Ignore the problem, then what?

I want to explain a straightforward concept that is at the heart of the current economic crisis. It is the most basic reason that all the tomfoolery of the Obama administration and other G20 countries have succumbed to will do no good. It is as simple as this: they are pretending there is a liquidity crisis and refusing to deal with the real-life solvency crisis.

To illustrate let me ask you a question. If you earn $4,000 a month and owe $700,000 on your mortgage, $60,000 for cars, and $120,000 on credit cards, how many new credit cards do you need to be in good financial condition? One? Two? Five? Really, how much more credit would it take to make your finances make sense?

Say your monthly payments were $10,000 per month. You'd be short $6,000 this month. The Obama administration's solution would be to give you $6,000 this month, $6,000 next month, then a final payment of $6,000 the next month. Problem solved, right? Right? These nitwits think a little liquidity, a little cash will help, while the basic situation gets worse.

When a bank owns mortgages worth $100 million, but the actual houses are only worth $65 million, and they have reserves of $1 million, that's a problem. giving them a million dollars this month doesn't solve a blessed thing.

When a government owes $107 TRILLION and takes in $1.5 trillion per year, that's a problem. You can say pretty things and read a teleprompter like crazy but look at this. In 2005 the total owed was $67 trillion. See a problem? It's going in the wrong direction at 90 miles an hour.

When a government in that situation takes over banks in that situation, where's the solution? A little extra cash this month does absolutely ZERO. ZERO. That is why I say our government has done nothing about the crisis they created except to bring it back next year but bigger.

Is there any way they don't realize that is what they have done? I doubt it. Really doubt it.

Does this seem right to you??

"The mechanism for the bailout of Europe is the Fed's provision of dollar credit in virtually unlimited amounts via central bank swaps lines.....the Fed swap lines help the bankrupt nations of the EU ignore their mounting fiscal problems......Fed Chairman Ben Bernanke is engaged in a little geopolitical engineering in Europe -- and the people of the EU do not yet realize that a political change in control has occurred.... the leaders of Europe now find themselves beholden to the Fed for their continued political existence.... Chairman Bernanke and the FOMC have but to terminate the Fed's swap lines with the various central banks of Europe or start selling the MBS portfolio in the US, and governments from Washington to Berlin will start to fall."

"More fed swap Lines for Europe and the End of Globalization", Clifford Rossi, Institutional Risk Analysis

This has been the constant theme of this recession, soon to be depression. The powers that be, especially in the US, seize or weasel into control of huge entities so that they control everyone else's very existence. They now have it set up to the point that they can almost instantly collapse countries, banks, markets...

Is there any possible way that is a good development?

Burning ring of fire

Anyone with investments should pay attention to this article. This is what it looks like when, as I have been saying, investors start a "fundamental re-pricing of risk." The charts in the article clearly show a gigantic spike in rates right now, which indicate investors are freaked out about the prospect of banks and governments not being able to repay their loans. It's still sliding quickly downhill. Don't think that because it started on February 12th and the final collapse hasn't happened yet that it won't happen.

You tell me. What would it take to stop it now? And what would it take to get world leaders to start doing something to start addressing problems and make things better? They're still absolutely dedicated to making things much worse! Why is that?

Remember, we are right in the middle of the worst of them (see above). We are hardly safe.

Read this

One of the best articles about how 2008 became the crisis of 2010 except much bigger.

Getting nothing for something

I saw a video from Bloomberg or somewhere where a liberal IMF economist was trying to claim that the US is out of the woods, growing GDP at over 3% a year. He was challenged by my mental Siamese twin Peter Schiff, who pointed out that the measly 3% was A.) not nearly enough to recover much, and B.) not actual GDP but just passing along government-borrowed money. The liberal doofus said that criticism of the growth of GDP was nonsense. That was the whole defense of his nonsensical position (typical for liberals who always have the facts against them).

What I wish he had pointed out was that first, it is 3% up from dropping off a cliff in 2009. Big flippin deal. More importantly, think about this. Last year Obama (the Idiot Overlord) and company spent more money than all previous presidents COMBINED. Over $12 TRILLION. And they got a tiny blip of 3%. Pathetic! They spent $12 trillion in order to get $375 billion. That's ridiculous, and certainly nothing to crow about. I can turn $12 into 37 cents any day of any week. Just act like an idiot. And this liberal apologist wants to brag that Idiot Overlord managed this feat?

