Posts Tagged ‘bankruptcy’

Rural migration (tic-toc… tic-toc)

May 16, 2011

It’s been some time since I wrote one of my “tic-toc” posts and although till then what I was writing about could have been considered speculation, this Guardian article bears out some of the logical outcomes I was pointing out.

There are also other aspects of this article that are interesting from my point of view. I am going to post the entire article and intersperse my comments throughout.

Debt, unemployment and poverty is causing mass unrest and thousands to seek a cheaper lifestyle outside the capital

High in the hills of Arcadia, in a big stone house on the edge of this village overlooking verdant pastures and a valley beyond, a group of young Athenians are busy rebuilding their lives.

Until recently Andritsaina was not much of a prospect for urban Greeks. “But that,” said Yiannis Dikiakos, “was before Athens turned into the explosive cauldron that it has become. We woke up one day and thought we’ve had enough. We want to live the real Greece and we want to live it somewhere else.”

Piling his possessions into a Land Rover and trailer, the businessman made the 170-mile journey to Andritsaina last month. As he drove past villages full of derelict buildings and empty homes, along roads that wound their way around rivers and ravines, he did not look back.

“Athens has failed its young people. It has nothing to offer them any more. Our politicians are idiots … they have disappointed us greatly,” said Dikiakos, who will soon be joined by 10 friends who have also decided to escape the capital.

They are part of an internal migration, thousands of Greeks seeking solace in rural areas as the debt-stricken country grapples with its gravest economic crisis since the second world war.

“It’s a big decision but people are making it,” said Giorgos Galos, a teacher in Proti Serron on the great plains of Macedonia, in northern Greece. “We’ve had two couples come here and I know lots in Thessaloniki [Greece’s second biggest city] who want to go back to their villages. The crisis is eating away at them and they’re finding it hard to cope. If they had just a little bit of support, a little bit of official encouragement, the stream would turn into a wave because everything is just so much cheaper here.”

GR: Mr. Galos is oblivious to what exactly has caused this crisis which is in fact government intervention. Seeing the devastation wreaked on his nation, Mr. Galos calls for more of what has caused the crisis in the first place in the form of “official encouragement” in order to nudge those that are sitting on the fence to make the move because, as he says, “… everything is just so much cheaper here”.  But that’s exactly the problem and Mr. Galos does not see it. As is always the case, things are “cheap” till government encourages people to make use of something. The moment government encourages some entities to do something, prices will automatically rise not least because when economic actors perceive that there are funds to be had from the government they will feel no compunction at all to take advantage of the perceived free money… because it is government money… and government money is not perceived to be any natural person’s money… but, of course, it is and sooner or later it has to come out of our taxes or increased cost of living somewhere. Similarly, politicians are naturally inclined to give away funds as a way to garner votes from interest groups. Crucially, debt based fiat money allows politicians to be profligate because unlike value based money fiat money is perceived to be cost free. All that is needed, it is thought, is to expand the debt. And, anyway, in an electoral democratic system, a politician is never around to see the extent of the ramifications his/her policies engender.

The trickle into Proti Serron might have gone unnoticed had the village not also been the birthplace of the late Konstantinos Karamanlis who oversaw the nation’s entry into the then European Economic Community in 1981. An alabaster white statue of the statesman in the village square is adorned with the words: “I believe that Greece can change shape and its people their fate.”

Nearly sixty years after they were uttered, a growing number of Greeks, at least, are beginning to wonder whether the old man was right. The drift towards the bright lights of the big cities were by Karamanlis’ own admission one of the great barometers of the country’s transition from a primarily agricultural society into an advanced western economy.This week, as the IMF and EU debated ways of trying to re-rescue Greece and observers openly wondered whether the country would have to leave the euro, Greece appeared more adrift than ever, tossed on a high sea of mounting anger and civil disobedience from people who have lost trust in their politicians, and at the mercy of markets that refuse to believe it can pull itself back from the brink of bankruptcy. “The reality is that these people, they are in deep shit,” the managing director of the IMF, Dominique Strauss-Kahn said recently. “If we had not come they would have fallen into the abyss. Two weeks later the government would not have been able to pay civil servants’ wages.”

GR: Mr. Strauss-Kahn is a product of his environment and cannot therefore admit the perversity of his statement. The IMF rides ostensibly to the help of countries distressed by debt by offering… more debt… Of course, if you understand the nature of debt based fiat money, then you also understand that supranational entities such as the IMF exist precisely to prop up the monetary construct. Debt based fiat money can only exist in an environment of expanding credit regardless of the natural characteristic of debt to conform to the law of diminishing marginal utility. Had the IMF not offered assistance, Greece wouldn’t be any worse off. Look to Iceland for a glimpse of what can be achieved if only politicians had the balls to stand up to banking interests. But of course. A politician is by definition someone that lives by expedients so that biting the hand of the entity that finances your politically expedient programs is not done.

