Saturday, June 25, 2011

June 25 2011: The Future of Physical Gold, Part V - An Imperfect World in The End

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Ilargi: Breather. Big week(s) coming up/ June 27-28-29 we have the Greek austerity vote. On July 5, A German court is set to rule on whether the EU/ECB Greel bailout plans conform to German and/or EU constitutions. That could be a dark horse/black swan. They're riding the very edges.

Ashvin Pandurangi:

The Future of Physical Gold, Part V - An Imperfect World in The End

"It is dangerous to be right when the government is wrong."

The first four articles in this series (Dialectic Foundations, The Evolution of Value, The Final Realization and Deflationary Canyons and Caves) used theories, facts, data and general observations to explain why the dollar price of physical gold would most likely take a significant hit over the next decade. It was also consistently argued that the global financial system would not be "re-capitalized" through the revaluation and monetization of physical gold reserves, as argued by the theory of Freegold. That, in turn, means that physical gold is very unlikely to reach valuations as high as $50-100K in current purchasing power per ounce, either in the near future or, for all practical purposes, ever.

Much of this series has focused on the Federal Reserve, U.S. Treasury and the U.S. Dollar as THE key influences on future monetary developments in our global financial system. Freegold advocates would take issue with this focus, because they believe the "rest of the world" (ROW) will be much more instrumental in leading the physical gold-based re-capitalization process, such as Europe, the Middle East, China, Russia and India. The problem for them is that such a conclusion is not supported by either sound theories of complex systems' evolution (i.e. evolution of the global economy) or straightforward empirical evidence. Let's return to a passage from Part IV:

[Deflationary Canyons and Caves]: We could even see several large institutions, such as central banks and governments in Asia, Europe or Japan, flood the markets with (sell) a portion of their gold holdings to temporarily relieve pressure from their dire private and public funding situations. The sheer momentum of financial capitalism will lead them to conduct their "re-capitalization" efforts through established fiat currency and debt  mechanisms, rather than through an ongoing revaluation/monetization of gold by central banks such as the ECB (as argued in FOFOA's Reference Point: Gold - Update #1 and Update #2).

A complex and dynamic system relies on "central hubs" to keep itself functioning at anything close to its current scale, and therefore the "peripheral" branches of the system are more flexible and can deteriorate much faster. Accordingly, fiat currencies existing in the "periphery" of our global economy should be expected to fall first. For example, Belarus recently experienced the initial stages of HI as their currency lost 36% of its purchasing power in one month. However, the value of alternative mediums of exchange within the economy (i.e. dollars, gold, silver) can be suppressed in spite of such events as long as there are significantly bigger countries (currencies) willing to backstop the smaller ones, which will be Russia in this situation (with conditions of privatizing national assets, of course). [1], [2].

The countries on the periphery of the EU are in a somewhat similar position, but the Euro, as an accepted and stable currency, is obviously much more important to the system than the Ruble of Belarus. Even as the PIIGS continue to repeatedly experience public financing problems, the Euro has managed to maintain its value through various financial and political charades by the national governments, IMF and ECB (i.e. sovereign bond monetization, "credible" austerity plans, the prospect of labeling a default as "voluntary reprofiling", etc.). At every juncture, however, it became more clear that these efforts had increasingly less impact on public bonds and derivative instruments tied to their value.

At the end of every excruciating day, there must be a white knight in shining armor waiting in the shadows, ready to spring to action and prevent a complete European financial (Euro) implosion in the event of a PIIGS default. Countries such as Russia, Japan and China are simply not big enough to provide any credible backstop to the entirety of Europe, so we once again return to the operations of the U.S. Treasury and the Fed. In addition to various USD-Euro swap programs, it was revealed just yesterday by a report on Zero Hedge that almost all of the dollar flows generated from the Fed's QE2 Treasury monetization program have gone directly to European banks (~$600B to date).

The Federal Reserve Building in D.C.

Implication #3 explains why the US dollar has been as week as it has  since the start of QE 2. Instead of repricing the EUR to a fair value,  somewhere around parity with the USD, this stealthy fund flow from the  US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips,  keeping it far from its fair value of about 1.1 EURUSD. [3].

It conveniently turns out that major financial institutions in the Western world, whether technically classified as "American" or "European", repeatedly stop at the U.S. Treasury and USD markets and collect their "Go" money. The abridged reason is that the world has been flooded with dollar-denominated debt over the last few decades, and that debt, unsurprisingly, gives the institutions of dollar hegemony extreme leverage over the ROW when the liabilities come due and there is very little cash to go around. That has been a central theme of this series from the very beginning, and when you understand that, you start to understand what can happen to the value of physical gold.

The point has always been to maintain power structures of the system by transferring larger and larger amounts of resources and capital to its central hubs. When the PIIGS inevitably default on their sovereign bonds, EU citizens will realize that they were forced to sell their precious assets (including gold) for pennies on the dollar, while the major creditors who initially put them into debt were largely "re-capitalized" by the ECB/Fed and are set to absorb initial losses on any remaining debt-assets with ease. The Euro will experience a major sell-off relative to the U.S. dollar, when investors realize that the ECB is nothing more than a shell subsidiary of the Fed.

Gold may benefit a bit from capital flight out of Euro-based holdings over the next few months or year, but it will be difficult for it to maintain any marginal increases in value as financial contagion spreads and massive debt obligations come due. The latter are typically not payable in physical gold due to the system's evolutionary design, and so it will merely serve as a temporary and relatively illiquid repository of wealth for many investors. The debt-dollar system of "cash" and liquid bonds, on the other hand, will greatly benefit from capital flight, and that will also serve to suppress the value of gold on international exchanges.

Towards the end of Part IV, however, I explained that the shell game between the USD and Treasury markets cannot last forever. After a prolonged period of dollar appreciation and relative gold devaluation (~10 to 15 years), the central hub institutions would have concentrated and centralized too much wealth for their own good, just as predicted by Marx well over a hundred years ago. What both Marx and predictors of Freegold (Another and Friend of Another) really failed to understand, though, was that the complex global economy would not quickly rebound after this period with a drastic shift in property relations or systemic re-capitalization via physical gold.

In stark contrast, physical gold will become valuable mainly because it serves as a convenient and accepted medium of exchange in certain locations after the global financial architecture has crumbled into tiny bits and pieces. Ironically, the central hubs that were most dependent on that architecture will witness the most dramatic reversal, during which physical gold becomes a very important constituent of survival. For example, private communities in U.S. states have relatively small amounts of physical gold compared to those in Latin America, Africa, Asia and Europe. This lack of general availability will help to elevate its value in trade, as well as physical silver to a lesser extent.

In addition, at even smaller scales, black markets for trade in specific goods will inevitably become entrenched within "first world" countries over time as more and more people are displaced from the broader currency system. That trend is already prevalent in many poorer regions of the world, and it will simply expand to encompass those in the former "middle-class" who are living in densely-populated communities. For example, relatively poor neighborhoods in cities such as Detroit, Chicago, Los Angeles, New York, etc. will likely develop such markets over the next 20 years. Physical gold and silver, along with various other barter items, will become quite valuable in these locations.

It is also true that communities in the developed world have significantly less ability to sustain themselves through local food production, water procurement/treatment (more negatively impacted by shortages and impurities), efficient energy utilization, cooperative organization, ethnic/racial tolerance, etc. All of these physical, political and social deficiencies make it more likely that people will need to engage in extensive and reliable (trusted) trade to procure the things they need to survive, protect existing wealth and maintain bearable standards of living after HI occurs. Once again, this fact speaks volumes for the value of both physical gold and physical silver in the future.

On the other hand, locations with a lengthy history of gold or silver-backed currencies may find themselves re-instituting those monetary systems in the future at relatively smaller scales. States in the Indian sub-continent are a good example of those which may adopt a "gold standard" as the Rupee falls apart, and that would mean holders of gold are likely to gain a considerable increase in purchasing power. Alternatively, communities in Latin America may have a stronger affinity for silver-backing due to their historical paths of economic development. It is also possible that bimetallic currency standards are adopted at relatively small scales of organization in some parts of these regions.

It is perhaps most important to remember that a prolonged period of dollar deflation will be an extremely destructive process for general confidence in the global, regional and national structures of  human society. Capital investments and revenues in every field of industrial economic activity will dry up in this self-reinforcing process, and that will in turn affect every aspect of our lives, including our ability to obtain adequate food, water, energy and shelter. By the time the central structures (the U.S. Dollar) of our system completely give out, the value of any official or unofficial monetary system will be constrained by the basic needs of people to survive in many regions.

Instead  of hoarding physical gold for purposes of securing wealth or trading in a hyperinflationary environment, then, one may be better served by skipping directly to physical preparations that satisfy such needs. That is especially true in the  developed world, where a relatively liquid and available means of exchange still exists and critical supplies are still somewhat affordable, but where self-sufficiency also requires a lot of effort. Once you are comfortable with your specific level of  preparation, then you should begin looking for places to store excess currency wealth long-term. There is little doubt in my mind that physical gold is the place that generally towers above all others.

Some readers may feel that this article series has not delivered what it "promised", in so far as they were expecting an extremely detailed account of physical gold's future. While there was certainly no intent on my part to deceive, the series was organized to place significant emphasis on the role of complexity and uncertainty in our global economy as financial structures deteriorate. It is much more feasible, and therefore more important, to understand the broader foundations of how we got to this unique point and how the value of our wealth is likely to evolve from here. As explained in Part IV and above, much of the latter depends on our localized circumstances of existence.

There is a well-known saying by Voltaire that "the perfect is the enemy of the good", and it's one of those cliches that should probably be tattooed on the palm of one's hand. Some people recite it as "we should not let the perfect be the enemy of the good", and that may be true, but it's just not as comprehensive as the original quote. The perfect is the enemy of the good, always. Perfect knowledge, perfect information, perfect monetary systems, perfect investments, perfect theories, perfect arguments... these things are all our enemies. What made me think of that quote was the following comment from a reader of the articles posted to a recent comment thread on FOFOA's website (emphasis mine):

"Anonymous": I offer profound thanks to FOFOA for giving me better insight into the economic events unfolding. I have become pretty much convinced about Freegold and hyperinflation.

But I have wished for an intelligent critique of FOFOA's writings because you can never be sure of a perspective until you understand the good arguments against it. So I thank Ash too, and look forward to reading the next installments of his series on the future of physical gold, at TAE. Perhaps it will undermine my tentative conclusion that FOFOA is right. Perhaps it will only lead to a more tempered version.

Reading all this stuff is a hard slog, especially when I have to work, and maintain a family. It is always a struggle to see the world aright.

I can only hope that other readers also find my series good enough to stand as a critique to the ever-insightful arguments of FOFOA and Freegold. Advocates of the latter would be the first to tell you that it is not meant to be predictable with certainty or a perfect monetary system by any means, but one cannot help but wonder if it's vision still flirts with perfection way too much. Even those who initially "exposed" the alleged trail towards Freegold (A / FOA) are depicted as the modern-day Messiahs of global finance; the Insiders among insiders who, sometime in the 1990s, managed to crack the code of financial elites around the world. That code was, of course, inked and cast in physical gold.

They wrote about their "revelations" from 1997-2001, during which time they preached the near inevitability of the global capitalist system being enveloped by a Freegold monetary paradigm. I could have trimmed around the edges of Freegold with quoted analysis/opinions, financial market data and/or questions about "why it hasn't happened yet", but that would not have been the way to critique such a fundamental argument about where we are headed. Instead, I believe this series has firmly established a well-researched argument that Freegold's foundations of socioeconomic evolution and its views of economic "value" in our global financial system are deeply flawed.

The empirical evidence to back up those theoretical arguments was later provided in the form of economic data and analysis of that data. It then follows that Freegold's strict predictions against prolonged dollar deflation are very questionable, as well as its views regarding the ECB (and the ROW) and its implications for the purchasing power of physical gold in the near future. This series was obviously not designed as a general argument against investment in physical gold. I simply ask that readers remember there is usually a vast chasm in our minds between owning physical gold and understanding the influences guiding its potential future. The time to narrow that chasm is right now.

"Doubt is not a pleasant condition, but certainty is absurd."

Credit default swap insurance against Greece may be worthless
by Simon Goodley - Guardian

UK banks could find they do not have the protection they expect in sovereign debt crisis, says analyst

Credit default swap insurance taken out by UK banks to hedge their exposure to sovereign debt defaults may prove worthless, financial analysts are warning.

The forecast also adds a cautionary note to claims that the UK and US financial systems have a low exposure to the debt crisis engulfing Greece, and comes as Britain's new risk watchdog, the financial policy committee (FPC), increased the pressure on banks to boost capital cushions.

Erik Britton, a former Bank of England economist and director of financial market consultancy Fathom, said: "If banks have taken out insurance with a hedge fund, are they comfortable that they will pay out in the event of a default? There is a chance that they have taken cover that is worthless. The banks could be facing a loss [on one side of their investment book] and they won't be able to claim the insurance [on the other side]. Then they may have to recapitalise."

The Britton scenario is a worst case, involving a swift default by Greece that pulls Ireland and Portugal into the crisis and then, possibly, Spain and Italy. Most watchers assume that French and German banks are the most vulnerable to a Greek default. However, recent figures published by Fathom suggest that much of the eurozone's exposure has been passed to UK and US banks, which have in turn insured themselves in London and New York with hedge funds.

The report states: "Looking across the eurozone periphery as a whole, the total for the US is €193bn and the UK is €74bn. Core European banks' indirect exposure stands at only at €35bn. So the majority of the [insurance] guaranteeing periphery debt appears to have been underwritten by UK and US banks."

The comments came as Bank of England governor and FPC chairman Sir Mervyn King said a roadmap was still needed to show markets there was a way out of the Greek debt crisis, and the watchdog's first set of recommendations focused heavily on the risks posed by high-indebted eurozone states. "Sovereign and banking strains are the most material and immediate threat," it said. "Market concerns remain over fiscal positions in a number of euro area countries and the potential for contagion to banking systems."

Credit analysts say that hedge funds, which have gambled on default, will be the only winners of a swift default scenario. No default, or a delayed default, will provide investors that have recently bought Greek bonds with profits.

Financial institutions typically insure against falling bond prices by taking out a credit default swap (CDS). The difference between a traditional insurance policy and a CDS is that anyone can purchase one, even those who have no direct interest in the loan being repaid. That means speculators, such as hedge funds, can use them to bet on defaults. Credit analysts estimate around €240 billion ($340 billion) of Greek debt will have to be written off.

America's role in this Greek tragedy
by Mark Weisbrot - Guardian

Greece faces unacceptable conditions for a new bailout. If it defaults, the US had better be ready for the economic shock

The European authorities are playing a dangerous game of "chicken" with Greece right now. It is overdue for US members of Congress to exercise some oversight as to what our government's role is in this process, and how we might be preparing for a Greek debt default. Depending on how it happens, this default could have serious repercussions for the international financial system, the US economy and, indeed, the world economy.

The US government has a direct and significant role in the Greek crisis because the US treasury department has the predominant voice in the International Monetary Fund (IMF). The IMF, together with the European Commission and the European Central Bank (ECB) – the three are commonly referred to as "the Troika" – are negotiating a new austerity package with the Greek government, in return for a new bailout deal.