Scaring away elephants

The following excerpt is a little harder to read than most of the stuff I use, but it has important points, especially about the key problem with the worldwide economy, and america's economy in particular.

"The problem is that the recession is not due to a lack of aggregate demand, whatever that may actually be, but due to what Friedrich Hayek, winner of the 1974 Nobel Prize in economics, called malinvestment. Hayek subscribed to what is now called Austrian business cycle theory. This theory is that business cycles are caused by credit injections by the central bank which artificially lower interest rates. This lowered interest rate distorts the price signal for producers as to the willingness of consumers to forgo consumption today in return for goods in the future. Producers then engage in production of capital goods, such as housing, for which the demand is not sustainable. The upside of the business cycle results in overemployment in certain industries. When the credit expansion ceases, or in some cases, merely slows down, the reality of demand and supply becomes apparent. In order for labor and other resources to move to industries where the demand is sufficient to sustain employment, labor and resources must become temporarily unemployed. This is the downturn of the business cycle.

In his Nobel address, “The Pretence of Knowledge,” Hayek explained that once the central bank has set in motion the excess liquidity that distorts the price signal for savers and investors, there is little to be done other than await the market response that will result in equilibrium in the goods and labor markets. The labor and resources that have been misallocated will eventually find their proper location. Attempts by government to prop up prices and artificially stimulate demand in the sectors with malinvestment will only continue the misallocation and lengthen the time it takes for resources and labor to find those industries where consumer demand is sufficient to employ them.

The recent recession is a textbook case of Austrian business cycle theory. The Federal Reserve lowered the federal funds rate from 6.4% in December of 2000 to 1% by July of 2003 and kept the rate there for one year. Then, fearing inflation might occur, the Fed increased the rate gradually to 5.24% in July of 2006. The lowering of the interest rates created an artificial boom in housing, with the malinvestment of resources that Austrian business cycle predicts. Once the artificial interest rates were lifted, it became clear that the demand for housing was not sufficient to maintain absorb the amount of housing that had been built and sustain the employment of resources in the housing industry. Housing prices collapsed and the distortion of resources was felt throughout the economy.

A problem with ability of the market system to repair itself and create wealth for the masses is that government action which slows the recovery will be held up as having been the cause of the recovery. In the past I have suggested this is akin to the story of the man who is sitting on a park bench and every two minutes jumps up and waves his newspaper in the air. A second man, observing this for awhile, walks up and asks what the first man is doing. The first man says, “I’m scaring away the elephants.” “There are no elephants around here,” protests the second man. The first man responds, “See. It works.”

This is what is happening as our federal government engages in stimulus packages, health care reform, regulatory reform, and every other reform of which it can think. Each action actually slows down and hampers the recovery, but the economy still makes steady progress repairing itself and thus the federal action is held up as if it were the cause of the recovery."

Full article

The bottom line of this article is that government shenanigans like you see in chart above, with the explosion in the amount of money the Fed has made available (borrowed and printed), causes huge distortions in the market as people react to the mountain of more or less free money. This causes bubbles, then downturns, which we don't need. Then the government screws around some more and pretends to fix the problem while making it worse and simultaneously funding all their pet projects that help their friends. Despite what they have done, the economy recovers and the useless politicians say, "Tada! It worked."

Back when politicians were allowed to tell the truth

'The cat"s out of the bag and everyone knows Obama is a closet socialist, but lets take a look at a American favorite, Franklin D. Roosevelt.

Despite all his spending programs, public works, quick fix legislations, radio talks, etc., it solved nothing. Years after his programs were in full swing even his Treasury Secretary, Henry Morgenthau admitted, "We have tried spending money. We are spending more than we have ever spent before and it does not work ... After eight years of this Administration we have just as much unemployment as when we started ... And an enormous debt to boot!". '

US swims against the logic

Everybody knows it but our government (from this article):

"IMF Looks Ahead and It Doesn’t Like What It Sees Either

In its April 20th 2010 Global Financial Stability Report, the International Monetary Fund (IMF) warned that government risk in the advanced economies is now the biggest threat to the world economy. These governments, the IMF correctly observes, not only took on many of the bad debts incurred by private institutions these past several years, but due to the economic fallout of the crisis, and the existence of a plethora of government social nets, these governments face continuing heavy borrowing needs for at least the next few years. An ugly situation for sure, and one the IMF said could get out of hand, and fast, if not addressed.

In conjunction with the release of the report, José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said:

In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured.… If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase.

This author couldn’t have said it better.

