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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘France

U.S. Corp and the impending IMF merger

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by Robert Denner
of Daily Economic Update
Posted December 1, 2011

BEEN LOTS OF TALK AROUND LATELY REGARDING THE COLLAPSE OF THE U.S. DOLLAR AND WHAT THAT WOULD MEAN FOR THE UNITED STATES OF AMERICA AND THE WORLD. There has also been a lot of talk about the Federal Reserve Bank of the United States of America and how unhappy the people of the US are getting with this largely unknown organization.

These two forces are converging together in what could be a very serious and detrimental way as it relates to the average US citizen. This article will rely heavily on flawed analogies to help the lay person understand the inner workings of both the IMF and the Federal Reserve Bank. This is not to be taken as an academic piece and I would ask that it not be judged as such. This is meant to help those people that have recently woken up to the reality that their country has been hi-jacked and those that are desperate to get up to speed as quickly as possible. So let’s jump right into the thick of it shall we? First we need to start with what I hope are simple lessons so that you can take what I am about to teach you and apply it to the real world.

There is one thing that bankers and computer people love to do and that is to use big scary acronyms to scare off the simple folk. So here is your first lesson.

IMF and the SDR

So right off the bat we are using acronyms that mean absolutely NOTHING to the lay person and yet that is an actual sentence believe it or not… IMF stands for the International Monetary Fund. The SDR is short for Special Drawing Rights and is the currency of the IMF. The International Monetary Fund is a private bank that is used to help sovereign nations engage in international commerce. Just like if you owned a company and you used bank A, and your supplier used Bank B, the IMF would be the bank that both banks A and B used to transfer payments and credits back and forth to each other. To Company A and B (using Bank A and B) it would be seamless.

But the IMF does a whole lot more for the global economy. They are the creditor of last resort for a lot of countries. For if you want to engage in international commerce in the free world (meaning the world now) you must be a part of the IMF system. Should a country that is part of this system become over leveraged because of mismanagement and debt accumulation, the IMF stands ready to come to the rescue. To understand how this relationship has worked in the past (and the present); I MUST go into some history. I will keep it brief I promise.

To understand how the global monetary/commercial world works you have to go back to the end of World War II. Following the war the United States was alone as a major industrial power. The rest of the industrial countries were in shambles. The United States was also nearly alone as a producer of oil. It is this later point that needs to be highlighted.

The United States used its vast oil reserves and coupled it with a highly trained industrial labor force and put it to work in its vast expanse of industrial capacity to re-build the rest of the world. It is this fact that is at the very center of our current monetary system some 60 years later. So I will start with my first analogy…

The US Corp could be seen as a huge company like General Motors. Following WWII US Corp was the only company left with the capacity to make things and it had the working capital and energy to do what it wanted. US Corp went out into the world and started to acquire other businesses. First was Japan Corp which US Corp had beaten into a pulp during the war. US Corp decided that it was in its own best interest to build Japan Corp back up but it needed to make sure that it never again could threaten US Corp the way it did in WWII.  Japan Corp used its own currency called the YEN and US Corp obviously used the Dollar. So to make this all work, US Corp had to make sure that the workers at Japan Corp didn’t feel like the last of their country was being taken from them. To keep them vested in the viability of their own country it was very important to let them keep their own currency and their own political structure, albeit greatly modified under the surface. We allowed Japan Corp to keep their figurehead CEO (the Emperor) and we installed a new board of directors (Democratic institutions). We linked the Bank of Japan to US Corp’s bank the Federal Reserve Bank through a new institution called the International Monetary Fund and the World Bank.

If we were to compare this to General Motors this would be like GM buying another company and bringing it under the umbrella of the GM brand. So in this case Japan is like Pontiac and they are given free rein to run their subsidiary the way they see fit, SO LONG as they abide by the parent companies rules.

This setup worked wonderfully and within a decade Japan Corp was back on its feet and was supplying cheap labor and products for US Corp and with every single barrel of oil Japan Corp bought on the international market it further linked them with our monetary system.  To keep the Japanese citizens from feeling that it was the US Corp in charge of everything we came up with the International Monetary Fund and the World Bank. Of course these institutions were funded initially by the United States and Great Britain and as such they were just pseudo US institutions. But it worked and the Japanese subsidiary of US Corp gladly bought oil and products from the United States in its own currency (the Yen) but it was linked via the IMF to the US Dollar. For you see US Corp linked everything that the industrial world needed to the US Dollar. All gold/oil/silver/food/etc were priced first in US Dollars and depending upon the relative “strength” of your currency to the US Dollar, this would dictate how much of your currency it would take to purchase a barrel of oil or an ounce of gold. This gave US Corp a huge advantage in the world as we produced almost everything anyways. We had most of the world’s oil supply and a very large portion of the food supply. We were the largest producer of the big complex things the world needed to rebuild. We allowed the smaller subsidiaries to produce the little stuff we needed or wanted. Japan Corp was great at the later, supplying us with small radios and other cool electronic gadgets.

