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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘Creditors

Gold and silver: We were right – they were wrong

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by Brandon Smith of Alt Market
Posted July 25, 2011

ONLY NOW, AFTER THREE YEARS OF ROLLER COASTER MARKETS, EPIC DEBATES, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway.

Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse.

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. [And he a Nobel Prize winner!] Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt ceiling debate a final warning sign

If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”.

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.

Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma. Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+.

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions).

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.

This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

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Cracks beneath the Façade

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by ilene
from Stock World Weekly
Posted June 26, 2011

China 

ON THURSDAY, QU XING, DIRECTOR OF THE CHINA INSTITUTE OF INTERNATIONAL STUDIES, a Foreign Ministry think tank, told reporters that China doesn’t want to see debt restructuring in the Eurozone and is working with the IMF and countries involved with the debt crisis in an attempt to avoid it. Speaking at a press conference during a visit to Hungary, Premier Wen Jiabao said, “China is a long-term investor in Europe’s sovereign debt market. In recent years we have increased by a quite big margin holdings of Euro bonds. In the future, as we have done in the past, we will support Europe and the Euro.”. Sunday, on a tour of the Chinese-owned Longbridge MG Motor factory in Birmingham, Premier Wen told BBC it will lend to European countries, and also has plans to stimulate domestic demand and reduce its foreign trade surplus.

China’s stated position prompted Zero Hedge to ask, “Will the third time be the charm for the Chinese ‘white knight’ approach to Europe, where it has so far sunk about $50 billion in bad money after good?” Saturday, Zero Hedge reported that China’s European Bailout (And TBTF) Bid Hits Overdrive, As Wen Jiabao is Now in the Market for Hungarian Bonds. “It seems China has learned from the best, and either knows something others don’t (except for the SHIBOR market of course) or is actively preparing to become Too Biggest To Fail by making sure that if something bad happens to it, literally the entire world will follow it into the depths of hell.  Sunday, ZH wrote, “As expected, China is the new IMF… All this means is that China will do everything in its power to prevent the ECB from launching an outright unsterilized monetization episode, which will double the amount of importable inflation (plunging EUR) to hit the Chinese domestic economy, and destabilize the already shaky stability, so critical for the Chinese communist party.” (China Says It Will Bail Out Insolvent European Countries.)

It’s good to know that China has its problem with inflation now solidly under control.

 

Greece

Greece has a population of just over 11 million people. Compare that to the New York City metropolitan area population estimated at 18.9 million. It may seem strange that Greece’s travails might greatly affect the global economy, but the potential repercussions from a Greek default become more significant when considering leverage and derivatives. Data from the International Monetary Fund (IMF) show that German banks are heavily leveraged, holding 32 Euros of loans for every Euro of capital they have on hand. Other banks are leveraged to the hilt as well. Belgian banks are leveraged 30-1, and French banks are leveraged 26-1. Lehman’s leverage at the time of its collapse was 31-1. U.S. Banks are paragons of sanity by comparison, with an average leverage of only 13-1. (Europe’s sickly banks) France and Germany are the countries most exposed to Greek debt through bank and private lending and government debt exposure (chart below).

Derivatives present another potential minefield. As Louise Story wrote in the NY Times,
“It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.? No one seems to be sure, in large part because the world of derivatives is so murky. But the possibility that some company out there may have insured billions of dollars of European debt has added a new tension to the sovereign default debate… The looming uncertainties are whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default.” (Derivatives Cloud the Possible Fallout From a Greek Default)

Michael Hudson explored the differences between what happened to Iceland and its debt crisis, and what is currently happening in Greece:
“The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury)…

“The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect…

“One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world had learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. ‘Good accepted practice’ is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style, while wealth is siphoned up to the top of the economic pyramid.

“My friend David Kelley likes to cite Molly Ivins’ quip: ‘It’s hard to convince people that you are killing them for their own good.’ The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?

“One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up…” (Michael Hudson’s Whither Greece – Without a national referendum Iceland-style, EU dictates cannot be binding for more.)

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The Greek “Ultimatum”: Bailout (for the Bankers) and (loss of) Sovereignty

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by Tyler Durden
Posted May 29, 2011

SO, AFTER ONE YEAR OF BEATING AROUND THE BUSH, IT IS FINALLY MADE CLEAR THAT, as many were expecting all along, the ultimate goal of the Greek “bailouts” is nothing short of the state’s (partial for now) annexation by Europe. According to an FT breaking news article, “European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens. People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.”

