Wednesday, April 28, 2010

Is A Greek Default Inevitable?

No, it isn't.  But it may very well be desirable for all concerned, up to a point.

There are two extreme possibilities in resolving the Greek debt crisis:

  • Plan A:  Massive default with near zero recovery for creditors and exit from the eurozone. 
  • Plan C:  Massive Greek fiscal adjustment with murderous wage, pension and public service cuts, plus tax hikes.
Plan A puts the entire workout cost on the shoulders of  lenders.  Most of them are foreign banks that have posted their holdings as collateral with the ECB, and various public pension funds.  This makes Case A politically and strategically untenable, as lenders would then try to seize Greek financial and physical assets  wherever and whenever they find them,  freeze trade and generally bring unbearable pressure to bear.  ECB's balance sheet would take a huge blow and the euro could fall apart.

Plan C places the entire burden on the Greek economy.  This may seem fair at first.  After all,  it was Greeks who borrowed with abandon and squandered the money on overpriced houses, Olympic Games and a hugely bloated public sector.  Not to mention a thoroughly corrupt cleptocratic political system that is constantly in bed with a private sector that no longer produces much of anything at globally competitive prices.  

And yet.. it was foreign lenders who made all this possible, even though they knew - or should definitely have known - what was going on in Greece.  For example, it was foreign banks that kept buying Greek bonds at a ridiculously tiny spread of 30 bp (0.30%) over German bunds for years because they could post them as "cheap" collateral at the ECB.  What happened to their fiduciary responsibility?  It went out the window - the same window that allowed for the manufacture of poisonous AAA synthetic CDOs from CCC subprime mortgages.  It is ludicrous that such irresponsible practices should be rewarded post facto and their practitioners be made whole.

Therefore, I call for implementing Plan B, a solution obviously in-between A and C.
  • Plan B: Share the blame and the cost, but not necessarily 50-50.  
My proposal (though obviously not my opening gambit at the inevitable bargaining table) would be to pay creditors a net present value of  65-70 cents on the euro through a combination of maturity extentions, lower coupons and outright principal reductions.  At the same time, I would demand the Greek government to implement at long last serious tax, pensions and public sector reforms in order to immediately (i.e. 2011) produce primary budget surpluses.

As part of the bargain I would also like to see all EU or eurozone countries exercise their right of eminent domain over their sovereign bond credit default swap contracts (CDS).  To wit, I would require all such contracts agreed under EU laws, or between parties domiciled in the EU, or their subsidiaries wherever domiciled, to be settled in case of default or other credit event, only by tendering the relevant bonds.  This would include all present and future CDS contracts.

In other words, all should share in the pain because all share the blame of creating and sustaining the debt bubble.

Greek Debt Watch: 5-year CDS currently at 850 bp;   implies CPD of 72% if recovery is assumed at 65%


  1. You're bonkers on the CDS.

    If you are saying all CDS contracts have only to be traded by a bond holder, who the hell is going to be the seller?

    CDS is a zero sum game. When the buyer wins, the seller loses or vice versa.

  2. No, I am not saying that they have to be TRADED by a bondholder. I am saying that they have to be SETTLED (in the event of a credit event) by tendering bonds.

    Allow me to know a thing or two about the sovereign bond market, perhaps even more than yourself?

    In the interest of much less than full disclosure let's just say that I was instrumental in the creation of some such markets.

  3. I think that, in order to maximise the misery and to punish those pesky irresponsible Greeks who spent the money thrown so freely at them, "the international community" will push enthusiastically for 'Plan C', then within a few years a Greek version of Jobbik will rise, enter parliament and we get the 'Plan A' that we could have had immediately If we just skipped the "pain" path.

    The only reason so much OTC paper exists is because it facilitates fraud - and cheaters are rewarded for their efforts.

    The solution to the CDS problem is to ban all OTC-traded derivatives and to void the existing ones!

    The exchange-traded options market has never blown up anywhere because it is watched by a "Machine God" that adjust prices so that the net value of all outstanding options are always (well, close to) Zero.

  4. Next problem.

    1. Those buying the bonds were naughty because they substained the unsubstainable.

    At the same time

    2. Those who point out the risks by trading CDS contracts are naughty because they are pointing out that the game is up.

    You can't have it both ways.

    Then, you say, look in effect the CDS spreads are high, and they are the cause.

    Now, you also say, bond holders should only get 70% back in a restructing. Back of a fag packet calculation.

    1/0.7 - 1.0 = 43%

    Seems to me like the bond holders are being set up to be mugged.

    Why invest when you are going to lose immediately?

  5. I'm not having it both ways. That's why I suggest a 65-70% recovery, i.e. I'm placing the "blame" for the untenable current situation mostly on the borrowers.

    And I am again pointing out that delivery of physical bonds should only occur on CDS settlement in the event of default, not during trading.

    Please don't keep confusing the issue.


  6. So what's the interest rate that the lenders should charge, if the Greeks threaten 70% recovery?

    Ball park figure is good enough.

    What's the current interest rate?

    With a 70% recovery in the offing, what rate would you charge for a CDS?

    ie. It's the borrowers who are compeletly at fault.

    It's nothing to do with the lenders who have not triggered anything. Likewise with CDS contracts. They have not caused the problem one iota.

    It is all the borrowers fault.

    Higher up the list than lenders or CDS traders if you ask me are the accountants.

    If you think Enron was bad for off balance sheet accounting, think about governments.

    Pension liabilities? All off the books.

    Interestingly, the IPSA coming into force in January 2011 is going to force the civil service pensions onto the govenment books.

  7. While reading more or less fair proposals is cool, more interesting is to try to see how this unfolds.

    fajensen gives a possible realistic suggestion, IMO...

    Issues like contagion are also of "interesting". How will the global system held if Greece (and, erm, a few countries more) decide to default (or cannot pay)?

    The IMF helicopter spreading money everywhere?

    What are the consequences...

  8. Has the IMF got the cash? It's just done a large number of bail outs and to do that it had to get a capital infusion.

    The difference between the Greeks and the UK is just that the UK printed cash. Quantative easing

  9. I've read somewhere that they were just adding 500 Billion to the SDR:

    Just googled for it. Here it is:

    While Frankfurt/Berlin refuses to print, there seems to be no problem to use others' printing presses.