US Corp built a company with dozens and dozens of subsidiaries, each one of them bringing something to the table either large or small. And as the world re-built, other countries wanted to get in on the good times and they voluntarily sold themselves to US Corp. Other countries were very reluctant to join our big happy company. Those countries fell into two groups. Either they were affiliated with Russia Corp or they wanted to stay neutral. But in a world that was moving fast towards globalization it became apparent that each country would have to choose a side lest they be shut out of the global market. For remember that the only way to gain access to US Corp’s vast array of markets and supplies is to be a part of the IMF/World Bank. It was the only way to convert your currency to other currencies (like the US Dollar to buy OIL!!).

I will end this history lesson there as I could get sucked in for hours explaining how US Corp and Russia Corp went to economic(and sometimes real) war with each other and how Russia Corp tried to have it both ways by linking themselves partially to the IMF to gain access to US Corps vast supplies and labor.

I will leave that to YOU to go out and study on your own as it is a story to rival any fictional book you have ever read. The important thing to take away here is that the International Monetary Fund and the World Bank are institutions that were created by the United States and Great Britain. It is a global system that allows countries using different currencies to exchange their goods and services with each other almost seamlessly. Remember also that the system was setup INITIALLY to allow US Corp to control the world’s most important supplies. Things like FOOD, OIL, COMMODITIES (gold,silver,etc) and the rest. At the time this system was created it was the United States that was supplying the lion’s share of these items. But as the decades have come and gone, these items have increasingly come from other parts of the world.  And a good portion of these countries are ones that were FORCED into our system either out of necessity or by direct manipulation of their country by forces outside their borders(meaning the US and the IMF).

CONFESSIONS OF AN ECONOMIC HITMAN

This next part of our story is centered on how the US has maintained its spot at the top of the economic order even in the face of massive budget deficits and seemingly unending debt loads. The title of this section is called Confessions of an Economic Hit Man, as I give a nod to a book of the same name written by a man named John Perkins. Mr. Perkins is a trained economists and his specialty was international finance. His job was to go out into the world and sell foreign leaders on US Corp and to convince them to get on board with our system. Or more importantly, it was his job to make sure that they were forever caught up in our system and that they did not attempt to leave our company.

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Our fragile “hothouse” economy

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by Charles Hugh Smith
from Of Two Minds
Posted November 03, 2011

Financialization has led to a “hothouse” global economy where the slightest disruption in central bank/Central State intervention will cause the sickly flowers to wilt and expire.

Of the three great financial truths that have been left unspoken for the past four years out of sheer dread, lest their mere mention collapse our economy, let’s start with the most obvious:

The first great financial truth: If the Federal Reserve and Federal government ever crimped the dripline of “easing” and bailouts, America’s financial sector would promptly roll over and expire.

Does this strike you as a robust, flexible, transparent system? Of course not. Rather, it is a “hothouse” financial sector, one that needs constant injections and a carefully controlled environment just to keep it alive.

And since the U.S. economy has been fully financialized, it is now dependent on financial machinations and skimming for its “growth,” profits and the debt expansion that fuels everything else, including the metastasizing Savior State, a gargantuan aggregation of an unaccountable National Security State with crony-capitalist cartels and a dependency-inducing Welfare State.

Without the debt conjured into existence by the Fed, Treasury and the financial sector, even the mighty multi-tenacled Savior State would quickly starve.

As a result of our dependence on financialization and exponential debt, our entire economy has become a weak, sickly “hothouse” economy which can only survive in a narrow band of temperature, debt injections and opaque manipulations of data and what’s left of the nation’s shriveled markets.

Once exposed to Nature, i.e. “wild” transparent markets that are allowed to discover the price of all assets naturally, then both the nation’s financial sector and its economy would implode.

The second great financial truth is that the financial sector has long been detached from the real economy. The real economy is for chumps; the “no-risk” skimming of monetary legerdemaine is the raison d’etre of the entire financial sector, a point brilliantly made in this “must read” essay posted on Zero Hedge: MF Global Shines A Light On Monetarism’s Incapacity To Enhance The Real Economy. Granted, some of the financialization schemes described are not that easy to grasp, but here’s the primary point:

That is why this system has to change at some point. It is exactly designed to be misleading, and the reason is so very simple. In any fractional system there will be a desire to amplify that fraction to the maximum degree. But in doing so, participants recognize that the process of maximization entails creating negative human emotions and perceptions since history is not really that kind to this manner of fractionalization. So the system has institutionalized, abetted by the very regulators that are supposed to cap fractions and leverage, these methodologies of hiding just how much financial entities have engaged in maximizing themselves under the cover of mathematical precision.

