Friday, September 30, 2011
Wednesday, September 28, 2011
Tuesday, September 27, 2011
NYC Police Brutalize Wall Street Protesters. MSNBC Gets IT RIGHT!
Visit msnbc.com for breaking news, world news, and news about the economy
Monday, September 26, 2011
Sunday, September 25, 2011
Saturday, September 24, 2011
5 Banks Hold US$ 250 Trillion in Derivative Exposure
Amazing report from the US Office Of The Comptroller's Quarterly Report on Bank Trading & Derivative Trading in the second quarter of 2011.
It is showing that 5 major US banks hold 96% of US$ 250 trillion in gross notional amount of derivative contracts outstanding. The top 25 commercial banks hold US$ 333 trillion in derivative exposure.
So what, you say, does this mean to me and what are credit derivatives?
Credit derivatives are like insurance. If you hold debt of a given company, say company bonds you have bought, and you want to insure that you are paid, you buy a credit derivative to insure your investment in the company goes if it goes bankrupt. You bought a credit derivative and you still get your money. But Credit Derivatives are not like regular insurance, with regular insurance you buy fire, flood, etc. coverage to pay for property that you own and have a financial risk. With credit derivatives, you have the ability to buy insurance on any house and collect money on that property without ownership of that property. You are essentially gambling on that house burning down and actually are betting that the said house will burn down.
Some people bought credit derivatives to protect their bonds or mortgage backed securities, or any other time of security to protect their interests. But many people have bought credit derivatives by people who were NOT purchasing insurance to protect their insurable assets, but wanted to gamble that certain companies would fail. And an even more sinister plot could take place where people bought credit derivatives, not just to gamble, but because they had inside info on a certain company, that was shaky or they had the ability to push a shaky company to fail and collect
on that companies failure.
Here is where the problem gets really sticky. Credit derivatives are unregulated, thank you Congress, and because of this we have no real idea of what the true market is. But from the story above, we can see it is more than US$ 333 trillion which is more than 22 times the size of the USA's GDP.
We used to have Glass-Steagall and other security regulations that came out of the depression to protect us. That is all gone now, regulated away by greedy lobbyists and politicians looking for a cash payout.
So we are seeing the bigger banks getting bigger with their risk exposure reaching unheard of highs. To big to fail? I doubt it. But when these trees in the worlds forest of financials crash to the ground, they will burn and so will you, because we have nothing left to bail them out.
You can read more about this at Zero Hedge here.....
It is showing that 5 major US banks hold 96% of US$ 250 trillion in gross notional amount of derivative contracts outstanding. The top 25 commercial banks hold US$ 333 trillion in derivative exposure.
So what, you say, does this mean to me and what are credit derivatives?
Credit derivatives are like insurance. If you hold debt of a given company, say company bonds you have bought, and you want to insure that you are paid, you buy a credit derivative to insure your investment in the company goes if it goes bankrupt. You bought a credit derivative and you still get your money. But Credit Derivatives are not like regular insurance, with regular insurance you buy fire, flood, etc. coverage to pay for property that you own and have a financial risk. With credit derivatives, you have the ability to buy insurance on any house and collect money on that property without ownership of that property. You are essentially gambling on that house burning down and actually are betting that the said house will burn down.
Some people bought credit derivatives to protect their bonds or mortgage backed securities, or any other time of security to protect their interests. But many people have bought credit derivatives by people who were NOT purchasing insurance to protect their insurable assets, but wanted to gamble that certain companies would fail. And an even more sinister plot could take place where people bought credit derivatives, not just to gamble, but because they had inside info on a certain company, that was shaky or they had the ability to push a shaky company to fail and collect
on that companies failure.
Here is where the problem gets really sticky. Credit derivatives are unregulated, thank you Congress, and because of this we have no real idea of what the true market is. But from the story above, we can see it is more than US$ 333 trillion which is more than 22 times the size of the USA's GDP.
We used to have Glass-Steagall and other security regulations that came out of the depression to protect us. That is all gone now, regulated away by greedy lobbyists and politicians looking for a cash payout.
So we are seeing the bigger banks getting bigger with their risk exposure reaching unheard of highs. To big to fail? I doubt it. But when these trees in the worlds forest of financials crash to the ground, they will burn and so will you, because we have nothing left to bail them out.
You can read more about this at Zero Hedge here.....
Congress is Creating A Financial Meltdown
Interesting article by Martin Armstrong calling out the American Congress & President Obama for their weak understanding of financial markets and complete inability to manage the American economy. They just want to ignore the problems they have created and look for the "good news."
With their heads in the sand, it will be a long time before there is good news on the financial front for the American people.
You can read Martin Armstrong's comments here in his .pdf
With their heads in the sand, it will be a long time before there is good news on the financial front for the American people.
You can read Martin Armstrong's comments here in his .pdf
Friday, September 23, 2011
Follow The Money
What happened to the money? Remember the big fight in Congress of the debt limit last month?
