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Posts Tagged ‘central banking

German Pope, Italian Central Banker

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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?


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.


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.

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Everything I learned about succeeding in business, I learned outside of the institutional academic system

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by JS Kim
Originally posted January 26th, 2011

Here is a related article to the previous one (posted earlier today) by JS Kim. I apologize if I appear to be plugging SmartKnowledgeU, Mr Kim’s independent research, education and consulting company, but I happen to completely agree with all that he says about education and related issues. Bold italics are my own. This is a must-read!! –Aurick

In a recent US study called “Academically Adrift: Limited Learning on College Campuses”, researchers studied more than 2,300 students that attended 29 different US universities. Here is what they concluded:

(1) 45% of the students showed no gains in learning the first two years of college, and
(2) 36% gained little learning even after four years of college level courses

even though the average GPA (Grade Point Average) was 3.2 among the sample of students.

Richard Arum, the author of the study, discovered that “students [were] able to navigate through [college] quite well with little effort”. Furthermore, he discovered that many faculty were focused on their own research with a disdain for teaching many of the introductory freshmen and sophomore level courses that colleges required of them.

The gains in learning were ascertained by tests that measured critical thinking, complex reasoning and writing skills in a standardized manner.

Of course, other factors outside of the enormous failures of the US educational system are also responsible for the failures of students to gain any critical thinking or complex reasoning skills during their years spent inside institutional academics.

There is a plethora of mass entertainment designed to prevent young adults from noticing that bankers are ruining their lives and ignoring all the topics that affect their quality of life while keeping them fixated on events that will eventually have no consequence on their quality of life. The Jersey Shore, American Idol, the Bachelor, an 18-game NFL season that will extend the nation’s fixation on football for several more weeks…shall I continue?

Arum’s study found that students spend less time studying today and more time socializing as compared to their peers from a decade ago and blamed students for deliberately seeking easy courses full of fluff for their lack of learning in addition to professors and universities that valued research and money more than teaching. Of course, the question still persists of why do universities even waste students’ time by offering students courses full of fluff? And if students really go to college to socialize more than they study, do they really need to waste $30,000 of their parent’s money every year for the privilege of playing Xbox in their dorm rooms with their friends?

Though the value derived from institutional academia seems to be little, this hasn’t prevented the owners of these institutions from raising tuition prices by 29% over the last four years from $84,940 to $109,172 for a four-year private university degree (Source: the National Inflation Association). In fact, if people were to view institutional academia as the money-making business it really is, one would likely conclude that in terms of value for money spent, this business would rank as one of the greatest all time-scams next to the fractional reserve banking system.

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Gold & Silver: This Time it IS Different

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by J. S. Kim
Posted originally October 6th, 2010

WITH GOLD AND SILVER BULLS, SINCE THE BEGINNING OF THIS NEW PRECIOUS METALS BULL IN 2001, the four dreaded words that every gold/silver bull has been reluctant to say because it has served as the kiss of death every time gold/silver has been on the verge of a seemingly enormous breakout, is “This time is different”.

Yet this time IS different and here’s why. At the rate of currency devaluation being inflicted upon the world’s major currencies today by Central Bankers there are, and there will be, no real gains in any of the world’s leading stock markets. As every gold bull reader is aware of, if you price the world’s leading stock markets in gold, all Western government/banker engineered rises in stock markets are exposed for what they are – illusory gains, not real gains. Real gains for the last two months in most Western stock markets when priced in gold are firmly negative.

The rigged rises in Western stock markets have been nothing more than shenanigans designed to fool the people into buying the economic recovery fable that bankers/politicians so desperately are attempting to sell, especially in the US, where November mid-term elections loom. For example, price the S&P 500 index in gold since early August, and one will discover that the S&P 500 has dropped more than 9.3%. Price the S&P 500 in silver and the losses are even more marked, at nearly 20%.

While is true that gold/silver are heavily overbought now and PM stocks are either in heavily overbought territory or rapidly approaching heavily overbought territory, during strong runs in past gold/silver bulls, the underlying metal prices and stock prices can remain in overbought territory for months on end. This alone is not a reason for a correction as Central Bankers have been fighting the fundamental weaknesses in their fraudulent global monetary system daily for quite some time now.

When bankers legalize fraud through the legislation they sponsor/endorse, technical analysis is insufficient to ascertain the short-term direction of not only stock markets but also gold/silver markets. One must understand the history of Central Banker engineered attacks and price suppression schemes against gold and silver to estimate the probabilities of short-term corrections in addition to the use of technical analysis.

Today, Central Bankers are increasingly having a more and more difficult time suppressing the price of gold and silver. This is a marked departure from years past, even as recently as 2008, when they engineered a gold/silver crash to coincide with their engineered stock market crash. Though they still have the power to engineer short-term corrections in gold/silver markets, their power to do so has been fading this past year. They must resort to more and more trickery to engineer these collapses.

If they decide to engineer a strong rapid decline in major US indexes in the near future, you can be sure that they will use this event to also use all of their abilities to engineer a simultaneous sell-off in gold and silver. Still, any correction we receive in gold/silver markets before the end of the year will be likely to be very short-lived as various global players will step in, stop the decline with buying, and continue the rising trend in gold/silver prices.

In any event, the fading influence of the Bank of England and the US Federal Reserve over gold/silver markets has happened for a number of reasons.Western Central Banks, specifically the US Federal Reserve, very likely possess much less gold than their “official numbers” indicate. Though the US Federal Reserve only owns paper certificates, these gold certificates give them ownership of the gold reserves at Fort Knox.

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U.S. Unemployment Out of Control?