The Panic of 2008 was supposed to correct these excesses and remedy the fact that risks have not been accurately priced for decades. Yet the system has resisted every effort, simply settling for redefining the appearance of safety yet again. Somewhere in that mathematical pursuit of maximum fractions, the very goal of finance changed, as if traditional banking was no longer sufficient to support the pursuit’s ever-growing ambitions. So the financial economy has broken away from the real economy, using the ironic cover story of enhancing price discovery to the process of intermediation.

The fact that money is disconnected from the real economy never enters the consciousness of monetarists since money is always the answer. But make no mistake, the primary reasons for this global malaise are that money has lost its productive capacity and its proper place as a tool within the system.

The third great unspoken truth is that the conventional Status Quo – the financial punditry, the Cargo Cult of Keynesianism, the incestuous academic community, the PhDs in the Fed and Treasury, the politico lackeys, the self-serving think-tanks of both empty ideologies (“which is better, Bud or Bud Light?”), not to mention the lobbyists, revolving door toadies and all the other hangers-on in New York and Washington – have no Plan B and certainly no Plan C. In other words, they are utterly clueless about what to do when their abject and total failure becomes unavoidably obvious.

It is of course a crisis of self-service; nobody dares put their own status, wealth, power and perks at risk by thinking independently, much less speaking All That Cannot Be Spoken Lest This Sucker Implode.

But it is also a monumental lack of imagination; the lackeys and toadies cannot imagine any other Beast other than the one whose teat they have sucked all their lives. They live in mortal fear not of being ignorant or lacking in imagination – those deficiencies are too obvious to contest – but of the truth of the system’s increasing weakness and vulnerability being openly revealed.

America’s (and the world’s) financial sector is a fragile, sickly hybrid which will shrivel and expire the moment it is placed in the real, dynamic world. And because the global economy has become dependent on the slouching beast of financialization, it too is fragile and sickly, sensitive to the slightest perturbations and exquisitely vulnerable to any disruption of the constant life support offered by central banks and Central States.

It is neither capitalism nor socialism, but a twisted hybrid of the worst traits of each.

I happened to catch a brief interview on DW TV (German TV, with English announcers and subtitles) of one of the few ECB (European Central Bank) officials with the integrity to resign in protest at the ECB’s blatant interventions in the bond market (buying Italian bonds to prop up a market that would implode the second ECB support vanished) and the central bank’s slippage toward money-printing as the answer to every problem.

This gentleman said that the ECB had to monitor the global economy 24 hours a day lest some tiny policy mistake bring the entire shaky edifice down.

Does that strike you as a description of a robust, adaptable, capitalist system based on transparancy and price discovery of assets? Of course not; it describes a hothouse economy, always on the ragged edge of collapse if its central bank and Central State minders make the tiniest error in its care.

For four precious years we have been force-fed nothing but lies, obfuscation, misdirection, fear-mongering, spin, sins of omission, misinformation, propaganda, false rumors and false hopes. The hothouse is slowly falling apart, and the sickly global financial sector is wilting. The financial media is heralding every “save” and every “rescue” with ever-shriller enthusiasm, lest a contagion of truth spread through the hothouse like a chill wind.

But we can be sure of one thing: those who know better have already sold, and it is now the job of the politico lackeys and the toadies of the Mainstream Media to convince the bagholders to hold on and not sell, because “everything’s been rescued.” Distilled to its essence, that is their one and only job: to convince you not to sell. That keeps the bid up for their Masters to sell into.

If history is any guide, the final collapse will be triggered by an apparently “controllable” event, something like the bankruptcy of MF Global. All eyes are on Greece’s referendum, apparently scheduled for December 4 or 5; but regardless of the vote, does a “yes” or “no” change that nation’s fundamental insolvency? No, it doesn’t.

Does the passage of some toothless law in Italy magically render that nation solvent? No, no, a thousand times no; none of these public-relations tricks can change the fact that all these nations are insolvent, the banks are insolvent, and even France and Germany are staggering under unprecedented burdens of debt.

The smart money sold in May, 2010, and the disbelievers among the Power Elite sold in May 2011, or perhaps August. Now those below the smart money (but still above the dumb money) are sniffing the fetid hothouse air, where the rank, sweaty desperation of the minders is now ever-present.

So the apparatchiks and foot soldiers have been ordered to keep the dumb money from selling, until their “betters” can sell into a rumor-juiced bid. This explains the sudden jump in the S&P 500 on every rumor of rescue, as if an over-indebted and leveraged-26-to-1 financial system can be rescued with “belt-tightening” and ECB intervention with taxpayer money.

The entire euro “project” was a scam that enabled a vast new scale of financialization. Now that the “project” is falling apart, the bagholders who bought into the shuck-and-jive are nervous and fearful; has it all really been “saved”?