Ironically, it is the medicine doled out under last year’s draconian EU-IMF €110bn (£96bn) rescue programme, implemented to modernise a sclerotic economy, that has made their lot worse. Twelve months of sweeping public sector pay and pension cuts, massive job losses, tax increases and galloping inflation have begun to have a brutal effect. GDP is predicted to contract by 3% this year – making Greece’s the deepest recession in Europe.

GR: The author of the article at once identifies the problem and then negates it. GDP is contracting simply because it had been artificially inflated for so many years prior. If anything, GDP is reverting to its true intrinsic value. The public sector in Greece like in the rest of Europe but, particularly in Latin Europe, is bloated because it is politically expedient to just hire people in order to garner votes from unions and interest groups. One of the most glaring examples of political expediency of the past 3o years was the Italian airline Alitalia where over staffing and staggering losses reached biblical proportions over the years.

In Athens, home to almost half of Greece’s 11 million-strong population, the signs of austerity – and poverty – are everywhere: in the homeless and hungry who forage through municipal rubbish bins late at night; in the cash-strapped pensioners who pick up rejects at the street markets that sell fruit and vegetables; in the shops now boarded and closed and in the thousands of ordinary Greeks who can no longer afford to take family outings or regularly eat meat.

“We’ve had to give up tavernas, give up buying new clothes and give up eating meat more than once a week,” said Vasso Vitalis, a mother-of-two who struggles with her civil servant husband to make ends meet on a joint monthly income of €2,000.

GR: Not to detract from the real drama Ms. Vitalis is experiencing but one of the less intuitively related advantages of decreased consumption is a decrease in the rate of depletion of food stocks, a diminished carbon foot print and the concomitant beneficial effects that counter the devastation of the environment that has, in large part, been brought about by aberrant inflationary monetary policies over many decades. Greens the world over should embrace this crisis. Reduced consumption of animal protein could allow the replenishment of fish stocks that have been decimated over the years as well as the re-stocking of staples that no longer need to be used to rear live stock. Prices drop, the environment is saved and food stocks get replenished. Everyone’s a winner.

“With all the cuts we estimate we’ve lost around €450 a month. We’re down to the last cent and, still, we’re lucky. We’ve both got jobs. I know people who are unemployed and are going hungry. They ask family and friends for food,” she sighed. “What makes us mad is that everybody knew the state was a mess but none of our politicians had the guts to mend it. It was like a ship heading for the rocks and now the rocks are very near.”

GR: Bingo! Except that we are already on the rocks. And, yes, it has been clear for many decades that the system is mathematically not viable… but politics being the expedient animal it is… what is happening was a foregone conclusion… and we are no where near the end of it all...

Greeks also know that with their economy needing another financial lifeline, and few willing to lend to a country in such a parlous state, it will also get much worse before it gets better.

GR: Once again. The author of the article fails to recognize the problem of insolvency brought about by too much debt. Particularly when every single country in the world is afflicted by the same problem. You see, in a global economy, for as long as only one or two countries are afflicted by too much debt as, for example, Japan was in 1989, increasing the debt burden appears to help because a country could still sell goods and services to other countries. But, as time goes by and each country feels the necessity to expand their credit market in order to stimulate the national economy, the diminishing marginal utility of debt ensures that at some point all countries will be buried in debt simultaneously. At that point, more debt no longer helps. And this is the point we are at today.

“In the past, the future always implied hope for Greeks but now it implies fear,” said Nikos Filis, editor of the leftwing Avgi newspaper. “Until this week people thought that with all the measures the crisis would be over in a year or two. Now with the prospect of yet more austerity for more aid, they can’t see an end in sight.”

With unemployment officially nudging 790,000 – although believed to be far bigger with the closure of some 150,000 small and medium-sized businesses over the past year – there are fears that Greece, the country at the centre of Europe’s worst financial debacle in decades, is slipping inexorably into political and social crisis, too. Rising racist tensions and lawlessness on the streets this week spurred the softly spoken mayor of Athens, Giorgos Kaminis, to describe the city as “beginning to resemble Beirut”.

GR: Greece is not at the center of Europe’s crisis. Greece was merely the first in Europe to succumb to the debt crisis. Others have followed Greece since and still more will follow in months to come or till politicians will grow a pair and we let global banks fail.

Yannis Caloghirou, an economics professor at the National Technical University of Athens, said: “Greece has become a battleground, at the EU level where policymakers have made the crisis worse with their lack of strategy and piecemeal approach, and among its own people who no longer have trust in institutions and the ability of the political system to solve the situation. My concern is that the country is slipping into ungovernability, that ultra-right groups and others will grab the moment.”

GR: As a person Mr. Caloghirou is entitled to his opinion. As an economics professor Mr. Caloghirou fails to grasp the dynamic that is afflicting Greece. A debt crisis is not due to lack of strategy and piecemeal approach. It is due to too much debt that has been piled on by deliberate political decree. So, the strategy was not so much lacking as it was aberrant.