    What is the value of money lately?

  10. Hell, there isn't really a right answer, is there. There is what we want and what we get. It was always the punchline to your blog.

    This whole issue is zero-sum when looked at the perspective of everyone Lord Blagger, but it is not necessarily zero-sum to you or I personally depending what we want out of it and what and how all the legos ultimately land when the pieces all fall down.

    If Greece default even 35-40%, what does that do to France's debt numbers as a nation?

  11. You know, in The Age of Consensual Money one has to wonder what constitutes default, after all?

    If Greece goes for, say, a 30% haircut but banks are allowed by the ECB to write off their loss over a 20 year period.. what is the loss?

    I'll say it again: it's only money.



  12. This whole issue is zero-sum when looked at the perspective of everyone Lord Blagger, but it is not necessarily zero-sum to you or I personally depending what we want out of it and what and how all the legos ultimately land when the pieces all fall down.

    Quite. It is all the matter of where you draw your boundaries.

    If you draw it round all the participants, a CDS is a zero sum game.

    If you decide to ignore one of the participants, its not.

    Hence my critisism of the original post.

    CDSs not not caused anything. They are a zero sum game. When the demand is their to ban purchases of CDS contracts unless you hold a bond, its another drawing of a boundary that excludes one participant. The seller. By leaving them outside of the analysis, you get to stupid answers.

    1. Is the seller of protection allowed to hedge?

    2. Are they going to be allowed to short Greek bonds as their hedge?

    3. I suspect the answer is no. You can't have people shorting. It might mean problems.

    4. End result, no CDS market and people are really exposed with no ability to insure.

  13. Plan D
    Greece defaults and Germany leaves the EMU. More the Sweedish solution IMO.

    Thai, still have connections to the old country? Turmoil there is more important than Greece I think.

  14. It a possiblity.

    So how's it going to work?

    How can you confiscate people's Euro's and force the new drachma on them?

    Any Greek is going to say, sorry, my Euros are Euros.

    The Greek government then devalues and starts paying people in Drachmas.

    The citizens either then carry on using Euros as a parallel currency, or convert and make a profit, which is inflationary.

    The silly ones will be those that keep their Euros in a Greek bank account. The clever ones will move there Euros to a non-Greek regulated bank in order to profit.

    I suspect there will be runs on Greek banks as the Greeks work it out for themselves

  15. Lord Blagger… It is not a zero-sum game! Where on earth do you get that? When the zero sum is collateralized, and leveraged, it becomes a multiple of zero sum.

    Where it was 0*0=0
    In a perfect world, it becomes 0*0*30=0

    Then the enabling self fulfillment factor of money creation through these synthetics goes haywire in a rinse lather repeat cycle!

    It becomes 0*0*3,000=0 …..3,000,000 ….3,000,000,000

    …and then counterparty risk creeps in and all of a sudden those zero sums have a .01 on them. …and when they were created and lent, they don’t take into consideration in pricing, just how far their compounding risk of cascading defaults have taken them.

    Your zero sum game completely overlooks the gross miscalculation of price and risk by the lenders.

    That fault, is with the lender through and through.

    Zero sum… yeah right. nothing for nothing!

    All the best,
    Miss America – Rich Hartmann

    p.s. OKEY, yes, your quotes were part of one of those 95% complete articles. (I might say though… It was the closest I came in a long time to completing an article! I’m still thinking about finishing it anyuway… we’ll see. I have some other incomplete thought to finish first.)

    p.p.s. Hell… What can I say… You’re my idol. I’ve promoted you for years now, and you never let me down. From an a readers perspective… your education mixed with entertainment still leaves you at the very top of my list… and the reason I always come back. …and just about the only place I still leave fingerprints.

  16. Lord Blagger… It is not a zero-sum game! Where on earth do you get that? When the zero sum is collateralized, and leveraged, it becomes a multiple of zero sum.


    It is a zero sum game.

    Even fractional reserve banking is a zero sum game.

    The only non zero sum game is printing money.

    Counterfeiting and central banking only.

    So if we take the example of fractional reserve, where does the cash come from and what is it balanced against?

    It's all balanced. For every debtor there is a creditor. For every loan made, there is a deposit or capital. It's a zero sum game.

    What you are doing is drawing the boundary arround the system to exclude one of participants and saying its not a zero sum game. It doesn't work that way.

    For example.

    Fred Smith creates a bank. Fred Smith transfers capital to the bank. Fred is down cash, the bank up cash. Zero sum game.

    Now repeat the process for the other transactions and you will see its a zero sum game the whole way.

    All that happens is money gets transfered between participants.


  17. Lord Blagger,

    I own a $300k house. If everyone in the neighborhood is allowed to buy fire insurance on my house, there could be a total payout of $30mil when fire breaks out. Sure it is a zero sum game. But is it really?

    Now back to Greece...

  18. Lord Blagger...
    I certainly don't have the financial expertise to advance anything to counter your hypothesis that a zero sum game is at work.
    But my personal, psychological observations of people and the way our society is structured make ME conclude that while sums are done, we invented the, uh, MATHEMATICAL OPERATION OF MULTIPLICATION for a reason.
    Multiplication and addition ARE NOT THE SAME THING, and they do NOT represent the same world for us.
    i say that you ignore the effects of multiplication, positive, or negative, at your own risk and peril.
    Another thing....
    I dare ANYBODY on this blog to assertain that ANY outcome to this crisis AT THIS POINT IN TIME is a REALISTIC one.
    Because... there is no such thing as realism.
    We live in an ideological world, my friends.
    Those who are still swearing by the "reasonable" nature of "realism" are quite simply naïve (and I repeat, this is NOT NECESSARILY A BAD THING...).

  19. Multiplication is just a repetition of addition.

    Even with gearing, its still a zero sum game.

    Someone loses, someone wins.

    So if you look at Greece and say, who are the winners and losers for 30% default.

    At the point of default. The bond holders lose, and Greece wins. There is an effect transfer from bondholders to the Greek government. The bond holders won't get back 30% of what they are owed.

    The consequences aren't covered by the zero sum game, but they are serious for Greece.