Remember they added $400 billion to the debt ceiling to get us through the elections in 2012? Well, seems like the money is gone! Spent. Bye Bye! Have drunken sailors got ahold of the government purse strings? You can look at the Daily US Treasury Statement and check out Table III C. This statement means we have blown through $400 billion dollars in less than 2 months. WTF?!? Congress is trying to pass a new spending bill that will keep the federal government running through November 18th, 2011
and they are having a pissing contest to see who will give in first and take the blame. Why do we put up with this from our government. This government designed reality TV show featuring gridlock and infighting isn't productive for the country, but might help with spending. Weren't they supposed to be the "Peoples" representatives? Why do you, the American public put up with this crap? We keep letting the President and Congress spend us into debt slavery. Why doesn't the American public and MSM acknowledge that Government spending is the problem? Simple math tells you that 4 wars and the ability to delivery a US military to any corner of the world on a moments notice costs a ton of money.
Remember they added $400 billion to the debt ceiling to get us through the elections in 2012? Well, seems like the money is gone! Spent. Bye Bye! Have drunken sailors got ahold of the government purse strings? You can look at the Daily US Treasury Statement and check out Table III C. This statement means we have blown through $400 billion dollars in less than 2 months. WTF?!? Congress is trying to pass a new spending bill that will keep the federal government running through November 18th, 2011
and they are having a pissing contest to see who will give in first and take the blame. Why do we put up with this from our government. This government designed reality TV show featuring gridlock and infighting isn't productive for the country, but might help with spending. Weren't they supposed to be the "Peoples" representatives? Why do you, the American public put up with this crap? We keep letting the President and Congress spend us into debt slavery. Why doesn't the American public and MSM acknowledge that Government spending is the problem? Simple math tells you that 4 wars and the ability to delivery a US military to any corner of the world on a moments notice costs a ton of money.
Wednesday, September 21, 2011
Doug Casey - Gold & Silver Only Safe Harbors In 1000 Year Storm
If you are looking for answers to explain the global financial meltdown that we are facing read this article by Doug Casey. Clear, concise view of what is going on now and how to protect yourself.
Doug Casey: Debt, Doom, and Opportunity
Doug: Well, never say never. And I’m an eternal optimist. But as I’ve said before, even if friendly space aliens landed on the White House and gave us a magic technology that fed and housed everyone, the economic dislocation would still wreck the world as we know it. I truly can see no way out. Let me be completely clear about why. The West in general, but the US in particular, has been living way above its means for a long time. The proof for that statement is all the debt we’re awash in – federal, state, municipal, and individual. Debt is worse than living out of capital. It amounts to living out of anticipated future revenues – which may not even be there. It amounts to eating the seed corn.
L: Well, even if you could see a way out, the politicians would never do the right thing.
Doug: It’s worse than that, much worse. They can be counted on to do not just the wrong thing, but the opposite of the right thing. Everything the government is doing is making things worse – for instance, Obama’s idiotic $447 billion stimulus plan. It will extract that much productive capital from society and simply flush it down the cosmic toilet. But I’ll go further: Not only do I not see any way out – politically feasible or not – everything I know about economics tells me that it’s impossible for the global economy to get out of this intact. Important body parts are caught in the wringer; we are, therefore, going through the wringer.
L: And yet, the dollar is holding its own against the euro…
Doug: That’s just an illusion created by the race to the bottom; the euro is in even worse shape than the dollar. Italy – surprise, surprise – may not be able to enact the necessary austerity measures required for its bailout. Greece, Italy, Portugal, Spain, Ireland – all these governments are bankrupt. So is France. The euro is in terminal decline. So what does it mean that the USD is running neck and neck with it? It just means both are being debased at similar rates. Just look at the dollar or euro against the Swiss franc, for example.
L: Here’s a chart. I suggest clicking on the five-year option – pretty impressive.
Doug: Exactly. However, now they’re stepping in to fix the price of the CHF. It’s yet another stupid idea. A strong currency is a huge advantage. It temporarily hurts local exporters, of course; but it reduces the cost of all imports, makes it possible for business to buy foreign assets at a discount, encourages domestic producers to become more efficient, and rewards those who have saved. It acts to increase the standard of living of everyone in the country. A devaluation does the opposite. This whole thing with the Swiss franc is quite telling. Even though the Swiss franc has historically been a “strong” currency, it’s really just another government-issued piece of paper, backed by nothing. And yet it has a patina of value, a perception of historical strength that is making it a refuge for frightened money all around the world.
L: The safe-haven premium.
Doug: Everything is relative. Any port in a storm, as they say.
Sunday, September 18, 2011
Central Government Planning Always Goes Wrong
Nice article by Victor Davis Hanson discussing where our government has gone wrong from the welfare state to the elite stealing at the top, worth the time to read the entire article.
"The welfare state, aside from being broke, is eroding initiative and warping reality — both for the elite at the top, like the executives who just milked a half-trillion dollars in sweetheart loans from some idiotic “green” bureaucrat, to the late-model truck drivers robbing productive farms to pay for their stereos and hydraulic-lifters."
