Wednesday, May 25, 2011

May 25 2011: The Future of Physical Gold, Part II - The Evolution of Value

John Vachon Uprooted July 1940
"Migrant mother of family from Arkansas in roadside camp of cherry pickers, Berrien County, Michigan"

Ilargi: As Europe falls further apart, Ashvin continues his look at the future value of what so many perceive to be the ultimate safe haven: gold. Is it, though? What does it derive its value from, and how does that really work?

Ashvin Pandurangi:

The Future of Physical Gold, Part II - The Evolution of Value

"Fort Knox Gold Mine" - Photo by Kevin Fitzgerrel

Part I of this series, The Future of Physical Gold - Dialectic Foundations, discussed how the concept of money had been fundamentally transformed by the material (rather than ideological) forces of the financial capitalist system. It was no longer just a convenient medium of exchange, unit of account, and store of value, but also became a social and political means of systemic oppression. The leverage embodied in financial instruments (by far the largest component of money in the global economy) imprisoned the very definitions of economic, social and political activity within a strict mode of operation.

The culture imperative of the developed world was financed consumption and apathy, while its political imperative was the concentration of wealth and the appeasement of those being continuously plundered. All of those lacking control of productive assets, including both "debtors" and "savers", found it impossible to maintain their wealth, purchasing power and/or service their debts over time. These people were all "workers" who sold their productive capacity in the marketplace, and received increasingly less value for it over time.

Superficial concessions were frequently granted by the controlling class (i.e. minimum wages, union benefits, bankruptcy process, welfare, wage-arbitraged prices, etc.) and their propaganda was planted deeply in the minds of middle-class dreamers, but that has not stopped the middle-class from relentlessly fading to black. It then becomes clear that any other global monetary system, including "Freegold" (a synthesis of physical gold-based money and debt-based currencies; briefly described in Part I), would serve as a lie for the masses.

It would be another means of convincing people that they actually have not been plundered (it's all in your imagination), and that they can continue their time-honored tradition of financed consumption, albeit with some "fail-safe" mechanisms built into the system that would prevent excessive financial speculation and protect those who wish to save (Glass-Steagall, anyone?). Take a look at this quote from Jean-Claude Juncker and its accompanying commentary (excerpted from the article Trojan Lies on The Automatic Earth):
"When it becomes serious, you have to lie", Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union's key spokesmen, said in recent remarks.

Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country's economy by driving up borrowing costs. "If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this," Juncker said. [1].

Basically, Juncker is telling us that broad-based lies are necessary in modern society to whitewash the underlying reality, because, without them, the underlying reality would become much worse, much more quickly. However, anyone who has attempted to orchestrate a complicated series of lies knows that it is not sustainable and will only make the underlying situation psychologically more difficult to bear, once the lies become plainly contradictory and/or ridiculous.

Indeed, lies must be continuously advertised and sold like any other product, and the propaganda industry is struggling to turn a profit these days. The reason is because human ideas cannot fundamentally change the underlying material reality of the human condition, and now, despite our propensity to tell ourselves lies, the reality has become much too plain and stark to consciously ignore. Instead, the deteriorating material reality will drive our ideas and our willingness to accept the ideas of others, just as the Marxian dialectic would dictate.

The fundamental problem in the material sphere of financial capitalism is a lack of aggregate (effective) demand in the developed consumer/investment markets of the global economy. Annual aggregate demand in the private economy can be simply represented as (nominal GDP + change in private credit). GDP obviously incorporates private consumption, investment and non-transfer public expenditures (i.e. social security, welfare benefits, etc. are not counted), while also adding trade surpluses and subtracting trade deficits. [2].

In the capitalist system, then, public credit (deficit) growth and personal savings (non-investment) would act as the "demand of last resort". The latter typically sits very still in a recession until it is finally forced to come out for the purchase of necessities and/or to avoid an outright collapse in purchasing power. To understand why private consumption, investment, savings and private/public credit growth have all begun to stagnate or substantially decline in the developed world, and why they will soon follow suit in "emerging markets", we must start with a basic history of "wealth" creation in a capitalist system.

First, we should discuss the meaning and sources of "value" in this system as a foundation for why the private demand for commodities and financial investments (the availability of excess wealth) is constrained over time. Karl Marx realized that a commodity's value had evolved from what it once was in the relatively simple barter societies of our past, as its "exchange-value" became distinct from its "use-value" and allowed for the production of "surplus value". The following excerpt is taken from Debunking Economics, a book written by the notable Australian economist, Dr. Steve Keen [emphasis mine]:

Marx: "The exchange of commodities, therefore, first begins on the boundaries of such communities, at their points of contact with other similar communities, or with members of the latter... The constant repetition of exchange makes it a normal social act. In the course of time, therefore, some portion at least of the products of labour must be produced with a special view to exchange. From that moment the distinction becomes firmly established between the utility of an object for the purposes of consumption, and its utility for the purposes of exchange. Its use-value becomes distinguished from its exchange-value." [Debunking Economics, Chapter 13]

From Living in the Spiral

Marx basically gives us a brief description of the transition from a simple barter economy to a production-based economy. In the initial stages of barter at the "boundaries" of communities, a commodity's ratio of exchange with another commodity is a "matter of chance" and may be influenced by their perceived utility in consumption. As the benefits from barter accrue over time, however, a repetitive pattern of trading develops and leads to the production of certain commodities with the sole purpose of using them in trade, rather than consuming them.

It is at this time when the commodity's exchange-value is separated out from its use-value, with the former being the sole determinant of its value in trade. Both use-value and exchange-value can be thought of as objectively determined values, since the former is the utility of a commodity performing a specific function, and the latter is the sum of the use-values consumed in its production. Dr. Keen clarifies the commodity dialectic with the use of labor as an example, in his research paper entitled, A Marx for Post Keynesians:

Keen: "To apply his Commodity Axioms to labor-power and the origin of surplus value, Marx had first to identify labor-power's exchange-value and use-value. He argued that the exchange-value of labor-power was its value, the means of subsistence, which could be represented by a bundle of commodities, while its use-value was labor, the ability to perform work. The former identification was hardly novel; however, the latter was revolutionary, in two senses. [A Marx for Post Keynesians, pg. 8]."

Stopping here for a moment, it is important to understand why increased systemic complexity fundamentally changes and constrains the role of commodities, including those claiming to be "wealth reserves", in the political economy. Dr. Keen talks about the implications of systemic complexity a bit in terms of "representative agent" models in mainstream macroeconomics [emphasis mine]:

Keen: "I have more to say about this in Chapter 12, but here it is worth noting that representative agent macroeconomics amounts to assuming that the economy consists of a single individual producing and consuming a single commodity. However complex might be the reasoning used by such aficionados as Paul Krugman, the realm of applicability of this theory is thus that of Robinson Crusoe, living off coconuts before the arrival of Man Friday. It beggars belief that anyone who truly knew where this notion had come from would attempt to apply it to something as complex as a modern, multi-commodity, multi-million person economy." [Debunking Economics, Ch. 9]

FOFOA, the most popular Freegold advocate still blogging, uses two "representative agents" from a model "game" to illustrate why physical gold will be"tapped" by natural market forces to serve the role of global wealth reserve over any other monetary asset, since it is a natural "focal point" for investors to place their excess currency wealth in upcoming years. Although this example may not necessarily entail the same flawed assumption used by Neo-classical economists to model aggregate market behavior, it follows a very similar logic [my emphasis]:

FOFOA: "Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square [..]

[..] is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split".
[Focal Point: Gold].

It should be clear that a simple "game" with simple "rules", such as the square game above, cannot provide insights into the monetary decisions of actors operating within complex financial markets, where irrational and non-linear behavior is THE dominant and "emergent property". Getting back to Marx's commodity dialectic, we can proceed to explore the two "revolutionary" insights he had with regards to use-value (in the context of labor):

Keen: "Firstly, in contrast to Smith or Ricardo, Marx gave use-value an  active role in political economy. Secondly, he asserted that, under  specific circumstances, use-value could be quantitative--though what was  being quantified was not abstract satisfaction, as in neoclassical  analysis, but the objective function of the commodity in question." [..]

"...Thus,  in the case of this commodity [labor], use-value and exchange-value  could both be measured in the terms of the exchange-value of  commodities. He then applied axiom 4 above--that the use-value of a  given commodity plays no role in determining its exchange-value--to  conclude that these two value magnitudes would be different, and that  this difference was the source of surplus value."
[A Marx for Post Keynesians, pg. 8]

So  the worker's ability to labor ("labor-power") is sold in the labor  market for its exchange-value (= "subsistence wage"), but it is bought  by the employer for its much  higher use-value (= sum of the exchange-values of the commodities it  produced). For example, the employer might pay a worker $6/hour for his  ability to produce widgets over 10 hours, would only need 5 hours of widget production to justify the $60 subsistence wage and would therefore generate  surplus value from the widgets produced during the extra 5 hours.  Labor-power, therefore, is a unique commodity because its use-value can  be measured in terms of exchange-values in certain circumstances.

What Marx eventually failed to incorporate into his theory of  value was only the fact that all commodity inputs to production possessed a  similar inequality of use and exchange-values. There is only one major modification needed for this general rule, and that is for financed-assets which provide returns (bonds, shares, currency deposits, land, etc.). These assets derive value directly from their use-value, which happens to be the expectation of their future exchange-value. This crucial distinction sets the stage for Minsky's "Financial Instability Hypothesis", discussed in Part III, and it is fully consistent with Marx's commodity dialectic approach to value.

Before moving on, it should be pointed out that physical gold as a monetary asset in the Freegold system does not fall under the category of being a "non-commodity", or a good that is not mass-produced for exchange and/or use in the production process (i.e. rare statutes, antiques, etc.). Dr. Keen proposes that a final axiom is needed to encompass these "non-commodity" goods, as well those that temporarily exist in the netherworld of being neither a commodity nor a non-commodity (i.e. brand new technological goods):

Keen: "Products which are not part of the system of reproduction of products are not truly commodities, and hence not fully bound by the dialectic of commodities. [Axiom] [..]

This suggests that the products of technological development--which will in time become commodities as they are integrated into the system of reproduction--are liable to have their initial prices set by forces in addition to their costs of production. Perceived utility is one such additional force[..]

[..] ...the price of a newly developed product is likely to be above its exchange-value, but to be driven towards this over time by the forces of competition and commodification."
[A Marx for Post Keynesians, pg. 14-15]

Since Freegold envisions physical gold as being the global reserve asset, and certainly not any sort of technological good, it is fair to say that gold will be "commodity" within the industrial capitalist system of exchange subject to Marx's dialectic. Indeed, as argued in Part I, gold would find it impossibly difficult to trade completely independent of this broader system, and most likely the financial system as well. Therefore, we can return to evaluating the process of wealth creation and preservation under the Freegold system when gold is subject to the commodity dialectic.

Freegold's flawed conception of value stems from Austrian economics, as clearly reflected in FOFOA's piece, The Value of Gold. Although he correctly states that Karl Marx's "Labor Theory of Value" is flawed, he goes on to accept the even more flawed "Marginal Utility Theory of Value" (MTV) advocated by the "Neo-Classical" and "Austrian" schools of thought. The perspective informing the latter is captured well in Principle of Economics, written by the founder of Austrian economic theory, Carl Menger [emphasis mine]:

Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...

Following this logic, FOFOA concludes that the marginal utility of purchasing additional physical gold units will not diminish, because its utility in preserving a given level of purchasing power will always remain the same, as long it remains a monetary asset that is independent of the official currency. [3]. However, Menger's subjective and simple conception of utility does not translate to the complex political economy of capitalism, where the value of a monetary asset is determined by either its exchange-value on a market or its objective use in producing future exchange-values.

From A Marx for Post Keynesians by Dr. Steve Keen

This comprehensive view of commodity dialectics casts an even larger dispersion on Menger and Freegold's MTV foundation, which only considers one circuit of our complex political economy, and that too in a subjective manner. In this circuit, the end goal of producing commodities is to sell them into a market for a profit and use all of that profit to consume more commodities (C-M-C), without any creation of surplus value in the process. Therefore, the utility of monetary capital in this circuit, whether mediums of exchange or "pure" wealth reserves, is solely a subjective expression of commodities desired, and absolutely determines its value in the capitalist system [emphasis mine]:

FOFOA: "...let's take a quick look at the marginal utility of gold as a store of value[..]

Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."
[The Value of Gold]

As Marx articulated, however, a more essential circuit must (and does) exist in the capitalist economy, where capitalists use monetary capital to purchase commodity inputs (labor, raw materials) with the end goal of creating and realizing surplus value. The following excerpts clarify the capitalist's "wealth accumulation circuit" (M-C-M+) and are contained within Keen's paper debunking Say's Law, entitled Nudge Nudge, Wink Wink, Say No More, and also Debunking Economics:

Marx: "The expansion of value, which is the objective basis or main-spring of the circulation M-C-M, becomes his [the capitalist's] subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist... Use-values must therefore never be looked upon as the real aim of the capitalist. Neither must the profit on any single transaction. The restless never-ending process of profit making alone is what he aims at." Nudge Nudge, Wink Wink, Say No More, pg. 4)

Keen: "Since Say’s Law and Walras’ Law are in fact founded upon the hypothesised state of mind of each market participant at one instant in time, and since at any instant in time we can presume that a capitalist will desire to accumulate, then the very starting point of Say’s/Walras’ Law is invalid. In a capitalist economy, the sum of the intended excess demands at any one point in time will be negative, not zero. Marx’s circuit thus more accurately states the intention of capitalists by its focus on the growth in wealth over time, than does Walras’ Law’s dynamically irrelevant and factually incorrect instantaneous static snapshot." (Debunking Economics>, Ch. 9)

As mentioned before, and contrary to what many official "Marxists" and "Neo-Classical" critics say, Marx did not believe a commodity's use-value had no role to play in the creation of surplus value within the M-C-M+ circuit.  The following excerpts from Dr Keen's paper, entitled Use-Vale, Exchange-Value and the Demise of Marx's Labor Theory of Value, further explain Marx's initial analysis of surplus value in the industrial capitalist economy [emphasis mine]:

Marx: "We are, therefore, forced to the conclusion that the change originates in the use-value, as such, of the commodity, i.e. its consumption. In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use value possesses the peculiar property of being a source of value." (pg. 5)

Keen: "Marx specifically referred to the use-value of a machine being greater than its [exchange] value, and in contrast to his discussion of depreciation in Capital, dissociated the productivity of a machine from its depreciation. The use-value of a machine will differ from its exchange-value and, as with labor, we can assume that its use-value will be "significantly greater than its value." In practice this will mean that the amount it loses in depreciation will be significantly less than the amount it contributes to the value of output, and it will, with labor, be a source of surplus value." (pg. 7)

After that lengthy, yet "valuable" bedrock of wealth creation, we can return to the problem of insufficient aggregate demand in a capitalist system. In Part III, we will discuss how the creation of surplus value via production in the M-C-M+ (wealth accumulation/concentration) circuit implicates an inherent problem for the system, since wealth is only realized from this value when it is monetized in a market. Over-supply of commodities in the production process on a consistent basis leads to negative excess demand in the entire economic system, as a sum of the C-M-C and M-C-M+ circuits (a clear violation of Say's "Law").