Yet, in 2010, the U.S. Congress passed the largest government spending initiative in history in Obamacare. Now, those same politicians are talking about cap and trade, not to mention even more stimulus programs. This on top of those already horrible 2009 debt risk metrics.

Clearly, America is not addressing the seriousness of its financial state.

Indeed, the IMF put pen to paper, suggesting the very same thing about America. This, taken from the IMF’s World Economic Outlook Database:

America, on the basis of these metrics says the IMF, is a nation going in the wrong direction. With an estimated Deficit to GDP ratio of 10.97% in 2010, only Ireland is expected to show a ratio worse than the U.S.

America is NOT a PIIG?

Surely, you say, America is not a Greece, an Ireland or even a Spain. And in a sense you would be correct. Just not in the way you think. For in one very important respect, America is potentially worse, a lot worse.

You see, America has the Federal Reserve’s printing press. Steward of the world’s reserve currency, America issues debt in a currency it alone can print. America can in no uncertain terms inflate its debt away, without limitation, with a few taps on a computer.

Portugal, Italy, Ireland, Greece and Spain, members of the Euro-zone are countries without a printing press. They can’t bail themselves out by printing money to pay for their debts. No, as we are witnessing in this, the latest financial crisis, they have to show at least some manner of fiscal austerity before they can get access to the printing press of the European Central Bank.

Can the same be said about America?

In essence, the Federal Reserve’s printing press is buying time for America. It allows America to kick the debt-can down the road a bit longer, no holes barred, an option not available to the PIIGS. The result, the appearance that America is in control, its finances manageable, nothing at all like the finances of the PIIGS.

The problem is that same printing press eventually makes matters worse, because it fosters even more irresponsibility on the part of politicians, allowing them to hand out economic goodies without thought, without ever having to ask a single voter to pay for them. And as a result, the debt-can gets ever bigger, while the urge to inflate it away gets ever stronger.

One false move

Here is a full article explaining what I have been saying about a trigger event:

By Howard Schneider and Neil Irwin

Washington Post Staff Writer
Monday, May 24, 2010

If the trouble starts -- and it remains an "if" -- the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland's economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

"If what happened in Greece were to happen in a large country, it could fundamentally mark our times," Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

That local economic development boards are sponsoring panels on government debt in Greece is perhaps proof enough that Europe's problems are the world's. That the dominoes can tumble fast was shown Thursday when a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.

It marks a change, Barclays Capital chief European economist Julian Callow wrote in a Friday analysis, from a situation in which the bonds of European countries were considered to carry virtually zero risk to a "brave new world" where sovereign default in one of the world's core economic areas is a tangible threat.Bank holdings of European debt are now being studied with the same focus given to holdings of U.S. mortgage-backed securities as the global financial crisis unfolded in 2008 -- and with the same suspicion that problems in one part of the world could wreck others.

The most vulnerable European countries -- Greece, Spain, Portugal and Ireland -- may represent only about 4 percent of world economic activity, but "the debt crisis and its ripple effects are bad news for all corners of the world," said Cornell University economist Eswar Prasad

MSMedia AWOL, of course

The fourth International Climate Conference on Climate Change was held recently, with almost all of the world's top climate scientists in attendance. The only ones who failed to show up were the ones with a political agenda, that is, the ones who are pushing man-made global warming, world Marxist government, eco punishment, and so on. According to this article, the main stream (unabashedly liberal) media were AWOL too. Rational inquiry into what is going on with the world climate doesn't fit into their agenda.

Frankly, if those five dozen scientists and all those politicians think they have figured out a way for man to control the whole environment, they had better get on it. As scientists know, the global cool down that started in 1998 due to the latest solar cooling cycle is a serious threat. Warm climate has always been great for life on earth. Cooling is another matter. If they think they have a way to warm us up, they darn well better start now.

Greek tragedy after all?

The German government today announced an emergency ban on short selling and credit default swaps on European bonds and some other European stuff. The details aren't important. What's important is that this is the government equivalent of running around screaming and waving your hands. It is a rare act of pure panic that normally always precedes a collapse (because it almost never works).

We will see what the European market does tomorrow. The Asian market isn't reacting too great right now. Of course, the first obvious effect is it forces immediate losses on some, and generally panics the market with its unpredictability.