    1. Seizing of overseas assets unless a deal is done.
    2. Penal rates of interest.
    3. Lack of new loans

  20. Lord B,

    Nope. I know my fractional reserves. Having been a Wall Street Banker for 15 years, on the clearing side, I know its inner workings. I sit with a birds eye view right in between the traders and the buyer/sellers.

    The zero sum concept acts like their there is a buy and a sell. 1 up, 1 down. It totally disregards the whole cost association. Then it goes on to further disregard the extraction and consumption on the 1 up side.

    Net/net… when the gain side extracts, it spends (and seems to recycle), but when it spends on mythical things. Things that “evaporate” in value, there is no put back to keep the 1 down side balanced.

    From the consumption side, that recycling only net/net comes out to “zero sum” when when growth outpaces consumption minus cost (production/etc…)

    What your left with is a void. It is not zero sum. The “printing money” nis an effort to fill that void that was thought to be zero sum. That void was sooooooo large, that even with the effective multi-trillion dollar print… we STILL DON’T HAVE INFLATION!!!

    It is not zero sum… Only in theory.

    Oh, and in theory, I am the smartest, most handsome man in the world.

    All the best,
    Miss America – Rich Hartmann

  21. …and p.s. “someone losses, someone wins” was an unfortunate concept that was lost for some time. You see, when you learn how to play this game on a playing surface that is no longer solid, but rather abstract based on time, you learn how to create a concept of everyone wins. Both sides book the gain. The balance sheet loss is both pushed out until a future date, or blatantly held off balance sheet as “mark to my lou may darling”

    MA - RH

  22. Hell,

    Knew that if I dropped in you would have something 'juicy'. Anon. captured it well.

    Here in Dublin things are somewhat delicate. Some nervous cats around the place.

    Best wishes.

    Brian P

  23. This is getting exciting. Love it.
    Addition and multiplication are the same thing ONLY IN THE ACCOUNTANT'S BOOKS.
    Not in the "real world", as you like to call it here.
    But thanks to the way we have been enslaving ourselves to the binary way of looking at the world (i.e. the computers...) we have forgotten what multiplication IS, and what it is FOR.
    And... we are PAYING FOR THIS. (And not just on the accountant's sheets.)
    Multiplication, Lord Blagger :
    Five years ago my cherry tree kicked the bucket.
    So... we chopped it down.
    The stump is still there.
    And.. THE ROOTS are still there too.
    Now... every time that I cut one of those roots, I then make... TWO roots, that continue to send out shoots.
    THAT is the model for multiplication, Lord Blagger.
    It is.. IN NATURE, not in your computer.
    But... it's not because YOU can't/don't see it, and other people are spending so much time tickling the keys of their computers that they never get their hands into dirt that it will be going away any time soon.
    I wish we had an egghead mathematician on this blog to confirm what I'm saying, because I presume lots of people are going to think I'm nutto.
    But... I'm NOT.
    Multiplication is NOT a modified addition game.
    And that means that... zero sums does NOT pan out in the long run.
    It's not... realistic, if you like...

  24. Debra,

    Multiplication, (the simple type) is in fact multiple addition. But it stops there.

    Organic (complex) multiplication usually involves an exponential. NOW you do have a predicament! Think Ponzi!

    Many commentators have attempted to get others interested in this very nasty business of exponents. Sadly, they have not succeded. I guess its a difficult concept to get your head around.

    B Peter

  25. MarcoPolo, re: instability being far more damaging to the more developed old country

    I think you're right. I haven't really been appreciating this as much as I should have. Kind of like rural poverty: it never quite looks as bad as urban poverty when you really start digging into the details. ;-)

    Re: multiplication/exponential tipping point systems

    So are we starting to agree a bit more on the fact that we live in a fractal/non-linear world?

    If so, then perhaps grammatical communication aspect errors are a larger source of disagreement on this blog than something more fundamental, like (say) anti-matter? ;-)

    For if this is the case, perhaps the disagreements arise more from the fact that some of you are talking about the 10th level of the fractal while others are talking about the 17th so to speak.

    Perhaps cooperation is possible?

    And @ Rich Re: the consequence of .01 on all those exponential zero-sums

    I hope you know I love your comments. And I would certainly agree with you that I would love to see a reduction in this so we get big brains like Brian P back to curing cancer if we can, but without defending bankers one bit, we must also be realistic and admit that Brian P is going to do what he is going to do.

    My only hope is you are not asking me to cut school budgets in order to tell Brian P what career he should choose as I reeally like my local elementary schools and cooperation between us on this issue will be difficult.

    As for getting frustrated at externalizations and their butterfly effects (which you have every right to be upset about), perhaps the following pop psych 101 tale might calm your nerves?

    Elliott Jacques, an industrial psychologist interested made famous for coining the term "midlife crisis", studied organizational decision making/predictions and folded his research into a theory known as stratified systems theory.

    Anyway, long story short, he noticed the following observation:

    45% of people can see the consequences of their
    actions 1hr to 3 months out maximum. they are simply incapable of thinking further than that.

    Another 45% can see the consequences of 3 months to 1 year out.

    Still another 5% can see 1-2 years out

    And less than 5% can see the consequences of their actions more than 2 years out.

    Less than 5%

    ... I think it safe hypothesize that these people are also not equally distributed throughout the country.

    Perhaps a much larger share work in Wall Street than elsewhere?

    Who knows?

    But moving them from Wall Street to regulators of Wall Street seems less than zero-sum to me.

    Further, if you look outside of Wall Street, you will find that the corollary to the first law of the dinosaur (e.g.- "The art of medicine consists of amusing the patient while nature takes its course") is that a lot of us are just as guilty for taking .01 as we amuse the patient while nature takes its course.

    Try to remember these "facts"as you get angry at these guys. And no foul if you do as I'm certainly guilty of this myself from time to time.

    And if you have a solution that won't cut school budgets, I'm all ears.

  26. You're clearly not a banker.

    Share price 1 dollar. Buy 100 shares.

    Seller pays 100. Buyer receives 100 USD. 100 shares move the other way.

    Now, lets say your value evaporates.

    Share price drops to zero.

    Follow the money.

    Seller has the same money as he started with. Buyer has the same money as they started with.

    There is still 100 dollars in the system.

    i.e. No money is destroyed. One side won, one side lost.