Nineteen months into office the ruling socialists, riven by dissent and increasingly disgust over policies that ideologically many oppose, are likewise beginning to show the strain of containing the crisis, with the prime minister, George Papandreou, being forced publicly to whip truculent ministers into line.

A mass exodus of the nation’s brightest and best has added to fears that in addition to failing one or perhaps two generations, near-bankrupt Greece stands as never before to lose its intellectual class. “Nobody is speaking openly about this but the prospects for the Greek economy are going to get much worse as the brain drain accelerates and the country loses its best minds,” said Professor Lois Lambrianidis, who teaches regional economics at the University of Macedonia.

“Around 135,000, or 9% of tertiary educated Greeks, were living abroad and that was before the crisis began. They simply cannot find jobs in a service-oriented economy that depends on low-paid cheap labour.”

GR: Other than to say that exodus of  people whether bright or not is not a big deal, Mr. Lambrianidis hits the nail on the head although I suspect he does so unwittingly. Namely, Mr. Lambrianides identifies the problems of a service based economy but, from what we are given to understand from this limited quote, fails to realize that a service based economy is the inevitable consequence of debt based fiat money.

Just as in Arcadia where the young are choosing to start anew, Greece, he says, needs to rebuild itself if it is to survive its worst crisis in modern times.

Timo Soini – another good egg

May 9, 2011

Along Vaclav Klaus, Ron Paul and Olafur Ragnar Grimsson, add Timo Soini to the politicians I would support.

When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the so-called bailouts of euro-zone member states. These bailouts are patently bad for Europe, bad for Finland and bad for the countries that have been forced to accept them. Europe is suffering from the economic gangrene of insolvency—both public and private. And unless we amputate that which cannot be saved, we risk poisoning the whole body.

Germany is asking the bondholders share the pain

November 25, 2010

And that is exactly the lawful, moral and decent thing to do.

From my favorite pinata Ambrose Evans Pritchard (full text with my comments intersperesed throughout):

German plans to push for bondholder haircuts in Europe as soon as next year have triggered a surge in default risk on European bank debt and set off further flight from Spanish, Portuguese and Irish bonds.

“Credit default swaps on Spanish five-year bonds surged to an all-time high of 312 basis points, and reached 510 on Portuguese bonds, after Frankfurter Allgemeine cited a confidential report by the German finance ministry suggesting that Berlin aims to confront creditors with the risk of serious losses two years earlier than feared.

The Markit iTraxx Senior Financials index – the “fear gauge” for banks – jumped to a reading of 158.5, the highest since the mini-panic in the late spring.

“There is a major fear of contagion in the eurozone,” said Gavan Nolan, chief economist at Markit. “If Portugal stays beyond the 500 level for long, that is when the pressure starts to ratchet up, as we saw in Ireland. This whole scenario of burden-sharing for bondholders is scaring people. The plans have been changed so many times, investors don’t know what to believe anymore and are sceptical about promises that senior debt won’t be touched.”

The German document said “collective action clauses” (CAC) should be introduced into all EMU bonds issued from next year. These clauses open the way for creditor haircuts in cases where countries need a rescue.

The planned date is even sooner than the 2013 target announced by EU leaders in October’s summit, which itself came as a nasty shock to the bond markets. It gives the eurozone’s struggling debtors far less time to clear up their public finances. The plans will be aired at the EU summit in December.

Elena Salgado, Spain’s finance minister, warned Germany that the proposal risked making matters worse at a delicate moment. “We don’t think this idea is quite appropriate right now, including after 2013,” she said.

GR: Elena Salgado fears for her position. That is all. The delicate moment she refers to is nothing but public anger slowly rising which, from a political point of view, means that a politician’s position is at stake. Ms. Salgado obviously finds that shutting off the spigot of fiat money simply means she, and her party along with her, will be booted out of power. There are absolutely no other considerations in her line of thinking; certainly there are no fiduciary duty considerations.

Mrs Salgado said there was “an abyss” separating her country from Ireland and Greece. “We have a solid financial sector. Austerity and reforms are producing exactly the results we forecast,” she said, insisting that the country was the victim of a “speculative attack”.

However, iFlow data from the Bank of New York Mellon shows a major withdrawal of foreign funds from Spanish debt markets, mostly coming from “real money” investors. “The flows look rather similar to what we saw in Greece,” said Neil Mellor, the bank’s currency strategist.

GR: I had taken the other side of the bet on this issue a few weeks back. Had the Spanish prime minister taken the bet then, once again, I would be a rich man.

Portugal had the added strain on Wednesday of a near total shutdown of its airports, harbours, trains and buses as unions launched their first general strike in 22 years, protesting against the latest austerity budget and wage cuts of 5pc for public workers.

“Sacrifices by workers is not the way out of the crisis,” said Manuel Carvalho da Silva, of Portugal’s CGTP union, echoing a refrain now heard in a string of European countries.