The most immediate effect of a Euro collapse would be good for us. The dollar would get stronger, the price of oil would go down, etc. It's the panic and hellish part after that that isn't so great. We'll see. I have been saying for eight months that it would start in March and be going totally off a cliff by July. It is extremely possible. (Reminder: it started Feb. 12th.) With the next collapse starting in Europe instead of here, that gives us a little time before people will really understand what's going on and panic here. That's good for preparing and shopping and such, instead of being in a scene like in the movies where people are climbing over each other to grab the last can of peas...

Risk roller coaster

In terms of government debt (Greece, Ireland, UK, US, Spain, etc.), we are at the fear stage. Investors are ready to jump ship at any second, they are just dancing as long as the music is playing.

Be like Europe? Seriously?

Shamelessly quoted:

Eric Singer: A Backlash Finally Hits Europe

Thursday, 13 May 2010 08:53 AM

Article Font Size

By: Eric Singer

If you’ve listened to the mainstream media up until now, Europe's been doing everything right.

And we in the United States have been doing everything wrong.

They have universal healthcare; so should we.

They're environmentally conscious, employ green initiatives and have stiff gasoline taxes; why don't we?

They have a VAT (value-added tax); why not us?

Government makes up a bigger part of their economy; shouldn't ours?

Workers there have six weeks of vacation and retire five to 10 years earlier than we do; what about here?

And so on.

Every now and then, though, the results of these policies are cast in a new light by unexpected events. The deadly riots in Greece bring home the depth of the bankruptcy of Europe's failed policies.

Monday, world stock markets rallied as it was announced that the 11 million people of Greece would require only 145 billion euros ($182.21 billion) to be rescued during the next three years. Tuesday, the markets convulsed, as it became clearer that the citizens of Germany might not vote to support such largesse.

Waiting in the wings are the 120 million people of the other PIIGS, namely Portugal, Ireland, Italy and Spain. Crudely extrapolating the numbers, these countries could easily need more than 1 trillion euros to stay afloat.

Now it's true that much of the potentially defaulting debt is held by the Germans, but there are only 40 million German workers. If they have to support 40 percent of that rescue, each German worker could be proffering 10,000 euros directly in support.

That's a lot.

In fact, it's so much in an election year, it may not happen.

What's missing from the assumption that we should do the same as Europe is a true appreciation of the hidden costs of their morbidly obese governments.

The Europeans may look great, and the cities may be very pretty, but they can't afford to have kids. Their populations are shrinking. The price of a VAT for some people will be forgoing children.

Unemployment for the young is horrible in part because of the red tape surrounding firing anyone.

In France, ethnic French under 25 years old have 25 percent unemployment. Immigrant French Muslims under 25 have a jobless rate of 45 percent.

Spain, in part by wasting precious resources with the biggest green-jobs effort in the euro zone, was able to get its unemployment down to 18 percent overall.

These levels of youth unemployment make the world so much more dangerous. There is so much less hope and more anger associated with finding a job through the government than finding a job that the market provides, or keeping one only because the government is protecting you. This is part of why the Greek riots turned deadly.

The fantasy at the core of the crisis is that these governments are providing value for the taxes that are paid. Bus drivers who get 14 months of pay on top of vacation for every 12 months of work seem like racketeers to me. Government radio announcers who can retire on full disability because their microphones have germs are functionally gang members.

No wonder 95 percent of Greeks failed to report their swimming pools to the tax authorities in Athens. The Greeks properly perceive the government gravy train as a scam.

The Asian economies are emerging in part because their economies are becoming relatively freer. The euro zone has submerging economies because their governments are looking everywhere for money to feed a whole new layer of Euro Government.

Against this backdrop, we should understand that the calls in the United States for a value-added tax are essentially calls to give cancer a trial period.

It does not matter that rates will initially be low, or not affect every good cell — or that for a moment we will look like our budget gap is shrinking.

The question is not whether only 174 cancer cells are tolerable. Cancer cells will multiply until they have taken over their host.

The Greeks have done us a favor by opening Pandora's Box for the entire world to see.

The European Leviathans are too big not to fail, and may well have to give up their extra layer of government to survive.

We should take note, and return to the roots of limited government while there's still time to avoid disaster.

Eric Singer is the portfolio manager at Congressional Effect Fund.

Their model turns out to be PIIGS

Below is the first half of a great article:

Greece: Coming Attractions? … Or Wake-Up Call?

by Of Thee I Sing 1776

"It is not the magnitude of the rapidly collapsing Greek economy that should concern us in America. It is, rather, that Greece is unquestionably the proverbial canary in the coal mine that should have the American ruling class burning the midnight oil to extract us from the mess they and their predecessors have created for us. Instead, our government is ignoring the warning.

