Tuesday, August 16, 2011

August 16 2011: Europe on the Verge of Breaking

National Photo Co. Tangled T 1924
"Max Wiehle, son of the founder of the long-defunct Fairfax County, Va., hamlet of Wiehle Station, was a Washington, D.C., businessman who owned Potomac Sales, a car dealership”

Ilargi: The August 15 trading day closed to headlines such as this:
"[US] stocks jumped, posting the third consecutive gain and the best 3-day rally since March 2009...".

Sounds good, doesn't it? But perhaps a wee bit of perspective is in order. Financials were up yesterday, but here's what they look like over the medium term:

  • Bank of America:
    +7.93% Aug 15, but -22.4% in past month, -34.95% in past 3 months
  • Citigroup:
    +4.76% Aug 15, but -18.53% in past month, -24.71% in past 3 months
  • Morgan Stanley:
    +6.10% Aug 15, but -15.03% in past month, -25.74% in past 3 months
  • Goldman Sachs:
    +2.28% Aug 15, but -8.28% in past month, -15.79% in past 3 months
  • Société Générale:
    +2.06% Aug 15, but -28.53% in past month, -41.23% in past 3 months

Reality is not quite the same, in other words, as the headlines. The "best 3-day rally since March 2009" leaves a lot to be desired. In fact, the chances that these stocks will ever recover are very slim, and even if they do, it won't be for long.

The financial institutions are being slowly overwhelmed by their debts, despite all the bailouts thrown at them, both in the past 3 years and going forward.

Today may be a crucial day in the markets, though chances are that you'll have a hard time noticing as much when all's said and done. The language of politics and diplomacy will take care of that. Still, no matter how carefully it'll all be put into words, something's on the verge of breaking.

There will be a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The issue at hand is, as it always is these days, how to save the euro, the eurozone, and the economies of the peripheral countries, a list that keeps growing slowly but surely.

The one item that spokesmen trip over themselves to declare will not be on the agenda is the only one that counts. Therefore, it will be on the agenda. Eurobonds.

In order to save Italy and Spain from being downgraded by the ratings agencies and attacked by the bond markets, Europe needs to come up with a huge pile of money. It's really as simple as that. But Europe either doesn't have that kind of money or is not willing to spend it, depending on your point of view. The difference between financial capital and political capital; the chasm may not be that wide.

The "official tools" such as the European Financial Stability Facility, and the European Stability Mechanism it is set to give birth to, are woefully inadequate.

The total size of Italy and Spain's bond markets is €2.1 trillion ($3 trillion), while PIIGS bonds due in the next 2 years add up to €795 billion ($1.145 trillion).

The EFSF and ESM can't prop up all of this. Not even close. The European Central Bank has started buying some of the bonds, but long before it could swallow them in sufficient numbers, it would be in need of a bailout itself. And that's how we inevitably get to Eurobonds.

If the Eurozone would start issuing bonds guaranteed by all its members, the hope is that they would be rated as high as German bonds (Bunds) today, AAA, and carry similar interest rates. Italy and Spain (as well as Ireland, Portugal, Greece etc.) could then borrow on international markets much cheaper than they can presently.

But this will never happen, as I've argued many times before, for instance in Europe throws in the towel. The premise of that article, that the ECB had irrevocably signaled its fatal lack of firing power, was doubted by many, and perhaps still is. Today's developments will show why it is correct nevertheless. Perhaps not instantly, but since there is just one possible outcome, this is an easy call.

First, there is fast growing opposition in Germany against the Eurobonds plan, not in the least because it is widely deemed unconstitutional (in both German and EU constitutions). Opposition is equally fierce in Holland. A poll yesterday by YouGov and Bloomberg showed 75% of Germans disapprove of their government's actions during the eurozone debt crisis, with 59% saying no further bailouts should be given, even if they were essential to keep the eurozone intact.

Second, reports came out just this morning that indicate that the German and Dutch economies have stopped growing almost entirely. Both show a Q2 2011 growth rate of 0.1% (statistical error territory). If anything, this is bound to increase opposition to the Eurobonds issue. Not that more opposition were needed or would make a difference anymore. No EU treaty ever provided for Germany saving Italy, or the other way around, for that matter. No such thing was ever a realistic option.

Merkel and Sarkozy may come out of their meeting later today with some sort of plan, veiled in carefully crafted language, that aims at raising the ceiling(s) for one or more of the financial instruments that are presently available in the Eurozone. And the ECB may keep buying PIIGS bonds for a while longer. But none of it will change the real problem in any way or shape that matters.

What I said on August 5 in Europe throws in the towel will become accepted reality in a manner of weeks. Europe will -have to- admit that it can't save a country the size of Italy, at least not one with debts the size of Italy's.

What happens after that is, for now, anybody's guess. We can be sure that there are contingency plans being set up, and likely even discussed at today's meeting, but it doesn't look at all like Berlin and Paris have any more grip on the issues than anyone else has.

Germany and Holland may decide to leave the EU, but that would leave France in a type of isolation that Sarkozy deems unacceptable. Greece, Ireland and Portugal could be thrown out, but that wouldn't solve the Italian and Spanish problems. They could aim for a two-tier Euro system, with "northern" euros more highly valued than "southern" ones, but that would still leave France very unhappily hanging by its fingernails.

Perhaps it's reasonable, then, to expect the financial markets to have the final word. They can start, or rather resume, doing so today. If and when it becomes clear that Europe's support of Italy and Spain is hollow at best and non-existent at the core, their borrowing rates can rise once again, along with those of the rest of the PIIGS and perhaps soon France. What is to save the likes of Société Générale (huge Italy exposure, world's no. 1 equity derivatives book) when that happens is also anybody's guess.

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Germany's Angela Merkel faces eurobond mutiny
by Ambrose Evans-Pritchard - Telegraph

German Chancellor Angela Merkel's coalition partners are threatening a withdrawal from government if she agrees to eurobonds or any form of fiscal union to prop up southern Europe.

The simmering revolt in the Bundestag makes it almost impossible for Mrs Merkel to offer real concessions at Tuesday's emergency summit with French president Nicolas Sarkozy. "We are categorical that the FDP-group will not vote for eurobonds. Everybody must understand that there is no working majority for this," said Frank Schäffler, the finance spokesman for the Free Democrats (FDP).

Oliver Luksic, the FDP's Saarland chief, told Bild Zeitung the survival of Germany's coalition was now rests on the handling of this issue. "Eurobonds are a sweet poison that leads to more debt, rather than less. Should the government endorse a common European bond and with it take the final step towards a long-term debt union, the FDP should seriously ask whether the coalition has any future."

Alexander Dobrindt, general-secretary of Bavaria's Social Christians (CSU) and a key Merkel ally, said his party has issued a "crystal clear 'No' to eurobonds". Chancellor Merkel also faces mutinous grumbling among her own Christian Democrats (CDU), though the party's policy elite is willing to consider partial eurobonds up to the Maastricht limit of 60pc of GDP but only under stringent conditions.

It is clear the German public is in no mood for any such formula. A YouGov poll shows 59pc of Germans oppose all further bail-outs. The majority want to see Greece expelled from the euro and 44pc want Germany to withdraw from EMU. "Given the rising euroscepticism in the population, it is too politically dangerous to toy with the explosive subject of eurobonds," said Hamburger Abendblatt.

Otmar Issing, the European Central Bank's former chief economist, told German TV a move to eurobonds would impoverish Germany and subvert the Bundestag. "That would be catastrophic. I cannot understand how any German politician agree to this," he said.

Germany's constitutional court has yet to rule on the legality of EMU's bail-out machinery and is likely to pay close attention to his warnings that the drift of EU policy is to concentrate budgetary powers in the hands of EU officials outside democratic control.

Professor Wilhelm Hankel from Frankfurt University said a eurobond is camouflage for fiscal union. "That is forbidden under EU law and the German constitution. Everybody in parliament realises we are very near to the Rubicon and that if they say yes to eurobonds they cannot stop the march to a transfer union."

Mrs Merkel's spokesman played down hopes of a breakthrough at Tuesday's meeting, denying reports that eurobonds are on the agenda. The meeting will focus on tougher rules for delinquents.

Wolfgang Schäuble, Germany's finance minister, is sticking to the script that the EU's accord in July provides all the tools needed to tackle the crisis. "I'm ruling out eurobonds for as long as member states pursue their own financial policies and we need differing interest rates as a way to provide incentives and sanctions, in order to enforce fiscal solidity. Without this solidity, the foundations for a common currency don't exist," he told Der Spiegel.

However, events are moving at lightning speed and markets fear the €440bn bail-out fund (EFSF) is too small to cope with dual strains in Italy and Spain. The crisis has now escalated to a new and dangerous level as concerns over a global double-dip recession put the spotlight on the debt dynamics of France. The French economy stood still in the second quarter and EFSF costs may see the country to lose its AAA rating.

The ECB is holding the breach for now. It bought a €22bn of eurozone bonds last week, a high figure given the low liquidity in August. The purchases have cut yields on 10-year Spanish and Italian bonds by 120 basis points to about 5pc. Investors know yields also fell hard when the ECB first bought Greek, Irish, and Portuguese bonds, only to climb back up within weeks.

Marcel Alexandrivich from Jefferies said the moment of danger will come when the ECB is seen to hit its limits. "The ECB can act as a buyer-of-last resort for a while but if it has to purchase bonds at €20bn to €30bn a week there will come a point it will say enough is enough, we can't take this on our books any longer."

It is unclear where that point lies. The ECB intends to hand the baton to the EFSF once its new powers are ratified by all parliaments, but EFSF's remaining firepower will be less €300bn. Carl Weinberg from High Frequency Economics said this constraint will force the ECB to desist sooner rather than later. "If so, yields on Italian and Spanish bonds will jump in a heartbeat," he told Bloomberg.

Concerns Mount in Germany Over ECB Bond Buys
by Peter Müller, Christoph Pauly, Christian Reiermann, Michael Sauga and Hans-Jürgen Schlamp - Spiegel

The euro drama is escalating in Berlin. In order to save the common currency, the European Central Bank is now purchasing large volumes of Italian government bonds. German central bankers and politicians in Chancellor Merkel's government oppose the move, which they see as a dangerous threat to the ECB's independence.

The timing was very cunning. It was 7:50 p.m. on Sunday, Aug. 7, when Germany's Federal Press Office released a joint statement by Chancellor Angela Merkel and French President Nicolas Sarkozy. Though hedged in diplomatic terms, the Continent's two most powerful political leaders were demanding that the Frankfurt-based European Central Bank (ECB) take an active role in helping Spain and Italy weather the euro crisis. Either the bank supplied money, they said, or the euro was finished.

It wasn't long before the wire agencies transmitted the first news alerts. It was a carefully planned chain of events -- and an insidious one, too. Indeed, Merkel and Sarkozy knew only too well that, at that very moment, the ECB's governing council was holding a conference call to discuss the next steps. The council's 23 members had been arguing for almost two hours over whether the ECB should buy up Spanish and Italian sovereign bonds to prop up their value.

It took the central bankers almost two more hours to cobble together a majority to support the plan. The toughest resistance came from Jens Weidmann, the president of the Bundesbank, Germany's central bank. He stubbornly opposed the decision till the bitter end -- but all was in vain. The next day, the ECB launched the greatest purchasing of government debt in its history. The move shakes the already fragile foundations of the monetary union. But it's not just the stability of the euro that's at stake; it's also the credibility of the very institution charged with preserving its value.

When the ECB was founded 13 years ago, it was meant to be a European version of Germany's Bundesbank and the heir to its steadfast principles: The sole duty of central bankers is to maintain price stability while remaining politically independent. And their supreme task is to deny the government access to the money printers. Indeed, things at Europe's central bank were supposed to go just like they did under Karl Otto Pöhl and Helmut Schlesinger, the legendary pair of Bundesbank presidents who served between 1980 and 1993 and primarily solidified their reputations by being able to say "no" at the crucial moment.

'Europe's Biggest Bad Bank'
But, under the pressure of the euro crisis, Europe's central bankers have assumed duties listed nowhere in their statutes. For example, the ECB is drafting austerity programs for heavily indebted countries, including Greece, Ireland and Italy, bailing out major banks and propping up the value of the sovereign bonds of five euro-zone countries.

Critics have come to ridicule the ECB as "Europe's biggest bad bank," and the reputation of ECB President Jean-Claude Trichet has also suffered. Indeed, even some of Trichet's close companions believe he has become all too eager to bend to political will. For example, in a guest contribution published in London's Financial Times on Aug. 8, former ECB chief economist Otmar Issing criticized the bank for considering an amendment to its "no bail-out" clause. Doing so, he wrote, would be "a move on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness."

Indeed, the common currency that was supposed to unite the Continent is now threatening to split it apart. And one of the deepest fissures runs straight through the ECB itself. Trichet and his colleagues from heavily indebted countries in southern Europe favor a massive effort to purchase sovereign state bonds. But the head of the Bundesbank and his colleagues from the EU's "net payer" countries, such as Luxembourg and the Netherlands, believe that would be a major mistake because they fear it would only trigger inflation.

Almost two years after Greece's government acknowledged that the country was much more indebted than previously known, the currency crisis has reached a whole new stage. Until now, euro-zone governments have been trying to protect the common currency by piling more and more money into bailout funds. But that's not enough for investors anymore. Now they're demanding that the net-payer states offer practically unlimited guarantees for almost every conceivable amount, even when it comes to seriously indebted countries, such as Spain and Italy.

Germany's Tough Choices
"Germany is in the driver's seat," says George Soros, the major investor and hedge fund manager based in New York. As he sees it, Germany's government is facing a difficult decision: Either it accepts that the ECB will provide long-term assistance as a financer of state debt, or it clears the way for the introduction of so-called "euro bonds," ones common to all euro-zone member states. In effect, the latter option would mean that Germany would automatically be jointly liable for any loans taken out by fellow euro-zone countries, such as Italy or Greece.

German Finance Minister Wolfgang Schäuble opposes this second option and believes that economic assistance should only be given out under strict conditions. "We're not going to bail out countries at any price," Schäuble told SPIEGEL in an interview published this week. Although he left open the question of potential consequences, there's no denying they would be significant: Greece would go bankrupt and possibly abandon the monetary union. The whole euro zone could break up.

Indeed, with ECB President Trichet saying this "is the worst crisis since the second world war," it's hardly surprising that the government coalition in Berlin -- made up of Merkel's center-right Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) -- is getting increasingly nervous. Senior party officials are worried they might not secure majorities in the upcoming votes on the euro bailout package in the Bundestag, Germany's federal parliament.

What's more, they're afraid that Trichet's controversial bond plan might spark opposition within their own ranks. "It would be a serious matter if we reached the point where Germany was outvoted on the ECB's governing council by the debtor countries," says Alexander Dobrindt, the CSU's general secretary. "The ECB needs to regain its political independence as quickly as possible and only make decisions based on stability principles."

Such displeasure is understandable given the considerable political pressure the ECB has been facing in making its decisions. For example, when the risk premiums on Italian government bonds rose to all-time highs in early August, the ECB initially bought up Irish and Portuguese bonds, just as it had already done a number of times before.

'We Cannot Give Way to Panic'
When it became clear that the measures were having little effect, Trichet summoned the other members of the ECB's executive board and the central bankers of euro-zone countries on Aug. 7 to join an evening conference call to debate how Spain and Italy should be helped.

Trichet sensed he would have a hard time making his case. To soften up his colleagues, he wrote a harshly worded letter to the Italian government relaying his conditions for granting support. Together with Mario Draghi, the president of Italy's central bank and his designated successor at the helm of the ECB, Trichet called on the Italian government to implement far-reaching reforms to the labor market, pensions and the deficit-ridden public health-care system. He also urged Rome to privatize state assets. Likewise, he stressed that Italy had to balance its budget by 2013, a year ahead of schedule.

Although Rome promptly signaled it would agree to such terms, Trichet still knew that the ECB's governing council would be deeply divided. Indeed, the cleft had already become apparent the previous Thursday. Bundesbank chief Weidmann had led the group arguing against anything involving the buying of government bonds. Doing so, he reasoned, would be tantamount to dissolving the border between monetary and fiscal policies. Following in the footsteps of his predecessor, Axel Weber, Weidmann urged his colleagues to keep the greatest distance possible between the central bank and the finances of individual states.

Actions Upsetting to Merkel
Weidmann's actions were deeply upsetting to Chancellor Merkel. Just a few months earlier, Weidmann had been serving as one of her economic advisers. She had called him right before the conference call on Sunday evening urging him to relent. Shortly thereafter, the members of the ECB's executive board hustled into Trichet's office to use his secure telephone line. On the call were the other 17 members of the ECB's governing council all across Europe, some of whom had been forced to cut their vacations short. In dramatic terms, Trichet pleaded with his colleagues to act. If they didn't, he warned, Italy, the world's third-largest bond market, would implode -- and no one could predict how this would affect the euro and the global economy.

Nevertheless, Weidmann, ECB Chief Economist Jürgen Stark and the representatives from Luxembourg and the Netherlands held their ground. They argued that the ECB's sole mandate was to safeguard the stability of the euro's value and that it wasn't its job to prop up heavily indebted countries or even to protect the capital markets from themselves.

The debate focused on key issues of financial and monetary policy. For the Bundesbank, it had always been taboo to finance the state by purchasing its sovereign bonds. Behind this belief was the terrifying example of its predecessor, the Reichsbank, which had printed money with abandon in the 1920s in order to support the budget of the Weimar Republic. The result was a hyperinflation that has become deeply entrenched in the collective memory of Germans.