Some of the "real-world" economic results of this process will also be discussed, and then the financial dynamics of capitalism, as articulated by Hyman Minsky and Dr. Keen, can be explored to explain why a process of hyperinflation, if and when it finally occurs, will still not "cure" the "realization problem". Finally, we can begin to talk concretely about how all of these trends will impact the future of physical gold in the political economies of human civilization. Far from being an irrelevant monetary asset, physical gold will have a very important role in certain parts of the world and at certain scales of economic activity.

However, the "investment opportunities" implicated by the theory of Freegold will be revealed as exaggerated and misleading. Until then, I ask that readers carefully consider the Marxian approach to dialectic evolution and economic value in a capitalist system. An accurate understanding of Marx, unique to even many of his "followers", provides an invaluable perspective from which to view the global economy's fundamental nature and path at this unique point in history. The material implications of this perspective are quite bleak, but, nevertheless, we will soon begin to trust in those striking, yet simple portraits that have been etched deeply into our honest minds.

Our account of this science will be adequate if it achieves such clarity as the subject-matter allows; for the same degree of precision is not to be expected in all discussions, any more than in all products of handicraft.
Aristotle, Nicomachean Ethics

ECB's Balance Sheet Contains Massive Risks
by Matthias Brendel and Christoph Pauly - Spiegel

While Europe is preoccupied with a possible restructuring of Greece's debt, huge risks lurk elsewhere -- in the balance sheet of the European Central Bank. The guardian of the single currency has taken on billions of euros worth of risky securities as collateral for loans to shore up the banks of struggling nations.

On the green fields near Carriglas, halfway between Dublin and Ireland's west coast, the wind whistles eerily around rows of half-finished houses. Most of these buildings are roofless, leaving their bare walls unprotected against the elements. Even the real estate brokers' for-sale signs and the project offices are gone. Hardly anyone in Carriglas believes that the houses will ever be finished. There are many of these ghost towns in Ireland, including 77 in small County Longford alone, which includes Carriglas. They could end up costing German taxpayers a lot of money, as part of the bill to be paid to rescue the euro.

That bill contains many unknowns, but almost none of them is as nebulous as the giant risk lurking in the balance sheet of the European Central Bank (ECB), in Frankfurt. Many bad loans have now ended up on that balance sheet, including ones that were used to build houses like those in Carriglas and elsewhere. No one knows how much they are worth today -- and apparently no one really wants to know.

Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billion euros with central banks. The central banks have distributed large sums to their countries' financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are -- to put it mildly -- not particularly valuable.

Risks Transferred to ECB
These risks are now on the ECB's books because the central banks of the euro countries are not autonomous but, rather, part of the ECB system. When banks in Ireland go bankrupt and their securities aren't worth enough, the euro countries must collectively account for the loss. Germany's central bank, the Bundesbank, provides 27 percent of the ECB's capital, which means that it would have to pay for more than a quarter of all losses.

For 2010 and the two ensuing years, the Bundesbank has already decided to establish reserves for a total of €4.9 billion ($7 billion) to cover possible risks. The failure of a country like Greece, which would almost inevitably lead to the bankruptcy of a few Greek banks, would increase the bill dramatically, because the ECB is believed to have purchased Greek government bonds for €47 billion. Besides, by the end of April, the ECB had spent about €90 billion on refinancing Greek banks.

Former Bundesbank President Axel Weber criticized the ECB's program of purchasing government bonds issued by ailing euro member states. In the event of a bankruptcy or even a deferred payment, the ECB would be directly affected.

But even greater risks lurk in the accounts of commercial banks. The ECB accepted so-called asset-backed securities (ABS) as collateral. At the beginning of the year, these securities amounted to €480 billion. It was precisely such asset-backed securities that once triggered the real estate crisis in the United States. Now they are weighing on the mood and the balance sheet at the ECB.

No expert can say how the ECB can jettison these securities without dealing a fatal blow to the European banking system. The ECB is in a no-win situation now that it has become an enormous bad bank or, in other words, a dumping ground for bad loans, including ones from Ireland.

Ireland Not Yet Rescued Yet, Despite Bailout
The Emerald Isle experienced an unprecedented boom that ended in 2007, followed by an equally severe crash. Irresponsible real estate sharks, unscrupulous bankers and populist politicians had ruined the country's finances. It was forced to spend €70 billion to support its banks, even as the government itself was all but bankrupt. In November 2010, the Europeans came to the rescue of the Irish with €85 billion from their joint bailout fund. But Ireland is still far from being rescued.

Bank branches line the main street in the small town of Longford. Loans are no longer available here, says an employee with the EBS Building Society, noting that nowadays the bank only accepts savings deposits. A blue information brochure on the table explains what borrowers can do if they encounter financial difficulties. "Please do not ignore the problem," the brochure implores.

But more and more Irish are indeed ignoring the problem and have simply stopped making payments on their loans. Like other banks in Ireland, EBS -- which issued more than a fifth of all Irish mortgages -- had to be rescued by the Irish government. The fact that EBS, a relatively small bank specializing in home loans, was able to issue so many mortgages is the result of a practice that was commonplace before the crisis and ultimately almost led to the collapse of the financial system.

Mortgage loans were bundled into packages worth billions, allowing the associated risks to be transferred to the international capital markets. They disappeared from the banks' books, allowing lenders like EBS to provide funding for even more real estate in the island nation. By 2007, German insurance companies and savings banks, in particular, were buying up Irish residential mortgage-backed securities. However, in 2008, the international investors became increasingly nervous. The asset-backed securities at EBS -- known as Emerald 1, 2 and 3 -- suddenly slid into negative territory.

An Irish Time Bomb
But the Irish seemingly had a solution. "We wanted to preserve our good relations with our old business partners," says one of the loan experts. In the spring of 2008, investors bought back Emerald 1, 2 and 3, and EBS took back the mortgage loans temporarily. The investors could hardly believe their good fortune. Then EBS packaged the loans from the asset-backed securities with other mortgage loans, creating Emerald 5, an Irish time bomb containing about €2 billion in loans.

But, by 2008, international investors were no longer interested in this type of security. Asset-backed securities were already seen as toxic, and the market had collapsed. But EBS knew that the ECB had pledged to accept such securities as collateral for fresh cash. "We didn't have enough bonds to submit to the ECB, so we built Emerald 5," says the EBS employee. Many others did the same.

According to the Association for Financial Markets Europe (AFME), the face value of asset-backed securities newly launched on the European market in 2010 amounted to a tidy sum of €380 billion.

However, the majority of those securities, worth €292 billion, were never offered for sale. Instead, they served one particular purpose: to obtain fresh cash from the central banks.

According to AFME figures, the total value of all outstanding asset-backed securities in the euro zone and the United Kingdom is an almost unimaginable €1.8 trillion. Of course, not all asset-backed securities are toxic. German banks, for example, package together car or small-business loans to ease pressure on their balance sheets.

But the securities that end up at the ECB from peripheral countries like Greece or Ireland are often of questionable value. The central bank is supporting lenders that are in fact no longer viable. And the bombs continue to tick.

Three years after it was launched, things are looking grim for Emerald 5. Eight percent of borrowers are more than three months behind on their loan payments, and of those, a third are more than 12 months behind. The Moody's rating agency has now reduced its rating of Emerald 5 to A1 and announced a further downgrade to A3 unless the security finds new supporters soon. According to current rules, if it slips below a rating of A, it can no longer be submitted to the ECB. And then?

Does The ECB Know How Safe Its Collateral Is?
The ECB maintains a list of "eligible assets," a sort of seal of approval for securities. Every major bank in the euro zone must have such securities, such as bonds or government bonds, or it would be excluded from the money market. There are currently 28,708 securities on the ECB list, with a total value €14 trillion at the end of 2010.

The national central banks determine which securities are placed on the list and under what conditions. "The ECB has no obligation to supervise the central banks, nor does it have the ability to monitor individual central banks," explains an ECB spokesman.

In other words, ECB President Jean-Claude Trichet doesn't even know exactly what kinds of risks he is taking on. In principle, the conditions for ECB investment-grade securities are outlined in a 37-page document, most recently updated in February. To keep the risks for the central banks within reason, some of the haircuts on securities are very high, comprising up to 69.5 percent of the value of a security.

However, the degree to which individual central banks strictly adhere to these rules varies. This leads to irregularities that should simply not occur in a bank, let alone a central bank. For example, Depfa Bank, the Irish subsidiary of the scandal-ridden German bank HRE, had 78 securities placed on the ECB's list of investment-grade securities in February. According to documents SPIEGEL has obtained, 25 of those securities appear not to have been sufficiently discounted.

Pattern of Overstating Collateral Values
An inquiry about these incorrectly valued securities elicited the following nonchalant response from the Central Bank of Ireland: "Thank you for the information. The discount for XS0226100310 should be 46 percent. We will apply this discount in the next few days." This meant that the owners of the security could borrow about 20 percent less money from the ECB.

Only after a second inquiry did the Irish central bankers wake up. On Feb. 28, they almost doubled the discounts on 21 additional Depfa securities. Only three securities, for which the Central Bank of Luxembourg was responsible, initially escaped this fate. As a result, the owners of the Depfa securities were initially spared losses of up to €10 million -- until April 1, when Luxembourg also caught up. "The rating of the Depfa securities was changed in early April, which resulted in an updating of the discount," says the Central Bank of Luxembourg, noting that this is in conformity with the current rules of the euro system.

Ireland's central bank turned a blind eye for weeks to two other debt instruments issued by Irish mortgage lender EBS, with a total face value of €1.3 billion. Even though the instruments had only a B rating, they were valued as first-class securities. "We are not aware of this," says the central bank.

After being repeatedly queried about this discrepancy, EBS finally engaged Fitch Ratings, which promptly provided both securities with its rating of "A-" on April 11. This pattern was repeated several times. The quality of a security was tested, the central bank was contacted, it thanked us for the tip and then adjusted the balance-sheet value of the collateral. Such inadvertent or intentional sloppiness doesn't cast the ECB and its affiliated central banks in a very good light. It also shows that the incentives for rating agencies, which collect large sums of money each time they rate such asset-backed securities, are still questionable.

Although stricter guidelines for the central banks came into effect on March 1, 2011, no one seems to have paid much attention to them. The Central Bank of Luxembourg, for example, still placed 197 asset-backed securities on the ECB list on March 4. After several inquiries were made, the number was reduced to 179 on March 8 and to 146 on March 16.

The quality of securities used as collateral with the Dutch central bank is apparently much higher. On March 8, Fitch rated 281 asset-backed securities held by the central bank, giving its top rating of AAA to 54. These securities were last reviewed before the beginning of the financial crisis and, oddly enough, have not suffered at all since then.

A small team of Fitch employees in London completed the mass rating. The move ensured that securities worth a total of €50 billion were prevented from being removed from the ECB list.\ "We have observed the selection criteria for collateral in the euro system at all times," writes the Dutch central bank. It also notes that the ratings for the asset-backed securities were confirmed by "monitoring reports" prior to March 1.

The handling of these securities is surprising, particularly as they pose an ongoing risk until well into the future, with maturities ranging from 30 to 90 years. Many asset-backed securities are now in constant decline. In the fall of 2008, the Frankfurt-based central bankers already had to concede that the ECB could face losses as a result of its acceptance of asset-backed securities as collateral.

Following the bankruptcies of the German branch of Lehman Brothers, the Dutch bank Indover and three subsidiaries of Icelandic banks, the ECB was stuck with the failed banks' collateral. They had a total face value of €10.3 billion and consisted "primarily" of asset-backed securities, according to an ECB announcement.

No one really knows how high the central bank's risk is in the crisis-ridden countries of Ireland, Portugal, Greece and Spain. But Bundesbank statistics provide an indication of how drastically the situation has changed in Europe. They show that these countries' liabilities to the euro system have risen to €340 billion within about three years. Since the countries are disconnected from the international capital market and domestic savers have only limited confidence in their banks, other European central banks -- most notably the Bundesbank -- are forced to inject more and more money.

Call for a Reform of European Central Banks
Hans-Werner Sinn questions whether this can succeed in the long term. The president of the Munich-based Ifo Institute for Economic Research believes that a reform of the system of European central banks is urgently needed. He wants limits imposed on the autonomy of national central banks when it comes to recognizing securities as collateral. He has also called for "higher country-specific price discounts for securities submitted as collateral." The banks in these countries would slowly have to return to refinancing themselves in the normal capital market.

The ECB stresses that the securities will only have to be realized if the banks actually declare bankruptcy. But as the drama in Ireland shows, the central banks are walking a very fine line. By applying a great deal of pressure, ECB President Trichet made sure that the Europeans came to the Irish government's aid so that Ireland was able to protect its banks from collapse. This spared the central bank the embarrassment of having to realize the precarious instruments among its asset-backed securities, which are based on real estate loans in County Longford and elsewhere.

But if the euro crisis rumbles on, the worst-case scenario isn't all that far away. To ensure its national survival, Ireland should reject the European rescue effort and, instead, accept the failure of its banks as a necessary evil, Morgan Kelly recently said. The renowned professor of economics at University College Dublin knows who would be especially hard-hit by such a step: the ECB. "The ECB can then learn the basic economic truth that if you lend €160 billion to insolvent banks backed by an insolvent state, you are no longer a creditor: you are the owner" Kelly wrote in the Irish Times earlier this month.

Eurozone: Frankfurt’s dilemma
by Ralph Atkins - Financial Times

“Events in Greece have brought the euro area to a crossroads: the future character of European monetary union will be determined by the way in which this situation is handled.”
Jens Weidmann, Bundesbank president and European Central Bank governing council member, Hamburg, May 20.

By rights, the ECB could have abandoned Greece long ago. Nothing in the rule book says it must prop up countries at risk of economic collapse. If anything, the architects of the monetary union, launched in 1999, envisaged the opposite. Because members would share a currency but not spending and tax policies, governments were meant to take responsibility for their own finances – the “no bail-out” principle was enshrined in a European Union treaty. Logically, a nation that flouted the rules as recklessly as Greece should be left to its fate.

Faced in recent weeks, however, with the renewed fears of a Greek default, the ECB has balked. With increasing vehemence, the euro’s monetary guardian has warned of catastrophic effects across the 17-country currency union. Jean-Claude Trichet, ECB president – with less than six months before his eight-year term expires – has refused to discuss any debt restructuring for the nation, storming out of a meeting of eurozone finance ministers in Luxembourg this month when it was raised.

His colleagues, including Mr Weidmann of the Bundesbank, have raised the stakes. They warn that if politicians take even a modest step towards a restructuring, the ECB will cut Greek banks off from its lifesaving liquidity supply, triggering a financial collapse that would push the country’s economy into the abyss. It is the central bank equivalent of nuclear deterrence: defy us and we will blow up the world. How the ECB responds to the conflicting pressures created by the Greek crisis matters enormously.

Shunned by financial markets, the country’s banks survive only because the Frankfurt-based central bank meets in full their demands for liquidity against collateral of rapidly declining quality. Early next month, the ECB has to decide whether to continue that eurozone-wide “unlimited liquidity” policy; so far it has said it will last only until early July. The bank also owns about €45bn of Greek government bonds, acquired during the past year as part of efforts to calm financial market tensions.

Mr Trichet has piled pressure on Athens to reform its uncompetitive and overregulated economy, especially through an accelerated privatisation programme. But if this fails, he or Mario Draghi, the Italian central bank governor expected to succeed him on November 1, will face a dilemma. They will have to decide whether the ECB pulls the plug on Greek banks, leaving governments to decide whether to rescue the country. Otherwise, they will have to jettison the rule book completely and throw money at the problem, perhaps rescuing the euro but at enormous cost to its long-term credibility.