No, it hasn’t; it cannot be saved. The only “solution” available is to sell: sell now, while there is still a bid. Sell fast, sell hard, sell everything denominated in euros. That is precisely what the Status Quo fears the most: an awakening continent of bagholders and debt-serfs.

Anyone thinking the euro (and eurozone) can’t possibly go down until after the Greek referendum may well find their confidence in the Status Quo’s “rescue” has been sorely misplaced.

500 Million Debt-Serfs: The European Union Is a Neo-Feudal Kleptocracy (July 22, 2011)
The Dynamics of Doom: Why the Eurozone Fix Will Fail (July 25, 2011)
The European Model Is Also Doomed (February 7, 2009)
When Debt-Junkies Go Broke, So Do Mercantilist Pushers (March 1, 2010)
Why the Euro Might Devolve into Euro1 and Euro2 (March 2, 2010)
Why the Eurozone Is Doomed (May 10, 2010)
Ireland, Please Do the World a Favor and Default (November 29, 2010)
Why The European Union Is Doomed (March 28, 2011)
Greece, Please Do The Right Thing: Default Now (June 1, 2011)
Why the Eurozone and the Euro Are Both Doomed (June 23, 2011)
Greece Is a Kleptocracy (June 28, 2011)

EU leaders throw Europe a plutonium life preserver

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by Charles Hugh Smith from Of Two Minds
Posted October 27, 2011

The euro system was doomed from inception for fundamental reasons; trying to conjure up “something for nothing” solutions will fail catastrophically, and soon.

As Europe flails helplessly in the waves of insolvency, its leadership has tossed it a life preserver. Too bad it’s plutonium, and will take Europe straight to the bottom. Plutonium is of course one of the most toxic materials on the planet, and the “rescue” cooked up by the EU leadership is the financial equivalent of plutonium.

Stripped of propaganda and disinformation, the “rescue” boils down to this: something for nothing. Sound familiar? Isn’t “something for nothing” what inflated the bubbles which have popped so violently? The EU “rescue” conjures something for nothing in two ways:

1. The financial alchemist’s favorite magic: leverage. Take a couple hundred billion euros in cash, leverage it up with various magic (unlimited power is now at your fingertips!) and voila, you can suddenly backstop 1 trillion euros of banking-sector losses, all with illusory money. Something for nothing.

2. “Guarantees” to cover the first 20% of loan losses. This is being presented as the equivalent of 100% guarantees, because it is inconceivable that losses could exceed 20%. In other words, the credulous buyer of at-risk Euroland bonds is supposed to be reassured enough to load the wagon because 20% of the bond is backstopped.

This is something for nothing because the EU leadership is explicitly claiming the at-risk portion–80% of every bond–is somehow “safer” because the first 20% will be paid by EU taxpayers.

In essence, the EU is claiming that its illusory “something for nothing” magic will turn lead into gold. Abracadabra….oh well, close; it’s heavy, it’s metallic – oops, it’s plutonium.

The leadership is resorting to Cargo Cult incantations and legerdemain because the alternative is to raise the 1 trillion euros in cold hard cash needed to bail out the first wave of failed banks and underwater bondholders by raising taxes and cutting budgets, i.e. austerity. (Recall that the total bill will be at least 3 trillion euros, so 1 trillion is just a down payment.)

Raising cash the hard way is politically unacceptable in both France and Germany, not to mention every other nation in the EU, so the political lackeys of the banking sector and bondholders are cravenly substituting a “something for nothing” magic show which they hope will fool the global bond market.

Note to EU lackeys: there is no free lunch. Leverage is plutonium, not gold, and guaranteeing the first 20% of bonds that are doomed to lose 40%-75% is not terribly appealing to anyone not influenced by the ECB’s mind tricks. (“These are not the euros you’re looking for; move along.”)

No wonder France was so anxious for the ECB to crank up the euro printing press: they wanted– just like everyone else involved–something for nothing.

The best way to understand the EU’s current situation is to imagine an astoundingly dysfunctional family of deep-in-denial-addicts, screaming co-dependent parents, and grown-up grifters acting like spoiled brats, all trapped in a rat-infested, flooded flat that’s had the gas turned off for lack of payment – and there’s a plutonium life preserver glowing in the knee-high water. Admittedly, this analogy is imperfect, but it does capture the essential psychology of the end-game being played out.

A slightly more formal model for understanding the increasingly unstable dynamics of the EU is the post-colonial “plantation” model I’ve described before. The key characteristics of the Colonial Model of Capitalism are:

1. Low cost labor and low-value materials flow from the periphery (colonies) to the Empire (center), which then ships high-value, high-profit finished goods back to the colonies.

