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September 2011: 25 signs that the financial world is about to hit the big red panic button

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from The Economic Collapse
Posted August 30, 2011

MOST OF THE WORST FINANCIAL PANICS IN HISTORY HAVE happened in the fall. Just recall what happened in 1929, 1987 and 2008. September 2011 is about to begin and there are all kinds of signs that the financial world is about to hit the big red panic button. Wave after wave of bad economic news has come out of the United States recently, and Europe is embroiled in an absolutely unprecedented debt crisis. At this point there is a very real possibility that the euro may not even survive.

What is causing all of this? Over the last couple of decades a gigantic debt bubble has fueled a tremendous amount of “fake prosperity” in the western world. But for a debt bubble to keep going, the total amount of debt has to keep expanding at an ever increasing pace. Unfortunately for the global economy, sources of credit are starting to dry up. That is why you hear terms like “credit crisis” and “credit crunch” thrown around so much these days. Without enough credit to feed the monster, the debt bubble is going to burst. At this point, virtually the entire global economy runs on credit, so when this debt bubble bursts things could get really, really messy.

Nations and financial institutions would never get into debt trouble if they could always borrow as much money as they wanted at extremely low interest rates. But what has happened is that lending sources are balking at continuing to lend cheap money to nations and financial institutions that are already up to their eyeballs in debt.

For example, the yield on 2 year Greek bonds is now over 40 percent. Investors don’t trust the Greek government and they are demanding a huge return in order to lend them more money.

Throughout the financial world right now there is a lot of fear. Lending conditions have gotten very tight. Financial institutions are not eager to lend money to each other or to anyone else. This “credit crunch” is going to slow down the economy. Just remember what happened back in 2008. When easy credit stops flowing, the dominoes can start falling very quickly.

Sadly, this is a cycle that can feed into itself. When credit is tight, the economy slows down and more businesses fail.  That causes financial institutions to want to tighten up things even more in order to avoid the “bad credit risks”. Less economic activity means less tax revenue for governments. Less tax revenue means larger budget deficits and increased borrowing by governments. But when government debt gets really high that can cause huge economic problems like we are witnessing in Greece right now. The cycle of tighter credit and a slowing economy can go on and on and on.

I spend a lot of time talking about problems with the U.S. economy, but the truth is that the rest of the world is dealing with massive problems as well right now. As bad as things are in the U.S., the reality is that Europe looks like it may be “ground zero” for the next great financial crisis.

At this point the EU essentially has three choices. It can choose much deeper economic integration (which would mean a huge loss of sovereignty), it can choose to keep the status quo going for as long as possible by providing the PIIGS with gigantic bailouts, or it can choose to end of the euro and return to individual national currencies.

Any of those choices would be very messy. At this point there is not much political will for much deeper economic integration, so the last two alternatives appear increasingly likely. In any event, global financial markets are paralyzed by fear right now. Nobody knows what is going to happen next, but many now fear that whatever does come next will not be good. The following are 25 signs that the financial world is about to hit the big red panic button….

#1 According to a new study just released by Merrill Lynch, the U.S. economy has an 80% chance of going into another recession.

#2 Will Bank of America be the next Lehman Brothers?  Shares of Bank of America have fallen more than 40% over the past couple of months. Even though Warren Buffet recently stepped in with 5 billion dollars, the reality is that the problems for Bank of America are far from over. In fact, one analyst is projecting that Bank of America is going to need to raise 40 or 50 billion dollars in new capital.

#3 European bank stocks have gotten absolutely hammered in recent weeks.

#4 So far, major international banks have announced layoffs of more than 60,000 workers, and more layoff announcements are expected this fall. A recent article in the New York Times detailed some of the carnage….

A new wave of layoffs is emblematic of this shift as nearly every major bank undertakes a cost-cutting initiative, some with names like Project Compass. UBS has announced 3,500 layoffs, 5 percent of its staff, and Citigroup is quietly cutting dozens of traders. Bank of America could cut as many as 10,000 jobs, or 3.5 percent of its work force. ABN Amro, Barclays, Bank of New York Mellon, Credit Suisse, Goldman Sachs, HSBC, Lloyds, State Street and Wells Fargo have in recent months all announced plans to cut jobs — tens of thousands all told.

#5 Credit markets are really drying up. Do you remember what happened in 2008 when that happened? Many are now warning that we are getting very close to a repeat of that.

#6 The Conference Board has announced that the U.S. Consumer Confidence Index fell from 59.2 in July to 44.5 in August.  That is the lowest reading that we have seen since the last recession ended.

#7 The University of Michigan Consumer Sentiment Index has fallen by almost 20 points over the last three months.  This index is now the lowest it has been in 30 years.

