Posts Tagged ‘sovereign default’

The inevitability of the diminishing marginal utility of debt… part II

December 4, 2011

The social promises that activists, unions and individuals thought had been won over the past 40 years are being blown out of the water for the expedient political stratagems they were.

A debt based fiat monetary system (DBFM) can only work provided credit markets can be expanded. Credit markets can be expanded only when:

a) GDP must expand at a greater degree than the debt market

b) Interest rates must progressively be lowered

c) A combination of the above two conditions

Clearly as already pointed out here, condition ‘a’ has not been met since 1980. However, this  can be obviated by assimilating other markets and currencies in your monetary system. Hence the abrogation of Bretton Woods and the institution of the Floating Exchange Rate mechanism which led to the Euro and globalization. So regardless of how you achieve condition ‘a’, this is a strategy that is limited mathematically.

Condition ‘b’ is obviously limited mathematically too. The alternative of course would be to allow some inane program as was proposed last year to put a ‘use by’ date on money or charge savers.

When credit expansion has outpaced GDP expansion by orders of magnitude for four decades and when interest rates are knocking on the 0 limit, there is an absolute point at which it is mathematically impossible to expand credit. Greece is there now.

Simply put, our current monetary system is a pyramid scheme. This means that all our economic constructs are predicated on a constantly growing number of contributors to the system. For as long as more input outpaces more output, the system can be expanded and looks solvent. When more is taken out than what is put in, the system detonates.

Social security is a noble idea. Social security as it has been devised, implemented and managed is a pyramid scheme. Social security is a preordained consequence of DBFM. Social security as it has been implemented is predicated on the perpetual expansion of credit markets. If for whatever reason credit markets can no longer be expanded or, Ye Gods!, should contract, social security cannot be maintained… and will be reneged upon…

This message is important. It is particularly important that this message be understood by those entities that are used by government to enforce government policy. For example. It is very important for the police in the USA and for the new international Gendarmerie that has recently been set up in Europe to understand that they are in the same boat as everyone else.

Our current monetary system has a well defined mathematical limit. When this limit is approached, all social promises and public expenditure will gradually be rolled back. Historically speaking the way out of this mathematical dead lock is a war.

How the war starts and where it starts matter not in the least. Historically speaking, the insolvency of prominent sovereigns has always resulted in war. The EU and its individual members are insolvent. China is insolvent. The USofA is insolvent.

Social unrest a precursor to total war.. tic-toc… tic-toc…

May 25, 2011

Things are coming together nicely. What we are missing is for these localized national movements to coalesce across borders and Bob will be your proverbial uncle… our leaders will precipitate a conflict requiring drafting millions into the war effort…

Of course, the alternatives are only two. Let things develop and do nothing. The sequence of events would go something like this:

– mobs start roaming the streets looking for some politicians and bankers to lynch

– governments are taken down wholesale

– political and social strife for control

– likely rise of an extremist government

Second alternative, would be to come clean, let the banks fail, abolish central banks, repudiate debt based fiat money, place monetary policy within the democratic framework and prosecute all fraud dating back to, say, the past 10 years.

So, what are you going to do?… To answer this question it helps to know that similar junctures in history have resulted in global conflicts. Global conflicts typically preserve banking and, to a certain extent, political interests.

Some of us consider ourselves progressive, others conservative. Some of us are believers, some not. Some of us have clearly defined ideologies, others are apolitical, but we are all concerned and angry about the political, economic, and social outlook which we see around us: corruption among politicians, businessmen, bankers, leaving us helpless, without a voice.

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.

From the horse’s mouth

February 4, 2011

Significant excerpt emphasis added:

Quoting the economist Herbert Stein in saying that “if something cannot go on forever, it will stop,” Bernanke said that the federal government must stabilize its budget.

The question, he said, “is whether these adjustments will take place through a . . . careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”

The above is confirmation that fiscal revenue is indeed declining thus evidencing an underlying deflationary bias. The above also means that the authorities are aware of the potential outcome of their monetary policy. Bernanke’s astounding comment shows that he is familiar with Austrian economics and understands the mechanics of what is happening. Compare his comment above to the following:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved. — Ludwig von Mises”

Since it appears that Bernanke does understand the dynamics involved, then the legitimate question that comes to mind is why persevere in a course of action that is clearly and glaringly politically expedient thus corrupt and detrimental to the well being of the nation and, by virtue of the US$ being the global reserve currency in a floating exchange rate environment, detrimental to the stability of other nations too.