2. The colonies must buy the high-value finished goods on credit that is issued and controlled by the Imperial center.

Hmm – doesn’t this sound like the relationship of Germany to the European periphery? The euro cemented this co-dependency: Germany had the most efficient production, and once the euro raised the cost of production in the periphery nations, then of course nobody could beat Germany’s cost advantages. The euro actually lowered Germany’s cost of production in terms of foreign exchange rates while raising the costs in periphery nations that were previously able to lower their cost of production via currency devaluations.

Having surrendered that mechanism to access the deep credit markets of the center, then they had no choice but to buy the high-margin finished goods from Germany, as nobody else could make the same goods for the low German price.

These booming high-profit German exports of finished goods to the European periphery generated vast surpluses of capital that were then loaned to the periphery to enable their further purchases of German goods. Why risk the heavy investment costs of production in the periphery when Germany had the lowest costs of production and was willing to loan the buyers the cash needed to keep buying?

It’s the classic mercantilist-consumer co-dependency on a gigantic scale, with low-cost credit fueling both increased consumption and production. As long as the credit flowed in vast torrents of low-cost, easy to borrow money, the co-dependency looked like a “virtuous cycle.” Debt junkies eventually have to start servicing their debts, of course, and that’s when the ugly realities of colonial dominance become visible.

Germany casts itself in this melodrama as the wronged party, the industrious craftsfolk churning out high-quality goods who have somehow been lured into pouring hard-earned cash down various ratholes to save nefarious EU banks – including their own.

But setting aside the melodrama for a moment, let’s ask: how many German goods would have been imported by the EU periphery if those nations had been forced to pay cash for everything from the start? Precious little is the answer; the cash – in the form of actual surpluses available to spend on imports – would have run out immediately after the euro was launched.

In other words, the debt orgy enabled not just carefree consumption, it also enabled vast German exports to the Eurozone. Now we start seeing how the once-mutually beneficial co-dependency has become toxic: now that the periphery’s debtors have become debt-serfs, German exports to the periphery are contracting.

This helps explain why even the supposedly prudent Germans are seeking something for nothing as the painless answer to an intrinsically unstable and self-destructive system. When it all implodes, German exports to the periphery will be a shadow of their past glory, and the surpluses which enabled the leveraged orgy of credit will dwindle. (Germany’s other big export markets, China and the U.S., are also contracting.)

Sovereign currencies are the only mechanism for discounting differences in credit worthiness and production costs. The euro was established as the currency equivalent of gold, holding the same value in every member country. But the mercantilist/quasi-colonial model requires credit to flow from the center to the periphery, and that is precisely what has happened in the EU.

In the colonial model, the colonists are indebted and poor. The net value of their labor flows to the Imperial center as interest payments, and the banks at the center set the cost of money and the terms – naturally.

This co-dependency based on credit flowing from the mercantilist center to the periphery is both exploitative and systemically unstable. Now that the ontological instability of the euro is being revealed, the dysfunctional family members are blaming each other and desperately trying to conjure up something for nothing to bail themselves out of a system which was doomed to implode from its very inception.

All the complexity and confusion distills down to this: the EU leadership needs something for nothing to save the EU, but there is no free lunch. There is only one solution to the exploitation, the illusory leverage, the crushing debts: massive write-offs of all the bad debt everywhere in the EU. And since debt is someone else’s asset, then that means writing down the assets, too. The only way to clear the insolvency is to write off 3 trillion euros of debt-based assets and re-enable sovereign currencies. Anything else is simply more tiresome melodrama.

The real contagion risk

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 by Chris Martenson
Posted October 24, 2011 

 

AROUND HERE, WE LIKE TO TRACK THINGS from the outside in, as the initial movements at the periphery tend to give us an early warning of when things might go wrong at the center. It is always the marginal country, weakest stock in a sector, or fringe population that gives us the early warning that trouble is afoot. For example, rising food stamp utilization and poverty levels in the US indicate that economic hardship is progressing from the lower socioeconomic levels up towards the center –that is, from the outside in.

That exact pattern is now playing out in Europe, although arguably the earliest trouble was detected with the severe weakness seen in the eastern European countries nearly two years ago.

Because of this tendency for trouble to begin at the periphery before spreading to the center, here at ChrisMartenson.com headquarters we spend a disproportionate amount of our time watching junk bonds instead of Treasurys, looking at weak sectors instead of strong ones, and generally spending our time at the edges trying to scout out where there are early signs of trouble that can give us a sense of what’s coming next. In this report, we explore the idea that Europe is the canary in the coal mine that tells us it is time to begin preparing for how the world might change if the contagion spreads all the way to US Treasurys (which is mathematically inevitable, in our view).

Why the US should care about Europe

At the very core of the global nuclear money reactor are US Treasurys and the dollar. If the dollar’s role as the world’s reserve currency wanes or even collapses, then the scope and pace of the likely disruptions will be enormous. Of course, we’ll be glad to have as much forewarning as possible.