September 18, 2011
The California Corridor
Some Lessons on Government Largesse From the New Frontier
by Victor Davis Hanson
Pajamas Media
The Great Warpath
This summer it has been a softer, modern version of living in a cabin on the Great Warpath circa 1740 near Albany or Montreal (in this regard, take a look at Eliot Cohen’s new book Conquered into Liberty on the origins of the American way of war), readying oneself for the next break-in — so our inland “California Corridor” has become from Bakersfield to Sacramento.
More specifically, I have been on the lookout around my farm for a predatory, nearly new, grey/silver Toyota truck that drives in and then speeds out — always a day or so before the nocturnal theft. He’s clever, this caser — and audacious too, like a wily Sherman tank prowling through the hedgerows. (Why, if poor, is he not home growing a tomato garden or scouring the roadside for the ubiquitous tossed aluminum cans and plastic bottles?)
On three separate occasions from June to August, I have had copper wire stripped out of pumps, the barn ransacked, and the two locks pried off the shop and various things stolen. (Why did they steal buckets of 1900 antique bolts and square nails and leave alone a drill press and grinder? Ease of recycling? Ignorance?)
more....http://www.victorhanson.com/articles/hanson091811.html
"The welfare state, aside from being broke, is eroding initiative and warping reality — both for the elite at the top, like the executives who just milked a half-trillion dollars in sweetheart loans from some idiotic “green” bureaucrat, to the late-model truck drivers robbing productive farms to pay for their stereos and hydraulic-lifters."
September 18, 2011
The California Corridor
Some Lessons on Government Largesse From the New Frontier
by Victor Davis Hanson
Pajamas Media
The Great Warpath
This summer it has been a softer, modern version of living in a cabin on the Great Warpath circa 1740 near Albany or Montreal (in this regard, take a look at Eliot Cohen’s new book Conquered into Liberty on the origins of the American way of war), readying oneself for the next break-in — so our inland “California Corridor” has become from Bakersfield to Sacramento.
More specifically, I have been on the lookout around my farm for a predatory, nearly new, grey/silver Toyota truck that drives in and then speeds out — always a day or so before the nocturnal theft. He’s clever, this caser — and audacious too, like a wily Sherman tank prowling through the hedgerows. (Why, if poor, is he not home growing a tomato garden or scouring the roadside for the ubiquitous tossed aluminum cans and plastic bottles?)
On three separate occasions from June to August, I have had copper wire stripped out of pumps, the barn ransacked, and the two locks pried off the shop and various things stolen. (Why did they steal buckets of 1900 antique bolts and square nails and leave alone a drill press and grinder? Ease of recycling? Ignorance?)
more....http://www.victorhanson.com/articles/hanson091811.html
Money Supply Explodes
What is happening with the M1 & M2 numbers at the FED?
M1 & M2 is the money supply or money stock and is the total amount of money that is available in the economy. There is a relation between money and prices that is historically related to long term inflation and money supply growth.
M1 is the amount of money in circulation. It is a very liquid measure of the money supply that includes cash and assets that can be converted to cash.
M2 is a much wider view of money than M1. M2 includes M1 as well as longer term time related deposits, overnight repurchase agreements, money market deposit accounts, like CDs, savings deposits, money mutual funds.
So, M1 is the liquidity of money and M2 is the measure of most of the money supply in the US.
The above graph is from the NY Fed site explaining M1 & M2 gives a clearer picture of how M1 & M2 work.
Lets look at the money supply numbers for the last three months through August 2011.
What you see is a huge jump in money supply since january and a giant 14% jump since July!
You can look at the numbers yourself on the US Treasury site here.
Here is the chart from last month.
What do these numbers mean to you? Hyperinflation. The velocity of the increase of money
in the money supply is 36% this year. Where is that money going? I would hazard a guess that the Fed is using this increase in money supply to purchase US Treasury bonds. Why? No one else, Euroland or China, for example, want them. In fact, Ambrose Evans-Pritchard in The Telegraph UK reports that China is dumping US Treasuries. This is a clear example of the end of the US dollar as the world reserve currency, when we have to buy our own Treasuries. As well as a very loud alarm bell for hyperinflation. Move over Zimbabwe, here we come!
M1 & M2 is the money supply or money stock and is the total amount of money that is available in the economy. There is a relation between money and prices that is historically related to long term inflation and money supply growth.
M1 is the amount of money in circulation. It is a very liquid measure of the money supply that includes cash and assets that can be converted to cash.
M2 is a much wider view of money than M1. M2 includes M1 as well as longer term time related deposits, overnight repurchase agreements, money market deposit accounts, like CDs, savings deposits, money mutual funds.
So, M1 is the liquidity of money and M2 is the measure of most of the money supply in the US.
The above graph is from the NY Fed site explaining M1 & M2 gives a clearer picture of how M1 & M2 work.
Lets look at the money supply numbers for the last three months through August 2011.
What you see is a huge jump in money supply since january and a giant 14% jump since July!