    So perhaps you can post the scenario, with the cashflows, that shows money is destroyed. I guarantee you leave out a participant.

  27. Hell, since you seem more in "the know" then the rest of us blokes- which if true means you probably won't answer this question but I thought I'd give it a try anyway...

    Do you know if there is some kind of European wide capital control plan already in place which could be immediately activated to keep money where it is and in the currency it already exists in?

    If so, what would be the kind of things warnings that we could recognize to tell that the plan is about to be activated.

    It does seem that the runs on Greek banks may be starting from what I am reading but this could be simply the internet version of post office so I'm not sure what to really think.

  28. Oops, I forgot to add, my interpretation of a post office game is coming from this

  29. Part 1

    Lord B… Why would you say that?

    Clearly… your not a psychic.

    I don’t hide behind a fake name. Rich Hartmann is my real name. The same name my bank puts on my weekly paycheck. The same name that writes for Nouriel Roubini’s RGE (although not so frequently) and Seeking Alpha, and potentially for Zero Hedge (they said “c’mon board” just as I stopped writing)
    Beauty thing about banking is… 99% of your bankers, brokers, clients, etc… know less then 5% of what goes on in their industry. What got my career path moving towards the management side of the business (bad career move) was the fact that I probably knew more than 10%! (a couple of years ago I wrote a few pages on fractional reserves that you would probably benefit from reading)
    Anyhow, your share price drops to zero scenario is a bit confusing. Are you talking about equity markets? Huh? If so… there’s no real need for me to reply with anything other than: You seem to have shown up on the wrong page. The Cramer blog is a few blocks over. Equity is a casino. Used to be more fundamentally priced, but “free markets” and the dot com era seemed to have changed that for good. It’s the kiddie pool of our financial woes.
    This is a fixed income game. The big pool. The whole place where debt becomes money. ..and every dollar made, in effect is legal tender for a dollar of goods and services owed. …and if for a minute you think that there is a dollar out there for every dollar that is owed… then stop reading now.
    So let’s have fun with your scenario anyway… (and clean it up while we’re at it) Where traditional fracx res would take place. Mr X deposits $100 at bank. Bank (using 10% FrxRes) lends out $90… That $90 in turn gets deposited somewhere else, and that bank lends out $81… etc… til you get to you $100 = $1,000 in the system…
    …Banks stopped even waiting for the initial deposit of $100 to start this process of money creation. (this is why the Fed only creates 3% of the US total dollars in existence!!! …and banks create OUT OF THIN AIR, the other 97%.) Now all these deposits $1,100 worth, need a rate of return that is greater than the interest paid out. So along come your fixed income investments that will cover that spread.
    So Spacely Sprockets comes along and wants a loan to build widgets, …and the Bank of Cogs gives it to him. (from thin air since the cost of the actual loan will not come from Cogs balance sheet since they are repackaging this for the fixed income market as a brand new shiny corporate bond. The $100 Spacly needs goes towards his product, salaries, etc… The Corp Bond is on the secondary market at par 100 with a 5% coupon. Now Peter and Paul trade this back and forth depending on who wants the collateral more at the time. (I think this is where your viewing your zero sum game?) But while peter and paul own this, they pledge it as collateral, to take out more loans so they can buy more bonds. The loan they take is at a cost less then the return on their bond. The spread is their profit. CASH MONEY!!! Take it home, buy a hooker, drink some booze or just fly around the world a few times. Depending on how many times they levered up, the greater the payday on the win side. 30X, 50X, 70X That float is their payday. Their fees cover the rest.
    Now all these loans they’ve taken out or on AAA rated stuff. Trading at par. Well folks, Spacely Sprockets is having some problems back at the factory. They’re gonna restructure a little bit. Haircuts anyone? When they say, 70 on the dollar, the unfortunate problem is that the collateralized piece that Peter and Paul own was leveraged out 30X. The loan they took on it was $100 at an interest rate of 4%. They were making (or thought they were making) 1% on the spread from their original debt they own… but now they’re being told their debt is only fetching at best $70 in the new illiquid market.

  30. Part 2


    Uh oh… Time for Peter and Paul to raise some cash. Sell some more illiquid assets to a market that’s only buying Gov’t backed papers. This distressed discount leaves you a bit short when all said and done… but no problem, that’s what the war chest is for.

    WHAT!!! We spent that on hookers and yachts?
    You see, Peter and Paul made wound up borrowing 3,000 @ 4% but their assets (debts) are no longer worth $3,000 @ 5%. They are really worth only $2,100… and considering all they brought to the table was $100 to start with, means they are in trouble. …but so are all those banks that lent money to them. …because they didn’t even use true traditional FraX Res to create the original loan in the first place. They just used their name and overall credit to create it from thin air. (This was limitless, and our banks all quickly learned this on the way up) So now what? Cascading defaults? What started with net sum 100 finds itself at 9x negative!

    So steps in the gov’t. They can’t have Peter and Paul fail. They can’t have the banks fail. So they exchange good payments for payments that aren’t being made. They keep the Fed borrowing costs so low for so long, while backstopping Spacely Sprockets 5% interest payments until the spread from the Fed, vs these unpayable (but backed) obligations can fill the void of the $900 gap.
    (now mind you, I haven’t even touch the cost of servicing. From the custody fees, to the paying agents, transfer agents, ADR dept, Income collection, DTC, underwriting, accounting, oh the list goes on and on… that 100 buy vs 100 sell turns out to be more like 90 buy 90 sell, but both counterparties carry it on their books like its 100 from day 1, forget the fact they further put in their lending /borrowing box, and borrow/lend on it like its at 100.)

    The evaporation is mind numbing once you get on the inside.
    No one had a better view then me after 9/11 when I was put on a special team of 7 people to recreate the following 3 days of market activity. Those days were lost at 1 point on the books of BNY, and clearing 41% of the worlds trading activity at the time put BNY in a precarious situation. GS, MS, BoA, as well as all your biggest MF’s, PIMPCO, Franklin Tem, Fidelity, etc… they were all clearing through us. …and that recreation led me to realize how F’d we all are on the over complication of the market. The overgrowth and the necessary servicing cost alone far exceed the evaporating cost of what we have seen in the market downturn. That cost is just pushed on. …and the unrealized losses of peter and Paul and their lenders… C’mon!!! It’s gone! Evaporated. From the same thin air it came from.
    …and now you want to get into the CDS side?
    Like I said. Zero sum… Ha! It’s 2:30 and time for me to sleep. I gotta get up early. Bankers hours!
    All the best,
    Miss America – Rich Hartmann
    p.s. This is off the cuff and not edited, so I apologize if it’s no concise.