“All of those options are potentially lethal for the eurozone,” says Thomas Mayer, chief economist at Deutsche Bank. Taxpayers elsewhere, particularly in northern Europe, may revolt at demands for fresh help. “But the ECB becoming a backstop for Greece would amount to ‘monetary financing’ [central bank funding of governments], which is forbidden by European Union treaty.”

For the ECB, the turning point was last May. Brutally exposed by the recession that hit Europe after the collapse of Lehman Brothers investment bank in September 2008, Greek fiscal problems exploded into a eurozone-wide crisis. Financial market tensions rose alarmingly as fundamental flaws were exposed in the construction of the monetary union.

The ECB helped persuade eurozone political leaders to assemble a €750bn rescue plan with the International Monetary Fund. It also took action itself. For Greece, it suspended the minimum rating requirement for government-backed collateral used in its liquidity offers, a concession since granted to Ireland. Greek banks could continue to tap the ECB for funds, no matter how far the country was downgraded by rating agencies (it has now reached “junk” status). For the eurozone as a whole, the bank stepped up the provision of unlimited liquidity.

The ECB attracted far more controversy when it decided to start buying eurozone government bonds. The immediate objective of the “securities markets programme” was to try to calm the markets. Officially, it would ensure market interest rates remained in line with the rate deemed necessary to control inflation. But many, especially in Germany, feared it was aiding and abetting fiscally irresponsible governments, violating the spirit of eurozone rules. Axel Weber, then Bundesbank president, publicly opposed the policy. In private, as many as four other ECB governing council members opposed the step.

By declaring it would act as a backstop in bond markets, the ECB bought the eurozone time. A year later, however, the securities markets programme has failed. The debt crisis has spread to Ireland and Portugal, both now subject to ECB-backed international bail-out plans. Greek bond yields have soared this week to record highs as investors shun the country’s debt, with nervousness spreading to countries such as Spain.

Although accounting together for only about 5 per cent of eurozone gross domestic product, Greek, Irish and Portuguese banks today take about €242bn of ECB liquidity – 55 per cent of that provided to the eurozone financial system. The ECB stipulation that it provide liquidity only to solvent banks against adequate collateral has been pushed to the limit.

As such, the risks and conflicts of interest the ECB faces have multiplied. Under the securities markets programme, it acquired €75bn in government bonds, almost two-thirds of which are Greek. It also has on its books perhaps €150bn in other financial assets put up as collateral by Greek banks, much of which is backed by Athens.
. . .
Should Greece default, the value of those holdings would decline sharply. The ECB bought the bonds at market prices, which assumed some risk of default, so the immediate losses might be manageable. JPMorganChase calculates that, with €81bn in capital and reserves, eurozone central banks could withstand even a 50 per cent “haircut”, or discount, on Greek bonds. But if write?downs on Portuguese and Irish bonds followed, eurozone governments might be forced to provide billions of euros to rebuild the ECB’s balance sheet.

According to one view, the ECB has been caught by the consequences of actions it took a year ago. “They are basically trapped. They are now like many people in the banking system in calling out for no debt repudiation because they are so exposed,” says Charles Wyplosz of the Graduate Institute in Geneva.

The ECB’s role was deliberately limited, unlike those of “activist” central banks such as those of the US and UK, Prof Wyplosz argues. “We knew there would be a risk of indiscipline by member states such as Greece. In a monetary union without a fiscal union, you have incentives for governments to piggy-back on the prudence of others and a currency regime that protects you from an immediate financial market backlash.”

Another, more charitable, explanation is that the bank finds itself obliged by the mistakes in the eurozone’s construction to act pragmatically. “The ECB sees that over the past half century, the economic systems of advanced countries have become based on bank leverage and inter-linkages that are predicated on the assumption that governments don’t default,” says Julian Callow of Barclays Capital. “If you did have any kind of debt restructuring, even a ‘soft’ one, that assumption would really be shaken.”

What will happen next? Possibly helping the ECB are brighter economic prospects for the rest of the eurozone, which have boosted the chances of countries such as Greece easing their plight through economic growth. But in another sense, robust growth in countries such as Germany and France has compounded the ECB’s difficulties – it is much harder to set interest rates for the zone as a whole when there is a real chance of a big economic shock – a default – from one of its smallest members.

The immediate priority is to put Athens’ reform programme back on track. The ECB, with the European Commission and IMF, is part of the “troika” negotiating measures to restore Greek public finances to a sustainable basis. As part of those efforts, it is working on Greek banks’ funding plans – thrashing out ways to reduce their dependence on its liquidity. Similar plans are being drawn up in Portugal and Ireland. Once they are ready, the ECB could edge towards the pre-crisis system of auctioning liquidity rather than simply providing banks with as much as they need.
. . .
But to escape the potential dilemma it faces over Greece – as well as Ireland and Portugal – the ECB requires eurozone governments to take over responsibility for resolving the immediate crisis and the longer-term problems facing the monetary union. So far, their willingness has fallen short of hopes in Frankfurt. This year, Mr Trichet lobbied for EU rescue funds set up following last year’s crisis to be given powers to intervene in government bond markets, allowing them to act as backstop instead of the ECB. He was rebuffed.

The bank is disappointed, too, by steps taken to beef up eurozone fiscal rules to prevent Greek-style crises; it wants financial sanctions imposed automatically on the worst offenders. And it has been alarmed by German attempts to make explicit the circumstances in which private investors would be hit in future bail-outs. In its view, Berlin’s crass understanding of financial markets has scared off potential outside investors in countries such as Greece.

If Greece now requires fresh outside financial help, the ECB will probably lobby for governments to improve the country’s €110bn programme. But with euroscepticism rising in Germany and elsewhere, its appeals may fall on deaf ears and pressure for other ways to relieve Athens’ debt burden would build.

The ECB fears an orderly restructuring would be hard, if not impossible, to pull off – and would risk triggering a bigger, far more damaging Greek default. But, says Mr Mayer of Deutsche Bank, its objections suggest “it has not studied the Latin American experience enough”. During the 1980s and 1990s, Latin America learnt difficult lessons on how restructurings could if necessary be implemented.

Policymakers in Frankfurt have not given up the idea that Greece will spare them such a choice. They take comfort from signs of progress this week in Athens on structural reform plans. If Greece does head towards restructuring, the ECB’s only hope will be that its cataclysmic warnings were wrong. A blow to the bank’s credibility, for sure – but the stakes are so high, even that would be a relatively small price to pay.

A Greek Default Won’t Be ‘Contained’, John Mauldin Says
by Aaron Task - Daily Ticker

Financial markets shuddered Monday as fears over Europe's sovereign debt crisis resurfaced yet again. Still, the Dow closed off its worst levels of the session amid the conventional view that Greece's debt crisis can be managed.

But Endgame author John Mauldin says Greece won't be any more "contained" than subprime mortgages were in 2008. "It's not something that stops at the European waters," Mauldin says. "Just like the subprime crisis didn't stop in California…I'm worried this one has a lot of contagion and it'll affect the world."

As for the mechanism for that contagion, Mauldin lays out the following scenario in the event of a Greek default:
  • Greece has to nationalize its banks.
  • Greek citizens are forced to take deposits in drachmas, rather than euros.
  • Greek consumers and businesses then default on all debts because of the resulting haircut, which he estimates at 50%.
  • French and German banks are forced to take write-downs on their Greek exposure.
  • The ECB is forced to take a write-down on its exposure to Greek debt.

Such a scenario would not go unnoticed in Portugal or, especially, Ireland, where voters have already shown their displeasure with having to pay for bank bailouts, Mauldin notes.

Meanwhile, U.S. banks have written credit-default swaps to European banks. Most of these positions are hedged but "you're only balanced as long as both of those counterparties are good," Mauldin says. "If you have a bad counterparty, now you're out of balance."

If you'll recall, it wasn't the failing subprime mortgages per se that caused the real crisis in 2008, but banks refusal to trade with other banks. It was this "counterparty risk" which caused the financial system to seize up, which is why policymakers here and in Europe are doing everything and anything to prevent a repeat.

Europe's Split on Debt Crisis Hardens
by Charles Forelle and Brian Blackstone - Wall Street Journal

Central Banker Calls Greece Restructuring 'Horror Scenario' in Debate Over Solutions That Is Reigniting Investors' Fears

The dispute between Europe's central bankers and politicians over how to deal with Greece's worsening financial problems intensified, as one of the European Central Bank's top officials rejected calls by Germany and other euro-zone states for a restructuring of Greek debt—calling it a "horror scenario." The comments from Bank of France Governor Christian Noyer, a member of the ECB's governing council, mark the latest salvo in an increasingly heated debate that is fueling fears among investors that the region's debt crisis has entered a dangerous new phase.

The standoff—which has pitted Europe's central bank against Germany and several other euro-zone governments—cuts to the heart of a question at the center of the region's 18-month crisis: how much are the euro area's wealthier members willing to pay to keep the bloc intact.

At issue is whether Greece, barely a year after receiving a €110 billion ($155 billion) bailout, should be forced to default on its obligations or if Europe should extend it more aid. The ECB worries about the consequences even a mild debt restructuring could have on Ireland and other weak euro-zone countries, while leaders in the currency bloc's strong economies, foremost Germany, fear the political cost of further bailouts.

Moody's Investors Service on Tuesday also warned about the consequences of restructuring, saying any Greek debt default would likely torpedo the country's credit for a "sustained" period, possibly thrusting Greek banks into default and leaving other weak euro countries "struggling" to stay out of junk territory.

The head of France's Société Générale, one of Greece's creditors, echoed the restructuring concerns, saying it would be difficult to convince investors that Greece was a one-off. There are consequences for "how the market will look at the European Union and each country," Société Générale Chief Executive Frédéric Oudéa said in an interview. "In my view, the issue is not really just the Greek issue."

The outcome in Greece could hit Ireland, which was forced to seek a bailout last year. Ireland's government is less indebted that Greece's, but its banking system is fragile and fears of debt restructuring could reignite the crisis there.

The disagreement within Europe's leadership revolves around a basic question: What to do as Greece, again, runs out of money? There is broad agreement in Europe that the €110 billion granted last spring isn't enough to get Greece through next year. But there is practically no agreement on how to plug the gap.

Under intense political pressure, leaders in Europe's stronger economies are deeply reluctant to simply write another check. That, many fear, would put the euro zone too far down the road to a fiscal union, in which strong countries have no alternative but to pay for weak countries. Instead, Berlin and its allies want Greece and other weak countries to repair their finances through deep spending cuts and debt restructuring.

The ECB's position is that Greece's financing shortfall must be filled by other euro-zone countries once Athens has exhausted all options for paring its budget and selling its state assets—not by delaying or reducing payments to creditors.

But several key European finance ministers, including Wolfgang Schäuble of Germany and Christine Lagarde of France, have left the door open to a so-called reprofiling of Greece's debt. Under that scenario, Greece's private creditors would be asked to accept repayment later than expected, to help Greece cover its fiscal holes in 2012 and 2013. Such a rescheduling would lessen—or, in an optimistic scenario—obviate the need for European governments to pay for a second bailout. At the least, a reprofiling would mean that private-sector creditors feel some pain, along with taxpayers.

Since the debt crisis emerged in early 2010, nearly all of official Europe had maintained a euro-zone debt default of any flavor was unthinkable. National leaders feared a loss of prestige and a hit to confidence in the region. ECB officials feared the Continent's fragile banks, unprepared for losses on what they had thought were ultra-safe investments, could collapse. But as national leaders have faced the consequence of that position—that preventing a euro-zone debt default means they must always be ready to write more bailout checks—they have backed off.

In Germany, the bloc's strongest economy, the political mood has long been one of antipathy toward further bailouts. But the mood in Europe was shifting more broadly this spring. A right-wing Finnish party made big gains in an electoral campaign by fiercely opposing bailouts. The party didn't win, but it forced Finland's government to tread carefully in talks over revamping the European Union's various bailout funds. As a result, final decisions on those funds—expected as part of a "grand bargain" in March—have not materialized.

Mr. Schäuble was among the first key politicians to suggest a reprofiling of debt could be considered. Ms. Lagarde later joined him, and at a meeting of European finance ministers last week, so did Luxembourg Premier Jean-Claude Juncker, who heads the group of 17 ministers.

The ECB rejects such calls. "Under the ECB's own narrow interest, there is perhaps no better option than to have the whole of the burden being borne by fiscal authorities—Greek taxpayers and taxpayers of the euro zone," instead of by banks who hold Greek debt, says Sony Kapoor, managing director of Brussels-based think tank Re-Define. But given the broad political opposition, Mr. Kapoor says, ECB officials have "unfortunately painted themselves into a corner."

Mr. Noyer of the ECB said that if there were a restructuring, Athens's debt would no longer be accepted as collateral for ECB loans—echoing threats last week by ECB executive board member Jürgen Stark and Bundesbank President Jens Weidmann, both of Germany. Those ECB loans are a lifeline to Greek banks, which borrowed €88 billion from the ECB in March alone. Suspending them would bring the Greek banking system to its knees.

Unlike one year ago, when a cacophony of voices from the ECB on issues such as government bond purchases added to confusion in financial markets, the ECB board is speaking out with unanimity against debt restructuring of any kind.

In the past, officials have reversed similar pledges. Last year, they suspended minimum investment-grade ratings requirements for Greece weeks after ECB President Jean-Claude Trichet said he would make no such exceptions, and bought Greek government bonds days after Mr. Trichet said the idea hadn't been discussed. Many analysts think the ECB could come up with a similar solution and keep funding Greece's banks even if the country is forced to default.

The ECB has pushed hard before. In November, with Irish authorities resisting a bailout, ECB officials threatened to pull the plug on an emergency-lending facility that was helping keep Irish banks afloat. Ireland soon accepted the aid. And ECB pressure has been sufficient to squelch talk of the Irish state's defaulting on the debt of now-state-controlled banks—despite the electoral victory of a party that advocated just that. As a consequence, Irish taxpayers are pouring money into the hobbled banks so they can repay their loans.

Few believe the ECB would cut off Greek banks entirely. But ECB officials maintain a default changes everything, and making an exception for default-rated collateral would put the ECB's balance sheet, and eventually taxpayer money, at risk.

Greece crisis worsens amid political stalemate
by Philip Aldrick - Telegraph

A damaging political stalemate is threatening to plunge Greece deeper into crisis as hopes of cross-party support for further austerity measures were dashed on Tuesday by the main opposition leader.

Antonis Samaras, head of New Democracy, the conservative party that earlier this month called for a renegotiation of the original €110bn (£95bn) bail-out, said he would not support additional austerity measures, totalling €6bn, to reduce the country's budget deficit. His refusal to back the government could jeopardise both payment of the rescue package's next instalment, of €12bn due in June, as well as ongoing talks over a second bail-out, of as much as €60bn.

The political wrangling came as Vince Cable, the Business Secretary, became the first UK politician to admit openly that Greece has no option but to restructure its €330bn of public debt. "What they are going to have to do is to have a rescheduling of their debt and it can be done in a soft way or a hard way, and that's what the current debate is about," he said in a newspaper interview. "I think in practice what will happen, people are already discussing this, is a negotiated rescheduling. "You can't just deal with this by cutting, cutting, cutting – it does not work."

