Guest Post: Sorry, Bucko, Europe Is Still In A Death Spiral
by Charles Hugh Smith
Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals.
Sorry, Bucko–Europe is still in a financial death spiral. Friday’s “fix” changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:
1. Growth was dependent on borrowing money and blowing it on consumption and malinvestment. Replacing old impaired debt with new impaired debt does not generate growth.
2. Borrowing more money to pay the interest on past borrowing will not generate growth. Money must be borrowed to pay the interest and additional money borrowed to fund current consumption. As interest increases, this creates a geometric increase in debt and interest costs.
3. Borrowing more money to fund current consumption is a death spiral, as the interest payments eat up future revenues, starving productive investment and future consumption.
4. Borrowed money must be backed by either collateral or future income streams. The collateral remaining in malinvestments (villas in Spain, etc.) is either impaired, near-zero or simply non-existent. There is no legitimate collateral on which to base more borrowing.
5. Future income streams are already committed to paying interest on past debt and mandated consumption (entitlements, government payrolls, etc.), so there is no legitimate collateral on which to base more borrowing.