Jürgen Michels from Citigroup said Germany’s haircut proposals would make it much harder for struggling Club Med states to raise money, risking a self-fulfilling crisis. “Portugal and Spain would be probably forced to tap the current European Financial Stability Facility, which could bring the facility to its limit and even exceed it,” he warned.

Mr Michels said the results would be so destructive that Germany is unlikely to win EU backing for the idea.

However, Chancellor Angela Merkel has already announced that she will “not back down” on demands for creditor pain. In an odd statement this week she said investors had made money “speculating on the bankruptcy of countries” and must now share the burden of rescue costs.

Critics say Mrs Merkel seems unwilling to acknowledge the difference between two vastly different types of players: hedge funds who are “short” eurozone debt and therefore stand to benefit from her policy; and the pension funds, life insurers and savers (many of them German) who bought southern European and Irish debt in good faith and now stand to lose.

GR: Pension funds and life insurers would not have purchased sovereign debt had it not been falsly graded investment grade by the rating agencies. Rating agencies that are working for and are sponsored by the banks I might add. So, having already been duped (very often willingly because of political favor) over the years, now pension and insurance funds should throw even more money after bad? This is a problem created by the politicians with the assistance of the bankers. It is time we cut the funds off to them. Whatever is lost is lost anyway. We should not give them even more.

There is confusion in the markets over how different types of debt will be treated. The Irish government has already enforced an 80pc haircut on the junior debt of Anglo Irish Bank but insists that senior debt is sacrosanct. That guarantee is now worthless since Fianna Fail is certain to lose the election in January.

GR: From the legal point of view there is nothing sacrosanct about senior debt. Quite the contrary. That’s the role they are suppose to play by law; i.e. take the losses. Senior bond holders reap the profits when things go well. They should shoulders the losses when things don’t go well.

Opposition leaders have not clarified how they will handle the issue. However, it is becoming ever harder to explain to the Irish people why they should suffer austerity in order to ensure that foreign holders of damaged Irish bank debt should lose nothing. The country’s Labour Party already favours burden-sharing. The concern is that once Ireland cracks on senior debt, the dam will break across Europe.

Greg Gibbs from RBS said the European Central Bank (ECB) had helped cause the latest eurozone eruption by draining liquidity too soon and signalling that it aimed to end the “addiction” of struggling Irish and Club Med banks to its cheap funding window sooner rather than later.

“This tough stance is reigniting a eurozone debt crisis. The ECB needs to rethink its plans,” he said. The RBS team said the central bank should dramatically increase its purchase of eurozone debt, especially Spanish debt, starting with €100bn sovereign and corporate bonds.

José Luis Martínez Campuzano, Citigroup’s economist in Spain, also faulted the ECB for letting matters get out of hand. “We have a situation where bodies that should be playing a key role are sitting on the sidelines repeating messages that have little to do with reality and the true risks ahead. That is the case with the ECB,” he said.

However, it is unclear whether the ECB has the firepower – or the legal mandate – to carry out the sort of bond purchases seen in the US, where the US government stands behind the Federal Reserve.”

GR: What is clear whether in the US or in Europe is that monetary policy has lost traction. It has been gradually losing traction over many years but it has now pretty much reached the point of least effect if at all. Doing more of the same in the clear absence of a demand driver anywhere in the world only serves to obliterate the currency.


November 14, 2010

As the only people that held out against the Lisbon Treaty till they succumbed to the ignorance politicians, I have hopes Ireland will reject the help of the EU and/or the IMF for it is no help at all. As was the case for Fannie Mae, AIG or Greece for example, financial aid is not aimed at aiding the people nor, indeed, the country or the state. EU and/or IMF help is money that will be given to the bond holders of the debt; i.e. the banks. Ireland should simply default and force the bond holders to take their lumps. Iceland has done it. The black letter of the law stipulates that to be, in fact, the role of bond holders. Fiduciary duty says that’s the way it should happen. Personal responsibility and plain simple decency say that’s what should happen. Iclandic people went as far as investigating how the whole scam worked and naturally it turned out that 80% of the credit was distributed to bankers and their friends (echos of Friends of Angelo). Thus, rightly, Icelanders deliberately opted for default and so should all of us… if we had any balls.

I know Ireland can and have high hopes they will reject IMF help. Remember the Lisbon Treaty folks! Remember Iceland. No longer should we the people be pushovers.

From Michael Shedlock:

IMF Ready to “Help” Ireland; Can the IMF “Help” Anyone?

The IMF is ready, willing, and able to “Help” Ireland according Dominique Strauss-Kahn, the IMF Managing Director.

Please consider Strauss-Kahn Says IMF Can Help Ireland’s ‘Difficult’ Situation

The International Monetary Fund stands ready to help Ireland if needed, its managing director said, as market concern about the country’s debt crisis continues.

“Everybody knows that the situation with Ireland, it’s a difficult situation,” IMF Managing Director Dominique Strauss-Kahn told reporters today in Yokohama, Japan. “So far I haven’t received any kind of request. I think they can manage well. If at one point in time, tomorrow, in two months or two years, the Irish want support from the IMF, we will be ready.”