This package promises more suffering for the Greek people – that is acknowledged by all sides. But the Troika thinks it can ram the programme through the Greek parliament on Tuesday, with the threat that the IMF will not disburse the next $17bn instalment of Greece's current loan package – thus putting Greece in a situation of sudden default.

The Troika won the first round of its battle against the Greek citizenry, with a parliamentary vote of confidence last Tuesday; and if the ruling party's slim majority holds up this coming Tuesday, they will have a slim majority again in favour of the austerity package. But it is a high stakes gamble, and this week's vote won't end the instability.

It has been largely forgotten, but there was a Greek debt crisis just over a year ago, in May 2010, that rattled world financial markets. It was exacerbated by the extremism of the European Central Bank, which was also playing a game of brinksmanship back then. On 6 May 2010, the ECB refused to commit to buying European government bonds in the midst of the crisis.

The idea was that this would be a form of "monetising" the debt of the weaker eurozone countries, just as the US federal reserve has monetised some $2tn of US government debt (through quantitative easing) in the last few years. This was anathema to the ECB, which is considerably to the right of the Fed. But after a harsh negative reaction in world markets, including a plunging US stock market, the ECB reversed its position four days later and began buying European government and private debt.

Perhaps the European authorities believe they have the tools to stem any panic that may occur this time in response to a Greek default. And as happened last year, they can count on the federal reserve to open a swap line of dollars as necessary. But it is worth noting how much the European debt situation has deteriorated since over the last year.

At the peak of last year's crisis, interest rates on the 10-year government bonds of Greece, Portugal, and Ireland were 12.4%, 6.3% and 5.9% respectively. They are currently at 16.8%, 11.4% and 11.9%. Credit default swaps for these three countries – a measure of the risk of default – peaked respectively at 891, 460 and 273 basis points in the May 2010 crisis; they are currently at 1,977, 827 and 799 points.

Clearly, the risk of contagion from the Greek crisis has risen significantly since last year. At the time, a number of economists (including myself) noted that the pro-cyclical policies imposed by the Troika would only worsen the Greek economy and its debt situation. This has evidently come to pass, as the economy shrank by 4.5% last year, unemployment continued soaring to more than 16%, and public opinion in Greece turned sharply against the austerity measures.

A "voluntary" rollover by some of the bondholders, as currently proposed, will not resolve the problem. And there is only so much punishment that the Greek population (or the Spanish population, which has recently seen hundreds of thousands of protesters in the streets in the face of 21% unemployment) will take. The Greek government has already laid off 10% of its government workers, and the plan that they will vote on this Tuesday calls for layoffs of another 20%. It also provides for a total of 12% of GDP of fiscal tightening for 2011-2015 – a recipe for never-ending recession, for the purpose of trying to pay off an unpayable debt to bankers and bondholders.

A Greek debt default appears inevitable, and the potential for financial contagion is significant. What is the US government doing to avoid a financial crisis, and to prepare for the various contingencies that may be anticipated? One would think that, after living through the events that followed the collapse of Lehman Brothers in 2008, some responsible government officials in the United States would be asking these questions.

America, land of the free to go hungry
by Eric Augenbraun- Guardian

As unfortunate as our current age of austerity is claimed to be, legislators at both the federal and state levels seem to relish the opportunity it has provided them to dismantle the last vestiges of the social safety net. If the economic crisis taught us anything, after all, it is that there is too much government regulation on Wall Street, and too many government safeguards for those most in need, right?

With the latest set of proposals, "belt tightening" will have a very literal meaning for millions of Americans as Republicans in Congress have now proposed cutting and radically restructuring the Supplemental Nutrition Assistance Programme (Snap) – the programme more commonly known as food stamps – despite record numbers of people presently on the rolls. Without question, these cuts and changes would prove devastating for many of those to whom food stamps represent a last line of defence against hunger.

Food stamps were first instituted in 1939 at the tail end of the Great Depression, but were discontinued in 1943. It was more than two decades later that the programme was established on a permanent basis with the Food Stamp Act of 1964 – as a part of President Lyndon B Johnson's "Great Society". Since then, it has undergone some changes but remains essentially intact.

And it is a good thing it has.

In March 2011, a record 44.5 million Americans received food stamps, which was an 11.1% increase over the year before. Even more illustrative of the profound impact the economic recession has had on poor and working-class Americans is the fact that this represents a 64% increase over the number of recipients in March 2008.

Faced with this evidence of increased need, on 31 May, the House appropriations committee nevertheless approved the fiscal year 2012 agricultural appropriations bill, which includes $71bn for Snap – $2bn less than President Obama's recommendation. On 16 June, the bill was just barely approved with a 217-203 vote in the House.

Meanwhile, Wisconsin Republican and House budget committee chairman Paul Ryan's "Path to Prosperity" budget proposes deep cuts to Snap, and even more fundamental changes to how it is administered:

"[P]rogrammes that subsidise food and housing for low-income Americans remain dysfunctional, and their explosive growth is threatening the overall strength of the safety net."

His plan would turn Snap into a block grant programme in 2015 (along with Medicare, starting 2013), meaning the funds would be delivered to the individual states with only loose stipulations about how they are to be used. The belief is that this improves flexibility and promotes innovation and creativity in the delivery of federal funds. But coupled with Republicans' intention to slash Snap by 20% over the next ten years – or $127bn, as the Centre on Budget and Policy Priorities calculates – Ryan's plan could leave millions in danger of going hungry.

While Ryan has not made clear the specifics of how the cuts would be instituted, Dottie Rosenbaum of the CBPP speculates that they would most likely come in two areas: a change in eligibility requirements and an across-the-board cut in the benefits available. Additionally, she argues, block-granting Snap would render it "unable to respond automatically to increased need resulting from rising poverty and unemployment during an economic downturn" and would also give individual states the option of placing their own restrictions on the programme. Finally, Rosenbaum responds to Ryan's claim that Snap has undergone "relentless and unsustainable growth" by pointing out that "[t]he recent growth in the number of people participating in Snap closely tracks the increases in poverty associated with the recent recession."

A fuller appreciation of the potentially disastrous effects of these cuts is gained by examining their possible impact at the local level. "Nobody really wants to see what it will look like if they block-grant Snap, because it's going to be ugly," says Carey Morgan, the executive director of the Greater Philadelphia Coalition Against Hunger. Her organisation screens 6,000–7,000 Philadelphia-area households per year for eligibility for food stamps, of which about 70% qualify. Then, they assist families with the application process and provide them with case work services for dealing with what can be a complex bureaucracy.

Morgan, who recognises the structural roots of poverty and its inherent relationship to hunger, notes that Ryan's plan would hit Philadelphia particularly hard:

"When we see the rates of poverty being 27%, which is what it is in Philadelphia, of course you're going to have high rates of hunger."

Moreover, the costs of cutting food could have attendant effects in other areas. She adds:

"If you can't eat, you're going to get sicker and you're going to be sick more often, and those medical costs will go up. Food is a great preventative tool."

It seems like common sense, but apparently, not to Ryan and his ilk.

One enduring legacy of the Reagan administration has been the extent to which it greased the ideological rails for the continued destruction of the welfare state – long after he had his crack at it by perpetuating lurid fantasies about the purportedly pathological (largely urban and black or hispanic) poor. Who could forget Reagan's most notorious and nefarious tall tale? That of the "welfare queen":

"She has 80 names, 30 addresses, 12 social security cards and is collecting veteran's benefits on four non-existing deceased husbands. And she is collecting social security on her cards. She's got Medicaid, getting food stamps, and she is collecting welfare under each of her names. Her tax-free cash income is over $150,000."

This and similar anecdotes have framed the rightwing discourse about poverty for the past 35 years. If the poor are a fundamentally defective, lazy and criminal underclass, the logic goes, what good can government aid possibly do?

But nothing could be further from the truth, which is obvious if one just talks with some of the people who rely on these benefits. For instance, Tamika Finn is a 34-year-old, recently-unemployed single mother from West Philadelphia. She cares for her mother and son – both of whom are disabled – while she completes an associates degree in information technology. "I'm grateful to have food stamps," she says. But, she maintains, "the goal is always to get off and do something different – do something better." Dispelling the notion that recipients wish to remain on food stamps indefinitely, Morgan points out that "99% of the people we talk to are not proud of getting the benefit and are not looking to scam the system."

The assault on the welfare state has hardly been the work of Republicans alone. Lest we forget, it was Bill Clinton who signed Personal Responsibility and Work Opportunity Reconciliation Act of 1996 into law, keeping his promise to "end welfare as we know it". Among many other things, this act made significant cuts to Snap. Incidentally, it was also Bill Clinton who, in 1999, repealed the Glass-Steagall Act of 1933, which prevented speculation by banks. This move is now believed to have contributed to the current economic crisis.

Indeed, the logic of slashing the social safety net fits cozily with an upwardly redistributive programme of tax cuts and deregulation. And, of course, this is the path we have been on for the last 30 years. Morgan sums up bankruptcy of this trend nicely: "Our priorities are completely messed up if we are cutting food, which is a basic right to the most vulnerable populations we have." As the oft-repeated maxim goes, the true test of a society is how it treats its weakest members.

The U.S. is too big to fail, right?
by Brian Edmonds - MarketWatch

No one knows who will be hurt if Greece defaults

While many investors are focused on the precarious situation surrounding Greek debt, and whether the rest of the so-called PIIGS (Portugal, Italy, Ireland, and Spain) might follow closely behind, there is a less-publicized yet equally dangerous element in the mix: If Greece defaults, who will be holding the bag?

On Wednesday, Fed Chairman Ben Bernanke assured us that the effects of a Greek default on U.S. banks would be very small. But in our interconnected world, we have seen many surprises, and they have not been pleasant. Surely, the European banks who directly own Greek (and PIIGS) debt would be most affected. But who else does, and to what extent, is unclear. Recent publications have pointed, as one example, to the exposure of big U.S. money market funds that hold large amounts of short-term European bank debt.

The biggest way that the risk of default is mitigated is through credit default swaps, in a largely unregulated, over-the-counter (as opposed to exchange traded) marketplace where investors buy and sell protection against default on outstanding debt of corporations and countries. Sovereign debt swaps are the gorillas in the PIIGS room, but no one really knows if they are just 800-pound gorillas (large but manageable) or King Kongs (think AIG).

Only if, or when, Greece defaults will we know who ultimately has sold insurance against that default. In 2008, it was a surprise to find out that AIG had sold a massive amount of insurance against the downgrade of sub-prime mortgages, and the federal government had to come to the rescue, to the tune of close to $200 billion. The global macro-investment outlook has proven to be very tricky in 2011, with even the largest and most successful hedge funds suffering large losses so far this year. If Greece defaults and we learn of massive exposure by major American financial institutions, more shocks will be in store.

In the meantime, U.S. Treasuries have once again proven to be a deep and liquid safe haven. But I worry about what would happen if investors shun low yielding treasuries because of highly suspect credit worthiness. Since the 2008 crisis, we have seen an implosion of sub-prime and other private debt replaced by an explosion of U.S. government public debt -- currently $14+ trillion -- and this is coupled with the very real risk that we could default on our debt payments in August if our politicians continue to play a high stakes game of fiscal chicken and are unable to increase the debt limit.

We are not Greece, many argue, but our country is clearly on an unsustainable path of deficits and increasing national debt and we must take steps to curb government spending and reduce debt levels. The U.S. is too big to fail, right? But who would (could) bail the U.S. out?

If Greece goes…
by Economist

The opportunity for Europe’s leaders to avoid disaster is shrinking fast

The European Union seems to have adopted a new rule: if a plan is not working, stick to it. Despite the thousands protesting in Athens, despite the judders in the markets, Europe’s leaders have a neat timetable to solve the euro zone’s problems. Next week Greece is likely to pass a new austerity package. It will then get the next €12 billion ($17 billion) of its first €110 billion bail-out, which it needs by mid-July.

Assuming the Europeans agree on a face-saving “voluntary” participation by private creditors to please the Germans, a second bail-out of some €100 billion will follow. This will keep the country afloat through 2013, when a permanent euro-zone bail-out fund, the European Stability Mechanism (ESM), will take effect. The euro will be saved and the world will applaud.

Time to stop kicking the can
That is the hope that the EU’s leaders, gathering in Brussels as The Economist went to press, want to cling to. But their strategy of denial—refusing to accept that Greece cannot pay its debts—has become untenable, for three reasons.

First, the politics blocking a resolution of the euro crisis is becoming ever more toxic. Greeks see no relief at the end of their agonies. People are protesting daily in Syntagma Square against austerity. The government scraped through a vote of confidence this week; the main opposition party has committed itself to voting against the austerity plan next week and a few members of the ruling Socialist party are also doubtful about it.

Meanwhile, German voters are aghast at the prospect of a second Greek bail-out, which they think would merely tip more money down the plughole of a country that is incapable either of repaying its debts or of reforming itself. As the climate gets more poisonous and elections approach in France, Germany and Greece itself, the risk of a disastrous accident—anything from a disorderly default to a currency break-up—is growing.

Second, the markets are convinced that muddling through cannot work. Spreads on Greek bonds over German bunds are eight points wider than a year ago. Traders know that Greece, whose debts are equivalent to around 160% of its GDP, is insolvent. Private investors are shying away from a place where default and devaluation seem imminent, giving the economy little chance of growing. The longer restructuring is put off, the more Greek debt will be owed to official lenders, whether other EU governments or the IMF—so the more taxpayers will eventually suffer.

The third objection to denial is that fears of contagion are growing, not receding. Early hopes that Greece alone might need a bail-out were dashed when Ireland and Portugal also sought help. The euro zone has tried to draw a line around these three relatively small economies. But the jitters of recent weeks have pushed Spain and even Italy back into the markets’ sights again. The belief that big euro-zone countries could be protected from attack has been disproved. Indeed, far from fears of contagion ebbing, the talk is of a Greek default as a “Lehman moment”: like the investment bank’s bankruptcy in September 2008, it might unexpectedly bring down many others and devastate the world economy.

While the EU’s leaders are trying to deny the need for default, a rising chorus is taking the opposite line. Greece should embrace default, walk away from its debts, abandon the euro and bring back the drachma (in a similar way to Britain leaving the gold standard in 1931 or Argentina dumping its currency board in 2001).

That option would be ruinous, both for Greece and for the EU. Even if capital controls were brought in, some Greek banks would go bust. The new drachma would plummet, making Greece’s debt burden even more onerous. Inflation would take off as import prices shot up and Greece had to print money to finance its deficit. The benefit from a weaker currency would be small: Greece’s exports make up a small slice of GDP.

The country would still need external finance, but who would lend to it? And the contagion risk would be bigger than from restructuring alone: if Greece left, why not Portugal or even Spain and Italy? If the euro zone were to break up it would put huge pressure on the single market.

The third way
There is an alternative, for which this newspaper has long argued: an orderly restructuring of Greece’s debts, halving their value to around 80% of GDP. It would hardly be a shock to the markets, which have long expected a default (an important difference from Lehman). The banks that still hold a big chunk of the bonds are in better shape to absorb losses today than they were last year. Even if Greece’s debts were cut in half, the net loss would still represent an absorbable proportion of most European banks’ capital.