The left in America, has flirted with the European economic welfare paradigm for years and now we have an Administration that has morphed that flirtation into a full blown love affair. Greece, which has spent itself into oblivion providing unsustainable benefits (mostly to ever-growing public payrollers) is, we are told, an aberration and the Administration will, no doubt, say the same thing about Portugal and Italy and Ireland too. But then we have Spain and Great Britain and even France (and let’s not forget Iceland) staggering down the same path toward economic never-never land, all suffering from the same delusional affliction that is now being pursued with gusto by our ruling class…the belief that we can best improve life for all Americans, nearly half of whom pay no taxes, by raising taxes on the declining number of Americans who do.

The left has always believed that prosperity is something that can be bought through government taxation of society’s income, rather than something that is simply a by-product of society’s productivity. Let us say it again. Government cannot create sustainable wealth or prosperity. Only the people, individually and through the commercial and industrial institutions they create, can do that.

Healthy societies are growing societies that earn the means (the capital) for reinvestment in continued health and growth. In this process of market-driven growth everyone who participates eventually prospers. Healthy societies are not those such as we are witnessing in Europe, whose earnings are sucked dry by government for redistribution to accomplish objectives as dictated by government planners. Yet it is this withering European model that our current Administration and its congressional majority have embraced, notwithstanding the warnings screaming at us from across the Atlantic and throughout nearly every precinct in America. President Obama has stated, unambiguously, that he personally believes that at some level of income no one needs to earn any more, presumably the point at which government should take the balance for redistribution. He acknowledged, however, that this view was, “not the American way.”

While there are structural differences between the debt-laden welfare states of Europe and America, there are very frightening similarities between the course we are now pursuing and the course that has brought so much of Europe to such sorry circumstance. The primary difference, of course, is that Euro-denominated states cannot monetize the burgeoning debt created by their own individual budget deficits. That is, they do not have the ability to devalue a national currency as we can by printing more of it. That is because the twenty-seven Euro countries are all yoked to the Euro. That said, the problem being experienced in Europe is not, at its core, currency driven. It is caused by excessive overborrowing to support programs that cannot be paid for from current revenue, which results in accumulated debt that cannot be retired through economic growth because the debt service burdens consume the capital which would otherwise be available to create that growth.

Greece, like the other PIGS countries (Portugal, Italy, Ireland and Spain) as well as Great Britain, France and Iceland got into so much hot water (or red ink) by spending (and committing to spend in the future) far more money than their already high tax rates could fund, so they borrowed with the same abandon that the United States is now funding its commitments. They, like the United States, have turned time and time again to taxes and debt to stay afloat but never to sustained reductions in spending. Never, of course, is a very long time and, in Europe, time has finally run out. The creditor nations (or, we should say, the central banks of the creditor nations) have had enough and severe spending cuts are being imposed on Greece, as they surely will be on the other high spending countries of the EU if defaults on national debt are to be avoided..."

Fixed what?

I'll be lazy again today and just provide excerpts that summarize very well. The gist of it is that having bankrupt countries borrow money from other bankrupt countries to try to save other bankrupt countries is absurd. What the Euro shenanigans over the weekend actually did was to show that the Euro zone is just as pathetic and the US and UK, willing to just borrow and spend, borrow and spend like there's no tomorrow. Everyone knows there will be hell to pay, and soon. They do it anyway.

The Gold Report: Today we are talking with Casey Research Chief Economist Bud Conrad who recently presented a riveting talk during Casey Research's 2010 Crisis and Opportunity Summit. Here are four major points from his talk:

1. The world economy is in a calm between a credit crisis turning into a currency crisis as the collapse of the private debt bubble is replaced by a government debt bubble that will also collapse.

2. The world is at a point of no return for government debt as debt-to-GDP approaches 100%. When debt becomes too big, governments cannot control the interest rates and currency. The lead warning is Greece, much the same as Lehman Brothers was in the credit bubble crisis.

3. Peak oil. The wealth of humanity has been built on energy. Half the world's conventional oil supply is already used. That means that the quantity of oil produced each year will not increase much from the current level even as demand from developing countries like India and China increases. Wars over oil have already started. Energy prices will rise. We will see a substantial rise in the cost of food, as food production requires energy.

4. The U.S. can prosper and stay ahead of the rest of the world by developing and investing in three forms of technology—the Internet and cell phones, new medicines through biological breakthroughs and new sources of energy. All are good investment opportunities and are necessary for human expansion.