  31. Dear Rich,

    Congrats on an excellent off the cuff explanation. And many thanks for your kind words.


  32. "It's a Zero Sum Game" is an old, tired cliche used by those who do not and cannot understand the financial system. Rich did an excellent job further up, so I won't
    attempt another.

    Instead, I will throw a techno-philosophical nut into the turning cogs of the argument.

    The second law of thermodynamics says that ultimately we all lose.

    So there..

  33. So no takers for providing an example where money is destroyed.

    Not surprised.

    Now if you had said value is destroyed you might have a case.

    However, its all down to delusional government

  34. Umm Rich and Hell?

    I read your example REAAALLLLYY close, even mapped it out and I'm sorry to say but if this your smack-down retort, some of us in the kiddie pool have got to say you lost big time and Lord Blagger won.

    The only thing your example showed was that fraud is most decidedly not zero-sum.

    Perform the same exercise all over again but take the instances of fraud out and it become zero-sum again all over again.

    I never read anything in Lord Blagger's comments to believe he was condoning fraud, though if I missed it my definite bad as I did not scrutinize his like I did yours.

    If your whole premise that the financial system is not zero-sum because of fraud, so be it.

    But your real issue is fraud, not all this other stuff and that does not sound very different than the same issue everyone faces everywhere in all spheres of their life. To think it unique to your industry is narcissism at its best.

    You have not proposed an alternative system that eliminates the problem of fraud as far as I know. Further, no interconnected system on that exists is immune to the problem of massive cascading default as a result of fraud.

    Hell's Greenback proposal does not eliminate this issue in any way whatsoever and at some level it assumes the almost child like notion that the problem of a system relying on integrity and personal responsibility can be kicked up another level (e.g. a noble governmental ruler) so that us little kiddies don't have to bother with such trivial matters.

    Sorry, so far in this smack-down, you lost.

    Zero-sum stands until you either give a better example or you clarify your terms.

  35. Even fraud is zero sum.

    Fraudster wins, the mark loses.

    People are confusing 'value' with zero sum.

    i.e. If you buy one share at 1 dollar, and a year latter someone trades the share at 10 dollars, the value has gone up.

    If you buy at 10, and the price drops to 1, the price has gone down as has the value.

    I think people are saying, look, value is destroyed, its not a zero sum game.

    However, even here, it still is.

    The person who sold at 10, has their money. The person holding the share is the one who lost.

    It's still zero sum.

    Hence the challenge still stands.

    Lay out the transactions that do not form a zero sum game. Who did what, when, and for how much.

  36. Geez, you guys are really hopeless.
    How many times have we said here that what is important is NOT what IS (and how the hell are we ever gonna know THIS ???) but the way we perceive things to be.
    It's not by putting a bunch of stuff into the shaker and mixing it up and seeing the way it settles out, AND LOOKING AT THE FINAL OUTCOME and saying triumphantly... "SEE, ZERO SUM !!! that all the INTERMEDIATE STEPS get blown away.
    Maybe IN THE LONG RUN it IS zero sum. (But I don't believe that...)
    But.. JUST HOW LONG do you want the long run to run while you're sitting back waiting for zero sum to arrive ?
    Eternity, anybody ??
    The world can fall in a shambles around us while we're waiting for zero sum to arrive...
    NOBODY commented on the addition/multiplication and the binary/ternary outlook on things.

  37. This is the most interesting thread I've read in ages. Many thanks to all.

    Your insights are creating value. I wish I could only offer back as much as you offered.

    There is just one thing that I find difficult to swallow: Hell comment that money is "only money".

    I thought money (at least partially) represented the most important commodity of all: trust.

    Again, many thanks. I intend to re-read this thread quite some times in order to just understand it in a more general picture.

  38. Debra, you are confusing what happens to an individual, with what happens to the game, which is all participants.

    Chess is a zero sum game. One winner, one loser, or a draw.

    However for an individual, you can be a repeated loser.

    Zero sum does not mean as an individual that over time what you lose or win you will win or lose.

    Zero sum means that the money is balanced. In a zero sum game, money is transfered from winners to losers, it is not destroyed or created.

    So perhaps you can respond to the challenge.

    For something you believe isn't a zero sum game, post the transactions that take place that show money is destroyed. Remember to include all the participants.

    Lord Blagger

  39. @Lord Blagger:

    If money isn't "value," then how are you defining it?

  40. Ok. Me give you an example.

    Buy a share for 1 USD. Price goes to 10, then back to 1 again.

    Has anything been created or destroyed?

    Has anyone lost any money?


  41. Lord B…

    I think what’s being lost (and what I stated above somewhere) is that this fixed income, debt and dollars aren’t being valued at a fixed moment. The value is finite base on time. The dollar exists now, the debt is paid tomorrow. That debt issued is infinite.

    In zero sum… there has to be a winner and a loser. When you have bank 1 and bank 2 both on opposite side of a CDS bet, but yet you have both bank 1 and bank 2 holding and pledging that each of their CDS for more credit, you realize that you don’t have +1/-1.

    They are both holding, collateralizing, and recycling that credit for more cash in the system. They both hold this as +1 / +1, (Net +2) when in actuality it is Net 0. …and this isn’t FRAUD!!! That’s the way it works. FASB 157A,B,C!!! …and there is nothing stopping this because that’s the “correct” way this is supposed to work. In chess, you don’t say, you can have my bishop, queen, and king, and the victory in exchange for your all your pieces in this same game tomorrow. Chess is fixed in length.

    Financial voodoo.

    So the worldwide pool of credit stands at $1,000,000. (now in actuality, all that credit is nothing. Fiat! Logically, people think of that fiat dollar in your pocket as an asset. It’s actually not. That dollar is just a Gov’t issue I.O.U. The most basic modern day asset… is actually debt!)