An orderly restructuring would be risky. Doing it now would crystallise losses for banks and taxpayers across Europe. Nor would it, by itself, right Greece. The country’s economy is in deep recession and it is running a primary budget deficit (ie, before interest payments). Even if Greece restructures its debt and embraces the reforms demanded by the EU and IMF, it will need outside support for some years.

That is bound to bring more fiscal-policy control from Brussels, turning the euro zone into a more politically integrated club. Even if that need not mean a superstate with its own finance ministry, the EU’s leaders have not started to explain the likely ramifications of all this to voters. But at least Greece and the markets would have a plan with a chance of working.

No matter what fictions they concoct this week, the euro zone’s leaders will sooner or later face a choice between three options: massive transfers to Greece that would infuriate other Europeans; a disorderly default that destabilises markets and threatens the European project; or an orderly debt restructuring. This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro. That option will not be available for much longer. Europe’s leaders must grab it while they can.

Euro Crisis Has Decimated Greek Private Sector
by David Böcking and Ferry Batzoglou- Spiegel

Consumption has plunged in Greece and so too have the profits of several small and mid-sized companies in the country. Many say that the government isn't doing enough to help -- and a new round of austerity could make the situation even worse.

Jannis Papagrigorakis is a man of the world. On his business cards, he uses the English translation of his name: John. Foreign business partners should not be confused by unfamiliar words. His office in the Athens diplomatic district of Kolonaki is one of dapper prosperity: marble slabs on the walls, a huge map of the Balkans -- an historic original -- behind the desk. Neatly-pruned orange trees grow outside.

The 56-year-old is the founder and chief executive of JEPA, an engineering firm that designs electronics for major projects. The list of projects he has worked on is impressive, ranging from the new Acropolis Museum to London's Heathrow Airport. But the list is no longer growing much. "Over the past two years our business has shrunk by 95 percent," says Papagrigorakis. "We are an office with 43 people -- and not a single phone is ringing!"

The culprit is easy to find. The Greek private sector, which accounted for 97 percent of JEPA's orders three years ago, has collapsed . Back then, the company had business from banks, hotels and restaurants. "The private sector was going well," says Papagrigorakis. But then the Greek state was plunged into financial disaster . And now the government , as so often in the past 30 years, is making a terrible mistake, Papagrigorakis says. "Instead of shrinking the public sector, it is raising taxes."

Greeks like Papagrigorakis find their own state as alien as many foreigners. While some state officials head home even before their lunch break, most private entrepreneurs work hard. At JEPA, 15-hour days are the norm, as is weekend work. Many state enterprises, however, simply have "no reason to exist," complains Papagrigorakis. He refers to the famous example of the office to oversee the reclamation of a lake which vanished way back in 1957.

'Pleasantly Surprised'
In Greece, one in four employees works for the state. Industry makes up only about 12 percent of gross domestic product -- about half as much as in Germany. Small- and medium-sized enterprises make up the largest part of the Greek economy. And these medium-sized enterprises do have their strengths. Greek college graduates are well trained -- like the engineers working at JEPA.

"I have been pleasantly surprised by the high level of competence that I have encountered here," says Byron Vargas. He has been the technical director at the Greek subsidiary of Bosch and Siemens Household Appliances (BSH) for a year. The company has been operating in Greece since the late 1970s, manufacturing refrigerators and stoves at two factories.

But while Bosch and Siemens is a German brand with a good reputation, there is a lack of illustrious company names in Greece. There were once strong industries, like textiles. But they lost their competitive edge when Greece suddenly had to compete with Eastern European countries within the EU. There has been little new investment since, and even many Greek entrepreneurs are putting their money in Balkan countries.

Today, the Greek economy has an image problem -- even within its own borders. "Many Greeks don't believe that high production quality is possible here," says Vargas. Some Greek companies even disguise their origin, an industry representative in Athens says, citing a pharmaceutical company which markets its products through a foreign PR firm as an example.

International Role
The country's reputation is clearly not the only problem facing Greek companies. The collapse of domestic consumption means there are hardly any profits to be had at home. BSH too saw a decline in sales in Greece last year and was forced to lay off staff. But the German company can at least use production capacity in Greece to supply other European Union markets. Many Greek companies, though, are much too small to have such an international role.

The average Greek engineering firm only has five or six employees, said JEPA boss Papagrigorakis. That is too few to compete for large projects. "Nobody needs a Greek engineer to build a 200-square-meter house in Qatar."

JEPA, on the other hand, is involved in major projects in countries as diverse as Ukraine, Nigeria and Iraq. Papagrigorakis and his team have recently become part of a engineering co-op called Sibraxis. Altogether, some 250 engineers and designers offer their services jointly. The group is likely the first of its kind, says Papagrigorakis, and was born out of necessity. "The government always says that we should go abroad. But it doesn't help us do so," he says.

Companies also see the Greek government as being less then helpful when it comes to domestic investment. "The permit process must be improved. Otherwise the country is missing a golden opportunity," says Vargas. The BSH manager worked in Spain long ago. There too, the permit process was slow. "But there, one knew when the decision was made."

Only for Large Projects
The Greek state has become aware that it must do more to secure new investments. "Overcoming Obstacles" is the telling name of a conference being held by the government organization Invest in Greece on Friday. At the conference, a law passed in February aimed at facilitating investment in Greece will be presented.

But the new rules only apply to large projects, such as the privatization of the former Athens airport Ellinikon. At the beginning of the year, the Greek government appeared to have reached an agreement on the sale of the airport to investors from Qatar. Since then, however, negotiations have stalled. BSH manager Vargas believes that the government shouldn't solely focus on such mega-deals. "There also needs to be an accelerated permit process for mid-sized companies," he says. "The potential is huge."

For Papagrigorakis and his employees, new orders can hardly come soon enough. The company founder says that JEPA has only been able to avoid layoffs by cutting salaries. Furthermore, it has begun eating into company capital built up over the last 10 years. Papagrigorakis hardly cares what move the government makes next. They should just go ahead and raise taxes, he says with a bitter laugh. "I don't really care about taxation," he says, "as long as we're not making any profits anyway."

How European Elites Lost a Generation
by Ullrich Fichtner, Jochen-Martin Gutsch, Barbara Hardinghaus, Ralf Hoppe, Juan Moreno and Barbara Supp - Spiegel

The European Union is in bad shape. Not only is the common currency in a shambles and the economies of many member states moribund, but young Europeans no longer see how the EU helps them. Millions of them are taking to the streets to demand a future. By

When Kostas Dekoumes, a 24-year-old Greek, is asked about Europe, he launches into a rant about German Chancellor Angela Merkel. When Oleguer Sagarra, a 25-year-old Spaniard, is asked the same question, he says that Europe represents the only chance to find work. Karl Gill, a 21-year-old Irishman, responds to the question by railing against the banks. And when Jacques Delors, 85, is asked about Europe, he says things like: "Europe needs a pioneering spirit," and he asks: "Do the men and women of this era truly want this Europe?"

Delors, together with former French President François Mitterrand and former German Chancellor Helmut Kohl, was one of the driving forces behind the European Union, and under his leadership as president of the European Commission, treaties were signed that would be impossible to forge agreement on today.

Delors represents a time when Europe inspired the imagination of statesmen. The goal was to secure peace in Europe and prosperity for the continent's poorer countries including jobs, education and justice. Europe was a promise. When Kostas Dekoumes, Oleguer Sagarra, Karl Gill and hundreds of thousands of other citizens protest in the squares of European cities, it is to demand that governments and politicians make good on this promise. In their opinion, Europe is in the process of making them poor . In response, they are speaking out and exerting pressure on their governments, just as the financial markets are doing.

A Look at the Zeitgeist
When Delors, an elegant man with a soft face, worries about the common European currency -- a monetary union which in recent months increasingly resembles a teetering house of cards -- he talks about the debt crises of individual countries, and he says that the markets are testing the EU "because they are convinced that it is not capable of taking action." All of this is very disconcerting, says Delors, but it isn't the real reason for the scope of the crisis.

"We are talking about the Zeitgeist, aren't we, about the 'mood'?" says Delors. By that he means that two crises are unfolding at the same time in Europe today. On the one hand, there is the debt crisis faced by individual nations. The second crisis, and the more dangerous one, is a crisis of meaning. Do Europeans -- the citizens and their political elites -- even want the historic project of a European Union anymore?

The search for an answer to this question inevitably leads to those places where agitation is at its most intense, where citizens are fighting for the future, even if is only their personal future. It leads to Barcelona, Dublin, Athens, Lyon and Lisbon, to the rebellious crowds full of rage but not necessarily full of hope.

Spaniard Oleguer Sagarra is no revolutionary. He is a conscientious young man who wears eye-catching glasses. He has lived in Montreal and Sydney, speaks fluent French and English and is trained for complex data analysis. Sagarra used to think that he wasn't the kind of person who took part in demonstrations. Such a person is made for work.

Sagarra is sitting on a large rock at the foot of one of the twin fountains on Plaça de Catalunya in Barcelona. A small tent city covers the square behind him. Young people are siting in front of the tents talking, some are sunbathing, while others are painting protest signs or cooling off in one of the fountains. There are makeshift information booths at the center of the tent city. Sagarra, an academic and the son of Ferran Sagarra, the dean of the Barcelona School of Architecture, spent the night here, on the street.

Deep Crisis
In about an hour, shortly before it gets dark, thousands will gather on the square once again and start banging on pots, just as the Argentineans did in the 1990s during their economic crisis, shortly before the country's bankruptcy.

Spain is currently experiencing the worst crisis since it became a democracy. Thousands of young people have occupied the central squares in several Spanish cities for weeks now. Sagarra sums up the mood of his generation in a short sentence: "It's every man for himself." Forty-four percent of young people are unemployed. "I finished school more than a year ago," says Sagarra. "There were more than 50 of us who graduated with degrees in physics here in Barcelona. Only one person found a job. One of more than 50. I speak several languages and I'm a physicist, and I'm living in the room where I lived as a kid."

Some from Sagarra's class have gone to the Netherlands or Germany to pursue their doctorates. For them, Europe is a place that promises work. Sagarra doesn't question Europe as an idea, nor does he see Europe as the enemy. "A lot would be achieved if politicians weren't serving the business lobbyists and special interests, but the people instead," he says. The young protesters' demands are modest. They want more citizen involvement, a reform of voting rights and curbs on the power of banks. One of the protest signs reads: "We are not against the system. The system is against us."

That system consists of the banks, which are secretly counting on government support, and the governments, which have gone into debt to rescue the banks -- especially the governments in the so-called PIGS states, Portugal, Ireland, Greece and Spain. Just a fleeting acquaintance with the news is enough to realize that Europe's fate is tied to these countries' national debts. There is surprising common ground between the international financial markets and Europe's young citizens: Both are leery of the European project, its institutions, its leaders and its currency.

To put things harshly, today's EU, in the perception of the majority of citizens, from Estonia to Portugal and from Finland to Greece, can be likened to Franz Kafka's "Castle." Perhaps not as sinister but every bit as secretive; somehow omnipresent, but physically elusive; a domineering, faceless power that decides who becomes rich or poor.

It is a paradox that an even greater dose of this Kafka-esque, unloved Europe would be necessary to survive the present-day crises and the challenges of the future. Portugal is a case in point. The country has been battered by global competition. As recently as the 1990s, Portugal was an important textile center that only ran into trouble once China joined the World Trade Organization in 2001. Investors began turning their backs on the country and, beginning in 2004, focusing on new European Union member states in Eastern Europe, which had lower taxes and lower wages.

Part 2: Does Europe Mean Moving Abroad for Work?
A strong EU could not have prevented this adverse competition, but it could have softened its impact. Brussels should have tried to balance interests. If the concept of European unity had been taken seriously, the EU could have considered direct aid to Portugal. Nothing of the sort happened, of course. Now Portugal is surviving with loans from other European countries and the International Monetary Fund (IMF). Germans call it a rescue package. The papers write that Portugal is now under the "European rescue umbrella."

When Paula Gil, 27, reads this sort of thing in the newspaper in Lisbon, it means very little to her. Rescue? Like many Portuguese, Gil feels that her country is not being rescued but taken over. By a foreign power. By Europe.

"We aren't getting any aid. We're getting loans," she says quietly. "But does one fight debt by going even more deeply into debt?" People she has never voted for can now influence her country and her future, says Gil. People like IMF executives, ratings agency analysts and Angela Merkel, the chancellor of far-away Germany .

Gil, a petite young woman, studied international relations in Great Britain. She has a Master's degree and speaks English fluently. She is currently doing an internship with a non-governmental organization. She doesn't know how many internships she has already done, but at least this one is paid, which is unusual, says Gil, €750 ($1,080) a month for full-time work. She spends €300 a month on the room she rents in a shared apartment. She has no health insurance or unemployment insurance, and her internship ends on Dec. 31. Many young Portuguese are in the same boat. Some 27 percent are unemployed.

Would Even Go to Angola
She doesn't need a job that will last forever, or one that pays a lot, says Gil. But she does expect to be treated with dignity and to get what she feels she is entitled to: health insurance, unemployment insurance and a contract that cannot be terminated from one day to the next. Sometimes, says Gil, she is afraid she will end up like her mother, who is 47 and unemployed. "At first, you get part-time jobs in Portugal -- because you're young. Then, when you hit your mid-40s, you don't get any jobs at all -- because you're old."

Gil applied for many jobs after receiving her university degree, including positions in France, Spain and Great Britain. She says she would even go to Angola, a former Portuguese colony. At the same time, she finds it absurd that the only way to succeed is to look for work outside Portugal. "You can't expect an entire generation to emigrate. The country has invested a lot in education, and we are better educated than any generation before us. And then they send us away? Is this Europe?" Gil asks.

She says that she always liked the European idea, but that she now has the feeling that a European idea or identity no longer exists. What does exist, she points out, is European money and a European economy, dominated by the wealthy north, by countries like Germany. "The way I feel about Europe is that I am a second-class European," says Gil. But who is responsible for Portugal's debt? Who is supposed to solve the problems?

A Few Thousand Protesters
Gil shrugs her shoulders. Entire governments are agonizing over the same questions. How should Gil, a 27-year-old intern who became part of the protest movement more or less by accident, know the answers? She and her friends had announced on Facebook that they were going to hold a demonstration on March 12. Someone had come up with the idea over drinks at a bar. No one had much experience in this sort of thing. They hoped to attract a few thousand protesters.

More than 300,000 showed up on March 12. On that day, Portugal's youth protested in several cities throughout the country, revealing the frustrations of an entire generation. "It was really about just one thing," says Gil, "an outlook for the future."

The protesters in Portugal will probably never be as furious as they are in Greece or Spain. "It isn't our style," says Gil. "We are the only country in the world that staged a revolution with flowers. With carnations."

Not long ago, Gil met with some of the old fighters from the 1974 Carnation Revolution in Portugal. The former army officers have an office in Lisbon and still exert some influence in society. Now they were getting to know Paula Gil and the "geração a ràsca," or "generation of junk." "One of the old officers said to me: Our revolution was easy. We had one enemy: the Portuguese government and the dictator. But who are you fighting?"