Even more absurd is how Bernanke is willing to take credit for some things but not for other things that are intimately related. It is disingenuous of Berrnanke to deflect even partial responsibility for the rise in prices of commodities given that he is taking credit for the increase in value in the financial market for example. But more to the point, Bernanke is trying to make lemonade with the lemons he has unwittingly been left with. Bernanke is obviously counting on people’s short attention span. Namely, the original stated intent of QE was to keep interest rates artificially low by artificially propping up the bond market. What has happened instead is that despite the hundreds of Billions spent on QE the bond market has sold off regardless and interest rates took off effectively increasing the cost of new loans for companies and individuals.

What a crock of shit.

Must read (Mike Shedlock & Contrary Investor)

December 31, 2010

Below is the link to and the full text of a succinct but very clear distillation of reality brought to you courtesy of some of the best analysts and commentators alive today.

Looking for Love in all the Wrong Places? Contrary Investor Examines Misguided Fed and Obama Admin. Efforts to Increase GDP Via Increased Consumption

The latest Contrary Investor Subscriber Report contains an interesting set of charts and commentary that shows just how misguided Fed and Obama administration focus on supporting consumption as the means to improve GDP.

Their analysis is always well written, so inquiring minds may wish to take a closer look.

I have permission to do occasional clips so please consider this clip from Looking For Love In All The Wrong Places?

Looking For Love In All The Wrong Places?…You are all very much aware of the change in market tone and sentiment over the last four months. Strategists and investors fretting over rapidly deteriorating macro leading economic indicators (remember the ECRI reaching levels always consistent with recession?) and contemplating the possibility of a double dip has given way to these same folks now trying to one up each other in putting forth ever higher domestic GDP growth estimates for the new year. Goldman (Jan Hatzius) has been a poster child example of this about face, but they have plenty of company. The transition is not hard to understand. With the heavy POMO started in September, followed up by QE2, and now the tax cut extension legislation that should add about $400 billion of “new” fiscal stimulus in 2011, we better have an improved outlook. Certainly THE issue as we move into 2011 is the potential for organic economic growth, or otherwise. Personally, we just can’t put a big “multiple” on marginal stimulus (read borrowed money) additions to macro near term economic expansion. But this issue will not become relevant until 2011 is well underway.

As we see it, one of the really big keys for economic and we believe ultimately financial market performance in the new year will be first, whether corporations spend their currently amassed “savings”. It’s more than well known that through both operations and borrowing in a generationally low interest rate environment, corporations are sitting on top of a boatload of cash at the moment. We’re already seeing the M&A deals primarily in tech and health care sectors taking place. Secondly, again if QE2 is to be effective, corporations must spend their cash domestically, and not let that cash “leak” into foreign direct investment and/or capital markets. Preferably, corporations would spend their cash domestically on productive investment. Even we’ll admit, that would be bullish. And crazily enough, it would be in stark contrast to what we believe are the misguided policies of the Fed and US government over the last three years.

Right to the key point of this portion of the discussion that happens to be a question and will hopefully become clear as we look at a few longer term data points. Why has the Fed and Administration focused their monetary and fiscal policies virtually exclusively on consumption when it is productive investment that is the key to longer term sustainable economic health and ultimately growth?

The Fed and Administration are carrying out a failed longer term policy of focusing virtually exclusively on trying to stimulate consumption. Unless they change their ways, and fast, it will only be the corporate sector that can truly save the day for the longer term sustainable health of the US economy. Keep an open mind and let’s walk through a bit of history.

The top clip is self explanatory. You may also remember, and we will not drag you through it again, that US credit market debt relative to GDP began a three decade acceleration in the early 1980’s leading up to the recent peak of a generational credit cycle.

We believe the message of the combo chart above is as clear as a bell. As consumption became an ever larger piece of US GDP over time, the ten year rolling average of US GDP growth went into longer term rate of change decline.

The point is that debt financed consumption pressured the longer term growth rate of US GDP over time as consumption adds nothing back to the longer term infrastructure and productive capacity of the economy itself.

Now, remember that disposable income can either be consumed or saved. And it’s that very savings that ends up as productive economic investment over time. So next up is a look at the US savings rate relative to the 10 year rolling average of US GDP growth over the last half century. Notice anything? Of course you do.

From the late 1950’s through to the early 1980’s, the US savings rate reached ever higher highs, as exactly did the rolling ten year average of US GDP growth. But once the decline in the savings rate began, so did the decline in the longer term growth rate in US GDP. Directionally these two data points are twins.

