set the value of their money, as they have since the last trace of the gold standard was destroyed by Richard Nixon in 1971? One notes that President Nixon was acting in tacit submission to the perils of fiat currency, since his motive (one of them) was to halt American gold holdings being shipped to France, at the demand of President Charles de Gaulle, to settle the American commercial deficit. (Had he not broken the dollar-gold link, one shivers at what American-Chinese relations would be today, with China able to demand redemption in gold of its dollar holdings. On the other hand, what peril now may exist to both countries in the lack of what might be called an objective corollary to printed money?)

Fiction and fantasy in finance provide questions that might profitably be the subject of another of those “summit conferences” that have kept high officials on the road in past months. It might be devoted to rescuing the economy from the depredations of speculation, which just last week created a situation in which, as Jeremy Warner wrote in the London Telegraph, even German bonds had lost “their ‘risk-free’ status. … No one wants to hold euro denominated assets of any variety. … All of a sudden, the pound is the European default asset of choice.”

Visit William Pfaff’s website for more on his latest book, “The Irony of Manifest Destiny: The Tragedy of America’s Foreign Policy” (Walker & Co., $25), at

© 2011 Tribune Media Services, Inc.

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By Amon Drool, December 7, 2011 at 5:33 pm Link to this comment

mr. pfaff…i’m largely in agreement with what you
write here, but this one statement of yours gives me
trouble: “Consider the present all but universal
policy of imposing austerity on nations,
automatically creating unemployment and depressing
consumption, making impossible the growth with which
the victim nation can never pay its debt.”

is ‘growth’ the only way a nation can deal with its

the following is from the Wiki entry for the movie
(available on you tube) ‘Debtocracy’:

The Case of Ecuador

The documentary suggests the case of Ecuador as an
alternative gov’t reaction to the IMF and the World
Bank, sensitive to social justice, that saves the
people from having to pay for a loan that didn’t
benefit them.
In 2006, the Prime Minister of Ecuador, Rafael Correa
reacted to the huge public debt that the country had,
with a series of actions that aimed in the protection
of rights of the people of Ecuador. First, Correa
decided that the funds from the natural resources of
the country (exploitation of oil) would be used for
public policy, and not for the payment of debt.
Second, Correa decided that only 20% of the annual
budget should be used for the debt, instead of 50%.
Third, he organized a committee to analyze the public
debt. Despite the obstacles and the reactions to
this, the committee was able to complete the analysis
of the debt, and to find that it was illegal on the
basis that the loans taken were used for projects
that benefited only a “few’, the governments signed
the contracts without informing the people, and the
bankers were aware of this. In the end, Ecuador was
able to save about $7 billion.

i’ll primarily focus on Correa’s third way of dealing
with the debt. this deals with the legal concept of
‘odious debt’.  again from Wiki:
  In international law, odious debt is legal theory
that holds the national debt incurred by a regime
for purposes that do not serve the best interests of
the nation, should not be enforceable. Such debts
are, thus, considered by this doctrine to be personal
debts of the regime that incurred them and not the
debts of the state. In some respects, the concept is
analogous to the invalidity of contracts signed under

i guess the point i’m trying to make here is that
‘growth’ is not the only solution to debt.  why feed
the private bankers who imprudently created this debt
when international law can be used to produce
distributive justice?

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By Marian Griffith, December 7, 2011 at 4:30 pm Link to this comment
(Unregistered commenter)

Credit rating agencies essentially rise and fall on their ability to predict what their customers want to hear. Their customers being the investment banks and similar financial institutions.

In the days where everybody is optimistic their customers want to hear that everything is fine and that the credit is good, and they will not do business with an agency that warns about bad credit. Thus the agencies will put and AAA rating on everything they can hold still long enough to stamp.

Today everybody is full of gloom and fear, and an agency that says credit is good will not be believed and thus will not find any business.

Which ultimately points at the fact that these credit ratings agencies are not so much an instrument of american imperialism as some europeans would like to think as well as that they are essentially irrelevant.
They echo what the market wants to hear, which then proceeds in a mad stampede to make these predictions come true.

The smartest thing the EC can do at this point is to simply default on its foreign debts and restructure its internal ones without pressure from the financial system. This will require nationalisation of probably 80pct of its banks, and a massive transfer of money from germany to the mediteranean and an equally massive transfer of authority and sovereignty the other way.
The point is that all those financial institutions have no choice but to invest in Europe (all the doom and gloom about the euro has not resulted in the currency weakening against the others, meaning that the trust in the dollar or the yen is lower still than the trust in the euro). There are only three trade blocks big enough to aborb a meaningful fraction of the ocean of money set loose in the financial system: The USA, Europe and Japan. The first is making everybody nervous with its deficit, political stalemate and prospect of nothing happening during the next campaign year and an indetermined period after. Japan has its own problems and has recovered from a very long economic slump but suffers from political stagnation and natural disasters. This leaves Europe as the natural target of all that investment money despite the gloom and doom stories about it.
If only the european politicians realise that they can play it as hard as the international banks and funds, and hold them as much hostage as they themselves are held hostage by the interest rates they have to pay to refinance their debts. They could threaten to crush the american and chinese economy by simply refusing to play the ‘game’ any longer.