There are no easy answers to his question. Are they fighting the crisis, the banks, Europe, capitalism? Something as abstract as Portugal's debt, a number with many zeros behind it? Is it even possible to protest against debt, or revolt against numbers? Gil says that she isn't opposed to the politicians, or to democracy, Europe and the banks. She has nothing against the system, the favored adversary of all rebels. Gil simply wants a chance -- to be allowed to participate, and to work, nothing more. That is her dream for Europe.

Never Built
Young people throughout Europe have agreed to organize a joint campaign. "One Voice," Gil calls it, as she stubs out her last hand-rolled cigarette. It sounds almost like the idea for one Europe that politicians once set out to build -- and that was never built.

It isn't just young Europeans who have lost their connection to the ideas of the European founding fathers. Of course, they live with the achievements of the community, but they are hard-pressed to find arguments for why this union should be continued, expanded, developed or intensified. The slogan "No More War!" that marked the beginning of the European unification process has become devoid of content, because that goal has already been met.

It is also Europe's current state that prompts Frenchmen like Julien Boyer to head out to the Place Bellecour in Lyon every evening at 7 p.m. "The free republic," one of the banners reads. Phrases like "Let's be outraged!" "They're our banks!" and "Democracy 2.0" appear on other banners -- or the tongue-in-cheek message, printed in smaller letters: "There are non-smokers here too."

They aren't demonstrating. They're a little further along than that. "People who do nothing but demonstrate are just leveling accusations and leaving it up to the government to find a solution," says Boyer, a young man of 30, wearing a shirt with a jacket, with his hair combed back neatly. He could be an up-and-coming employee, but the impression is deceiving. He is wearing more respectable clothing because he is handing out flyers to the citizens of Lyon and, subversively enough, was trying not to look like someone who is trying the change the world.

An engineer by profession, he once worked in office jobs as a technical sales consultant, all the while feeling a deep sense of unease about the world. For years, it was a feeling he expressed only on the Internet, in blogs and on Facebook. And now everything has changed. Why? "Because it's time," says Boyer.

Part 3: The Search for More Democracy
It's time for the pamphlet written by 93-year-old Frenchman Stéphane Hessel, "Indignez-vous!" ("Time for Outrage!"), to have its effect in France, after having triggered the protests in Spain. It's time for Boyer, a former engineer and current freelance web designer and manager of the website http://, to spend every evening with outraged citizens on Place Bellecour, with 20, 200 or 300 people, depending on the weather. It is the "assertiveness of people thinking for themselves," in cities like Rouen, Angers, Lille and Montpellier, that Boyer finds so appealing.

They are sitting at the base of a statue of Louis XIV, holding an "Assemblée générale," or general assembly, and saying the things that matter to them into the microphone: Solidarity with the outraged citizens in Spain! In Belgium! Greece! Should alcohol be banned during the assembly? What do we do about plastic garbage? What could a society look like in which everyone has a real, paid job? Who is bringing food for dinner tomorrow?

They talk, sometimes with the furor of people trying to shake off a colonizer or a dictator. The word democracy keeps reappearing, even though they know perfectly well that they live in a democracy. It just isn't the one they want.

It's dark now, after 10 p.m., and while the Democracy Task Force earnestly discusses the environmental crisis, the power of lobbies and banks and the weakness of representative democracy, another task force is on the move in the pedestrian zone on Rue Victor Hugo, turning off lights. They have discovered how to switch off neon signs. They leave behind flyers and slogans scrawled in pink chalk, as they turn off the signs of commerce, at a shoe store, at a travel agency and at a pasta store. Click. They believe that there are too many lights on in the world at night, and that saving electricity helps reduce the need for nuclear power plants. Click. Too much light in the world. The fireflies are dying out. Click.

Impossible to Influence
Boyer, a Frenchman and a European like millions of others, talks of decentralization, civic activism, but no parties. He wants direct democracy, politics at the grassroots, a Europe governed by the base.

Europe -- the word itself has a pleasant ring to it. The EU allows countries to grow together, which Boyer likes, in theory, but he doesn't like the way they are doing it. For him, today's Europe is the opposite of direct democracy, a place where decisions are made by impenetrable committees that are almost impossible to influence.

Boyer has no answer to the question of whether this Europe can be tamed, with more referendums and more civic activism. But that, at least, is the hope of the many who convene on public squares and network on Facebook, and it's the hope at

Real democracy. It's a big word, and he knows it. Is the world out there receptive to the idea? In Lyon? In France? In Europe?

Until then, the screws of debt continue tightening, and in the world of networked markets, it operates almost like a law of nature, as the lenders lose confidence in the borrowers. The rating agencies, sharply criticized after the global financial crisis for having been too lax, are now doing their jobs as demanded and downgrading the credit ratings of some countries on the strength of solid arguments. This prompts investors to demand higher interest rates as a premium for their willingness to assume risk, as well as to cushion the blow of possible payment defaults in advance. The high interest rates, in turn, only further increase the debt burdens of beleaguered countries. To them, it feels as if they were stuck in a trap with no way out.

The Real Crash
It is a feeling with which the Greeks are already familiar . Every evening for the last two-and-a-half weeks, Kostas Dekoumes has gone to Syntagma Square, the Greek version of Cairo's Tahrir Square. "There were 500,000 of us on Sunday," says Dekoumes, "half a million people." He says that he is neither a leftist nor a right-winger. In fact, he says, politics doesn't really interest him.

Dekoumes, 24, is wearing flip-flops and a black T-shirt, and he has piercings, tattoos and a full beard. Until now, there were plenty of things more important to him than demonstrations, things like rock music and motorcycles, whose tires he repaired in his father's workshop. His parents, who vote for the Social Democrats, always explained things to him on the few occasions when he had questions about politics. Now he calls his friends every day and tells them to come to the square with him.

Dekoumes talks about freedom, about Angela Merkel and the International Monetary Fund. Standing on the balcony of his parents' apartment, where he still lives, he blows smoke from his cigarette into the sky over Athens.

His mother, a bookkeeper, still has her job. But his father, who has been selling motorcycle tires for 20 years, recently had to let three of his employees go. And although he didn't lay off his son Kostas, he did reduce his wages. Which explains why Kostas is only driving a small scooter these days, instead of the big motorcycle he used to drive. He bought his first motorcycle at 17, an Aprilia RS 125, a street bike. He sold it to buy a better one, a process which continued until a few months ago, when he lost his fifth motorcycle in an accident. He could only afford a scooter after that. This is the biggest crisis for Dekoumes, the real crash.

He says that his grandparents were guest workers who worked in factory near Düsseldorf in western Germany. They were poor and they worked hard, but by the time they returned to Greece, the lives of their children, Kostas' parents, had improved. Things have always gone uphill for them, he says, while everything seems to be going downhill for him.

One of Europe's Fools
Dekoumes says he knows that there is really no solution for Greece. His country's debts are already so high that he can't even comprehend the number. Bankruptcy will come, but when it does, he says, he still wants to be a proud Greek -- not someone reduced to driving around the city on a moped.

And not someone who is dependent on the government, "on the assholes I didn't vote for," he says, or on Europe or Angela Merkel, who, for Dekoumes, is the face of evil. This is his image of Europe: There is another government above his own government, one that is much worse than the Greek government, and that government is headed by Angela Merkel -- the worst of them all.

The Greeks, he says, bought their washing machines, their cars and their traffic lights from the Germans. The only reason the Germans are doing so well, he says, is because the Greeks exist. "Now they're doing their next deal with us."

For Dekoumes, who prefers to walk rather than be seen driving a scooter, the most important thing is his dignity. He doesn't want to feel like one of Europe's fools. Evening has come, and Dekoumes trades his flip-flops for his Nikes, grabs his backpack and his camera and, driving his parents' car, picks up his friend Psi, a student. They smoke in the car and don't say much to each other. The streetlights are plastered with Signs that read "Óxi!" or "No!" -- a reference to the Greek sellout. "We own nothing. We are selling nothing. We pay nothing!" The word "Óxi," written in red ink, appears throughout the entire city. The Greeks have become the people of No.

In the past, "Óxi!" was a symbol of resistance against Mussolini's occupiers.

Part 4: Dragged Along by the Crisis
The organizers of the protest movement use Skype to stay in touch with young people in other countries, in Spain, France and Portugal. The Spaniards are pressuring the Greeks to take things a step further. The Greeks are the worst off, they say, which is why the experiment should begin in Greece. What experiment?

They don't elaborate. But they do tell stories about people who were poor for a long time and were always peaceful, but who stopped being peaceful when they realized that nothing was changing.
The Greek parliament will vote on the next major austerity program on June 28. Large protests like the ones that took place in late May are scheduled for the evening before the crucial vote. The organizers expect more people turn out than ever before. Óxi!

Many like to compare the rebellious Greeks with the peaceful Irish, who are expected to perform the same balancing act of cutting costs while trying to stimulate growth. In Ireland, as in Portugal, a stronger Europe could have prevented worse things from happening. The island nation -- exhibiting a lack of solidarity still tolerated by the EU today -- built itself up as a tax oasis, sucking vast sums of foreign capital into the country. The banks were poorly regulated and it was widely known that their executives were in bed with the government.

Tighter Controls
When the roller coaster of the global economic crisis dragged Ireland along with it, the small country announced that it was prepared to guarantee its banks' liabilities to the tune of €440 billion -- a sum more than twice as high as the country's economic output at the time. It would not have come to this if the EU had had the gumption to at least try to stop Ireland's low-tax policies years ago, and if Brussels had had the power to impose tighter controls on the banks.

It is evening in Dublin, where a banker and a young Irishman are having an argument at the Porterhouse Pub. The Irishman stacks beverage cases by day, but now he has a stack of paperback books in front of him. The title of one of the books is "Marx Today." "Tell me something," says the banker, a man in his early 40s, wearing a gray suit with cufflinks, as he points to the books, "what exactly do you Irish expect to get from this shit, from Marx, from the theories of the 19th century?" "At least these theories didn't get us into the shit."

The banker chews on that for a moment. Then he sticks out his hand. "My name is Johan," he says. "I'm a Dutchman, and I'm pissed off." "My name's Karl, and I'm an Irishman," Karl says amiably, "and I'm pissed off, too."

Karl Gill, a bearded redhead with a round face and a round belly, was born in Dublin, the fourth of four children. His mother was a seamstress and is now a housewife. His father, who used to work for a telephone company, is now the janitor at a school called the Scoil Lorcáin. Karl still lives with his parents in a tiny row house in the town of Dún Laoghaire, only a few kilometers away. Getting his own apartment would be an impossibility. He is 21, but he seems older and more mature. He studied sociology and political science at the university, and for the past three years has been a member of the Socialist Workers Party. He is something of a leftist rising star. He hopes to be voted into the Dublin City Council and later into Ireland's parliament.

Benefiting from the Boom
"Why, Johan," he asks, "are you so pissed off at the Irish?" "Because I think it's unfair that countries that keep their finances in order, like the Netherlands, should pony up for others that live beyond their means. The protests and the outrage on the left, these are just smoke screens to cover up unrealistic demands. Why should a Dutch worker pay for a Greek protester, someone who doesn't produce anything, who contributes nothing to Europe?"

"Good point," says Gill. "But you mustn't forget that it wasn't the countries that were living beyond their means and benefiting from the boom, but always individual classes within society…" "Oh come on, classes?"

"Okay, then individual groups. While other groups did not benefit, or hardly at all, and certainly had no power to make decisions. And in Ireland those who are not responsible for this mess are supposed to pay the bill? Do you think that's fair? I don't. That's why I'm fighting back." "What about the Spanish mothers?" the Dutchman asks. He sounds irritated. "What do you mean?"

"The Spanish mothers! I recently read about this in a study or an article. They would rather send their kids to a football school, where they learn to dribble, because they have dreams of their sons becoming strikers, instead of encouraging them to learn something worthwhile -- a trade, or math or languages. Instead, it's football! That's supposed to be Europe? Are we supposed to prevail in the world market by watching each other play football? And we're supposed to pay for that?"

"So it's a cultural problem?" "Absolutely," says the Dutchman. They toss sentences back and forth at each other like actors in a revolutionary drama.

Saddled with Debt
"Look at me, for example, Johan. I'm a student. Just because I happen to be Irish, I'm supposed to be responsible for some of the government's debt, and suddenly I'm saddled with thousands and thousands of euros in debts? What about the retirees whose pensions have been cut? What about the students who don't have rich parents? We are supposed to tighten our belts for a party to which we were never invited."

"You have to start somewhere," says the Dutchman. "That's true." Karl uses his fingers to list his points. "We have to start by reforming the tax system. The big companies that were lured here with low tax rates need to pay more now. By the way, what's your profession, Johan?" "Banker, uh, consultant," says the Dutchman. "Where do you work?" "I'd rather not say."

"Oh." Karl reaches for his glass and empties it. "I have to get going," says Johan. Are Karl Gill, Kostas Dekoumes, Julien Boyer, Paula Gil and Oleguer Sagarra dedicated Europeans?

No -- they don't want more out of life than other young Europeans. Sagarra wants to work as an engineer, somewhere in Europe. Gil doesn't want to be a second-class European or live in a colony of the IMF. Boyer wants a democratic Europe, not one that's run by bureaucrats. Dekoumes wants a real motorcycle. That's his idea of Europe. And Gill wants the same kind of tax system that exists in other European countries, a tax system that makes the rich poorer and the state richer, and everything a little more socialist.

None of this sounds like Jacques Delors, or like the Europe envisioned by statesmen like Mitterand and Kohl. The people of Europe looked on as these men shaped their policies, and they enjoyed the benefits. Now, as things become less comfortable and possibly more expensive, the European idea is being reexamined, precisely by those whose future is being influenced by this idea more than ever before.

Why Europe?
And now those who in the past showed very little interest for the European Commission, the Parliament and the bureaucracy in Brussels -- because they assumed that they weren't expected to be interested in these things -- are reading daily about the strange things European statesmen have done with the European idea: things like circumventing their own regulations, falsifying statistics and breaking promises. They are responsible for an impressive number of rule breaches and untruths. Can anyone blame Europeans who, in the last few months, have learned more about Europe than they ever wanted to know, for being distraught -- to put it mildly -- over what their governments have done in their names and with their money?

The real paradox is that it is precisely those young Europeans in Lisbon, Barcelona, Lyon, Dublin and Athens who need a strong European Union. They need a union that redistributes work in Europe; that monitors the banks and speculators in different ways than national governments can; that regulates the handling of nuclear power, nuclear waste and energy policies on a European level; and that coordinates climate protection for the countries. In short, they need a union that exists not because political romantics from the postwar generation want to keep it alive. They need a union that exists because the Europeans of tomorrow see it as their greatest opportunity.

But perhaps the entire historic project has already been brought to completion. The European idea has made it possible to reconcile the destroyed continent after the war and get it back on track. Europe was helpful in surviving the chill of the Cold War era. The EU was able to help process the fall of the Berlin Wall and heal the most serious wounds of the division between East and West. With its two waves of expansion eastward in 2004 and 2007, it contributed to providing a continent -- long divided along artificial lines -- with a common form once again. The Balkan countries will still have to be brought home to Europe, and so will Ukraine, perhaps. The prospects for Turkey aren't looking so good.

