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Archive for June 2010

Has BP summoned the Fires of Hell?

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by Rick Ackerman
Posted originally June 14, 2010

WE’VE RAILED AT TRADERS AND SPECULATORS RECENTLY FOR THEIR ARROGANTand sometimes breathtaking stupidity in failing to discount an onslaught of world-shattering news. If the dolts, rubes, bozos and mountebanks who have kept stocks afloat even remotely understood what has been going on in this world, we wrote here recently, the Dow Industrials would plummet 6000 points in mere days. And the news has been grave, indeed.

America’s wholly imagined economic recovery died for good on Friday with the release of shocking retail figures for May. Household incomes have been falling, consumer credit imploding, M3 plummeting, and now it turns out that corporations have allowed $1.8 trillion to sit idle in low-yielding bank accounts, hastening the economy’s deflationary collapse and the onset of a Second Great Depression.

We face the impossible task of getting out from beneath $130 Trillion of debt and liabilities amassed by government at all levels. The nation is adrift under a weak president whose radical politics have sharply divided the voters. Iran and Turkey (a NATO member!) have declared war on Israel, sending warships to run the Gaza blockade. Europe’s financial house of cards is within months, or even weeks, of total collapse. The jihadists may be turning the tide against U.S. and British forces in Afghanistan.

Unfortunately the list does not end there. For in fact, there is one crisis that greatly overshadows all of them: the seabed irruption in the Gulf of Mexico. We won’t even pretend any longer that there is a market “angle” to this story. In fact, the markets are a side show, and politics a droll burlesque, in comparison to the geophysical dreadnought taking shape in the Gulf. Because it could eventually threaten all life on this planet, there may be no “investable issues” here.

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The Bernanke Defense – Fail!

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from The Daily Bell
Posted originally June 14, 2010

BERNANKE BUILDS UP A CUSHION AS WE DANCE ON PINS… WE ARE ALL OF US BALLOONS DANCING in a world of pins, noted Sir Anthony Montague Browne, one of Winston Churchill’s private secretaries. That seems to describe our economic condition. Share prices drop like stones in response to action by Greek civil servants, or an oil spill in the Gulf of Mexico, or an Israeli attempt to enforce its blockade against Hamas, or rumours that the Chinese regime is attempting to slow its economy. And then soar when Spain manages to borrow a few billion from unwary investors. Uncertainty is the order of the day. Which makes life difficult for economic forecasters, who are more comfortable basing their effusions on non-random, hard data that point in one direction. That happy circumstance is denied them. Just when the housing market seemed to be stabilising and the manufacturing sector to be recovering, along comes a report that only very few private-sector jobs were created last month. Retailers, seeing sales drop 1.2% in May, wonder just how much stuff they should order in anticipation of the Christmas season. And just when the financial sector is preparing to hire large numbers of laid-off workers, a 2,000-page financial regulation bill introduces an unnerving degree of uncertainty. Equally important, just when the American economy seems to be regaining its footing, news from Europe turns gloomy. Retrenchment is the order of the day; Germany refuses to stimulate domestic demand; the European Central Bank declines to loosen monetary policy to offset the new austerity programmes; and a shrivelled euro threatens the export market for American goods. – Times OnLine

Dominant Social Theme:
The problems with Western economies are grave but not insurmountable if central bankers do the right thing.

Free-Market Analysis:
It is so interesting to see the ways that people construct the various realities of modern day life – and their evolution. In our opinion, the London Times has gotten a lot more aggressive and honest in terms of covering the current economic crisis. This fits into our understanding of how elite messaging operates. As we tend to see it, the Anglo-American power elite uses the London Times as a mouthpiece (along with The Economist newspaper and some others) to present theses that it wishes to promote. These have lately tacked hard toward libertarianism and frank acknowledgement of the West’s financial mess.

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50 Statistics about the U.S. Economy that are almost too crazy to believe

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by Michael Snyder
BlackListedNews Contributing Writer
Published on June 03, 2010

MOST AMERICANS KNOW THAT THE U.S. ECONOMY IS IN BAD SHAPE, but what most Americans don’t know is how truly desperate the financial situation of the United States really is. The truth is that what we are experiencing is not simply a “downturn” or a “recession”. What we are witnessing is the beginning of the end for the greatest economic machine that the world has ever seen. Our greed and our debt are literally eating our economy alive. Total government, corporate and personal debt has now reached 360 percent of GDP, which is far higher than it ever reached during the Great Depression era. We have nearly totally dismantled our once colossal manufacturing base, we have shipped millions upon millions of middle class jobs overseas, we have lived far beyond our means for decades and we have created the biggest debt bubble in the history of the world. A great day of financial reckoning is fast approaching, and the vast majority of Americans are totally oblivious.

