The Nightmare after Christmas

by Detlev Schlichter
of The Cobden Center
Posted December 26, 2011

THE PATHETIC STATE OF THE GLOBAL FINANCIAL SYSTEM WAS AGAIN ON DISPLAY THIS WEEK. Stocks around the world go up when a major central bank pumps money into the financial system. They go down when the flow of money slows and when the intoxicating influence of the latest money injection wears off. Can anybody really take this seriously? On Tuesday, the prospect of another gigantic cash infusion from the ECB’s printing press into Europe’s banking sector, which is in large part terminally ill but institutionally protected from dying, was enough to trigger the established Pavlovian reflexes among portfolio managers and traders.

None of this has anything to do with capitalism properly understood. None of this has anything to do with efficient capital allocation, with channelling savings into productive capital, or with evaluating entrepreneurship and rewarding innovation. This is the make-believe, get-rich-quick (or, increasingly, pretend-you-are-still-rich) world of state-managed fiat-money-socialism. The free market is dead. We just pretend it is still alive.

There are, of course those who are still under the illusion that this can go on forever. Or even that what we need is some shock-and-awe Über-money injection that will finally put an end to all that unhelpful worrying about excessive debt levels and overstretched balance sheets. Let’s print ourselves a merry little recovery.

How did Mr. Bernanke, the United States’ money-printer-in-chief put it in 2002? “Under a paper-money system, a determined government can always generate higher spending…” (Italics mine.)

Well, I think governments and central banks will get even more determined in 2012. And it is going to end in a proper disaster.

Lender of all resorts

Last week in one of their articles on the euro-mess, the Wall Street Journal Europe repeated a widely shared myth about the ECB: “With Germany’s backing, the ECB has so far refused to become a lender of last resort, …” This is, of course, nonsense. Even the laziest of 2011 year-end reviews will show that the ECB is precisely that: A committed funder of states and banks. Like all other central banks, the ECB has one overriding objective: to create a constant flow of new fiat money and thus cheap credit to an overstretched banking sector and an out-of-control welfare state that can no longer be funded by the private sector. That is what the ECB’s role is. The ECB is lender of last resort, first resort, and soon every resort.

Let’s look at the facts. The ECB started 2011 with record low policy rates. In the spring it thought it appropriate to consider an exit strategy. The ECB conducted a number of moderate rate hikes that have by now all been reversed. By the beginning of 2012 the ECB’s policy rates are again where they were at the beginning of 2011, at record low levels.

So why was the springtime attempt at “rate normalization” aborted? Because of deflationary risks? Hardly. Inflation is at 3 percent and thus not only higher than at the start of the year but also above the ECB’s official target.

The reason was simply this: states and banks needed a lender of last resort. The private market had lost confidence in the ability (willingness?) of certain euro-zone governments to ever repay their massive and constantly growing debt load. Certain states were thus cut off from cheap funding. The resulting re-pricing of sovereign bonds hit the banks and made it more challenging for them to finance their excessive balance sheets with money from their usual sources, not least U.S. money market funds.

So, in true lender-of-last resort fashion, the ECB had to conduct a U-turn and put those printing presses into high gear to fund states and banks at more convenient rates. While in a free market, lending rates are the result of the bargaining between lenders and borrowers, in the state-managed fiat money system, politicians and bureaucrats define what constitutes “sustainable” and “appropriate” interest rates for states and banks. The central bank has to deliver.

The ECB has not only helped with lower rates. Its balance sheet has expanded over the year by at least €490 billion, and is thus 24% larger than at the start of the year. This does not even include this week’s cash binge. The ECB is funding ever more European banks and is accepting weaker collateral against its loans. Many of these banks would be bust by now were it not for the constant subsidy of cheap and unlimited ECB credit. If that does not define a lender of last resort, what does?

And as I pointed out recently, the ECB’s self-imposed limit of €20 billion in weekly government bond purchases (an exercise in market manipulation and subsidization of spendthrift governments but shamelessly masked as an operation to allow for smooth transmission of monetary policy) is hardly a severe restriction. It would allow the ECB to expand its balance sheet by another €1 trillion a year. (The ECB is presently keeping its bond purchases well below €20 billion per week.)

Deflation? What deflation?

It is noteworthy that there still seems to be a widespread belief that all this money-printing will not lead to higher inflation because of the offsetting deflationary forces emanating from private bank deleveraging and fiscal austerity.

Gold, Eurodollars, and the Black Swan that will devour the US Futures and Derivatives Markets

by Jesse at CaféAméricain
Posted December 3, 2011

THE EURODOLLARS ESTIMATE IN THE CHART BELOW IS BASED ON THE BIS BANKING ESTIMATES from Commercial Banks and may not include official reserves held by Central Banks. As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply. I like to think of Eurodollars and banking system derivatives as the Fed’s off-balance-sheet method of monetization and policy implementation, with plausible deniability.

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers. So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain. But the effect is there, and the smart money closer to the financial system sees it coming. I do not know if the Fed’s swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base. But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollars to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy. But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed’s Balance Sheet and the domestic US economy and the savings of many. The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling. And how this will manifest in the real world economy is not fully known. A good sized chunk of the financial system may simply vaporise.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector.