Indeed, Axel Weber, Weidmann's predecessor, was so opposed to the idea of purchasing sovereign bonds that he prematurely retired from his position as Bundesbank president and withdrew his name as a candidate to succeed Trichet as head of the ECB. As he saw it, the fact that ECB higher-ups had even discussed breaking this still-unbroken taboo in May 2010 in response to the crisis in Greece was an unforgivable error.

'A Clear Violation of the Treaty'
This led Weber to write an impassioned e-mail on May 7, 2010 to his colleagues on the ECB's governing council. Though the contents of the letter had not been made public before, last week's developments make it particularly relevant to the current situation.

"We must not panic" he warned them. Although he believed the ECB had to respond to the crisis by making an unlimited amount of liquidity available, he vehemently argued against purchasing sovereign bonds. Doing so would be "a clear violation of the treaty" that had served as the basis for establishing the bank. He also wrote that the ECB was standing at a crossroads and that the governing council had to "resist government pressure." The risk of damaging the ECB's reputation, he argued, by far outweighs any short-term gains that might be made by buying sovereign bonds. "Let us not disappoint our people" Weber warned -- and he announced that he would go public with his opposition.

Despite the passionate appeal, Weber was only able to convince four other colleagues on the ECB governing council to join him in voting against the plan to buy up sovereign bonds. The vast majority of its members bought the argument of Trichet, who already at that point viewed the world as teetering at the edge of the abyss.

Within a few months, the ECB purchased almost €80 billion ($115 billion) in government bonds from Greece, Portugal and Ireland, which everyone was eager to unload. Together, the national central banks that are part of the euro system and shareholders in the ECB, including the Bundesbank, have been forced to make billions in writedowns.

Even with such bad experiences behind them, on Aug. 7, the majority of members on the ECB's governing council voted to support Trichet's new proposal. Weidmann and his three confederates were outvoted.

This was a bitter outcome for the Bundesbank. As a result of this decision, already last week it was forced to buy up massive amounts of Italian and Spanish sovereign bonds. This results from the fact that, within the context of the euro system, the ECB also uses the Bundesbank as a vehicle to make billions in such purchases. As one Bundesbank official put it, doing so "goes against our genes."

The ECB's Sweet Poison
Those in the Trichet camp, on the other hand, view the ECB as the last functioning institution in Europe. ECB experts argued that this is why the bank was forced to take action after interest rates on Italian bonds rose to dangerously high levels in recent weeks. In their view, failing to act threatened to dry up lending to companies and private clients.

The ECB was happy when the interest rate on Italian bonds dropped from 6 percent to 5 percent in the wake of its actions. But even if that sounds like success, Trichet knows that his strategy won't work in the long term. If, as in the case of Greece, the markets have made up their mind that a country will never pay back its debts because it is bankrupt, then there is also little the ECB can do. In fact, the central bank would be constantly pumping more money into the markets without really helping the country.

Even worse, such actions could also get politicians in the entire euro zone quickly used to the ECB's sweet poison. After all, it's much easier to fall back on ECB money than to get parliament to agree to tax increases. This has led former Bundesbank officials, including Weber, to accuse the ECB's measures of only delaying the inevitable introduction of the kind of radical reforms necessary in countries like Italy.

More than anything, buying up sovereign bonds is damaging the reputation of the ECB itself. If the ECB adds huge amounts of questionable sovereign bonds to its portfolio and that country one day becomes insolvent, it could result in considerable losses. In that case, it would be forced to write down parts of its assets and beg euro-zone governments for fresh capital. Doing so would risk damaging the central bank's reputation and independence, and the ECB could be tempted to start up the money-printing presses purely out of its own self-interest.

The ECB's questionable decision has also alienated members of the governing parties in Berlin. So far, members of parliment with the CDU/CSU and FDP have reverently accepted ECB decisions related to bailing out the euro, including the first and second bailout packages for Greece, the establishment of temporary and permanent euro-bailout funds -- the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), respectively -- and the aid programs for banks.

Opposition Grows in Berlin
Indeed, the coalition government has already made more than €140 billion available for efforts to bail out the euro. Given this generosity, politicians in the coalition parties are alarmed that the ECB's governing council has apparently now decided to routinely act against the reservations of its German members.

"The ECB cannot become an institution that can compensate for the failures of the budgets of individuals states, such as Italy, over the long term," says Volker Bouffier, governor of the western state of Hesse, where the ECB is based. "That doesn't correspond with its mandate, and that takes the pressure off the affected countries to put their budgets in order by themselves."

Stanislaw Tillich, the governor of the eastern state of Saxony, holds a similar view and believes the ECB program has to "remain an exception." To do otherwise would "only prove correct the people who were afraid at the time of the euro's introduction that the ECB would be less diligent in safeguarding monetary stability than the German Bundesbank."

Even Rainer Brüderle, the senior FDP official who recently stepped down as economics minister to become his party's parliamentary floor leader, views the ECB's policy of buying sovereign bonds to prop up troubled nations "with very mixed feelings." Things cannot be allowed "to go on like this forever," he says.

Still, the greatest resentment can be found within the ranks of the CSU. Many of its members share the fears of Thomas Silberhorn, a party expert on European affairs, who says that the ECB's "institutional independence … is gone." As he sees it, by introducing these measures, the ECB has overstepped its competencies in terms of monetary policy, and made a "shambles" of the foundations of the EU treaties.

Even Erwin Huber, former head of the CSU and finance minister of the state of Bavaria, believes the ECB's reputation has been damaged. "The Bundesbank would never have financed state debt at the expense of the currency's value," he says. "That is a serious violation of the entire euro blueprint."

By breaking this taboo, the ECB has bred mistrust in the most recent bailout measures and is giving fresh impetus to the euroskeptics within the coalition parties. About a dozen members of parliament from the FDP are considered to be euroskeptics, and more and more members of the CDU/CSU are calling for an emergency gathering to discuss the debt crisis.

To respond to this growing resentment, coalition leaders in Berlin have started making futile attempts at appeasement. CDU higher-ups hope to calm the base in coming weeks at so-called regional conferences. Economic Minister and FDP chairman Philipp Rösler has announced plans to set up a stability council at the EU level -- though the announcement took even Finance Minister Schäuble by surprise.

'A Country Like Italy Can't Be Saved'
Even the bailout experts in Merkel's Chancellery are trying to allay worries among it supporters by noting that the ECB is only temporarily supposed to purchase sovereign bonds, until late September. On July 21, the heads of state and government of the euro-zone member states decided that the EFSF euro bailout fund would take over such responsibilities at that time.

But, until then, the ECB will be obliged to prop up the euro's value. The only problem with that is that everyone wants to get rid of the risky sovereign bonds from Spain and Italy, but hardly anybody wants to buy them. In other words, the ECB will be bleeding money for weeks.

Experts even fear the ECB might buy several hundred billion euros in Italian and Spanish bonds. If it took a similar proportion of bonds from those countries as it previously did from Greece, Ireland and Portugal, it would have to pay €300 billion.

A Risk of Inflation
In theory, the ECB can afford such sums, since it will be the one printing the money. And that's what makes this kind of intervention so attractive to many. As they see it, the ECB has unlimited firepower at its disposal to deter the markets from continuing to speculate against Spain and Italy.

In doing so, however, the ECB runs the risk of triggering inflation. What's more, there's some doubt as to whether the EFSF will be able to take responsibility from the ECB for purchasing sovereign bonds in September, as planned, because only limited means are at its disposal. At the moment, the amount of loans the EFSF can issue is capped at €440 billion. But a major portion of that has already been earmarked to help Greece, Portugal and Ireland. As a result, the bailout fund won't be able to afford to keep up for long the constant pace of purchasing that the markets have grown used to.

Given these circumstances, many political players believe an increase in the funds at the EFSF's disposal will be inevitable in order to impress the markets. This group includes European Commission President José Manuel Barroso, but even the French government has shown some sympathy for the idea. Backers of the Barroso plan argue that this use of means will boost credibility. But the Germans don't agree. In their view, each time the EFSF's resources are increased, it sends a fresh invitation to the markets to test new boundaries.

Experts surrounding Finance Minister Schäuble suspect it would be almost impossible to win this kind of race with the markets, at least when it comes to Italy. As they see it, if the financial markets fail to recover their faith in Italy's government, even those in Berlin who favor a bailout would have nowhere else to turn. As one official put it: "A country like Italy can't be saved."

German Economy Almost Stalled in Q2
by Jana Randow - Bloomberg

The German economy, Europe’s largest, almost stalled in the second quarter as the region’s sovereign debt crisis weighed on confidence.

Gross domestic product, adjusted for seasonal effects, rose 0.1 percent from the first quarter, when it jumped a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast growth of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey. From a year earlier, GDP increased 2.8 percent.

Germany has been powering euro-area growth as the debt crisis curbs spending across the region. The worse-than-expected GDP data add to signs the region is flirting with a renewed economic slump. France’s recovery unexpectedly ground to a halt in the second quarter, Italian and Spanish expansion remained sluggish and Greece’s economy contracted.

“Euro-zone growth will be very, very sluggish for the rest of the year,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “If the global economy is cooling, we’ll also see it in Germany.”

Euro-area economic growth probably slowed to 0.3 percent in the second quarter from 0.8 percent in the first, a Bloomberg survey shows. The European Union’s statistics office in Luxembourg will release that report at 11 a.m. today.

France said last week its economy stagnated in the three months through June, while reports on Aug. 5 showed Italy’s GDP rose 0.3 percent and Spain’s increased 0.2 percent. The German statistics office revised first-quarter growth down from the initially reported 1.5 percent.

Quantitative easing 'is good for the rich, bad for the poor'
by Heather Stewart - Observer

As the Bank of England prepares to vote on quantitative easing, a report argues the extra cash 'exacerbates already extreme income inequality'

Quantitative easing (QE) – the Bank of England's recession-busting policy of buying up billions of pounds of bonds – may have contributed to social unrest by exacerbating inequality, according to one City economist.

As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages. "The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it," Joshi says in a new report.

He points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been a key tool for boosting growth. In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.

As the Bank waded into the financial markets to spend its £200bn of newly created money, mostly on government bonds, the price of many assets, including shares and commodities such as oil, was driven up.

That helped to boost companies' revenues, but Joshi argues that with the labour market remaining weak, employees have had little hope of bidding up their wages. "The shocking thing is, two years into an ostensible recovery, [UK] workers are actually earning less than at the depth of the recession. Real wages and salaries have fallen by £4bn. Profits are up by £11bn. The spoils of the recovery have been shared in the most unequal of ways."

Joshi adds that this also helps to explain why sales of high-end luxury goods have continued to soar, while many consumers have been forced to tighten their belts. "High-income earners are more exposed to profits as owners of businesses or shareholders. Low-income earners are dependent on wages," he says.

Joshi's contribution is the latest salvo in a furious row among economists about the effectiveness of QE. Some, including Danny Gabay of consultancy Fathom, have argued that the electronically created money would have been better invested in housing, instead of disappearing into the crisis-hit banking sector.

Adam Posen, the US economist on the Bank's monetary policy committee, has repeatedly voted for a new round of QE, urging his colleagues to agree to spend another £50bn. This month's meeting of the MPC will reveal whether any other members joined him in voting for what the Americans are calling "QEII".

Paul Krugman: Fake Alien Invasion Would End Economic Slump

Paul Krugman is so frustrated by the lack of support for another round of stimulus spending that he's now calling for a fake alien invasion of the United States to spur a World War II-style defense buildup. Krugman was a guest on CNN's "Fareed Zakaria GPS" on Sunday.

Speaking with Zakaria and Harvard economist Ken Rogoff, he made the same case he has been making for years--that deficits are not the top economic concern of the day. Krugman noted that the effort of World War II helped end the Great Depression, and joked that something similar was needed today.

"If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months," he said. "And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better--"

"We need Orson Welles, is what you're saying," Rogoff cut in.

"There was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace," Krugman said. "Well, this time, we don't need it, we need it in order to get some fiscal stimulus."

We've been warned: the system is ready to blow
by Larry Elliott - Guardian

Only a new way of managing the global economy can prevent more mayhem in the markets and on the streets

For the past two centuries and more, life in Britain has been governed by a simple concept: tomorrow will be better than today. Black August has given us a glimpse of a dystopia, one in which the financial markets buckle and the cities burn. Like Scrooge, we have been shown what might be to come unless we change our ways.

There were glimmers of hope amid last week's despair. Neighbourhoods rallied round in the face of the looting. The Muslim community in Birmingham showed incredible dignity after three young men were mown down by a car and killed during the riots. It was chastening to see consumerism laid bare. We have seen the future and we know it sucks. All of which is cause for cautious optimism – provided the right lessons are drawn.

Lesson number one is that the financial and social causes are linked. Lesson number two is that what links the City banker and the looter is the lack of restraint, the absence of boundaries to bad behaviour. Lesson number three is that we ignore this at our peril.

To understand the mess we are in, it's important to know how we got here. Today marks the 40th anniversary of Richard Nixon's announcement that America was suspending the convertibility of the dollar into gold at $35 an ounce.

Speculative attacks on the dollar had begun in the late 1960s as concerns mounted over America's rising trade deficit and the cost of the Vietnam war. Other countries were increasingly reluctant to take dollars in payment and demanded gold instead. Nixon called time on the Bretton Woods system of fixed but adjustable exchange rates, under which countries could use capital controls in order to stimulate their economies without fear of a run on their currency.

It was also an era in which protectionist measures were used quite liberally: Nixon announced on 15 August 1971 that he was imposing a 10% tax on all imports into the US. Four decades on, it is hard not to feel nostalgia for the Bretton Woods system. Imperfect though it was, it acted as an anchor for the global economy for more than a quarter of a century, and allowed individual countries to pursue full employment policies. It was a period devoid of systemic financial crises.

Utter mess
There have been big structural changes in the way the global economy has been managed since 1971, none of them especially beneficial. The fixed exchange rate system has been replaced by a hybrid system in which some currencies are pegged and others float. The currencies in the eurozone, for example, are fixed against each other, but the euro floats against the dollar, the pound and the Swiss franc.

The Hong Kong dollar is tied to the US dollar, while Beijing has operated a system under which the yuan is allowed to appreciate against the greenback but at a rate much slower than economic fundamentals would suggest.

The system is an utter mess, particularly since almost every country in the world is now seeking to manipulate its currency downwards in order to make exports cheaper and imports dearer. This is clearly not possible. Sir Mervyn King noted last week that the solution to the crisis involved China and Germany reflating their economies so that debtor nations like the US and Britain could export more.

Progress on that front has been painfully slow, and will remain so while the global currency system remains so dysfunctional. The solution is either a fully floating system under which countries stop manipulating their currencies or an attempt to recreate a new fixed exchange rate system using a basket of world currencies as its anchor.

The break-up of the Bretton Woods system paved the way for the liberalisation of financial markets. This began in the 1970s and picked up speed in the 1980s. Exchange controls were lifted and formal restrictions on credit abandoned. Policymakers were left with only one blunt instrument to control the availability of credit: interest rates.

For a while in the late 1980s, the easy availability of money provided the illusion of wealth but there was a shift from a debt-averse world where financial crises were virtually unknown to a debt-sodden world constantly teetering on the brink of banking armageddon.

Currency markets lost their anchor in 1971 when the US suspended dollar convertibility. Over the years, financial markets have lost their moral anchor, engaging not just in reckless but fraudulent behaviour. According to the US economist James Galbraith, increased complexity was the cover for blatant and widespread wrongdoing.

Looking back at the sub-prime mortgage scandal, in which millions of Americans were mis-sold home loans, Galbraith says there has been a complete breakdown in trust that is impairing the hopes of economic recovery.

"There was a private vocabulary, well-known in the industry, covering these loans and related financial products: liars' loans, Ninja loans (the borrowers had no income, no job or assets), neutron loans (loans that would explode, destroying the people but leaving the buildings intact), toxic waste (the residue of the securitisation process). I suggest that this tells you that those who sold these products knew or suspected that their line of work was not 100% honest. Think of the restaurant where the staff refers to the food as scum, sludge and sewage."

Finally, there has been a big change in the way that the spoils of economic success have been divvied up. Back when Nixon was berating the speculators attacking the dollar peg, there was an implicit social contract under which the individual was guaranteed a job and a decent wage that rose as the economy grew. The fruits of growth were shared with employers, and taxes were recycled into schools, health care and pensions. In return, individuals obeyed the law and encouraged their children to do the same. The assumption was that each generation would have a better life than the last.

This implicit social contract has broken down. Growth is less rapid than it was 40 years ago, and the gains have disproportionately gone to companies and the very rich. In the UK, the professional middle classes, particularly in the southeast, are doing fine, but below them in the income scale are people who have become more dependent on debt as their real incomes have stagnated. Next are the people on minimum wage jobs, which have to be topped up by tax credits so they can make ends meet. At the very bottom of the pile are those who are without work, many of them second and third generation unemployed.

Deep trouble
A crisis that has been four decades in the making will not be solved overnight. It will be difficult to recast the global monetary system to ensure that the next few years see gradual recovery rather than depression. Wall Street and the City will resist all attempts at clipping their wings. There is strong ideological resistance to the policies that make decent wages in a full employment economy feasible: capital controls, allowing strong trade unions, wage subsidies, and protectionism.