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from The Daily Bell
Posted originally Thursday, August 12, 2010

THE HORROR SHOW… THE EMPLOYMENT SITUATION IN THE UNITED STATES is much worse than even the dismal numbers from last week’s jobless report would indicate. The nation is facing a full-blown employment crisis and policy makers are not responding with anything like the sense of urgency that is needed. The employment data for July, released by the government on Friday, showed that private employers added just 71,000 jobs during the month and that the unemployment rate remained flat at 9.5 percent. But as bad as those numbers were, if you look beyond them you’ll see a horror show. – New York Times/Bob Herbert

Dominant Social Theme:
A situation that needs to be addressed.

Free-Market Analysis:
We’ve written about the difficulty of reigniting employment in the midst of a crack-up boom, and now even the New York Times is starting to come around to that point of view. For those conspiracy-minded folk that like to chant “out of chaos, order,” we want to point out as we have before that the power elite enjoys controlled chaos, not out-and-out chaos, which is unpredictable and can turn violent. Unemployment on a vast scale is a real problem for the powers-that-be. Hence, Bob Herbert’s alarm.

The power elite has controlled society, certainly in the past 100 years, through the production and promotion of dominant social themes that have controlled people’s expectations and behaviors even though the subjects themselves thought they were reaching their conclusions voluntarily. If the elite sought chaos, it wouldn’t bother with dominant social themes. It would simply rule through intimidation and fear.

Of course, in the long run, the few cannot rule the many simply via brute force. This is the reason, ultimately for the development of hierarchical societies, religious structures, etc. It is the reason that the elite is obsessed with its fear-based promotions and counts on them to retain power. But too much unemployment generally makes people doubt the system. Herbert understands this. He writes:

At some point we’re going to have to claw our way out of this denial. With 14.6 million people officially jobless, and 5.9 million who have stopped looking but say they want a job, and 8.5 million who are working part time but would like to work full time, you end up with nearly 30 million Americans who cannot find the work they want and desperately need. We’re not heading toward the danger zone. We’re there. The U.S. will not remain a stable society if this great employment crisis is not addressed head-on — and soon. You cannot allow joblessness on this scale to fester. It’s wrong, and the blowback will be as destructive and intolerable as it is inevitable.

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75 years of funny money

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by Martin Masse, Financial Post
Originally published March 10, 2010

A GOOD START TO UNDERSTANDING THE REAL NATURE of central banking is the libertarian bumper sticker saying “Don’t steal! The government hates competition.” The whole purpose of the bureaucratic machine called the central bank is indeed to steal from us.

How does it do this? By constantly printing money (or, nowadays, creating it out of electronic bits on computers) and increasing the money supply, thereby creating inflation.

When you get to the Bank of Canada’s Web site, it says “We are Canada’s central bank. We work to preserve the value of money by keeping inflation low and stable.” Do a little search on the same Web site, however, and you discover that since the Bank started its operations in 1935, the dollar has lost about 94% of its value. A basket of goods and services that cost $100 in 1935 would cost $1600 today. That’s some preservation!

Counterfeiting is understandably illegal and punishable by law. But central bankers do it all the time, the only difference being that they have a legal stick – their dollars are the only permitted legal tender – and they deploy a huge propaganda machine to force us to accept their funny money.

There are big stakes involved. Inflation is a way for governments to spend more without having to directly impose taxes. A central bank is an essential part of big government. Central banking operations also serve as a permanent bailout for debtors. Interest rates are usually kept lower than they would be in a free financial market. And by reducing the value of the money being owed, they make life easier for debtors. So the modern era of central banking is one where debt, public and private, inexorably grows, to the point where the whole monetary edifice now threatens to collapse.

Finally, central banks protect the reckless practices of financial institutions, who lend money that they don’t have under the fraudulent fractional reserve system. With government acting as a lender of last resort, financial institutions are prone to taking greater and greater risks. As we’ve seen recently, wads of cheap cash are always at their disposal to keep them solvent and profitable.

It’s interesting to read (in A History of the Canadian Dollar, a little book produced by the Bank) that the reason Canada went off the gold standard in 1914 was to rescue insolvent commercial banks. “On 3 August 1914, an emergency meeting was held in Ottawa between the government and the Canadian Bankers Association to discuss the crisis. Later that day, an Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender.” Take my money, or else.

That 1914 move off the gold standard became one of the major steps towards creation of the Bank of Canada in 1935 and the full nationalization of money in Canada. All the gobbledegook that passes for monetary economics nowadays aims to obscure the basic economic fact that central banks make us poorer. The Bank of Canada’s archives contain endless studies about ways to calculate money supply, fancy rules on how to manipulate interest rates, etc. This scholarship is supposed to help central bank bureaucrats better “preserve the value of money” when, in fact, the very existence of the Bank is the reason why money gets devalued.

For decades now, anyone raising issues about this has been tagged as a crank. Debates about monetary policy are monopolized by a handful of economists speaking in unintelligible jargon, almost all of them working at central or commercial banks or related one way or another to the network of central bank beneficiaries, as research in the U.S. has shown.

What is most amazing is that even most economists who claim to support free markets ­– apart from a small group who adhere to the Austrian School –approve of central banking, especially in times of crisis. But even if it were true that “flooding markets with liquidities” could kick-start the economy, this logically implies a fundamental violation of property rights and should be unacceptable to them.

Previous eras understood this much better than today, as the heated debates surrounding the creation and abolition of the two first banks of the United States attest. In a sane world, central banking would today be considered an act of expropriation and would be abolished. Let’s hope that an explanation to its logical conclusions will one day become part of the economics curriculum.

Martin Masse is publisher of the libertarian webzine Le Québécois Libre and a former advisor to Industry Minister Maxime Bernier.
Read more: http://www.financialpost.com/news-sectors/economy/story.html?id=2668127#ixzz0iR14gT3Z