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy. As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision. Period. Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are. The Fed owns a printing press, and it uses it selectively.

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically. The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable ‘real interest rates.’ However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them. So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system. ‘Not on the horizon’ does come to mind.

Europe Doesn’t Get It

by Peter Tchir
of TF Market Advisors
Posted December 7, 2011 

I STILL THINK THE MOST LIKELY SCENARIO IS THAT SOME AGREEMENT TO AGREE IS MADE AT THE SUMMIT, which is then followed up by increased printing from the ECB, coupled with new Fed policies and fresh IMF money.  Although that still seems the most likely, I am getting concerned that Europe is once again missing the point.

Many EU leaders seem to actually believe that the Treaty changes are important.  The reality is the market could care less about treaty changes.  The market cares about only one thing, that the ECB will announce new, bigger, more aggressive sovereign purchases.  That’s all the market cares about.  The market believes that the treaty changes provide an excuse for the ECB and IMF to ramp up their efforts.  The EU can do all the treaty changes it wants, but if it is not followed up with aggressive new printing policies, the markets will sell-off.

Not only are politicians acting as though the treaty changes mean much, there is even talk about being able to implement changes without national votes. That idea horrifies me on a personal level as it is yet again trashing any sense of democracy, but it is bad for the markets.  I have been assuming that the meeting will result in another agreement to agree. That is relatively easy to pull together. Since it doesn’t really mean much, any countries that aren’t really on board, can be cajoled into holding hands for the photo op and pretending they agree long enough for the ECB and IMF to throw more money at the problem.

Agreement is far less likely if real permanent changes are being implemented. It is one thing to agree to the plan on the condition that you have to go back and get approval. It is much more risky for someone to agree to permanent changes implemented using some backdoor legal technique. Talk of actually implementing policy action this week is actually a negative as it makes it less likely that they can announce a “successful” summit.

On a side note, my favorite part of the proposal is the fines for going over the approved limits. So countries that have the biggest deficits will be fined, adding to those deficits? Debtor’s prison never worked very well, so why this would accomplish much is beyond me and would likely be waived any time it could be used. But no one on Wall Street has bothered to read the treaty proposals because no one cares, all anyone cares about is that the ECB uses it as an excuse to print.

Yesterday’s FT rumor of ESM and EFSF working together was yet another reason to be afraid that Europe doesn’t get it. Not only would implementing both at the same time place the AAA rated countries at greater risk of downgrade, it ignores the fact that EFSF has been a total failure. I thought Europe had moved beyond floating yet another iteration of something that hasn’t worked. The fact that they haven’t is a potential indication that the printing presses aren’t going to be turned on as soon as the market would like.

Finally, there is more and more talk about what the national central banks can do. People are acting as though they were cleaning the living room, and found some money when they lifted up the cushions on the couch.  This is not “found” money. Participants and lenders are well aware of these reserves.  They can be used for example to fund loans to the IMF to lend back to some countries, though I don’t fully understand why they can’t just lend to the countries directly, but I assume there is some law that lending to the IMF lets them circumvent. But there will be a cost to these actions. There will be a consequence, and although it will later be viewed as “unintended” the consequences are actually foreseeable. The countries with large reserves at the national central bank level have a reduced cost of funds because of those reserves. Lenders are not always totally stupid. There is value that is being realized from having those reserves. Using them to create loans for the IMF will impact that country’s ability to borrow. Plain and simple.

The fact that many pundits are treating this as newfound money that can be used any which way, without consequences is absurd and is yet another example of why so many ideas have failed. Any plan that raids the national central banks for money for the PIIGS needs to be thought through more carefully and the potential costs need to be addressed. The cost/benefit analysis may be worth the risk, but I suspect serious analysis would show that it is a bad idea. The cost/benefit should be about zero since it is just shifting money from one place to another. There really is no obvious reason to believe that this is a net positive. In the real world it is likely negative because as we have seen time and again, these changes break the existing model and that causes confusion which more than offsets any potential benefit (not triggering CDS is a shining example).

So while we limp along towards the most likely outcome, the risk of disappointment or even outright failure continues to grow. The inability to hold yesterday’s rumor rally is a signal that the market has moved well past the short squeeze phase and is now trading long.

All the world’s a stage

by Peter Tchir
of TF Market Advisors, 
Posted December 5, 2011

I CAN’T HELP BUT FEEL THAT WE ARE WATCHING A PERFORMANCE THIS WEEK. It feels like the actions, the meetings, and the statements are all very scripted. It seems reasonably clear which ending they are going for, but many of their actions also fit the “alternative” ending so it remains imperative to be cautious.

Roles for “bit” players have been cut

Last week, for the first time, the EU seemed to be able to muzzle the minor players and even limit the lines of the big players. The Finance minister summit was a failure. Nothing useful came out of it. EFSF was a total flop. The bank backstop plans are at a national level and revolve around the idea of getting banks to borrow even more in the short term and not extend their maturities.

In spite of the obvious failure, there were relatively few comments. Rather than getting headlines of disputes, or even headlines of bigger and better ways to leverage, they seemed to let it die a relatively calm death and move on. This was a chance for every finance minister to get their quotations in the news, but they seemed reasonably constrained. There were far fewer comments about the ECB or even from ECB members. To me, it seems that the big players (Merkozy and Draghi) have taken control of the play and are trying to get it to the ending they want.