But the truth is that you cannot defy the financial laws of the universe forever. What goes up must come down. The borrower is the servant of the lender. Cutting corners always catches up with you in the end. Sometimes it takes cold, hard numbers for many of us to fully realize the situation that we are facing.

So, the following are 50 very revealing statistics about the U.S. economy that are almost too crazy to believe….

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.

#46) Total U.S. government debt is now up to 90 percent of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.

#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.

#42) In the area around Sacramento, California there is one closed business for every six that are still open.

#41) In February, there were 5.5 unemployed Americans for every job opening.

#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

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Athens hosts the Olympiad of Debt

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by Gary North
Originally posted June 7, 2010

In my previous report, “There Is No Money,” I surveyed Europe’s sovereign debt markets. I argued that the outgoing Chief Secretary to the Treasury of Great Britain, Liam Byrne, hit the nail on the head when he placed a note on his desk for the incoming Chief Secretary to read: “There is no money.” He did this as a joke, as he later explained to the media, but the joke was on the incoming government: there really is no money. But there are expenses – lots and lots of expenses. These expenses will increase. Tax revenues will not cover them.

WHAT IS TRUE FOR THE GOVERNMENT OF GREAT BRITAIN IS ALSO TRUE of all national governments in the West. The European governments are all running unprecedented deficits for peacetime, some greater than others as a percentage of national production.

Investors are content to continue to buy IOUs from these governments, despite the fact that no modern national government is expected to pay off its debts, and no mainstream economist would recommend any such policy. It is universally assumed that government debt is forever. It is also universally assumed that economic growth is also forever. The fact that national government debts around the world are racing ahead of economic growth is assumed by investors, voters, and economists to be a temporary phenomenon. It isn’t temporary. It is permanent.

Bond investors have the choice among national government bonds, state bonds, municipal bonds, and corporate bonds. They select national government bonds first of all. They seek predictable interest payments. It is widely assumed that no large national government will ever default on its debt. It is also widely assumed that no national government can ever pay off its debt or should pay off its debt.

Investors buy national government bonds because they expect to be able to get out of this purchase at any time. In other words, they expect liquidity. They believe that they individually will be able to sell the bond and gain a currency of predictable value at any time. They also know, of course, that if everybody tried to sell his government bonds at the same time, interest rates would skyrocket, the market value of the bonds would collapse, and nobody would get his money back. But they assume that this is no different from any other capital market. If anybody wants to be able to get out of a market, he assumes that he will be able to get out of it simply by calling his broker and telling the broker to sell the asset. He knows that not everybody can get out at the same time, but he also believes that not everybody will attempt to get out of the market at the same time. So, liquidity is a matter of selecting particular markets that are less likely to be subject to sell-offs at the same time.

The crisis that has overwhelmed the European capital markets since April 23, 2010, when the Greek government said it could not meet its obligations, has begun to raise questions in the minds of investors regarding the liquidity of certain European governments’ sovereign debt. It is not that they believe that they will not be able to sell at any time. It is that they believe that they will not be able to sell for the same amount of money that they have invested in the bonds today. In other words, they think liquidity will decrease. They think interest rates may increase, which is the same as saying that they think the market value of their bonds may fall.

There is now a quest to buy the sovereign debt of nations that will retain the liquidity of their bond markets, but will not be subject to interest rate spikes, and will not be subject to mass inflation by the nation’s central bank. The quest seems to arrive at the door of the United States Treasury. From around the world, investors are shifting resources in the direction of United States government bonds. They are doing this because they believe that this is the largest bond market in the world, and that there is the least likelihood of a collapse of liquidity. They believe that they will be able to sell their bonds at any time, and receive back dollars of constant purchasing power.

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Which Horizon?

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by James Howard Kunstler
Posted originally June 7, 2010

DID THE NATION HEAVE A SIGH OF RELIEF WHEN BP ANNOUNCED that their latest gambit to “cap” the Deepwater Horizon gusher will result in hosing up fifty percent of the leaking oil? If so, the nation may be sighing too soon since the other half of the oil will still collect in underwater plumes and hover all around the Gulf Coast like those baleful mother ships in the most recent generation of alien invasion movies. I shudder to imagine the tonnage of dead wildlife flotsam that will wash up with the tide for years to come. It will seem like a “necklace of death” for several states, though even that may not be enough to distract them from the more gratifying raptures of Nascar and NFL football.