You can look at the numbers yourself on the US Treasury site here.
Here is the chart from last month.
What do these numbers mean to you? Hyperinflation. The velocity of the increase of money
in the money supply is 36% this year. Where is that money going? I would hazard a guess that the Fed is using this increase in money supply to purchase US Treasury bonds. Why? No one else, Euroland or China, for example, want them. In fact, Ambrose Evans-Pritchard in The Telegraph UK reports that China is dumping US Treasuries. This is a clear example of the end of the US dollar as the world reserve currency, when we have to buy our own Treasuries. As well as a very loud alarm bell for hyperinflation. Move over Zimbabwe, here we come!
Saturday, September 17, 2011
Moody's To Downgrade Italian Bonds? Bet On It!
Rumors abound that Moody's Investors Service is reviewing for a possible downgrade of Italy's Aa2 local and foreign government bond
ratings according to Bloomberg News.
Moody's started looking into a possible downgrade of Italian bond ratings
on June 17, 2011. They were concerned about Italy's economic growth challenges, the risk surrounding plans that are required to reduce Italy's
debt and keep it at affordable -to pay- interest rates, and the risks of default with the constantly changing funding conditions for European sovereigns with high levels of debt, i.e. PIIGS issues.
So what does that mean? Italian debt is going to cost more in the short term and following Ireland, Spain Portugal, Cypress and Greece, my end up blowing up like Greece with unsustainable debt loads. America are you listening?
Moody's started looking into a possible downgrade of Italian bond ratings
on June 17, 2011. They were concerned about Italy's economic growth challenges, the risk surrounding plans that are required to reduce Italy's
debt and keep it at affordable -to pay- interest rates, and the risks of default with the constantly changing funding conditions for European sovereigns with high levels of debt, i.e. PIIGS issues.
So what does that mean? Italian debt is going to cost more in the short term and following Ireland, Spain Portugal, Cypress and Greece, my end up blowing up like Greece with unsustainable debt loads. America are you listening?
Friday, September 16, 2011
Thursday, September 15, 2011
Rogue Trader Loses $ 2 Billion At UBS
Smells fishy. When do we hear of the successes when the "Rogue Traders"
get it right? You don't. The banks are lying through their teeth and want you to think it was one bad apple. Wrong! They liars, cheaters, nasty bullies and rotten to the core. Here is what Matt Taibbi At Rolling Stone thinks about this BS.
get it right? You don't. The banks are lying through their teeth and want you to think it was one bad apple. Wrong! They liars, cheaters, nasty bullies and rotten to the core. Here is what Matt Taibbi At Rolling Stone thinks about this BS.
Europe In Crisis, Trouble For US?
A must read from The Golden Truth blog to understand what is happening behind the scenes in Euroland and our banking world.
Looks worse than 2008 when they let Lehman go. Prepare yourselves!
The Golden Truth
THURSDAY, SEPTEMBER 15, 2011
What Exactly Happened Today?
I don't have time to explain the details, but essentially over the past few days the Fed, ECB, Swiss National Bank and Bank of England have been working in concert in order to make liquidity available to prevent the European banking system from collapsing - similar to what happened here in the autumn of 2008. To simplify things, what has happened is that European banks have dollar liabilities (shorter term loan funding of various sorts denominated in dollars) that are being used to finance non-dollar income-producing assets (mostly denominated in euros). Greek and Italian sovereign debt securities, for instance. The assets are falling way short of being able to support the cash flows required to fund the liabilities (repos, for instance). So, the European banking system is at the brink of "freezing up" and collapsing.
You can read about the details HERE In addition, our Fed has made $500 billion swap "liquidity" facilities available for use - this has been in place for awhile. And even more startling, it turns out that some big U.S. banks have been engaging in private market repo transactions with some big Euro banks, who have been using crappy collateral. Zerohedge sourced this article: LINK
I was actually stunned when I saw that because it shows how desperate European banks have become for cash. But why are the big U.S. banks willing to take crappy collateral in exchange? Traditionally repos are done using very short term Treasuries or Agency debt as collateral. Why would U.S. banks be willing to take this shit to keep Euro banks solvent? And why is the Fed extending half a trillion of Taxpayer-backed funding to keep the Euro system from collapsing?
I don't know for sure, and we'll never know until everything collapses, but I suspect that if countries like Greece and Italy and Spain collapse, then the big too-big-too-fail Euro banks collapse. And if that happens, I suspect that our too-big-to-fail banks - primarily Citi, JP Morgan and Goldman - would collapse under the weight of a very large amount of credit default derivatives and interest rate swaps that require Euro bank counterparties to be able to fund in the event the default parameters are triggered. In other words, U.S. banks and our Fed are just as desperate to keep the Euro banks alive as are the ECB/SNB/BOE bank members desperate to stay alive.