The “Script”

Germany took great pains last week to distance themselves from ECB decisions. The speeches made it clear that the ECB should be “independent”.  This has been taken as a sign that Germany is relenting on letting the ECB print. By affirming the ECB’s independence, Germany can, in theory, explain that it wasn’t responsible for the printing. There is also a chance that this is a way to take the blame off of Germany if the ECB decides not to print.  That seems less likely, but not everyone, especially at the ECB, believes printing is a solution, so this could be a way for them to take the focus off of Germany’s “nein”.

According to the script, Merkel and Sarkozy will become the Merkozy again tonight so that they can ride into this week’s summit with a “renewed joint focus”, blah, blah, blah. There is no way that they don’t act as though they have some agreement (even if they don’t). We won’t know what is discussed, we won’t know how much time is spent working out plans for a summit failure, all we will get is another handholding moment meant to encourage the market. I suspect that more time “off screen” will be spent discussing preparations for a failed summit, but all we will see is smiling confident faces.

At this point, I will give the politicians some credit. For the first time in months they seem to be writing the script. They aren’t just taking whatever script Wall Street hands them, and trying to act that out. The Wall Street scripts haven’t worked and have been unbelievable. The  politicians are finally taking control and trying to develop their own plan, and selling Wall Street on how viable it is. Since they are politicians, they are actually trained at figuring out what can get done and selling it to the people.  It probably won’t work, but at least they are doing what they are good at, and it would be hard to do worse than listening to another round of self-serving Wall Street advice.  On a refreshing note, at least we have agreement on something, Wall Street and politicians now both think the other group doesn’t understand anything and has no sense of timing.

The “puppets” are pushing through austerity in Italy and Greece. They can be held up as shining examples to other countries of what needs to be done. They aren’t the heroes of the story, but are there so that the Merkozy can point them out and show that i) it can be done, and ii) when it is done, the EU and IMF will come through with additional funds.  The “it” they got done won’t be well defined (but this is a movie, not the real world anyways) but the reward those good countries receive will be highlighted.

So the meeting will have Merkozy telling the smaller and problematic countries what a great future lies ahead for the eurozone. They will talk about the sacrifices they are making to ensure the viability of the future. There will be no criticism of the plan as only “friends and family” reports will get the inside scoop, and the “trailer” will be played over and over as part of the advertising campaign. We, the audience, will suspect that all the best parts of the play are in the “trailer” but we won’t be able to dig deep enough to argue against it.

The puppets will tell the other countries how happy they are that they have finally adopted austerity with growth to move forward and that they are excited about this opportunity to be part of the renewed commitment to the eurozone. Anyone who tries to figure out how austerity and growth work together, or where the money is coming, or any other details, will be escorted from room, and will be Clockwork Oranged into reading “fringe blogging websites” until they accept that details are bad, and only vague notions and slogans can “solve” anything.

At the end of the day, any holdouts will get invited to special meetings with the Merkozy. This is where they will be asked what they want to get in order to support the agreement, and reminded, that it is only an agreement in principle so they might as well say yes now, and they can always reject it later. These dark little meetings where the bribes are given and the futility of the agreement are discussed will only be available on the director’s cut, but will make people cringe when they realize what went on.

So in the end, according to script, everyone will get a chance for a joint communiqué and photo up where they talk about their commitment to implement these progressive changes. Every person who truly thinks about it for more than a minute, will know that it is a sham. They will see what has gone on, but it won’t matter. The “critics” will fall all over themselves to proclaim the success of the summit and that we are witnessing the birth of a new and better Euro. For a few days at least, the airwaves will be filled with the excitement that the “great leadership” exhibited by the Merkozy, and the diligence of the puppets, has led to such a monumental agreement. The future will be so bright, some might even “wear shades” when they discuss what has been accomplished.  Tears wouldn’t even shock me.

Then before anyone can complain that the positive reviews were bought, or that the script is flimsy, we will see the next wave of activity. This will be like a giant publicity machine, trying to turn a horrible movie into an Oscar winner through the sheer strength of publicity and graft.

The ECB will cut rates by 50 bps. The ECB will announce further participation in the secondary markets and hint at the ability and willingness to print money. The IMF will announce some new programs. The EFSF will start participating in the primary market. Even the Fed might hint at future QE (if not actually doing anything).

Then the leaders can sit back and hope their magic works.  Hope that their story has been bought and that the markets can take off and that they won’t actually have to implement much.  Yes, I think this is the key here.  They know that the treaty agreement changes are unlikely to be implemented.  They know the ECB has limits, that the IMF is going to struggle to do what people seem to believe they can do, they just hope that this is enough to give the markets so much confidence that they don’t have to do anything.  A market that can swing 6% on a 50 bp rate cut, might be manipulated into going so high that confidence is regained, long enough to buy time.

The “alternative ending”

So far, the directors have rejected the alternative ending. They don’t think that America in particular is ready for a non Hollywood ending, but they are filming some scenes just in case.  Fortunately many of the scenes are exactly the same as in the preferred ending. In the alternative ending, Merkozy and the puppets can’t convince everyone to go along with the communiqué. They can’t convince them that it is really meaningless so there is no point to disagree. Somehow the summit ends without the decision to move forward.