    So now that $1mm pool of credit is just the modern version of price for the real tangible assets. Oil, food, shelter, etc… As those are consumed they need they deplete the $1mm pool. So growth has to outpace or maintain that $1mm pool. Our “assets” can’t depreciate either, or else they need to also be added to this net growth. …but in the modern world, supply and demand pricing, free markets decided that this was no longer good. Instead, securitization of this whole $1mm pool happened. …and fractional reserves of credit were now issued against all assets. No longer is just the deposit of cash/credit fiat… but the ownership of the whole $1mm pool became fiat.

    …and Bank 1 and Bank 2 have helped make that pool now equal $2mm. Sure the pool is still the same size, but the value we assign it is more. Then the pool became $4mm because the banks decided to further securitize the out of thin air credit/debt that was associated with it. The pool being $1mm or $2mm is all relative. The securitization of the product from thin air in not! The actual size of the pool and the value of it still remains relative, but the fact remains that people perception of wealth remains.

    If we call the market’s peak that $4mm moment, then when our “perceived wealth” was market to market through depreciation of ABS, (the #! product, through MBS, RMBS, CorpRe, etc..) we take that $4mm pool and bring it down to $3mm.

    …but the world isn’t realizing that deflation. We’re filling the void with a fiat payment from tomorrow. No one is actually forced to absorb this fiat loss. …but everyone is consuming from that $1mm pool (that’s valued at who knows what now) based on the fact that they still have something like that $4mm. It becomes no longer relative because the market can no long correctly price the true hard asset as they depreciate, …and growth (which isn’t happening) no longer knows how to maintain or outpace the needed existing size of the pool. The pool is still whatever sustainable size it is. It’s collaterization, is relative to it s market price, say current value, $3mm (even with a $1mm created from parallel securitization of the fiat thin air debt mixed in) …but we spend like we have $4mm. That difference is pushed out in time. or printed when needed NOW.

    In tragic irony, all those dollars created from thin air, stand under the guise of a Gov’t backed I.O.U. …but when in actuality we are carrying around “as an asset” this debt like it is something positive.

    All the Best,
    Miss America Rich Hartmann

  42. In trying to simplify I went to my most hated source… Wiki! (Hate it) In hopes there was a clearer def I actually found a simple statement that I hope you find useful:
    Many economic situations are not zero-sum, since valuable goods and services can be created, destroyed, or badly allocated, and any of these will create a net gain or loss. Assuming the counterparties are acting rationally, any commercial exchange is a non-zero-sum activity, because each party must consider the goods it is receiving as being at least fractionally more valuable than the goods it is delivering. Economic exchanges must benefit both parties enough above the zero-sum such that each party can overcome its transaction costs.

    Like I said…
    All the Best,
    Miss America Rich Hartmann

    p.s. Deb, no worries here, just having fun. Still value the smile more then the dollar. Regardless of my bondage, my disposition remains good despite the clarity that forces me to wear rose colored glasses. I just hope to share the knowledge of how unfortunately bonded reality and ponzi are. It’s sad it’s cliché.

    @ Thai… I’m not looking to win. Nobody won. …a few years ago, everybody won. Now we have to pay the price of zero-sum. Now we all lose. How you choose to lose is also relative.

  43. Two years ago I went into my local post office, and in the course of the verbal dog sniffing that our species does, the woman on the other side of the counter said to me.... "Time is money".
    THAT is the ideology that arose from the perverted effects of the Protestant reform.
    Because that equation is NOT true, and we are collectively behaving as though it WERE true.
    Rich, I can see Lord Blagger's points because he is reasoning only WITHIN the symbolic system of money and its nature.
    From WITHIN this system, I think he is right.
    The problem is, as I said earlier (or later ?), our world can not be reduced to our symbolic systems.
    Money is SUPPOSED TO BE a "measurement" of value.
    A number value assigned to... at this point lots of convoluted products of the symbolic system of money itself.
    At a certain point, when you continue opening door upon door upon door in your symbolic system, you.. GET LOST.
    Everybody gets lost, and in my opinion, there are maybe ONE OR TWO people who look like Goethe among those nice men in jackets swearing in on the economic bibles, but..
    They are geniuses. You can't have a generalized system that only one or two people understand.
    On the fraud problem...
    The zero sum philosophy could be equated with what "we" shrinks call castration, which goes somewhere along the line of you can't have your cake and eat it too (but Freud was too smart to fall totally into that monotheistic morality trap...).
    It is in human nature to NOT BELIEVE that you cannot have your cake and eat it too.
    So, reducing general human nature to particular fraud is simplistic and misguided.
    Like reducing Freud's unconscious to Sartre's "mauvaise foi", or bad faith.
    No way to prove things work this way, I say, Lord Blagger.
    If i can't prove that money is destroyed, YOU can't prove that people's main motivation is fraud (not that you really tried, anyway...).
    One of these days I think I am going to have to put y'all to contribution to look at what we call the Ponzi scheme.
    I think we need to look much harder at it.
    We're not seeing how... the Ponzi "scheme", from another angle, looks like the multiplication of the loaves and fishes.
    We can be so thick, though.
    That's what "mauvaise foi" does to you, though.
    Makes you thick.
    Thank you for your comment Peter.
    I will ask for YOUR contribution particularly on the Ponzi scheme.

  44. Money is SUPPOSED TO BE a "measurement" of value.


    Not supposed. It is. Even gold as a currency is a measure of value.

    Money is just a means of facilitating exchanges of value indirectly, to avoid the necessity of battering goods you want directly with the producer.

    All forms of money, gold included, rely on the producers believing that when they want to realise the value of the money, that other producers will do likewise.

    So I'm in perfect agreement with you on this point.

    As for fraud, has it gone on? Yes. See for my alter ego's opinion on it. (You have to get irony to read it!)

    However, you have to look where the large frauds are taking place. It's not in the banks. The real fraud is with government.

    For example, the UK government uses off balance sheet accounting to hide its debts. It admits to 800bn of debt, but the real liabilities are around the 4,000 bn mark. It's all off the books

    Fraud? Yep. Ponzi? Yep.


  45. Miss America Rich Hartmann


    A long post of your's but lets pick the easiest flaw.

    So now that $1mm pool of credit is just the modern version of price for the real tangible assets. Oil, food, shelter, etc… As those are consumed they need they deplete the $1mm pool.