#8 The Philadelphia Fed’s latest survey of regional manufacturing activity was absolutely nightmarish….

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009

#9 According to Bloomberg, since World War II almost every time that the year over year change in real GDP has fallen below 2% the U.S. economy has fallen into a recession….

Since 1948, every time the four-quarter change has fallen below 2 percent, the economy has entered a recession. It’s hard to argue against an indicator with such a long history of accuracy.

#10 Economic sentiment is falling in Europe as well. The following is from a recent Reuters article….

A monthly European Commission survey showed economic sentiment in the 17 countries using the euro, a good indication of future economic activity, fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors.

#11 The yield on 2 year Greek bonds is now an astronomical 42.47%.

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Please Europe, either put up or break up

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by Ambrose Evans-Pritchard
Posted August 5th, 2011

THE DEBT CRISIS IS MOVING AT LIGHTNING SPEED. We must wait to see whether the ECB is really willing to sit back and let the whole edifice collapse. Are the Bundesbankers really so stubborn that they would rather bring down the European financial system, tank the world economy, and cause a deep global depression, rather than enter the bond market on a sufficient scale to back-stop Italy and Spain?

Tough call. 50:50, I’d say. The hardliners are seriously ideological people, and there seem to be some in the upper echelons of German policy-making (though obviously not the floundering bean-counter Schauble, or the battered Chancellor), who suspect that it might be better to lance the boil by forcing an immediate break-up of EMU.

I note that Belgium’s central bank governor Coene hinted that the ECB is withholding bond purchases to force Italy and Spain to push through – you guessed it – yet more growth-destroying austerity. Dangerous game. These 1930s deflationists really are a menace to society. In a nutshell, unless the ECB is willing to step in – I mean really step in, not piss in the wind – until such a time as the revamped EFSF bail-out is ratified by all parliaments and is ready to take the baton (say November), and unless the EFSF itself is quadrupled in size and given a €2 trillion mandate without all the German-imposed ifs and buts, then the game is up.

If the EU authorities refuse to do this, it is best for everybody that it is recognized immediately and that arrangements are made for the orderly break-up of monetary union…  not next year, or next month, but next week. There are two basic choices:

1) a spiralling crisis in the South, leading to a string of countries being blown out of EMU, causing a catastrophic financial collapse akin to 1931. As Citi’s William Buiter told me yesterday, the issue is not how long Italy and Spain can ride out the storm in bond markets. There would be a banking and insurance crisis long before sovereign defaults came into play, simply because the fall in bond prices on the secondary market is causing carnage to bank books (among other transmission mechanisms).

Or 2) Germany and its satellite economies withdraw immediately from EMU (let us say the Netherlands, Austria, Finland, Flanders and Luxembourg). This allows the South to enjoy a much-needed devaluation to restore competitiveness without going through a disastrous Fisherite debt deflation. Their contracts would remain in euros, so they would not need to default.

Temporary capital controls and some form of financial repression would obviously been needed for a few weeks. The German bloc would have to stand ready to recapitalize its banking system with €100bn perhaps (peanuts in the bigger picture) to offset the shock effect on sudden exchange losses on Club Med debt.

This would require French leadership. (I have almost given up on Germany.) Carried out with Napoleonic speed and determination, I think this could conceivably prove the game-changer that halted the downward global spiral. Markets would very quickly see that the greatest impediments to recovery had been removed. We could rejoice, and breathe a little easier again. My guess is that stock markets would surge in Milan, Madrid and Paris, as occurred in London and Milan after the ERM crisis in 1992.

Yes, I know, EMU is not the ERM, blah, blah, sanctity of the Project, blah, blah, blah. But just how different is it really? Will this happen? I don’t see much evidence that anybody is thinking along these lines. (The Buba men seem to want to expel Greece, Portugal, etc, which is not at all what I mean.) Just my instant thoughts on a story that is moving with lightning speed.

More later, after some Rioja, and a Vecchia Romagna to finish.

The Charade of World Depression

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from The Daily Bell
Posted originally, December 23, 2010

Self-righteous Germany must accept a euro-debt union or leave EMU If Germany and its hard-money allies genuinely wish to save the euro – which is open to doubt – they should stop posturing, face up to the grim imperative of a Transferunion, and desist immediately from imposing their ruinous and reactionary policies of debt deflation on southern Europe and Ireland … One can sympathise with the German people. Their leaders in the 1990s told them “famine in Bavaria” was more likely than the preposterous suggestion that Germany might have to bail out countries as a result of EMU. But events have moved … Chancellor Angela Merkel must know that the Spanish state, juntas, and banks cannot refinance €300bn (£254bn) next year at a bearable cost if the Tesoro is already paying a decade-high of 5.45pc to sell 10-year bonds, yet she continues to play for time she does not have. – UK Telegraph

Dominant Social Theme:
Germany must grasp the nettle.