Greece's debts are expected to hit 150pc of GDP this year, the highest in Europe, on top of a 10.5pc budget deficit. It has already begun retrenchment to reduce the deficit to 7.5pc this year, including €50bn of privatisations.

However, officials from the European Union and the International Monetary Fund (IMF), which put up the original €110bn loan, fear the country will miss its fiscal consolidation targets. The government has proposed a further €6bn of measures to bring the deficit down, but Mr Samaras said on Tuesday: "To this demonstrably mistaken recipe, I will not agree." He has previously backed privatisations but warned that increasing taxes would only push the country deeper into recession.

Cross-party support is vital if Greece is to receive further loan instalments and a second bail-out. Brussels and the IMF have made it clear that "political groups set their disagreements aside". Mr Samaras may be angling for a debt restructuring as Greek politicians have acknowledged it may be unavoidable. But some European officials fear a restructuring could trigger panic in the markets for all peripheral euro sovereign debt and spark a second credit crunch.

A second bail-out is expected to comprise of a fresh loan, further austerity, a fresh commitment on earlier agreements and a "soft restructuring" – or lengthening of the terms of the existing debt. Insurance on Greek debt soared on Tuesday, implying a 71pc chance of default within five years.

BRICs slam European grip on IMF, Lagarde leads race
by Lesley Wroughton and Alexandria Sage - Reuters

Top emerging economies joined forces to slam Europe's "obsolete" grip on the IMF's top job, even as France's finance minister appeared to strengthen her lead in the race to replace Dominique Strauss-Kahn.

Brazil, Russia, India, China and South Africa, known as the BRICs, sharply criticized European officials on Tuesday for suggesting the next International Monetary Fund head should automatically be a European. In the first joint statement issued by their directors at the Fund, the BRICs said the choice should be based on competence, not nationality, and called for "abandoning the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe."

French Finance Minister Christine Lagarde plans to announce her candidacy on Wednesday after the European Union agreed to back her, diplomatic sources said. Hours before the BRIC statement was issued in Washington, France's government said China would back Lagarde to succeed Strauss-Kahn who quit after he was charged with sexually assaulting a hotel maid in New York.

Emerging nations say it is time for Europe's 65-year grip on the IMF to be loosened but no clear consensus candidate to represent them has emerged. Mexico's top central banker said some countries welcomed his decision to run, while South Africa and Kazakhstan may put forward their own candidates.

'European Consensus'
Following Strauss-Kahn's resignation, Europe has made clear it wants to stay in charge of the multilateral lender at a time when it is helping to bail out Greece, Ireland and Portugal. "It's a European consensus," Francois Baroin, France's budget minister and government spokesman, told Europe 1 radio. "The euro needs our attention. We need to have the Europeans (on board), the Chinese support the candidacy of Christine Lagarde," he said.

But China's Foreign Ministry said it had no comment on whether Beijing would back Lagarde, a 55-year-old former lawyer, for the job. Sources in Washington have said the United States would back a European, continuing a tradition that also allows an American to run the World Bank.

The United States and European nations jointly have power at the IMF to decide who leads it but securing support from some emerging economies would defuse a potentially bitter row over the decision. In April 2009, the Group of 20 leading nations endorsed "an open, transparent and merit-based selection process" for heads of the global institutions.

France, which presides over the G20 this year, has made an effort to reach out to Beijing on key issues for developing countries like global monetary reform and speculation in commodity markets. Last week, the head of China's central bank, Zhou Xiaochuan, said the IMF's leadership should reflect the growing stature of emerging economies. But he stopped short of saying its new boss should be from an emerging economy.

Wu Qing, a researcher with the Development Research Centre government think tank in Beijing, said it was plausible that China would support Lagarde as there weren't many qualified candidates from China or Asia in general. The IMF's board will draw up a shortlist of three candidates and has a June 30 deadline for picking a successor.

'Part Of The Process'
Emerging economies say a backroom deal under which Europe maintains its grip on the IMF and an American heads the World Bank could undermine the legitimacy of the institutions. Mexico's Carstens told Reuters the United States welcomed his participation in the race for the IMF job but was neutral on whether to support his candidacy. "They welcomed that I was participating and they thought it was an important part of the process," Carstens said. Brazil seemed reluctant to back Carstens, with government sources saying he is seen as a long shot for the job.

South African Finance Minister Trevor Manuel may also be a candidate to run the IMF, and Russia has said it would back Kazakhstan's central bank chief, Grigory Marchenko. A growing concern about Lagarde is a possible legal probe of her role in a 2008 payout to a prominent French businessman to settle a dispute with a state-owned bank. Judges are due to rule on June 10 -- the deadline for when countries must submit candidates for the IMF job -- whether to launch an inquiry into the matter.

No more bailouts put UK's biggest banks in danger of ratings downgrades
by Alex Hawkes - Guardian

Ratings agency Moody's put Lloyds TSB, Royal Bank of Scotland and Santander UK on review for possible credit rating downgrades, saying that there will be no taxpayer-funded bailouts in the future. The three are the most high-profile of fourteen banks and building societies put under review by the agency. The review relates to the financial institutions' senior debt and deposit ratings.

"The reassessment is not driven by either a deterioration in the financial strength of the banking system or that of the government. It has been initiated in response to ongoing guidance from the UK authorities (the Bank of England, the Financial Services Authority and the Treasury) that banks that fail in the future should not expect capital injections from the public purse," said Elisabeth Rudman, a Moody's senior credit officer and bank analyst.

The move by Moody's could lead to a hike in the banks' borrowing costs. The review process will take three months. The banks and building societies covered by the review are: Bank of Ireland; Co-operative Bank; Coventry Building Society; Lloyds TSB; Nationwide Building Society; Newcastle Building Society; Norwich & Peterborough Building Society; Nottingham Building Society; Principality Building Society; Royal Bank of Scotland; Santander UK; Skipton Building Society; West Bromwich Building Society; and Yorkshire Building Society.

The move follows an announcement from Moody's last month that it would reassess the levels of systemic support incorporated in the senior debt ratings of UK financial institutions. Moody's will conduct a full review of the levels of government support available, and any other mitigating factors that could obviate the need for a downgrade. It said that it was reviewing the situation because the current long-term ratings on banks involved levels of government support "that the rating agency may now deem to be too high for the evolving post-crisis environment".

Moody's said: "The authorities have taken a number of legislative and other steps to permit losses to be imposed on creditors as part of the going-concern resolution of banks. While we note – and will take into consideration – the technical difficulties in resolving larger, complex banks, we will also need to assess the likelihood of further developments in this area over the medium term, given the very clear determination of the UK government to put in place a resolution mechanism that can also be applied to large, complex banks," Rudman said.

Government support accounts for an uplift of two to five notches for the big banks, and one to five for the smaller institutions. "Moody's expects to retain a high level of systemic support uplift in the senior debt ratings of the major UK banks, as the rating agency believes that the regulators do not currently have all the tools necessary to resolve such institutions without causing financial instability," it said.

The announcement also said that Barclays has been changed to negative from stable, and that HSBC's rating has been affirmed with a negative outlook. Barclays and HSBC are not under review but have suffered a hit, Moody's said, because the government has publicly stated it believes senior debt holders should share the pain if the banks get into trouble.

China seen as the candidate for 'next catastrophe'
by Helia Ebrahimi - Telegraph

Beware the China bubble because until hedge funds have found a way of directly shorting the soaring economy it will remain unchecked, says Greg Zuckerman, author of The Greatest Trade Ever. Mr Zuckerman's book was one of the first to reveal the billions in profits which hedge funds and banks from taking bets against the sub-prime market just before the housing bubble burst.

China, where the economy has expanded 10.1pc a year on average since 1978, is reminiscent of the housing market before credit default swaps allowed hedge funds to make bets against the entire market, according to Mr Zuckerman.

When China's growth will decelerate or come to an abrupt stop is probably the most critical question facing the world economy. But predictions of a hard landing on everything from bad loans to investment-led overheating or inflation has yet to derail the country's expansion.

This is because the government-controlled economy is insulated from speculators testing the true voracity of the market, claims Mr Zuckerman. "We need short sellers," he said. "The problem with the housing bubble was that for a long time people couldn't bet against it. Credit default swaps gave hedge funds specific tools to short the entire market. That pricked the housing bubble. "It is very difficult to make a direct bet against China. You can short property companies in Hong Kong but it is not the same thing. It is a candidate for the next catastrophe."

Risk From Spent Nuclear Reactor Fuel Is Greater in U.S. Than in Japan
by Matthew L. Wald - New York Times

The threat of a catastrophic release of radioactive materials from a spent fuel pool at Japan’s Fukushima Daiichi plant is dwarfed by the risk posed by such pools in the United States, which are typically filled with far more radioactive material, according to a study released on Tuesday by a nonprofit institute.

The report, from the Institute for Policy Studies, recommends that the United States transfer most of the nation’s spent nuclear fuel from pools filled with cooling water to dry sealed steel casks to limit the risk of an accident resulting from an earthquake, terrorism or other event.

“The largest concentrations of radioactivity on the planet will remain in storage at U.S. reactor sites for the indefinite future,” the report’s author, Robert Alvarez, a senior scholar at the institute, wrote. “In protecting America from nuclear catastrophe, safely securing the spent fuel by eliminating highly radioactive, crowded pools should be a public safety priority of the highest degree.”

At one plant that is a near twin of the Fukushima units, Vermont Yankee on the border of Massachusetts and Vermont, the spent fuel in a pool at the solitary reactor exceeds the inventory in all four of the damaged Fukushima reactors combined, the report notes.

After a March 11 earthquake and tsunami hit the Japanese plant, United States officials urged Americans to stay at least 50 miles away, citing the possibility of a major release of radioactive materials from the pool at Unit 4. The warning has reinvigorated debate about the safety of the far more crowded fuel pools at American nuclear plants.

Adding to concern, President Obama canceled a plan for a repository at Yucca Mountain in the Nevada desert last year, making it likely that the spent fuel will accumulate at the nation’s reactors for years to come. The Nuclear Regulatory Commission maintains that both pool and cask storage are safe, although it plans to re-examine the pool issue in light of events at Fukushima.

Nearly all American reactors, especially the older ones, have far more spent fuel on hand than was anticipated when they were designed, Mr. Alvarez, a former senior adviser at the Department of Energy, wrote.

In general, the plants with the largest inventories are the older ones with multiple reactors. By Mr. Alvarez’s calculation, the largest amount of spent fuel is at the Millstone Point plant in Waterford, Conn., where two reactors are still operating and one is retired. The second-biggest is at the Palo Verde complex in Wintersburg, Ariz., the largest nuclear power plant in the United States, with three reactors.

Companies that run reactors are generally reluctant to say how much spent fuel they have on hand, citing security concerns. But Mr. Alvarez, drawing from the environmental impact statement for the proposed repository at Yucca Mountain, estimated the amount of radioactive material at all of the nation’s reactors.

In the 1960s, when most of the 104 reactors operating today were conceived, reactor manufacturers assumed that the fuel would be trucked away to factories for reprocessing to recover uranium. But reprocessing proved a commercial flop and was banned in the United States in the 1970s out of concerns that the plutonium could find its way into weapons worldwide.

Today roughly 75 percent of the nation’s spent nuclear fuel is stored in pools, the report said, citing data from the Nuclear Energy Institute. About 25 percent is stored in dry casks, or sealed steel containers within a concrete enclosure. The fuel is cooled by the natural flow of air around the steel container.

But spent fuel is transferred to dry casks only when reactor pools are nearly completely full. The report recommends instead that all spent nuclear fuel older than five years be stored in the casks. It estimated that the effort would take 10 years and cost $3.5 billion to $7 billion.

“With a price tag of as much as $7 billion, the cost of fixing America’s nuclear vulnerabilities may sound high, specially given the heated budget debate occurring in Washington,” Mr. Alvarez wrote. “But the price of doing too little is incalculable.”

The casks are not viewed as a replacement for a permanent disposal site, but as an interim solution that would last for decades.

The security of spent fuel pools also drew new attention after the attacks of Sept. 11, 2001, partly because one of the planes hijacked by terrorists flew down the Hudson River, over the Indian Point nuclear complex in Westchester County, before crashing into the World Trade Center in Manhattan.

Indian Point has pressurized water reactors with containment domes, but its spent fuel pools are outside the domes. The pools themselves are designed to withstand earthquakes and other challenges, but the surrounding buildings are not nearly as strong as those that house the reactors.

In a 2005 study ordered by Congress, the National Academy of Sciences also concluded that the pools were a credible target for terrorist attack and that consideration should be given to moving some fuel to dry casks.


ghpacific said...

The other contagion spreading throughout Europe:

el gallinazo said...

Charles Hugh Smith writes a very well constructed analysis today that should be close to the hearts of I&S. Among others things, he states that the central banks' primary power comes from the public perception that they can control things, and the public is rapidly losing that perception. He also points out how the Fed and the other PTB have truly painted themselves into a corner. As Yates put it, "the center can no longer hold" (or something like that).

One question he asks about the Greeks and the peasants in general is, "Does anyone really think the people of Greece will stand idly by while the state treasures of their nation are transferred to the banks which foolishly lent billions to a visibly risky enterprise?" Well, no one thinks that. But can they stop it? As Jay Gould purportedly said, "I can hire half the working class to kill the other half."


Interesting to see another listener to Corbett. He is the source of much good information as well as some total bullshit in the areas of peak oil, population, and maybe, man made global warming (though there is a case, maybe very weak, to be made that changes in solar output are primarily responsible).

In these areas Corbett's primary arguments are ad hominem. Malthus was a scumbag; the Rockefeller brothers were/are scumbags (eugenics), carbon taxing is fostered by scumbags like Al Gore. Nobody here would argue with the fact that all these guys are scumbags. But say, the Rockefeller brothers are against a total nuclear exchange because it will make their investments less valuable? Does that, ipso facto, make a total nuclear exchange desirable? And this is the core of Corbett's reasoning when it comes to these topics. His arguments devolve into snippy sarcasm. Everyone on this blog knows that I hold no brief against sarcasm (it is next to oxygen for me), but when it becomes the substance of an argument, it is just a form of disinformation.

But why does someone so intelligent and logical commit these stupid fallacies? It's basically because he is an idealist optimist. He simply cannot recognize the reality that the globe is going to go into the shitter regardless of how enlightened any new policies implemented by the peasant class might be. In this he is not doing anyone a favor, because his recipes are for revolutionary central reform, as opposed to I&S, who are saying for families and small communities to prepare as best they can. I am a fan of Karen Tostado,, who claims that the only meaningful form of resistance is to get off the grid as much as one can.

el gallinazo said...

Hey Ash

You got a photo of the Fort Knox Tungsten Mine?

Ashvin said...

El G,

Yeah, I didn't want to come out and say anything like that, but that's part of the reason I thought it was a good picture. It shows how

a) gold has become a commodity involved in the (re)production process like anything else and

b) for those who understand there probably isn't much real gold at Fort Knox, that gold's value is just as susceptible to financial manipulation, dilution, etc. as other commodities.

Frankly, I don't even really know if it's from Fort Knox, but that's what the photographer claimed on his website.

Phlogiston Água de Beber said...

I second The Red Buzzard's recommendation of todays CHS analysis. What I perceive is that a growing phalanx of people who as Lewis Black so memorably put it, "have thoughts", are pointing toward approximately the same conclusion. We are sooo screwed.