It’s your choice, Europe: rebel against the banks or accept debt-serfdom

by Charles Hugh Smith
from Of Two Minds
Posted December 4, 2011

THE EUROPEAN DEBT BUBBLE HAS BURST, AND THE REPRICING OF RISK AND DEBT CANNOT BE PUT BACK INTO THE BOTTLE. It’s really this simple, Europe: either rebel against the banks or accept decades of debt-serfdom. All the millions of words published about the European debt crisis can be distilled down a handful of simple dynamics. Once we understand those, then the choice between resistance and debt-serfdom is revealed as the only choice: the rest of the “options” are illusory.

The euro enabled a short-lived but extremely attractive fantasy: the more productive northern EU economies could mint profits in two ways: A) sell their goods and services to their less productive southern neighbors in quantity because these neighbors were now able to borrow vast sums of money at low (i.e. near-“German”) rates of interest, and B) loan these consumer nations these vast sums of money with stupendous leverage, i.e. 1 euro in capital supports 26 euros of lending/debt.

The less productive nations also had a very attractive fantasy: that their present level of productivity (that is, the output of goods and services created by their economies) could be leveraged up via low-interest debt to support a much higher level of consumption and malinvestment in things like villas and luxury autos.

According to Europe’s Currency Road to Nowhere (WSJ.com):

Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not.

This explains at least part of the German export and manufacturing miracle of the last 12 years. In 1999, exports were 29% of German gross domestic product. By 2008, they were 47%—an increase vastly larger than in Italy, Spain and Greece, where the ratios increased modestly or even fell. Germany’s net export contribution to GDP (exports minus imports as a share of the economy) rose by nearly a factor of eight. Unlike almost every other high-income country, where manufacturing’s share of the economy fell significantly, in Germany it actually rose as the price of German goods grew more and more attractive compared to those of other countries. In a key sense, Germany’s currency has been to Southern Europe what China’s has been to the U.S.

Flush with profits from exports and loans, Germany and its mercantilist (exporting nations) also ramped up their own borrowing – why not, when growth was so strong?

But the whole set-up was a doomed financial fantasy. The euro seemed to be magic: it enabled importing nations to buy more and borrow more, while also enabling exporting nations to reap immense profits from rising exports and lending.

Put another way: risk and debt were both massively mispriced by the illusion that the endless growth of debt-based consumption could continue forever. The euro was in a sense a scam that served the interests of everyone involved: with risk considered near-zero, interest rates were near-zero, too, and more debt could be leveraged from a small base of productivity and capital.

But now reality has repriced risk and debt, and the clueless leadership of the EU is attempting to put the genie back in the bottle. Alas, the debt loads are too crushing, and the productivity too weak, to support the fantasy of zero risk and low rates of return.

The Credit Bubble Bulletin’s Doug Nolan summarized the reality succinctly: “The European debt Bubble has burst.” Nolan explains the basic mechanisms thusly: The Mythical “Great Moderation”:

For years, European debt was being mispriced in the (over-liquefied, over-leveraged and over-speculated global) marketplace. Countries such as Greece, Portugal, Ireland, Spain and Italy benefitted immeasurably from the market perception that European monetary integration ensured debt, economic and policymaking stability.

Similar to the U.S. mortgage/Wall Street finance Bubble, the marketplace was for years content to ignore Credit excesses and festering system fragilities, choosing instead to price debt obligations based on the expectation for zero defaults, abundant liquidity, readily available hedging instruments, and a policymaking regime that would ensure market stability.

Importantly, this backdrop created the perfect market environment for financial leveraging and rampant speculation in a global financial backdrop unsurpassed for its capacity for excess. The arbitrage of European bond yields was likely one of history’s most lucrative speculative endeavors. (link via U. Doran)

In simple terms, this is the stark reality: now that debt and risk have been repriced, Europe’s debts are completely, totally unpayable. There is no way to keep adding to the Matterhorn of debt at the old cheap rate of interest, and there is no way to roll over the trillions of euros in debt that are coming due at the old near-zero rates.

Fooled Again!

by John Rubino
Posted December 2, 2011

THE PATTERN IS BY NOW SO FAMILIAR THAT IT DESERVES A PLACE BESIDE other technical indicators like moving averages and Fibonacci retracements. It begins with part or all of the global economy appearing to implode under its five-decade accumulation of debt. The public sector/central bank nexus responds with a liquidity injection, leading the markets to rally explosively and the pundits to declare the problem fixed. Then the markets gradually remember that liquidity and solvency are two different things, and that the mortgage lenders/money center banks/PIIGS countries/hedge funds/State and local governments, etc., are insolvent, not illiquid. And the cycle begins again.

But what to call it? “Sucker rally” seems a little too benign and prosaic for a process that looks more like fraud perpetrated on a learning-disabled, desperately-credulous victim.

“Death throes of a decadent system” is accurate but too pretentious and doesn’t convey the cyclical (and cynical) nature of the process.

