Ireland was one of the first European countries to get hit by the financial crisis. It decided to bail out its banks at the direct cost of the taxpayer. In 2012, those banks were still overleveraged (and still are today) to the same level as for instance Cyprus, with assets over 800% of GDP. Probably only Iceland has been worse (UK?!). According to IMF/EC, 2012 Irish national debt was 117% of GDP; not a pretty number either. This all as a lead-up to a May 5 article by Dan White in the Irish Independent that TAE's own Nicole Foss sent over recently. But first a little history, for who may be bit shaky on it, just for fun, and to explain how Ireland got to have its present population of 4.5 million people.

The population of Ireland in the 1830's, when it was part of Britain, was around 8.5 million. There are estimates of as much as 10-12 million; in those days counting everyone, even in a census, was an obvious struggle. Ireland then had perhaps 30% of the overall population of the kingdom, a sharp contrast with today.

In 1845, the Great (Potato) Famine hit home. Over the next 5 years, 1 million Irish died of hunger and disease, and 1 million emigrated. And it didn't stop there. Millions more emigrated in the following decades, and the country remained dirt poor, so starvation didn't stop either. Some say Britain liked things that way (religion was always a big factor). Only in the 1916 Great Rising, the -catholic - Republic of Ireland gained independence, while - protestant - Northern Ireland became part of the UK.

Ironically, it was the very same potato that, once it came to Europe from the Americas in the 16th and 17th centuries, allowed for a huge increase in population in Ireland and beyond. The "Old World" didn't have a crop that all by itself people could live on. Now they had one. And then someone imported blight.

Today, the Irish Republic counts 4.5 million citizens, or 4 million less than in 1830. Northern Ireland's 1.8 million make up some of the loss, but the picture is clear: 180 years later, during which time world population rose from just over 1 billion to just under 7 billion, and Britain went from some 20 million to 63 million, Ireland's population still hasn't recovered (will it ever?).

There is the Irish diaspora, however. Approximately 15 times as many people of - often fiercely proud- Irish descent live elsewhere in the world today than live in Ireland. In the US alone there are over 40 million.

So today, we have (the Republic of) Ireland at 4.5 million people. That's useful when looking at debt numbers. Especially since it is just about 70 times less than the US at 315 million. Irish unemployment is 14.1%, youth unemployment 30.3%, both numbers somewhat recovering from deeper pits.

One more thing before we get to the article: it refers to GNP, Gross National Product. Refresher: it's almost the same as GDP, but not exactly. The latter is a measure of the value of goods and services produced in a country, the former is a measure of the value of goods and services produced in a country by its domestic institutions and individuals. For most countries both will be quite similar, but in Ireland, GNP is estimated to be perhaps as much as 25% smaller than GDP.

The reason for this is that Irish tax laws make the country very attractive for foreign companies (there are some 600 American ones alone operating in the Republic). Ergo (simplified): a lot of the revenue generated in GDP leaves the country as profit for mother companies, and doesn't count towards GNP. This makes some voices even claim that recent GDP gains are false signs of a recovery, and that when measured in GNP, there has been no recovery whatsoever. One more detail: Irish property prices have fallen over 50% since 2007.

So there: Ireland's initial cost for the bailout of its banks was €40 billion ($52.4 billion if you use a 1:1.31 exchange rate). In 2011, US "investment manager" BlackRock conducted a stress test that concluded that the four Irish banks still in business, AIB, Bank of Ireland, Permanent TSB and EBS (now part of AIB), would require an extra €24 billion of capital. So that added up to €64 billion ($83.5 billion). In comparative US terms (70 times bigger), that was $5.85 trillion.

And thus we finally get to Dan White, who says the Irish are far from done bailing out. He starts off referring to numbers published by (Danish, thus foreign) Danske Bank Ireland the week before, and takes it from there:

Taxpayer beware! Irish banks need another €30 billion at least

[..] The latest write-offs mean that Dankse will have written off almost €3.6 billion, just over a third of a loan book which had a total peak value of just over €10.5 billion. If that isn't enough to give taxpayers a bad case of the heebie jeebies then nothing will.

For those of us who have followed the crisis from the beginning Dankse has been a useful pointer to future developments at the Irish-owned banks. Unlike its domestic counterparts, who are still in denial about the full extent of their problems, Dankse has been upfront about its loan losses. Where Dankse goes today the Irish-owned banks look set to follow tomorrow. [..]

The BlackRock stress tests concluded that total loan losses at the continuing Irish-owned banks would amount to between €27.5 billion and €40 billion. The biggest single source of these losses would be residential mortgages with BlackRock forecasting losses of between €9.9 billion and €16.9 billion.

The other big generators of losses were forecast to be commercial real estate lending (between €8.1 billion and €10.3 billion) and corporate lending, including SMEs (between €7 billion and €9.5 billion). [SME=small business]

Even on the basis of the banks' own figures it is clear that these projected losses were hopelessly optimistic. According to the most recent AIB results, €8.1 billion of its €39.5 billion Irish mortgage book was more than 90 days in arrears at the end of December 2012.

Over at Bank of Ireland €3.6 billion of its €27.5 billion Irish mortgage book was more than 90 days in in arrears at the end of last year, while €5.5 billion of Permanent TSB's €24.5 billion Irish mortgage book was similarly suspect.