This scenario is startlingly similar to what happened right before Lehman was allowed to tank, which triggered the big bailouts here. Only this time the scale is Lehman x 50 or 100 because it includes a couple of countries and all of the U.S./UK/European/Swiss To-Big-To-Fail Banks. I also believe that what I just surmised has a very high probability of being pretty close to what is actually going on. It also is interesting to me that some big, anonymous banks/Central Banks are lending/swapping out their gold holdings in order get their hands on badly needed U.S. dollars to meet dollar liquidity needs: LINK
What would be frightening to me with these gold swap transactions is that there is a high probability that a lot of this gold being leased out may actually be coming from the same HSBC vault that "safekeeps" the GLD gold. HSBC is one of the largest LBMA depository banks, which contain a large percent of the world's 400 oz. gold bars. This is exactly why Hugo Chavez wants Venezuela's gold removed and delivered to Venezuela. Remember the CNBC video in which Bob Pisani is standing in the HSBC vault and supposedly picking up a bar from the GLD "allocated" section? Remember how that bar was NOT actually a bar on GLD's gold list but was purported to be a GLD bar? More than anything else you read, that event underscores why you can't trust ANY of the gold in that HSBC vault and you can't trust that GLD truly has 100% backing of unencumbered bars (i.e. leased out or used in derivatives deals).
I said in my original GLD research report back in Feb 2009 that one day we'll wake up and the price of gold will be up $200 and the opening price of GLD will be down 50% (you can see that report HERE ). What is happening right now in the financial system is exactly the kind of scenario and events that I envisioned would cause GLD to ultimately be exposed for what it is. We could be closer than any of us realize to this type of situation actually occurring. In other words, if you own GLD and think that you own gold, you don't. Get rid of your GLD and buy the real stuff.
Finally, do not let this latest 2-day smack on the price of gold shake you out of your positions or scare you off from buying more physical gold/silver. This hit on gold, I believe, was nothing more than a coordinated Central Bank intervention in order to get the price lower ahead of all of the above massive fiat/liquidity operations. This is what happened in the summer of 2008 as well. It also means that the global financial system is in far worse trouble than anyone not inside the Central Bank nerve centers realizes.
Tuesday, September 13, 2011
Monday, September 12, 2011
Germany vs. Greece Mutual Assured Destruction?
Is this one of those crazy world soccer fests that captivate Euroland?
Nope! Greece is teetering on default and running out of cash. This is a tete a tete over Euroland bonds. These sovereign bonds are what countries sell, with a paid interest rate, to raise cash from investors - mutual funds, pension funds - who want a return on their capital and who feel the countries will pay off the bonds. The interest rate usually corresponds to the risk of default. So what is happen here?
Why is Europe so close to default? The lack of individual countries abilities to sell their bonds to the world or print their own currency - inflate - to protect those bonds. They gave up the right to their own currency when they joined the Euro. So, the world isn't buying Greek bonds, or Spanish bonds or Italian bonds and the individual countries can't print their way out, say, like the US. So they have to rely on the ECB who is being forced to sit on it's hands and be fiscally responsible. So, two really good articles, the first by Ambrose Evans-Prichard of The Telegraph.UK and the second by N.Y. Times economist Paul Krugman, go into simple detail and explain the problems. Paul Krugman!?! Haven't you railed about his thoughts in previous blogs. Well, yes I have. Credit where credit is due. That said, even a blind squirrel finds an acorn on occasion. But I must say his views on the Euroland problem are spot on and help clarify what is happening there and the problem it holds for the world financial community. His solutions for Euroland, as with all inflated fiat currency, not so much.
First up, Mr. Ambrose Evans-Prichard
Tuesday 13 September 2011
Nope! Greece is teetering on default and running out of cash. This is a tete a tete over Euroland bonds. These sovereign bonds are what countries sell, with a paid interest rate, to raise cash from investors - mutual funds, pension funds - who want a return on their capital and who feel the countries will pay off the bonds. The interest rate usually corresponds to the risk of default. So what is happen here?
Why is Europe so close to default? The lack of individual countries abilities to sell their bonds to the world or print their own currency - inflate - to protect those bonds. They gave up the right to their own currency when they joined the Euro. So, the world isn't buying Greek bonds, or Spanish bonds or Italian bonds and the individual countries can't print their way out, say, like the US. So they have to rely on the ECB who is being forced to sit on it's hands and be fiscally responsible. So, two really good articles, the first by Ambrose Evans-Prichard of The Telegraph.UK and the second by N.Y. Times economist Paul Krugman, go into simple detail and explain the problems. Paul Krugman!?! Haven't you railed about his thoughts in previous blogs. Well, yes I have. Credit where credit is due. That said, even a blind squirrel finds an acorn on occasion. But I must say his views on the Euroland problem are spot on and help clarify what is happening there and the problem it holds for the world financial community. His solutions for Euroland, as with all inflated fiat currency, not so much.
First up, Mr. Ambrose Evans-Prichard
Tuesday 13 September 2011
Germany and Greece flirt with mutual assured destruction
Bild Zeitung populism has prevailed. Germany is pushing Greece towards a hard default, risking the uncontrollable chain reaction so long feared by markets.