But for the moment, the real question is this: Do Europeans recognize why they need Europe?

Could Italy go the way of Greece?
by Kathleen Brooks -

Italy has hogged the headlines in recent weeks mostly for political reasons rather than financial ones. But in a few months we may be concentrating on its fiscal woes and unsustainable debt burden.

Last week credit rating agency Moody’s announced it was putting Italy on review for a possible downgrade to its Aa2 credit rating. These reviews typically last three months or so, and although a downgrade would still leave Italy at the higher end of investment grade, it is not good news to be sliding down the scale, especially when a sovereign debt crisis is raging further along the Mediterranean coast.

The reasoning behind the move by Moody’s was firstly challenges to economic growth, and secondly difficulties in bringing its debt levels down. A lot of attention has focused on a Greek default hitting Portugal and Ireland hardest, but Italy has a public debt-to-GDP of close to 120 percent of GDP, thus it is extremely vulnerable to investors dumping its debt, which would push up interest rates and make its debts too expensive to service.

Nearly a quarter of all debt issued by the euro zone comes from Italy and yet its growth remains stubbornly sluggish. Its average quarterly growth rate since 2000 is just 1 percent. Italy now risks becoming a long-term low growth/high debt economy. Although its budget deficit is at a manageable level just below 4 percent of GDP, it has more than €300 billion of debt maturing this year and needs to get access to the capital markets in order to fund these bond redemptions.

So what is Italy’s problem? It is mainly an issue of low productivity and rigid labour laws. Its labour laws are some of the stiffest in the developed world. Article 18 of the Labour Code states that after a short probationary period, an employee fired from a company with 15 or more employees can bring a lawsuit against their former employer. Although they have no right to reinstatement, they would be entitled to compensation ranging from 2.5x to 6x monthly pay. That explains the low unemployment rate, since firms can’t fire inefficient or sub-par workers without a hefty cost.

Its work week was also shortened in 1997 to 40 hours from 48 hours. Italy’s competitive record is dismal and it is already trailing in the wake of fast-growing, innovative emerging markets. If there was a crisis in Italy’s sovereign debt market it’s easy to see how its economy could stagnate for a generation or more.

Investors in credit markets are forward-looking and they can see that this situation is unsustainable. If labour laws don’t change or Italy’s public debt burden is not cut then it may face both a sovereign credit rating downgrade and the wrath of the bond market vigilantes. There is a caveat to this, and Italy isn’t in hot water when it comes to exposure to other peripheral nations. Its financial sector has less than €40 billion exposure to Greece, Ireland, Portugal and Spain combined. In contrast, French banks are exposed to Greek debt to the tune of €60 billion.

Likewise, its budget is forecast to have a deficit of less than 4 percent this year, one of the lowest levels in the euro zone, and private debt levels are also manageable. But even though this might mean that Italy is out of the immediate firing line from bond investors – there are easier targets including Greece, Portugal and Ireland – it is difficult to muster much enthusiasm for the third largest economy in the currency bloc.

Italy’s structural economic deficiencies are only expected to get worse. By 2030 there will be less than two workers for every retired person aged 65 years or over, that compares with three today. If you think productivity is low now, imagine what it could be in the future. It has one of the fastest aging populations in Europe and its pension costs are set to continue to expand rapidly. This is the major challenge it faces in the coming decade. Without easy access to the capital markets it is easy to imagine a Greek-style situation for Italy as it drowns in its enormous public debt.

Italian Banks Plunge Amid Concern Debt Contagion Spreading
by Marco Bertacche, Elisa Martinuzzi and Francesca Cinelli - Bloomberg

UniCredit SpA and Intesa Sanpaolo SpA slumped in Milan after a review of lenders’ credit ratings spurred concern the European debt crisis may spread just as banks face scrutiny from regulators over capital levels. UniCredit, Italy’s biggest lender, led the drop, tumbling as much as 8.9 percent. Intesa Sanpaolo, the country’s second- largest bank by assets, slid as much as 7.2 percent. Both stocks were briefly suspended.

Moody’s Investors Service said yesterday it may downgrade 13 Italian banks because they would be vulnerable to a cut in the government’s credit rating. The firm said last week Italy’s ratings may be cut because of slowing economic growth and the potential for the sovereign crisis to drive the country’s borrowing costs higher. Italian banks are also being stress- tested by European regulators next month to assess whether they have sufficient capital.

“The downgrade by Moody’s may be furthered to encompass the long-term debt,” said Thomas Laschetti, a trader at Tullett Prebon Ltd. in London. “That is enough to create the right environment for deleveraging exposure to the sector.” Officials at Intesa Sanpaolo and UniCredit in Milan declined to comment. The banks pared some of their losses by 2:02 p.m. Intesa was down 2.6 percent at 1.74 euros while UniCredit fell 5.3 percent to 1.37 euros.

'Sensitive' to Rating
“These banks are sensitive to even a moderate change in the government’s credit standing and its ability to support the country’s banks,” Moody’s said in its statement. Prime Minister Silvio Berlusconi said today the country’s banks are “well capitalized.” Speaking at a summit of European leaders in Brussels, he said he wasn’t worried about Moody’s comments about the country’s banks.

The European Banking Authority yesterday updated its stress tests to take into account extra trading losses that banks may face on their holdings of sovereign debt from crisis-hit European Union countries including Greece. Intesa and UniCredit are among the five Italian banks that are subject to the tests.

Italian banks are also seeking to raise money from investors to bolster capital. Unione di Banche Italiane ScpA, Italy’s fourth-biggest bank, fell as much as 5 percent to 3.628 euros. The lender may struggle to lure buyers to its 1 billion- euro ($1.4 billion) rights offering, which closes today. The bank is offering investors eight new shares at 3.808 euros for every 21 held.

'Struggling' Economy
“There is still uncertainty surrounding the sovereign risk and bank capital requirements,” said Paul Vrouwes, who helps oversee about 20 billion euros of shares at ING Investment Management in The Hague. “Italy’s economy is struggling more than other nations.” He doesn’t plan to buy UBI stock.

European Central Bank President Jean-Claude Trichet said this week that the link between the region’s debt crisis and its lenders is “the most serious threat” to financial stability in the European Union. EU leaders are meeting in Brussels, seeking to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. They are in talks to avert a Greek default, while preparing a second bailout.

Banca Monte dei Paschi di Siena SpA, which is seeking to raise 2.2 billion euros in a rights offering that runs through July 8, fell as much as 5 percent to 51.95 euro-cents, a record low. The shares are available for 44.6 euro-cents in the offering.

The price of Wall Street’s black box
by John Gapper - Financial Times

JPMorgan Chase this week became the second Wall Street bank after Goldman Sachs to face a large fine and a stiff warning over its sales of mortgage-backed bonds in the last days of the housing bubble in spring 2007. Others are to come, perhaps including Merrill Lynch, Deutsche Bank and Citigroup.

It is no coincidence that the Wall Street banks have lobbied with such energy against efforts to force trading of more derivatives on to exchanges and through clearing houses. They do not want the black box of fixed income and derivatives trading, which has provided so much of their profits for so long, to be exposed to plain view.

The failure of US prosecutors to secure criminal convictions against any senior bankers or hedge fund managers apart from Raj Rajaratnam is a let-down. They have been defeated by the difficulty of proving fraudulent intent in the deceptions that flourished as banks struggled with mortgage losses.

Yet JPMorgan’s battle with the Securities and Exchange Commission, in which it paid $153m to settle civil fraud charges, carries an important lesson. The behaviour revealed in the JPMorgan and Goldman cases is a product of the conflicts of interest embedded in how integrated Wall Street banks work. As they say in Silicon Valley, it’s not a bug – it’s a feature.

That feature is inherent in most of what banks do, but the opacity and complexity of credit derivatives – especially mortgage-related securities such as collateralised debt obligations – let deception, overpricing and ultimately fraud flourish. From this black box came the bulk of revenues and bonuses.

In some ways, JPMorgan’s case is less serious than that of Goldman. It has been wilier in keeping its head down, its fine was lower ($133m versus $300m) and the SEC did not impose such serious conditions on the settlement. There was no equivalent of Goldman’s “Fabulous Fab” Tourre and his lurid e-mails.

But the difference is a matter of degree. In other ways, the case against JPMorgan is a carbon copy of the Goldman one. The SEC caught both of them failing to be honest with the investors to which they were selling securities about the involvement of a hedge fund in designing the instruments.

That was the alleged fraud (neither bank conceded it) but, to my mind, JPMorgan and Goldman’s most egregious behaviour came when they found themselves stuck with the flawed securities in spring 2007. Both scrambled to find gullible investors on whom to dump the problem.

In JPMorgan’s case, that meant passing on $150m of mezzanine securities (soon to become worthless) to, among others, Thrivent Financial for Lutherans, a faith-based life insurer from Minneapolis; two Taiwanese life insurance companies, Far Glory Life and Taiwan Life; and Security Benefit Corporation, a life and pensions company from Topeka, Kansas, which woke up to find it wasn’t in Kansas any more.

The internal e-mails urging the JPMorgan sales team to pass along its securities (“We are sooo pregnant with this deal, we need a wheel-barrel [sic] to move around”) are like those at Goldman at the same time. “Things we need to do ... Get out of everything,” Dan Sparks, Goldman’s former mortgage head, noted after a call with another executive.

The Wall Street defence for this kind of behaviour is that these were sophisticated investors that were qualified to make up their own mind about mortgage securities – even immensely complex ones. JPMorgan has been told to pay the money back not because it was inherently wrong to sell securities it no longer trusted but because it did not make the right disclosures.

Even if the securities had been labelled correctly, however, there was something wrong about the entire way that Wall Street behaved. These institutions were not widows and orphans themselves but they represented ordinary people’s retirement funds and the losses they suffered would, had the financial crisis not occurred and investigations been made, ended up as a levy on annuities and pensions.

The synthetic CDOs that caused the trouble were expensive bespoke instruments that were very profitable for the banks involved – JPMorgan was paid $19m to structure and market the Squared CDO alone before it got stuck with $880m in unanticipated losses. Their complexity meant that only a few professionals could grasp them – most “sophisticated” investors went by credit ratings.

For investors, it was akin to being informed by a mechanic at the local garage that your vehicle needs expensive new parts and servicing. The garage has an incentive to charge you as much as possible and the information asymmetry between professional and customer makes it easy to pad the bill.

As long as the structure encourages it, investment banks will place their interests above those of their clients, no matter what they say. That is one reason why the US and European reforms to push as much of the derivatives market on to to exchanges and clearing houses – and into sight – are vital.

It also reminds me of the way the City of London was organised before the Big Bang deregulation in 1986, when stock brokers were separated from stock jobbers (what would now be known as marketmakers). That was partly to ensure that brokers did not pass on shares to customers to avoid losses themselves. It seems old fashioned, and was ended by the Thatcher government in an effort to make the City competitive with Wall Street. But it had virtues that, reading the SEC’s settlements with JPMorgan and Goldman, make me nostalgic.

UK banks ordered to reveal true exposure to Greece
by James Moore - Independent

Britain's banks may potentially have huge hidden exposures to beleaguered Greece through their lending to other institutions, Mervyn King warned yesterday.

The Bank of England Governor was speaking as he unveiled its latest Financial Stability Report, which highlighted the eurozone debt crisis as the biggest threat to Britain's financial stability.

But he also tightened the screw on bonuses, saying: "When the good times come that is not time for banks to relax and pay out big dividends and bonuses." Rather, he said, they must work on building up their reserves.

Mr King added that, while UK banks had "remarkably low" direct exposure to Greece, "experience has shown that contagion can spread through financial markets especially when there is uncertainty about the precise location of exposures". The Governor said: "A UK bank could have lent to a bank that itself had lent to a bank that in turn was exposed to sovereign risk."

He highlighted the "heavy exposure" of Britain's banks to their equivalents in Germany and France, which have much greater involvement with Greece, and could spread the contagion of a Greek default back here.

According to the report, British banks' combined claims on France and Germany represent about 130 per cent of their core tier-one capital, with close to half accounted for by loans to French and German institutions. But asked if Greece could become "the next Lehman Brothers", Mr King said: "It doesn't have that much in common other than that it's a mess."

The same fears over hidden exposures could be true of other teetering economies at Europe's fringes such as Portugal and Ireland, both bailed out, or risky economies such as Spain. As a result of the concerns, the Financial Services Authority will order British lenders to come clean about their true exposures to financial crises around Europe as part of their regular reporting.

This was one of six recommendations made by the Bank's new Financial Policy Committee, all of which were agreed unanimously and accepted. On the issue of bonuses, Baron Turner of Ecchinswell, who sits on the committee as chairman of the FSA, said he would not cap how much banks could pay out, arguing that each company's circumstances would be different.

But both he and Mr King said regulation would play a role in forcing banks to focus on building up reserves when their earnings are strong. They said they wanted to be sure banks which followed regulators' guidelines did not suffer if rivals chose to ignore the rules and began making bumper payouts.

Further recommendations included a call for the FSA to extend its work on loan forbearance, where lenders ease pressure on corporate and individual borrowers who find themselves under stress. The committee wants banks to set aside cash to cover them if these loans ultimately default. But Mr King stressed that he did not want to see banks reining in forbearance – a factor which led to a low level of defaults and repossessions during the recession.

New Jersey Assembly passes landmark employee benefits overhaul
by Chris Megerian and Jarrett Renshaw -

New Jersey lawmakers tonight voted to enact a sweeping plan to cut public worker benefits after a long day of high-pitched political drama in the streets of Trenton and behind closed doors.

Union members chanted outside the Statehouse and in the Assembly balcony, and dissident Democrats tried to stall with amendments and technicalities. Although they successfully convinced top lawmakers to remove a controversial provision restricting public workers’ access to out-of-state medical care, they failed to halt a historic defeat for New Jersey’s powerful unions and a political victory for Republican Gov. Chris Christie.

"Together, we’re showing New Jersey is serious about providing long-term fiscal stability for our children and grandchildren," Christie said in a statement released after the vote. "We are putting the people first and daring to touch the third rail of politics in order to bring reform to an unsustainable system." Christie and Republicans banded together with Senate President Stephen Sweeney (D-Gloucester) and Assembly Speaker Sheila Oliver (D-Essex) to advance the bill despite opposition from the majority of Democrats who control the Legislature.

More than 8,500 protesters, the most this year, poured into Trenton this morning with signs, speeches and their trademark inflatable rat. But most had dispersed by the time Democrats emerged from their hours-long caucus meetings where they debated the bill’s details and a separate budget proposal. The Assembly convened for a vote at about 6:15 p.m., more than five hours late, and lawmakers delivered speech after speech on the bill for nearly three hours.

"We cannot afford to put off these needed reforms for another year," said Assemblyman Lou Greenwald (D-Camden), a sponsor. "Kicking the can down the road and doing nothing will only require more sacrifice from taxpayers and public workers in the future."