At the end of December 2012 some €38 billion of owner-occupier mortgages and €10.6 billion of buy-to-let mortgages were in arrears, while a further €6.7 billion of owner-occupier and €3.2 billion of buy-to-let mortgages had been restructured but were not in arrears. By value that's the equivalent to over 41% of the total €142 billion stock of outstanding mortgages held by the domestic and foreign-owned banks.

Apply this pro rata to the €91.5 billion of Irish mortgages held by the domestic banks and one is looking at over €37 billion of compromised loans. With property prices having fallen by at least 50% since 2007 it would seem reasonable to provide 50% against these loans, say €18.5 billion.

In addition the Irish-owned banks have at least €50 billion of loss-making tracker mortgages on their books. Some of the foreign-owned banks have been offering to reduce loan balances by between 20% and 25% for tracker customers who are prepared to switch to a variable rate. Even a 20% write-down on trackers would cost the Irish banks another €10 billion.

Throw in a further 20% provision for those mortgages not currently impaired, €11 billion, and the Irish-owned banks are looking at mortgage losses of €39.5 billion, €22.6 billion more than forecast by BlackRock in its "worst case scenario".

And that's barely the half of it.

The Irish-owned banks have €27 billion of SME lending on their books. Last month the Central Bank's director of credit institutions, Fiona Muldoon, revealed that 50% of SME lending was in distress. On the basis of a 50% write-down of the distressed loans and a 20% precautionary write-down of the remainder that translates into a further €9.4 billion of losses, €4.9 billion greater than BlackRock's "worst case scenario".

The Irish-owned banks also still have almost €30 billion of commercial property lending on their balance sheets. Once again one has to ask, just how realistic is BlackRock's "worst case scenario" of €10.38 billion of losses.

By the time one adds losses on other lending, to large corporates, personal loans, credit cards etc. and it is hard to see how the cost of any fresh bank recapitalisation could come in at under €30 billion. That would bring the total cost to the Irish taxpayer of "fixing" our bust banks to almost €100 billion.

Clearly greater love hath no government than that which lays down its citizens for its banks!

Looking through White’s numbers, for instance "Irish-owned banks have at least €50 billion of loss-making tracker mortgages on their books", I'm thinking even he stays on the cautious side, but they're bad enough as is already. The "total €142 billion stock of outstanding mortgages" translates to $186 billion, which in "US Size" (x70) would be over $13 trillion, about on par with the US at $41.350 per capita, but in a country that has no particular history of owning homes. It's not home value, it's mortgages. Not assets, but debt. And prices have already fallen over 50% in Ireland since 2007.

As late as October 2010 Ireland declared itself "fully funded well into 2011", but just one month later, in November 2010, the government asked for a €67.5 billion "bailout" from the EU and the IMF as part of an €85 billion 'program' (the Irish State "funded" €17.5 billion itself). By August 2011 total funding for the six biggest banks by the ECB and the Irish Central Bank came to about €150 billion; at that point the largest of the six, Bank of Ireland, had a market capitalisation of just €2.86 billion.

The question then becomes how Ireland is going to facilitate another €30 billion bank recapitalisation. The government stated this spring it was getting ready to ask for further aid, but EU forces apparently - and curiously - have a completely different take on this. Before Ireland was recently handed a 7-year extension on paying back the loans, the "donors" made clear they not only don't feel like approving extra aid, they want Ireland to exit the bailout scheme and return to the bond markets for funding. As the Irish Times reported on April 12:

Euro zone believes deal will see Ireland exit bailout this year

An imminent deal to postpone Ireland’s bailout repayments will be enough to secure a smooth exit from the EU-IMF programme later this year, according to the chief of the euro zone finance ministers. The position set out by Dutch minister Jeroen Dijsselbloem is in defiance of the Government’s claim for further aid to ease the cost of propping up Allied Irish Banks and Bank of Ireland.

Although the IMF has strongly backed Dublin’s push for the ESM rescue fund to bear historic debts of the two banks, Mr Dijsselbloem indicated in an interview with The Irish Times yesterday that a decision on that front might not be taken for at least another year.

That is well beyond Ireland’s anticipated return to private debt markets at the end of the bailout and means he expects the Government will be able to do without a specific pledge of bank debt relief from the ESM fund.

Asked if the return to market financing would be eased by a definitive commitment of ESM aid, Mr Dijsselbloem insisted that the two issues should be separated. "The access to the markets is relevant right now, and this year, and we will try to help Ireland and Portugal in exiting the programmes," he said.

"The direct recap instrument ESM isn’t available at the moment," he added. "What we can do is to look at the maturities of the EFSF loans and that’s why we are . . . discussing a proposal by the troika on more time for Ireland and Portugal [NB: 7-year extension since granted]. That would greatly help both countries going back to the markets and finding their own funding."

While agreement on whether the ESM can retroactively bear historic debts is anticipated in June, Mr Dijsselbloem said a decision on which countries can use the scheme will only be taken after a common bank supervisor is set up in the middle of next year.

The Government campaign for ESM aid relies on a pledge by euro zone leaders to break the link between bank and sovereign debt, but Germany and like-minded allies, such as the Netherlands and Finland, remain sceptical.

Last week, the IMF reiterated its call for the ESM to take equity stakes in the two Irish pillar banks, arguing that it could play "an invaluable role in marking prospects for recovery and debt sustainability more robust". However, Mr Dijsselbloem said he could not predict whether the retroactive application of the direct recapitalisation instrument would be sanctioned at all.