Bailing out Ireland’s financial system could cost as much as 50 billion euros under a “stress case” scenario compiled by the Finance Ministry and central bank. The country’s gross funding need for 2011 will be 23.5 billion euros, falling to 18.6 billion euros in 2014, the nation’s debt agency said yesterday.

Can the IMF “Help” Anyone?

Inquiring minds are asking “Can the IMF Help Anyone?”

That’s a good question. Mish readers may be shocked by my answer: “Yes It Can!”

The irony is no country in its right mind should ever accept “help” from the IMF.

This apparent paradox can be explained by the fact that “help” from the IMF is akin to tossing an anchor to a struggling swimmer.

Help does not go to the country accepting the offer of help. Rather “help” goes to the creditor nations who would otherwise bear the risk of a default by the debtors.

In this case, the IMF will not help Ireland. Instead, the IMF would screw the citizens of Ireland while bailing out the bondholders. Who are those bondholders?

The answer of course is banks in Britain, Germany, the United States and France.

Irish banks, bonds hit as EU eyes survival plan

Please consider Irish banks, bonds hit as EU eyes survival plan

Shares in Ireland’s banks hit record lows and national borrowing costs reached new euro-era highs Monday as the government presented its latest plans for financial survival to the European Union’s economic commissioner, who has the power to order changes.

The interest rates charged on the treasuries of Ireland, as well as fellow indebted euro-zone members Portugal and Spain, have been rising ever since German Chancellor Angela Merkel last month said she expected any future EU bailouts to come with new rules requiring bondholders to absorb some losses.

But Ireland is experiencing by far the greatest skepticism from would-be lenders, who look with horror at Ireland’s projected deficit of 32 percent of GDP, a modern European record.

Bank of Ireland and Allied Irish have received billions in state aid to cover their dud loans to bankrupt construction tycoons, while Irish Life & Permanent has received no bailout help but is most exposed to Ireland’s depressed market for residential property.

Traders said a widely read article in the Irish Times by University College Dublin economics Professor Morgan Kelly – known in Ireland as “Dr. Doom” because of his accurate forecasts of the death of the Celtic Tiger economy – added to the gloom.

Kelly forecast that state support for banks would cost taxpayers an extra euro30 billion beyond the euro45 billion to euro50 billion declared last month by Lenihan. He accused the government of maintaining “a dreary and mendacious charade” on the true scale of property-based losses in the pipeline.

Kelly called the current deficit-fighting push “an exercise in futility” and rated Ireland’s financial fate alongside that of the Titanic. He said there was no point trying to cut billions from the budget “when the iceberg of bank losses is going to sink us anyway.”

“We are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers,” Kelly concluded.

As the traditional owners of Irish treasuries – chiefly banks in Britain, Germany, the United States and France – seek to dump them because of their falling value and increased perceived risk, new sellers can be attracted only by offering higher yields.

Traders say the main buyer of Irish bonds in recent weeks has been the European Central Bank.

Reject Phony Offer of Help

Irish voters, if they have a chance, should reject this phony offer of “help” from the IMF, the EU or whoever. Merkel has it ALMOST correct when she said “any future EU bailouts to come with new rules requiring bondholders to absorb some losses.”

I say “almost” because the future is now. In addition, I say “almost” because “some of the losses” is inadequate. Bondholders should suffer losses down to the last penny. If they are wiped out, so be it.

The citizens of Ireland should not be responsible for those losses. In short, they should tell the IMF to “Go to Hell”. The simple way to do that is default.

To get its economy functioning again, Ireland will still need austerity measures, public sector reforms, bank reforms and other initiatives, but it certainly does not need any anchors from the IMF. Ireland has enough problems already.

No joy in confirmation (re-post)

November 12, 2010

No joy in confirmation…

By guidoamm

Greece, Spain, Latvia, California, the UK, Italy… it could be anyone.  It really does not matter. What matters is that this is the clearest indication yet that our monetary system has hit a brick wall; a mathematical brick wall that is enshrined in a monetary logic predicated on accelerating credit and money creation at rates that far exceed the rate of growth of the economy.

The rationale for the use of an unchecked fiat monetary system is well established. Fine. Now we have to deal with the political and social consequences of said system. Namely, when the monetary system hits the wall as it did in the 30s and again in the late 60s and again today, the result is always the same i.e. excess debt, gross industrial overcapacity thus rising unemployment, declining purchasing power,  implosion of asset values with the direct result of a collapse of state tax revenues.

Under these circumstances, rolling over debt becomes increasingly difficult till the moment it becomes impossible. Try this for size. Just in the current year 2010 the USA will have to roll over something in the region of US$450Billion. That’s just the USA.

If you cannot spot the problem, here it is. In a US$ based fiat monetary system predicated on floating exchange rates as we have today globally, sovereign currencies derive their value from the value of other currencies. Hence, sovereign currencies derive their value from other sovereigns buying each other’s sovereign debt.