Accordingly, it is my belief that if the contagion spreads from Greece to Portugal (or Italy or Spain), and then to the big banks of France and Germany in such a way that they fail, then rather than strengthening the dollar’s role (as nearly everyone expects), we should reserve some concern for the idea that the contagion will instead jump the pond and chew its way through the US financial superstructure.

While I am expecting an initial strengthening of the dollar in response to a euro decline, I believe this will only be a temporary condition.

The predicament is that the fiscal condition of the US is just as bad as anywhere, and we’d do well to ignore the idea, widely promulgated in the popular press, that the US is in relatively better shape than some other countries. ‘Relatively’ is a funny word. In this case, it’s kind of meaningless, as all the contestants in this horse race are likely destined for the glue factory, no matter how well they place.

While there are certain to be a lot of false starts and unpredictable twists and turns along the way, eventually the precarious fiscal situation of the US will reach a critical mass of recognition. Before that date, the US will be perceived as a bastion of financial safety, and afterwards everyone will wonder how anyone could have really held that view.

A good recent example of how swiftly sovereign fortunes can change: One day, everything was fine in Greece, which enjoyed paying interest rates on its national debt that were a few skinny basis points (hundredths of a percent) above Germany’s. A few short months later, Greece was paying over 150% interest on its one-year paper.

What I am asking is this: What happens when the same sweep of recognition visits the US Treasury markets? Is such a turn of events even possible or thinkable?  Here’s one scenario:

How contagion will spread to the US

My belief is that someday, perhaps within a matter of months but more likely in a year or two, the US Treasury market will fall apart as certainly and as magnificently as did Greece’s. Here’s how that might happen:

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The Endgame: Europe is finished

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by Tyler Durden
Posted Zero Hedge on September 14, 2011

THE MOST SCATHING REPORT DESCRIBING IN EXQUISITE DETAIL the coming financial apocalypse in Europe comes not from some fringe blogger or soundbite striving politician, but from perpetual bulge bracket wannabe, Jefferies, and specifically its chief market strategist David Zervos. “The bottom line is that it looks like a Lehman like event is about to be unleashed on Europe WITHOUT an effective TARP like structure fully in place.

Now maybe, just maybe, they can do what the US did and build one on the fly – wiping out a few institutions and then using an expanded EFSF/Eurobond structure to prevent systemic collapse. But politically that is increasingly feeling like a long shot. Rather it looks like we will get 17 TARPs – one for each country. That is going to require a US style socialization of each banking system – with many WAMUs, Wachovias, AIGs and IndyMacs along the way.

The road map for Europe is still 2008 in the US, with the end game a country by country socialization of their commercial banks. The fact is that the Germans are NOT going to pay for pan European structure to recap French and Italian banks – even though it is probably a more cost effective solution for both the German banks and taxpayers….Expect a massive policy response in Europe and a move towards financial market nationlaization that will make the US experience look like a walk in the park. ” Must read for anyone who wants a glimpse of the endgame. Oh, good luck China. You’ll need it.

Full Report:

In most ways the excess borrowing by, and lending to, European sovereign nations was no different than it was to US subprime households. In both cases loans were made to folks that never had the means to pay them back. And these loans were made in the first place because regulatory arbitrage allowed stealth leverage of the lending on the balance sheets of financial institutions for many years. This levered lending generated short term spikes in both bank profits and most importantly executive compensation – however, the days of excess spread collection and big commercial bank bonuses are now long gone.

We are only left with the long term social costs associated with this malevolent behavior. While there are obvious similarities in the two debtors, there is one VERY important difference – that is concentration. What do I mean by that? Well specifically, there are only a handful of insolvent sovereign European borrowers, while there are millions of bankrupt subprime households. This has been THE key factor in understanding how the differing policy responses to the two debt crisis have evolved.

In the case of US mortgage borrowers, there was no easy way to construct a government bailout for millions of individual households – there was too much dispersion and heterogeneity. Instead the defaults ran quickly through the system in 2008 – forcing insolvency, deleveraging and eventually a systemic shutdown of the financial system. As the regulators FINALLY woke up to the gravity of the situation in October, they reacted with a wholesale socialization of the commercial banking system – TLGP wrapped bank debt and TARP injected equity capital. From then on it has been a long hard road to recovery, and the scars from this excessive lending are still firmly entrenched in both household and banking sector balance sheets.

Even three years later, we are trying to construct some form of household debt service burden relief (ie refi.gov) in order to find a way to put the economy on a sustainable track to recovery. And of course Dodd-Frank and the FHFA are trying to make sure the money center commercial banks both pay for their past sins and are never allowed to sin this way again! More on that below, but first let’s contrast this with the European debt crisis evolution.

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The imminent failure of the Eurozone

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by Econophile
Posted  September 2, 2011
This article originally appeared on the Daily Capitalist.