Thus Greece is faced with the banker win-win choice, of not only abandoning sovereignty, a first in modern “democratic” history, in the pursuit of “Greek” policies that are beneficial for Europe, or not get a bailout, which would only serve to prevent senior bondholder impairments. How could Greek leaders and its population possibly not accept such an attractive option which either leaves the country as another Olli Rehn protectorate, or forces it to not bailout Europe’s overleveraged banker class. In essence Europe is now convinced, just like Hank Paulson was on September 14, 2008, that the downstream effects from letting Greece implode are manageable. But the key development is that the Greek bankruptcy, which from the beginning, and as Peter Tchir’s note below demonstrates, was always simply a Greek choice, was just made that much easier.

From the FT:

People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures. Officials hope that as much as half of the €60bn-€70bn ($86bn-$100bn) in new financing needed by Athens until the end of 2013 could be accounted for without new loans. Under a plan advocated by some, much of that would be covered by the sale of state assets and the change in repayment terms for private debtholders.

Eurozone countries and the International Monetary Fund would then need to lend an additional €30bn-€35bn on top of the €110bn already promised as part of the bail-out programme agreed last year. Officials warned, however, that almost every element of the new package faced significant opposition from at least one of the governments and institutions involved in the current negotiations and a deal could still unravel.

In the latest setback, the Greek government failed on Friday to win cross-party agreement on the new austerity measures, which European Union lenders have insisted is a prerequisite to another bail-out. In addition, the European Central Bank remains opposed to any restructuring of Greek debt that could be considered a “credit event” – a change in terms that could technically be ruled a default. One senior European official involved in the talks, however, said ECB objections could be overcome if the rescheduling was structured properly.

Despite the hurdles, pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months.

And the latest set of very timely observations from TF Market’s Peter Tchir:

You can lead a Trojan Horse to water but you can’t make him drink

Restructuring in one form or another seems imminent rather than years away
Well, it seems as though this week’s news flow has spurred the mainstream media into action. Everywhere you look there are stories about the Greek credit crisis. It is encouraging to see that more of them now agree with my view that a restructuring would occur sooner rather than later. Only a month ago, almost every article and every piece of official street research made it clear that a restructuring was at least a year off, if not longer. I demonstrated why I thought that opinion was wrong, and although I haven’t been proven correct yet, I am no longer in a tiny minority. Restructuring (reprofiling or default or whatever you want to call it) will not be easy, but I remain convinced that it is the best outcome for Greece and in the long run will be the best outcome for Europe even with the short term pain it will cause.

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Welcome to hyperinflation hell: Following currency devaluation, Belarus economy implodes, sets blueprint for developed world future

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by Tyler Durden
Posted Zero Hedge, May 25, 2011

A ‘91-STYLE MELTDOWN IS ALMOST INEVITABLE.” So says Alexei Moiseev, chief economist at VTB Capital, the investment-banking arm of Russia’s second-largest lender, discussing the imminent economic catastrophe that is sure to engulf Belarus following the surprise devaluation of the country’s currency by over 50%. “Unless Belarus heeds Russia’s call for mass privatization of state assets, it is headed for “hyperinflation, massive un- and under-employment, and a shutdown of production” Moiseev concludes.

Ah: “privatization” as Greece is about to learn, the lovely word that describes a fire sale of assets to one’s creditors, courtesy of a “globalized” new world order. Ironically, this is precisely the warning that will be lobbed at each country in the developed world, as the global race to devalue currencies, first against each other on a relative basis, and ultimately against hard currencies, or on an absolute basis, as the world realizes that there simply is not enough cash flow to cover the interest payments on a debt load, in both the public and private sectors, that continues to rise at an astronomic rate, even as the world prepares to exit from the latest transitory, centrally-planned bounce in the Great Financial Crisis-cum-Depression that started in earnest in 2007 and has been progressing ever since.

Ultimately, Belarus will succumb to hyperinflation, as will each and every other government seeking to devalue its currency (hint: all of them): “Unless Belarus heeds Russia’s call for mass privatization of state assets, it is headed for “hyperinflation, massive un- and under-employment, and a shutdown of production,” VTB’s Moiseev said. The ruble will slide to 10,000 per dollar, he added.” Of course, this is the primary side effect of attempting to avoid formal bankruptcy through currency devaluation. And all those who continue to believe deflation is an outcome that will be allowed by the Fed, need to look just to the former Soviet satellite to see what lies in store for everyone currently doing all in their power to devalue their currency.