$450Billion is pretty much a whole chunk of the entire global sovereign ability to buy debt. This means that in order to succeed, the US government must attract virtually the entirety of budgets of most sovereigns thus leaving no funds available for countries to buy any other country’s debt…. ergo… the floating exchange rate mechanism as contemplated by our current monetary system is broken…. kaput; dead; it is no more; it is pushing up daisies;

Where do we go from here?

If our politicians were a sober well meaning bunch, I’d say we have nothing to worry about. A bit of austerity for a few years and we’ll be on our way again.

But politicians being what they are and operating in a legal and political environment that is geared towards ensuring expediency over efficiency or intrinsic value, I say a world war is a lock-in.

The problem starts with the inability of government to finance its requirements via tax revenue.  Thus government increasingly relies on the capital markets. As even the capital markets begin to show the strain, governments must curtail public spending.

Curtailing public spending brings you this:

As you curtail public spending and as public anger rises, and as the shenanigans of the power elite keep coming to light(

the public is sure to turn violent.

As the public turns violent, governments take the brunt of the violence and political control may be lost and anarchy and/or revolution ensue.

That’s the point at which governments must have done their homework well in advance and prepared a bogeyman somewhere off their shores so as to be able to, the moment come, turn the attention of the masses away from their own failings and the failings or our entire economic/social/political models.

Clarity and objectivity by James Rickards

August 23, 2010

Lest we forget how we arrived here:

Once, the strength of a bond was based on the reputation of its issuer.

But a change began in 2008, as Fannie Mae and Freddie Mac verged on bankruptcy, and legislation was rushed through the US Congress to restructure them. The political importance of these institutions created a new world, one in which a bond’s performance is determined by the reputation of its holders.

Next week the US Treasury hosts a major conference to discuss Fannie and Freddie’s future. But to understand how they changed the rules, we must return to the circumstances of their restructure. Such things are normally straightforward. Equity is wiped out, assets are revalued and the gap in the balance sheet is uncovered. Bondholders take a “haircut” – meaning a lower than expected return – or a principal reduction. Some principal converts to equity, management is replaced; voilà, life goes on.

Curtailing social expenditure…

August 18, 2010

I won’t bore you with more links to past posts. If you are interested in perusing some of numerous previous posts by the same title which should be read along all the posts titled “tic, toc…” you can to a search on this blog.

Countdown to war is still on… but I have a feeling it is accelerating…

Far from me to give any credence to or have respect for their operating model but I happen to agree with Moody’s take on the state of our sovereigns:

Some excerpts (but it is worth reading the entirety of this short article) –

Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has ‘fast-forwarded’ history, eroding all the time available to adjust, ” said the group’s quarterly Sovereign Monitor.

Guido here: That’s right! Because inflation is inherently an accelerating dynamic. Hence the reason that since 1980 sovereign debt in the USA has progressed by 1200% but GDP only progressed by 100% in the same time period.

Countries that “fail to demonstrate the level of social cohesion required to stabilise debt” will lose their AAA rating. “Intra-generational” conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards. ”

Guido here: In plain English, the above means that social expenditure must be curtailed and that doing so will inevitably generate social unrest that must be managed (i.e. Greece).

This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. “While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change.”

Guido here: As above. Social expenditure must be curtailed.

All the above results necessarily in things like this (of which you will find dozens of examples in previous posts):

The basic winter fuel payment, made to more than 12 million people, will also be cut by £50 for new recipients and £100 for the oldest.

Reality vs academic research… sometimes they match

August 14, 2010

Eric Sprott digging out scientific papers that show the inherent diminishing return of debt i.e. showing the mathematical limit of excessive spending.

With thanks to Zero Hedge.


If we use the Fed’s own numbers, the impact of debt on GDP is even more dismal. In Chart B below, we present the marginal impact of debt on marginal GDP since 1966 using data from the Federal Reserve. Deficit spending, which has generated smaller and smaller increases in GDP over time, is now generating a negative impact on GDP due to the costs of servicing the debt. The chart suggests we have already entered what PIMCO refers to as the “Keynesian endpoint”, where the government can no longer afford to increase debt levels.10 No debt = no stimulus. No stimulus = ???

End excerpt –

Eggspurt (expert) research is of course always welcome but the ability to notice empirical evidence can save you a whole bunch of time and headache. Deficit spending has an inherent diminishing-return quality about it. How else could you explain that since 1980 government debt has progressed from US$2Trillion to US$12Trillion and yet GDP only progressed from US$6Trillion to US$14Trillion? This is simple arithmetic that even modest merchants use to judge the viability of their shops. But above all, for anyone that wants to see it, this is an economy that has been aggressively stimulated for many, many years and yet the main stream political/economic elite is calling for more stimulus (much more if your name is Krugman, somewhere in the realm of blue-yonder more). Recall here the definition of insanity.