“Financial terrorism” is better, since the regularity of the cycle — and the fact that central banks have absolute control over the timing — imply that there’s massive insider trading going on, possibly as part of a scheme by the (name your favorite elite conspiracy group) to suck as much wealth out of the system as possible before finally letting it collapse. Still, the term doesn’t convey the comic aspect of rich, supposedly-astute players getting suckered over and over. Incompetent money managers are funny.

In the end, what it’s called is less important than the fact that it’s a great trading indicator. Starting in 2007, if you’d gone long risk when the markets were falling apart — on the assumption that panicked governments would quickly intervene — and then taken profits and gone short a few weeks after the intervention, you’d have made a fortune from all the volatility.

The current market looks like another perfect set-up: A week ago, Europe was collapsing, China was slowing down and the US budgeting process was paralyzed. Stocks around the world had fallen hard, and a Euro-zone breakup was being actively planned for by governments and trading exchanges. Armageddon, in other words. So the central banks inject another hit of liquidity and Germany and the ECB appear to embrace the commingling of the continent’s balance sheets. And voila, the bulls are back in charge.

Now, trading strategies work until they don’t, and there’s always the risk that this latest bailout will actually fix the world’s problems and usher in a new era of consumer-led growth with soaring corporate profits, low inflation, and rising share prices. But…nah, why even give this possibility serious consideration? Nothing that was promised this week will make much of a near-term difference. Lower reserve requirements in China and cheaper dollar-denominated loans in Europe are just tweaks to already existing programs. More fiscal integration in Europe is inevitable if the common currency is to function as promised. But think for a moment about what this implies — Germany and France getting to micromanage Italy’s pension and tax system — and it clearly isn’t happening this month. Getting from here to a German-run Europe will take maybe five more near-death experiences, and in any event won’t address the fact that even Germany’s balance sheet (when you include its unfunded liabilities) really isn’t AAA.

So, the pattern should hold: “Risk-on” trades work this week, then things get choppy for a while. Then the markets grow cautious and finally terrified. The most likely catalyst for the panic stage is the massive, front-loaded refinancing schedule that Italy and Spain have unwisely set up for early 2012. But it could be anything. The point is to be short risk when it hits but not to marry the position, because more liquidity is on the way. The con will keep working as long as the world continues to see fiat currencies as valuable.

Your New American Dream

by James Howard Kunstler 
Posted November 28, 2011

IT’S REALLY SOMETHING TO LIVE IN A COUNTRY THAT DOESN’T KNOW what it is doing in a world that doesn’t know where it is going in a time when anything can happen. I hope you can get comfortable with uncertainty. If there’s one vibe emanating from this shadowy zeitgeist it’s a sense of the total exhaustion of culture, in particular the way the world does business. Everything looks tired, played out, and most of all false. Governments can’t really pay for what they do. Banks have no real money. Many households surely have no money. The human construct of money itself has become a shape-shifting phantom. Will it vanish into the vortex of unpaid debt until nobody has any? Or will there be plenty of worthless money that people can spend into futility? Either way they will be broke.

The looming fear whose name political leaders dare not speak is global depression, but that is not what we’re in for. The term suggests a temporary sidetrack from the smooth operation of integrated advanced economies. We’re heading into something quite different, a permanent departure from the standard conception of economic progress, the one in which there is always sure to be more comfort and convenience for everybody, the economy of automatic goodies.

A big part of the automatic economy was the idea of a “job.” In its journey to the present moment, the idea became crusted with barnacles of illusion, especially that a “job” was a sort of commodity “produced” by large corporate enterprises or governments and rationally distributed like any other commodity; that it came with a goodie bag filled with guaranteed pensions, medical care to remediate bad living habits, vacations to places of programmed entertainment, a warm, well-lighted dwelling, and a big steel machine to travel around in. Now we witness with helpless despair as these illusions dissolve.

The situation at hand is not a “depression,” though it may resemble the experience of the 1930s in the early going. It’s the permanent re-set and reorganization of everyday life amidst a desperate scramble for resources. It will go on and on until there are far fewer people competing for things while the ones who endure construct new systems for daily living based on fewer resources used differently.

In North America I believe this re-set will involve the re-establishment of an economy centered on agriculture, with a lot of other activities supporting it, all done on a fine-grained local and regional scale. It must be impossible for many of us to imagine such an outcome – hence the futility of our current politics, with its hollow promises, its laughable battles over sexual behavior, its pitiful religious boasting, its empty statistical blather, all in the service of wishing the disintegrating past back into existence.

This desperation may be why our recently-acquired traditions seem especially automatic this holiday season. Of course the “consumers” line up outside the big box stores the day after the automatic Thanksgiving exercise in gluttony. That is what they’re supposed to do this time of year. That is what has been on the cable TV news shows in recent years: see the crowds cheerfully huddled in their sleeping bags outside the Wal Mart… see them trample each other in the moment the doors open!

The biggest news story of a weekend stuporous from leftover turkey and ceremonial football was a $6.6 billion increase in “Black Friday” chain-store sales. All the attention to the numbers was a form of primitive augury to reassure superstitious economists – more than the catatonic public – that the automatic cargo cult would be operating normally at this crucial testing time. The larger objective is to get through the ordeal of Christmas.