Below we’re looking at the year over year change in nominal US GDP. About as simple as it gets. Alongside is the year over year change in non-residential US fixed investment. A very broad proxy for productive investment/corporate capital spending. These two data points are about as highly directionally correlated as they come. And what this clearly implies is that the longer term rhythm of the US economy is integrally tied to productive investment. Not consumption, but productive investment.

So stepping back just a bit, why have the Fed and Administration been focusing their efforts on consumption when it’s clear that productive investment is the driver of longer term US economic growth? Is it consumption that allows China to grow its economy at double digits, or productive investment? Again, we know there has been over investment in China and we have too much productive capacity globally for now, as this is really a story for another complete discussion. But China never could have “arisen” economically without an important investment in long lived productive assets. You know the fiscal remedies so far stateside. Cash for clunkers, home buyer tax credits, appliance purchase rebate credits, the recent one year drop in the employee side of payroll tax rates, etc. – every single initiative focuses on consumption as opposed to investment. Again, maybe we’ll look like nut balls before the current cycle is over, but Fed and Administration policies are not going to put the US on a longer term firm economic footing, especially within the context of a globalized economy. The US is not going to borrow and consume its way to prosperity. That only enriches the nations doing the actual production. We did that over the last thirty years and the rolling ten year US GDP growth report card is our reward.

Unfortunately, as opposed to supporting and encouraging this transition from reliance on consumption (in a still highly levered economy) to increasing focus on productive investment, the Fed and Administration are acting in contravention. They appear blind to the messages of history. We’re scratching our heads. To be honest, we have only one answer as to why this is happening, and we sound like conspiratorial maniacs when we voice it. Consumption favors the financial sector, especially if that consumption is even partially financed.

It’s simply out in the open these days that the Fed and Administration have done everything in their power to protect the financial sector in the US, even at the expense of the taxpayers and small business. The same thing is happening in Europe. Could it really be that this misguided and myopic focus on consumption as our current savior is simply an extension of that blanket of “protection” to the financial sector? Let’s hope not. Let’s just hope it’s ignorance, ok?

Explaining Fed Actions

The Fed is clearly beholden to the banks, especially large too-big-to-fail (TBTF) banks. Certainly the Fed may sound concerned about unemployment, but it’s safe to assume the Fed’s overriding concern is borrowers’ ability and willingness to pay back the banks.

History shows Bernanke’s idea of inflation targeting at 2% ignoring asset bubbles that build along the way is economically stupid. So why does he do it?

For the sake of argument and in deference to Occam’s Razor , let’s assume that all of the Fed’s mistakes are out of ignorance as opposed to some conspiracy by the Fed to transfer wealth to the financial sector. Simply put, never ignore stupidity when it is a plausible answer to why something happened.

Regardless of why, nothing changes from the perspective of the Bank CEO. The TBTF banks know full well they can take enormous economic risks, secure in the knowledge the Fed will bail them out if they get into trouble.

The latest twist is Citigroup’s chairman now brags that Citigroup is “Too Interwoven To Fail”. Please see 98 TARP Recipients Close To Failure; Citigroup’s Chairman Gives Reasons Citigroup Should Be Broken Up for details.

When profits are rising CEO and executive compensation soars. When the banks fail, taxpayers bail out the banks and shareholders take the hit. However, the CEO gets a golden parachute worth hundreds of billions of dollars. Thus, from the perspective of TBTF banks, the right thing to do is take enormous risks.

The same thing is happening in Canada right now. Please see Canadian Borrowing Gone Mad: A Look at BMO’s Misguided Balance Sheet Theory and the Keep on Dancin’ Market Share Theory of Toronto-Dominion for further discussion.

This process explains the massive boom bust cycles we have seen and how wealth gets increasingly concentrated into fewer and fewer hands over time.

Mike “Mish” Shedlock

Here is my goofy attempt at explaining the same thing:

Essentially, the whole thing is down to the efficiency of money. Since inflation conforms to the law of diminishing returns, the efficiency of each new unit of credit and/or money has a diminishing effect on the expansion of GDP.

As the proponents and enablers of a debt based fiat monetary system, banks, particularly those banks that gravitate around the creator of the currency in the USA known as the Primary Dealers, stand to benefit first, third and last in the creation of each unit of credit and/or currency. But, as the politicians agreed to impose the monetary system proposed by the banks unto society, they (unwittingly?) also agreed to always put the interest of the banks first and foremost as it is perceived that only by saving the banks can the state attain it’s perceived rightful raison d’etat.