In other words, there's now a substantial stretch of financial no man's land in Europe. The EU still doesn't have its newest "direct recap" instrument, the ESM Stability Mechanism, ready yet while its predecessor, the EFSF, is still sort of active, though it can't take on any new commitments, and what's - still - being discussed is in what shape EFSF loans can be transferred to the ESM - if they can at all - . Of course a banking union could play a large role in all this, but that looks as far away as ever.

Meanwhile, affording Ireland and Portugal more time to pay back loans appears to be seen in Brussels as some kind of end solution, but how realistic is that? Ireland would need to cough up, what, €10 billion a year over that 7 year period (?!), while, in the short term, ingesting another €30+ billion into its banks. Anyone who doesn't think of Dijsselbloem, Lagarde and Draghi as the next reincarnation of the genius of Albert Einstein might come away with some doubts as to whether this is going to work out.

Nor does this stop at Ireland, of course, or Portugal. Take for instance this loud warning about Spain from everyone's favorite right-wing anti-Europe correspondent for the Telegraph, Jeremy Warner:

Spain is officially insolvent: get your money out while you still can

I'd not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor, published last month, comes about as close to declaring Spain insolvent as you are ever likely to see in official analysis of this sort. Of course, it doesn't actually say this outright. The IMF is far too diplomatic for such language.

Let's take the projected budget deficit first. This is expected to decline quite steeply this year to 6.6% of GDP, but that's mainly because the cost of bailing out the banking sector fell substantially on last year's budget. On a like-for-like basis, there has in fact been very little fall in the underlying deficit. And nor on the present policy mix is there ever likely to be, for that's where the deficit is projected to remain until the end of the IMF's forecasting horizon in 2018. Next year, the deficit is expected to be 6.9%, the year after 6.6%, and so on with very little further progress thereafter. [..]

The situation looks even worse on a cyclically adjusted basis. What is sometimes called the "structural deficit", or the bit of government borrowing that doesn't go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2% of GDP this year to 5.7% in 2018. By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US.

So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that's what's going to happen to Spain, where general government gross debt is forecast to rise from 84.1% of GDP last year to 110.6% in 2018. No other advanced economy has such a dramatically worsening outlook. And the tragedy of it all is that Spain is actually making relatively good progress in addressing the "primary balance", that's the deficit before debt servicing costs.

What's projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3% by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures, which even if they were attempted would very likely be self defeating. In any case, it seems doubtful an economy where unemployment is already above 25% could take any more. [..] Spain is chasing its tail down into deflationary oblivion.

All this leads to the conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign bond yields have fallen sharply since the announcement of the European Central Bank's "outright monetary transactions" programme. The ECB has promised to print money without limit to counter the speculators. But in the end, no amount of liquidity can cover up for an underlying problem with solvency.

Europe said that Greece was the first and last such restructuring, but then there was Cyprus. Spain is holding off further recapitalisation of its banks in anticipation of the arrival of Europe's banking union, which it hopes will do the job instead. But if the Cypriot precedent is anything to go by, a heavy price will be demanded by way of recompense. Bank creditors will be widely bailed in. Confiscation of deposits looks all too possible.

I don't advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it's the only rational thing to do.

Let's cautiously summarize it this way: Europe's finances - still - are in tatters. Ireland and Spain are just two examples. We can come up with similar stories about a handful (or two) of other countries. Perception for now remains that Draghi will do whatever it takes - re: buy buy buy - to rescue anyone and everyone. But that perception rests on the idea that he can, in the first place. Jeremy Warner puts his finger on a sore spot that doesn't get nearly enough attention anymore:"... in the end, no amount of liquidity can cover up for an underlying problem with solvency".

The illusion of central bank omnipotence, be it in setting interest rates or in buying up any and all kinds of paper, will continue until it doesn't; we have our media, our politicians and our own gullibility and wishful thinking to thank for that. In the meantime, though, hardly any of the problems in Europe are truly being solved. Moreover, those that are even attempted will increasingly involve bail-ins as a way of funding bail-outs.

It's just a matter of time until the walls come down, and of course it's ironic that the longer reality can be kept hidden underneath the carpet, the less real it seems. But that's simply a predictable consequence of having short attention spans. And we should be able to look beyond that.

Picture top: Vincent van Gogh - The Potato Eaters - 1885

Dalit or Untouchable Woman of Bombay according to Indian Caste System - 1942 - Wikimedia Commons

Throughout history and throughout the world, there have been classes of untouchables. Best known perhaps (other than Elliott Ness and Wall Street bankers) are the caste that goes by the name in South Asia, a.k.a. the Dalits, but there are/were also for instance the Cagots in France, the Burakumin in Japan, and the Roma and Jewish populations in medieval Europe though the Middle East. In the US, one could include the black and native populations. Wikipedia has this definition:

Untouchability is the social-religious practice of ostracizing a minority group by segregating them from the mainstream by social custom or legal mandate. The excluded group could be one that did not accept the norms of the excluding group and historically included foreigners, house workers, nomadic tribes, law-breakers and criminals and those suffering from a contagious disease. This exclusion was a method of punishing law-breakers and also protected traditional societies against contagion from strangers and the infected.

The origin of the phenomenon may have started simply as a way to exclude criminals and diseased people from a community, but obviously that's not where it led.

Untouchability typically means none to limited access to public resources, schools, churches, temples, and having to live outside of established communities and villages. Often - but not always - there was a connection with certain occupations, especially those seen as impure, such as handling the dead (this could include executioners), and dealing with human and animal waste. In parts of Europe, dealing with money was seen as impure, from a religious point of view, which drove a lot of Jews into the field, since they were banned form most other occupations.