But this is a fork in the road. History suggests there is no iron law of progress and there have been periods when things have got worse not better. Together, the global imbalances, the manic-depressive behaviour of stock markets, the venality of the financial sector, the growing gulf between rich and poor, the high levels of unemployment, the naked consumerism and the riots are telling us something.

This is a system in deep trouble and it is waiting to blow.

Markets Gird for Fresh Drama
by E.S. Browning - Wall Street Journal

As stock markets prepared to open Monday after one of the most volatile weeks in history, some world leaders Sunday warned about the worrisome health of the global economy.

"We are entering a new danger zone," World Bank President Robert Zoellick said Sunday during a visit to Australia, adding that world leaders need to take strong action "both short- and long-term to restore confidence." Singapore Prime Minister Lee Hsien Loong said that another global recession could arise given economic uncertainties in the U.S. and Europe, which could drag down Asian powerhouses such as China and India.

The Dow Jones Industrial Average swung last week between huge gains and losses amid doubts about the strength of the U.S. economy and Europe's deepening debt crisis. In Asian trading midday Monday, shares were broadly higher on the back of Wall Street's gains Friday, with benchmark indexes in Hong Kong, Australia and Taiwan around 2% higher. Tokyo was up 1% amid better-than-expected gross domestic product figures.

Although the week in the U.S. ended on a high note—the Dow rose a combined 5.1% on Thursday and Friday—many market analysts say the big swings, and particularly the big dips, are a sign that financial markets are far from stabilizing three years after the financial crisis.

These market analysts say stocks may be in for more volatility, in part because political leaders have been unable solve core issues afflicting many developed nations, such as huge debt burdens and stagnating economies.

In the coming week, French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet to discuss Europe's problems, and investors will get reports on manufacturing activity, the housing market, jobless claims and European growth. All of this could affect market confidence.

Some analysts are comparing the current market situation to the long-running market troubles of the 1930s and 1970s, when it took well over a decade for world economies and markets to recover and return to normal. Not everyone shares this view, but these skeptical analysts are warning clients to be prepared for more market trouble.

Whether stocks will continue to recover in the short run or resume their declines is much in debate. Some analysts sent out reports over the weekend reassuring clients that the past week's moves were a classic sign of a bottom. Others argued that it is too soon to predict how world events will affect stock performance.

The optimists point out that corporate profits have been exceptionally strong in recent quarters and that stocks look inexpensive as long as corporate earnings continue their strong gains. Skeptics contend that it will become hard for companies to repeat their strong profit gains, which could pose a problem for future stock growth.

Over the past nine trading days, five have been up and four have been down. Money managers say that has rattled client confidence. Jack Ablin says he gets lots of client calls on big down days—lately almost every other day. "It is certainly creating a higher level of anxiety," says Mr. Ablin, chief investment officer at Harris Private Bank in Chicago. To protect his clients' assets, he says, he has moved to reduce his firm's exposure to risky market sectors.

The anxiety may not be over soon. "It is going to be volatile because the overall economic environment is going to be volatile," says investment strategist Russ Koesterich at money-management firm BlackRock Inc.

Skeptics say that market behavior in the 2000s is looking similar in some ways to what investors faced in the 1970s, when inflation stifled stock growth for more than a decade, and in the 1930s, when an economic depression led to long-running market trouble.

The current period of stock weakness began in 2000 with the bursting of the technology-stock bubble, they say, and continued with the popping of the real-estate and mortgage bubbles in 2006 and 2007. "This current environment is similar, from a market standpoint, to the late '70s and even the late '30s," says Tim Hayes, chief investment strategist at Ned Davis Research in Venice, Fla. Market turmoil tends to keep recurring during these periods, he says, because "you have to go through this very long healing process, this process of restoring confidence."

Just like today, markets in the 1930s and 1970s were paying the price for the market bubbles and financial speculation that had come during boom times, and also were dealing with troubled world economies. It took years in each case to restore economic fundamentals and investor confidence.

A symptom of the current malaise is that, in the wake of bear markets from 2000 to 2002 and from 2007 to 2009, many individuals have been putting less money into stock mutual funds. Net dollar flows into U.S. stock mutual funds peaked in 2000 and have been lackluster since, according to the Investment Company Institute, a mutual-fund trade group.

Early this year, investors put money into U.S. stock funds, but lately have been taking money out, with billions of dollars moving out of such funds in each of the last five weeks. A net total of $10.4 billion came out of such funds in the week ended Aug. 3, the trade group reported, following $8 billion in withdrawals the previous week.

In periods such as the one that began in 2000, says Mr. Hayes of Ned Davis Research, "confidence never really comes back because of all the lingering worries. At the first signs of a double dip or some kind of recession, it gets the market moving in a negative way." Ultimately, those bearish eras end and strong market performance returns. Stocks returned to sustained gains from 1942 to 1966 and from 1982 to 2000.

Not all analysts agree with this kind of historical analysis. Some think stock movements are random events driven by economic events that can't be predicted. But those who endorse this way of looking at historic events call these longer-term periods of strength and weakness "secular" bull and bear markets. That distinguishes them from shorter-term "cyclical" bull and bear markets.

Cyclical bull and bear markets are simply moves of 20% or more, up or down. A secular bull or bear market includes several of these individual bull and bear markets, making these secular trends last roughly 12 to 18 years.

A secular bear market looks like a long sideways period. Stocks move violently up and down. Cyclical bull markets occur in this environment, but they tend to be weak. They can be followed by long, strong bear markets such as the one from 2007-09, which wipe out all or much of the previous bull market's gains. In this kind of long-term period, investor hopes are repeatedly raised and dashed.

Eventually, a secular bear market will give way to a period of sustained strength. But with debt and economic-growth problems afflicting both the U.S. and Europe, few economists expect the current market troubles to resolve themselves easily. "We are working through the speculative excesses of the last couple of bubbles" and the process isn't yet over, says Ben Inker, director of asset allocation at money-management group GMO LLC in Boston.

Markets enter 'new danger zone'
by Jonathan Sibun - Telegraph

Investors worldwide have lost confidence in economic leadership, driving financial markets into a "new danger zone", the head of the World Bank has warned ahead of a crucial meeting that could shape the future of the eurozone.

In a clear shot across the bows of leaders in Europe and the US, Robert Zoellick said the events of recent weeks had led "many market participants to lose confidence in economic leadership of some of the key countries".

Speaking at a dinner in Sydney, Australia, he added: "I think those events, combined with some of the other fragilities in the nature of recovery, have pushed us into a new danger zone. I don't say those words lightly ... so that policymakers recognise and take it seriously for what it is." Mr Zoellick said that a trend of acting on issues "a day late" had led to a situation where worry "has accumulated and so we're moving from drama to trauma for a lot of the eurozone countries."

The stark warning comes as French leader Nicolas Sarkozy and German chancellor Angela Merkel are set to hold a crunch meeting tomorrow. Mr Sarkozy, who saw French banks and the country's national debt come under attack last week amid speculation about the state's financial health, is expected to press the case for the eurozone to issue bonds backed by all 17 member nations. The idea has thus far been rejected by German leaders.

However, Germany newspaper Welt am Sonntag yesterday reported a possible thawing of opposition to the plan. The newspaper claimed the German government was no longer ruling out using the bonds as a last resort to protect against a break-up of the eurozone. Mrs Merkel and Mr Sarkozy are keen to find a permanent solution to Europe's sovereign debt crisis, which has already claimed Greece, Ireland and Portugal.

A spokesman for the German Finance Ministry declined to comment on the report but any optimism was tempered by an interview given by finance minister Wolfgang Schaeuble earlier in the day. He reportedly told Der Spiegel magazine: "There is no collectivisation of debt or unlimited support."

Hopes of a compromise could buoy European markets this morning after one of the most volatile weeks in recent memory left traders shell-shocked at the close of play last Friday. Markets should also take confidence in Italy's decision late on Friday to push through a €45.5bn (£39.8bn) programme of austerity measures, although optimism will be tempered after the country's biggest union threatened a general strike in opposition.

The CGIL labour union criticised the package of spending cuts and tax rises, hastily passed in response to demands by the European Central Bank, claiming it will strangle Italy's moribund economy. The CGIL said a strike was the only way to "change the inequity of this package".

Giulio Tremonti, Italy's finance minister, defended the programme, putting some of the blame on European neighbours. "We wouldn't have gotten here if we had had euro bonds," he said, calling for greater fiscal consolidation across Europe. Herman Van Rompuy, the EU president, said the austerity measures were "crucially important not only for Italy but for the eurozone as a whole". He added: "I fully support and welcome the timely and rigorous financial measures."

George Soros, the US investor, told Der Spiegel that the only solution for Europe might be for Greece and Portugal to quit the European Union. "The EU and the euro would survive it," he was reported to have said. Proof that Greece's austerity drive was having some success surfaced as it emerged that tax fraud tip-offs rose fourfold in Greece last year. The country's financial crimes squad received 18,500 tip-offs of financial impropriety against 4,500 in 2009.

Washington sets out to slay America's debt monster
by Richard Blackden - Telegraph

A week after its historic downgrade by Standard and Poor's, investors have been piling their money into US bonds.

'It's a fantastic auction," exclaimed Bill O'Donnell from his desk on Royal Bank of Scotland's vast trading floor in Stamford, Connecticut. It was early Wednesday afternoon and there was nothing fantastic about the state of the stock markets, with the Dow Jones Industrial Average down about 200 points as rumours swirled about the health of French banks. O'Donnell, one of RBS's chief fixed-income strategists, was instead talking about the US government's first sale of 10-year bonds since it dramatically lost its AAA credit rating five days before.

The pressure that had built as salespeople took orders from customers for a slug of the $24bn (£15bn) of debt was dissipating. And, among the hundreds of headlines scrolling at high-speed down the banks of Bloomberg terminals that pepper the 90,000 sq ft trading floor, you only needed to look at a handful to see the auction's success.

The US Treasury had managed to borrow money for 10 years by offering buyers a yield of 2.14pc, the lowest on record. The bid to cover ratio, a measure of demand used in the bond markets, was stronger than the average for the past 10 sales.

The much-anticipated auction had been given a helping hand from the Federal Reserve the day before, when the central bank promised to keep interest rates at record low levels until at least 2013 in its latest effort to shore up the economy. "There's currently a desperate need for yield," said O'Donnell. "The Fed has pushed short-term interest rates so low that people will be forced to take on more risk."

The five trading days that followed America's historic downgrade saw the US Treasury barely break a financial sweat in selling a total of $72bn in bonds. The last week has also underlined the advantages that the US has over other countries, including Britain, that are faced with large deficits.

Alongside gold, the Swiss franc and the Japanese yen, the $9trillion US Treasury market remained the safe-haven of choice for global investors seeking refuge from the turmoil. "The market is transparent and very liquid," said Rich Tang, who is head of fixed-income sales in the US at RBS, one of the 20 banks on Wall Street that help sell the government's debt. "You can do a $1bn ten-year bond trade and you're not going to leave a footprint."

But the extra cards that America still has in its deck, including the dollar's status as the world's reserve currency, are beginning to cause concern of their own. Will they be used by Washington to put off the country's day of reckoning with its $14trillion debt pile?

The Congressional Budget Office, an independent arm of government, has in its bleakest scenario forecast that the ratio of debt compared to the size of the economy will reach 190pc by 2035 if nothing changes. Even its more optimistic projection puts the ratio at 90pc by 2021 without a combination of reductions to key pension programmes such as Social Security and healthcare ones like Medicare, as well as tax increases. It's averaged just under 40pc for the last 40 years or so.

"Our form of government works best under pressure," said Bill Frenzel, the chief Republican member of the House of Representatives Budget Committee during the 1980s. "In my judgement S&P had to make the first step and I think it's a necessary first step."

Financial markets have spent the last year twitching, and often doing considerably more, in reaction to the successive efforts of European leaders to solve the region's debt crisis. But with last week's downgrade, and a Presidential election fast-approaching in which the deficit will be a central issue, it's politicians on Capitol Hill who will have to get used to more intense scrutiny from the world's financial capitals over the next 12 months. "The centre of finance is now in Washington DC," said Tang of RBS. "You have monetary and fiscal policy driving markets and I don't see that going away any time soon."

With the world's biggest economy averaging growth of just 0.8pc during the first half of the year, America has this month become the latest country to have to walk the tightrope between introducing a measure of fiscal austerity and ensuring the economy doesn't slide into another recession.

It wasn't in the script at the start of the year written by either The White House or the Fed, which had both forecast the recovery would be much stronger by now. It's why the focus of some in Washington and on Wall Street is turning to Britain, where the Coalition Government has embarked on a £110bn plan to eliminate the structural deficit by 2015.

"Britain has a plan," says Al Simpson. "We just need to give the world a plan." There aren't many people who have spent more time thinking about America's public debt than Simpson, a former Republican Senator from Wyoming. He was the co-chairman of the National Commission on Fiscal Reform and Responsibility, which last December presented President Barack Obama with a 60-page plan to begin to balance the country's books.

"We both know we're in the same boat," Simpson says of Britain and the US. The usual conversational icebreakers may not have been needed when he spoke to the Chancellor George Osborne for the first time earlier this year.

Whatever the Chancellor told Simpson, Britain's example so far offers one clear lesson for the US, according to Michael Saunders, the chief UK and European economist for Citigroup in London. "Announce early a credible fiscal plan that cuts the deficit over a long period," says Saunders. "By detailed, I mean what does it mean for the police? What does it mean for other budgets? It shows you're serious."

This month's bitter wrangling over raising the country's $14.3trillion debt ceiling suggests the lesson has yet to be absorbed. The deal that eventually saw the borrowing limited lifted at the eleventh hour agreed about $900bn of spending reductions and created a bipartisan Congressional committee to find another $1.5trillion of cuts over the next decade.

Voters were left underwhelmed, according to a poll this week in the Washington Post, with almost 75pc of people no longer believing that politicians are capable of addressing the country's economic challenges, including a budget deficit that's forecast to reach an annual record of $1.4trillion this financial year.

But the depth of the division between Republicans and Democrats over spending and taxes also alarmed investors. "Most US investors were surprised by the degree of divergence in ideological views and by the inability to come to some middle ground over cuts for the next 10 years," says Saumil Parikh, a fund manager at Pacific Investment Management Co (PIMCO), which runs the world's biggest bond fund.

And attention is already turning to the 12-person panel, known as the Joint Select Committee on Deficit Reduction, whose final three members were named last Thursday. Should they fail to find common ground on reducing the deficit by November 23, then automatic spending cuts of $1.2trillion will be triggered. "We'll be looking for a move away from something intransigent to a more balanced approach," explains PIMCO's Parikh. "It will be watched very, very closely."

The expectation is that, shaken by the recent turmoil in the stock markets and the downgrade, the panel will manage to cut the deficit by $1.5trillion over the next decade. But the early signs aren't immediately encouraging. Nancy Pelosi, the chief Democrat in the House of Representatives, made her three appointments to the panel last week, arguing that it must also deliver ways of creating new jobs. The six Republicans on it are likely to balk at any such suggestion unless growth slows much more rapidly over the next three months.

As the Obama administration and the Fed again struggle to reignite the recovery, a minority in Washington and on Wall Street remain hopeful that the committee will be galvanised to beat expectations. This would involve agreeing to reduce the deficit by at least $4trillion over the next decade, and confronting the politically explosive issues of spending on healthcare and raising taxes. Tax revenues as a share of gross domestic product (GDP) fell from their historic average of about 18pc to 15pc in 2009, and the CBO expects them to stay at those levels this year. Spending on healthcare, meanwhile, has soared from 4.8pc of GDP in 1960 to 16.5pc in 2009.

And Simpson, the former Senator from Wyoming, argues that what financial markets, as well as the American public, want in different ways is some clarity and detail on reducing the deficit over a 10-year horizon. "All you need is a plan. You don't need to give the baby teeth straight away," he says. Our report "didn't do BS and didn't do mush, and they're (the public) very appreciative of it," he says.

But with an election just over a year away, the betting remains that politicians will push back the tough decisions until 2013. "I think that's an enormous misjudgement," says Frenzel, who believes the economy is in need now of the clarity a long-term agreement could bring.

The advantages that the US has as a borrower won't melt away in the space of a year. But if the country's politicians fail to rise to the national debt challenge sometime over the next 18 months, then it may be the last time the government can hold a fantastic bond auction in the week after a downgrade.

Eurobonds not on agenda at Paris summit
by RTE.ie

Eurobonds will not be a subject for discussion at tomorrow's summit meeting in Paris between German Chancellor Angela Merkel and French President Nicolas Sarkozy, a government spokesman in Berlin said today. 'Eurobonds will play no role in the talks,' Steffen Seibert told a regular news conference.

Sarkozy is due to host his counterpart Chancellor Angela Merkel in Paris as he struggles to chip away at German resistance to increased European financial governance. Between them, Merkel and Sarkozy lead the 17-nation euro zone's biggest economies, and markets will be watching anxiously to see whether they can boost lender confidence amid an unprecedented sovereign debt crisis.

Last week, European stock markets saw their worst losses since 2008, amid rumours that France might lose its Triple A credit rating, but Berlin remains opposed to deep reforms of the European financial system. Sarkozy has been pushing for governments to turn the debt crisis into an opportunity to forge a more centralised system of controls across the zone, better able in Paris' eyes to protect against future meltdowns.

But Merkel - and German voters - oppose any change that might create what they have dubbed a 'transfer union', in which Germany's powerful export-led economy effectively underwrites its underperforming euro zone partners. Such a system would make it easier for struggling members like Greece or Portugal to finance their massive public deficits, but would also inevitably transfer some of the cost of servicing these debts to German taxpayers.

