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Thursday, October 27, 2011

Europe Celebrates Lawlessness

The fiscal problems in America and Europe have driven government sanctioned fraud globally.  In March 2009, with the global crisis hitting lows, the FASB changed accounting rules to allow banks to mark 'assets' at a valuation they determine, rather than what the asset is worth on the open market.  This was called mark to market accounting, instituted back in the Great Depression.

The idea is that assets have value, equivalent to what others are willing to pay for it.  For example, if I state my house is worth the amount I paid for it, but nobody today will buy for that price, then what people will pay for it today would be the 'mark to market' price.

Since then, banks across the world have enjoyed a great run, and why not? Their assets in accounting terms don't lose value.  Its a great gig.

Europe now proposes that Greece will be able to write down their bond debt by fifty percent AND this will not trigger a default on their debt.   The second part is key here.  If the debt write down is not termed a default, it cannot be an event that triggers legal action when defaults happen.

This to me rings of what I see in society often today, avoiding responsibility by changing the rules.  This will have ramifications that I believe will far outweigh the benefits in the years ahead.
How can anyone enter into financial agreements if accounting rules can change, if definitions like debt default are altered to suit the "other side of the tables" needs?

The answer is, if you act responsible with your money, you can't  You will avoid entering into such agreements in an industry that has a track record of avoiding adhering to the construct the agreement was based upon.

If the Greece plan comes to pass, the event will AVOID triggering the debt default agreements (like insurance) called Credit Default Swaps.  In the near term, this is a fantastic thing.  I have covered before how CDS coverage exceeds gobal GDP by multiple times.  If CDS is not triggered, is greatly reduces the change of a financial depression.  Thats the good news.

The bad news if money is not treated with respect, and does not have a rigid enforcement of law, the other result is currency collapse.

While I am not stating that a currency collapse will happen, I am stating there is no free ride for avoiding responsibility, there will be consequences.  For today, time to celebrate, markets will go up.  Watch gold and gold miners, I may buy more.

My Favorite quote during this event is
"The world is watching Europe and Germany; it is watching whether we are ready and able, in the hour of Europe's most serious crisis since the end of World War II, to take responsibility," Merkel told parliament.

The way I see it, above was a twist of words, below I have fixed it.

"The world is watching Europe and Germany; it is watching whether we are ready and able, in the hour of Europe's most serious crisis since the end of World War II, enforce responsibility," what Merkel should have told parliament.

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