    Why is the pool depleted?

    If I buy food, is money destroyed? No. It goes to the seller.

    ie. You've done what I've said people would do, and omit one of the participants from their analysis.

    Still a zero sum game.

    Your comments on 'perceptions of wealth' are a different issue. They related to value, which others have discussed to.

    Value can be destroyed, but value is a virtual concept. It's unrealised profit and loss in the banking world.

    In zero sum… there has to be a winner and a loser. When you have bank 1 and bank 2 both on opposite side of a CDS bet, but yet you have both bank 1 and bank 2 holding and pledging that each of their CDS for more credit, you realize that you don’t have +1/-1.

    Yes you do. It's always +-1.

    However, can you tell me how people pledge CDS contracts? News to me that you can put them up as collateral.

    Every deal I've known would rely on people paying cash for the premiums?



  46. So the worldwide pool of credit stands at $1,000,000. (now in actuality, all that credit is nothing. Fiat! Logically, people think of that fiat dollar in your pocket as an asset. It’s actually not. That dollar is just a Gov’t issue I.O.U. The most basic modern day asset… is actually debt!)

    Still a zero sum game.

    Who are the participants?

    Public to government. Government back to public

  47. Lord Blagger...
    You did not respond to MY critic.
    I said that these issues are zero sum ONLY WITHIN the symbolic system itself.
    That means that... outside of the symbolic system, they are NOT zero sum.
    And I maintain, for example that Haiti's earthquake is outside our symbolic systems.
    Like other things are outside our symbolic systems.
    And CQFD the RULES that govern our symbolic systems do not necessarily apply outside of them.

  48. People have been claiming that the financial system is not a zero sum game.

    I've pointed out it is, and why.

    If you want to change the subject to something else, please do so. I'm prepared to discuss that to

    However, as it stands, no one has offered up a scenario that shows an non zero sum game when it comes to finance.

    eg. Fraud isn't a zero sum game. Oh yes it is, the victim loses, the fraudster wins.

    You're better off admitting defeat on the zero sum game, and moving on to an equally interesting subject, namely what destroys value


  49. Lord Blagger:

    When I sold my house in the Netherlands, I signed a piece of paper, giving full authority to the estate agent. An old chap, that was both greedy and honest (I had entrusted him to help me buy the same property and I knew him to be a stereotypical old Dutch). 5 minutes took me to sign the paper. I also signed for a hefty commission. He sold my house, did everything as discussed. Price: commission and 5 minutes. Never crossed my mind that he might defraud me.

    Compare this with my partner here in Portugal just trying to rent a place: several times she was told that the conditions were X, just to arrive at the signature date (she never dreamed of giving full power to the estate agent - not enough trust) and see that she was lied (and the contract not signed). Cost: 2 months searching for a home, commission, several days at work lost.

    Zero-sum game my ass. It is called "Externalities".

    Corruption and fraud are socially inefficient to the extreme (we live in societies, they do exist).

  50. Ahhhhhh!!!!!

    Enough of this Deb!

    We get your point, honest.

    We get that you are trying to tell us about the age old problem of epistemic closure.

    We get that you are trying to tell us about the problems of inductive reasoning. Note Hell has The Black Swan on his reading list.

    We get that you are trying to tell us that if we develop a reductionist model which incorporates everything we know as humans, and this model tells us everything in the universe, indeed life, thinking and the universe itself are all zero-sum in the end (which is does), still the model is flawed with the problem that there is always information that is outside our model (because it is outside the the system we know from which we built our model) which could change everything. FWWIW, this is basically Godel's Incompleteness theorem.

    And we get that if we come up with a model which explains everything, the assumptions necessary to create the model itself cannot be validated by the model (again Godel)

    We get it, honest.

    But you don't know what's outside the system any more than the rest of us so we are back to arguing about whether Angels exist because we can't see them.

    And while I'll concur with you that it is as valid a discussion as any other on some absolute cosmic scale which should give equal time to all the other systems we missed in our own reductionist model of life/the universe/everything, still it is not helpful either.

    We get it

    If you message from all this is we need to cooperate?


  51. Tiago, amen

    There be Greek Socialists amongst their Norwegian brethren. ;-)

    But since Mr. Spirit level says its all about equality, and lack of equality is a spectrum from top to bottom, should you "create" this equality by cutting off the top? Or cutting off the bottom? Or some permutation of a combination of both? Or leave well enough alone and let the pieces fall where they may?

    Since you are the socialist, I ask you: are you really prepared to do what is necessary in order to achieve better trust amongst Greeks living with Norwegians?

    This is not just an academic issue either...

    Will you let me have a few weeks/months of your or your wife or your parents or your child's life of MY choosing (this is the key: my choosing, not yours) to use as a credit card for one of your neighbors whom you do not trust/respect/approve of?

    Clearly you already said "yes" to this for neighbors you do approve of? What if you see more and more of what you do not?

    Cooperation is tough

    Think about it

  52. Oh, and Tiago, it is zero-sum. ;-)

    Life is fractal and zero-sum is only one building block in that fractal. E.g. there is still plenty of room for trust. ;-)

    Be well my friend

  53. Oops I misspoke

    I meant to say: zero-sum is only the boundary condition of the fractal- e.g. there is still plenty of room for trust. ;-)

  54. Lord B…

    Your tenacity is great… I guess we just don’t see eye to eye. I fail to comprehend, even from your exhaustive scenarios, what makes it zero sum?

    You grow an apple. You sell it to me for an I.O.U. (we’ll call I.O.U. $1Blagger) I eat the apple, you have the $1blagger. (let’s forget whatever cost was associated with you producing that apple)

    Equal so far?

    Now let’s take a look at these scenarios.
    1. After eating that apple, I either repay that $1Blagger IOU, through good or service, -or- you pass that IOU on to someone else for a good or service and I perform that IOU for them. (The energy I perform the good or service is done with the strength that apple gave me.)

    Are we zero sum?

    2. After eating that apple, I expend all my energy running in circles. I exhaust the energy supply. I just chose to never pay you back that IOU. (or you passed the $1blagger along to someone else for a good or service and they don’t receive their good or service. …leading to potential cascade, especially if you exchanged it for something that exhausted too.)

    Are we zero sum?

