Financial unions and the debt chains that bind

The Scottish vote for independence this week can go either way, the polls are too close to call. But after the global debt bubble of 1996 to 2014, it makes perfect sense that people all over the world are today considering ways to reorganize and deconstruct into more independent fiscal arrangements– to cut the debt chains that have increasingly come to bind.

The trouble with larger groups is that they tend to move away from individual accountability and self-governance in favor of a few leaders and a majority of followers. This can work sometimes, for a while, where leaders are self-sacrificing, fiduciary and wise. It works very badly where they are not. It also tends to gradually emaciate the strength and self-control of followers. Case in point is the past decade of worldwide abdication of individual discipline in favor of collective debt, leverage and faith in the prestidigitation of bankers, accountants, big business and ‘high’ finance. Individuals have been complicit: they want to believe in an easy road to riches. Politicians and academics have been purchased to serve the cause. Layers of complexity have enabled deceit and extraction by a few amid the complacency of many.

As in corporate mergers, the coming together of disparate cultures can sound progressive and exciting: Greater efficiencies! More revenue! And yet, hundreds of studies attest that the overwhelming majority of corporate mergers fail in the end. By the time they do, the architects and executives who instigated them have usually cashed out and long gone.

The European Union sounded like a good idea on the surface: a united Europe was said less likely to war. Most of all a common currency made it easier for EU countries, companies, and households to borrow and spend. And they did both more than ever before. For a while those countries selling the most exports were delighted with the broader customer base. Germany profited handsomely. Those who collected up front on transaction volume made off like bandits. As debt levels soared, bankers extracted fortunes packaging debt and moving it “off book” into derivative products so that borrowers could borrow beyond reason. And they did. When the US consumer credit bubble inevitably burst in 2007, the great global unraveling began.

Since then governments around the world have been stepping in to absorb bad assets in exchange for commitments of fresh cash taken from taxpayer-co-signed lines of credit. This bought some more time for bad behavior and the past 6 years of continued self-destructive habits. It also spent future cash flow on past and present funding, leaving escalating deficits now and ahead.

In this next phase, the masses are becoming increasingly aware that the public purse has been decimated. As in divorce, the focus will now be on cutting the financial chains that had bound individual countries into union.

As Bank of England head Mark Carney warned last week, the case for a common currency is extremely weak where no sovereign union exists. Imagine being on the hook for your neighbor’s financial choices, with no power to direct them. In an effort to scare Scottish separatists, Carney admitted what his fellow banking colleagues had long denied: 15 years after the EU merger, their monetary union was always doomed.

During boom times, mergers are all the rage. In the give back phase, excesses are revealed, debt is abhorred and retrenchment predictable. Whatever the outcome in Scotland this week, the push to decentralize governments and untangle balance sheets has likely just begun. With global debt levels now tens of trillions higher than when the 2008 crisis first erupted into the light of day, more nations are likely to want their names removed from the shared credit facility of a common currency. While the process will be messy, the move back to personal accountability and financial self-governance is a necessary evolution in this healing process.

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