First we learn from planted leaks that Germany is activating "Plan B", telling banks and insurance companies to prepare for 50pc haircuts on Greek debt; then that Germany is “studying” options that include Greece's return to the drachma.
German finance minister Wolfgang Schauble has chosen to do this at a moment when the global economy is already flirting with double-dip recession, bank shares are crashing, and global credit strains are testing Lehman levels. The recklessness is breath-taking.
If it is a pressure tactic to force Greece to submit to EU-IMF demands of yet further austerity, it may instead bring mutual assured destruction.
"Whoever thinks that Greece is an easy scapegoat, will find that this eventually turns against them, against the hard core of the eurozone," said Greek finance minister Evangelos Venizelos.
Greece can, if provoked, pull the pin on the European banking system and inflict huge damage on Germany itself, and Greece has certainly been provoked.
Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been "Unconditional Capitulation", and "Terrorization of Greeks", and even “Fourth Reich”.
Mr Schauble said there would be no more money for Athens under the EU-IMF rescue package until the Greeks "do what they agreed to do" and comply with every demand of `Troika' inspectors.
Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany's austerity dictates in the long run. From there the chain-reaction into EMU's soft-core would be fast and furious.
Let us be clear, the chief reason why Greece cannot meet its deficit targets is because the EU has imposed the most violent fiscal deflation ever inflicted on a modern developed economy - 16pc of GDP of net tightening in three years - without offsetting monetary stimulus, debt relief, or devaluation.
This has sent the economy into a self-feeding downward spiral, crushing tax revenues. The policy is obscurantist, a replay of the Gold Standard in 1931. It has self-evidently failed. As the Greek parliament said, the debt dynamic is "out of control".
We all know that Greece behaved badly for a decade. The time for tough love was long ago, when the mistakes were made and all sides were seduced by the allure of EMU.
Even if the Papandreou government met every Troika demand at this point, it would not make any material difference. Greek citizens already understand this, and they understand that EU loan packages are merely being recycled to northern banks.
Instead of recognizing the collective EU failure at every stage of this debacle, the creditor powers are taking out their fury on what is now a victim.
We have never been so close to EMU rupture. Friday's resignation of Jurgen Stark at the European Central Bank is literally a kataklysmos, a German vote of no confidence in EMU management. Dr Stark is not just an ECB board member. He is the keeper of the Bundesbank's monetary flame.
The vehemence of his protest against ECB bond purchases confirm what markets suspect: that the ECB cannot shore up Italian and Spanish debt markets for long without losing Germany.
"I look at what is happening in EMU and the words that spring to mind are total and utter disaster", said Andrew Roberts, credit chief at RBS. He thinks German Bund yields could break below 1pc in the flight to safety.
Citigroup and UBS both issued reports last week on the mechanics of EMU break-up, both concluding with touching faith that EU leaders cannot and will not allow it to happen.
"The euro should not exist," said Stephane Deo from UBS. It creates more costs than benefits for the weak. Its "dysfunctional nature" was disguised by a credit bubble. The error is now "painfully obvious".
Yet Mr Deo warns that EMU exit would not be as painless as departing the ERM in 1992. Monetary unions do not break up lightly. The denouement usually entails civil disorder, even war.
If a debtor such as Greece left, the new drachma would crash by 60pc. Its banks would collapse. Switching sovereign debt into drachma would be a default, shutting the country out of capital markets. Exit would cost 50pc of GDP in the first year.
If creditors such as Germany left, the new mark would jump 40pc to 50pc against the rump euro. Banks would face big haircuts on euro debt, and would need recapitalization. Trade would shrink by a fifth. Exit would cost 20pc to 25pc of GDP.
UBS concludes that the only course is a "fiscal confederation", a la Suisse.
Well, perhaps, but Germany's top court chilled such hopes when it ruled that the Bundestag's budgetary powers may not be alienated to "supra-national bodies". Nor do I believe that German society is willing to undertake such a burden for Greco-Latins in regions equal to six times East Germany.
Citigroup's Willem Buiter disputes the "federalism or bust" dichotomy, saying Anglo-Saxon commentators are trapped in the mental world of the Peace of Westaphalia in 1648, which established the sovereign state as pillar of international order.
"There is no recent, close analogue to the EU," he says. As a blend of national and supra-national, the EU resembles the Holy Roman Empire, which united central Europe from the 10th Century until Luther (technically until 1806).
Dr Buiter says the two "canonical models" for EMU break-up - that debtors walk out, or the German-led core walks out - are both are fraught with perils.
The weak would sell their souls for a mess of potage, discovering that devaluation can be an "uncontrollable process" with little lasting gain for exports.
If the German bloc left to create a "Thaler", the costs would be less. However, the rump euro would fall apart, with massive dislocations. "It would not be pretty," he says.
Ultimately, political investment in the EU project is by now too great to entertain such thoughts. The eurozone will muddle through along a third way, with spasms of debt restructuring kept within the euro-family. It will fall short of a transfer union or a debt pool, he said.