As I outline in the post below, other than a lag in time there is no difference between government and private debt. Eventually both the interest and principle must be paid through taxes. Pay today or pay tomorrow but pay we must because government has no money of its own. Government’s only income comes from you and me. So that in a situation where both government and individuals are taking on increasing amounts of debt, you must perforce reach a mathematical limit beyond which underlying economic activity no longer suffices to service the debt (notice in this regard the various nations, states and municipalities that are circling the fiscal drain as we speak). At this point, taking on further debt in an attempt to stimulate economic expansion is sheer madness.

But of course. Though mad it might be, deficit spending is populist and politically expedient. So deficit it is for as long as we can maintain some degree of social expenditure. But gradually as the social promises our leaders handed out over the past half century must necessarily be curtailed, social unrest will follow till revolution enters the realm of the probable. At that point our “leaders” will plunge us in a world war.


August 12, 2010

Post added to on August 13, 2010 – last few paragraphs

The latest reason people are getting their knickers in a twist is Laurence J. Kotlikoff’s ruminations on the de facto bankruptcy of the USA. Professor of economics at Boston University, Mr Kotlikoff bases his comments on an IMF report that sets forth some indisputable arithmetic whereby current and projected US GDP falls short of satisfying current and projected state spending to the tune of over $150Trillion over the next twenty years or so. That’s Trillion with a “T”.

Kotlifoff’s Bloomberg article is being pored over and dissected by some of the brightest minds in the world as well as some of the less bright bulbs in government and everyone has something to say about it whether for or against the arguments set forth.

Rather than adding to the analytical cacophony, I prefer to whittle down the argument to simpler  terms and it goes something like this.

Short of returning to barter, we have no choice but to make use of some type of money. In actual terms, money is just like barter but since it allowes us to break down the value of an item in small fractions of value, it allows people to interact more easily than, for example, exchanging 20150 shovels to buy a car. Instead, you sell your shovels for bits of value that you then can deposit or carry around in order to exchange for other items and services you require.

So, money is necessary and is a fantastic concept.

What remains to be chosen now, is how the monetary system is to be managed.

In our life time, since 1913 to be precise, nations have gradually moved to a fiat monetary system. The USA were the first to adopt fiat money but then since 1971 gradually all other countries world wide have followed suit.

Fiat money is a rather ingenious concept to be fair or, at least, it could be. But the variety of fiat money first adopted by the USA and then imposed on the rest of the world is inherently self destructive as has been proven several times since the advent of modern finance in the 1500s. The variety of fiat money adopted by the USA in 1913 is the type that is predicated on the perpetual expansion of the monetary base ergo inflation.

At this point we can debate whether the choice was deliberate or forced and whether or not it was born of ignorance or intent. But that is not the point I wish to make. The point is that this is the monetary system we have to contend with.

The historical logic of fiat money has manifested itself several times since 1913. As the sole users of fiat money from 1913 to 1970, the USA first flirted with bankruptcy in 1929 only a short 16 years from adopting the system. In fact, the depression engendered then lasted up till WWII when the USA emerged as the only standing industrial power. As the only manufacturer to the world, the USA were then once again free to expand the monetary base in leaps and bounds without immediately suffering the effects of inflation. But by 1970 the cows were, once again, coming home and the USA were de facto bankrupt … yet again.

In 1971 salvation came in the form of the abrogation of Bretton Woods so that the then industrialized world moved onto a system of US$ based floating exchange rates. Thus since 1971 first Europe and then gradually all other countries have moved onto a fiat monetary system based on the US Dollar. Thus, regardless of when a country has adopted fiat money, due to the magic of floating exchange rates, today we all must contend with an inflationary dynamic that is just shy of 100 years old.

That is a lot of inflation.

Now; economists can calculate, extrapolate, study and dissect data but the logic of fiat money is well known. The only variable is time but the conclusion is inevitable and has been evidenced several times since the Renaissance. To be fair, history is replete with examples of catastrophe brought about by monetary debasement whether fiat or otherwise. It is just that fiat money is that much easier to debase masked as it is by government’s ostensible fiduciary duty.

So government makes the arbitrary and unilateral decision to adopt fiat money. Fiat money is predicated on inflation ergo it is predicated on the debasement of the currency.

So what’cha gonna do!!

Government is an entity. As an entity, government has made a choice that it thinks will allow it to achieve its ambitions. This choice was made 100 years ago and then imposed on all other governments. For governments and politicians today to come out and express doubt regarding a decision taken 100 years ago and that, in fairness, appears to have worked rather well, is unconscionable. Of course, we will never know what an alternative monetary system may have brought about but what we got for the past 100 years is not so bad. So why stop now. Quite the contrary. Government thinking at this point goes something like this. If 100 years of debasement have brought us this amount of development (and profit), then why not just do more of the same.

Of course, few ever stop to consider that debasement cannot be and is not infinite. If it were infinite, then the majority would not need to work at all. All we would need is to employ a handful of geezers to operate the money printing press and everyone else could safely kick their feet up and Bob would be your uncle right?