Excerpt from another article:

The Federal Reserve's involvement warrants a closer examination. The Fed has indicated that it would participate in dollar-swap agreements with the ECB, similar to one it undertook in 2008. Without an audit of the Fed, we can only speculate as to what exactly this swap entails. However, a reasonable guess is an exchange of freshly printed euros by the ECB for freshly printed US dollars by the Fed at the current exchange rates.

The Fed would then use the euros to either directly or indirectly purchase the debt of the eurozone nations. The ECB in turn would use the dollars to purchase US Treasury debt. Therefore, this is just a convoluted scheme to monetize government debt. It's a cinch that the funds necessary for this bailout would be created out of thin air rather than raised via taxes or issuing debt. Only in the world of central banking and thin-air money creation can one bankrupt entity bail out another.

And another excerpt from another:

A Play for Time

Impressive as it sounds, the trillion-dollar rescue package – which still has major logistical kinks to be worked out – essentially buys time and nothing more. The real problems of the eurozone are left woefully unaddressed.

If anything, in fact, those problems have been made worse by this desperate action. Consider the following:

Europe is effectively borrowing huge sums from itself.

Spain and Portugal now have far less incentive to "belt tighten" than before.

The issues of high unemployment (Spain +20%) and slow growth still loom.

Greece, aka "patient zero," is still at long-run risk of default.

The ECB's credibility has been torn to shreds.

Can we believe anything the European Central Bank has to say? Last week they said debt monetization (buying bonds) was not even under discussion. Then they did exactly that a few days later.

"If the rules of the euro can be rewritten on a Sunday night in Brussels once," Bloomberg columnist Matthew Lynn opines, "they can be rewritten next time there is a crisis. Investors will remember that. And they won't believe what they are told about how the euro operates from now on."

Thank you. Now I don't have to say it

Money News

Roche: There's No Logic to Europe's $1 Trillion Bailout

Tuesday, 11 May 2010 02:40 PM

Article Font Size

By: Julie Crawshaw

The nearly $1 trillion European bailout merely postpones an inevitable collapse, says David Roche, global investment strategist for Independent Strategy.

"There is not one word in what was decided ... as to how the austerity measures which will enable these countries to become solvent again are going to be enacted by them, democratically, in the face of resistant politicians," Roche says.

"All I see is a huge amount of leverage being taken on by countries which are supposedly strong, like Germany which has 80 percent of GDP in government debt, to bail out countries which have 135 percent of GDP in government debt," Roche told CNBC.

"I can really not see how adding to already excessive sovereign debt is going to cure the impossible sovereign debt of countries which are patently insolvent."

Roche points out that there are only two alternatives here.

“Either so much money is printed or created and thrown at people to actually cover their insolvency with waves of free money and waves of liquidity that we end up with fiat currencies being completely devalued in the eyes of people and gold at something like $7,000 an ounce,” he says.

“Or alternatively ... eventually the governments will default on their debts.”

Interest rates surged in the bond market after European leaders and central banks around the world agreed to a nearly $1 trillion aid package to help stem growing debt problems in Europe, The Washington Post reports.

With the rescue package in place, investors are diving back into riskier assets like stocks at the expense of safe investments like U.S. Treasury bonds.

Fantastic video sums up situation today

Oh no, a wolf pack with slide rules

I tried to edit this graphic to remove the "socialists" reference, but couldn't. Obviously, it's mixing socialist economic suffocation with socialist promising everything to everybody that made all these countries (including ours) broke. The point of the graphic is that a lot of countries are in trouble, and the US is certainly not far from the worst of them.

'May 9 (Bloomberg) -- European Union finance ministers pledged to stop a sovereign debt crisis from shattering confidence in the euro as they held an emergency summit to hammer out a lending mechanism for deficit-stricken nations.

Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed on the backstop yesterday and told ministers to get it ready before Asian markets open.

“We are going to defend the euro,” Spanish Economy Minister Elena Salgadotold reporters as she arrived to chair today’s Brussels meeting. “We think we have a duty for more stability for our currency. We will do whatever is necessary.”

Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted the U.S. and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession…

‘Wolfpack Behavior’

“In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.” '

Full article

The Europeans crack me up with this wolf pack business, and all these pretensions and protestations that people are evil for noticing that it is physically impossible for them to pay their bills. They keep crying and whining about "bond market vigilantes" and dangerous "attacks" on the bond market. Let's be crystal clear about what they are saying. They want you to know that all of the actions they have taken in recent years to get themselves into this mess are in no way their fault. the leaders are not to blame. It's the people who loan governments money; they're evil.