One noted gambler had this to say.

You can fool all of the people some of the time and some of the people all of the time. Those aren't bad odds.

-- Brett Maverick

Unfortunately, "some of the people" can scale all the way down to almost none of the people. Therein lies the rub with that theory of gambling. You can loose way more than just your bet.

el gallinazo said...

There are actually a couple of companies in China that specialize in gold plating tungsten. DIYer and I got into this a year or so ago. He is a very capable practicing chemist while I am a practicing three toed sloth. Of course, the only thing that tungsten and gold have in common is their densities. So it might have fooled Archimedes.

gold 19.320 g/ml
tungsten 19.600
Uranium 18.90

So depleted uranium could have a viable use in Fort Knox as well after all the brown skinned children of the world get their minimum daily requirement. But if you hit bars with a hammer, they sound totally different because gold is malleable and tungsten is not. I wonder when Fort Knox will be marked to market. Crapola and with all these fluorescents and LEDs, tungsten is losing value. Better not wait too long :-)

scandia said...

@El G, re the CHS article and whether the people will stand idly by that's what propaganda is for. Nothing like well done propaganda to keep the serfs serving their masters:)And war of course.

Greenpa said...

Scandia- "keep the serfs serving their masters..."

That tripped my trigger. THE theme song for TAE simply has to be

Everybody's gone serfing!
Serfing USA.

Frankly, we need a full set of lyrics, and a YouTube performance. We have an abundant lyrical talent here; please hop to it. :-)

Greenpa said...

Hell, there's a whole opera waiting to be written.

The Two Tungsten Krugerrands Opera, perhaps.

lautturi said...

Did my earlier post got lost?
Let's try again...


Finnish "presentatives" sold their souls/ simply lied/ showed their true colours/ whatnot ie. the six parties between the Cabinet talks had a vote on Portugal bail-out.

Results: 137 votes yes and 49 no (a few blanks and missing, too). Funny that - before elections the same sock-puppets told populace a strong no ie. 135 told they were against bailing Portugal out whereas 56 sailed with "clean" yes-men signs.

Some interesting notes about the issue: usually there's a live TV-coverage from the Parliament when issues votes are first discussed and then voted on. Not this time. Other one was that late news tonight (11pm) didn't even mention the results - at all.

I wonder how long this charade will go on... Especially now that I think internet is starting to show it's power - people are aggressively collecting voting behaviour lists. Quite a many are still pretty dumb-struck saying "how, why, I can't believe they cheated" etc. Methinks the fuse is starting to smoulder.

Greenpa said...

lautturi said...
Did my earlier post got lost?
Let's try again...

Yeah, one of mine apparently got vaporized, too. Mine is easier to reconstruct, though:

El Gal- gold 19.320 g/ml, tungsten 19.600

Since tungsten is usually formed by sintering powder, instead of melting, it should be easy to adjust the density of a blank to precisely 19.320, if they want to get that fussy; just squeeze a little less.

Phlogiston Água de Beber said...

OK Greenpa, you asked for it. And now with all due apologies to Chuck Berry and The Beach Boys for a bad job of lyrical butchery.

If everybody was a workin'
Across the U. S. A.
Then everybody'd be serfin'
Like in Merry Olde Britann-i-a
You'd seem 'em wearing their sackcloth
Tire tread sandals too
A scragly greasy hairdo
Serfin' U. S. A.
You'd catch 'em serfin' at Del Mar
Ventura County line
Santa Cruz and Trestle
Australia's Narabine
All over Manhattan
And down Doheny Way
Everybody's gone serfin'
Serfin' U.S. A.
We'll all be plantin' and weedin'
We're gonna plow real soon
We're gonna do our serfin'
We can't wait for June
We'll be sweatin' all summer
We're in serfdom to stay
Tell the master we're serfin'
Serfin' U. S. A.
Haggerties and Swamies
Pacific Palisades
San Anofre and Sunset
Redondo Beach L. A.
All over La Jolla
At Waimia Bay
Everybody's gone serfin'
Serfin' U.S. A.
Everybody's gone serfin'
Serfin' U.S. A.
Everybody's gone serfin'
Serfin' U.S. A.

scandia said...

@Greenpa and I.Am Nobody, Serfin U.S.A! What talent on this board:)

@Lautturi, Your news of the vote is so-o depressing!!!!Wonder why the " change you can believe in"?
I really had put my bet on a No vote, on Finnish sensibility and sanity. Oh where oh where in the world can we find those qualities?

Phlogiston Água de Beber said...

gold 19.320 g/ml
tungsten 19.600
Uranium 18.90

The density of uranium and its degenerate cousin plutonium at the moment of maximum implosion pressure is what matters, monetarily speaking, IMHO. As long as we have a decent reserve of those elements, the dollar should be able to remain the world reserve currency no matter what anybody thinks it is worth. Perhaps even about up to the moment the masters belatedly notice that nearly all their serfs have died.

I'm thinkin' maybe both of PCR's forecasts will be realized. First a Continental Debtors Prison yielding to a coast-to-coast Graveyard.

el gallinazo said...


Hmmm. Fort Knox filled with bars of gold plated weapons grade uranium. More bang for your buck!

Time to load up on beer, popcorn, and Depends. No matter what they call it, reprofiling, a soft restructuring (DSK in Rikers without viagra?), Greece is gonna trigger trillions in CDS claims which is going to start the dominos falling over fast.

We may not have to worry about it though. If the USA sends in the navy Seals to try to capture or destroy the Pakistani nuclear arsenal, the fiscal "crises" could become moot. High probability of a false flag nuclear event in North America or Europe planted with an al Qaeda / Pakistani flag. The corporate media propaganda will be that the Pakistanis don't have the command and control to protect their arsenal against terrorist pilfering, so Big Brother is going to have to take it away for safe keeping. India would regard Pakistan without its nukes as lunch.

However, China has issued a warning that it will regard an attack on Pakistan to be the same as an attack on China itself. They are gifting Pakistan with 50 of their best fighters / interceptors ASAP. And the Russian / Chinese good neighbor policy is in high gear. The PM of Pakistan told their parliament recently that any attack on Pakistani "strategic assets" will be responded to with overwhelming force. Putin, who may be the sanest leader of the bunch, has pulled Medvedev back onto the reservation, and he is no longer snuggling up to the western banksters.. The stupidity is starting to feel like the summer of 1914. Better change the priority to Depends, tequila, and popcorn.

Nassim said...

Funny how we all agree that fiat money is a scam and yet we spend so much time trying to work out how we can cheat on gold-content. :)

I guess there are some latent alchemists who subscribe to this blog. Philosopher's stone

Phlogiston Água de Beber said...

Darn it Gallinazo! We be sittin' here on an indefensible border of Bloggeria and you go talkin' trash like that about other people's nukes and what might be done with'em, and by whom. I will note that you failed to mention the vested interests of one nuke armed state, which in the interests of all I will also abstain from mentioning. And I encourage everyone else to follow suit.

el gallinazo said...


Yes, the nuke armed state whose name cannot be mentioned is part of the USA/India alliance against Pakistan.

Also, George Washington of Zero Hedge hits another one out of the park.

Phlogiston Água de Beber said...

It is not in Pakistan that the world swirls around the drain. The state in question poses an existential threat to much bigger and even more troubled fish than Pakistan.

I believe following the money almost always yields the best clues. Right now European money matters the most. Politicians all over the EU are doing things not very much in their personal political interest to try and keep it afloat. I do not see this as coincidental or the product of ignorance.

@ scandia and lauturri

I admire your Fightin' Finn spirit, but honestly, Paul Craig Roberts did speak the truth. Western democracy is largely an illusion. The hoi polloi will always loose on matters that really matter to The People Who Matter (TPWM).

NZSanctuary said...

Epic fail: TEPCO

It costs TEPCO US$2.44 million to reprocess one tonne of radioactive water. They have 22,000 tonnes at Reactor 3 alone at present (more to come). That equals 50+ billion for the water reprocessing of just one Reactor (and counting)!

Greenpa said...

IM - !! outstanding! :-)

Ok, gang; now what we need is for folks attending the next Stoneleigh lectures to work this up, before she gets there- and do a little Flash performance from the audience. And get it on video.

Viral YouTube, here we come.

And plenty of latitude for more verses too! I wanna see one with a reference to Cali-forn-i-eh and the Sperminator all put together...


Greenpa said...

oh, yeah; and OBVIOUSLY, the flash performers should be in appropriate serfing costume...

Greenpa said...

on a less cheery note; lots of bad news from NKH today;

"Radioactive contamination has been found in tea leaves in Chiba and Gunma prefectures, about 200 kilometers from the crippled Fukushima Daiichi nuclear plant. Similar contamination has been found over a wide area around Tokyo including Ibaraki, Kanagawa, Saitama and Shizuoka prefectures.

"Chiba authorities say up to 763 becquerels per kilogram of radioactive cesium were detected in tea leaves picked on Tuesday in Narita and 3 other cities.

"The provisional state limit is 500 becquerels per kilogram.

"The Chiba government on Wednesday requested tea growers in the 4 cities to voluntarily halt shipments, and asked dealers not to sell the tea produced in the areas.

"But 2 tea growers in Narita City reportedly shipped their tea leaves, and dealers sold some processed tea to local consumers."

Which means... consumers of Japanese tea will stop buying ANY- since it's known to be contaminated, and some growers are selling contaminated tea, knowingly.


"Sony posted a hefty net loss in the year through March, due mainly to supply shortages caused by the March 11th disaster.

"Sony announced on Thursday that its full-year loss amounted to about 3.2 billion dollars.

"The net loss for a third straight year came mainly from a write-off of deferred tax assets: these are projected future tax refunds which companies record as capital.

"Sony estimates that supply shortages will continue this business year and sales will be down by about 5.4 billion dollars. But it is targeting a net profit of 980 million dollars through cost cutting. If this goal is achieved, it will mark the first profit in 4 years."

Translation; Sony is going to be cutting dividends, jobs and salaries, meaning less available capital down there in the "real" economy; ie less consumer spending; ie; less sales for Sony...

downward spiral.

Ashvin said...

Mish had a brief "debunking HI" post yesterday:

Personally, I think it was less than informed, and even blatantly inaccurate in some places. He doesn't help the deflationist "cause" by misrepresenting the views of others and pretending like HI can never happen...ever.

8. Failure to understand peak oil will not cause hyperinflation. Heck, peak oil will not even cause inflation.

Really, Mish? I'd like to hear the explanation on that one.

I agree with him that the elites would not prefer HI over deflation, but I'm not sure many people are making that argument, if any (FOFOA is not, contrary to what he implies). It is also conceivable that the elites would go down the HI route soon, just not very likely.

Ilargi said...

"Ash said...
Mish had a brief "debunking HI" post yesterday:[..]

I agree with him that the elites would not prefer HI over deflation...."

DId he make that point? I think his view, like ours, is that it doesn't matter one hoot what "elites" prefer. There'll be deflation whatever they do or prefer.


Frank said...

@Greenpa, that Sony report doesn't ring true. If they had a decent first 344 days of their fiscal year, no disaster on day 345, which took several more days to ripple to overseas operations was going to swing their result from say +3 to -3 billion dollars.

Either they were already having a crappy year, and blamed it the earthquake, or they were having a so-so year at best, and used the earthquake as an excuse to write off every bit of bad news they'd been hiding for the last 5 years. Now next year will look great.

Ashvin said...


Well he does say this, which implies they could cause HI if they really wanted to:

Please note that banks do not want hyperinflation or even massive inflation. The reason is simple: Banks will not want to be paid back with cheaper dollars, especially worthless dollars, and Congress is beholden to itself and the banks.

Hyperinflation could theoretically come from massive sustained political will to bail out the little guy at the expense of the banks, the wealthy, and the political class. However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy.

And it wouldn't necessarily have to be through "bailing out the little guy", if they just started monetizing every single debt-asset of the banks. However, I don't think they would do that until the deflation becomes very severe, and as you say, by that time HI may not look like such a scary option for anyone, since the global economy is spiraling down the toilet anyway.

Greenpa said...

Frank- yeah, it all looks a little odoriferous. :-)

Bizniz as usual.

Anonymous said...


Something is missing in your analysis of money/commodity explanation-

We have 3 types of money and all are held in Central Bank reserves-in one form or another-

Currency Credit/Debt and Gold-

Currency is money because it "acts" like money-

Credit is money because it "acts" like money-

Gold is money because it "acts" like money-

Two of those cannot deflate-

Credit can and did deflate and debt is all that remains-

Credit was by far the greater supply of money-poof gone-

The other two money supplies have to make up/try to replace the lost supply-

Both Currency and Gold are hoarded in deflation-thus making both much more scarce and valuable in a time of severe money shortage-

I'll try to link some charts of gold performance in the last deflation-but-i doubt this thing will take them-

lautturi said...

Sorry to break the wishing well... I think the general problem here is that most of the "presentatives" don't know sh!t about real problems. In spite of that, I'm rocking the boat the best I can ie. I've managed to get a few of those very same people reading my site. Might get leverage to pull some levers at some point. No way changing anything major but maybe I still can provide a small candle of understanding about the big picture.

Main Stream media is rather limited here - they are very much like lemmings ie. they don't wonder much beyond the single most popular issue. That means that when Greece went under nobody wanted to talk about other PIIGS -countries, same happened when Ireland and later Portugal dropped their balls.

Lately a bit talking about Spain, though - and even some hints about Italy, too - but obviously "presentatives" don't follow even that much. I've wrote about many, many stories influenced with TAE and TOD already close to 3 years ago... I'm afraid my stories will prove rather phyrhic literature - but I can at least bust the "nobody saw this coming" -balloons later on.

Sad to hear about the radiation in Chiba prefecture on NHK. I lived there for 2 years 2005-07 (feels like a millenia ago). Many, many fond memories from that time - and rather sad realizations about the strong division between social classes in Japan. Stoneleigh mentioned about it in one of her nuke disaster posts.

Still (for some strange reasons?) I play with the idea of going back more often than not. Strange place for most of Westerners but suited me just fine. Ah, well... soon I need to make my final decision - way, way back to hinterlands of Finland or Asia.

Anonymous said...

Wow-miracles are possible-blogger didn't eat my post-

Ilargi-if i remember correctly predicts a long period of extreme low Bond yields?

Here's an inverse correlation between 30 yr Bond rates and Gold-
Why should this change?

Note especially 2000/01 and 2008-

Anonymous said...


Screwed the post up-here's the Gold chart comparison-

Ashvin said...


The distinction must be made between currency (or credit-assets) and money. All currencies are money, but not all money is currency. So physical gold only acts as money in the US right now, in so far as it can be bartered for value, like many other commodities. It cannot be legally tendered as final payment in any economic or financial transactions.

scandia said...

@ Lautturi, They lied? Quel surpris!
Guess the political breed are the same the world over. I am embarassed by how saddened I feel. I'd better toughen up, drop " hope ".
In the old days of TAE it was said that this dynamic needs to work itself out, that there is no way to change the outcome just an oportunity to mitigate the disaster. Seems the politicos don't even want to mitigate the suffering. The political pack(Fred) is a global pack and the pack is " all in " as they say.
Again in the olden days of TAE the advice to prepare still holds. At least, Lautturi, you can look yourself in the mirror knowing you have informed others in Finland. You are on my rooster of heros.