Each of these reports is a terrific read, but as an unreconstructed Westpahlian - and having covered a lot of NO votes to EU referendums - I don't accept that Europe has a teleological destiny towards closer union.
It has already pushed its ambitions beyond the tolerance of Europe's historic states and cannot be made democratically accountable.
The new fact of recent months is that German society has begun to discern a clash between its own democracy and the fiscal drift of EMU. The two are seen to be in conflict for the first time. Germans may be forced to choose. The outcome to that is far from clear.
Nor do I accept the headline figures of UBS. Every Treasury official and every voice of orthodoxy warned in 1931 that British exit from the Gold Standard would unleash the seven plagues. It proved a liberation. The UK, the Empire, and allied states broke free from a system that had become an engine of deflationary Hell. It cleared the way for monetary stimulus and recovery.
There is a close parallel between 1930s Gold and EMU, both in destructive effect and totemic sanctity. The Gold Standard was more than a currency system. It was the anchor of an international order and way of life.
My solution - like that of Hans-Olaf Henkel, the ex-head of Germany's industry federation (BDI) - is to split EMU into two blocs, with France leading a Latin Union that keeps the euro. This bloc would devalue but not by 60pc, yet uphold its euro debts intact. The risk of default and banking crises would decrease, not increase.
The German bloc could launch their Thaler, recapitalizing banks to cover losses from rump euro debt. Disruptions could be contained by capital controls at first. None of this is beyond the wit of man. My bet is that aggregate losses would be lower than the status quo, and the long term outcome much healthier. The EU might even carry on, unruffled.
The status quo, however, is not acceptable. EMU's debt-deflation strategy has trapped half of Europe in depression, with youth unemployment reaching 46pc in Spain and no way out for years.
Perhaps a global coalition of the G20, IMF, China, and the oil powers will combine to rescue Euroland, as some now hope. But how would that bridge the gap between EMU’s North and South? It solves nothing.
OP-ED COLUMNIST
An Impeccable Disaster
By PAUL KRUGMAN
Published: September 11, 2011
On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe’s equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed “impeccably, impeccably!” as a guardian of price stability.
Indeed it has. And that’s why the euro is now at risk of collapse.
Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.
And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.
I’ve complained a lot about the “fiscalization” of economic discourse here in America, the way in which a premature focus on budget deficits turned Washington’s attention away from the ongoing jobs disaster. But we’re not unique in that respect, and in fact the Europeans have been much, much worse.
Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.
Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. And while it was hit hard by the collapse of its housing boom, it’s still a relatively low-debt country, and it’s hard to make the case that the underlying fiscal condition of Spain’s government is worse than that of, say, Britain’s government.
So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.
Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.
Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.
Which brings us back to the impeccable E.C.B.
What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.
Adding to the problem is the E.C.B.’s obsession with maintaining its “impeccable” record on price stability: at a time when Europe desperately needs a strong recovery, and modest inflation would actually be helpful, the bank has instead been tightening money, trying to head off inflation risks that exist only in its imagination.
And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.
So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.
A version of this op-ed appeared in print on September 12, 2011, on page A27 of the New York edition with the headline: An Impeccable Disaster.
Indeed it has. And that’s why the euro is now at risk of collapse.
Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.
And all indications are that European leaders are unwilling even to acknowledge the nature of that threat, let alone deal with it effectively.
I’ve complained a lot about the “fiscalization” of economic discourse here in America, the way in which a premature focus on budget deficits turned Washington’s attention away from the ongoing jobs disaster. But we’re not unique in that respect, and in fact the Europeans have been much, much worse.
Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.
Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. And while it was hit hard by the collapse of its housing boom, it’s still a relatively low-debt country, and it’s hard to make the case that the underlying fiscal condition of Spain’s government is worse than that of, say, Britain’s government.
So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions.
Here’s how such a run works: Investors, for whatever reason, fear that a country will default on its debt. This makes them unwilling to buy the country’s bonds, or at least not unless offered a very high interest rate. And the fact that the country must roll its debt over at high interest rates worsens its fiscal prospects, making default more likely, so that the crisis of confidence becomes a self-fulfilling prophecy. And as it does, it becomes a banking crisis as well, since a country’s banks are normally heavily invested in government debt.
Now, a country with its own currency, like Britain, can short-circuit this process: if necessary, the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed), but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. As a result, the threat of a self-fulfilling crisis is very real — and interest rates on Spanish and Italian debt are more than twice the rate on British debt.
Which brings us back to the impeccable E.C.B.
What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. In fact, the E.C.B. started doing just that a few weeks ago, and produced a temporary respite for those nations. But the E.C.B. immediately found itself under severe pressure from the moralizers, who hate the idea of letting countries off the hook for their alleged fiscal sins. And the perception that the moralizers will block any further rescue actions has set off a renewed market panic.
Adding to the problem is the E.C.B.’s obsession with maintaining its “impeccable” record on price stability: at a time when Europe desperately needs a strong recovery, and modest inflation would actually be helpful, the bank has instead been tightening money, trying to head off inflation risks that exist only in its imagination.