I don’t see how Europe gets through it financially. The jig is up there. Lovely as Europe has become since the debacles of the last century – all those adorable cities with their treasures of deliberately-created beauty – the system running it all is bankrupt. Europe is on financial death-watch and when the money stops flowing between its major organs, the banks, the whole region must either go dark or combust. Nobody really knows what will happen there, except they know that something will happen – and whatever it is portends disruption and loss for the worlds largest collective economy. The historical record is not reassuring.

If Europe’s banks go down, many of America’s will, too, maybe all of them, maybe our whole money system. I’m not sure that we will see a normal election cycle here in 2012. A few bank runs, bank failures… gasoline shortages here and there… the failure of some food deliveries to supermarkets in some region… these are the kinds of things that can bring down a political system drained of once-ironclad legitimacy. All that is left now is the husk of ritual – witness the failure of the senate-house “super-committee.” The wash-out was so broadly anticipated that it was greeted with mere yawns of recognition. It would be like pointing at the sky and saying, “air there.”

This holiday season spend a little time musing on what the re-set economy will be like in your part of the country. Think of what you do in it as a “role,” or a “vocation,” or a “trade,” or a “calling,” or a “way of life,” rather than a “job.” Imagine that life will surely go on, even civilized life, though it will be organized differently. Add to this the notion that you are part of a larger group, a society, and that societies evolve emergently according to the circumstances that their time and place presents. Let that imagining be your new American Dream.

German Pope, Italian Central Banker

by Gary North
Posted November 24, 2011 

CONCLUSION: EUROPE IS IN BAD SHAPE. This is hedge fund manager Kyle Bass’s assessment of the situation in Europe. He stated this in a rousing interview on the BBC’s TV network. Here is the segment:

He made two crucial points – points that stock market investors are ignoring. First, over the last nine years, there has been an increase of world debt from $80 trillion to $210 trillion. These numbers are staggering. Global debt over the last nine years has grown at 12% per year, while GDP has grown at 4% per year.

While he did not verbally spell out the conclusion for the interviewer, it is this: when credit must grow by 12% per year in order to produce 4% GDP growth, at some point there will not be enough GDP to supply sufficient credit. It is time once again to quote economist Herb Stein: “When something cannot go on forever, it has a tendency to stop.”

Bass had a great metaphor: the PIIGS have “sailed into a zone of insolvency.” Second, he explained, the sovereign debts in Europe will be written down. There is no other solution. The airhead interviewer with the Oxbridge accent seemed to be doing a college-skit imitation of Emma Thompson. She challenged him. What about Germany? Can’t Germany continue to fund Europe’s “southern neighbors”? Germany has “the earning power.” (Note: this means German taxpayers.)

Bass responded instantly. First, the German court has determined that any further bailouts are unconstitutional. Second, Greece – and, by implication, the other “southern neighbors” – will spend every euro it borrows from Germany and then come back for more, threatening a default if its demands are not met – exactly what it has done so far. This goes on until the write-down takes place, which it will.

There are two ways of looking at this: the Bass way and the Bass-ackwards way. The airhead chose the latter.

He draws conclusions from the numbers. No one in the mainstream media and mainstream investment fund world seems to be willing to do this. They talk and invest as if the process can go on forever. Debts need not be repaid. This is ancient Keynesian dogma that goes back to the New Deal. “We owe it to ourselves.” On the contrary, specific borrowers owe it to specific creditors. At some point, the specific borrowers are going to default, leaving specific creditors with huge losses. How huge?

THREE TRILLION EUROS!

Charles Hugh Smith agrees with Bass. He says that there will have to be a write-down. By “write-down” he means write-off. He estimates the losses at three trillion euros. Someone will have to take the hit. The great political debate in Europe today is over who will take this hit, and how soon.

It will be investors. But, to forestall the day of reckoning, Europe’s politicians pretend that taxpayers’ credit lines can be used by superficially solvent Northern European governments in order to borrow more money from creditors in order to lend to the PIIGS’s governments, so that the PIIGS’s governments can continue to (1) delay real austerity measures, i.e., massive layoffs of government workers and massive cuts in welfare payments, and (2) make payments on what they owe to investors, mainly banks.

Smith admits that three trillion euros is a guess. Nobody knows how much bad sovereign debt there is, so we must start somewhere. In a world of $210 trillion worth of debt, his estimate seems reasonable to me.

Let’s start with the most basic fact about all this uncollectible, impaired, bad debt: every euro of debt is somebody else’s asset. Wipe out the debt and you wipe out the asset. That’s why there’s no willingness to accept the writedown of debt: somebody somewhere has to suck up 3 trillion euros of loss.

This is the source of Europe’s present policy of “kick the can,” or more accurately, “kick the can with press releases and summits.” If there were a pain-free solution, it would have been implemented long ago. There is no way Europe is going to “grow its way out of this debt.” How much of the eurozone’s “growth” was the result of rampant malinvestment and risky borrowing? More than anyone dares admit. It won’t take austerity to crash the euroland economy, all it will take is turning off the debt spigot.

Europe is facing the problem that Bass raised when he spoke of 12% per year increases of credit and 4% increases per year of GDP. There is no way to grow your way out of this. This is not just Europe’s problem. It is the world’s problem. But Europe is facing it now because the debts are coming due now. They must be rolled over. Creditors must agree to re-lend. But why should they?