The bill passed the Assembly 46-32 and will be sent to Christie’s desk for his signature. Fourteen Democrats voted for the bill, while 32 opposed it. After the vote, protesters in the balcony shouted "Shame on you!"

Unions have blasted the bill for ending their ability to collectively bargain their medical benefits. Health care plans for 500,000 public workers would be set by a new state panel comprised of union workers and state managers, rather than at the negotiating table. A sunset provision would allow unions to resume collective bargaining after increased health care contributions are phased in over four years.

In addition, police officers, firefighters, teachers and rank-and-file public workers would all pay more for their pensions and health benefits. Supporters of the bill say the state needs to cut costs because the pension and health systems are underfunded by more than $120 billion total. The Christie administration estimated the bill would save $3 billion in health benefits over the next 10 years and $120 billion in pension costs over 30 years. Much of the pension savings are from the controversial elimination of the cost-of-living adjustments for retirees, which unions have threatened to challenge in court.

Christie, who has staked his reputation on shrinking government costs, has called the bill a model for the the country. New Jersey is one of 23 states that have asked workers to pay more for their pensions since the Wall Street crisis in 2008, according to the Pew Center on the States.

The Assembly passed the bill much like the Senate did on Monday. Democrats voting for the bill have been either from South Jersey and allied with that region’s power broker, George Norcross, or from North Jersey and tied to Essex County Executive Joseph N. DiVincenzo Jr. Most Democrats denounced the bill, and Assemblyman Joseph Cryan (D-Union), the Assembly majority leader, called it "one of the most stunned and disheartening times" of his career.

Today's union protest, like other recent demonstrations, did nothing to stop the bill. But it did highlight the growing fissures in the state Democratic Party. While Sweeney and Oliver were pushing the bill, the chairman of the state party, Assemblyman John Wisniewski (D-Middlesex), was rallying protesters with two-dozen other Democrats. "I represent the Democratic wing of the Democratic Party," he said. Bob Master, a leader in the Communications Workers of America, said Democrats should not be "collaborating" with Christie.

Later, on the Assembly floor, Republicans heaped praise on Oliver while her Democratic colleagues condemned the bill. Assemblyman Joseph Malone (R-Burlington) said she showed courage, saying "I’ll remember your actions for the rest of my life."

Sweeney, who has urged cuts to public worker benefits, said the legislation would help save the state’s retirement system. "Nobody is talking about how we protected 800,000 people’s pensions," he said today. "I don’t apologize for that."

Over the years, lawmakers and local leaders from both parties have offered increased benefits to public employees, often in exchange for political support. But even as benefits improved, the state and municipalities failed to meet its financial obligations. Since 2004, the state has not made $15.11 billion in required payments to the pension funds, while the municipalities have skipped $1.9 billion. Public employees, meanwhile, have fully paid their required contributions.

As a result, the state has a $54 billion shortfall in its pension system, among the highest in the nation. New Jersey’s health benefit system is in even worse shape than the pension fund and is the most poorly funded in the nation at $66.8 billion in the hole, according to the Pew Center on the States.

Michio Kaku: Fukushima - "They Lied to Us"
by CNN

Cleanup will take 50-100 years


el gallinazo said...


"If you find a dead animal, thou shalt not sell its meat to members of our tribe. But selling its meat to strangers is just fine."

Bernie Madoff must have read the Classic Comic in Bar Mitzvah school and skipped that chapter.

(Though road kill does tend to mature with age :-)

Anonymous said...


The decision by the German constitutional court should have come out in February. I wonder what the delay could have been...


el gallinazo said...


The justices are probably in hard price negotiations with the troika. These delicate things take time.

jal said...

Good day Ash!

A few variations on your essay. :-)

Countries such as Russia, Japan and China are simply not big enough to provide any credible backstop to the entirety of Europe,

(... China has unveiled that it is now preparing to go ahead an buy Hungarian bonds. ... Look for China to keep buying up ever more European debt as it intertwines its fate with that of the rest of the central planning cartel...

I repeat:
China has a lot of US$ that it can use, through shell companies and institutions, to affect the future of the EU.

Diversification, control of assets, and improving cash flows is an objective that is not foreign to China.

I’m sure that China is not happy that it has so many of its eggs in the US market.

Getting involved deeper in the EU will prolong the shell game longer than expected and give China more control.

Keep your eye on the bouncing Chinese ball. The game is not over until China says so.)

... repeatedly stop at the U.S. Treasury and USD markets and collect their "Go" money.

(China has the biggest pile of “Go money” which it is using to buy income producing assets)

... there is very little cash to go around.

( except by China)

... Once you are comfortable with your specific level of  preparation, then you should begin looking for places to store excess currency wealth long-term. There is little doubt in my mind that physical gold is the place that generally towers above all others...

(wrong! This belief is a recent development of our social and economic structures. Accumulation of gold or dollars is not a good way to preserve wealth. What is important is to obtain control over producing assets -cash flow. Once you have secured the cash flow, the value of the tokens are NIL.
You can bury the tokens in the ground at your funeral.
Its value can only be used as a tokens during times of surplus production, (of food), to soak up the surplus before it rots. This is a good way to use idle workers. They can be used to make a monument etc. and to create non producing assets instead of thinking about rioting and trying to find ways to compete with your success full accumulations of income producing assets.
Doing anything else with the tokens will destroy the economic stability of the society.)


scandia said...

@Ash, Your argument " makes sense" to me:)
Love the Voltaire quotes!

el gallinazo said...


How do you define "cash flow" in a Zimbabwe like hyperinflated economy where an alternate, reserve fiat currency no longer exists?

Greenpa said...

So, gosh, we live in the age of the google. It just took a little more motivation from El Gal, and I googled a searchable Bible. Took me like 30 seconds. King James.

Deuteronomy 14:21

"21: Ye shall not eat of any thing that dieth of itself: thou shalt give it unto the stranger that is in thy gates, that he may eat it; or thou mayest sell it unto an alien: for thou art an holy people unto the LORD thy God. Thou shalt not seethe a kid in his mother's milk."

The kid seething bit is of course the basis of the two sets of dishes, and vast quantities of rabbinical argument. Strange no one argues about the biggest chunk of that verse. Or even remembers it.


Greenpa said...

So, Scandia; "thou mayest sell it unto an alien" - in case you're inclined to do a little traveling in the Levant- you know what to expect on the menu... :-)

el gallinazo said...

"Thou shalt not seethe a kid in his mother's milk."

As it stands that always struck me as both a nice sentiment and a prohibition against greed based double dipping, so to speak. Killing the kid of a nanny goat is bound to create hard feelings, but then milking her to add to the stew is a bit too much. Insult to injury. Too bad Lord Blankfein didn't get the message when he created doomed CDO's out of rancid, suicide cabrito, which he then touted to only his best customers, and once sold, shorted. That certainly ain't kosher. But then the news clippings didn't report if his customers were from his tribe or not.

But hey! Another line from the Bible. "If you lie down with dogs you're gonna get up with fleas" Kings 22:34

Now boiling a chicken in its mother's milk is another story.

Phlogiston Água de Beber said...

@ jal

I found your thoughts interesting. A little elaboration on the notion of acquiring producing assets might be helpful. The reference to cash flow combined with tokens worth NIL seems contradictory. Is there a temporal shift implied? Are you saying that under the current economic system such enterprises should yield a cash flow, which will diminish post-collapse as cash loses its trade mediative appeal.

I'm just trying to figure out if we are on about the same page here. In the Enlightened world, money and power are largely interchangeable. In the Dark world of culturally devastated societies following the collapse of empire, power is represented by people under one's control. Their feal mostly pledged in exchange for the bare necessities. Paying them in some currency is the last thing a feudal lord would want to do. How ya gonna keep'em down on the estate when they've got coins jingling in their pockets?

Some residual amounts of currency will be needed or at least wanted by the lords to mediate some exchanges among themselves and their overlords. Is this approximately what you are thinking?

Skip Breakfast said...

Really valuable insights in this article. A lingering question still troubles me:

TAE has emphasized many times the foolhardiness of "timing the market." That is, those who think they can get out of the market almost invariably end up getting fleeced by "insiders" who are better able to extricate their money before ordinary investors get around to it.

TAE also argues that dollars are likely the safest "asset class" in the unfolding scenario.

But TAE (including this article) has also argued repeatedly that there is an end-game to the dollar, and that gold will be a superior store of value.

My concern/question then becomes, practically speaking, aren't we then trying to "time" another market--in this case the "top" in the dollar? We ultimately have to "get out" of dollars. But our timing has to be quite impeccable to avoid getting fleeced by more powerful, nimble operators. And so doesn't that bode well for anyone who CAN afford to invest in gold NOW/SOON (even if it falls to some unknown value ($200? $1200?) over 10 years, given that the fiat system will invariably collapse at some indeterminate point and gold will rise again).

I so understand the value in ensuring one has fiat capital to provide for basic necessities in intervening 10 to 20 years. I'm just afraid of trying to time something knowing full well that timing is a fool's game. Maybe it's only going to be 8 years? Five years?! Given our inability to predict precise market turns, all these dates seem plausible, even if the end game is relatively certain.

TAE has argued that those who can afford to hold gold for 10+ years might not be so foolish to buy it at its inflated price right now. I just wonder, if the fiat collapse is inevitable within 5 - 20 years, then EVERY individual under 50 should still be accumulating a little bit of gold along the way, even at prices that are sure to go down. Because who knows where the top/bottom of these markets (dollar:gold) might be. Eventually those gold values will return.

Fair enough--it's advisable to wait a year or two, perhaps, before grabbing gold. But I'm worried about trying to perfectly time super-cheap gold at a super- inflated dollar.

el gallinazo said...

Skip Breakfast

A very well reasoned post and a pleasure to read. Stoneleigh deals with the precious metal question in her lifeboat primers, and comes to the same conclusions that Ash does in his rather more detailed presentation today.

As to timing on speculative asset classes, she says that if you are gambling with money you aren't prepared to throw away, it is better to divest yourself years before the collapse than a day to late. When the markets collapse, as with all Ponzis, it will be very rapid, and since the insiders control the machinery of the market, when they see the handwriting on the wall, (or more probably pull the plug out of the drain), they are going to make sure that it is their equities that are converted first. Others will be just pushing on the sell key on their PC's with nobody home on the other end.

As to when to buy your stash of gold? The point that Stoneleigh and Ash both make is that gold will devalue against nominal dollars during the great crash and deleveraging. Many holders of gold will be forced to sell it to avoid debts, margin calls, and kneecapping, or buy necessities of life, because during the collapse, it will be the one thing that people with money will be interested to buy. Nobody with money is going to want to buy your plasma or that 55 T-Bird that was worth $100k last year. But since money will be scarce, the price will go down in nominal terms. But when to buy?

To paraphrase St. Morgan (JP), I made my fortune by buying and selling in the 30-70% range. I never tried to buy at the cheapest and sell at the dearest.

Gold will be one of the first material assets to start to recover, along with the necessities of life. So the answer would be just to watch and wait. When the deleveraging is well under way and gold starts to see some upward if jagged support, then it might be time to buy in. In Ponzi situations, the upwards are usually much more gradual than the collapses. And the perfect is the enemy of the good.

scrofulous said...


If you are going to do anything redoing this site, how about structuring it like the Oil Drum. Reading down it, particularly today, looks like a fric and frak reunion.

Needs a bit of diversity.

Alfred said...

Money Market Mutual Funds (MMMFs).


These funds hold about $10 Trillion.

Mass withdrawal from MMMFs caused Bernanke to warn that the economy would disappear within a week without the $750 Billion bank bailout.

How Safe Now?

Didn't the Governmenrt pass a law giving it the power to feeze withdrawal from these funds???

I've got my 401K cash in an All-US Treasury Bill MMMF from Fidelity. Is this at risk?

Phlogiston Água de Beber said...

@ Newspaper Shoes

Of course your money is at risk. Everybody's money is at risk. Oh wait, I'm sorry, you probably wanted to know how MUCH risk and how soon you're going to lose it. I'm afraid that is one of those questions on which even the best of crystal balls tends to get pretty foggy.

The thing to keep in mind about 401K is that it was never meant to protect YOUR wealth. It was invented to pump a stock market bubble and it was remarkably successful. Now with fewer people employed and far fewer employed well enough to be offered a 401K and a wage high enough to be able to put some in, it is all the PPT can do to keep the market from falling into the sewer. I think this does not bode well for 401K holders. Or other living things for that matter.

Alfred said...

Regarding my US Treasury Bill Money Market Mutual Fund from Fidelity:

I can't liquidate my 401K while I'm still employed. That's not permitted.

I don't contribute any money, but my employer puts in some cash every month regardless. That adds up over time and I don't want to lose it.

I have a 401K account that allows me maximum investment flexibility. I can invest in pretty much anything.

My question:

Should I keep my money in all US Tresasury Bill MMMF. Will it be safer than most MMMFs since it's investing in 1 and 3-month TBills rather than bank commercial paper?

Or, should I just buy the treasury bills directly and skip the whole MMMF.

Josh said...

I'm a gambler, and I like my fancy clothes.

Anybody else ready to short this mother while the Hindenburg burns?

I've got my shares of SH and SDS all lined up and ready to go.

Anybody else want to take a ride?

jal said...

@ I. M. Nobody

I want you to imagine that you are the ruler of a rich city state 3,000 years ago.
There exists tokens to facilitate transactions/trade. Each token represents a value as determined by decree. (A list that you made.)

At every harvest, you get a portion of the harvest or some tokens. ( After all you are the ruler)
You also own or control all kinds of business enterprises that can generate tokens or consumable goods.

Soon, you will have all the tokens in your vaults as well as more product than what you and your entourage can consume before it goes bad.

( Horrors of horrors, surpluses going bad and being lost to vermin.)

Your option are to feed the people from your stock pile of produces in exchange for activities that you want done.

You could also give them tokens for their activities performed for you and let them exchange those tokens from your stockpile.

No matter what you do you will always end up with the greatest stock pile of produces or of tokens.

You can only use you tokens to obtain produces when they are available. That would not be when there is a crop failure.

If I recall, there was sound advise given to a king that he should store produces in years of plenty for the years of scarcity.

In order for the tokens to keep their value over a long period of time, it is necessary to keep the supply constant. That is why you control the mining activities, (gold) for the production of your tokens.
It is also why you use your stash of tokens for state project only during years of surplus harvest.

As long as the balance of tokens to produces are keep constant the economical activities are stable.

Since all tokens end up into your coffers they have no value to you as a symbol of wealth accumulation.

Your wealth, as ruler, comes from diverting produces into your granaries. Without having a continuous stream of produces or tokens you will be poor.

That is why believing that tokens/gold is a good way to store wealth is a recent development of our social and economic structures.

Again, wealth come from the constant inflow of produces.

For everyone else, the stash of tokens will be only as useful and valuable as decreed by the rulers.

In our time, China has the biggest stash of tokens and is scrambling to get rid of it by buying anything that will produce a stream of goods into its granaries.

In our time, an emergency kit full of food etc. will have more value than tokens. The tokens would be worthless because there is nothing that can be purchased in times of scarcity.

In our time, Tokens based on future production are worthless if there is a strong probability that there will not be any future production.


Blackbird said...