To Cdn readers I am anxious about who will replace our most excellent auditor general, Sheila Frazer who will retire in one week's time. She has kept the govt's feet to the fire for a ten year term, a class act.People like her don't grow on trees.I wish her well in the future.

Anonymous said...

It cannot be legally tendered as final payment in any economic or financial transactions.

Sure it can-

I can go to the Bank with my debt card and pay any amount of final payment-
Of course it must be exchanged first-but no different than if i had that amount of EUR currency in my hand-
I cannot make final payment with my credit/debt card either-unless i pay off the balance-but-
I can "spend" all of the above-which makes all of them "money"

Ashvin said...


Does that chart not show gold price crashing during the 80s recession, and then starting to crash hard again in 2008 until the government stepped in with massive intervention for risk assets?

And why is the x-axis so messed up? The space between years is not uniform at all...

Ashvin said...


When I said legally tendered, I meant banks and merchants are not required to accept it as final payment of anything... and many don't. Also, courts won't enforce financial contracts that use gold as consideration for the loan. Although it could be used as collateral, just like anything else.

p01 said...

Whoa, I'm actually starting to have a bit of admiration for the "smug little $hit" (Zuckerberg). Just a little bit, let's not exagerate...

[...]"eating what many people would not dare consume. He recently ate a chicken, including the heart and liver, and used the feet to make stock".

People would not dare consume offal and bones stock?! Is this how far americans have (been) deviated from normality? Sheesh!

Anonymous said...

When I said legally tendered, I meant banks and merchants are not required to accept it as final payment of anything.
Gold is legal tender-
Look at the $ stamp value on any Government minted coin-including silver-that is a Government stamp-of course it's worth more than the stamped price-but so is a legal tender silver dollar or a dime-

Also-yesterday in Utah gold became recognized as legal tender and more want to adopt that "law"

It starts in small fits and coughs but soon becomes a major infection-


Starting in May, Utah residents will be able to shop in a currency other than the dollar -- gold, something that hasn't happened since 1933.

Utah became the first U.S. state last month to recognize gold and silver coins minted by the federal government as legal tender. More than a dozen other states are considering similar measures, and are expected to follow Utah's example. The move, proponents say, is caused by declining faith in the U.S. monetary system and concern about rising inflation.

Ashvin said...


Yes but that's only for government-minted coins, which are legal tender under the coinage act. It doesn't apply to physical gold in general, much of which is not held in the form of USG coins.

The Utah law didn't really change anything, except make it more public that those coins can be used as legal tender... BUT, why would they? The market value of their metal content is much higher than their face value purchasing power. So it doesn't make it any more likely that we are headed for gold-backed currencies.

Anonymous said...

The Utah law didn't really change anything, except make it more public that those coins can be used as legal tender... BUT, why would they? The market value of their metal content is much higher than their face value purchasing power.

People wont be going into stores with gold coins-
Here's how it works-very similar to
As long as they cannot lease out or grant credit based on gold holdiongs-

btw-i don't see a return to gold backing anytime soon either-but never rule out that very real possibility and at the right $ price-gold could exterminate the debt without further currency devaluation-

SALT LAKE CITY (AP) — Utah legislators want to see the dollar regain its former glory, back to the days when one could literally bank on it being “as good as gold.”

To make that point, they’ve turned it around, and made gold as good as cash. Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes.

Craig Franco hopes to cash in on it with his Utah Gold and Silver Depository, and he thinks others will soon follow.

The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings.

Unknown said...

Just in case you have not seen this article yet: Why the British economy is in very deep trouble.

el gallinazo said...


I am finding your logic a little strange. You say that gold is legal tender because you can go to your bank with your debit card and get dollars out. If I had any ambition, and that is a very big if, I could go through the appropriate legal hoops to set up a commercial debit card, where I could promise applicants that I would hold a kg of dogshit in a secure vault for each dollar they invested in their account. I could then say the worth of their account and their ability to claim against it is based on the spot international price of dogshit. I could then go to the bank and take out some currency and make the claim that dogshit is real money. I am sure that many here and on Zero hedge would agree with that.

used - "Credit can and did deflate and debt is all that remains-"

Credit and debt are the two sides of the same coin. If one disappears, so does the other. Credit as well as debt, cannot "deflate," but it can liquidate either by the debtor paying it off or legally defaulting on it. In either case both the debt and the credit vaporizes. To say that the credit disappears but the debt remains is incorrect.

Because of the corruption at the highest levels, we are seeing a lot of zombie credit and debt right now. This is because the BGC (the bankster government complex) is allowing bad debt (and credit) which has little or no market value to be kept on (or off) the books at face value. Zombie credit is the greatest tool of TPTB to mask deflation, much bigger than the Fed's POMO, or the ECB and BOJ counterparts. It is analogous to the gold plated ingots of tungsten at Fort Knox and ties nicely into Schrödinger's cat (and also related to the prolonged dead cat bounce we are currently witnessing in the risk markets). Cats are some of my favorite people, but they just can't catch a break anymore.

I think you are often referring to "deflate" as an increase in the purchasing power of money or a commodity. Falling nominal prices are not deflation but a usual trailing outcome of deflation. A particular currency's money/credit supply can be only increasing or decreasing, while some prices may be increasing while others are decreasing.

As to Utah declaring gold as legal tender, I find this very interesting. I see a huge battle between state governments that try to do this and the BGC. Will be interesting to see what happens when the dust settles, If I were a betting man, my gold would be on the BGC. I noted this week that there was a bill in Texas to make it a crime for DHS agents to grab the genitals of five year old girls, but the Texans backed off in the face of superior firepower.

Phlogiston Água de Beber said...

I like the dogshit depository analogy. The principle is the same and it also highlights the factor that such a system works because few people actually want to carry around or even keep around the deposited item.

Utah passing a law making gold and silver coins legal tender is on par with it passing a declaration that it is the state where salt blows on the wind. Merely recognizing existing conditions established by higher powers.

el gallinazo said...

Does anyone have the exact link to the Utah gold and silver law? I can't find one and the MSM reporting totally sucks, so I would like to see the actual wording.

The best I could come up with is,

"The measure would recognize as legal tender gold and silver coins issued by the federal government — not just their face value, but also their value in gold and silver or to a collector...."

Well, let's review where we are. For the past 220 odd years, under that "piece of paper" (George W.) sometimes referred to as the Constitution, only the Congress has the right to coin money, unless they delegate the right to a private cartel of gangsters.

So that part is not new - it's over two hundred years old. As to the coins being valued at spot market prices of PM content, sounds very complicated. I guess if you walk into a 7-11 and buy a Big Gulp, pay with an Eagle, then you could whip out your iPhone, get the spot value of your coin, and negotiate with the clerk for your change, assuming he speaks English.

"Some details remain to be decided, including the exact fee schedule the depository will charge. Franco says clients will have 30 days to clear their accounts following transactions. When debiting, he'll use the spot price of the metal in question on the day a transaction is settled. "But the value of the account fluctuates on an hourly basis," Franco explained, "based upon the global market."

I don't see any logical or legal reason that my debit card shouldn't have the same privileges. Paying for a Big Gulp, a Slim Jim, or some pork rinds with my debit card would give me more than a little satisfaction. Almost (but not quite) worth taking the bus to Salt Lake City to do it.

Phlogiston Água de Beber said...

Anybody can base their credit money system on gold or dogshit. Real men go for fissile metals.

el gallinazo said...

I do love to write in a satirical vein (or as the Mad Magazine of my youth would put it, in a jugular vein). But in all fairness to "used," the debit card does give the holder valuable conveniences. What it is really doing is allowing a finance and secure storage company to issue you credit in dollars against the spot market collateral that it is holding (hopefully) in its vaults against your account. As you purchase Big Gulps, your claim against their gold storage goes down. It is giving you the functional appearance of gold as legal tender by streamlining (at a price) your sale conversion. A lot easier than hopping a plane to Jerusalem with your shekels and converting them to dollars with the temple moneychangers that flocked back in after the inconvenience of Jesus' outburst was dealt with.

What it is doing is what the goldsmiths of renaissance Italy did, but on an electronic level. Hopefully they are not doing it on a fractional reserve basis though with the level of fraud in all the financial markets, this would be difficult to determine for certain.

But that said, I still maintain that this could be done with absolutely any commodity, including dogshit, which has a spot market price, and thus does not prove in any respect that gold is money.

However, even Our Lady of the Irrefutable Conception, in her pyramid of money/credit regards gold as the most basic level of money. So to be more exact, it is not legal tender.

Anonymous said...

Part 1

This blogger system is ridiculous-
I will try and patch this through

el gallinazo said...


I am finding your logic a little strange. You say that gold is legal tender because you can go to your bank with your debit card and get dollars out. If I had any ambition, and that is a very big if, I could go through the appropriate legal hoops to set up a commercial debit card, where I could promise applicants that I would hold a kg of dogsh-t in a secure vault for each dollar they invested in their account.

Don't misconstrued my words-in order to make yourself look a bit smarter than you really are-

I never said Goldmoney makes gold legal tender-
Gold is legal tender-whether you believe the government minting stamp of guarantee or not-

Do you have a bank that sells or buys dogsh-t and holds it in their vaults?
Does the US Federal reserve hold dogsh-t on their balance sheet--"as currency reserves"?

"Credit can and did deflate and debt is all that remains-"

Credit and debt are the two sides of the same coin. If one disappears, so does the other.


Debt does not disappear with credit-
Credit "acts" like money in expansion-it "acts" very differently in contraction-when the value of the asset declines below the level of debt-it takes actual money to pay down that debt-so credit is no longer counted as money in final payment-credit is nullified it is in deflation/contraction (decrease in supply) and only debt remains-no?

Anonymous said...

Prt 2
This is because the BGC (the bankster government complex) is allowing bad debt (and credit) which has little or no market value to be kept on (or off) the books at face value.

It does not matter what they're "allowing"
That hidden/fantasy money-sits in Banks/Pension funds/MMMFS's and sits on the balance sheets of those investors involved-as
money" MZM
It will float to surface eventually-
You give Bernanke et al way too much credit to keep this thing upright-

I think you are often referring to "deflate" as an increase in the purchasing power of money or a commodity. Falling nominal prices are not deflation but a usual trailing outcome of deflation.

A particular currency's money/credit supply can be only increasing or decreasing, while some prices may be increasing while others are decreasing.
Don't assume you know my definition of deflation-i know perfectly well what deflation is and also why we are in deflation-
I have never used prices as a definition or the term purchasing power to define deflation-

And please tell me how any currency can deflate-
Where does it go?
It "has" to be somewhere-it can be under your mattress which is only deflationary-not deflation-
Credit is the only monetary aggregate that can actually deflate-
If I were a betting man, my gold would be on the BGC. I noted this week that there was a bill in Texas to make it a crime for DHS agents to grab the genitals of five year old girls, but the Texans backed off in the face of superior firepower.
Once again you assume you know the outcome-but you don't-
One more thing--
You write the same boring fantasy crap as Gonzo Lira-only in reverse-

Archie said...

Isn't the Bernank already the "dogshit depository" of the World?

Archie said...

@El G, Ash, Greenpa, and other longtime followers of this blog....

I sense (sniff, sniff) a former commenter here in the posts from blogger "Used". I detect more than a hint of "Scepticus" who I thought had permanently relocated to Steve Keen's blog.

Anonymous said...

I should add that if a country was in deficit and paying its balance off and had no means to keep printing/issuing credit (a lock) then they would be in deflation-they would be shipping their money supply out of the country-just like what happened to Nixon when foreign lenders by right of law demanded only gold payment-
The US was shipping out its "only accepted" form of "money supply"
Gold demand was forcing deflation on the US-

Gold payment demand castrated the USD-
The US would have lost all their gold reserves if they had obeyed international law and the only way out-was to default-which they did and that allowed the US to print freely and here we are-

Anonymous said...
This comment has been removed by a blog administrator.
el gallinazo said...


Don't misconstrued my words-in order to make yourself look a bit smarter than you really are


Ridiculing ideas here is fair game. Ad hominem attacks here against other commenters, unless they are obvious trolls from the Ministry of Truth, are not.

Adius (whatever that means)



Time will tell. You may be right.

Phlogiston Água de Beber said...

used said ...

The US would have lost all their gold reserves if they had obeyed international law and the only way out-was to default-which they did

Well not really, we just changed that law and told them to hang onto those dollars. That's the trouble with laws, they can change. The old law was that "he who has the gold gets to make the rules." When it became clear we didn't have enough gold to keep making the rules, we fell back on Plan B. He who has enough nukes gets to make the rules.

Anonymous said...

el gallinazo said...

ad hominem attacks



One of the most widely misused terms on the Net is "ad hominem". It is most often introduced into a discussion by certain delicate types, delicate of personality and mind, whenever their opponents resort to a bit of sarcasm. As soon as the suspicion of an insult appears, they summon the angels of ad hominem to smite down their foes, before ascending to argument heaven in a blaze of sanctimonious glory. They may not have much up top, but by God, they don't need it when they've got ad hominem on their side. It's the secret weapon that delivers them from any argument unscathed.

In reality, ad hominem is unrelated to sarcasm or personal abuse. Argumentum ad hominem is the logical fallacy of attempting to undermine a speaker's argument by attacking the speaker instead of addressing the argument.


I am not Scepticas-
I do know of him as he used to post on Mish's site-where i sometimes post as "used"
I had a few opposing points of view to Ash's post and i posted them all-in a non demeaning manor-

It was you el galinzo that was out of line with your ridiculous dogshit example and trying to build a strawman by assuming and twisting my words-in order to try and divert the topic-

That-is what ad hominem is-

Adius is a typo-it should read Adios-

Ric said...

From Zero Hedge:
Super Typhoon Songda Projected To Pass Over Fukushima Nuclear Power Plant

Archie said...


Since I am the one who brought up the subject, let me clarify a bit.

Your repartee with Ash seems legitimate, even reasoned at first. But after awhile, it becomes tedious and overtakes the comment thread. Can we call a stalemate on the argument and move on?

As far as the Scepticus reference goes, that blogger did exactly the same thing perhaps 2 years or so ago. Scepticus was engaging, even enlightening, for a time. Alas, he proved to be boring to the point that I, and many others including Ilargi, wondered why he didn't just establish his own blog rather than hijacking this blog.

Just my opinion, YMMV.

Peace and tranquility!

Nassim said...

There are worries that Yemen, already teetering on the brink of financial ruin, could become a failed state that would undermine regional security and pose a serious risk to its neighbour Saudi Arabia, the world's biggest oil exporter.

Hundreds flee as Yemen's tribal 'kingmakers' step up offensive

Yemen has historically always had a big say in what happened in Saudi Arabia - its poor neighbour. What is happening here must be giving the rulers of the kingdom much more cause for concern than anything happening up north in Bahrain and so on.

Saakashvili dismissed the protest as an attempt to thwart the independence celebration and trigger mass disturbances according to "a scenario written outside Georgia." The president, who came to power in 2004 after the so-called Rose Revolution, has since parted ways with most of his allies, who accuse him of being authoritarian.

Saakashvili was of course a US-educated guy who came from almost nowhere and managed to get elected - a bit like Obama.

Georgian police crush anti-government protest

I wonder how many fires can be put out at once.

ben said...

arriba reverse gonzalo!

Archie said...


I was a little late in reading this article today, Harper's Goal: Create an Irrational Reality. When I did read it, I thought of you. My condolences on the demise of your Federal State.

el gallinazo said...