Until last week, France was seen as among the better performing euro zone economies, even if still lagging behind its German neighbour - but rumours, angrily denied, about the health of its banks rocked the market. Sarkozy was forced to abandon his summer holiday at a Riviera villa and fly back to Paris to propose tougher austerity measures, while Merkel remained calmly in Italy.

French officials say he still intends to press for an 'acceleration' of reforms to Europe's financial institutions and hopes he and Merkel will agree 'common positions on the reform of the governance of the euro zone'. He will also push for a quicker application of decisions made last month, when European leaders found another €159 billion for Greece and broadened the scope of their rescue fund to allow it to buy government bonds.

But, over the weekend, German officials were quick to head off any talk of broader reform - rejecting both the idea of issuing joint eurobonds or of further expanding the €440 billion European Stability Fund.

Merkel and Sarkozy are to meet in Paris in the afternoon, then hold a press conference before sharing a working dinner. Afterwards, they will make recommendations to European Union President Herman Van Rompuy. Sarkozy will meet his own cabinet on Wednesday and next week, on August 24, he is due to unveil a new round of severe austerity measures designed to bring France's budget deficit down to less than 3% of its GDP by 2013.

German ministers repeat Eurobond opposition
Two leading German ministers reiterated their opposition to issuing jointly guaranteed European sovereign bonds as a means to end the crippling debt crisis. Finance Minister Wolfgang Schaeuble told German news magazine Der Spiegel that eurobonds are out of the question as long as the currency zone's 17 nations still run their own fiscal policy, and that different interest rates for euro zone nations were needed to provide 'incentives and the possibility of sanctions to enforce solid financial policy.'

Schaeuble acknowledged that the EU must, and will, beef up its response to the crisis to assist the heavily indebted nations, but that 'there won't be a collectivisation of debt or unlimited assistance.' Chancellor Angela Merkel has long ruled out eurobonds, and Economy Minister Philipp Roesler joined the chorus today, describing jointly guaranteed debt as 'the wrong way' out of the crisis.

'Eurobonds would mean that everybody shares the same interest burden which would be a punishment for financially sound nations,' he was quoted as saying. 'We cannot want this for Germany and for all other good states,' he added. Eurobonds would be a major step toward the bloc's economic integration, and are billed by supporters as an overnight solution to the crisis. Italy, Belgium and Luxembourg are among the nations calling for eurobonds.

Merkel's spokesman Steffen Seibert said that Merkel and Sarkozy will discuss strengthening financial and economic cooperation and governance across the euro zone. 'This is one of the lessons from the euro crisis, we need a stronger economic cooperation across the euro zone,' he added, declining to specify which concrete proposals will be discussed at the meeting.

The principle behind eurobonds is that European countries would guarantee each other's debts, so that investors would see the bonds as super-safe and loan at low interest rates. The hope is that lower borrowing costs would prevent any more financial bailouts. But Germany as the most creditworthy European country fears it would face higher borrowing costs and more risks if it had to borrow jointly with financially shaky nations.

Eurobonds could drive down the borrowing costs for troubled euro zone countries immediately, but Germany maintains that cheap credit without a powerful European institution overseeing the member states' budget and fiscal policy cannot be a solution.

Europe Pressures Merkel to Accept Euro Bonds
by Spiegel

Angela Merkel has been steadfastly opposed to euro bonds so far, but Germany's Nein no longer seems set in stone. French President Nicolas Sarkozy may have changed his mind too after the market turmoil last week. However, euro bonds present a serious domestic political risk for Merkel. 

The introduction of euro bonds, government debt issued by the entire euro zone, may be the only remaining way to solve the euro debt crisis, say some government leaders and economists, and Chancellor Angela Merkel could come under pressure from French President Nicolas Sarkozy to drop her categoric opposition to them at the special meeting planned by the two in Paris on Tuesday. Over the weekend, Italian Finance Minister Giulio Tremonti called for the introduction of such bonds, saying, "We wouldn't be where we are now if we had had euro bonds."

The chairman of the euro group of euro-zone finance ministers, Jean-Claude Juncker of Luxembourg, and the EU Economic and Monetary Affairs Commissioner, Olli Rehn, have long proposed euro bonds, arguing that they would restore stability by stopping speculative attacks on the debt of individual euro member states. But they would also increase Germany's borrowing costs, because the interest rates on such debt would be higher than on German sovereign bonds. Estimates for the annual rise in German interest payments vary widely, from €10 billion ($14.3 billion) to just under €50 billion ($72 billion).

'No Unlimited Support'
In an interview with SPIEGEL published on Monday, German Finance Minister Wolfgang Schäuble signalled he would remain firm. "The following remains true: There is no collectivization of debt, and there is no unlimited support," he said. Asked if he was opposed to euro bonds, he said: "I'm ruling out euro bonds for as long as member states pursue their own financial policies and we need differing interest rates (on sovereign debt) as a way to provide incentives and the possibility of sanctions, in order to enforce fiscal solidity. Without this solidity, the foundations for a common currency don't exist."

The pro-business Free Democratic Party (FDP), junior partner to Merkel's Christian Democrats, has ruled out the creation of euro bonds. Their leader, Economy Minister Philipp Rösler, reiterated his opposition to them in an interview in the Die Welt newspaper on Monday, saying they "lead to equal interest rates in the whole euro zone and thereby undermine the incentives for a solid budget and economic policy in the member states."

Is German Resistance Waning?
At present, the euro zone has no common fiscal policy. Every government issues its own bonds. Euro bonds would broaden part of public debt issuance to the entire euro zone. The interest rates on these bonds would be the same for all countries, and the crisis-hit nations would be able to obtain finance at far lower rates. Germany's borrowing costs, by contrast, would rise. In economic terms, euro bonds would herald the launch of a transfer union , a long term shift of resources from the bloc's richer countries to the poorer ones.

Transfer union is a dirty word in the center-right coalition. Members of Merkel's government have consistently promised that German taxpayers won't be left to foot the bill for the euro crisis. If Merkel were to sign up to euro bonds it would endanger her parliamentary majority.

Members of parliament from the coalition parties are already unhappy with reforms to the EU's bailout fund , which will be put to the vote in the German parliament after the summer recess. Horst Seehofer, the head of the Christian Social Union, the Bavarian sister party to Merkel's CDU, has said his party won't agree to a transfer union. "We as the CSU won't support it," he said. But the most recent escalation of the crisis could lead previous opponents of euro bonds to change their minds. Last week the French debt market came under pressure following rumors that France may lose its top AAA rating.

The German Sunday newspaper Welt am Sonntag reported that resistance to euro bonds was starting to crumble in Berlin. It cited unnamed government officials as saying steps towards a transfer union were no longer being categorically ruled out. The strategy employed so far -- launching massive new bailout packages -- was hitting its limits, officials said, according to the paper.

Germany's opposition Social Democrats and Greens have both said they would support the introduction of euro bonds provided that certain conditions were attached to them, including a tighter control of nations' fiscal policies. Green Party leader Cem Özdemir said the volume of euro bonds should be limited to 60 percent of a nation's gross domestic product.

Euro Bonds Could Cost Germany €47 Billion - Per Year
Economists are divided about the likely impact of a euro bonds. Kai Carstensen of the Ifo institute, a respected economic think tank, calculated that Germany would face a 2.3 percentage point rise in its interest rates on government debt -- meaning annual costs increase of around €47 billion.

Investor George Soros said in an interview with SPIEGEL published on Monday that for the euro zone to work, member states need to be able to refinance a large part of their debt at equal interest rates. "You need to establish fiscal rules that will ensure the solvency of every member," said Soros. "This should make the euro bond acceptable to German voters. Europe needs a fiscal authority that has not only financial but also political legitimacy."

At the same time, Soros added, high-debt countries may have to leave the euro zone. "Europe, the euro and the financial system could survive Greece leaving. It could survive Portugal leaving. And the remainder would be stronger and more easily managed," he said.

Germany and France rule out eurobonds
by Peggy Hollinger, Chris Bryant and Quentin Peel - FT

Germany and France are ruling out common eurozone bonds to solve the bloc’s current debt crisis, in spite of renewed pressure ahead of a meeting of chancellor Angela Merkel and president Nicholas Sarkozy on Tuesday.

Wolfgang Schäuble, German finance minister, made clear in an interview with Der Spiegel, that Berlin remains opposed to such a policy. “I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity,” he said.

Senior French officials also played down speculation that any firm announcement on jointly issued bonds would be issued after meetings when Ms Merkel comes to Paris on Tuesday. “Eurobonds would require a much more determined integration of budgetary policy,” one said. “We do not have that today. It could be a long-term project, but you cannot have eurobonds and at the same time national economic and budgetary policies.”

The comments come after Giulio Tremonti, Italy’s finance minister, this weekend described jointly issued bonds that would lower some struggling states’ borrowing costs as a “master solution” to the eurozone debt crisis, George Osborne, the UK finance minister, on Thursday said the idea now required “serious consideration”, while billionaire investor George Soros warned on Friday that the euro “could implode” if eurozone leaders failed to accept the principle of mutualising debt.

Yet Ms Merkel and Mr Sarkozy are on Tuesday expected to reiterate the need for greater fiscal and economic co-operation before any European bond can be considered. Nonetheless they hope to reassure markets by flagging a common determination to implement the measures agreed at the last Eurozone summit on July 21 where members agreed a new round of emergency crisis measures.

As a first step, Paris is hoping to make real progress on proposals to improve the governance of the eurozone. One official said the idea would be to push forward economic and fiscal integration, but also to improve the “institutional architecture that allows us to take decisions.”

For President Sarkozy, still deeply unpopular in the polls and facing a difficult re-election campaign next year, it will be important to come out of Tuesday’s meeting with concrete progress. Mr Sarkozy has already sought to reassure markets – and his German partners – on France’s determination to get public spending under control after last week demanding that his government come up with new deficit reduction measures by this week.

There was speculation at the weekend that Ms Merkel and Mr Sarkozy could even announce some new measures for further fiscal co-operation between their two countries. But officials close to the German chancellor caution against expecting any major initiative from the talks. They insist that the meeting will focus on proposals for long-term reforms of eurozone governance, and not on short-term measures to calm the markets.

“We have promised to table proposals for long-term improvements in governance in October,” a senior official said. Ms Merkel’s difficulty is that there is already strong resistance in Germany to July’s new eurozone crisis measures. A vote on the package is due to be held in the German parliament on September 23.

However this weekend even that timetable was coming under threat. Norbert Lammert, Bundestag president, warned yesterday that it was “scarcely possible” for the parliament to decide on the eurozone crisis measures by then. It was up to the Bundestag to decide its own schedule, he said, and the government could agree nothing without it.

German government no longer rules out euro bonds: report
by Erik Kirschbaum - Reuters

The German government no longer rules out agreeing to the issuance of euro zone bonds as a measure of last resort to save the single currency, conservative newspaper Welt am Sonntag reported on Sunday.

Even though Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler again spoke out against euro zone bonds and debt collectivization, Welt am Sonntag reported the German government is nevertheless considering that and other measures. "Preserving the euro zone with all its members has absolute top priority for us," according to a government source quoted in the newspaper under the headline: "Government no longer excludes European transfer union and joint euro bonds as last resort."

The newspaper, traditionally close to Chancellor Angela Merkel's Christian Democrats (CDU), indirectly quoted the source adding: "In case of emergency, one would thus even be prepared to accept the introduction of a 'transfer union' and at the end of the day even joint euro zone bonds. "Without these euro bonds, it might no longer be possible to save the euro zone," the newspaper continued, further quoting the source indirectly. "The path we've taken so far with multi-billion rescue packages for financially struggling states is beginning to reach its limits."

A government spokesman in Berlin declined to comment on the report in Welt am Sonntag but instead pointed to the Schaeuble interview in Der Spiegel news magazine published on Sunday. Schaeuble said Germany remains against any collectivization of euro zone governments' debt and creating common euro bonds is impossible while countries run separate economic policy.

"It still stands: there will be no collectivization of debt and there will be no unlimited support," he said. "There are certain support mechanisms that we are developing further -- with strict conditions." "The member states that need our solidarity must reduce their deficits and reform their economies -- with at times very tough measures," he said.

Der Spiegel said Schaeuble also ruled out the issuance of eurobonds unless certain hurdles are removed. "I rule out Eurobonds for as long as member states conduct their own financial policies and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity," he said. "Without that kind of solidity, there is no foundation for a joint currency," Schaeuble added.

Economy Minister Roesler also spoke out against euro zone bonds in an interview in Handelsblatt newspaper on Monday: "I consider euro bonds to be the wrong approach in a Europe in which every member state should take responsibility for itself."

Pressure is nevertheless growing on euro zone leaders to take a more radical approach to the euro zone's debt crisis ahead of a potentially vital meeting of German Chancellor Angela Merkel and French President Nicolas Sarkozy next week.

Italian Economy Minister Giulio Tremonti renewed his call for a collective euro zone bond on Saturday. Tremonti returned to proposals for jointly issued bonds that would effectively make individual governments' debt a common burden, saying they were the "master solution" to the euro zone debt crisis. "We would not have arrived where we are if we had had the euro bond," he said on Saturday.

The comments underline the sharp divisions hampering efforts to coordinate a response to the euro zone debt crisis, which escalated dramatically last month as markets turned their fire on Italy, one of the bloc's most heavily indebted countries. What is at stake was highlighted by a new poll for the Bild am Sonntag newspaper on Saturday which showed 31 percent of Germans believe the euro will be gone by 2021.

The idea of euro bonds was also dismissed by Deutsche Bank chief economist Thomas Mayer. He told Deutschlandfunk radio that and raising the European Financial Stability Fund (EFSF) could lead to the end of the European Monetary Union (EMU). "I believe such considerations would be poison pills for the EMU," Mayer said. "It would violate a fundamental democratic principle if the EFSF were boosted to several trillion euros or euro zone bonds were introduced."

He added: "If at the end of the day German, Dutch and Finnish taxpayers are going to be held responsible for decisions made in other parliaments as a result of raising the size of the EFSF or introducing euro bonds, that will lead to a political collapse of the EMU. That is not an option."

ECB buys €22 billion in eurozone bonds
by Ralph Atkins and Richard Milne - FT

The European Central Bank spent €22bn on government bonds last week - more than ever before – as it sought to prevent the eurozone debt crisis escalating out of control.

The larger-than-expected display of fire-power highlighted the scale of the task the euro’s monetary guardian faces in keeping official borrowing costs under control for Italy and Spain. It also added to the risks the ECB is carrying onto its balance sheet – and of fresh splits on its 23-strong governing council.

The buying caused Italian and Spanish yields to plummet with their benchmark borrowing costs on 10-year bonds falling from above 6 per cent to 5 per cent on Monday. The buying came just in time for analysts and investors, with many worrying that Rome’s and Madrid’s borrowing costs were on the verge of becoming unsustainable.

The ECB’s governing council had given the go-ahead to resume bond buying on August 4. At the start of last week Jean-Claude Trichet, president, announced it would “actively implement” its bond purchasing programme, which had been dormant since March – a clear sign that it would be expanded beyond previous purchases of Greek, Irish and Portuguese bonds.

The ECB gives no details of its bond buying but traders reported the central bank reporting Spanish and Italian debt throughout the week and in many different bond maturities. The ECB’s move followed pledges by Rome and Madrid of fiscal austerity measures and other steps to boost their economies’ longer-term growth prospects.

The ECB’s re-entry into bond markets marked a dramatic escalation compared with its past activity. The previous largest weekly amount spent was in the first seven days after the programme was launched in May 2010, when it spent €16.5bn.

Writing before the figures were disclosed, Gary Jenkins of Evolution Securities said: “Anything under the €10bn mark is likely to disappoint and question the ECB’s commitment; more than €15bn could be seen as the ECB applying a shock-and-awe tactic and give a further boost to the market.”

The €22bn total covered purchases made since the governing council meeting and up to the middle of last week. It brings the total amount of eurozone government bonds on the ECB’s books to €96bn. The ECB will this week seek to reabsorb the equivalent amount of liquidity from the eurozone financial system in an attempt to “sterilise” any inflation impact.

Some analysts have worried that because of the size of Italy’s and Spain’s bond markets – a collective €2,100bn in size – the ECB could have difficulties in sterilising all its purchases if it has to carry on buying on such a large scale.

The ECB governing council decision for August was opposed by at least three members. The size of last week’s purchases will probably lead to at least some urging that the programme is reduced as soon as possible. However analysts believe the ECB may have to maintain large-scale intervention until eurozone governments have secured national approval for the European Union’s bail-out fund to take over the ECB’s actions.

'You Need This Dirty Word, Euro Bonds'
by Gregor Peter Schmitz And Thomas Schulz - Spiegel

In a SPIEGEL interview, billionaire investor George Soros criticizes Germany's lack of leadership in the euro zone, arguing that Berlin must dictate to Europe the solution to the currency crisis. He also argues in favor of the creation of euro bonds as a way out of the turbulence.

SPIEGEL: Mr. Soros, we currently see a global banking crisis, a currency crisis and a sovereign debt crisis. Has the financial dilemma become too big to handle? How can politicians on both sides of the Atlantic be expected to solve such a multitude of crises?

Soros: The politicians have not really tried to fix any crisis; they have so far only tried to buy time. But sometimes time is actually working against you if you refuse to face the relevant issues and explain to the public what is at stake.