Hello everyone,

For those who don't know me, I'm by far the best prognosticator here.

I told people to buy back in fall of 2010. I told them to buy after the greek fluff pieces last Spring. I told them to buy in the fall.

My portfolio is up like a rocket ship.

My husband and I were once doomers. Now we see that all will be taken care of.

Now once again I offer you timing.

Buy Now. Buy the fear. Buy the hunger. Buy some stocks for the long haul ahead. The future is bright and dewy.

Alfred said...

Gold vs. Kentucky Dirt

Kentucky is a better place to invest your dollars as a medium to long term inflation hedge.

What do I mean by Kentucky?

Well anything associated with the very economically depressed coal regions of Eastern Kentucky Appalachia.

Why? These are energy rich regions with coal resources that aren't tapped at the present time due to environmental regulations and a focus on green energy. Population and propserity has been leaving this area for the last 50 years. Real estate (commercial and residential) are very very depressed.

In other words, this area is near a market bottom (unlike coastal California, for example).

In the medium to longer term, as economic desperation grows and our national economy turns inward, we'll re-tap those energy supplies.

Dirty and Dusty coal mining will replace hotel and restaurant management as a meaningful source of employment. People will flock back to these areas for employment.

How to invest?

Consider residential or commercial property in economically depressed but coal rich Kentucky counties.

Consider Harlan County:

29% poverty rate vs. ~12% nationally.
$18000 median income

Caol Resources: 6.7 billion tons of economically extractable coal.

You can currently buy property here for dimes and nickels. As deflation progresses, those prices will fall to pennies.

At that point, I'd begin to diversify out of my dollars and into some residential and commercial real estate in Harlan County Kentucky.

That Kentucky Dirt will be more valuable than shiny metal.

el gallinazo said...

This is a must read interview. Best analysis of Bernanke and Gross ever.

Elliott: How should we invest in this environment - when we take into account the Fed’s huge interference in the markets?
Lee: Think like a criminal. Look, it’s a matter of knowing what the Fed’s next move is going to be, and knowing the investment implications.


Ilene: So the Fed knew the money they gave to the Primary Dealers would end up in the stock market. Do they have an agreement with Goldman Sachs, like “hey we’re going to print you this money and we want you to buy stocks?”

Lee: Look, Brian Sack, the head trader for the Fed, sits down with the Primary Dealer traders every morning before the NY markets open, and they have a conference call. Every morning. The Fed makes no secret of this, it’s all on the NY Fed website, the “Fed points.” They describe the whole thing.


Ilene: What do you think about Bill Gross shorting Treasuries, is that going to work out for him?

Lee: William the Gross. Watch what he does, not what he says. The guy is a world class card player. For any public pronouncement he makes, generally, you have to consider the opposite. Think like a criminal. He’s the Godfather. When Gross comes on TV, I hear the Godfather music playing in the background.

ben said...

thanks bluebird for finding imn's debt bomb story. enjoyed it again very much. and I don't think I ever thanked you months ago when I wondered aloud about greyzone and you provided an update. thanks for that, too.

scandia said...

@Cheryl, I don't share your view that fear and hunger is a " bright and dewy future". That said congrats on your investing success.

@All, on the edge of deep sleep last night a wierd scenario arose. It was like a scene in a play. TPTB were sitting around on a cloud looking down at the pissants below, kind of a Bruegel like scene which my unconscious seems to favor. Anyway TPTB, between draws on a fine cigar, were wondering aloud how much shit and abuse the pissants would take. Their plans for social discord and revolution were taking longer than planned to realization.Seems it is harder to break obedience than one might think.

Also re the release of the oil reserves, still trying to make sense of that. Why!Why!Why!
One possibility is TPTB know that the system can no longer function in a way to utilize an oil reserve so might as well use it now as a pawn in the game.

Ashvin said...


Re: China, I was just saying that it cannot backstop the entire EU by itself, or even with help from Russia. As you say, it could use a portion of its dollar reserves for that purpose, but once again that would make it so the EU is going through the UST/USD markets for funding. I also think China will be facing its own increasingly dire internal funding needs (as partly evidenced by the skyrocketing SHIBOR rates), especially since they also must deal with their inflation problems by maintaining relatively high rates. That does not bode well for EU countries banking on China...

Really, it's all about keeping the major EU banks "solvent", and if that can be done despite a few peripheral countries going officially bankrupt (and it can be), then that's what will eventually happen. Of course, the more national assets they can extract through bailouts and austerity programs, the better for them. But they wouldn't survive a week without clear and continuous support from the UST and FED, IMO.

re: Gold as a long-term store of wealth

It is true that physical preps are much more valuable in a collapsing global economy, and I said as much in the article. Some items such as food, medicine, etc. will most likely serve as even better barter money in many areas. But physical gold has many advantages as money that those things do not, and in an environment where some significant networks of trade still exist (which I imagine will be many environments), gold will be a very important way of communicating values.

Anyway, I'm going to be "out of pocket" for a couple days, but thanks to everyone is reading and commenting.

Legendary Armor Rōnin said...

scandia said...

"Also re the release of the oil reserves, still trying to make sense of that. Why!Why!Why!

"One possibility is TPTB know that the system can no longer function in a way to utilize an oil reserve so might as well use it now as a pawn in the game."

You may be over-thinking it.

IMO, the most probable reason is because TPTB want the domestic political relief that comes from lower oil prices, and they don't think that there will be any further major supply disruptions over the next eighteen months. Simple as that.

"Sometimes a cigar is just a cigar" - attributed to Sigmund Freud.

@ Kentucky Rising -

Seems like a mighty smart plan to me, assuming of course that one still has the pennies with which to buy such properties, when the buyin' time comes.

Cheryl said...

"I'm by far the best prognosticator here.

"I told people to buy back in fall of 2010.

"My portfolio is up like a rocket ship."

1) Buying the S&P 5oo back in, say, the end of Aug. '1o, was indeed a good call - people who did so are up about 2o% right now. But you could have cemented your claim to be "the Champ" if you'd "prognosticated" that people oughta sell the S&P 5oo at the end of Apr. '11, thus helping folks avoid an 8% loss since then.

2) "Rocket ship" - meh. A 2o% gain over 1o months is very nice, but hardly earthshaking. Further, if your stock portfolio is a rocket, it appears to have reached apogee, and is rolling over to descend. The markets are trading now at essentially the same levels as they were at the end of Dec. '1o, six months ago.

3) Corn futures are up 5o%, sugar futures up 6o%, and cotton futures up 8o%, over the same timeframe in which you've made your "rocket-like" 2o% gains. You are indeed a better prognosticator than am I, for I didn't recommend to TAE readers that they buy ag commodities last fall, but you certainly aren't the best investor here.

4) Given that TAE's stated timeframe for their recommendations is at least five years, and in some cases a decade or more, it seems a bit premature to be crowing about 1o months' worth of counter-TAE-gestalt success.

For instance, I've had years in which the results of my investment choices were an order of magnitude better than Warren Buffet's annual results. But Mr. Buffet has a six decade record of mostly extraordinary success, which is why he's considered one of history's greatest investors, and I'm just a guy who's had a few good years.

The game en't over till it's over, is what I'm sayin'.

Frank said...

@board OK, I'll call the Kentucky bluff. Do you want to be the newly arrived outsider in a very clannish place, likely occupied by Blackwater goons (google "Coal and Iron Police"), when TSHTF?

I don't.

Frank said...

Another 'don't overthink it' take on the SPR release. This is a coordinated release by 24 (34?) countries in an amount the just happens to replace Libyan production, with oil that each country's refineries can actually use.

Yes, it's late. But Sarko and Cameron (I can see Obama going along readily, even saying nice things, but not twisting any arms) had to line up 24 governments to go along. 60 days to talk the non-Europeans into helping to bail the Euros out of a self-inflicted problem sounds like a realistic estimate.

rcg1950 said...

If you take Stoneleigh's ideas on our probable future at all seriously then these are the most important investments worth making going forward:

Pay down and eliminate your debts. Downsize your material and energy requirements. Put whatever money you have into low risk storage. Learn as best you can how to provide for basic necessities in a localized economy. And above all, help to build highly local relationships and communitities that are capable of supporting the individuals who comprise them.

If you believe "the future is bright and dewy" along the lines of the hi-tech energy intense super consumption globalized economy of the past 50+ years, by all means follow Cheryl's advice.

Legendary Armor Rōnin said...

While I'm at it...

D. Benton Smith said on JUNE 23, 2011...

"The funny thing is, EVERYBODY has the same plan !

"Go short on the whole friggin' world, and hedge that bet by gaming the system as it falls."

Maybe everybody with clue is planning the same thing because that's the best plan.

Seriously, is there a better one?

Frank said...

"OK, I'll call the Kentucky bluff. Do you want to be the newly arrived outsider in a very clannish place, likely occupied by Blackwater goons (google "Coal and Iron Police"), when TSHTF?"

That's why you find an influential local to be a minority investor in your venture, or better yet several such personages, even if you have to loan them the ante.

Also, you'll be an employer in a depressed region; further, if the mines are expanding during a time of national economic blight, there will soon be a lot of newly arrived outsiders around.

scrofulous said...

For anyone interested, here are some Letters from, 'Home on the (Natural Gas) Range'.

Supergravity said...

There goeth a sad and dismal darkness before its body; of which darkness is the moist nature, of which moist nature the Body consisteth in the sensible world, from whence death is derived.

Phlogiston Água de Beber said...

@ jal

That was a very lucid explanation of your vision of the future. I think you will not be far wrong. Though it would be hard to predict how soon that will come to pass. It may be possible that the current generation of goldbugs might get to enjoy their vision of the future for a little while.

@ ben & bluebird

Your interest in the debt bomb story has goaded me into writing a follow on to it. I'll post it after I have checked it over a little more thoroughly.

@ board

Has anyone else noticed that the sock puppetorium seems to operate mostly at night? Makes one wonder if their masters are too damned cheap to get them their own office space. I guess austerity begins at home, so to speak.

seychelles said...

Mazel on your short-term stock-picking luck.
You said
Buy Now. Buy the fear. Buy the hunger. Buy some stocks for the long haul ahead. The future is bright and dewy.
Let's compare net assets in 2015.

el g
Thanks for the Adler link.
Seems logical/rational...
But I wholly agree with RP that financial markets swing based upon variation in social mood and that the
Grand Poobahs undergo the same endogenous mood shifts as the rest of us. So does this mean that we should psyche out their next manipulative ploy and run with it, or run counter to it, or run counter-counter to it...? Is there next manipulative ploy rationally formulated?

Is Foss an Amish name?
I tried talking up action for preemptive self-sufficiency here with a local luminary, a judge who handles probate issues. The idea of people cooperating for the collective good caused him to roll his eyes, shake his head in disbelief and change the topic. Hopefully his reaction is just a disease of small Texas towns.

Frank said...

@LAR I don't think we're talking about the same circumstances.

I read the OP to be talking about someone who had one or two hundred grand and was looking for a doomstead for the immediate family and maybe parents or a sibling or two.

Your version sounds like someone with at least twice the cash, and who knows the area well enough to identify an enterprise that will still, after TSHTF, be able to thow off dividends or paychecks for some junior partners.

1. If you know the area that well, you're not a stranger. I live in rural New Hampshire. Strangers come from Kentucky. Maniacs and Vermonters are our kind of people who live a ways away. We'll know the difference before you leave the general store.

2. If you have that kind of capital/influence, it's worth Blackwater's while to make you an offer you can't refuse rather than leaving you dead in a burning house.

el gallinazo said...

I found the Spiegel article to be essentially a long editorial under the guise of colorful reportage of European youth. The gist of it is that just as more debt is the cure to the debt crisis, more central EU (bankster) control over formerly sovereign countries is the cure to the EU crisis.

Is it really so hard for these educated youth "to get it," or is it that the corporate management of Der Spielgel doesn't want it laid out in clear and concise terms?


Thank you for your input. I will take it under advisement.

Re the Ilene / Lee interview I linked

I wonder how loud the shrieks of pain from Wall Street will have to be before QE 3 starts again? In S&P500 terms, you see 1000 bandied about quite a bit. Or will the Chairsatan bow to precedent and wait for the next Jackson Hole meeting of the elites to take place in late August.

Phlogiston Água de Beber said...


I guess I'm with Frank on the coal enterprise idea. It would be well to consider what the reaction of people like the heirs and assigns of for instance Mr. Peabody, A.T. Massey and their ilk might be to some interloper trespassing on their feudal coal estates. Not likely to end well.

Before anyone decides to take the KFC real estate agent up on his offerings, it would be wise to consider how the coal lords make a habit of rendering homesteads and entire communities unfit for occupancy. There are good reasons why Central Appalachia is so impoverished.

scandia said...

Speaking as a Cdn , after reading this story,,
I need to be reminded why we support the US gov't. I need to be reminded why the Cdn military is fighting in Afganistan, building schools and roads in Afganistan while our native population doesn't get those benefits?
How much lower can an empire go beyond the depths of digging around in an old ladies soiled diaper for WMD? Sorry I misunderstood. They wanted to dig around a old lady's soiled honey pot.I refuse to imagine the procedure!

el gallinazo said...

seychelles said...
el g
Thanks for the Adler link.
Seems logical/rational...
But I wholly agree with RP that financial markets swing based upon variation in social mood and that the
Grand Poobahs undergo the same endogenous mood shifts as the rest of us. So does this mean that we should psyche out their next manipulative ploy and run with it, or run counter to it, or run counter-counter to it...? Is there next manipulative ploy rationally formulated?


Well, first, I don't think you can view the Fed and its policy as a typical, even very large typical investor. They really answer to no one any more other than the international banking cartel - the eight families in Mafia terms. They have the technical skill and the resources (meaning the ability to isolate markets from reality) until such time as they can't. I think a good analogy may be a large, failing dam. It can control the water outflow to the city beyond until such a point as the reservoir rises up and goes over the top or the dam fails catastrophically. As the Adler interview points out, there is quite a bit of strategic stupidity in the Fed Open Market Committee, some of it intrinsic to the idiots who compose it and some from political jockeying. I agree with Adler that the Fed is to a large degree responsible for the political instability in many low income countries. ( Aside - As to the "Arab Spring," the CIA just took the discontent and directed it, but Libya chose to be a tougher nut to crack and is dulling the momentum of the entire project. I see it as quite possible that our Manchurian President, O'bumma will start bombing the Syrian people shortly to prevent civilian casualties. Hope he doesn't drop a bomb on Angelina Jolie in error).

My disagreement with the editors of TAE and Prechter is that I think they had underestimated the ability of the Fed to manipulate markets in the short term. Of course, this is not to imply that they are all powerful. From the beginning of the crises the Fed had to take a triage approach. Once pressure, read the debt crisis, builds up to the point that the dam breaks, their analysis is right on.

For example, Stoneleigh was able to predict the dead cat bounce almost to the day, but, using 1930 as an example, it should have lasted much less than a year. I regard the Fed intervention in the markets as the reason for the "unnatural" prolongation of the dead cat bounce. Furthermore, I am somewhat dubious regarding the value of technical analysis including Elliott waves when markets are primarily being manipulated centrally.

scandia said...