Alabama town failed pension is a warning

December 23, 2010

If you followed my “tic, toc…” posts, this press article is the first shot across the bow of state finances in the Western world.

As I mentioned before on this blog and on comment pages of some news papers like The Telegraph, at this stage of the crisis, options are few and very well defined. Whatever we may do going forward, pension promises across the West cannot and will not be kept in their original form and, in some cases, will be terminated outright.

Our options today are:

Save the banks and let society alone shoulder the costs of this developing crisis that, incidentally, is about to get worse.

Let the banks sink and ensure that all share the burden of the crisis

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.

Who do the IMF or the ECB really want to bailout?

November 17, 2010

As the mainstream press appears to steadily if hesitantly move towards a more objective role, the Wall Steet Journal today reports who the real beneficiaries of the bailouts really are.

Not news to us of course.

All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.”

And there you have it.
Banks are once again trying to skirt their primary legal and fiduciary responsibilities. Banks are businesses. Businesses make strategic decisions in an attempt to earn a profit. When decisions turn out to have been wrong, a business takes the loss or goes bankrupt. It is how it is supposed to work in open free economies.
But in our bank imposed, debt based, fiat monetary system, not only are banks perceived as indispensable to the normal functioning of the system but they have also placed themselves above the law. This would not be such a bad thing if it weren’t for the fact that banks have successfully maneuvered into this position with the ongoing connivance of the political, legislative, judicial and executive framework of presumably sovereign democratic countries.
Hence the reason banks can disregard entire swathes of accounting rules that apply to everyone else. Hence the reason banks enjoy selective legal treatment. Hence the reason banks get fined token amounts in cases where they have clearly and deliberately committed fraud, if not been criminally negligent, as is the case with the ongoing foreclosure debacle that incidentally is in the process of getting “settled” for yet more token amounts and where nobody will go to jail… yet again.
Mathematically, we’ve reached the limits of this monetary system. The upshot of this situation is that debt based fiat money conforms to the law of diminishing marginal utility so that as you reach the mathematical limits of the system, the progression accelerates till it implodes. We are literally 3 to 5 years away from total implosion.
You know my position. This implosion will bring global conflict just because neither our politicians nor, indeed, our electoral political systems are geared towards doing what needs to be done or taking responsibility for a crisis years in the making. Politicians and electoral politics are inherently expedient and short-termist in inspiration and in deed thus guaranteeing immunity from responsibility. A fall-guy will be found, a sacrificial lamb will be slaughtered and a war precipitated.
Ireland like Iceland before it, should tell the banks to go pack fudge. Bank bondholders should be forced to assume their roles as prescribed by law and take the loss. Public funds must no longer be used to safeguard bank’s deliberately reckless behavior. Bondholders must no longer be saved from the scheming ways of their own creation.
Someone has suggested recently that each citizen should buy a silver coin or a silver ingot. You needn’t spend much; less than US$50 will do. But each and every person in the world should buy a small quantity of physical silver either in coin form or in ingot form. Buy it and put it in your pocket; i.e. do not buy a certificate. Buy the real physical item. Whilst you are at it, you can do the same with gold. If every sentient and reasonable person in the world did so, the monetary authorities would be quickly brought under control. Help reason and decency prevail. Buy a little bullion.

Something is not confirmed till government officially denies it (re-post)

November 15, 2010

I re-post because I can… :))… and because had anyone actually put money down on the bet, I’d be a rich man by now… by the way, other than the re-post below, notice that the Irish government is bending over backwards to deny they are in talks with the ECB/IMF.

Begin re-post:

My favorite theme. Check out any of these prior posts…

Obviously having learned nothing from Almunia and his histrionics, today we have none other than the Prime Minister of Spain declaring:

Euro Debt Crisis is Over

Now, I can understand how politicians can never learn from their and other politicians’ mistakes past and present. Politics is inherently and by necessity expedient and manipulative in nature so politicians do and say what they do and say.

What I have a harder time understanding is how presumably “informed” media agents, media companies, professionals and, indeed, members of the public can so regularly not see political statements for what they are.

Once again. As I did with Almunia whom, incidentally, has disappeared from the public scene, I will gladly take the other side of this bet. Sovereign credit spreads as well as fiscal revenue trends say this is easy money. So easy in fact, it could qualify as hustling.


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.