Free-Market Analysis:
The problem of the EU seems simple, as indicated by this article excerpt above. The Southern PIGS are bankrupt but cannot devalue because of the euro contract. The wealthy North will therefore have to bail out the PIGS and in doing so, provide substantive oversight. Germany ends up being the guarantor of last resort and also the state providing the watchdogs, basically, since it is German money that will save the EU. It is a German EU after all, and the Germans will have to stop dithering …

This is one (fairly simplistic, we would argue) way of evaluating the situation that is currently evolving in the EU. But here at the Bell we have also argued that the Anglo-American axis is really behind the EU – and perhaps the average German won’t have much say in the matter. The Anglosphere seeks world government and the EU is a basic building block.

The point we want to advance in this article is that there is perhaps a deeper subterfuge going on. Yes, we’ve suggested this before, but as the EU unwinds, as America quakes from unemployment and China shudders from inflation, we continue to explore the possibility. And so we ask, once more … Is the world being manipulated into an ever-more-massive depression? And how would that work exactly?

In order to explain it, we need to establish (for purposes of argument anyway) that there is an Anglo-American power elite composed of certain fabulously wealthy families that seek one-world government. There has been speculation, for instance, that these families have a hand in the recent saga of Foundation X which sounds more like the plot of a bad paperback novel than anything real. Lord James of Blackheath mentioned Foundation X at the House of Lords in early November.

It was his contention that ‘Foundation X’ had the resources to “bail out” the UK and that Foundation X’s gold reserve was larger than what is considered to be the world’s total mined reserves. Lord James of Blackheath was roundly derided as a “nutter.” We don’t find him so. We have asked if Foundation X was merely a cover for the financial interests of the Anglo-American power elite. It still seems a pertinent question. This kind of money is massive indeed, assuming Lord James didn’t drop off his meds for a day. It reinforces the idea that what we are watching around the world is a charade.

We have previously argued that there is a level of behind-the-scenes collusion between ALL the powers-that-be. All of them, East and West, may be cooperating to bring down the current system with an eye toward instituting something in its place that will be mutually agreed upon. (The IMF’s bancor comes to mind.)

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Charles Hugh Smith: Interview

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Charles Hugh Smith interviewed
My “Straight Talk” Interview on ChrisMartenson.com (Part 1)
Posted originally December 6, 2010

I am honored to have been interviewed as part of the “Straight Talk” series on Chris Martenson.com. This is Part One. At the request of the savvy membership of Chris Martenson.com, General Manager Adam Taggart drew up ten thoughtful questions for me as part of CM.com’s “Straight Talk” series. Restraining my usual verbosity was difficult, but I managed to keep my responses below 5,000 words. To keep you from nodding off too directly, I’ve cut the interview into Part One and Part Two, which will appear another time.

“Straight Talk” features thinking from notable minds whom the ChrisMartenson.com audience has indicated it wants to learn more about. Readers submit the questions they want addressed and our guests take their best crack at answering. The comments and opinions expressed by our guests are their own.

This week’s Straight Talk contributor is Charles Hugh Smith, who has been an independent journalist for 22 years. His weblog, www.oftwominds.com, is a daily compendium of observations and analysis on the global economy and financial markets, as well as notable political, social and cultural trends. Charles has authored a number of books across several genres, including the recent Survival+: Structuring Prosperity for Yourself and the Nation.

1. Of the many forces at play that you write about within the economy, society, and politics – which ones do you see as the most defining for the future? How do you expect things to unfold?

CHS: Clearly, demographics and Peak Oil are forces which cannot be massaged away by policy tweaks or financial engineering. I think the exhaustion of Global Neoliberal Capitalism and State Capitalism is apparent, as is the bankruptcy of the two ideologies that more or less define our politics. The reliance on expansion of credit and State power is a dynamic with only unhappy endings.

There are also structural end-games such as Baumol’s Disease at work (see below excerpt from Wikipedia): the inefficient sectors of the economy end up dominating the national income. Services such as healthcare, education and the Armed Forces become more productive at much slower rates than the overall economy. Looking ahead, the Empire (the hundreds of overseas military installations, the diplomatic and financial reach into every nook and cranny of the planet, etc.), healthcare and other entitlements will require most of the national income. That is an unsustainable trajectory, especially as Peak Oil/peak everything kicks in.