First look at the Belarus Ruble chart below: this is what always happens to every country that resolutely continues to live outside its means. Always.

And here are some additional observations from Bloomberg on the country that everyone in the media continues to ignore, yet which will very soon be the model for virtually everyone else engaging in central planning warfare.

The Belarusian central bank let the managed ruble weaken by 36 percent versus the dollar on May 24 as demand for dollars and euros from importers and households threatened to derail an economy already laboring under a current-account deficit equal to 16 percent of gross domestic product. Russia and other former Soviet partners last week agreed to give Belarus a $3 billion loan and urged President Aleksandr Lukashenko’s government to sell $7.5 billion of assets to replenish the state’s coffers.

Finance ministers from former Soviet nations agreed in Minsk on May 19 to give Belarus up to $3.5 billion over three years, with the first $800 million payment expected in the week after a separate meeting on June 4, Russian Finance Minister Alexei Kudrin said in Moscow yesterday. The Nationalnyi Bank Respubliki Belarus set its official dollar-ruble rate at 4,931 for today’s trading, from 3,155 on May 23, according to its web site. Trading of foreign currency between companies, banks and individuals needs to stay within a 2 percent range of the daily rate, the regulator said May 23, when it announced the devaluation and reintroduced restrictions lifted on the interbank market on April 19 and for households on May 11.

Devaluing the currency will only worsen the situation for Belarus, VTB’s Moiseev said.

“The main problem is that the economy produces goods which consist of little else than a combination of imported spare parts,” he said. “So devaluation only makes things worse.” Belarus’s economy effectively collapsed in 1991 as the disintegration of the Soviet Union eliminated natural markets for the country’s exports of farm machinery, textiles and agricultural products. The catalyst for the country’s imploding economy: socialism and price controls. Sound familiar?

Lukashenko reintroduced controls on prices and the currency and re-nationalized some companies and infrastructure after coming to power in July, 1994, on a platform of “market socialism.” The nation’s economy returned to growth in 1996, according to World Bank data.

At the Minsk Refrigerator Plant Co. shop in the capital today, about 20 people queued in drizzling rain to use their rubles to buy fridges. While the shop didn’t open on the day of the devaluation, most of the models in the store already had ‘Sold Out’ stickers on their doors. “I came on Saturday and it was a nightmare, the store was stormed by people who wanted to spend their rubles because of rumors about the devaluation,” said Nikolay, a 74-year-old pensioner who declined to provide his last name. His entire savings of 6 million rubles now buy one fridge compared with three before the devaluation, he said.

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Germany looks to Justin Bieber to solve the crisis

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From Simon Black of Sovereign Man
Posted May 23, 2011

THE WORLD IS NOW DIVIDED INTO ESSENTIALLY THREE CATEGORIES:
 (1) those nations that can effectively sidestep catastrophic meltdown;
 (2) those nations that cannot avoid meltdown, but can afford to kick the can down the road
 (3) those nations that must face their grim, unavoidable meltdown reality now…

The United States, for better or worse, is in category 2. Politicians can keep pretending that the wheels on the bus go ’round and ’round because, at present, there are too many other countries in category 3… namely, much of Europe.

Greece is on the brink of official insolvency… yet in an exceedingly bizarre interview with German news magazine Der Spiegel published today, Jean-Claude Junker insists that (a) Greece is not broke, (b) if Greece doesn’t make its debt payments, this is not the same as ‘default,’ and (c) it’s OK for politicians to lie because people don’t understand capital markets.

(*Note, suspension of disbelief IS required to read this interview; Junker caps it off with a metaphoric riddle, “If the donkey were a cat it could climb a tree. But it is not a cat,” which has about as much insight as “Confucius say: Man who go to bed with itchy butt wake up with smelly finger….”)

As the Prime Minister of Luxembourg and president of the Euro Group, Junker is a very important figure in European finance… and in the interview, he makes it quite clear where his priorities lie: with the bankers. As Junker states, “If Greece were to declare a national bankruptcy tomorrow, the country would have no access to the international financial market for years to come, and its most important creditors, the banks in Germany and Europe, would have an enormous problem…”

Well, certainly no one should expect Europe’s banks to suffer their own losses after making idiotic loans to corrupt governments. It’s much easier to stick the people with the bill by establishing a trillion dollar bailout fund with taxpayer money.