YOU KNOW THOSE MOVIES WITH THE BOMB SET TO A TIMER ticking down to 00.00 where the sweaty hero nervously cuts one wire at a time while holding his breath and then at 00.01 he stops the bomb? Well, Europe is like that except that the bomb goes off and kills everyone.

Our planet has a problem. Its leading economies, the U.S., Japan, and the E.U. are declining. That is, about one-sixth of the world’s population is losing ground.

These big economies are the ones that lead the rest of the world, including China. Countries like China, India, and Brazil, depend on the health of the big economies to keep buying their products and commodities so they can grow and generate wealth for their citizens.

What is especially concerning is the blow-up that is about to happen in Europe. It is not something that is happening “over there.” In a world that is so interconnected financially and by trade, a sinking Europe is everyone’s concern.

Their problems are much the same as ours with a twist. Their governments and central banks have also pursued reckless monetary and fiscal policies and now, effect is following cause. They have more or less followed the same policies as has the U.S., much to the same end. They spent large, engaged in Keynesian fiscal stimulus in a bailout attempt, ran up huge debts and deficits, and their economies are in decline.

The twist is the European Monetary Union (EMU), known as the eurozone. It is as if here in the U.S. there was no federal government and each state was truly sovereign, but there was a Federal Reserve Bank. Some states spend more than others, funding deficits by borrowing huge sums to support programs their citizens wanted. The profligate states want the Fed to buy their debt and float them loans created out of thin air, or otherwise they will go belly up and they will take down many states’ banks. The responsible states know they will be stuck with the bill.

The EMU started on the idea that it would bind the EU closer. In essence it was a political decision rather than an economic decision. They passed a stern rule that said no state could run of deficits of more than 3% of their GDP. Except for Estonia, Finland, and Luxembourg, all countries, including Germany, now exceed the limit. Thus their politicians sacrificed fiscal probity for political gains.

They have hit the wall: Greece will soon default on their sovereign debt. On Tuesday, yields on one year Greek bills  reached 60%.  It is a sign that investors have no faith in the Greek government’s ability to repay their debt.

The EU, ECB, and the IMF are trying to establish a European Financial Stability Facility (EFSB) in order to further bail Greece out. They have already pledged €110 billion and they are trying to put another package together of €109 billion. But Finland insists that Greece puts up additional collateral, which is not possible. Since the collateral would be part of the bailout money, it would be, in essence, Germany and France guaranteeing Finland’s contribution.

Greece has missed every fiscal target it or its saviors has had. They are trying to get their deficit down to 7.6% of GDP through more austerity measures, but it looks like they will miss again (est. 8.5+%). Basically they are asking the Greeks to do something they don’t want to do, and they will no doubt take to the streets again in protest.

If they default, then that opens a can of worms. European banks, other than Greek banks, hold €46 billion of Greek sovereign debt. Belgium’s Dexia hold Greek sovereign debt equal to 39% of its equity; for Germany’s Commerzbank, it’s about 27%. On top of that, EU banks are into private Greek companies for about €94B (France, €40B; Germany €24B). According to the Wall Street Journal, the total market cap of all EU banks was just €240. The same article also points out additional unknown liabilities to insurers and investment banks.

The International Accounting Standards Board (IASB) has warned banks they need to write down, or mark-to-market, the Greek debt they hold. Whether they do or don’t doesn’t matter. The fact is that these banks are undercapitalized and in trouble. Their “stress tests” are a fiction. Liquidity is starting to shrink in their banking system because of these jitters. Rabobank, for example, said it is growing cautious about interbank lending – now limited to overnight loans. More banks are stepping up to the ECB window for funds. Overall, credit is starting to tighten. Nervous Greek depositors are withdrawing funds from their banks. Rich Greeks never trusted their banks.

In other words the Europeans have created a problem that they can’t solve, easily at least.

Here are their alternatives:

1. Keep bailing out Greece, with the specter of Italy and Spain being the next target of market forces as EU economies cool off. This is not appealing to Germany and France who know their taxpayers will have to put up most of the money.

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In this grave crisis, the world’s leaders are terrifyingly out of their depth

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by Peter Oborne
Posted August 6th, 2011

Ineffectual: an emergency telephone conference among the G7 finance ministers feels as relevant as a Bourbon family get-together in the summer of 1789

CERTAIN YEARS HAVE GONE DOWN IN HISTORY AS GREAT GLOBAL TURNING POINTS, after which nothing was remotely the same: 1914, 1929, 1939, 1989. Now it looks horribly plausible that 2011 will join their number. The very grave financial crisis that has hung over Europe ever since the banking collapse of three years ago has taken a sinister turn, with the most dreadful and sobering consequences for those of us who live in European democracies.