As readers know, I am intensely interested in dynamics which are subtle and not quantifiable. Since they can’t be quantified, they are generally ignored. Yet they are very real, even though we may not even be conscious of them.

The reliance on propaganda, for instance, has become so pervasive that the notions of truth and honesty have been hollowed out. Nobody expects the President or Ben Bernanke to speak honestly, as the truth would shatter an increasingly fragile status quo. But this reliance on artifice, half-truths and propaganda has a cost; people are losing faith in government, in all levels of authority, and in the Mainstream Media—and for good reason.

The marketing obsession with instant gratification and self-glorification has led to a culture of what I call permanent adolescence. Politicians who promise a pain-free continuation of the status quo are rewarded by re-election, and those who speak of sacrifice are punished. An unhealthy dependence on the State to organize and fund everything manifests in a peculiar split-personality disorder: people want their entitlement check and their corporate welfare, yet they rail against the State’s increasing power. You can’t have it both ways, but the adolescent response is to whine and cajole Mom and Dad (or the State) for more allowance and more “freedom.” But freedom without responsibility and accountability is not really freedom; it’s simply an extended childhood.

2. You’ve written recently that you expect us to enter deflation because the amount of QE dollars pale in comparison to the amount of bad debt still to be destroyed. How can you be so sure? Why should anyone trust the dollar as a viable long term unit of wealth preservation in an environment where the natural checks & balances of the interest rate mechanism is being subverted?

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The Prosecution’s case against Alan Greenspan

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by Gonzalo Lira
Posted originally September 3, 2010

Should Alan Greenspan, the former Chairman of the Federal Reserve Board (1987–2006), be tried for Crimes Against the Economy, put up against a concrete wall, handed a cigarette, offered a red blindfold, and then executed by firing squad?

“What, me worry?” Yes—absolutely. No question. (And this coming from an anti-death penalty, anti-abortion Catholic.) Herewith, the case for the prosecution. There are four main charges against the so-called “Maestro”:

One — Irresponsible market liquidity, which created rampant moral hazard:
The Accused was instrumental in creating the pernicious policy mentality of “providing markets with necessary liquidity”—essentially, throwing money at every problem.

This first started within days of Greenspan’s assuming the role of American central banker: The frenzy that caused the stock market crash of October 1987 was doused by Greenspan’s pledge to provide “all necessary liquidity, should the need arise”. This instantly soothed the markets as surely as a hit soothes a heroin junkie — within a few months, it was as if the panic had never happened.

After that, and throughout his tenure and that of his successor, Greenspan applied the same remedy, time after time, to every single problem. He became the living embodiment of that old saw: “If all you have is a hammer, every problem looks like a nail”. Or maybe Curtis Mayfield’s famous refrain would be more apropos: “I’m your pusher-man”.

This addiction to market liquidity reached a peak with the Long Term Capital Management (LTCM) fiasco of the Fall of ‘98. LTCM made a series of bad bets that went sour due to the Russian Crisis — therefore, to pay off its losses, LTCM would have to stage a fire-sale to come up with the cash. To avoid this disorderly unwind and subsequent fire-sale — which would have led to an across-the-board run on LTCM’s counterparties, and eventually a wholesale market panic — the Fed under Greenspan organized LTCM’s counterparties, and effectively underwrote the firm’s break-up, providing essentially a bridge loan to finance the whole mess.

Whether LTCM should have been bailed out by the Fed in order to effect an orderly unwind is debatable. Some believe that LTCM had to be bailed out, others believe it should have been allowed to fail, and let the chips fall where they may.

What is not debatable, however, is that, as a direct result of LTCM, two things happened: One, every Wall Street firm realized that, if they were ever hard-up for cash, Easy Al would come through with liquidity—which meant effectively that firms could begin figuring out ways to leverage themselves even more, in the pursuit of profits. They were one and all confident that Uncle Al would bail them out with liquidity, if they ever got into any real trouble.

The other thing that happened was what didn’t happen. Once the bail-out and liquidation of LTCM was carried out, Greenspan failed to learn the obvious lesson from the experience: Sophisticated financial products created under his chairmanship had directly led to the collapse of the firm, and put at risk the entire U.S. financial markets.

If brainiacs like Merton and Scholes, with killer-traders like John Meriwether at the wheel, could drive LTCM off a cliff, what about the hoi polloi of Wall Street, strapping the same financial weapons of mass destruction as Merton, Scholes & Meriwether had been wielding? What kind of trouble could they get themselves into, with all of these fabulous “innovations”?

Did Greenspan put a stop to such suicidally risky practices after LTCM? In a word: No. Which leads directly to the second charge—

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