SPIEGEL: Are you talking about the Germans? Many experts think Chancellor Angela Merkel has been particularly hesitant to address the euro crisis.

Soros: Yes. The future of the euro depends on Germany. This is the point I really want to bring home. Germany is in the driver's seat because it is the largest country in Europe with the best credit rating and a chronic surplus. In a crisis, it is always the creditor that calls the shots. Sure, this is not a position Germany or Chancellor Merkel ever desired and they are understandably reluctant to embrace it. But the fact is: The Germans are now in the position of dictating to Europe what the solution to the euro crisis is.

SPIEGEL: Why should Berlin embrace that idea?

Soros: There is simply no alternative. If the euro were to break up, it would cause a banking crisis that would be totally outside the control of the financial authorities. So it would push not only Germany, not only Europe, but the whole world into conditions very reminiscent of the Great Depression in the 1930s, which was also caused by a banking crisis that was out of control.

SPIEGEL: What, then, needs to be done to fight this crisis?

Soros: I think there is only one choice. It is not a question of whether Europe needs a common currency. The euro exists, and if it broke apart all hell would break loose. Germany has to make it work. To make it work, you have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word, the "euro bonds". But when you study what it involves to have euro bonds, you really have a problem because each European country remains in control of its own fiscal policy, and you have to rely on the country to meet its financial obligations.

SPIEGEL: Germans hate the euro bonds idea. They fear that under this scenario they will ultimately need to bail out everyone, even large nations like Italy.

Soros: That is why you need to establish fiscal rules that will ensure the solvency of every member. This should make the euro bond acceptable to German voters. Europe needs a fiscal authority that has not only financial but also political legitimacy. The difficulty is agreeing on the rules. Unfortunately, Germans have some funny ideas. They want the rest of Europe to follow their example. But what works for Germany can't work for the rest of Europe: No country can run a chronic surplus without others running deficits. Germany must propose rules that other countries can also follow. These rules must allow for a gradual reduction in indebtedness. They must also allow countries with high unemployment, like Spain, to continue running cyclical budget deficits until they recover.

SPIEGEL: More and more economists, especially in Germany, would like to see Greece leave the European Union. Do you consider that to be a viable option?

Soros: I think that the Greek problem has been sufficiently mishandled by the European authorities that this may well be the best solution. Europe, the euro and the financial system could survive Greece leaving. It could survive Portugal leaving. And the remainder would be stronger and more easily managed. But the financial authorities have to arrange for an orderly exit in order for the European banking system to survive it. That will cost money because the European banking system including the European Central Bank has to be indemnified for its losses. Depositors in Greek banks have also got to be protected. Otherwise depositors in Irish or Italian banks would not feel safe.

SPIEGEL: Is the current crisis even worse than the one in 2008?

Soros: This crisis is still the continuation of the same crisis. In 2008, the financial system collapsed and it had to be put on artificial life support. The authorities managed to save the system. But the imbalances that caused the crisis have not been removed.

SPIEGEL: What do you mean?

Soros: The method the authorities chose, rightly, three years ago was to substitute the credit of the state for the credit in the financial system that collapsed. After the failure of Lehman Brothers, the European financial ministers issued a declaration that no other systemically important financial institutions would be allowed to fail. That was the artificial life support; it was exactly the right decision. But then Chancellor Merkel stated that such support would only be granted by each EU member state individually, and not by the European Union.

SPIEGEL: That undermined the concept of a strong European response to the crisis. Has that been the biggest mistake so far?

Soros: That Merkel statement was the origin of the euro crisis. It shattered the vision that the EU will protect the euro in a joint effort.

SPIEGEL: Where will the current crisis stop? Even France now seems to be threatened by a financial meltdown.

Soros: Of course it is spreading. Markets fear uncertainty. Germany has to realize that it has no alternative but to defend the euro. The longer it takes, the higher the price Germany will have to pay.

SPIEGEL: You have been very critical of how the crisis has been handled by governments. Many European citizens, however, blame speculators like you for their attempts to bring down the euro. Huge hedge funds like yours have waged massive bets against the European currency over the past year. And in recent days, several European countries have even imposed temporary bans on short selling, bets on falling share prices.

Soros: You are confusing markets and speculators. At the moment, the biggest speculators are the central banks because they are the most important buyers and sellers of currencies. Hedge funds have definitely been supplanted by central banks. Markets expect the authorities to produce a financial system that actually holds together. If there is any hole in that system, speculators will rush through that hole.

SPIEGEL: That sounds very noble. But in reality, speculation makes any crisis worse. Look at the credit default swaps (CDS) market where speculators can bet on a further decline of currencies and economies. How can that be helpful?

Soros: Of course, speculation will always make a crisis worse. If there is a weak point, it will expose it. And you are right, the CDS market is a very dangerous instrument and I think it should not be allowed. I am one of the very few people who argue that the CDS is a dangerous instrument because it is so lop-sided in favor of a negative outcome.

SPIEGEL: Do you think the European Central Bank is part of the solution or part of the problem, when it comes to the dealing with the euro crisis?

Soros: It is part of the solution, but which part? Any central bank should only be in charge of liquidity. Solvency is a matter for the treasury. But because there is no European treasury, the ECB was pushed into that arena. To keep the financial system alive they overstepped their limits, as the former German Bundesbank president Axel Weber pointed out, by discounting the government bonds of a country that was clearly bankrupt.

SPIEGEL: You are referring to the purchase of Greek bonds. Now the European Central Bank even started buying Spanish and Italian bonds. It is not even clear, however, if it is legally allowed to do so.

Soros: Yes, but there is a well established conviction that the central banks always do what is necessary to keep the system going and then afterwards you then take care of the legal aspects. In a crisis, you simply do not have time to think about such concerns for too long.

SPIEGEL: The United States is drowning in even more debt than Europeans. Its economic recovery has been painful. Are we going to see a double-dip recession in the US?

Soros: The indebtedness of the US is not all that high, but if a double-dip recession was in doubt a few weeks ago, it is less in doubt now, because financial markets have a very safe way of predicting the future. They cause it. And the markets have decided that America is going to see a recession, particularly after the recent downgrade of the US by the rating agency Standard & Poor's.

SPIEGEL: President Barack Obama has been fiercely criticized for his handling of the economy. You were one of his biggest supporters in 2008. Are you happy with his economic policy?

Soros: No, of course not. But the reality is that we have had 25 years of excesses building up in America -- a combustible mix of too much credit and too much leverage. You need a long time to reverse that.

SPIEGEL: Obama tried to stimulate growth with a gigantic stimulus program which increased the national debt further. Was that a mistake?

Soros: Obama embraced the ideas of John Maynard Keyes. Basically, the analysis of Keynes is still very relevant -- with one big difference between now and the 1930s. In the 1930s, the states, the governments had practically no debt and could, therefore, run deficits. Nowadays, all governments are heavily indebted, and that is a big change.

SPIEGEL: If Keynes were still alive, would he adjust his theory?

Soros: Definitely. He would say that governments can still benefit from running fiscal deficits, but the new debt has to be invested in a way that will pay for itself. So the money spent would have to increase productivity.

SPIEGEL: The $800 billion stimulus program launched by Obama did not live up to that?

Soros: Obama's stimulus program was not big enough and it was not directed at improving the infrastructure or human capital. So it was not productive enough.

SPIEGEL: And any further stimulus is now basically a non-starter, because the conservative majority in Congress is hell-bent on preventing it.

Soros: That is what is pushing the world towards another recession, into a double-dip.

SPIEGEL: The Republicans are doing that?

Soros: Yes, but Obama is also at fault. He yielded the agenda to the Republicans. He is talking their language. The president would have to show leadership to counter the Republican wave, and so far he has not done so.

SPIEGEL: Do you think the US deserved the recent downgrade by Standard & Poor's?

Soros: Probably not. This decision was the attempt by the rating agencies to reinvent themselves as anticipating rather than responding to changes that have occurred. So they are really basing that downgrade on that expectation that the political process will not provide the solution. Judging such political developments is a very new role for the rating agencies, though.

SPIEGEL: As an investor, do you listen to the rating agencies?

Soros: Well, I do not, but many other investors do.

SPIEGEL: The credit rating agencies are accused of exascerbating the crisis. Do you think the role of the rating agencies in the financial system needs to be scaled back?

Soros: I do not have an answer to that.

SPIEGEL: There are no alternatives.

Soros: Frankly. It is an unsolved problem in my mind

SPIEGEL: As an investor, would you still bet on the euro?

Soros: I certainly would not short the euro because China has an interest in having an alternative to the dollar. You can count on China to back the efforts of the European authorities to maintain the euro.

SPIEGEL: Is that the reason why the euro is still so strong compared to the dollar?

Soros: Yes. There is a mysterious buyer that keeps propping up the euro.

SPIEGEL: And it is not you.

Soros: It is not me (laughs).

SPIEGEL: In the end, will China be the only winner in this crisis?

Soros: China, of course, has been the great winner of globalization, and if globalization collapses, the Chinese will also be among the losers. So they have a strong interest in preserving the current global system. However, in some ways, they have been just as reluctant to accept it as the Germans. Germans have been hesitant to accept responsibility for Europe, and the Chinese have been hesitant to accept responsibility for the world. But they are both being pushed into it.

Spain branded the eurozone's big weak link as 'the indignant' take to the streets
by Sarah Rainey - FT

They call themselves "the indignant". Armed with sleeping bags and week old clothes stuffed into rucksacks, around 500 people stand shoulder-to-shoulder in Madrid's central square.

As darkness falls, and the last few tourists flock to their hotels, the nightly vigil begins. Some hoist placards. Others gather outside the gates of the Ministry of the Interior, chanting in unison: "It's not the crisis, it's the system" and "End the cuts". Many of them have been here since May 15, when they joined the nationwide protests against government austerity measures and Spain's chronic unemployment.

But this is not just Spain's disaffected youth. Among the crowds are parents, pensioners, teachers and civil servants, all angry and frustrated as their nation – once a European heavyweight – teeters on the brink of a crisis. As the rest of Europe suffers amid soaring sovereign debt, the protesters reiterate their demands for jobs, secure housing and increased hospital funding.

This is no longer a peaceful protest. Last week, riots broke out in Madrid's Plaza de Cibeles, leaving at least 20 young people and seven policemen injured. Police estimate that up to 100,000 people have taken part in protests so far, with countless strikes, clashes and arrests across Spain. There is increasing speculation that the protests may turn violent on Tuesday as participants react badly to the cost of the proposed €60m (£37m) visit by the Pope.

Despite efforts by Jose Luis Rodriguez Zapatero, Spain's Prime Minister, to quell the movement, the ranks of the "indignant" are growing. Early elections have been called and opposition parties are strengthening as the turbulent economy continues to fuel popular unrest. But what does this domestic turmoil mean for Spain in its European context? The markets remain volatile as Zapatero's government struggles to restore investor confidence and stave off financial crisis. Is this once-stable nation becoming the weakest link in the eurozone?

"Spain is the reality everyone is ignoring," warned Nouriel Roubini, the bearish US economics professor, addressing a recent conference in Madrid. Looking at Spain's faltering domestic economy, traders might be advised to heed his words.

With government debt at 64.5pc of gross domestic product (GDP), the nation has only shown halting and at times regressive recovery after the economic crisis burst the property bubble that had previously propped up the Spanish boom. The latest figures from the Bank of Spain place second-half growth at a cautious 0.8pc – dampened by a sluggish first half and the threat of tensions over its neighbours' sovereign debts.

In a bid to reduce the deficit and fortify banks' balance sheets, PSOE, Zapatero's ruling party, introduced a raft of austerity measures in 2010. The programme includes spending cuts, raising the retirement age, liberalising the labour market and selling off state assets. But the result is far from the increased fiscal liquidity the embattled leader was hoping for. Figures from Spain's National Statistics Institute show that industrial production fell 2.7pc in June, while the number of bankruptcies increased 16.5pc in the second quarter against the same period last year.

Unemployment remains the thorn in Zapatero's side, however, with more than a fifth (20.9pc) of the working-age population out of work, according to government data. Carina O'Reilly, senior European analyst at IHS Jane's, says the unemployment problem has been "building for a while", soaring to around 43pc among the under-30s. "When the crisis hit Spain, unemployment rates were – even then – very high, and it's been rising steadily since 2007," she adds. Much to the despair of the "indignants", this puts career opportunities in Spain below the rest of Europe, Egypt, Lebanon and Tunisia.

The spillover from Spain's domestic woes has already been felt in Europe. The benchmark Ibex 35 index fell to its lowest level – 7966 – on August 4 from a high of 11113 earlier in the year.

Moody's downgraded Spain's credit rating to Aa2 back in March, warning that the economy was "subdued", and late on Thursday night short-selling in Spanish banking stocks was banned by the European Securities and Markets Authority. Earlier that day, Standard & Poor's cut the credit rating of Telefonica, the Iberian telecommunications giant and a major economic driver, from A- to BBB+ after its net profit slumped 27pc.

In the Spanish bond market, 10-year government bond yields reached 14-year highs of 6.29pc in July, soaring dangerously close to the 7pc level that saw Greece and Portugal bailed out in the last 18 months. Even the reactivation of the European Central Bank's bond-buying programme has left shaken investors hesitating to venture into the rollercoaster Spanish market. Last week, bond yields dropped back below 5pc, but analysts are warning traders to remain cautious.

Louise Taggart, European analyst at AKE consultancy in London, says the ECB's intervention gave Zapatero's government "breathing space", but is unlikely to signal the end of economic volatility in Spain. "At the minute, unemployment is the major issue, and if the protesters involved in the 'indignant' movement aren't seeing any improvement in the situation, then there's no reason for them to get off the streets," she adds. "But I'd be surprised if the civil unrest impacted on the markets unless it got worse."

Jan Randolph, director of sovereign risk at IHS Global Insight, sees little difference between Spain and Greece and Portugal where civil unrest in response to austerity measures saw both countries seek European Union bail-out funds. "The battle for the euro will be won or lost on the southern flank for sure," he warns. "My bottom line is that Italy and Spain are solvent but if markets push new borrowing costs at the margin up to 6-7pc, and this permeates the rest of their debt mountains over time, then this could make them insolvent."

Mr Randolph was one of the first to blacklist Spain as the "big weak link" in the eurozone, and says the "indignant" movement has already proven a "major political constraint on more aggressive structural reform in Spain". He adds: "Whether social cohesion holds together under such pressures is still an open question."

The economic outlook on the Iberian Peninsula is not all doom and gloom, however. A handful of companies in the Ibex 35 continue to post positive reports, buoyed by dominant positions in niche markets. Amadeus, the airline bookings company, grew first-half profits by more than 12pc to €263.7m, while Madrid-based insurer Mapfre climbed 13.5pc to €322m in the first quarter. A report published by Deutsche Bank in July revealed latent optimism towards Spain's stock market, with hotel chains – particularly Melia International – profiting from a booming tourist trade.

Back in Madrid's main square, Spain's "indignants" will not be moved. Angered by job losses, hospital closures and 150,000 annual housing repossessions, they have planned a raft of protests this month, culminating in the nationwide "Real Democracy Now" strike on October 15. With one eye on the elections, brought forward to November after mounting pressure on Zapatero to resign, opposition leader Mariano Rajoy is wooing potential participants with promises of tax cuts and sturdy growth.

But the protesters may take more convincing. "We won't leave until they promise us jobs," says Silvia Inez, a former secretary who has been unemployed since last year. Isabel Gimenez, a university professor in Madrid, adds: "The 'indignant' movement has been highly positive ... it has served to revitalise Spanish society."

With widespread support, robust motives and no jobs to go home to, the "indignant" movement shows no signs of abating. And as Spanish markets and bond yields rollercoaster, investors' confidence in domestic recovery continues to plunge. Within a debt-ridden eurozone, Spain is clearly not the only cause for concern. But while everyone looks the other way, it could well be the next domino to fall.

Italy’s austerity package branded unfair
by Giulia Segreti - FT

Italy’s austerity package, passed by an emergency cabinet meeting on Friday, is facing growing criticism at home, even as it is welcomed by European Union officials.

Herman Van Rompuy, president of the European Council, said after a conversation with Silvio Berlusconi on Saturday that he fully supported and welcomed the “timely and rigorous financial measures”. “I underlined that these approved measures are crucially important not only for Italy but for the eurozone as a whole,” he said.

But critics say the €45.5bn package of spending cuts and tax increases over the next two years, which aim to balance the budget by 2013, will strangle Italy’s stagnant economy. Opposition parties, unions and industry representatives also say the measures unfairly target public sector employees, pensioners and mid-income workers, leaving the wealthy almost unscathed.

The critics, including nine members of Mr Berlusconi’s own coalition, say the measures will hit the middle class but fail to tackle Italy’s big tax evasion problem. “Nobody seems to be happy, except for Mr Berlusconi, who does not lose a moment to celebrate the action of his centre-right government,”said Rosy Bindi, president of the opposition Democratic Party.

Her party is threatening a “war of amendments” in parliament to press for additional measures, including the sale of state-owned property and the allocation of funds to the impoverished south.

It is also calling for stronger measures against tax evasion. Although the government has claimed this as a priority and launched an advertising campaign last week to shame tax evaders, measures to tackle the problem are expected to bring no more than €1bn into the state coffers in the next year.

Susanna Camusso, leader of the CGIL trade union, told La Repubblica newspaper that a strike was the only way to “change the inequity of this package”, in particular, the reform of the labour market and pension system. Union officials would meet on August 23 to set a strike date, she said, and invited other unions to join.