Funny. But the creature is really a gallo, not a gallinazo. My kinfolk flock is insulted.

scandia said...

@Archie, a dark shadow falls on Canada as in many countries in the world. Just to-day the Ontario Provincial Conservatives want all those Harper incarcerations to work on chain gangs, sweep the roads etc...getting nasty up here.
Any serf with a low paying manual job will have to give it up to
convicted criminals. I guess they'll work for less pay, for room and board so to speak.

Phlogiston Água de Beber said...


You guessed it. Those serfs will be joining their white collar compadres who have had to give theirs up for the benefit of the unconvicted criminals.

To paraphrase the Hindu legend, it's criminals all the way down.

Ashvin said...

Yeah, I guess this conversation got a bit out of hand, but, in all fairness to used, I am putting out a pretty "radical" argument to set the stage for what PG will end up doing in the global economy (any argumemt founded on Marx's theories of capitalism are pretty "radical" by definition, somehow even in these days of continous economic disasters).

I just don't understand why the new Utah law means anything is different... it would help to know whether coins will be accepted at their face value or they can be used at their market value based on metal content? If merchants and banks are forced to conduct transactions for the latter value, then it is certainly something to keep an eye on. If not, then we shouldn't expect transactions in US gold coins to inrease to a level much higher than what it is now.

It shouldn't really effect the ability of Gold Money (or similar middle-men companies) to provide their services, since they are just storing your gold and issuing you currency-denominated credit for various purchases, secured by the gold. That doesn't really have anything to do with gold or silver being legal tender. Just another financial company capitalizing on the PM boom and charging you to use your own money. I'd rather hoard the gold and wait for the Rapture...

A Fall Guy said...

@ scandia to lautturi
"You are on my rooster of heros"

And you are on my hen of heroines... ;-)

A Fall Guy said...

@ scandia

I also have misgivings about who will replace our auditor general. Fraser laid bare a few high misdeeds, and is probably a thorn Harper wants to soften.

A Fall Guy said...

@ scandia cont'd

In case you missed this article on CBC, you might find it interesting:

Sheila Fraser's greatest hits

A Walk in the Woods said...

Gold or any other commodity's value (dog-pooh) is derived from Confidence.

At one point in history, you could buy a pretty nice house with the right tulip bulb.

Confidence is the power behind all economic exchange, no matter the medium.

"Say Matthijs, I have supreme Confidence that the tulip bulb you just traded me for my house can be exchanged for something (anything) of similar 'value'. Here, take my house keys, see you later."

Confidence often goes hand in hand with The Greater Fool.

The element Rhodium, used in catalytic converters and other industrial uses (detectors used in nuclear reactors to measure the neutron flux levels), sells for about $2,075 (current spot price)

Gold sells for about $1525 (current spot price)

Obviously there is more Confidence that Rhodium is worth more than Gold.

Has this been true over thousands of years? No, but why?

When fossil fuel vehicles finally die (yay) and nuclear power plants finally die too, Rhodium won't be worth diddly squat.

It will have no practical uses, but far more important, it has no Street Cred, no Buzz, no Name Brand, no Mojo, no Funk, no Bling, no Track Record, no Rap Sheet and most important No Magic.

Gold does.

Gold has all those things and over millenniums to boot.

Gold is also very sexy, Rhodium is not.

My Element is Red Hot, your Element is Diddly-Squat.

Gold's value is certainly not just it's function as a fashion accessory and minor industrial metal.

The Confidence that props up a shiny mellow yellow metal like Gold is grounded in Magical Thinking, Superstition as it were.

Rhodium has none of that but at present, it's pistol whipping even the price of Gold.

Way back in 1979, Paul McCartney was awarded with a special Rhodium record disc for selling over 200 million albums. Gold just wasn't good enough to commemorate the event.

There was more Confidence that Rhodium represented a higher form of value and tribute than poor olde gold. What a sad day.

Even Rhodium's higher than Gold Confidence value level can't compare to Plutonium which can cost around $4,000/gram and Californium can cost $10/mg or $10,000/gram.

(Speaking of Californium and the value of Elements, Arnold Schwarzenegger is going to find out that Marriagium was grand but Divorcium is $100,000 grand)

I'll meet your gold troy ounce chips and raise you 16 kg of plutonium chips.

Where's your Confidence Jim Dandy?

Just bluffing.

ben said...

sorry about that, LG. down deep i must've chosen that video from used's perspective. ;)

when a fight started up in the schoolyard i belted-out the fight chant and did my part to form a perimeter so that they could swing freely. now i'm only like that online.

i'm reminded of the latter part of this short clip from 'dazed and confused,' which could well be the first time i came across the idea of herd mentality. as for the first part of the clip, it could be said that when i found TAE, my first doom blog, i was like the freshman character mitch kramer (addressed in this scene as 'junior'), starry-eyed and climbing a tower of new information. i'm still starry-eyed at the company i keep but i think, at least for me, that slater, on the right, is correct when he suggests that [coming to terms with impending doom] doesn't hurt after the first couple beams.

i wonder if i will have an equivalent response to doom doom.

lautturi said...

Thanks for kind words - though I don't feel much of a hero. Significant other thinks I'm wasting my time with this useless crap (website), not much communication with friends nor with parents as they have pretty solid imaginary worlds to look out from. Of course the same goes with most of other people around here (everywhere?).

The end result is listening to music, enjoying different ciders, movies and other small joys while watching the Titanic taking water and reporting/writing about it. I do have savings to survive 10 to 15 years so I've voluntarily opted out of all unemployment support systems. Nobody can say I'm using government money though useless resource hog (in current system anyway) comes to mind. Basically I'm just observing things and trying not to lose my mind (not an easy task mind you).

Read this somewhere: "The price of being sheep is boredom. The price of being wolf is loneliness. Choose one or the other with great care." by Hugh Macleod. I find myself quoting others all the time so I guess I don't have much original thoughts - a strange feeling. As if I was inside a well read book or something... I "know" the story and ending - but still can't stop reading. Weird.

Brunswickian said...


You've been reading my mind. Of course it's all CONfidence, which SL has told us repeatably can turn on a dime.

ben said...


don't know if you might've seen this over at The Undertow:

Reverse Engineer says:
May 26, 2011 at 1:39 am

Obviously the logistics of evacuting Honshu would be pretty difficult, not to mention doing the sales job that you have to Destroy the Village in order to Save it. However, I think doing so would fairly well convince people the downside on Nuke energy is more than they would be willing to bear in their backyards.

On the problem of all the REST of the reactors currently harboring tons of spent fuel, at least for the moment it is still under control, so this stuff also you need to figure out where to put it where it will do the least damage.

My suggestion here would be to bring it all to a location on earth alredy with thoroughly depleted land and water table, like say the Sahara desert. Then you take the stuff and pump it all DOWN into the depleted Oil Wells in that neighborhood. You can’t grow anything in the Sahara anyhow, and without any water to dissolve the salts, the stuff can decay for a few millenia in relative isolation. Of course some gasses might escape the containment, but again these would rather quickly disperse into the atmosphere and only marginally increase background radiation world wide.

The other though I had would be to drill in a subduction zone right near major plate boundaries and pump the stuff down in the rock there. Then it would gradually get rolled into the Mantle and probably not spit back up out of a volcano until it had completely decayed in a million years or so. Using the slowest geological processes of the earth and locating the material as far from where it can do harm seems to me to be the best way to go here.


and a great comment from SFV right above it.

scandia said...

@The Fall Guy, yes, I had missed Sheila Fraser's Greatest Hits so thanks for that. Have you heard who is lined up to replace her? My hope is that Fraser leaves a good team behind who will guide her replacement.I heard her say on the radio that she has no interest in going to the Senate, in politics. It will be most important to keep an eye on the auditor general's office in the days to come.

@ Lautturi, great quote for Hugh Macleod. A similar one I like and don't know who said it is," If you don't want to be eaten by sharks don't swim with the shark bait."
I wish we could go for " sauna ", ease the loneliness in each other's company. Strange times in that we are in contact at all, different ages, a world apart.

@Nassim, I was thinking of you last night while viewing a film, a
2003 PBS DVD production, " Lawrence of Arabia, The Battle For the Arab World " A most timely film what with the Arab Spring revolutions. It is a cautionary tale of deceit by the world powers at the time. I recommend all Arab revolutionaries view it and take heed as to who offers aid, as to history of promises kept, promises betrayed.
I think I will now read Lawrence's " Seven Pillars of Wisdom ". Have you read it?

scandia said...

@Sailor Man, just got to your reference to the ftalphaville article on the British economy. Short,sweet and dark!
Perhaps Cameron's war plans in North Africa are about wealth acquisition- somebody else's wealth that is:)

el gallinazo said...


As Rhodium is a brittle metal with little ductility, chemists are quite surprised at its ability to bubble when placed on the pavement of Wall Street.

Rhodium prices rose brief during the millennium period[65] due to increased demand, then collapsed to nearly their original 1995-7 starting price of $500/oz between 2002 and 2004.[65]
Later on, the mysterious and unexpected Rhodium price bubble of 2008 suddenly increased prices from just over $500/oz in late 2006 to $9,000/oz-$9,500/oz in July 2008,[65] only for the price then to tumble down only $1,000/oz in January 2009.[65][88] Both an increase in demand in the American automotive industry, a herd instinct among investors, a then bullish market in rare metals and a rogue speculator or rogue speculators on Wall Street were all at least partly to blame for the sudden rise and fall in the rare metal's price.[89]

Also, for your viewing angst:

Police get violent in Spain

A letter from a Fukushima mother

Ashvin said...

AWITW said... "Confidence is the power behind all economic exchange, no matter the medium."

I'd say that confidence in trade (and the state's facilitation of trade) is one of the fundamental powers that establish the ability of collectives to produce value, but not a direct determinant of a commodity's value itself. BUT, that changes with a financial asset, as confidence in its ability to produce value in the future is a significant part of its current value. Paper gold, like all other paper commodities, could definitely be considered a financial asset right now, and physical gold perhaps as well but to a more limited extent.

scandia said...

@El G,Re Rhodium.. " chemists are surprised at its ability to bubble when placed on the pavement of Wall St." LOL
TAE Summary will no doubt play with that concept!

el gallinazo said...

Obama signs 4 year extension to the "Patriot Act" from Europe.

Chains we can believe in!

jal said...


Re: Vancouver- 31 may

See you there


lautturi said...

Strange world indeed, spirits connecting across the world (and in my case occasionally go down the throat, too). We'll think of each other and draw strength from that.

@el gallinazo
Chains we can believe in! Indeed... my stomach hurts from laughing (^_^)

PayPal founder encourages dropping out of school with 100ooo US$ fellowships. Can you hear Student Loan Industry groan?

jal said...

If you are planning to be at the vancouver meeting. Get up to date with the reality in vancouver.

Vancouver Real Estate Anecdote Archive
Stories From The Boom & Bust


el gallinazo said...


Did any of the True Finns vote for the Portugal bailout? If so, what percent?

The WSJ described the True Finn Party as "right wing." As a bunch of thieving fascists headed by the great Rupert, one would assume that they could recognize their own kind. But from what I was reading, my impression is that the True Finns are democratic populists, with a desire to maintain the sovereignty of the nation and its culture. This left/right crap doesn't mean much anymore if it ever did. Hitler was right; Stalin was left; who knew? What's your take on that? The unexpurgated letter to the WSJ by Soini didn't strike me as "right wing" at all. The Wikipedia article says they have conservative social values. What does that mean? Thanks.

A Fall Guy said...

Thanks jal for the link, I sent it to to friends and family in Vancouver.

When perusing the Vancouver info, I found this note by Bill McKibben to be well expressed (perhaps because of my sarcastic state of mind these days).

McKibben rant

scandia said...

Peter Osborne at The Telegraph on Obama visit to Britain which I found hard to stomach from suddenly being Irish to the chatter about what the wives were wearing....

Anonymous said...

El G,

You wrote:
"Time to load up on beer, popcorn, and Depends".

What is a Depend?

Do you mean uncertainties?

Thanks for the help,

jal said...

Damm! Some people are good with words.
Look at the following explanation and prepare.

Guest Post: The Economic Death Spiral Has Been Triggered

p01 said...

@FB Depends. I had to google them the first time El G mentioned them :)

The battle of Jean-Claudes. Mish podcast.

Anonymous said...

Thanks, P01.


Nassim said...


I would like to join all of you in that sauna. :) Forget about the birch whipping afterwards, though. :)

I saw the Lawrence film when it first came out in London's Leicester Square - we were all homesick at that time.

I read the book - Seven Pillars - a few years later.

From what I understand, some parts of the book were fiction - Lawrence had to hide his homosexuality. It was illegal in the UK until 1967 - just in time for my contemporaries.

Frankly, I have very little sympathy with those who were duped by the imperialists - they went into it with their eyes open. The deal was simple, we will make/keep you as king/prince/shah/emir and you will let us screw your people. They went along with it because they put their personal interests above that of their tribe/nation. Nothing new there.

scandia said...

A long awaited new post up by London Banker.
" Concentration,Manipulation and Margin Calls"

scandia said...

@Nassim, A well soaked birch bough beating is the best part!
Re Lawrence and the imperialists I gather you don't think the dream of a united Arabia was real. If you are right a lot of men and camels died for a lie. I guess there is nothing new here and history is about to repeat itself.

Jim R said...

IMN said, Anybody can base their credit money system on gold or dogshit. Real men go for fissile metals.

That would definitely discourage the greedy ones from over-accumulation.

Greenpa said...

Ben- actually, the geology under the Sahara has a lot of water, and a lot of fractures, and a past history of cities all over, under other climate regimes; perhaps like those ahead of us... so-

For those heading towards fissile metal standards; there is homework to do here. To my surprise, it's actually all up and available on the web:

And, by golly; he mentions abyssal disposal, too; the problem being "no profit".

Niven's economic analyses are right up some of the alleys being explored here; highly recommended.

NZSanctuary said...

A good post from Washington's Blog on laws and how they are interpreted (in secret).

More evidence of the rise of fascism and state control . . . as if more was needed.

jal said...
Erik Klemetti on May 26, 2011, 1:59 PM

NZSanctuary said...

el gallinazo said...
Obama signs 4 year extension to the "Patriot Act" from Europe.

Yep - it's that Nobel peace price at work!

Ruben said...

This video was on Garth Turner's blog...

YouTube - World Collapse Explained in 3 Minutes

ben said...

i disliked satire in college -- which was unfortunate since my emphasis was on 18th-century british lit -- and i find myself mostly indifferent to it now but that modest proposal of niven's, greenpa, really made me laugh. thanks. his 'lucifer's hammer' is many a doomer's no. 1, if i'm not mistaken.

lautturi said...

"Whipping" with a branch of a tree does sound a bit extreme but scandia is right, a well soaked birch bough feels splendid - and it gives a very nice aroma, too. The trick is using rather fresh ones and soaking them well for an hour or two before usage.

As a side note this July-August I'm going for a 3 week forest/lakes -trip in Saimaa area (has 10ooo or so lakes) with a couple of "associates" in a small rowing boat ie. muscle powered "propulsion". We'll have plenty of free saunas on many, many islands and camping sites (maintained by government for everyman's usage). Don't think they have free birch boughs as those should be prepared in early summer when new boughs are soft. In any case this could turn into a real consciousness trip and all that. (^_^) we are joking that the World has turned into something else on our return, you never know...