For the moment we can only speculate on what the still-unresolved incident will mean for America’s oil supply. The zeal to prosecute BP for something like criminal negligence has bestirred a Department of Justice comatose during the rape-and-pillage of the US financial system. BP may be driven out of business, but then what? The net effect of the oil spill, one way or another, will be the gradual shut-down of oil drilling activity in the Gulf of Mexico. New government supervision will make operations very costly, if not non-viable, and the surviving companies will probably pack up for the west coast of Africa where supervision is almost non-existent. Anyway you cut it, the US will produce less oil and import more – and have to rely on the political stability of places like Angola and Nigeria, not to mention the simmering Middle East.

So far, also, the US has done nothing in the way of holding a serious national political discussion about the the most important part of the story: our pathological dependency on cars. I don’t know if this will ever happen, even right up to the moment when the lines form at the filling stations. For years, anyway, the few public figures such as Boone Pickens who give the appearance of concern about our oil problem, end up down the rabbit hole of denial when they get behind schemes to run the whole US car-and-truck fleet on something besides gasoline.

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The Central Banker’s Dilemma: How to ride a Dying Elephant

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by Darryl Robert Schoon
Originally posted Jun 3 2010   www.drschoon.com

ECONOMICS ISN’T ROCKET SCIENCE. IT’S COMMON SENSE AND ECONOMISTS DON’T HAVE ANY. Bankers have a problem and because they do, so do we. In modern economies, bankers have two roles. As central bankers, overseers of the financial system, they are charged with maintaining economic order. As investment bankers, i.e. opportunistic predators, they profit from whatever opportunity presents itself. In the US, the former have now succumbed to the latter.

The system is dying. That much is evident. What is not evident is why it happened. In the long run, it may not be important. In the short run, it may not be important either as we are only observers, not those whose policies determine what will be. How the problem arose is less important than that it is fatal.

The idea that central bankers are independent is no more realistic than believing our political leaders are independent. Politicians – except for the very few – are captive to their own ambitions and to the special interests that allow them to parade on the public stage feeding their vanity and our sense of control. It’s a stage, however, that is about to collapse on everyone.

The eurozone crisis is only one of the many crises yet to come. The cost of the last two centuries is becoming obvious. The heady rush of scientific inquiry has produced hubris as well as truth and we are unable to tell the difference. What we do know is that we have gone too far.

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No Escaping Deflation’s Fatal Drag on Economy

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by Rick Ackerman
Posted originally June 3, 2010

GOTTA LOVE THOSE INFLATIONISTS! WE ENJOY GETTING IN THEIR FACES now and then because their nutty ideas, particularly that inflation is worth worrying about at the moment, can only confuse and misdirect people who are struggling to sort out the facts for themselves. Imagine waiting…and waiting…and waiting for inflation to “break out,” as the inflationists have been doing all too patiently since 1991. That’s when the Fed put pedal to the metal to escape the drag of recession. At the time, virtually every monetarist in the land was predicting that a nasty inflationary spiral lay just ahead.

All we got in the end was the kind of inflation that no one noticed, let alone complained about: asset inflation. Greenspan sealed his reputation as a bubblehead forever by finally noticing the bubble, although, to his further discredit, he was only explaining at the time that no one with a trained eye who was watching for a bubble could be faulted for having failed to see one.

And now, finally, deflation is overpowering the myth of monetarism itself – the myth that the Fed can fine-tune economic cycles by creating “money” out of thin air. Turns out it’s not so easy. In reality, the banking system’s feather merchants succeeded only in building, one nearly indiscernible layer at a time, a debt juggernaut that can no longer be controlled, let alone reversed. Deflation has suffocated the monetarists and is about to do in the Keynesians for good measure. It is also continuing to tighten its grip on just about anything that can be bought or sold. We’ll say more about that in a moment, even after conceding up front that inflation eventually is going to be a huge concern, since an outright hyperinflation will be needed to wipe hundreds of trillions of dollars’ worth of unpayable debt from the world’s books.