I could write a lot more on the interesting though often cruel and barbaric history of untouchability in a wide definition of the word, but I want to focus on what started to make me think of it, modern unemployment numbers in the western world. That is to say, we are now on the verge of casting a huge group of people, essentially our own neighbors, outside of our communities. They are no longer allowed to participate in what makes our societies tick.

This is true for people of all ages (see: Companies won't even look at resumes of the long-term unemployed), but it's an absolute "disaster that got tired of waiting to happen" among young people. Eurostat published this graph last week:

Youth unemployment in Greece (EL) is at about 60%, in Spain (ES) at 55.9%. Then Portugal and Italy at 38.3% and 38.4%, Ireland at 30.3%. Add a bunch of eastern European nations and you have the obvious suspects. Among the others, though, some truly stand out. How about Finland at 19.8%? That's an AAA country, EU core. Same story, only worse, for France: 26.5%. Sweden (SE), supposedly doing so well without the euro: 25.1%. Belgium at 22.3%, the UK 20.7%. They make the US look sort of OK at 16.2%, or at least they serve to somewhat hide how ugly that number really is. In comparison, the EU "hard core" gets no higher than Holland at 10.5%.

Of course there are people who will argue that some of the youth included are in school, not looking for jobs. But given such notions as A) governments' propensities to present rose-colored numbers and B) the numbers of kids enrolled in schools only to not be counted as jobless, I would be wary of overemphasizing the argument.

The numbers, let's focus on Europe for now, are certain to only get worse. How do we know? Easy as pie. It's a matter of political principle. All those unemployed young people are nobody's priority but their own. They simply don't have the political might yet to swing policy decisions in their favor. That is still with the generations of their parents and grandparents, who will vote against anyone trying to cut their wages and benefits. Who will even demand, and receive, government help in dealing with the losses on the homes they bought at irresponsibly elevated prices; they'll claim the government should have warned them.

Losses on homes is one thing the young need not worry about: purchasing a house is way out of reach for them, and for most will remain so for the rest of their lives. The lack of - conventional - political might threatens to doom the young to a life of subservient survival. What might they have will have to come from unconventional methods to change matters. For now, the situation is locked, even as it's sinking fast. What happened in Portugal over the past month is a "great" example of how Europe deals with its issues.

You may remember that in early April, Portugal's highest court declared a set of austerity measures included in the government’s 2013 budget illegal, saying they couldn't single out public workers for salary and benefits cuts. Then, before you could think: democracy works!, the EU/ECB/IMF troika paid an an "unscheduled" visit to Lisbon. The result? Portugal fires another 30,000 public workers. That's right, if you can't cut their benefits, you just fire them.

Of course this is merely the latest in a long line of troika induced measures. 50,000 public sector jobs were already lost in the past two years , and 205,000 jobs disappeared overall in 2012 alone, and 500,000 since 2008.

What do these numbers mean? Here's a helpful little exercise: The US is 30 times the size of Portugal. So to put them in an American perspective, it's like 900,000 public workers are fired in one fell swoop, after 1,5 million lost their jobs in the two years prior, in an economy that lost 6.15 million jobs overall in just the last year(!), and 15 million since 2008.

Not that the troika is done just yet:

Still, an I.M.F. report issued in January concluded that "Portugal’s education system remained overstaffed and relatively inefficient by international standards." It suggested "making the education system more flexible and limiting the state’s role as a supplier of education services" by eliminating 50,000 to 60,000 jobs. 15,000 public school teachers lost their jobs in the past two years.

That's right, their words, not mine: making the education system more flexible [..] by eliminating 50,000 to 60,000 jobs. Again, that would compare to firing between 1.5 and 1.8 million American teachers.

Can Portugal afford to lose all these teachers? Maybe not: about 63% of Portugal’s adult population has not completed high school. Plus, recently graduated teachers can forget about ever getting a job. And so 60,000 young and educated Portuguese emigrate every year. I don't know about you, but to me it's starting to feel like a scorched earth policy.

The European Commission, meanwhile, not only has no answer to these problems, it doesn't even have any intention of doing anything about them. Quite the opposite. The EC wants to continue with the "reforms" it has forced upon PIGSIC countries (can I buy a K?), and we all know what that means: jobs must be cut. Which in turn means that unemployment will rise. Even if they don't say it in so many words. In order to create jobs, you need to cut them first.

From the Telegraph:

[Olli Rehn, the EU's economic and monetary affairs commissioner], had no good news for Europe's growing ranks of unemployed and admitted that "mitigating" against unemployment was all that could be done under the present austerity policy that rules out public-led investment to boost jobs.

He also warned that growth across the EU would return too slowly to reduce unemployment in the short term as European economies remain dependent on exports to offset the impact of the recession and lack of investment caused by the financial and sovereign debt crisis.

"We are living through a very difficult process of adjustment and it is having an unfortunate toll on employment," he said.

"We need consistent consolidation of public finances and structural reforms to boost growth. We need to reform labour market policy to fight youth unemployment. We have to use all possible ways and means to turn the trend in the European economy and mitigate effects of current protracted recession."

And from Bloomberg:

"High unemployment points to the need for continuing the course in structural reforms," said Marco Buti, head of the commission’s economics department. "The reduction in fiscal deficits is making headway in a differentiated way."