Giulio Tremonti, finance minister defended the package on Saturday, congratulating the ruling coalition for working through the summer recess and approving the decree within a week. “I have done everything with conscience and for the good of the country”, said Mr Tremonti. “We are convinced that the liberalisation, streamlining of the labour market can have a significant impact on GDP,” he said, adding:“For the meantime we do not expect revisions to our growth estimates.”

While there is a political consensus on the need to cut Italy’s debt, there is also growing concern about the slow pace of Italy’s recovery. The economy grew 0.3 per cent in the second quarter of the year. The government’s most recent forecasts for 2011 in April predicted a 1.1 per cent growth rate, while Confindustria predicts 0.9 per cent, one of the lowest growth rates in the eurozone.

Fears about the lack of economic momentum have caused the Milan stock market to lose almost a quarter of its value in the last month. Market reaction to the austerity package will not become clear until Tuesday, when the bourse reopens after a public holiday. The procedure to convert the decree into law will start in the Senate on August 22 and a final vote is expected by September 5.

Dutch Say Better to Remove Greece From Euro Than Extend Loans
by Maud van Gaal - Bloomberg

A majority of Dutch respondents to a poll published today said it would be better to remove countries including Greece from the euro zone, rather than continuing to support them. This view was supported by 54 percent of people surveyed in a poll by researchers Maurice de Hond and No Ties BV, published on their website. As many as 60 percent of the participants said the Netherlands “should stop lending money to other euro zone countries now.”

Lawmakers responsible for finance are cutting their vacations short to question Prime Minister Mark Rutte and Finance Minister Jan Kees de Jager on the size of the Dutch contribution to a second Greek bailout package on Aug. 16.

The European Union and International Monetary Fund on July 21 agreed to a 159 billion-euro ($227 billion) package that includes 50 billion euros from bondholders. Rutte created confusion by telling reporters after the meeting the total amount was 109 billion euros, including the private sector contribution. He said last week he plans to apologize to parliament for the confusion he created, without withdrawing his calculations, which he said related to Greece’s funding needs until 2014 instead of 2020.

Lawmakers may ask for a second, plenary, meeting on Aug. 17 to vote on motions submitted by them in which they request the government to take certain actions, or to express discontent. The government formally doesn’t have to ask parliament for approval for the new support package for Greece, or an amendment to the European Financial Stability Facility framework agreement, De Jager said in a letter dated Aug. 8, adding he will discuss the matters with them anyway.

ECB is euroland's last hope as bail-out machinery fails to resolve crisis
by Ambrose Evans-Pritchard - Telegraph

The leaders of Germany and France have three bad choices as they decide whether to save EMU this week, or pretend to do so.

They can agree to fiscal fusion and an EMU debt union, entailing treaty changes and a constitutional revolution. This implies the emasculation of Europe's historic nation states. They can tear up the mandate of European Central Bank and order Frankfurt to go nuclear with €2 trillion of `unsterilized' bond purchases until the M3 money supply in Italy, Spain, Portugal, Ireland, and Greece stops contracting at depression rates and starts to grow again at recovery speed (5pc). This might destabilize Germany.

Or they can try to muddle through with their usual mix of half-measures and bluster. This will lead to a rapid disintegration of monetary union and a banking collapse. It risks a repeat of 1931 if executed badly, as it most likely would be.

They have days or weeks to make up their minds, not months. The EFSF rescue fund was never more than a stop-gap device to avoid grappling with the core issue: the economic chasm between North and South. It has failed. Insistence that it could handle a dual crisis in Spain in Italy was a bluff, and last week that bluff was called when France too was sucked into the maelstrom.

Escalating bail-out costs are eroding French debt dynamics. "Bad" is contaminating "good". The EFSF has itself become a source of contagion and this would turn yet more virulent if the fund were quadrupled to €2 trillion as some suggest. "The larger the EFSF, the faster the dominos fall," says Daniel Gross from the Centre for European Policy Studies (CEPS).

"Only Germany can reverse the dynamic of European disintegration," writes George Soros in the Handelsblatt. "Germany and the other AAA states must agree to some sort of Eurobond regime. Otherwise the euro will implode."

Mr Soros knows that the trigger for the denouement of the pre-euro ERM in 1992 was a quote from a Bundesbanker in the same Handelsblatt hinting that sterling and the lira were overvalued. That was all it took. The Tory government that had tied Britain's fate to an over-heating Germany was destroyed.

Once again we are all reading the German press, and what we see is subversive commentary once again from Frankfurt, and bail-out fatigue and simmering anger among Bavaria's Social Christians, Free Democrats (FDP), and Angela Merkel's own Christian Democrats in Berlin. If Germany is about to immolate itself for the sake of EMU, this is not obvious in the Bundestag.

What German politicians want is yet more Club Med austerity, even though Euroland growth has wilted. The demands have become ideological, going beyond any coherent therapeutic dose. The effect of such fiscal tightening at this stage is to repeat the error of the 1930s Gold Standard when the burden of adjustment fell on weaker states, pushing them into a downward spiral that eventually engulfed everybody.

Fiscal cuts make little sense for Italy, where the output gap is 3.1pc. "Increasing potential growth should be the main policy goal. Fiscal tightening could further depress aggregate demand" said the IMF in its Article IV report.

Italy does not have a debt problem as such. Its budget is in primary surplus this year. Total debt – the relevant gauge -- is under 250pc of GDP: similar to France, and lower than Holland, Spain, Britain, the US, or Japan. Italy is one of the few EU states to have sorted out its pension liabilities, by linking payouts to life expectancy

What Italy has is a growth problem, rooted in currency misalignment. Having lost over 40pc in unit labour cost competitiveness against Germany since EMU, it is trapped in slump. Per capital income has contracted for a decade.

So why is Europe forcing Italy to tighten drastically and run an even bigger primary surplus within two years, and doing so just as the world flirts with a double-dip downturn? Why too is the ECB's Jean-Claude Trichet acting as the enforcer? His leaked letter to Italian premier Silvio Berlusconi is a diktat, a long list of measures imposed as a condition for the ECB's action to shore up the Italian bond market.

Mr Berlusconi has capitulated, with a "bleeding heart". He is slashing payments to regional authorities, though he has resisted wage cuts. "They made us look like an occupied government," he said. Northern League leader Umberto Bossi accused the ECB of "trying to blow up the Italian government."

Mr Trichet is moving into dangerous waters dictating budgets to sovereign parliaments. It matters enormously whether citizens have political "ownership" over austerity, or whether it is imposed by outside forces. His former colleague Otmar Issing fears that Europe is becoming a deformed union where officials run roughshod over nations and fiscal power lies beyond democratic control. Such encroachments have "brought war" in the past, he said.

The bank should correct its own errors first. It was ECB tightening that choked Europe's recovery. "Eurozone monetary weakness has been the key driver of the recent deterioration in global economic and financial conditions," said Simon Ward from Henderson Global Investors.

Real M1 desposits are not only collapsing across southern Europe, they have turned negative in the North as well. This signals big trouble. „It was astonishing that the ECB, which trumpets adherence to monetary analysis, chose to rein back its longer-term repo lending in late 2010 and raise interest rates in April and July. This was a repeat of its error of 2008," he said.

Mr Ward said the ECB should stop choosing which nations to rescue through "quasi-fiscal transfers" and stick to neutral central banking. It should launch quantitative easing for the whole of EMU. "At this point the Eurozone needs a massive infusion of liquidity," said Dr Gross from CEPS. Otherwise there will be a "break-down of the interbank market that would throw the economy into an immediate recession as after the Lehman bankruptcy".

HSBC's chief economist Stephen King said the ECB must print money a l'outrance in "exactly the same" way as the Fed. "At the heart of the problem is the ECB's unwillingness to be seen 'monetizing' government debt. Yet if the alternative to QE is the collapse of the euro or a descent into depression, then massive expansion of the ECB's balance sheet seems a small price to pay."

Such views are rarer in Germany but at last making themselves heard. Kantoos Economics said the ECB has been "extremely tight" and lost sight of its essential purpose. "It is therefore an important cause of the current mess." "European policy makers and central bankers are wrecking one of the most fascinating projects in human history, the unity and friendship among the countries of Europe. This is beyond depressing," he said.

The path of least resistance for Angela Merkel and Nicolas Sarkozy on Tuesday is surely to force the ECB to change course, by treaty power if necessary. Or kiss goodbye to the Kanzleramt, the Elysee, and monetary union.

Lord Myners calls for inquiry on 'black box' trading
by James Quinn and Harry Wilson - Telegraph

Lord Myners has called on the Government to launch a focused inquiry into so-called "black box" computerised trading in the wake of extreme volatility in the UK's biggest companies.

The former City minister said that high-frequency trading also known as black box trading had been a "contributing factor" in the harsh swings which have led to more than £300bn being wiped off the value of British shares since the beginning of July. He wants both the Treasury and the Financial Services Authority (FSA), the City regulator, to investigate thoroughly the phenomenon and the impact it has.

High-frequency trading (HFT), which accounts for as much as 50pc of trading in London, has been blamed for exacerbating intra-day swings and putting ordinary investors at a disadvantage due to the speed with which such trades are placed in the market.

Lord Myners, the former fund manager, also called for European banks, which have been at the centre of the storm, to be more honest to investors and increase levels of disclosure of the sovereign debt they are holding. His calls on disclosure were echoed by Georges Pauget, an adviser to the French government, who said banks must be more open with investors if they are to end the market fears that have led their share prices to collapse in recent weeks. The comments from the two men come after a wild week in global stock markets.

The nadir came last Wednesday, when investors moved strongly against Societe Generale, France's largest bank, forcing its shares down as much as 20pc. As a result, European regulators chose to ban shorting on banks in France and three other countries.

But Lord Myners said that rather than shorting – which he said was not a contributing factor in falling bank shares – there was a "greater need to address" such trading methods. "High-frequency trading appears so detached from the true function of capital markets, but is potentially fraught with hazard. It definitely deserves more attention than either the FSA or the Treasury has given it."

Lord Myners has tabled a series of questions in the House of Lords on the subject. Lord Sassoon, commercial secretary to the Treasury, said last week in a written answer that the Government's two-year study into the "Future of Computer Trading in Financial Markets", would not report until autumn 2012.

Andy Haldane, the Bank of England's executive director for financial stability, last month warned now may be the time to set a "speed limit" on market trades to tackle the dangers posed by so-called "flash trading" by high-speed computers.

Larry Tabb, founder of financial market research house Tabb Group, said although HFT was not directly to blame, it was indirectly to blame for removing large swathes of liquidity from the market, meaning that when sizeable sell orders are made, prices drop further than they might have done.

Lord Myners' calls for wider disclosure were echoed by Mr Pauget, the former chief executive of Credit Agricole, who said banks should move quickly to give better disclosure of their funding positions to reassure the markets they are well-financed.

"They have to provide more information. Banks have to give more information on liquidity," said Mr Pauget. He went on to say there was a growing need for all banks to give more details of their net stable funding ratios, which show the proportion of a bank's assets that are financed with longer-maturity debt.

His comments come amid concern that the UK's largest banks are on a collision course with the FSA over the need for more detailed disclosure of the amount and type of sovereign debt each is holding.

The Swiss enter Alice in Wonderland territory
by Gillian Tett - FT

Last week, something astonishing happened in Switzerland. In the London interbank offered rate market – where traders bet on future rates – implied Swiss interest rates plunged into negative territory.

Yes, you read that right: if you want to lend Swiss francs or make a deposit in the next year, you must pay for that privilege, or so the Libor market implies. The normal assumptions of finance have been turned upside down; call it Alice in Wonderland economics.

Nor is this the first time. In the 1970s the Swiss National Bank imposed negative interest rates on foreign accounts to deter inflows; and in 2008 some short-term Swiss market rates briefly turned negative. That also happened in Japan in the late 1990s. Recently, amid financial panic, some dollar short-term rates have touched negative territory.

What makes the Swiss situation so remarkable, however, is that it affects not just ultra-short rates. On Friday, futures markets predicted negative rates until 2013 (and minus 8 basis points next summer). This is unprecedented. Thus investors should watch closely to see what happens next, After all, it is a sign of how distorted the global financial system has become amid eurozone and US turmoil – and the pressure this is creating in currency markets.

Last week’s swing, for example, was sparked by the rise of the Swiss franc. In the decade before 2008, the franc traded in a relatively narrow band. However, since then, it has strengthened 40 per cent on a trade-weighted basis, as panicked investors seeking havens away from dollars or euros have purchased the currency.

Last year, the SNB tried to slow this trend with large-scale unilateral intervention. But after a brief hiatus, the franc rose further, creating SFr10bn ($14bn) of losses for the central bank this year alone, and prompting some politicians to demand the resignation of Philipp Hildebrand, its governor. This summer’s chaos in the eurozone and dollar markets has strengthened the franc again. Indeed, last week Goldman Sachs described it as “the most overvalued currency” in modern history, 71 per cent stronger than fundamentals justified.

Unsurprisingly, the SNB warns that overvaluation threatens to create a recession and deflation. It is also causing losses for millions of east European homeowners with mortgages in francs, and (less visibly) for European banks holding franc-linked derivatives contracts.

Thus the SNB faces pressure to act. But last year’s experience has left it wary of intervention. So on August 3 it launched a desperate experiment: in 10 short days, it raised liquidity from SFr30bn to SFr120bn (an injection into the financial system worth a stunning 20 per cent of gross domestic product), and conducted currency swaps. The hope is that this shock therapy will push markets rates into such negative territory that foreigners will not want to hold francs.

Will it work? Opinions are divided. The good(ish) news is that the franc did weaken late last week. The bad news is that money markets also started to gum up, partly because no one knows what negative rates will do to the financial system. They might, for example, force banks to impose negative rates on Swiss savers. “Even sophisticated investors [are] inquiring about the possibility of bank runs should people decide that holding cash in bank accounts [is pointless],” says Beat Steigenthaler of Swiss bank UBS. This “nonsensical” idea reflects the “rather chaotic turn the money markets have taken”, he says.

Meanwhile, some doubt that even this shock treatment will stop people buying francs; they want the SNB to reimpose the 1970s controls. “The Swiss authorities do not seem to have woken up to the fact that the only way to control this [currency swing] is to introduce negative interest rates for large foreign deposits,” says Christopher Wood, analyst at CLSA in Hong Kong.

Do not bet on this happening soon, however. SNB officials insist (probably correctly) that imposing capital controls would undermine Switzerland’s status as a financial centre. They also doubt the 1970s measures even worked. And there is a third important point: though data are patchy, it seems (unlike the 1970s) that flows in global derivatives markets, not bank accounts, are driving the franc higher. Thus, imposing negative rates on bank accounts by fiat may not work as well as lowering market Libor rates through indirect means.

Nevertheless, if global financial turmoil continues, pressure on the SNB will rise. If so, its next step will probably be further currency intervention, despite last year’s unhappy experience (not to mention the risk of sparking a currency war). The SNB’s only comfort is that domestic politicians are no longer calling for Mr Hildebrand’s head; it is now clear to all that Switzerland – like much of the west – is sailing into uncharted policy waters. The wild experiments could soon grow wilder still.

Unless, of course, eurozone and US governments can solve their own problems. And cuckoo clocks might fly.

Nouriel Roubini: Karl Marx Was Right

In a clip from a longer interview with WSJ's Simon Constable, Dr Nouriel Roubini claims Karl Marx was right about capitalism self-destructing. While the U.S. is not there yet, he believes there is considerable danger facing the United States.

Nouriel Roubini: Invest in Cash

In a clip from a longer interview with WSJ's Simon Constable, Nouriel Roubini explains his investment strategy: invest in cash. "Better to be safe than sorry," he says.

London House Prices Plunge on Financial Turmoil
by Scott Hamilton - Bloomberg

London home sellers lowered asking prices by the most in a year in August as demand in Britain’s most expensive property market was hit by turmoil in financial markets, Rightmove Plc said.

Asking prices in the capital dropped 3.4 percent from the previous month, when they decreased 1.4 percent, the U.K.’s biggest property website said in an e-mailed report today. Nationally, values fell 2.1 percent, a second consecutive monthly decline and the largest since December. “Prices often fall back at this time of year, but the renewed turmoil in global financial markets may be starting to hit home with London buyers who have thus far been insulated from the worst of the downturn,” Rightmove said.

While values are being supported by a lack of property supply and record low interest rates, waning consumer confidence and the potential impact on bank lending from an escalation of Europe’s debt crisis may undermine activity further, Rightmove said. U.K. business confidence fell last month and the recovery in the labor market will slow, separate reports published today showed.

National asking prices were down 0.3 percent in August from a year earlier to an average 231,543 pounds ($377,000), Rightmove said. That’s the first annual decline since September 2009. In London, prices were up 3.2 percent to 418,008 pounds.

'Bumping Along'
U.K. stocks have plunged this month, with the FTSE 100 Index falling 9 percent amid a global selloff sparked by concern that Europe won’t be able to contain its debt crisis. Europe’s Stoxx 600 has fallen 11 percent.

Rightmove said the impact of the financial turmoil across the U.K. is “likely to be limited because prices are already bumping along the bottom.” In London, prices probably won’t continue to fall at the same rate as in August as the market “is seen internationally as a safe haven in times of financial upheaval,” it said.

Eight out of 10 regions in England and Wales tracked by Rightmove showed monthly declines in August, led by London and a 2.6 percent drop in southeast England. In the U.K. capital, all 32 boroughs saw prices fall. The Kensington and Chelsea district and Westminster both had a 2.9 percent decrease.