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‘”The Euro Zone Has Failed”

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by Václav Klaus Czech Republic President
Originally posted June 1, 2010

AFTER THE FALL OF COMMUNISM IN 1989, THE CZECH REPUBLIC WANTED TO BE a normal European country again as soon as possible, after being excluded from participating in the post-World War II European integration process for 41 years. The only way to achieve this was to become a member country of the European Union. We had no other choice, but the communist experience was still too “fresh.” We wanted to be free and didn’t want to lose our freedom and our finally regained sovereignty. Many of us were therefore in favor of a looser form of European integration, against the so-called deepening of the EU and against the creation of political union in Europe. People like me understood very early that the idea of a European single currency is a dangerous project which will either bring big problems or lead to the undemocratic centralization of Europe. My position was clear: With all my reservations, we had to apply for EU membership, but at the same time we had to fight against projects such as the euro.

As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe—for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.

The term “collapse” has at least two meanings. The first is that the euro-zone project has not succeeded in delivering the positive effects that had been rightly or wrongly expected from it. It was mistakenly and irresponsibly presented as an indisputable economic benefit to all the countries willing to give up their own long-treasured currencies. Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).

This has not happened. After the establishment of the euro zone, the economic growth of its member states has slowed down compared to previous decades, increasing the gap between the rate of growth in the euro-zone countries and that in other major economies—such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the euro zone.

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The Depression of 2011? 23 Economic warning signs from financial authorities all over the globe

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from Economic Collapse
Posted originally May 27, 2010

COULD THE WORLD ECONOMY BE HEADED FOR A DEPRESSION IN 2011? As inconceivable as that may seem to a lot of people, the truth is that top economists and governmental authorities all over the globe say that the economic warning signs are there and that we need to start paying attention to them. The two primary ingredients for a depression are debt and fear, and the reality is that we have both of them in abundance in the financial world today. In response to the global financial meltdown of 2007 and 2008, governments around the world spent unprecedented amounts of money and got into a ton of debt.

All of that spending did help bail out the global banking system, but now that an increasing number of governments around the world are in need of bailouts themselves, what is going to happen? We have already seen the fear that is generated when one small little nation like Greece even hints at defaulting. When it becomes apparent that quite a few governments around the globe cannot handle their debt burdens, what kind of shockwave is that going to send through financial markets?

The truth is that we are facing the greatest sovereign debt crisis in modern history.  There is no way out of this financial mess that does not include a significant amount of economic pain.

When you add mountains of debt to paralyzing fear to strict austerity measures, what do you get? What you get is deflationary pressure and financial markets that seize up. Some of the top financial authorities in the world are warning us that unless something substantial is done, that is exactly what we are going to be seeing as 2010 turns into 2011.

Of course some governments around the world could try to put these economic problems off for a while by printing and borrowing even more money, but we all know by now that only makes the long-term problems even worse. For now, however, it seems as though most governments are opting for the austerity measures that the IMF seems determined to cram down the throats of everyone. So what will austerity measures mean for the global economy. Think “stimulus” in reverse.

Yes, things are going to get messy. It looks like there is going to be a great deal of economic fear and a great deal of economic pain in 2011 and the years beyond that. So are we headed for “the depression of 2011”? Well, let’s hear what some of the top financial experts in the world have to say….

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Spain is trapped in a ‘perverse spiral’ as wage cuts deepen the crisis

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by Ambrose Evans-Pritchard
Originally published: 30 May 2010

THE SPANISH INQUISITION USED TO BURN ENGLISHMEN in Sevilla’s Plaza de San Francisco when they had the chance. There must have been some nostalgia for this practice when the news hit that Fitch Ratings had stripped the country of its AAA status. The downgrade could not have come at a more dreadful moment. The EU’s €750bn “shield” for eurozone debtors has halted an incipient run on Club Med banks, but it has failed to restore full confidence for the obvious reason that such a guarantee cannot plausibly be extended from Greece to Portugal and then to Spain. The sums are too large, the number of solvent creditors too reduced, the intra-EMU politics too poisonous.

Pierre Lellouche, France’s Europe minister, compares the shield to NATO’s Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all. Leaving aside the question of whether Nato’s Article 4 was ever credible, this use of NATO language illustrates the confusion in EU circles over the causes of the Club Med bond crisis. This is not a war. It is a beauty contest. Eurozone states must attract capital from pension funds and Asian central banks to finance their deficits or default.

Whether intended or not, Mr Lellouche may have pulled the detonation plug on EMU by boasting that Europe’s politicians had created an EU debt union on the sly. “It is expressly forbidden in the treaties. De facto, we have changed the treaty,” he told the Financial Times. How will that go down at Germany’s constitutional court, already facing a growing in-tray of claims that these bail-outs breach the Maastricht Treaty?

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

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