But debasement cannot be infinite because perpetual motion has not as yet been discovered and because Achille and the Tortoise argument is demonstrably false too come to that.

But… but… but… as the initial instigators to adopt fiat money and as the only and most vocal proponents of the system, the banks are perceived as the one and only pillar of life as we know it. At least, that is how government thinks evidenced by how all Western governments have responded to this crisis. And banks are now once again profitable. In actual fact, banks are making money hand over fist. So much so in fact, that never in the modern history of banking bonuses of this size have ever been paid out.

So that, if banks are making money, it means that we truly are in a recovery. How could banks turn a profit otherwise? Tim Geithner’s latest ramblings evidence such sanguine view of the world as viewed by bureaucrats.

And since in a fiat monetary system banks are the linchpin of the entire construct, if the banks are doing well then let the good times roll. That’s because, it is thought (or it is pretended), that if the banks are making money, this money will translate into loans which in turn will translate into economic activity and thus in expansion of the economy thus, eventually, in more money for the banks. And everyone should be happy.

The question of course is: are you happy?

Overlooked by almost all, is the fact that banks, in fact, are making money. But a significant chunk of the money they are making is due to government largesse and overtly and blatant preferential accounting treatment. Banks today cannot lose. Granted it is not all banks that cannot lose but certainly the banks members of the Federal Reserve cannot lose.

But, to return to Kotlikoff. As most pundits, analysts or economists, we’re all wringing our hands about something that in fact is following a logical evolution that is inherent in the system and the driver of which is the monetary system. Fiat money eventually obliterates itself. Fiat money in a democratic context eventually brings about the demise of government. The only variable is time and, certainly, government aggressive and continued intervention can stretch out the time line. But the longer you push back the natural tendency of the system to reset the more force you accumulate for the eventual unraveling.

What now remains to be seen is how the unraveling will come about.

As I never tire to repeat in these pages, modern government (whether democratic or autocratic) cannot contemplate any monetary system other than fiat. Fiat money is a brilliant construct. It is flexible and it is adaptable if easily manipulated. So that once we’ll come out of this crisis, I have to believe we will once again institute a fiat monetary system.

But from now till we emerge from this crisis, what are the likely events that will shape our lives? Since the viability of fiat money is predicated on inflation it follows that the system must constantly be fed at the bottom by assimilating new currencies and new markets. In the 30s monetary or political unions were unthinkable so that the crisis eventually was resolved by war. In the 70s, the monetary system absorbed a whole bunch of currencies so that then excessive US$ inflation could be released into European markets. Then came the Euro. Then globalization. Today, the US$ monetary system has assimilated all markets and all currencies. And guess what. We are today where the USA were in 1929 and 1970. That is we are now bankrupt. So what now? Bankruptcy is only deleterious to the extent that government cannot meet the social promises it has made. As social expenditure is curtailed, social unrest follows. As these two dynamics reinforce each other, the risk of revolution becomes real. But the West cannot allow revolution within its “civilized” borders. Revolution is something that happens in banana republics, not in the developed civilized West. So, watchyagonna do?

In my opinion the only thing that can now allow us to unwind the amount of inflation we have accumulated since 1913 is a war. A global war that is. And I’ll go out on a limb too on this one.

Regardless of where the war starts and why which cannot be predicted (we are neither short of excuses or triggers presently), if I am right and we are about to be plunged into a world war, I can predict where the war has to be taken to and that would be to a band of land that snakes from India through China to South Korea.

A bunch of things….

August 10, 2010

Obvious signs of overbearing government as enshrined in the inflationary fiat monetary logic:

LOS ANGELES – A former city manager’s huge $787,000 salary is only half of the unusually generous total compensation given to the official in the small California blue-collar city of Bell, according to a city official.

Robert Rizzo’s benefits, which included 20 weeks paid vacation, brought his total annual compensation to more than $1.5 million, according to Josh Pulliam, an interim public information officer for the city.

What the great French historian Alexis de Tocqueville would make of today’s Obama administration were he alive today is anyone’s guess. But I would wager that the author of L’Ancien Régime and Democracy in America would be less than impressed with the extravagance and arrogance on display among the White House elites that rule America as though they had been handed some divine right to govern with impunity.

Which obviously results in these sort of sentiments amongst the population:

There’s a class war coming to the world of government pensions. The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The biggest political change in my lifetime is that Americans no longer assume that their children will have it better than they did. This is a huge break with the past, with assumptions and traditions that shaped us.

The ruling class’s appetite for deference, power, and perks grows. The country class disrespects its rulers, wants to curtail their power and reduce their perks. The ruling class wears on its sleeve the view that the rest of Americans are racist, greedy, and above all stupid. The country class is ever more convinced that our rulers are corrupt, malevolent, and inept. The rulers want the ruled to shut up and obey. The ruled want self-governance. The clash between the two is about which side’s vision of itself and of the other is right and which is wrong.