That last bit is just meaningless weirdspeak, if you ask me. "The reduction in fiscal deficits is making headway in a differentiated way." Maybe he simply means to say that the people may be screwed, but the banks are fine.

What I do understand is that his words again come down to: "High unemployment points to the need for job cuts". And that remains a strange point of view, especially when seen from the eyes of the unemployed.

So is there any good news? Perhaps that depends on your point of view as well. For instance, I read this in the Telegraph:

"Austerity is finished. This is a decisive turn in the history of the EU project since the euro," [French finance minister Pierre Moscovici] told French TV. "We're seeing the end of austerity dogma. It's a victory of the French point of view."

First of all, that "victory" looks about as Pyrrhic as can be. Several EU nations get more time to cut their deficit to the mandated 3% maximum, but that's just because they're even more broke broker brokest than anyone was ready to admit last time around. And the EU did another round of adjusting predictions downward, a move that's devoid of any meaning if you repeat it every single time. There was also another round of "but next year we'll see the return of growth", but really, who listens anymore? As for the "French point of view", the people hate President Hollande so much after less than a year in office they long back for the good old days of Sarkozy. France is so screwed, but no-one has the guts to say it out loud.

Oh, right, and the EU was proven wrong in Italy. That must have hurt, even if they didn't say so. The return to power of Silvio Berlusconi caused yields on Italian 10 year bonds to plummet. Ergo: they should have left the midget mummy in place, so the markets spoke.

On the whole though, there is just one conclusion left for southern Europe, and I apologize in advance for repeating myself. Countries like Greece and Portugal and Italy need to get out of the Eurozone as quickly as they can. They badly need to regain of their own monetary policy. They must be able to devalue their currencies vis a vis Germany and Holland and the US. Moreover, if they don't leave, they will be swept up (and under) in the wave of bad data that will come out of the EU core. That will start a much bigger squeeze of the periphery than the one we've seen so far. It'll be like being trapped underneath a badly wounded behemoth, not something you should volunteer for.

The Eurozone (and probably the EU as a whole and as a mechanism) has nothing left to offer its poorer members but a world of pain. But it's up to the people themselves to make sure they get out in time. And all the countries still have europhiles in power. Italy got close, but it's already back to the days of old with the same old president and a new PM from the same old school. And if leaving half your children with the prospects of being condemned into meaningless lives, of being ostracized as modern day untouchables, is not enough to wake you up and say No Mas, you really need to wonder what is.

Brussels is not going to create jobs for Europe's young people, they're instead going to cut more jobs, they say so themselves. What they intend to do is squeeze the politically relevant - older - part of the population, but only so far. They don't want them to revolt. That leaves only the young to be squeezed more. Brussels incessantly produces positive looking economic growth numbers, and then incessantly adjusts them downward. They do this because it puts people to sleep. It works. People actually believe that things will get better, that their economies will start growing again and it'll all be fine.

People who are in power will do almost anything to hold on to it. That includes politicians, bankers, corporate executives. We can all identify those groups, and we love to rage against them. But political power in our societies is also defined by age. In that the young have very little of it, and the older have a death grip. That can work, and has worked, as long as - economical - trend lines are positive. It no longer does, however, when these lines break.

Then you don't have one society anymore, but several, starting with older haves and younger have nots. And of course everyone's parents have more than they do, but until now there was the prospect of going out and getting as much as or more than, one's parents have (a better life for my children). That prospect is now gone. But people are slow to realize and accept that. They'd rather believe otherwise, and there are scores of politicians and media willing to keep that faith alive. After all, their own livelihoods depend on it.

Unfortunately for our children, our believing it just about literally means we throw them away with the bathwater. And that can of course only spell trouble down the road. Unless we create all those millions of jobs for them. But we're not even trying: our politicians are busy only keeping us from blowing our gaskets over budget cuts and tax raises; they don't care about out children, because they're not the ones voting them in power. This is not a road to nowhere, it's a road to surefire mayhem. There will inevitable come a point where the younger generation we now leave out to dry gains the voting power and asks: What have you done for me lately? And then, what will be the answer?

But the reality is that in Europe too, "Companies won't even look at resumes of the long-term unemployed". And there are millions of long-term unemployed. Who will never have a real job. Which means that you will arrive at a point where this is no longer a problem solvable within current paradigms. So maybe we need to change those.

Our definition of work has slowly slid from doing something that is useful to yourself, your family and the society you live in, to doing something, a job, that will allow you to buy as big a car and home as possible, and consume as many products as you can whether you need them or not, in order to keep the economy growing. This change in definition has gone largely unnoticed until now, but in light of the levels of - youth - unemployment we see in ever more places, maybe we should take another look at what it means.

Maybe countries like Italy and Greece and Portugal would do better at this point in time to get out of the rat race posing as a force for the good that is the EU. Maybe they have to get back to basics, to making sure they can independently feed themselves, build shelter, and get clean water to everyone.

Maybe competing with Germany and Holland for a scarce musical chair is not the way to go; looking at those unemployment numbers, one might easily come to entertain that idea. And feeding and clothing oneself is not exactly a bad thing to begin with. Our ancestors did, that's why we're here. Maybe it's the best chance they have to engage their young people: in (re)building their societies. And even if things in the global economy do improve somewhere down the line, what exactly would they risk losing?

Better be quick though: the EU has one of its numerous edicts coming out soon that bans people who grow their own food in their gardens, in small plots and allotments, from using their own seeds. They must instead by law buy their seeds from vendors "ordained" by Brussels (yeah, there's Monsanto again...).