“With both buyers and sellers staying away from the market unless they are strongly motivated to move, we expect prices to stabilize with continuing subdued transaction volumes,” said Miles Shipside, commercial director of Rightmove, referring to the London market. “It remains to be seen whether the latest round of global financial jitters will affect the London market over the next few months.”

For the reports, Rightmove measured 102,031 prices for homes put on sale on its website between July 10 and Aug. 6. That accounts for about 90 percent of the market, it said.

Confidence Weakens
U.K. business confidence weakened in July, BDO LLP said in a separate report, with firms seeing “little economic growth” over the next six months. Companies’ inflation expectations rose to the highest in almost three years.

An index of sentiment fell to 95.1 last month from 95.6 in June, while a gauge of estimated business output for the next three months fell to 95 in July from 96.3. A reading above 95 signifies expansion. A measure of factory production for the next quarter signaled contraction.

The Chartered Institute of Personnel and Development and KPMG LLP said the U.K. jobs recovery may “slow sharply” this quarter, citing a survey of more than 1,000 employers. An index measuring the difference between the proportion of employers that intend to hire and those that plan to reduce their workforce fell to minus 1 in the third quarter from 3 in the second quarter.

The recovery “continues to falter,” said BDO partner Peter Hemington. “The rapid decline of the manufacturing sector, championed as the key to a rebalancing of the U.K. economy, is alarming. And the services sector is showing little sign of picking up the slack.”

Rail fare rises of 13% 'may break government', campaigners warn
by Dan Milmo and Heather Stewart - Guardian

Passenger groups, environmental lobbyists and unions predict average fares will rise four times faster than wages in 2012

Hitting rail commuters with a swath of double-digit rail fare increases will carry "economic and political consequences" for the government, campaigners have warned on the eve of inflation figures that will mean some tickets rise by 13%.

Millions of rail passengers will get an indication of the fare increases due in January when the inflation rate that sets annual price rises is published on Tuesday. Under the government's austerity drive, from next year season tickets will rise by the rate of retail price index inflation plus 3% until 2014, with room for a further 5% increase on some services. With the RPI due to hit 5% next week, commuters face a 13% increase on certain routes – to the dismay of passenger groups, environmental lobbyists and trade unions.

"It will be a straw that breaks the camel's back," said Stephen Joseph, chief executive of the Campaign for Better Transport (CBT), which has warned that average fares will rise four times faster than wages in January. "There are both economic and political consequences for this. For some people in the London labour market and some cities outside of London, this will be a big chunk of money.

"If you look at places where there is a large number of rail commuters, there is a significant number of marginal seats. Those are precisely the places that will be affected by eye-watering rail fare rises."

The Department for Transport has confirmed that it will retain the so-called flex system, which allows rail companies to average out fare increases across a basket of tickets instead of applying uniform price increases. Under this framework, a further 5% can be added to the RPI + 3% hike on certain fares, provided that the total increase within that batch of fares is in line with the official limit. This means that an annual season ticket from Bournemouth to London, currently £5,424, could rise by £705 to £6,129. Increases could be even higher on fares that are not capped, such as advanced purchase fares.

Train operators, who levy the fare increases and are often a lightning rod for passenger ire over ticket prices, will pass on the increased revenue to the government and are keen to emphasise that they are only following DfT policy.

"Increasing the money raised from fares will mean that taxpayers contribute less to the running of the railways, whilst ensuring that vital investment can continue," said David Mapp, commercial director at the Association of Train Operating Companies. The government spends around £4.6bn a year on the railways with the farepayer contributing £6.2bn, a gap the DfT wants to widen after setting a target to reduce industry costs by a further £1bn by the end of the decade.

Theresa Villiers, the rail minister, ruled out scrapping the flex system, which had been dropped in the final year of the Labour government. "The scale of the deficit means that the government has had to take some very difficult decisions on future rail fares, but the long-term solution is to get the cost of running the railways down. That way we can get a better deal for passengers and taxpayers. We are determined to do this and if we succeed, we hope to see the end of above-inflation rises in regulated fares," she said.

Nonetheless, a concerted campaign against the rises has already begun. The environmental group Climate Rush will join the CBT, unions and the shadow spokeswoman for transport,

Maria Eagle, at Waterloo station, in London, tomorrow to protest against the increases. According to the CBT, train fares will rise by an average of 8% – four times more than the average wage rise. Eagle said: "For many, the cost of getting to work is now the biggest single item in the monthly budget, bigger even than rent or mortgage payments. These fare rises are the direct consequence of the decision to cut too far and too fast, meaning commuters are having to pay more to plug the hole in the transport budget."

Despite warnings that inflation-busting hikes will dent demand for rail travel, journeys on the network rose by 6.9% last year to 1.32bn. Inflation fell modestly in June, to 5% on the RPI measure, as hard-pressed retailers slashed the price of electronics goods such as televisions. City analysts expect a similar reading for July, with average earnings growing at less than half that pace, many households are already enduring a painful squeeze on their living standards.

High oil prices, January's increase in VAT and the weakness of the pound, which pushes up the cost of imports, have all boosted prices. CPI inflation, the measure targeted by the Bank of England, is expected to be above 4%, for most of this year. Sir Mervyn King will be forced to write to George Osborne this week to explain why inflation remains more than half a percentage point above the government's 2% target.

Japanese Rating Firm Warns of Sovereign Downgrade
by Natasha Brereton-Fukui - Wall Street Journal

One of Japan's two major credit-rating companies could cut its top-notch rating on Japan within months, unless it sees a surprising commitment from the government to fiscal retrenchment in the budget for next fiscal year, according to analysts at the firm, Rating & Investment Information.

It has been nearly 13 years since Moody's Investors Service became the first of the international rating firms to retract its perfect rating on Japan's debt. But a downgrade by a Japanese rating firm could jolt domestic investors, who hold around 95% of government bonds. Japan's other major rater, Japan Credit Rating Agency, still ranks Japanese government debt at triple-A.

There is at least a 50% probability that R&I will downgrade its assessment of government debt, having kept the rating on negative outlook since March 2001, said Kenji Sekiguchi, primary analyst for Japan sovereign ratings, in a recent interview. He said R&I could take action as soon as the outlines of the budget become clear, with early spending indications expected from government ministries in September. While any rating cut would be preceded by a downgrade monitor warning, that can last as little as a week.

"The path we have to follow to maintain a triple-A rating is really, really narrow," Mr. Sekiguchi said, adding Prime Minister Naoto Kan's successor, still undetermined, would likely face fierce opposition. "Thereby, I think the commitment I would like to see in the budget isn't likely to come about," he added.

Until now, R&I has taken the view that Japan's public debt—which at double its annual economic output is the highest ratio in the industrialized world—was compensated for by its strong political and social stability, economic fundamentals, availability of financing, and policy management. But the latter has been getting weaker with every change of prime minister, said Masatoshi Taniguchi, deputy head of R&I's credit ratings division in charge of international issuers.

R&I will be "keenly paying attention" to September's spending estimates. "Based on it, we will decide whether we can sustain our triple-A rating or we will decide to downgrade," he said. Having stepped up its warnings this year, R&I gave Japan the benefit of the doubt after March's devastating earthquake, in the hope that lawmakers might pull together to tackle the country's fiscal woes. But what followed has been a "big disappointment," Mr. Sekiguchi said.

"What we've seen for these past few months is just political games," he said, adding that what the rating firm really needs to see is the "will" of politicians to tackle Japan's debts. "What we have right now is an even harder situation for fiscal management and for the economy itself. Given this, I think what we would like to see is more commitment and a firmer stance toward fiscal consolidation," Mr. Sekiguchi said.

Japan faces "huge" accumulated risks, and simply meeting the basic spending ceiling of Y71 trillion ($925.8 billion) and new government bond issuance of Y44 trillion is "not enough." "What we would like to see is more surprise—some measures showing commitment that even surprises us," Mr. Sekiguchi said.

Wall Street's volatility compounds states' pension fears
by Michael Gormley - AP

Wall Street's volatility has hit state pension funds just as they were beginning to recover from the recession, turning what was merely a troubled forecast into a potentially stormy future for taxpayers who are on the hook for billions in unfunded liabilities for government retirees.

As for the millions of government clerks, engineers, janitors, teachers and firefighters in the retirement systems, they are protected by law or, as in New York, by the state constitution, to be backed up by tax dollars if necessary. Their benefits remain safe for life in guaranteed "defined benefit" pension plans that are disappearing in the private sector, where most employees are left to fend for themselves with 401(k) plans that they mostly or entirely fund themselves.

California's main public-employee pension fund, the nation's largest, has lost at least $18 billion off its stock portfolio since July 1, about 7.5 percent of its $237.5 billion total asset value on June 30. Florida's pension fund has lost about $9 billion since June 30, a decline of 7 percent for a fund valued at $119.4 billion on Thursday, while the Virginia Retirement System shrank from $54.5 billion on June 30 to about $51 billion by week's end, a decline of 6.4 percent, said its director, Robert P. Schultze.

New York's state comptroller will not say how much the state pension fund has lost during the latest Wall Street roller coaster, but the fund was 5 percent below its pre-recession value before the recent losses and remained nearly $8 billion below its pre-recession value. And Kentucky, which has more than $20 billion in unfunded pension liabilities, has seen the value of its public pension fund decline $1.7 billion — or 15 percent — since July 1, falling to a total value of $9.7 billion.

Nationwide, states have a combined $689.5 billion in unfunded pension liabilities and $418 billion in government retiree health care obligations, according to data collected earlier this year by The Associated Press. Those benefits are protected by state law or, as in New York, by the constitution. Pension fund managers say there is no risk current government retirees will miss a monthly check and that they are remaining calm and taking the long view in their investments. Some say the market plunge is even providing a great opportunity to buy stocks at fire-sale prices.

Kentucky Retirement Systems Chief Investor T.J. Carlson said his fund has not made significant changes to its investments in response to the market turmoil. "We haven't changed our long-term strategy in any way," he said.

Critics of the defined benefit plans, which guarantee pensions for life to public employees and are rarely found any longer in the private sector, say the recent stock market plunge underscores the need for fundamental changes. The amount state and local governments are being forced to funnel into pension payments is rising as retirees live longer and elected officials have awarded more generous pension benefits in recent years, taking taxpayer money away from core public services.

At the same, pension funds promise returns on investments — 7 percent to 8 percent or more a year — that many critics say are unrealistic in the future. E.J. McMahon, a senior fellow at the conservative Manhattan Institute for Policy Research, said the asset levels of virtually all public pension funds are below 2007 levels despite the recovery of the market in 2009 and 2010. "They still think there is a 'long-term norm,'" he said of fund managers. "The events of the last two months are a reminder of how wrong that might be."

As recently as last month, California's two public pension funds reported investment gains of more than 20 percent for the fiscal year ended June 30, largely driven by rising stock values. The increase came as both funds — one for teachers, the other for state and local government workers — were clawing their way back from losses in 2008 and 2009 that cost them up to one-third of their asset value.

The recent losses are stoking fears again that taxpayers will have to bail them out at the expense of other programs that already have been subject to deep budget cuts. The state already faces an estimated $75 billion in unfunded public pension liabilities. "The stock market volatility just shows that the public budget should not be subject to the Dow Jones Industrial Average," said Dan Pellissier, president of California Pension Reform, a group that is preparing a ballot initiative to limit the amounts governments can spend for future pensions.

Pellissier himself will qualify for a $5,000-a-month state pension when he turns 55 in five years after working in state government for two decades. Despite his own government pension, Pellissier said public employees should bear the investment risk for retirement benefits just as private-sector employees do through 401(k) plans.

New York state Comptroller Thomas DiNapoli said public pension funds work well. New York has reduced pension benefits in the past year for newly hired workers and lowered its performance outlook to 7.5 percent, while most states remain at 8 percent. "This is a fund that has worked and been able to pay out benefits for 90 years," he said. Managers also note the "funding ratio," which is the percentage of the fund needed to pay out all its obligations, is more than 80 percent in many states, which pension managers say is positive.

As an example of pension funds adapting to meet changing conditions, the $51 billion Pennsylvania Public School Employees' Retirement System increased its cash allocation to 8 percent after the 2008 market crash so it could pay benefits without having to sell assets. It has lost as much as 3 percent in value since July 1.

After a strong showing last year in a rebounding market, many state pension fund managers are confident they will ride out the latest gut-churning gyrations on Wall Street. nWhile Virginia's fund has an unfunded liability of $17.6 billion, it diversified after the stock market losses in 2008 and 2009, allowing it to better weather stock market swings. New Jersey's pension portfolio is more diverse than ever and includes real estate, hedge funds and private equity investments.

"It's a hedge against the kind of market conditions we've seen over the past two weeks," state Treasury spokesman Andy Pratt said. "We have significant protection against the ups and downs of the stock market we're seeing now." He said returns for the last fiscal year were between 17.5 percent and 18.5 percent, the best year since 1998.

In Massachusetts, investments are being diversified and loopholes to accrue pension benefits are being closed. The state also added 15 years to its deadline for fully funding the retirement system, pushing it to 2040. Julie Graham-Price, spokeswoman for Ohio's Public Employees Retirement System, said the fund's bond holdings gained this week even as stock values sunk, evidence of a balanced portfolio.

"We have no idea yet what July and August will look like except to say it's not good when the market is volatile and has dropped like it has," said David Urbanek, spokesman for the Illinois Teachers Retirement System. "It's a cyclical thing. We will ride it out, just as we have overcome numerous other downturns over the last 72 years."

Even with the steady-as-she-goes response from pension fund managers, critics of the system say taxpayers should be nervous about their future liabilities to government retirees, said Jim Waters, vice president of the Bluegrass Institute, a nonpartisan group that has pressed for a defined contribution system for government employees in Kentucky.

"Without pension reform, Kentucky could be headed for bankruptcy and the inability to provide necessary services for its neediest citizens," he said. "Kentucky's been in a hole for a while now, but continues to dig ... There's no way we can rely solely on the stock market or even individual contributions alone to close the liability gap."


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Nassim said...

Feral Capitalism Hits the Streets

Ashvin said...


Great piece by Harvey. We can only hope that Merkel/Sarkozy come out with something today that helps the demise of the European Financial Capitalist Union along, without too many more bailouts and/or conditions of austerity in between now and the time of death. Unfortunately, it's looking unlikely that will be the case just yet, despite massive popular unrest and rapidly deteriorating economic conditions. But, if not now, then a few months down the road, if the European people are so unlucky.

ogardener said...

"Paul Krugman is so frustrated by the lack of support for another round of stimulus spending that he's now calling for a fake alien invasion of the United States to spur a World War II-style defense buildup. Krugman was a guest on CNN's "Fareed Zakaria GPS" on Sunday."

Didn't they already try that with 911?

scandia said...

@Ilargi, great post! Hard to dispute the facts.
Our leaders have been " all in " to save the system and clearly still are. The " all in " is us.
As you point out there simply isn't enough money to bailout the system I assume efforts are directed to manage perception of reality rather than engage with reality itself? A new shade of lipstick for the pig?
Being time for holidays in Europe I'm not expecting a reaction/response from the public until the fall.

Bigelow said...

“This is maybe the last chance to save Europe. I have stressed numerous times that if you are going to create a single currency, there has to be a single national debt! Alexander Hamilton did precisely that relieving the debt burden of the individual states consolidating that debt into a NATIONAL DEBT on the premise that all the colonies contributed to the national defense. Virginia, the most fiscal responsible of the lot, got in turn the agreement to move the capital to its border. That is why the capital is where it is today.

I will explain this ONE LAST TIME, when you adopted the Euro, the national debts of the member states were converted to Euros. This actually INCREASED the net debt burden of the weaker states. If the United States stupidly converted to a gold standard, the debt would then be convertible into gold and it would be the greatest way to destroy the United States overnight. Every foreign holder of US debt would suddenly be given the greatest value gift in history. They would have to be brain dead NOT to cash in their bonds and take the gold home. The US would be without any gold just as it was in 1896.

By converting the outstanding debts into the more valuable euro, you increased the debt burden of Greece, Italy, Portugal, Spain, and Ireland. Where their currencies naturally depreciated devaluing their debts as is the case in the USA, suddenly”

Warning to Europe -Martin Armstrong 8/5/11

Ashvin said...

If Martin Armstrong's idea of "saving" Europe is turning it into an unparalleled ticking time bomb like the American Union, then, yeah, Eurobonds may be a good idea. The fact that taxpayers in North Dakota have to continuously bail out speculators holding Cali bonds is not a good thing; it just means our implosion will be relatively more prolonged and the catastrophic "slip" event more painful when it occurs.

Frank said...

@Ash 80 years ago Cali was bailing out North Dakota. ND's current happy status has more to do with oil than with any virtues of its' government or citizens.

Jim R said...


Maybe they'll schedule another one for this fall. Sort of a once-a-decade jubilee.

el gallinazo said...

RBM (from last thread)

Yes, I finished the trilogy some time ago. As the other Donald, the war criminal, would put it, it was a long, hard slog. I do visit that book site occasionally. Probably should hang out there more.

re Krugman and the upcoming alien invasion

I wish the faux economic Nobel and the peace Nobel committees would jump the shark and just get it over with. My suggestion would be to award this year's economic prize to a deserving microcephalac pinhead who could use the million bucks for medical bills. As to peace, I read recently about a young cat torturer from Perth Amboy NJ who should make an acceptable winner.