And now it’s all coming to a head. We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer.
So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.
A version of this op-ed appeared in print on September 12, 2011, on page A27 of the New York edition with the headline: An Impeccable Disaster.
Massive Default Best Way To Fix Economy
So you don't understand why there is a financial problem rocking the western world and are confused with all of the debt ceiling issues and the hand wring over the national debt. How did we get here? Well here is a Market Watch Story by Brett Arends tells it like it is in a simple to understand format. Basically a call for Chapter 11 Bankruptcy to clear the books and the mal-investment. Perhaps we could consider a jubilee as well. A do over, where we could all start again free and clear....Just saying!
Sept. 12, 2011, 12:00 a.m. EDT
Massive default is best way to fix the economy
Commentary: Clearing away the debt is the only way forward
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) — You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?
There’s a way to do it. Fast. And relatively simple.
But you’re not going to like it. You’re not going to like it at all.
Default. A national Chapter 11 bankruptcy.
I told you that you wouldn’t like it.
The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.
I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.
But you know what? The time to stop that was five or 10 years ago, when the money was being lent.
It’s gone.
And mass Chapter 11 is, by far, the least obnoxious solution to our problems.
I told you that you wouldn’t like it.
That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.
I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.
But you know what? The time to stop that was five or 10 years ago, when the money was being lent.
It’s gone.
And mass Chapter 11 is, by far, the least obnoxious solution to our problems.
That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.
It’s the debt, stupid.
We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.
And a lot of that was in write-offs.
More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.
The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.
Think how corporations handle this kind of situation.
It happens all the time. Banks and bondholders find they have lent, say, $1 billion to a company whose assets and earning capacity will only repay, say, $300 million. What happens? Does the company soldier on with $1 billion in debt it can never repay? Do the stockholders send back their dividend checks? Do they sell their homes to pay off the bonds?
Not a chance. The company goes through Chapter 11. The creditors ‘fess up to their blunder, they face up to their losses, and they fix it. They write down the loans and take the equity instead. The balance sheet is cleaned up, and the company starts again.
Why not homeowners?
Most of the objections to this idea are well-meant, but misinformed.
A fund manager I asked raised the issue of “moral hazard.” Why should anyone pay their mortgage if some people were getting a pass, he asked?
The answer: For the same reason GE and Verizon kept paying the coupon on their bonds while Lehman Brothers defaulted. You want to keep your credit standing. And you want to keep your equity.
If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.
Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.
Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?
There’s no point telling people not to borrow money. They always will. I have yet to see a Wall Street executive turn down free money. I have yet to see a company in an IPO say, “Don’t give us so much money!” People like money. They will take as much as they are offered.
In a free economy, the people who are supposed to ration the loans are the lenders. Banks are supposed to lend carefully and responsibly. What else are they paid for? Accepting deposits? You could hire people on minimum wage to do that.
Some will say, “it’s immoral” for borrowers to default. Alas, most of these people are being inconsistent. They are usually the first ones to defend a company when it closes down a factory and ships the jobs to China, or pays the CEO $50 million for doing a bad job, on the grounds that “this ain’t morality, pal, this is business!”
But when Main Street wants to do the same thing, they start screaming “Morality! Morality!”
We don’t live in an economy based on morals and fairness.
T Mobile doesn’t charge me what’s “fair” each month. They charge me what’s on the contract. Your employer doesn’t pay you more if you need more. He pays you your economic value. Did Dick Grasso give back his bonus? Bob Nardelli? Dick Fuld? We operate in an economy based very firmly on contracts, and nothing else. Companies, and the wealthy, live by the letter of the law.
American mortgage contracts allow for default. Half of the states in this country are “non-recourse,” which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of “semi-recourse.” The bank can come after you for any shortfall, but only in a limited way. Broadly speaking they can’t touch retirement accounts and basic assets. You can typically keep your car, personal effects, often things like life insurance.
Most of the people who are deeply underwater don’t have that much anyway.
And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home.
If they didn’t know it, they should have. Their incompetence is not our problem.
It’s tempting to say, “if someone borrows money, they should repay it.” Generally speaking, I agree. I pay all my debts. But while that makes sense when applied to any individual, it doesn’t work so well when it’s applied to everyone.
We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.
And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.
Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.
You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.
What are the alternatives?
Government cutbacks, higher taxes, and a balanced budget? In a normal economy, fine. But in this situation, when the private sector is also slashing its spending, that could lead to absolute catastrophe. That’s what happened in the Great Depression. And our debt levels are worse than in the Great Depression.
Government borrowing? That’s the Keynesian solution. “The consumer can no longer borrow like a crazy person,” says the Keynesian, “so Uncle Sam has to do so instead.” It’s just transferring private madness to public madness.
Inflation? That’s probably the least bad alternative. But it’s just default by another name. And instead of taking money from the imprudent banks that caused the problem, it robs grandma’s savings.
Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge.
The first was the U.S. in the 1930s, the second was Japan in the 1990s.
The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms.
Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed.
The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.
I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
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