Any one of these countries can tell Brussels to go take a hike, and they'll pay back the debt over 50 years in a currency of their own choosing. But they're not doing it. Not so far. Coincidentally, in the graph above, if you look at Iceland, you'll notice they're doing about the best of the lot, with fast falling jobless numbers. Iceland didn't have to leave a monetary union, granted, but still.

They can either cling to our faith in a recovery that's been promised for years while everything has only gotten progressively worse, or they can do something about it. And that will soon be true for all of us. We're just still living in a theater of illusion grace to the fact that we have collectively decided to keep our debts hidden under the carpet, which today no longer works in southern Europe, and tomorrow will grind Germany, Japan and the US to a halt.

If we go there in blind faith, the future - however brutal it may be - still belongs to the young, and guess who will become the untouchables?

Artwork: Ilargi for The Automatic Earth

A report came out in Britain 10 days ago that deserves more attention than it got. If only because it uses the great term "unburnable carbon", great even before it's defined. It makes me ponder the popular and somewhat crazy claims about shale and fracking leading to US energy independence, the holy grail du jour.

It promises much vaunted freedom from outsiders, but what exactly does it consist of? Does it mean the ability to burn ever more carbon-based energy sources without having to buy them abroad? And does "abroad" include Canada, or do we think of this as an "energy Nafta"? Guys, if you would just waste a bit less of the stuff, you'd have been energy independent ages ago without having to inject tons of toxic concoctions into your land. What on earth are you thinking?

"Unburnable carbon" also makes me think of Professor Kenneth Deffeyes, who stated that "Crude oil is much too valuable to be burned as a fuel" , in reference to the long list of products, some of which are very beneficial to us (think medicine), that are made with oil carbons.

Deffeyes also said: "Thirty years from now, oil will be little used as a source of energy. Our grandchildren will say, 'you burned it? All those beautiful molecules? You burned it?'" Will we ever understand this? Not very likely. We don't even think about it. We just want to find more of the stuff and then burn it. Give any organism access to an energy surplus, and it will use it up as fast as possible. Man is no exception.

But first, that report. Which claims that national and international climate targets risk leaving huge amounts of oil and gas stranded. The risk alone should be enough to inject so much uncertainty into the markets that they could plunge into a huge crisis. Damian Carrington for The Guardian:

Carbon bubble will plunge the world into another financial crisis

The world could be heading for a major economic crisis as stock markets inflate an investment bubble in fossil fuels to the tune of trillions of dollars, according to leading economists.

"The financial crisis has shown what happens when risks accumulate unnoticed," said Lord (Nicholas) Stern, a professor at the London School of Economics. He said the risk was "very big indeed" and that almost all investors and regulators were failing to address it.

The so-called "carbon bubble" is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses . But the stock markets are betting on countries' inaction on climate change.

The stark report is by Stern and the thinktank Carbon Tracker. Their warning is supported by organisations including HSBC, Citi, Standard and Poor's and the International Energy Agency. The Bank of England has also recognised that a collapse in the value of oil, gas and coal assets as nations tackle global warming is a potential systemic risk to the economy, with London being particularly at risk owing to its huge listings of coal.

Stern said that far from reducing efforts to develop fossil fuels, the top 200 companies spent $674bn (£441bn) in 2012 to find and exploit even more new resources, a sum equivalent to 1% of global GDP, which could end up as "stranded" or valueless assets. Stern's landmark 2006 report on the economic impact of climate change – commissioned by the then chancellor, Gordon Brown – concluded that spending 1% of GDP would pay for a transition to a clean and sustainable economy.

The world's governments have agreed to restrict the global temperature rise to 2C, beyond which the impacts become severe and unpredictable. But Stern said the investors clearly did not believe action to curb climate change was going to be taken. "They can't believe that and also believe that the markets are sensibly valued now."[..]

Paul Spedding, an oil and gas analyst at HSBC, said: "The scale of 'listed' unburnable carbon revealed in this report is astonishing. This report makes it clear that 'business as usual' is not a viable option for the fossil fuel industry in the long term. [The market] is assuming it will get early warning, but my worry is that things often happen suddenly in the oil and gas sector."

HSBC warned that 40-60% of the market capitalisation of oil and gas companies [is] at risk from the carbon bubble, with the top 200 fossil fuel companies alone having a current value of $4 trillion, along with $1.5 trillion debt. [..]

The report calculates that the world's currently indicated fossil fuel reserves equate to 2,860 billion tonnes of carbon dioxide, but that just 31% could be burned for an 80% chance of keeping below a 2C temperature rise. For a 50% chance of 2C or less, just 38% could be burned.

Carbon capture and storage technology, which buries emissions underground, can play a role in the future, but even an optimistic scenario which sees 3,800 commercial projects worldwide would allow only an extra 4% of fossil fuel reserves to be burned. There are currently no commercial projects up and running. The normally conservative International Energy Agency has also concluded that a major part of fossil fuel reserves is unburnable. [..]

Jeremy Grantham, a billionaire fund manager who oversees $106bn of assets, said his company was on the verge of pulling out of all coal and unconventional fossil fuels, such as oil from tar sands. "The probability of them running into trouble is too high for me to take that risk as an investor." He said: "If we mean to burn all the coal and any appreciable percentage of the tar sands, or other unconventional oil and gas then we're cooked. [There are] terrible consequences that we will lay at the door of our grandchildren."