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Blueokie's avatar

By Blueokie, December 7, 2011 at 1:34 pm Link to this comment

It’s truly astonishing that no matter how often, and on such a grand scale, the ratings agencies prove they have no credibility, that anyone could take still take them seriously at all.  Speculators commodify everything under the sun and these people make their money by prostituting themselves to the outcome the speculators demand.  They are truly the tailors of the unclothed Emperor.

Anarcissie - Thanks for the site reference, read the top two items and hit the bookmark button.

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By felicity, December 7, 2011 at 12:21 pm Link to this comment

Rothschild introducing banking methods into America
in the late 1800’s.  “The few who can understand the
system will be either so interested in its profits,
or so dependent on its favors, that there will be no
opposition from that class, while, in the other hand,
that great body of people, mentally incapable of
comprehending the tremendous advantage that Capital
derives from the system, will bear its burden without
complaint, and perhaps without even suspecting that
the system is inimical to their interests.”

It was banking practices by the financial sector that
brought about the Crash.  It was banking practices
that brought about the recent economic collapse. 
Seems reasonable to take a long, hard look at
“banking practices” and change what must be changed,
keep what shouldn’t be changed. (But, that would be
too simple, wouldn’t it.)

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Anarcissie's avatar

By Anarcissie, December 7, 2011 at 9:28 am Link to this comment

William Pfaff:

‘... The extent to which the economic policy of nations is made on the basis of misinformation or wishful thinking is not generally recognized. ....’

Perhaps among journalists.  The proposition is quite popular among the unwashed, and can even be found widely among those with some knowledge of finance and economics.  See recent postings in Naked Capitalism, for example.

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Oceanna's avatar

By Oceanna, December 7, 2011 at 9:24 am Link to this comment

It was smart for Britain to keep their Sterling during the Euro conversions, which
was a decision that may have been more nationalistic than pragmatic. 

S&P is obviously exploiting the crisis for profits in downgrading EU credit
ratings to increase interest rates.  We should all remember their AAA ratings to
Citi, AIG, ect., whose credit default swap racketeering brought down the
economy and and destroyed the pensions of millions of Americans.  Nor should
we forget the S&P pristine credit ratings assigned to Enron over a decade ago,
which should have served as a warning for S&P’s malfeasance or collusion in
hiding insolvency. 

Simply put, the US and world economy are being controlled by casino ploys,
whose number and cash manipulations would be considered illegal in Vegas. 
That was an obvious conclusion to draw 3 years ago with the bailouts, which
were conducted in blatant opacity to the undisclosed trillions of tax dollars
being channeled into unknown destinations. 

Worldwide toxic derivatives are estimated to range from 600 trillion dollars to
amounts in the quadrillion range, far surpassing global GDP and ability to
assume the debt.  In the meantime, the casinos are hopping and poised to
action as the worldwide economy seemingly goes up in flames.  I hope I’m
concluding in hyperbole.

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By SoTexGuy, December 7, 2011 at 6:28 am Link to this comment

Economists and pundits, including the author here, practically always discuss these looming problems in the same terms and provide the same answers.. Those being; more money, more borrowing and more spending and especially more consumer spending are the answers.

There are other ideas out there.. That gal Annie Leonard and the Story of Stuff Project really speak to the problem. Check it out!


Thanks and have a great day.

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By tapxe, December 6, 2011 at 7:23 pm Link to this comment
(Unregistered commenter)

the thing about Pfaff is…

he’ll write one great article (and this is a very good one)

but then by the next one, after perhaps a few reprimanding call by you know who…  he’ll tow a much more sedate neocon line.

In the old days, when I used to read him in the Herald Tribune, he was (almost) always good.

But this is a different world we live in.

I bet he’d tell me that’s this is the price to pay nowadays to still be allowed to write and be published.

But this one here is cogent and quite a piece. 

Thanks Bill.

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By Lockweed, December 6, 2011 at 5:54 pm Link to this comment
(Unregistered commenter)

I have been thinking about the same things brought up in this article recently.  The credit agencies failed miserably in the last few years to accurately rate the ability of debtors to pay back their debt.  The Europeans don’t trust these credit agencies (all of which are American) and have discussed possibly creating their own credit agency.  While the article says the credit agencies operate to maximize the profits of their stockholders (I believe that), I also wonder if they might undermine a foreign country to benefit the USA.  I don’t know how eager they would be willing to do that against say Europe or Japan, but I have no doubt they would do it against countries like Iran, Syria or even China.

The Europeans have indicated they don’t have confidence in the credit agencies.  I think rating the ability of the debtors to pay back is a good idea, but like Pfaff, I don’t think these agencies can be trusted to provide accurate ratings.

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