Who are these bond vigilantes and why are they so evil? Well, they're private individuals with money to invest, pension fund managers, bank managers, hedge fund managers, government worker bees, etc. Their "vigilante" behavior is that they have recently said, "Hey, wait a minute. If I lend at all, it should be for a super premium interest rate to make it a tiny bit worthwhile." I know, it's evil, and sick and wrong. They should just lend the money for no interest out of the goodness of their hearts (which in the case of bank, pension, hedge fund, and government money managers would be a criminal offense) and forget about getting paid back.

So, once again, never forget that those leaders are not responsible for the huge mess they have made. That part is key. There would be no problem if people would just overlook what they've done.

Another key point in this article is that they are currently "fixing" the problem. This is the six time. After the last "fix" everything went haywire.

New York Times gets it. Uh oh

This article does a great job of explaining the worldwide systemic risk I have been talking about once confidence is lost. If even the New York Times gets it now, it must be right at our doorstep.

Excerpts from the article:

'Over all, United States banks have $3.6 trillion in exposure to European banks, according to the Bank for International Settlements. That includes more than a trillion dollars in loans to France and Germany, and nearly $200 billion to Spain.

What is more, American money-market investors are already feeling nervous about hundreds of billions of dollars in short-term loans to big European banks and other financial institutions. “Apparently systemic risk is still alive and well,” wrote Alex Roever, aJ.P. Morgan credit analyst in a research note published Friday. With so much uncertainty about Europe and the euro, managers of these ultra-safe investment vehicles are demanding that European borrowers pay higher rates.

These funds provide the lifeblood of the international banking system. If worries about the safety of European banks intensify, they could push up their borrowing costs and push down the value of more than $500 billion in short-term debt held by American money-market funds.

Uncertainty about the stability of assets in money market funds signaled a tipping point that accelerated the downward spiral of the credit crisis in 2008, and ultimately prompted banks to briefly halt lending to one other.

Now, as Europe teeters, the dangers to the American economy — and the broader financial system — are becoming increasingly evident. “It seems like only yesterday that European policy makers were gleefully watching the U.S. get its economic comeuppance, not appreciating the massive tidal wave coming at them across the Atlantic,” said Kenneth Rogoff, a Harvard professor of international finance who also served as the chief economist of the International Monetary Fund. “We should not make the same mistake.” '

James Kanter contributed from Brussels.

Run that by me again

Run that by me again about how the mess in Greece will be contained and not affect much...

What about now?

Do you believe me yet?????

Since October I have been predicting and explaining about the coming global collapse due to the fundamental repricing of sovereign debt, the loss of confidence, and the ensuing panic. I am not saying that this definitely is the event that starts the total collapse of the world economy and brings about a world totalitarian government. What I am saying is that I predicted that at duck would walk around a certain street corner at 4:00 pm. We're now at the corner and it's 3:57 and something is waddling and quacking around the corner on webbed feet.

In other words, I don't really care if this is the event that starts it off. It could be a different event next week or another one in three weeks. This is what the beginning of it will look like. And keep in mind that Greece is the tiniest, most insignificant blip in this drama. Greece is like equivalent to West Virginia. It's nothing, yet look at the panic, the trillions of dollars lost around the world, the emergency world leader meetings. What happens when it's Spain and Portugal and the UK? Or Italy, Ireland, and Hungary? Then when it hits Japan and the US, then what?

Because the stakes are very high, I will be more blunt than I have ever been on this blog. Once this thing really hits the ONLY things that will have value will be food, water, shelter, heat, light, alcohol and cigarettes, fuel, things like that. I wouldn't bet much on the chances of a person who hasn't prepared surviving the first 60 days of the serious panic and collapse. Read about currency-type crises. It is very, very bad. There is a hundred times the crime. There's looting, burglary, rioting, murder, starvation, war, civil war, totalitarian crackdown, martial law. You name it.

Maybe I'm wrong and it won't happen. Considering that in the last year I have been by far the most accurate forecaster on the planet, if you disregard my warning, you are most likely taking your life in your hands.

Greece uncertainty cubed

Danger for US

The second article is hilarious. It claims that the danger to the American economy is limited. I could pound that argument into the ground, but it should suffice to say that we get this nonsense all the time and it's never right. They have talked us through this whole recession with garbage like that. "Subprime is no big deal; it's tiny...Well, it's not tiny, but isn't a problem...Well, it's a problem, but will only hurt banks...It won't just hurt banks, but the effect will be small and of short duration..." And on and on.