@LAR...but,but,but Geitner said it wasn't a political decision so I took it off my list:)

Phlogiston Água de Beber said...


The most logical explanation for Canuckistani military involvement in Afghanistan and Libya is to validate your claim on a piece of the pie. Also to forestall the likely execution of a classic pincers maneuver by the Idaho, Montana and North Dakota National Guards to encircle Fort McMurray. It seems to be working so far.

I asked the lovely Sara N. Dipity if she could help me find some well chosen words to bring some understanding to the TSA's apparent fascination with underwear, etc. This is what she came up with.

Theater of the Absurd, by the Absurd, for...

Biologique Earl said...

OMAHA, Neb. -- A berm holding back floodwater at a Nebraska nuclear power plant has collapsed.

The U.S. Nuclear Regulatory Commission says the 2,000-foot berm at the Fort Calhoun Nuclear Station collapsed about 1:30 a.m. Sunday:

"The NRC says its inspectors were at the plant when the berm failed and have confirmed that the flooding has had no impact on the reactor shutdown cooling or the spent fuel pool cooling. NRC spokesman Victor Dricks says the plant remains safe."


Gee why don't I feel reassured. :-(

If everything is so hokeydoke why did they build the berm in the first place?

Phlogiston Água de Beber said...


Isn't it just so incredibly wonderful that there is never anything to worry about? Nevertheless, those of us who are fairly regularly downwind of the plant and those living downriver from the plant might perhaps be excused for being just a wee bit worried. Do I look worried? :-S

Mike Tanis said...

Regarding the little old 95 year old lady having her soiled diaper inspected by the TSA goons. As a society you eventually get what you deserve. I feel bad for the individual but have no sympathy for the political point of view which results in this type of foolishness.

Phlogiston Água de Beber said...

The Population and Debt Bomb Story: A Preface of Sorts

The Jungle Jimmy Papers

Chapter 1

Jungle Jimmy was the name my hobo acquaintance had taken for his jungle identity. I hadn't seen JJ in over a year. He had said the stench of the goop ouzing out of the thing they had called the debt bomb was unbearable. I told myself that he and probably all the 'boes had moved on to another jungle. The sight of JJ shuffling along the path toward my house filled me with a strange combination of excitement and foreboding. What unsettling tale might he bring this time?

I brought out some cheese, sausage and a bottle of Bushmills. As he indulged himself, I asked if anything new had happened since I last saw him. JJ looked up with a toothy grin and said oh hell yes, I got plenty to tell ya bout what's gone on at da jungle. I poured us each a few more fingers of whiskey and said I'm all ears.

Ya know dat debt bomb thingy I told ya was smellin' so bad and ya gimme dat stuff ina jar to rub under me nose. Yes, did it work? Yeah, it helped a little, but didn't like it much either. Anyways it stopped leakin' a few days later an rains washed the smelly shit down da crick. Well, that was certainly lucky. So you've stayed at the jungle all this time? Yeah we all liked dat jungle better'n any on da line. But, we gotta leave it now.

I opened my mouth to ask why, but he didn't pause. We gotta leave 'cause a buncha folks what ain't 'boes traipsed in a few days ago and pitched tents. A few more shows up ever day. It ain't a jungle no more. They's been callin' it Obamaville. Though I heard one feller call it Goldman Glen.

What about those bombs? Oh yeah, I almost fergot ta tellya. One night a truck an one dem SUVs roared into camp an loaded dat debt bomb onto da truck. They's jus bout finish when another buncha motors came roarin' toward us. Took off like a bat outta hell dem boys did. One of'em wearin' a fancy suit he was, dropped a case gettin in dat SUV. Strong wind blowin' an papers flew everwhere.

I sets bout pickin' up dem papers when another truck and two cars pull up nex ta dat population bomb. I squatted behind a bush to watch'em. Whilst da muscle loaded dat bomb on da truck I listen to da pencil necks from da cars talk bout da bomb. One of'em said we gotta take dis thing to da experts an see if it kin be made safe. I heard nother one say didn't dem green revolutionaries defuse it years ago? No said the first guy. We don't think it kin be defused. Dat damn fuse wuz design by some evil bastard name of Mal Thews. Built right inta da bomb. No way ta take it out. It suppose ta go off when people ketch up with food supply. Dem green boys figured out how farmers could grow more grains an we thought we wuz safe. But oh hell no! Now we got dis crazy climate ruinin' crops an peak oil makin' farmers stingy wit da fertilizer. The food supply might fall below nuff ta feed people we got now. Dat damn bomb jus might go off. Dat's what dat man said.

I took a hard pull from my glass and let it warm my throat. This was a lot to take in and more than a little hard to believe. I asked if they had said anything about where they would take the bomb. Nope, but dat man did say dat if'n it went off it wouldn't matter where it was. I bes' be goin' now. Gotta ketch dem otha 'boes afore the nex train comes thru. Then Jimmy pulled a package wrapped in cloth out of his bag and handed it to me. Dem's da papers I picked up from dat debt bomb fellers case. Thought maybe you could figure out what they's bout.

I wrapped the remaining cheese and sausage in the cloth from papers and handed it to him along with the whiskey bottle. As he stepped off the porch, I wished him a safe trip and told him to look me up if he came back this way.

scandia said...

@ IMN...your ,"... likely execution of a classic pincers manoevre by the Idaho,Montana and North Dakota National guards to encircle Fort McMurray." has me rolling on the floor! Thanks for the first belly laugh of the day.
As for validating our claim to a piece of the Afgan/Mena pie I would think the bad karma/moral hazard we accrue through the Tar Sands is worth the whole blood baked pie!
Fred does it again. Excellent closing line, " People deserve what they tolerate."

ben said...

JJ said,

"Ya know dat debt bomb thingy I told ya was smellin' so bad and ya gimme dat stuff ina jar to rub under me nose. Yeah, it helped a little, but didn't like it much either. Anyways it stopped leakin' a few days later an rains washed the smelly shit down da crick."

there goes the riparian zone.


IMN - holla!

seychelles said...

el g
Thanks for comments.
Hard to know for sure how powerfully/long Fed has pumped up stock markets but in long haul the manipulation will backfire and recoil will be much worse than if situation had been initially dealt with ethically/honestly (hypothetical concept).
Been waiting for the dam to burst for decades but it just keeps holdin' and holdin'....When the big break comes I think best situation will be swimming in
liquid safe tangible USD. Hopefully Stoneleigh and RP will be able to tell
us when/how to get out of them...if communications/internet remain uncensored and accessible. Only long term solution that seems realistic is many fewer people and lots more trees.

Adam said...

U.S. Dollar-centric deflationists-

Wrong on Gold for 10 years running, but they sure do keep trying...

Alfred said...

Kentucky is The Future:

Reasons to love Kentucky:

1) Great soil...tasty bluegrass good for livestock

2) Energy = coal = eastern and western coal deposits

3) Energy = wood = look at all that forested landscape (Daniel Boone National Forest etc.)

4) Transportation: greatest length of navigable waterways and streams in the contiguous United States. -- we'll be moving stuff by water in the future, and Ky has the advantage here.

5) Real Estate nearing a market bottom. Buy low sell high.

6) Great music

7) Good people -- salt of the earth

8) Don't'll fit right in

ric2 said...

Re: Kentucky Rising

9) No nuclear power plants in the state (although we're pretty much surrounded on all sides)

10) Quarter horses (I have a distinct memory as a kid visiting my cousins in Kentucky watching these "cutting horses" separate sheep from a flock while the rider was not giving command - basically along for the ride)

Pass the olive oil and balsamic for my blue grass salad, please.

Anonymous said...


but the king isn't the ruler, the financiers are the rulers and they have issued debt based money to the king and the king's "wealth" is really debt to the financiers.

what happens to your system when this reality is factored in?

Brunswickian said...

PM Bull - Hope springs eternal?...or...

ogardener said...

Before heading out to Appalachia you may wanna REED this. Pun intended.

jal said...

skilo said...

but the king isn't the ruler, the financiers are the rulers and they have issued debt based money to the king and the king's "wealth" is really debt to the financiers.

what happens to your system when this reality is factored in?
Nothing has changed but the players.


@ I. M. Nobody

I was trying to explain that the flow of goods/money/tokens is more important than what it is presently given. The accumulation, historically, had less importance as a wealth factor for the rulers.

Look at what is happening at present.

China has the biggest pile of "GO money". China has a lot of US$ that it can use, through shell companies and institutions, to affect the future of the EU.

Diversification, control of assets, and improving cash flows is an objective that is not foreign to China.

The game is over when someone leaves the table. For now, China is not willing to end the game.

The "gang of eight" has still too many properties, hotels and houses to generate cash flow.

A few more turns of the dice are still required before control of the game is transfered to the new player.

Learning Mandarin might be a good investment for the next generation.


Phlogiston Água de Beber said...

@ skilo

I'm afraid you've got it backwards. The wealth of the financiers consists of debts owed by the kings, queens and commoners. The wealth of those folks has mostly consisted of the complementary credits. Unfortunately, they did not make wise use of all that credit and cannot payoff those debts. Once that fact can no longer be ignored, the financiers will find themselves impoverished.

Their position at the top of the heap will be taken by people with an even more visceral tendency toward meanness and a greater facility with firearms and other implements of destruction. These people will be the new kings and lords.

The last Dark Age wasn't called that because the sun stopped shining. What went dark was the rule book. The new kings and lords of that era were free to make up the rules on the spot. We are already seeing that post-legal tendency develop in the empire. After the collapse, it will be the norm.

seychelles said...

IM Nobody said

What went dark was the rule book.


Effective money is first and foremost a social lubricant that keeps our civilization machine running smoothly and cool-ly. It can only do so when it is controlled with relative honesty and respected by the majority.

p01 said...


I'm pretty sure no matter how the chinese try and escape the inevitable, they will not succeed.
China will very soon have soooo much doo-doo spread by their own high velocity fan to deal with, that any reserves of any fiat/shiny metals/weirdly crystallized carbon cannot not wash away.
But they will try.

Phlogiston Água de Beber said...

@ p01

Of course China and every other player with liquidity to splash around are working to keep humpty up on that wall. But all they are doing is making the wall slippery. Humpty will fall and all their horses and men won't be able to put him back together.

Sara N. Dipity continues her good work with this link to a very pertinent column by Golem XIV.
Truth, Threats and the IMF

DSK is a bad man, but his replacement is quite evidently an even worse one. Kind of leads one to wonder if that maid might be collecting on both ends.

bosuncookie said...


scrofulous said...

Fed May Buy $300 Billion in Treasuries After QE2

"While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system"

Possibly quite old news to those here who have been listening to Jim Rickards, but the amount is a bit larger than I expected and added to the release of the Strategic oil reserves (in conjunction with oil increases by another 24 countries) that looks like QE3 'synthetic' (or 'sneaky' if you prefer) stimulus to me.

My question is: Will this be enough to keep the stock market smiling ... ask a greek you say?

Incidently just watched the changing of the Zouli infront of th Greek Parliament buildings ... quite interesting.

Got the link to a camera a few days ago, here I belive, but worth for any who did not save it or mised it:

Phlogiston Água de Beber said...

Another view of the Fort Calhoun and Cooper situation.
Nuclear Catastrophe Imminent in Nebraska?

scrofulous said...

A thought about that maturing debt of 300 billion, one thing that has bothered me about it is what was done with any maturing debt before this point? And what did it amount to?

ghpacific said...

Incredible video posted at Max Keiser regarding odious debt solution used by USA to avoid Iraq debt ,now being considered by Greece citizenry, not Popondreau;

Supergravity said...

The tyrant TSA must be abolished; it has consistently shown to be deliberately enacting extremist policies, and many of its employees are evidently affliced by dangerous delusions and chronic terror-psychosis, or are self-admittedly engaged in violent extremism and indiscriminate political persecution under misplaced authority of the TSA.

The outrageous attempt to rationalise the latest affront leaves no doubt; this is a symptom of autogenic political extremism by collective ethical dysfunction which is on the brink of causing persecution atrocities.
If any citizen commits, or publicly rationalises, such criminal misdeeds, so engaging in, or publicly advocating, political violence by the extremist TSA, this would suffice as grounds for criminal indictment and dismissal from public office.
Janet Napolitano, as accountable senior executive officer, if having authorised or publicly condoned said criminal acts, must be deemed a political extremist and is to be removed from office on grounds of severe ethical dysfunction/mental incapacitation.

Ruben said...

This Kunstler article really knocks it out of the park.

Back to the Future | James Howard Kunstler | Orion Magazine

el gallinazo said...


The Fed has almost tripled its balance sheet since August of 2008. See

(This graph is dated Feb so the Fed bs is probably about $300B bigger in the bottom, green treasuries.)

Dropping the QE2 increase, most of the increase is currently in MBS's (sometimes also labeled "Agency Debt" which means F&F MBS's.) Also note the shrinking of the short term alphabet soup (dark blue) and shadow banking (gray). Not to mention the mysterious other (light blue) which Tyler Durden thinks is probably direct and illegal investments in S&P equities and equity derivatives. It appears that it is the MBS debt that is maturing so rapidly. So you have a balance sheet almost 3 times the size of three years ago of which $1.4T is rapidly maturing (and fermenting) toxic waste.

Now one would think that a maturing debt would equal out the new treasury purchases, and the Fed bs would remain at about $2.7T, so that reinvesting the MBS's into treasuries should not expand the over all credit supply, which would demolish Rickert's theory. I tried to write a much longer comment about the machinery of exactly how QE invents money and how it goes to the PD's for reserves and speculation, but I realized that I have a lot of holes in my knowledge and will have to research it more. Of course Stoneleigh could explain it so that even an idiot could understand it, but she is tied up with her travels :-)

Greenpa said...

little bit of news popped up on BBC "Asia" news feed:

"The first ever audit of China's local government debt reveals it at $1.6tn (£1tn, 1.12tn euros).

A comprehensive review of regional spending uncovered the borrowing, equivalent to $1,200 per person."

Somebody tell Meredith Whitney.

Greenpa said...

I recommend keeping an eye on the Japan national public TV newsfeed. They regularly put up information which is highly revealing- and does not hit the MSM.

Today's is just solidly bad, all around, all fronts; worth tracking.

One example:

"An operator of waste incineration plants in Tokyo says it has found a high density of radioactive materials in ash at one of its plants.

"An Edogawa ward plant, which handles general household garbage, detected 9,740 becquerels of radioactive materials per kilogram of ash."

A becquerel, remember, is 1 disintegration per second. That's really hot ash. But later in the article, it explains the ash is not a problem, because it was filtered out of the air, see, so that air is now clean. Just please don't think about how it got into the incinerator in the first place; and what else is still out there...

Alexander Ac said...

And we have also Hottest day on record in Texas Panhandle; fire threatens Los Alamos

And one nuclear power plant in Nebraska under water... what next?



scandia said...

@Supergravity,Re TSA " ...on the brink of producing persecution atrocities"

Phlogiston Água de Beber said...

Jim Puplava interviewed Evelyn Browning Garriss for her views on what's next weather wise.
Worrisome weather patterns ahead

Ilargi said...

New post up.

If you can't pay them back, then don't