And it's of course not just the US that is involved. All major energy producers (and consumers) are. Nor is it just oil and gas: coal could get hit hard. Damian Carrington had this on Australia over the weekend:

Carbon bubble makes Australia's coal industry ripe 'for financial implosion'

Australia's huge coal industry is a speculative bubble ripe for financial implosion if the world's governments fulfil their agreement to act on climate change, according to a new report. The warning that much of the nation's coal reserves will become worthless as the world hits carbon emission limits comes after banking giant Citi also warned Australian investors that fossil fuel companies could do little to avoid the future loss of value.

Australia is already the globe's biggest coal exporter and "mega-mine" plans in Queensland for more extraction are identified as the world's second biggest "carbon bomb" threatening runaway global warming.

"Investments in Australian coal rest on a speculative bubble of climate denial, indifference or dreaming," said John Connor, one of the new report's authors and CEO of The Climate Institute, an independent research organisation based in Sydney. "Investors, governments and even some coal companies say they take climate change seriously, but this report shows they do not or are taking risky gambles."

James Leaton, at thinktank Carbon Tracker and also another of the report's authors, said: "Investors need to challenge the assumption that coal demand will continue to rise in China and elsewhere, otherwise billions of dollars of taxpayer, superannuation and shareholder funds will be wasted in assets linked to unburnable carbon."

Carbon Tracker's recent global report found that at least two-thirds of existing fossil fuel reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for "dangerous" climate change. The new report shows Australian coal reserves owned by listed companies alone are equivalent to 25% of the global carbon budget for the fuel to 2050.

However, far from cutting back on exploration for new coal reserves, Australian listed companies spent AU$6 billion on developing new deposits. If only half of potential future reserves were exploited, Australian coal would use up 75% of the global carbon budget for the fuel.

Earlier in April, Citi banking group issued a warning to investors in fossil fuel companies. "We see limited potential for engagement to alter the outcome in this case," concluded its report. "If the unburnable carbon [scenario] does occur – even with carbon capture and storage technology – it is difficult to see how the value of fossil fuel reserves can be maintained."

Leaton said China has indicated its coal use will peak in the next five years, but that this had not been priced by markets. "I don't know why the market does not believe China. When it says it is going to do something, it usually does." Yet Australia is banking on selling coal to China: "That doesn't add up."

Still, you could argue that governments will try to find a way to ignore climate treaties. Once they start painting a picture of plunging economies and lifestyles for their people, the hope will be that the treaties can be watered down to facilitate business as usual. Given the strength and broad appeal of climate activism, that won't be as easy as some might think.

For the Canadian government and economy, climate issues may not be the biggest headache going forward. Ottawa faces a growing and steadily better organized resistance from Indigenous peoples. Who, if they resist being divided and bought off, can be a major pain in the government butt, not least of all because they still have many elders who remember being raised on notions of keeping the land fit to pass on to multiple generations. Large scale exploitation of carbon resources doesn't seem to fit that bill. Martin Lukacs for the Guardian in December last year:

Canada's First Nations protest heralds a new alliance

Canada's placid winter surface has been broken by unprecedented protests by its aboriginal peoples. In just a few weeks, a small campaign launched against the Conservative government's budget bill by four aboriginal women has expanded and transformed into a season of discontent: a cultural and political resurgence.

It has seen rallies in dozens of cities, a disruption of legislature, blockades of major highways, drumming flash mobs in malls, a flurry of Twitter activity under the hashtag #IdleNoMore and a hunger strike by Chief Theresa Spence, in a tepee minutes from Ottawa's parliament. Into her tenth day, Spence says she is "willing to die for her people" to get the prime minister, chiefs and Queen to discuss respect for historical treaties.

[..] What remains unspeakable in mainstream politics in Canada was recently uttered, in a moment of rare candour, by former Prime Minister Paul Martin:

"We have never admitted to ourselves that we were, and still are, a colonial power."

[..] While Canada has the world's largest supply of fresh water, more than 100 aboriginal communities have tapwater so foul they are under continual boil alert. Aboriginal peoples constitute 3% of Canada's population; they make up 20% of its prisons' inmates. In the far north, the rate of tuberculosis is a stunning 137 times that of the rest of the country. And the suicide rate capital of the world? A small reserve in Ontario, where a group of school-age girls once signed a pact to collectively take their lives.

Such realities have not stopped politicians and pundits from prattling on about the sums supposedly lavished on aboriginal peoples. [..] Billions have indeed been spent – not on fixing housing, building schools or ending the country's two-tiered child aid services, but on a legal war against aboriginal communities.

Every year, the government pours more than $100 million into court battles to curtail aboriginal rights – and that figure alone went to defeating a single lawsuit launched by two Alberta First Nations trying to recover oil royalties essentially stolen by bureaucrats.

Despite such odds, the highest courts of the land have ruled time and again in favour of aboriginal peoples. Over the last three decades, they have recognized that aboriginal nations have hunting, fishing and land rights, in some cases even outright ownership, over vast areas of unceded territory in British Columbia and elsewhere.

Parliament will soon debate a bill that would break up reserves – still, mostly, collectively held – into individual private property that can be purchased by non-native speculators. The undeclared agenda of government policy is the same as it was a century ago: a grab for resource-rich lands, and the assimilation of aboriginal nations.

The Canadian federal and provincial governments act on a "shoot first, talk later" basis. As in many other places in the world, government policy is based on bullying citizens into compliance with what are labeled "democratic policies", which actually hugely benefit both the government and its corporate backers financially, but leave those citizens with mere scraps off the table.