@el gallinazo
True Finns voted 35 no and 4 blanks about Portugal burglary. Remaining 14 no votes came from Left League (or whatever in English). The funny thing is LL are in Cabinet negotiations but got a "permission" to vote no (to keep that promise to their voters). Tells something about the desperation of other Cabinet negotiators... I agree left-right -train of thought has left the building long ago. Only oligarchs vs. small people division remains - as if it wasn't there always.

Anyway, True Finns are no extremists (a few bubbleheads excluding but that's the case with all parties) and they are healthy nationalists. Their agenda includes gutting bureaucracy, equal rights for Finns and non-Finns (many immigrants appear to get extra money and there's a push to hiring on grounds of just being immigrant (who cares about language skills?) - I always said this is the old divide et impera -play), taxing the higher/investment income, taking care of old people, tough on crime... you name it. So plenty of "leftist" ideas but also some "rightist" ones.

Are you dangerous?

lautturi said...

A small add-on: birch bough whipping happens inside sauna during the sweating. Whipping on sweating bodies (oneself or others, up to you) in dark sauna sipping beer/cider and then jumping into the lake for a swim - before going back to sauna, whipping, drinking, swim... it easily can take 3-4 hours - or all night. You should try it sometime.

Nassim said...

You should try it sometime

Maybe one day. Who knows.

scandia said...

@Lautturi, not to forget the detox benefits of sauna, the afterglow and clear skin. I also find sauna slows my busy.busy mind. Too damn hot to hold onto resentments and anger etc...Good for body,mind and soul.
Some of my best childhood memories are of 3 generations of my family taking sauna together, the neighbours waiting in the house with their towels to take their turn:)No point wasting a good fire and hot water:)

p01 said...

Latest Celente rant(direct link to mp3).
False flag, population (plus the usual rants). Very interesting.

p01 said...

Fukushima Nuclear Plant Unprepared For Typhoon.
"We have made utmost efforts, but we have not completed covering the damaged reactor buildings. We apologize for the lack of significant measures against wind and rain."
[...]"We are now doing the utmost to prevent further spreading of radioactive materials in consideration of the typhoon."

Future_outmost > Present_outmost > Past_outmost. (Until it's not).

Phlogiston Água de Beber said...

Goshi Hosono, a special adviser to Prime Minister Naoto Kan, told a press conference Friday that the current measures "cannot be said to be appropriate."


The war has developed not necessarily to Japan's advantage.

-- Emperor Hirohito

Few can equal the Japanese in mastery of understatement.

scandia said...

@ Lautturi, " Are you dangerous "? Yes.I stir the pot whenever and whereever I can.

scandia said...

@p01, Just listened to the Celente rant. I have been concerned for the migrating populations for some time. Coincidently I went to Der Spiegel just now and find a lead article on fleeing populations after WW11. A long and graphic article, not for the romantic or feint of heart.
" Paying With Life and Limb for the Crimes of Nazi Germany ",1518,737,00.html

jal said...


Through out history, they have always been attacked, destroyed.
Their wealth was stolen by someone who was stronger.
If it is perceived that there are valuables that they wanted or needed then it became a target.

Just ask Gadafi. NATO has increased the bombing of his compound.


Chas said...

Any thoughts about this?

Phlogiston Água de Beber said...

I think jal's comment about doomsteads tending to draw the attention of people with dubious intentions deserves some consideration. If you build it, they will probably come.

This image may represent the ultimate in doomstead sustainability. Note, the heavily armed warrior seems to be showing no intention to move in or to cart away valuables.

The conclusion that could be drawn from that image is that when you are doomed, live like you are doomed. Trying to carry on living the good life may well result in living a foreshortened life. I suppose it depends on how deep the doom goes.

deflationista said...

Stoneleigh is in Boise TONIGHT.

All AutoEarthers in the area UNITE!

See you there:

Hyde Park Mennonite Fellowhip
1520 N 12th St.
Boise, ID

What could possibly be more important than this?

jal said...

@ I. M. Nobody

Your image is very telling.

There is a family story that, after the deportation, a group that were allowed back to Quebec, had to make a hole in the banks of a river in order to survive the winter.

Our forefathers survived.
Very few people can claim that they are descendants from a plush doomstead.


ben said...

boise be in da howse! do 'em stoneleigh!

ash, i just looked over part 2 again. way to break it down and make me work for it... a lot less than you had to. :) great stuff man.

el gallinazo said...


My thoughts are that you would have to study and mull over the fine print for hours, and I don't find it personally interesting enough to do so.

My other thought is that with fraud so endemically rampant in the financial markets, I don't trust nobody. (I recently learned that all the discount brokers charging $10 or less per trade are making their profit by frontrunning their clients. Goldman Sucks for the proles). My thoughts are that if you want to go with PM's, buy them and put them in a safe place. Or as they are always saying in the comment section of Zero Hedge, "Physical - bitchez."


Celente's voice has become so vitriolic, if he could bottle it, he could sell it to chem labs as a low cost substitute for aqua regia. He better be careful or he might put his gold stash into solution. I agree with everything he says except that he is a hyperinflationista, which frankly, worries me, as the little I am doing to prepare at this point is a deflationista approach.


We are blessed with these nasty little buggers, Rhodnius prolixus (vinchucas, kissing bugs) and I just caught one (fortunately unengorged with blood) on my bedroom floor. The good news is that Sonora has some of the lowest rates of Chagas in Mexico. A related species, infestans, were killing a lot of people where I was in Argentina.

Anyway, two questions for you. They reputedly can puncture you and suck your blood without the slightest trace of pain. How the hell can they do that?

Also, the chugas protozoa, Trypanosoma cruzi, has the same genus as the African Sleeping Sickness, Trypanosoma brucei transmitted by the tsetse fly. You figure a bug blew across the Atlantic, and which way? If it were the southern hemisphere you would figure from SA to Africa. When I was living in St. John, we often would get a coating of red Sahara dust on our windows.

el gallinazo said...


May be coming to a theater near you.

Dogs as far north as Virginia have tested seriopositive for chagas.

Phlogiston Água de Beber said...

el g,

For guys like us it's definitely deflation all the way. The Big Dogs get some inflation. No matter what prices may do, we won't be able to afford it. But, you already know that because Stoneleigh frequently reminds us.

I don't see HI happening unless we somehow get to a cash based economy with more than one currency being accepted as tender. Which certainly could happen someday. Our kind are crazy enough to let something like that happen even though we know how it works out.

el gallinazo said...


I follow all the arguments, over and over. Deflationistas are outnumbered about 50 to one. We don't even have enough wagons to form a circle. Some of the hyperinflationistas are pretty smart too, like Tyler Durden, John Rubino, and Celente. It's just that three of the smartest members of the thinking class, I&S and Steve Keen are in the deflation camp. Also history as well. Want to give me your house for this tulip bulb? It's a beaut!

The reason I found Rubino's interview with Chris Martenson so interesting (and it works better in audio than reading), is that he admits the dynamics are deflationary. He predicts HI simply because he feels that the politicians can't stand up against the popular outrage and will print. Of course, I&S say that deflation is unstoppable regardless of politics. Rubino thinks that the politicians are going to bend to the popular will, regardless of how economically misguided. The truth is they will take orders from the Oligarchs. Chains we can believe in.

el gallinazo said...

Was emailing with VK about the HI - deflation thing. He points out that you cannot have HI without wages and salaries shooting up. And that certainly is not what the Fed and the politicians are doing.

What happens when you are working at WalMart for $6/hour and a loaf of crappy white bread cost $500. Nobody is going to work. It just doesn't make any sense. You would have to try to raise your own food and trade necessities with barter or gifts with trusted friends. HI without commensurate nominal wage and salary increases would mark the instant death of a money economy. But a lot of people who should know better screw up "price inflation" with HI. I think Lyra was predicting 15% per annum increases in COL by the end of 2012 and was calling it HI. This is crap.

Of course the Fed wouldn't mind wages going down and prices going up. "Stagflation." Squeeze the last penny out of the pissants. If this goes too far though, you could have a revolution. I think the Oligarchs believe that they can scare and manipulate the peasant class to work out their anger on each other with 2 minutes of hate regularly and occasional missiles coming in from "the enemy." Plus all their new super high tech radiant weapons. Jeez, Orwell was so brilliant but his life must have been hell.

Nassim said...

el G,

Chagas disease sounds absolutely dreadful. The best advice I found was to sleep with a mosquito net - two for one.

Greenpa said...

El Gal; my familiarity with chagas is minimal-

Some blood feeders inject an anesthetic with their saliva immediately. Vampire bats have an anesthetic and an anticoagulant they inject; along with teeth so sharp they cut with minimal force.

Don't know about the distribution specifically in this case, but there are MANY organisms in South America with relatives in Africa; including oil palms and onychophorans. Neither of those are likely to be blowing or swimming. The generally accepted belief is that they go back to when Africa and South America were joined as part of Gondwana. Been a while, but relatives can be hard to shake off.

Yeah, lots of diseases are coming to our theaters. And there's pretty much damn-all to do about it.

Skip Breakfast said...

I would love someone to explain the position of Albert Edwards and Russell Napier (see links below). They seem to be advocating a S&P mega-crash...but yet Napier thinks the safety will be in emerging economy currencies! Huh? Just as baffling, Edwards postulates that US bond yields will go due to the end of QEII and the resultant collapse in commidities...yet he also says the only reason bond yields are currently down is BECAUSE of QEII. How can you possibly have it both ways? QEII causes low bond yields, and no-QEII causes low bond yields too?! I'm confused.

el gallinazo said...

Greenpa - thanks

Tyler Durden describing Goldman Sachs paying off a senator:

Squid Pro Quo

Ashvin said...

@JTHAB, "How can you possibly have it both ways? QEII causes low bond yields, and no-QEII causes low bond yields too?! I'm confused."

The reason that could work short-term, IMO, is because QE1 and QE2 have acted as a suction for both "dumb money" and "smart money" into risk assets, to keep the ponzi scheme going. A risk asset rally would typically be bad for T-bonds, but the QE2 program allowed the Fed to step in and make up the difference, which also kept a steady stream of investment in the treasury market.

Since QE2 was directed at treasuries, that will set the expectation that QE3, when it occurs, will also be a monetization of treasuries. As QE2 winds down, risk assets will sell off because they are no longer receiving a heavily subsidized bid from major institutions, and investors will seek out "safe havens" for a significant portion of their investment capital. The t-bond still manages to fit that bill right now, given the more precarious nature of Europe/Japan and its relative liquid nature, and will also benefit from the expectation of future QE.

I believe that future QE will have to eventually happen, though, to actually finance the increasing deficits created by lower revenues, potentially higher spending and drop offs in foreign government investment, and to keep a lid on rates.

scandia said...

I do apologize in advance Ash for this posting but the woman's laugh is so contagious, a tonic in these times. I keep watching it and laughing and laughing...Others might be in need of a laugh too.

el gallinazo said...

Taibbi does a short piece on oil and commodity speculation, promising an in depth article in the future.

Wyote said...

Scandia: I'll have what she's having.

Bear joke:
A Russian scientist and a Czechoslovakian scientist had spent their lives studying the grizzly bear. Each year they petitioned their respective governments to allow them to go to Yellowstone to study the bears.

Finally their request was granted, and they immediately flew to NY and on West to Yellowstone.

They reported to the ranger station and were told that it was the grizzly mating season and it was too dangerous to go out and study the animals. They pleaded that this was their only chance, and finally the ranger relented.

The Russian and the Czech were given portable phones and told to report in every day. For several days they called in, and then nothing was heard from the two scientists.

The rangers mounted a search party and found the camp completely ravaged, with no sign of the missing men. They followed the trail of a male and a female bear.

They found the female and decided they must kill the animal to find out if she had eaten the scientists because they feared an international incident.

They killed the female animal and opened the stomach to find the remains of the Russian.

One ranger turned to the other and said, 'You know what this means, don't you?'

The other ranger responded, 'Of course: the Czech is in the male.'


lautturi said...

If people have missed Adam Curtis' "The Trap" (3x60 min document) then you better find time to watch it. Lots of observations about how the world is as it is.

Part one is about how Nash's Game theory started trumping common sense (hint: easier to make calculations about humans when they are reduced into simpletons).

Part two is about "market is applicable to everything" -meme. Funnily in the end Nash himself doubts his theory's usability. Final remark is how there are only two groups of people behaving like Game theory assumes. The groups are --- economist themselves and psychopaths. Like we didn't know that one before...

Part three has ominous title to help you adjust your mindset with it "We will force you to be free". Three hours well spend I assure you.

scandia said...

@Wyote, oh dear, that one went over my head?

Wyote said...

A play on the phrase "The check is in the mail".

The urban dictionary defines it as:
"A catch phrase used by people, organizations, and credit lepers to appease other creditors, and other people and organizations waiting for money and is 1 of the top 3 lie top lies used by white males 18-65 living in the United States. ; )"

Ilargi said...

New post up.

Honey, I Swapped the Greeks


scandia said...

@Wyote, Ha, that sucked me in:)

Ashvin said...


Thank you the link, that is very interesting material. The simplifying assumptions of economics (and many other social sciences) is probably the single most critical factor determining why otherwise very intelligent and "well-read" people accept flawed theories and their descriptions/predictions of reality. For some reason, they treat these assumptions as being negligible and having very little influence over the accuracy of a theoretical model (which is a topic covered in-depth in Dr. Keen's Debunking Economics book)

A good example of that inability to see the fundamental difference between relatively simple systems and more complex ones is game theory, as Adam Curtis points out, although I'm not sure to what extent Nash actually approves of its extensive use in complex fields. Case in point - the theory of Freegold actually uses a focal point square game to model how millions of people will choose to invest their excess currency wealth around the world as financial markets break down, turning to gold because its a "focal point" (this example was discussed in my article).

Perhaps gold has traditionally been the most recognized monetary asset and store of wealth over thousands of years, but we are not living in a barter society or simple-trade economy thousands or hundreds of years ago. Complex systems theory teaches us, if nothing else, that the individual components of a system do not stay the same as they form more complex arrangements over time, regardless of whether we are talking about the field of physics or economics.

Damn... should have just used this game theory material in part I as an analogy instead of "quantum decoherence".

Nassim said...

... a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens.

The Greek "Ultimatum": Bailout (For The Bankers) And (Loss Of) Sovereignty

In case anyone thinks that this way of operating by predatory banks and governments is a new one, I would like to remind you of the case of the Suez Canal and Egypt in the 19th century.

Essentially, the rulers of Egypt - descendents of Muhammad Ali - went on a borrowing binge and spent the money on lots of useless things - a bit like the Greeks financing the Olympics a few years ago. The country had too much debt.

The British Prime Minister, Disraeli, with the help of the Rothschilds, and without parliament's permission, bought the shares not owned by the French - so that the Egyptians owned nothing.

Later still, to put down a local uprising against foreign influence in Egypt, the ruler invited the British to come and occupy the country - a bit like Bahrain inviting the Saudis to come in and occupy the place.

The 1956 invasion by the British, French and Israelis of Egypt was ostensibly because the Suez Canal's 99-year lease still had a few years to run and the Egyptians wanted to reclaim the Canal.

I am sure ordinary Greeks know their history better than the British their own. It is not so very long ago since Muhammad Ali was born in Greece and started his amazing career as a tax-collector for the Ottomans in the region of Kavla, Greece.

History doesn't repeat itself - at best it sometimes rhymes