The Establishment world of crony capitalism speaks of “re-structuring” the debt. What does this mean? Smith does not pull any punches.

“Restructuring” is a code word for writeoffs. Here, let me “restructure” the euro bond you bought at a 4% coupon yield. Now you’re going to get 2%, and you’re going to like it. Bang, your bond just lost half its market value, but everyone gets to keep it on the books at full value. Nice, until you have to sell it to raise cash. Oops, the euro has slipped in value so you lost more than 50%.

The banks keep the assets on the books at face value. The underlying value is down by at least 50% for Greek bonds. The European experts admit this. (Why the debt is worth that high a percentage is beyond me.) The Greeks are going to default, one way or another.

Who will take the hit? Smith writes: “There’s a fundamental truth that everyone has to understand: what the government spends, the public will pay for sooner or later, whether in taxes or inflation or having their debt defaulted on.” This is reality. But it’s not precise enough.

WHO IS THE PUBLIC?

If there is hyperinflation – price inflation above 30% per year for a decade or more – the public that takes the hit will be almost everyone inside the eurocurrency zone. There will be almost universal hardship.

On the other hand, if monetary inflation ceases for more than a few months, there will be a depression. Big banks will fail. Their depositors will lose everything. The money supply will shrink. It will be 1930-38 all over again.

Central bankers do not allow such things. The European Central Bank will try to walk the tightrope, just as the national central banks in Europe did after World War II. The ECB will pursue boom-bust policies, refusing to capitulate either to a Great Depression or hyperinflation.

But how can it walk this tightrope? The losses will be huge for large banks. The politicians will try to transfer the cost of bailing out Europe’s banks to Germany. But the debts are too large.

As the world crumbles: The ECB spins, the Fed smirks, and US banks pillage

by Nomi Prins
Posted November 21, 2011

OFTEN, WHEN I TROLL AROUND WEBSITES OF ENTITIES LIKE THE ECB AND IMF, I UNCOVER LITTLE OF STARTLING NOTE. They design it that way. Plus, the pace at which the global financial system can leverage bets, eviscerate capital, and cry for bank bailouts financed through austerity measures far exceeds the reporting timeliness of these bodies.

That’s why, on the center of the ECB’s homepage, there’s a series of last week’s rates – and this relic – an interactive Inflation Game (I kid you not)  where in 22 different languages you can play the game of what happens when inflation goes up and down. If you’re feeling more adventurous, there’s also a game called Economia, where you can make up unemployment rates, growth rates and interest rates and see what happens.

What you can’t do is see what happens if you bet trillions of dollars against various countries to see how much you can break them, before the ECB, IMF, or Fed (yes, it’ll happen) swoops in to provide “emergency” loans in return for cuts to pension funds, social programs, and national ownership of public assets. You also can’t input real world scenarios, where monetary policy doesn’t mean a thing in the face of  tidal waves of derivatives’ flow. You can’t gauge say, what happens if Goldman Sachs bets $20 billion in leveraged credit default swaps against Greece, and offsets them (partially) with JPM Chase which bets $20 billion, and offsets that with Bank of America, and then MF Global (oops) and then…..you see where I’m going with this.

We’re doomed if even their board games don’t come close to mimicking the real situation in Europe, or in the US, yet they supply funds to banks torpedoing local populations with impunity. These central entities also don’t bother to examine (or notice) the intermingled effect of leveraged derivatives and debt transactions per country; which is why no amount of funding from the ECB, or any other body, will be able to stay ahead of the hot money racing in and out of various countries.  It’s not about inflation – it’s about the speed, leverage, and daring of capital flow, that has its own power to select winners and losers. It’s not the ‘inherent’ weakness of national economies that a few years ago were doing fine, that’s hurting the euro. It’s the external bets on their success, failure, or economic capitulation running the show. Similarly, the US economy was doing much better before banks starting leveraging the hell out of our subprime market through a series of toxic, fraudulent, assets.

Elsewhere in my trolling, I came across a gem of a working paper on the IMF website, written by Ashoka Mody and Damiano Sandri,  entitled ‘The Eurozone Crisis; How Banks and Sovereigns Came to be Joined at the Hip” (The paper does not ‘necessarily represent the views of the IMF or IMF policy’. )

The paper is full of mathematical formulas and statistical jargon, which may be why the media didn’t pick up on it, but hey, I got a couple of degrees in Mathematics and Statistics, so I went all out.  And it’s fascinating stuff.

Basically, it shows that between the advent of the euro in 1999, and 2007, spreads between the bonds of peripheral countries and core ones in Europe were pretty stable. In other words, the risk of any country defaulting on its debt was fairly equal, and small. But after the 2007 US subprime asset crisis, and more specifically, the advent of  Federal Reserve / Treasury Department construed bailout-economics, all hell broke loose – international capital went AWOL daring default scenarios, targeting them for future bailouts, and when money leaves a country faster than it entered, the country tends to falter economically. The cycle is set.