Problem is, people in Europe are starting to wake up and get it.

The anti-euro “True Finn” party in Finland recently surged in the polls to become the country’s third-largest political party and a major obstacle for any European bailout. This weekend, Spain’s ruling Socialist party was hammered with losses as voters voiced their utter disgust with the current government’s handling of the economy. In Germany, this year’s state election results are showing that voters are sick and tired of shouldering the financial burden for the rest of Europe. Chancellor Angela Merkel’s ruling party is losing miserably, though in a pathetically desperate move, some local governments are changing suffrage limits and allowing 16-year olds to vote.

This is the strongest indicator yet of how bad the situation in Europe has become: German banks are so over-exposed to the PIIGS sovereign debt that, in the face of political revolt all across Europe, German politicians have resorted to recruiting the Justin Bieber crowd to maintain the status quo.

Simply put, if Greece fails, the banks will collapse, and European financial markets will tank. Politicians will stop at nothing to prevent this from happening… including sticking every man, woman, and child with the bailout bill, as well as pulling socialist-minded teenagers into the voting booths to ensure they stay in power.

Eventually, though, these efforts will prove fruitless. Greece has two months of cash left… and a default by any other name is still a default. The ‘have’ nations in Europe don’t want to foot the bailout bill any more than the ‘have not’ nations in Europe want to accept deep austerity measures. This is going to cause a lot of turmoil in Europe in the short-term… and as the US government has successfully kicked its can down the road through late summer thanks to the Treasury Department plundering public pension money, investors are free to get their worry on in Europe.

I would suspect gold and silver in euro terms to do quite well as the market looks around, once and for all and realizes that there are truly no good major currency alternatives. This could be the start of a chain reaction.

Austerity and Critical Mass

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from Ancient America
Posted May 17, 2011

Some say that QE3 won’t happen. The U.S. is done with stimulus and force-feeding liquidity and inflation down the world’s throat. Okay, it’s austerity then. How much austerity does anyone think we’re going to have here in America? What is the critical mass and when will we reach it? How much inflation can our creditors handle before they reach their critical mass and have to allow rates to rise? Paradoxically enough, the real question has become ‘can we afford austerity’? I believe the answer is ‘not anymore’. Due to relatively recent events, austerity has become a mathematical impossibility.

QUANTITATIVE EASING IS NOT TECHNICALLY “MONEY PRINTING”. However, it did accomplish scaring everyone out of dollars and into “riskier” assets. So, while we didn’t print much, emerging economies certainly did as people ran screaming from the U.S. dollar. The result of which has been rampant inflation all over the developing world and near parabolic gains in commodities and equities. We’re left now with a dangerously deflating economy here in America while our creditors are heavily overheated. Not many people have much confidence in what QE or stimulus have accomplished. Our banks have fresh new reserves they can’t and won’t lend while our employment picture remains increasingly grotesque.

With QE2 ending, negative real interest rates and emerging markets unable to afford more inflation, how does the future look for U.S. government bonds? When rates rise, what of the outlook for equities and for the economy as a whole? If the economy stalls and people want to hold onto their precious cash, business will suffer and who will fund our local, state and federal governments? If our government programs can’t function, and people start to worry about their grandmothers, their pensions and their grandmothers pension, what will happen? Austerity? Not over our Masters of Debt’s (MOD’S) dead bodies! But when will we reach critical mass?

Why will congress and the fed absolutely intervene? When you figure it out, it seems almost comical to have ever believed otherwise. Simply put, that’s their nature. Nowadays, it’s what they are designed to do. Given current events, they truly have no choice whatsoever. Did Volcker raise rates way back when? Yes. Are they sort of attempting austerity all over the world? Well, kinda. But that’s not what’s  happening here and now. It won’t happen…not for long. Tightening might come from the emerging markets, but not from us. Just as credit card addicts rarely cut themselves off, we’d sooner end this easy money regime as collectively give up cheap oil. In severe debt situations,  the creditors usually do the tightening, not the debtors. What environment will that conflict produce? When congress and the fed stimulate, ease and shuffle around assets and liabilities in a compounding vortex of fear and arrogance, how will our creditors react when they don’t have a choice anymore?