The events of the past few days have been momentous: the eurozone sovereign debt crisis has escaped from the peripheries and spread to Italy and Spain; parts of the European banking system have frozen up; US Treasuries have been stripped of their AAA rating, which may be the beginning of a process that leads to the loss of the dollar’s vital status as the world’s reserve currency.

There have been warnings that we may be in for a repeat of the calamitous events of 2008. The truth, however, is that the situation is potentially much bleaker even than in those desperate days after the closure of Lehman Brothers. Back then, policy-makers had at their disposal a whole range of powerful tools to remedy the situation which are simply not available today.

First of all, the 2008 crisis struck at the ideal stage of an economic cycle. Interest rates were comparatively high, both in Europe and the United States. This meant that central banks were in a position to avert disaster by slashing the cost of borrowing. Today, rates are still at rock bottom, so that option is no longer available.

Second, the global situation was far more advantageous three years ago. One key reason why Western economies appeared to recover so fast was that China responded with a substantial economic boost. Today, China, plagued by high inflation as a result of this timely intervention, is in no position to stretch out a helping hand.

But it is the final difference that is the most alarming. Back in 2008, national balance sheets were in reasonable shape. In Britain, for example, state debt (according to the official figures, which were, admittedly, highly suspect) stood at around 40 per cent of GDP. This meant that we had the balance sheet strength to step into the markets and bail out failed banks. Partly as a result, national debt has now surged past the 60 per cent mark, meaning that it is impossible for the British government to perform the same rescue operation without risking bankruptcy. Many other Western democracies face the same problem.

The consequence is terrifying. Policy-makers find themselves in the position of a driver heading down the outside lane of a motorway who suddenly finds that none of his controls are working: no accelerator, no brakes and a faulty steering wheel. Experience, skill and a prodigious amount of luck are required if a grave accident is to be averted. Unfortunately, it is painfully apparent that none of these qualities are available: Western leaders are out of their depth.

Barack Obama feels more and more like a president from the Jimmy Carter tradition: well meaning but ineffectual. And contemplate the sheer fatuity of the statement issued by Angela Merkel’s office on Friday night: “Markets caused the drama. Now they have to make sure to get things straight again.” This remark reveals in the German Chancellor a basic inability even to grasp the nature, let alone understand the scale, of the disaster facing Europe this weekend. Such a failure of comprehension is entirely typical of a certain type of leader throughout history, at times of grave international urgency.

An emergency telephone conference among the finance ministers of the G7 (membership: United States, Japan, Britain, Germany, France, Italy and Canada) has been convened. There was a time when this organisation – with its sublime pretence that financial powerhouses such as India, China and Brazil do not exist – counted for a great deal. This latest discussion feels as relevant as a Bourbon family get-together in the summer of 1789.

Another symptom of the frivolity of the European political class is that the European Central Bank is being urged to intervene in the Italian bond market to restore stability. Standard & Poor’s and Moody’s do not produce ratings for the ECB, but if they did, it would be given junk bond status, or worse. The ECB is bankrupt, and this would be evident for all to see but for the fact that it has grossly overvalued the practically worthless Greek, Irish and Portuguese bonds in its portfolio. At some point, eurozone states will be asked to fill the massive holes in the ECB’s balance sheet, and matters will then get messy. Some may plead poverty; others will point out that the constitution of the ECB specifically prevents it from purchasing national bonds, and that its market operations must have been ultra vires.

Furthermore, it is unclear to whom the ECB – whose dodgy accounting, reckless investments and contemptuous disregard of banking standards make even the most irresponsible Mayfair hedge fund look like a model of propriety – is ultimately accountable. The idea that it can step effectively into the Italian bond market, whose total value of around 1.8 trillion euros makes it larger by far than Greece, Portugal and Ireland combined, is a joke.

Wake up: the eurozone is very close to collapse. It will come as no surprise if some Italian and Spanish banks are forced to close their doors in the course of the next few weeks. Indeed, British holidaymakers on the Continent should be advised to take care: hold only the minimum of the local currency, and treat with especial suspicion euro notes coded Y, S and M (signifying they were printed in Greece, Italy and Portugal respectively). Take plenty of dollars with you, which shopkeepers will certainly accept if there is a run on the banks, or if euros suddenly cease to be legal currency. The precautions may not prove necessary, but there is no point in taking risks.

Where does this leave Britain? First of all, there is no point intruding on private grief. Nothing we can do or say will solve the problems of the eurozone. George Osborne does, however, face one overriding imperative: he must maintain the British national credit. Fortunately, the Chancellor grasps this essential point very clearly. After last year’s general election, he took exactly the right steps to cut the deficit. He must not be driven off course, or the markets will refuse credit to Britain as well (a point that Ed Balls, Labour’s economic spokesman, appears not to understand). An economic firestorm is heading our way, and Britain will be doing very well just to survive.