The US subprime crisis wasn’t so much about people defaulting on loans, but the mega-magnified effects of those defaults on a $14 trillion asset pyramid created by the banks. (Those assets were subsequently sold, and used as collateral for other borrowing and esoteric derivatives combinations, to create a global $140 trillion debt binge.) As I detail in It Takes Pillage, the biggest US banks manufactured more than 75% of those $14 trillion of assets. A significant portion was sold in Europe – to local banks, municipalities, and pension funds – as lovely AAA morsels against which more debt, or leverage, could be incurred. And even thought the assets died, the debts remained.

Three Card Monti

by Mike Krieger
Posted November 17, 2011

We are grateful to the Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But the world is now more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries. – David Rockefeller

The interests behind the Bush Administration, such as the CFR, The Trilateral  Commission – founded by Brzezinski for David Rockefeller – and the  Bilderberg Group, have prepared for and are now moving to implement open world dictatorship within the next five years. They are not fighting against terrorists. They are fighting against citizens. – Dr. Johannes B. Koeppl

Chancellor Angela Merkel said that Germany is ready to cede some sovereignty to strengthen the euro area and restore confidence in the common currency… “Germany sees the need in this context to show the markets and the world public that the euro will remain together, that the euro must be defended, but also that we are prepared to give up a little bit of national sovereignty,” Merkel said. Germany wants a strong EU and a euro “of 17 member states that is just as strong and inspires confidence on international markets.” – Bloomberg article, Nov 16, 2011

JUST LIKE THE CON (confidence) GAME THREE CARD MONTE, through which people have been swindled out of their hard earned money in alleyways and street corners all over the world for half a millennium, the previously sovereign nations of Greece and Italy have now officially been placed into the receivership of “technocratic governments” and are now in the final phase of their looting.  It truly is sad to watch these proud nations whose histories form the very core of Western civilization be taken down one by one but what is even more nauseating is watching the corporate media pundits, Wall Street analysts and financial experts cheer the news because it is ostensibly “good for markets.”

First of all, it doesn’t take a genius to see that the people that screw up the most get promoted and advanced in the Western world’s current political/economic structure. The primary reason for this is that there is a very serious agenda of TPTB and that consists on using a crisis to consolidate power in a one-world government, headed by a global central bank that issues a global fiat currency. People have been saying this on the fringe for decades and have been called conspiracy theorists the whole time but if you look at how things are progressing today you’d have to be asleep to not notice that the guys in charge are completely and totally determined to bring this sick, twisted dream into place. That is why the agenda moves forward despite the repeated, desperate cries of the citizenry for them to stop.

Let’s take a look at Mario Monti, the “soft” dictator that has been thrust upon the people of Italy by TPTB.  He is a member of the Bilderberg Group, he is the European Chairman of the Trilateral Commission (a think tank founded by David Rockefeller in 1973, see quote at the top) and is international advisor to none other than Goldman Sachs. This guy was put into place by design. Anyone in Italy who thinks they achieved a victory by ridding themselves of Berlusconi, think again. You just got the biggest insider, crony financial terrorist around put in charge of your country without having a say in it. Even for someone like me that expects these things, I am amazed by how badly Italy was just screwed.  Speaking of the unreported coup that just happened in Italy I will let my friend Jared Dillian of the Daily Dirtnap add his two cents.  From his piece today:

So I read recently that Italy wasn’t going to have elections because of “market crisis” or something like that, and I am the last guy who should be writing about this, since I know very little about political systems in any European country, for example, how can you just announce or not announce an election? Aren’t these things on a schedule? So already I don’t know what I am talking about. But I am worried about Greece and Italy that have chosen not to have elections to choose their leaders, I am actually quite concerned about that. You can’t use “market crisis” as an excuse to not hold elections. Even if elections take time and are messy and (most importantly) don’t produce the desired result, it is a part of gosh darn democracy, and if they are going to suspend elections for this, then they can suspend elections for anything. Like, say, pretend Mario Monti is a closet dictator and they just put a guy in there who is never going to hold another election again.

So this is a bad precedent.  

This is way worse than a bad precedent but well said, my friend. Oh, and another thing. If you are looking at the gold market and wondering why it is so weak stop wondering. In my opinion, all you have to look at is Mario “three card” Monti (credit to Gerald Celente for that name).  If I were anyone in Italy that cared I would be checking the gold in the vault every single day. I have zero doubt that Monti is letting the country’s treasure out the back door by the ton in the name of “global stability” and ECB bond purchases.  The backroom deals that are happening right now at the expense of the people of Italy have got to be completely off the charts. As I have said many times before, the reason Europe doesn’t announce a solution is because there is no solution. They also know that the minute they announce massive monetization gold and silver will go no offer and the gig will be up. This is also why the Fed hasn’t announced QE3 despite their desire to do so.

So the strategy is to announce nothing, sell sovereign gold behind the scenes and perform all sorts of market manipulations behind closed doors.  While the sheep in most nations will be completely unaware until way after the looting is over and then they are left with chaos and then a real dictator, the leaders of nations of China, Russia and others know exactly what is happening and will happily take Italy’s gold (and whatever Greece hasn’t already sold without telling anyone). I love how leaders keep coming out with stuff like “we need to stop freedom of speech and we need to manipulate markets and we need to take your sovereignty away to create confidence.”  The worst part is people actually fall for this crap!  On what planet does robbing someone, taking their freedom away and saying you and your children will be slaves forever inspire confidence?