The first point of critical mass will be when the austerity is no longer tolerable for the government. The second is when emerging markets are forced to let their currencies appreciate. The critical question is whether this can occur in an orderly fashion or not? I think not. Our economy is so over-leveraged that austerity simply isn’t an option. There was a tipping point where the cost of providing tolerable austerity became too expensive for the world to afford. That is the main concept to understand. The bizarre fact is that we couldn’t financially achieve a hard money stance if we tried. Unfortunately, this is a somewhat recent development.

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My Big Fat Greek Shotgun Wedding

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by Peter Tchir
Posted May 11, 2011

Only yesterday, I tried to compare the latest round of Greek bailout discussions to an arranged marriage. It is difficult to watch the protests on TV and read about the impact of the strikes and not think that the wedding has moved to the shotgun stage. It seems clear that the citizens of Greece are sick and tired of dealing with the austerity being placed on them. I cannot imagine that they like the idea of selling assets to pay foreigners. Whether or not they fully understand the consequences of a default (or restructuring) it seems like they have made their choice.

So we have evolved from the image of a country going with hat in hand to its neighbors for a hand out, to a reluctant bride doing what they are told because it is expected of them, to someone who is being bullied and dragged to the altar to take part of something they not only don’t want, but now know is the wrong choice.

Greece has to do what is best for Greece

Recently, almost all the arguments against a near term Greek default (restructuring) are based on the fact that Germany, France, and the ECB would be hurt.  It is not Greece’s responsibility to worry about what impact a default would have on outside creditors.  The situation has gone beyond that.   Greece has to act responsibly throughout the restructuring process so that it can access capital markets again over time, but honestly, that is a low hurdle.  Wall Street and Investors have a very short memory, and if restructured Greek debt performs well, there will be plenty of money available for future new issues.  The bottom line is that the situation has deteriorated to the point it is clear to everyone that this is a solvency issue, and regardless of the pressure brought to bear by other countries, Greece must do what is right for Greece.

A Default is not the end of the world for Greece

The ‘doomers’ (and yes it is strange for me to refer to someone else as a doomer) would have you believe that a default would send Greece back to the dark ages.  Argentina defaulted in 2001.  It is doing better than ever.

Were there some disruptions in Argentina at the time? Yes, but they fixed their problems and now have an economy growing at a rate much of the world is envious of.  Default does not have to be a big negative on the people of that country.  As I’ve argued before, defaulting now allows Greece to move forward with real long term solutions.  It should be easier for people to accept reforms when they are part of a new sustainable Greece, rather than to meet the demands of foreign borrowers.

Since courts cannot really enforce injunctions against Greece, they can attempt to implement some policies that benefit internal debt holders, especially individuals.  Greece can also attempt to use programs similar to Brady bonds to help banks avoid having to take immediate write downs.  Given the focus on mark to market, I am not sure that would help as much as in the past (and personally I don’t think it should) but it is worth a try.

Greece doesn’t need to know what the future holds to restructure now

More people have jumped onto the bandwagon that Greece should keep taking IMF money and maybe even so new bailout money until they figure out what their long term capacity to pay debt is.  I just don’t understand that at all.  First off, this argument is coming for a lot of analysts who thought the problem was solved a year ago.  Will there ever be a time when everyone will ‘KNOW’ the right debt level?  Probably not, and even if they did, the borrower will want the maximum haircut while the lenders will want the minimum haircut.  So negotiate now and deal with the future as it comes up.

The future will always be unclear so waiting is unlikely to provide much help, and in the meantime, real progress is delayed as the country is faced with work disruptions and growing bitterness towards the foreign bankers.

Whatever you do, do NOT pledge collateral or sell assets

Greek debt issued under International Law will help prevent Greece from hurting itself.  I just do not see why Greece would agree to pledge collateral or sell assets to pay debt. I can understand (somewhat) why last year when the Greek government actually believed their problem was one of liquidity created by soon to be shirtless hedge funds, that they agreed to some collateral provisions with the IMF. But a year later, with the hedge funds wearing fancy new monogrammed shirts, the Greek government is aware that this isn’t merely a liquidity problem. There is a growing certainty that they cannot meet their future obligations, so any pledge of collateral is likely to be executed on. They should avoid this at all costs. The nature of a sovereign default puts them in the driver’s seat for any negotiation. Most investors will have trouble winning relief against the government in Greek courts, and then even more trouble enforcing those judgments. Providing specific collateral against further lending makes no sense at this time. Save it for the future.

If Germany, France, and the ECB are really so desperate to avoid a default, they will cave on this demand.