In Canada, the situation is far less simple than the government would like, because aboriginal - land - claims that have been ratified in various treaties, and on many occasions confirmed by its own Supreme Court, numerous times, can't just be ignored without trampling both democracy itself and the rule of law.

In a very cynical move, Ottawa spends $100 million per year in legal fees to fight these aboriginal claims in courts across the country. Cynical because one might argue that this stunning amount of money rightfully belongs to the aboriginal population in the first place: hence, their own money is being used to keep them poor. Lukacs again:

Indigenous rights are the best defence against Canada's resource rush

In a boardroom in a soaring high-rise on Wall Street, Indigenous activist Arthur Manuel is sitting across from one of the most powerful financial agents in North America.

It's 2004, and Manuel is on a typical mission. Part of a line of distinguished Indigenous leaders from western Canada, Manuel is what you might call an economic hit-man for the right cause. A brilliant thinker trained in law, he has devoted himself to fighting Canada's policies toward Indigenous peoples by assailing the government where it hurts most – in its pocketbook.

Which is why he secured a meeting in New York with a top-ranking official at Standard & Poor's, the influential credit agency that issues Canada's top-notch AAA rating. That's what assures investors that the country has its debts covered, that it is a safe and profitable place to do business.

This coveted credit rating is Manuel's target. His line of attack is to try to lift the veil on Canada's dirty business secret: that contrary to the myth that Indigenous peoples leech off the state, resources taken from their lands have in fact been subsidizing the Canadian economy.

In their haste to get at that wealth, the government has been flouting their own laws, ignoring Supreme Court decisions calling for the respect of Indigenous and treaty rights over large territories. Canada has become very rich, and Indigenous peoples very poor.

In other words, Canada owes big. Some have even begun calculating how much. According to economist Fred Lazar, First Nations in northern Ontario alone are owed $32 billion for the last century of unfulfilled treaty promises to share revenue from resources. Manuel's argument is that this unpaid debt – a massive liability of trillions of dollars carried by the Canadian state, which it has deliberately failed to report – should be recognized as a risk to the country's credit rating.

How did the official who could pull the rug under Canada's economy respond? Unlike Canadian politicians and media who regularly dismiss the significance of Indigenous rights, he took Manuel seriously. It was evident he knew all the jurisprudence. He followed the political developments. He didn't contradict any of Manuel's facts.

He no doubt understood what Manuel was remarkably driving at: under threat of a dented credit rating, Canada might finally feel pressure to deal fairly with Indigenous peoples. But here was the hitch: Standard & Poor's wouldn't acknowledge the debt, because the official didn't think Manuel and First Nations could ever collect it. Why? As author Naomi Klein, who accompanied Manuel at the meeting, remembers, his answer amounted to a realpolitik shoulder shrug.

"Who will able to enforce the debt? You and what army?"

[..] The movement confronts a Conservative Canadian government aggressively pursuing $600 billion of resource development on or near Indigenous lands. That means the unbridled exploitation of huge hydrocarbon reserves, including the three-fold expansion of one of the world's most carbon-intensive projects, the Alberta tar sands. Living closest to these lands, Indigenous peoples are the best and last defence against this fossil fuel scramble.

No surprise, then, about the government's basic approach toward First Nations: "removing obstacles to major economic development." Hence the movement's next stage – a call for defiance branded Sovereignty Summer – is to put more obstacles up. The assertion of constitutionally-protected Indigenous and treaty rights – backed up by direct action, legal challenges and massive support from Canadians – is exactly what can create chronic uncertainty for this corporate and government agenda. [..]

The "Lord Stern report" focuses on the carbon bubble caused by the discrepancy between climate targets and the exploitation of carbon resources.

But there's another potential bubble in carbon that the report does not address: a large part of the resources will simply never become economically viable.

Even before you run into climate related limits, a lot of carbon will prove unburnable not primarily because of climate change legislation, but because of either one of two issues: 1) physics meets monetary limits, i.e. developing the asset makes no sense economically, or 2) physics meets physics, i.e. developing the asset makes no sense in energy terms because it costs more energy than it delivers.

In connection with these two issues, at present a substantial part of America's unconventional oil and gas only looks financially interesting because of the fortunes being made in speculation, for instance in land and land rights (in true Enron spirit, Aubrey McClendon and Chesapeake Energy have blown a huge market distorting bubble there).

Far more money is spent on the promise of oil and gas plays than on the actual product. The result is a carbon related land (rights) bubble, and a typical case of something that looks good; until it doesn't.

But there's more. A large part of the money that is being lavished on the carbon bubble is zombie money. If that money were not available, there would be no bubble. Every single debt that is not properly recognized, and restructured or defaulted upon, leaves zombie money present in a financial system. And every single asset this zombie money is invested in is by definition in a bubble.

If people had a more profound understanding of what occurs when debts are not cleansed the way they should be, there would be no zombie money. As it stands, accounting standards in nations hit by the 2007-08 crisis have become running jokes, all in order to hide the real state of both governments and financial institutions.

Hiding debt means hiding reality. Neither can remain hidden forever. Which, come to think of it, sets them apart from a lot of carbon resources. Which will never see the light of day.

The point to take away from all this is that a storm cloud of uncertainties is taking shape above the carbon industry. And that alone will be enough to leave a lot of carbon unburnable. Which may not be such a bad thing.