A fine mess and fine description

This is one of the best descriptions I've seen of the current situation, though a little economicsy:

"If the EU lets Greece fail, it's like letting Lehman fail in 2008 or the Bank of United States fail in 1930. It sends out a signal. The dithering of the EU may already have sent out such a signal. They may already have altered expectations and behavior. The rescue package may lack believability for the moment. It may not have sunk in quite yet.

The rescue team, which consists of the stronger countries and the IMF, are damned if they do and damned if they don't. Instead of banks being insolvent with runs occurring on them as in the 1930s and 2008, we have whole countries being bankrupt, but their paper is held by banks in France and elsewhere, so there is a contagion thing to worry about. If the EU lets default happen, there is a run against all the bonds of all the weaker countries. Their yields rise, and they have to default too, and then that weakens a host of banks and others who hold the paper, and then they demand to be bailed out. If instead they rescue Greece and others, then the rescuing governments have to issue more debt, or else the IMF does too, or else the ECB gets into the act too, and this weakens the stronger countries and drives down the euro. So, either way, there are problems. It appears that the rescue option has been invoked, although tardily and reluctantly. This means that the governments are rescuing the bondholding banks and whoever else holds the Greek paper. That's the bailout here. This is preferable to the rescuers as compared with an outright default which then starts a contagion via the bond yields rising sharply which induces country bankruptcies and defaults.

The deflation at work here has already happened. It's that the values of loans held by banks have declined a great deal, and are below the values of their liabilities. The fractional-reserve banking system doesn't work today and it didn't work in the 1930s and at other times when depositors demanded cash or gold and the banks couldn't liquidate assets or gain access to cash flows to pay them. Even with the Fed turning bank loans into cash, the FDIC has to keep closing banks every week because they are way below any regulatory standards of operation.

Central bank inflation is necessary in this kind of a fiat money-fractional-reserve banking system to prevent the whole system from collapsing due to flight to safety. More money is like a blood transfusion to a patient who is losing blood. But this doesn't resolve the insolvency in the system. The regulators have what is called "forbearance." They ignore the insolvency and do not enforce mark to market. They then close the worst banks and hope that the rest make enough money to rebuild their liquidity. Gradually, as the banks use reserves that cost them 0% to invest in U.S. Treasuries at 3.5%, they make some money. The Treasury market stays firm for this reason. The Fed keeps rates low for this reason. The banks build up potential liquidity by holding treasuries. In a few years, they sell these and start making more loans, and price inflation starts appearing. Meanwhile, the economy limps along. This is the muddle-through scenario.

Full Article

Another article that explains what could kick the Greek crisis over the edge.

Quotes about seriousness of Greek situation

The chart above shows how soon Greece has to find funding.

In a few days time, there might not be a euro zone for us to discuss. - Nouriel Roubini, Roubini Global Economics

It's like Lehman Brothers and Bear Stearns. It is not so much the fundamentals as it is the unwillingness of the market to fund you. - Phillip Lane, Professor of International Economics, Trinity University

I covered emerging market sovereign bonds for many years, but I've never seen anything like this: a country trading at levels where the bear case is terrifying, the bull case is very hard to articulate, and everybody is talking about a possible default even when the country has an investment-grade credit rating from two agencies and is only one notch below investment grade at the third. Maybe the only thing which really explains what's going on is that both yields and ratings are sticky. Which would imply that Greece has a long way to deteriorate from here. - financial blogger Felix Salmon

The situation is deteriorating rapidly, and it's not clear who's in a position to stop the Greeks from going into a default situation. That creates a spillover effect. - Dr. Edward Yardeni, Yardeni Research

The issue is rollover risk [referring to Spanish debt contagion]. Spain has to issue new debt plus roll over existing debt to the tune of 225 billion euros this year. Fourty-five percent of their debt is held by foreigners so they are dependent on the kindness of strangers. - Jonathan Tepper, Variant Perception

Spain's cash flows are extremely bad... Spain's living standards are reliant on not just the roll of old debt, but also on significant further external lending... - Ray Dalio, Bridgewater Associates (one of the world's largest hedge funds)

Everything you knew or thought you believed about the European economy - and the eurozone, which lies at its heart - was just ripped up by financial markets and thrown out of the proverbial window. ...This is not now about Greece... This is about the fundamental structure of the eurozone. - Simon Johnson, former IMF chief economist