    3. After a week, I decide I do not want your apple. I give you back your rotten apple, and tell you I no longer owe you.

    Are we zero sum?

    In all 3 scenarios… I was “up” for the useful life of the apple. For the 3 scenarios, you were “enriched”, cheated, or lost opportunity cost (or the value of the apple energy yourself) ….and all of this is minus the cost associated with producing the apple.

    How, when you get something or nothing are you net “zero sum” for both scenarios. It can’t be both ways.

    Maturity (repayment) and default are destruction of the I.O.U. Inflation and deflation take care of the value through maturity. Default, consumption, and cost are lost! Inflation and deflation becomes the exponent on “lost” portion of wealth.

    I’m not saying you’re wrong… I just can’t cognitively accept or get past this concept. You’ll have to forgive me for not understanding your theory.

    All the best,
    Miss America – Rich Hartmann

  55. Rich, the energy which entered your sytem that started you +1 was the earth giving you the apple. Every transaction from thereafter had a cost of friction as the energy in the apple changes hands and form.

    You left mother nature out of your model. But you and I both know she is there. ;-)

  56. It's still a zero sum game.

    You lose, estate agent wins.

    However, if you draw the boundary round yourself, and ignore the estate agent, then you have excluded a participant in the game.

    The rules of a zero sum game exclude modifying the rules in this way.

    That doesn't make the analysis wrong.

    If you look at yourself as the system, the analysis will look like this.

    1. Cost and effort of me doing all the work.

    2. Cost of paying someone else, even a crook, to do the work.

    Which is cheapest?

    However, in the second case, you aren't discussing the whole game, you are discussing the strategy of one participant in a zero sum game.

    You might like to read up on the game 'prisoner dilema' It's a standard of game theory.

    The problem here is that you are a very infrequent player of the game. The estate agent can screw you over, and to him it doesn't matter. You aren't going to be a repeat customer. Prisoner dilema has different outcomes if you are playing an open ended game multiple times or a fixed number of games.


  57. Thai...maybe we agree on this and maybe we don't...
    I could say to YOU, "yes, Thai, we GET your fractal point of view on everything, how EVERYTHING boils down to fractals, etc, etc. and the conservation of energy, yes, of course, in the final analysis...
    So, I say... let's try to live and let live, OK ?
    I'll put up with your repetitions, and you put up with mine ?
    That's what cooperation is about ?
    Let's try to do a better job of it OVER HERE, OK ?
    I agree with Lord Blagger in his statement about looking at value.
    At how value is assigned a monetary equivalence which is dependant on the symbolic numbers system too.
    And to see how complicated this is, I'm going to tell you a little story.
    Two years ago I met up with my... American ACCOUNTANT, and we were discussing exchange rate stuff.
    And she made a comment about how things were... expensive in the U.K., BASED ON THE EXCHANGE SHE WAS GETTING on her U.S. dollars...
    I say.. that translates into a somewhat misguided notion of the way money works, to base your ideas of WHAT THINGS ARE WORTH in any given society on the exchange rate you are getting for your own currency, and the TRANSLATION of your currency, and your "system" into the system of the country you're in.
    As I think I've mentioned before.. if my international accountant can show THIS kind of ignorance about the way money works, what makes us think here that we have understood all of its ramifications ?
    I would not have so much hubris to make that assertion for myself, in any case.

  58. @ Thai...

    I didn't exclude mother earth in my brain... I knew for simplicity, that I would be re-fertilizing eventually, but chose to just show the wasted portion of the energy. The fact is, the earth was -1 in it's initial production of the apple. ...and by me not instantly refertilizing, or using my energy to replcace an equal portion of enegy back to mother earth... the earth lost out. I chose to burn it pointlessly running in circles.

    Reason being... The mother nature portion takes "time" to get the use. I was avoiding that... because "time" is what I say helps keep the chirade of it being "zero-sum, in place. Of course we can kick the cost out infinitely.

    My starting point is all post production. From this point forward... the apple, (much like FI) is a depreciating asset in face value.

    I just don't see it.

    I'm open to your thoughts... but it defies my logic.


    @ Lord I can't spin my wheels on this any more. We'll just have to disagree. Which isn't bad. for the +1/+1 CDS... Go talk to accounting.

  59. @LB Re: Estate agent willing to make their client to the mark due to infrequency of transaction.

    I agree it's zero sum, but Tiago is correct to point out you are forgetting the externality caused by the clients loss of trust on the entire system. Everyone else in society looses a little here as well. Money is not the only "information structure" conservation laws apply.

  60. Rich re: Defies logic

    I hear you, honest. I don't think any scientist would disagree with you. But it is what it is.

    I suspect you are making a distinction that you should not though I'm unsure...

    Let me try another way: what would you be willing to pay to buy trust?

    Think about it

  61. No idea what fractuals have to do with the subject Debra. What about crystals and homeopathy?

    The trust issue is relevant as others have mentioned. Money is a means of exchange. If trust goes the cost of doing business goes up. Fancy entering into barter for everything? Not me.

    However, the Greek issue. What's the cause? It's that the government acting as an intermediary has distorted cause and effect. ie. Run up lots of bills by borrowing and the effect, default, has been put off. If people had the full cost immediatedly, and not on borrowed cash, they would have said no ages ago.

    Allowing governments to borrow on people's behalf, is unstable.


  62. @ Thai... Forget Theory. Forget Philosophy...

    As Lord B stated: "CDS is a zero sum game. When the buyer wins, the seller loses or vice versa."

    is it really Win / lose. ...thus Zero sum?

    I'm talk hard cold money/credit... Accounting puts a fork in it.

    Is it zero-sum. CASH

    ...or is there a little more then meets the eye.

    MA - RH

  63. Fractal, not "factuals"

    ... Though maybe we do need crystals if LB quotes The Prisoner's Dilemma and has no idea what I'm talking about.

    ... Perhaps we all are doomed and should get that compound in the woods and stock up on canned goods after all.

    Rich, I'll map it again. I do respect your opinion greatly.

    Be well

  64. Lol, Lord Blagger, you don't know how ironic your last comment was.
    No comment.
    By the way... you can't BUY trust.
    We've "rigged" the system that way.
    And we know it too.
    Freud has taught us that, at least...