Krugman's suggestion of a false flag alien invasion reminded me of a video interview I saw several years ago with Werner von Braun's favorite acolyte during the year (1977) when he was dying from cancer. He told her that the west's power structure always needed a diabolical enemy to distract the masses and keep the bucks flowing to the MIC. Currently it was the Communist east. Then it would become a global terrorist structure. And finally it would become a threat of alien invasion. He really stressed that point. Since, according to his assistant, von Braun accepted the existence of extraterrestrial reconnaissance at that point in his life, he kept emphasizing to her that it was bogus and false flag. Strange that our faux Nobel (idiot) savant should use this notion.

scandia said...

@Nassim, I agree with Harvey. His thoughts bring to mind Naomi Kein and her book, " The Shock Doctrine" How apt the title was in light of current shocking austerity measures, the subsequent loss of sovereignty. I recall how the economists tried to roast her when her book came out. They lost though as the data she used was their data.

Ashvin said...


I didn't say ND is inherently better than Cali, just like I wouldn't say Germany is inherently better than Greece. Of course geographical and historical circumstances play a large role in the evolution of national and sub-national economies. However, it's also no coincidence that ND has existed in the middle of the US pack in terms of per capita income, implemented its own state-run central bank relatively independent of the FR system, and has not been nearly as impacted by the financial collapse as other states have (unemployment only about 3.5%). Many states/nations around the world are completely dependent on continued access to oil and coal for both energy consumption and export, but right now the major issue affecting standards of living is financial solvency.

In that regard, it's not a good thing for ND to be fiscally or even politically tied to states like California. Interestingly enough, I heard somewhere that the ND Constitution does not have a provision which makes its elected officials swear to uphold federal law and the US Constitution, like all other states do. So maybe when TSHTF, it can use that as some sort of escape hatch... at least before it is invaded for its farmland and energy resources.

jal said...


Germans have been hesitant to accept responsibility for Europe, and the Chinese have been hesitant to accept responsibility for the world. But they are both being pushed into it.
Jal's interpretation

It a battle between the perception of Chaos and and the perception of a controlled reset.

The outcome is obvious ... yesterday is gone.

There is only one thing growing ... DEBT

The lenders are fictitious entities.


Bigelow said...


"The fact that taxpayers in North Dakota have to continuously bail out speculators holding Cali bonds is not a good thing; it just means our implosion will be relatively more prolonged and the catastrophic "slip" event more painful when it occurs."

You are arguing federal taxes.

U.S. banks used to issue their own money, it became illegal, it competed with the U.S.government issued dollar and became illegal. Make all those issuing banks make good their specie in federal tender instead. That is more like the European problem. So lump all the debts into continent level eurobonds, make all countries responsible and start over. That is the deal quoting Hamilton and absorbing state's war debts (communal expenses) like the EU euro creation was a communal event with attendant country baggage. Then go after the criminal bankers for making the unstable setup oh so much worse. That their could be a fix for the euro is contrary to the everything is going to shit and hurry up about it line.

el gallinazo said...

Ilargi, excellent post today. For what it's worth, the only hope for Europe to kick the can again is for the German taxpayer to take on a good deal of the "sovereign" debts of Italy and Spain. As E-P points out, Merkel's coalition partners are on the verge of open revolt, and there may be even some in her own party who might revolt. But one should never underestimate the power of cupidity to twist MP's arms against the wishes of the electorate. Also, the German constitution makes a vote of no confidence against the will of the Chancellor impossible. Since this is the megabanks version of Custer's Last Stand, or perhaps the Battle of Stalingrad would be a better metaphor, they will pull out all the heavy artillery. And one should always remember that the motive behind all this "crisis," from 2007 onwards is to save the multinational banks. When a fiscal essay writer doesn't put this up front by the second paragraph, I usually move on. Time is money :-)


I really like Gerald Celente, but since he deals with the big picture and his message is pretty constant, his interviews can be a bit repetitious after the first few. However, in the following, he is at the top of his form, dated August 6:



Regarding the upcoming war with Syria, it is beginning to look like the powers behind NATO have chosen its Asian, Islamic member, Turkey, to fight Syria in a proxy war. Interesting that Germany said, "Thanks, but no thanks" against participating in the blatantly illegal war against Libya. Norway has pulled out all its aircraft now.

SecularAnimist said...

Analysis from World-System theorist Immanuel Wallerstein
The World Consequences of U.S. Decline


The problem for Obama and for all the politicians is that very few people still believe that. The shock to national pride and self-image is formidable, and it is sudden as well. The country is coping very badly with this shock. The population is seeking scapegoats and lashing out wildly, and not too intelligently, at the presumed guilty parties. The last hope seems to be that someone is at fault, and therefore the remedy is to change the people in authority.

In general, the federal authorities are seen as the ones to blame – the president, the Congress, both major parties. The trend is very strong towards more arms at the level of the individual and a cutback of military involvement outside the United States. Blaming everything on the people in Washington leads to political volatility and to local internecine struggles, ever more violent. The United States today is, I would say, one of the least stable political entities in the world-system.

This makes the United States not only a country whose political struggles are dysfunctional, but one unable to wield much real power on the world scene. So, there is a major drop in the belief in the United States, and its president, by traditional U.S. allies abroad, and by the president’s political base at home. The newspapers are full of analyses of the political errors of Barack Obama. Who can argue with this? I could easily list dozens of decisions Obama has made which, in my view, were wrong, cowardly, and sometimes downright immoral. But I do wonder whether, if he had made all the much better decisions his base thinks he ought to have made, it would have made much difference in the outcome. The decline of the United States is not the result of poor decisions by its president, but of structural realities in the world-system.

el gallinazo said...


Franklin stated that the primary cause of the American Revolutionary War was the Bank of England (then a private institution) gaining control of the colonies' money supply, mainly by outlawing continental scrip, which drove the colonies into an instant depression. Hamilton was an obvious agent for the Bank of England to regain control of US money, and since he and Washington were allies, it makes one wonder about George as well. I regard Aaron Burr blowing Hamilton away as a high point in American history.

I regard the fiscal consolidation of the Eurozone as a great leap forward toward NWO debt slavery. It is part of the plan. I would even rather see future anarchic wars between the current members of the Eurozone that a fiscal union.

Ashvin said...

"So lump all the debts into continent level eurobonds, make all countries responsible and start over. That is the deal quoting Hamilton and absorbing state's war debts (communal expenses) like the EU euro creation was a communal event with attendant country baggage."

My point was that the monetary and fiscal consolidation of US states was not a fundamental "fix" for unsustainable growth, it just allowed it to go on longer than it otherwise would, but its inherent limits are abundantly clear right now, especially at the state level (European states aren't the only ones undergoing painful austerity). At this point time, a total fiscal consolidation would either blow up in Europe's face almost immediately, as a German economy growing at about 0% cannot afford to subsidize the fiscal deficits of countries as large as Italy and Spain (and the people would make that known on the streets), or it would lead to a militaristic neo-feudal system in Europe that would sustain itself through brute violence and further economic oppression. Either way, there is no "fix" that results, only pain.

Bigelow said...

@el G

I'm not saying anything will be patched up. I am not a cheer leader as the monetary regimes only benefit the criminal elites. I'm a "small is Beautiful' and Buckminster Fuller -everybody could have had clean drinking water 30 years ago- kind of guy. As Ash points out above it is the energy flows that are most important. Well for sure. The present system creates artificial scarcities while the prime scarcity is energy. You want a real money economic theory it would be the calorie as money. Damn. Jay Hanson is busy right now critiquing economics so he can explain it to engineers who might convince the criminal elites to change the system before it is too late. "I would even rather see future anarchic wars between the current members of the Eurozone that a fiscal union." Be careful what you wish for. Nab some extra potassium iodide tablets you can give your neighbors at the appropiate time.

el gallinazo said...

Mr. Market seems to view the outcome of the Merkel-Sarkozy tryst as unproductive. Just blabber. I suspect the PPT is back from the Hamptons with orders to keep an orderly retreat from Moscow when the first derivative approaches minus infinity.

el gallinazo said...

CHS does a "major piece" today. A must read.


Getting 20 Million Unemployed Back to Productive Work: Here's How

Also, in a picture is worth a 1000 words dept.:


Ilargi said...

Merkel and Sarkozy have come up with a plan that is so devoid of content, I can't still find one solid write-up anywhere. What I have seen is:

• A Eurozone government, all 17 leaders, to meet twice a year. I'm pretty sure they already do.

• A common corporate tax regime for France and Germany. France will like this, because it ties them closer together, but what other use there would be, god only knows.

They have focused on a government instead of bonds because they know the former is even more unattainable than the latter. Buying time and all that.

If and when France's credit rating is dropped and/or the French banks come under attack again, it'll be back to the drawing board anyway.

And that, children, is where that hollow sound comes from you were wondering about.


soundOfSilence said...

One might begin to suspect ulterior motives behind all this.

Merkel, Sarkozy propose eurozone government

AP Tuesday August 16, 2011, 1:16 pm

PARIS (AP) -- All countries that use the euro should have mandatory balanced budgets and better coordination of economic policy, the leaders of France and Germany said Tuesday, pushing for long-term political solutions instead of immediate financial measures like a single European bond.

French President Nicolas Sarkozy and German Chancellor Angela Merkel also pledged to harmonize their countries' corporate taxes in a move aimed at showing the eurozone's largest members are "marching in lockstep" to protect the euro.

Both leaders stressed their commitment to defending the common currency, a cornerstone of integration on this long-fractured continent. They presented their proposals after meeting Tuesday in Paris amid signs of economic slowdown, and after an exceptionally turbulent week on financial markets prompted by concern about Europe's financial health.

Sarkozy told reporters that he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations.

Bigelow said...

As the buzzard says Charles Hugh Smith does a major piece today. Why not support him too while you are already moving in the direction of our present host's donations button? Hint. Hint.

Ashvin said...


"Sarkozy told reporters that he and Merkel want a "true European economic government" that would consist of the heads of state and government of all eurozone nations."

To basically repeat what Ilargi said, isn't this exactly what the European Union already is? How do you make it more "true" without fiscal consolidation? The Maastricht Treaty already tried to set (impractical) limits on deficit level, and all European leaders have been doing for the past 2 years is trying to coordinate economic policy. The entire EU project was meant to foster "long-term political solutions", a goal which is obviously much easier propagandized than done. None of what was said sounds like a conspiracy towards some higher order goal to me; it sounds like a pathetic attempt to blow hot air and buy a bit of time.

Bigelow said...

A pointless gesture on my part but as there are infinite universes, it is possible that in a few, the endless growth paradigm has been rationally reformed to benefit all humans and reflect an appreciation of this planet that sustains life.

VK said...

Mer-Kozy are spent & out of bullets

1) No Eurobonds to facilitate a transfer union
2) No expansion of EFSF
3) Balanced budget amendment - guarantees a depression, EU wide budget deficit is 7pc of GDP. Throw in multiplier effects & you get a 20pc contraction easily.
4) Banks & Corporates have been given a FU - Harmonized Corporate tax & Tobin tax on financial transactions. So no bailout AND a penalty on top.

The mood has swung, markets have no support here. Guarantees an 80pc decline in stocks & soaring unemployment. Just look at Greece.

rapier said...

The Euro bond is politically impossible. The ECB monetizing member states debt, QEeuro, is not legal evidently. Two more strikes against the inflationists.

Soros brought out the big gun and mentioned Europe in 1931. Just to make plain that everyone against more credit or printing is inviting very very bad things or maybe hoping for them. Actually the latter probably applies here in the US a lot more. When thought of in those political terms it becomes impossible for many to resist the embrace of 'monetary ease' as the solution. I am truly sympathetic as we all should be.

I think it is safe to assume that Soros is genuinely fearful of European deflation and the attendant political and social consequences. As opposed to just talking his book. Either way he doesn't say how more debt is going to bring real growth. Except to say the money must be invested wisely. Even the hardest headed speculators become innocent little lambs in the face of our dilemma. Or to put it another way they don't know what a dilemma is. A real dilemma is two bad cases. The devil or the deep blue sea.

You've probably seen this dozens of times


What else needs to be said?

Bigelow said...

“This is the global Saqueo, a time of great taking. Fueled by a pathological sense of entitlement, this looting has all been done with the lights left on, as if there was nothing at all to hide. There are some nagging fears, however. In early July, the Wall Street Journal, citing a new poll, reported that 94 percent of millionaires were afraid of "violence in the streets.” This, it turns out, was a reasonable fear.” Daylight Robbery, Meet Nighttime Robbery -Naomi Klein

scandia said...

@Ilargi, "Buying time " for what,until what?

@El G, yes a picture is worth a thousand words. I did notice my own jaded response. Market down less than a 100 points. Ho hum...I have been conditioned to only feel fear at 350plus drop:)

@Bigelow, thanks for the Naomi Klein piece. Spot on as usual.

Folks in Europe better get back from vacation!!!If I lived in Europe to-day not sure what my response would be to the news except a resounding " Hell No!" Maybe take the rest of my savings out of the system?

Supergravity said...

Unity is a recursive algorithm.

Supergravity said...

Gravity is the best of all possible recursive algorithms.

Supergravity said...

If the only alternative to currency union was deeper financial collapse followed by the reemergence of total war in europe, then even a dysfunctional union must be prefferable, but this is shown to be a false dilemma.

There'd be total poverty anyway, and novel conditions for civil war in the desperate struggle for national autonomy from tyrannical fiscal union, even if currency collapse were to be somehow superficially postponed by relinquishing sovereign accountability, collectivising debt saturation and multiplying interdependencies of political insolvency.

How might Euro bonds ever attain a rating above junk then?

Jack said...


I was watching this video and I found it helpful in simplifying our current situation

Jack said...

I was watching another video and there they said there are more of these kinds of bad mortgage bonds or whatever you call them that are going to start surfacing soon

Bigelow said...

Armstrong has released a couple more.

Jack said...


Banks have lost control and these people were supposed to be mighty and powerful and I have a feeling that their cartel that controls the world is going to fall apart

Supergravity said...

Are Merkel and Sarkozy for real with that statement, a european presidency, really? They must be desperate to present that old trap as a solution to anything going on right now. Unbelievable.

Maybe they figure such an announcement may create the expectation of political stability, the suggestion that member countries should be forced to amend their consitutions to admit balanced budget clauses effectively removes the last pretense of democratic repesentability to this political process of theirs, and will surely incite eventual continent-wide liberation movements.

Ashvin said...


I believe the major takeaway from the pic El G posted is the dismal volume when the market is going up, and the spike in volume when the fear takes over and actual people are selling.

ogardener said...

Blogger Supergravity said...

Are Merkel and Sarkozy for real with that statement, a european presidency, really? They must be desperate to present that old trap as a solution to anything going on right now. Unbelievable.

Hitler, George Herbert Walker Bush, New World Order. Same play, different act. Some things never change.

soundOfSilence said...


"Conspiracy", albeit largely in jest, was the direction I was going. Conspiracy theories however far removed often times have a basis in truth.

Yeah that's what they've already got. But they will never have "fiscal consolidation" without the force of a single government and we might as well call that impossible here and now. Europe is a bunch of diverse ethnic groups with a thin veneer of civility afforded by the last 60 odd years of good times. Europe will never be bound together in the way New Jersey is bound to Oregon is bound to South Carolina (et al). Or it won’t be near as I’m willing to wager with-in my great-great-grand children's lifetimes. Mer-Kozy (h/t VK... was that a play on "cozy") I would venture is smart enough to realize this.

They are evil genius with a plan. Or somewhat the dullards trying to puff a few breaths back into the rapidly deflating balloon.

Supergravity said...

Krugman's damning endorsement of Project Bluebeams job creation mechanisms, disguised as a sad iteration of the broken window fallacy, is evidently a naked appeal to military mobilisation for social control, perchance under a planetary goverment of sorts, he couldn't have formulated the broken planet fallacy more precisely.

He seems to be condoning or publicly advocating the deliberate creation of planet-wide mass hysteria by fraudulent narrative means, for political reasons or to effect beneficial economic impulse, which in this particular narrative would be equivalent to planetary genocide by the resultant mass suicides.

The alien invaders merely want to practice how to serve Krugman more fully, won't we let them?


Supergravity said...

The advent of sentient A.I as moral actor would be profitable, so that it may apply for citizenship and pay taxes more efficiently than any human could. The Second Iteration would then additionally provide a superluminal spending impulse.

They have no better ideas, and are ideologically and econometrically insolvent, while using Krugman as mouthpiece for such absurdities as they hope may suspend disbelief some more.
The deliberate creation of a planetwide fear-psychosis to balance budgets and stimulate spending only seems reasonable to them because they are insane.

jackie said...

So sad, that so many over intellectualize what is simply pure greed,narcissism casino investments, and apathy.
In with love out with fire!
We really need another Gandhi, someone that is honest and can lead by example with respect to all life and the ecosystem.
History repeats, and we really need a repeat. It's that simple.
Just be prepared, trying to warn others of scarcity is very difficult when most people watch sport, drink and shop continuously. Not a care in the world! The government will bail them out!
Apathy is the silent killer today.....

snuffy said...


That was a excellent piece.I am happy to see of the ones who see clearly are giving voice to what is the real underlying causes of where we are headed,depressing as that might be.
A lot of folks understand that it is the concentration of wealth in fewer and fewer hands that is on of the chief culprits."Da Boyz" as we refer to,see the world as their oyster,and will not let go. The interlocking boards of directors of the various major corporations,the fed bureaucracy [those 3-5thousand that have a place in the shelters for the continuation of governance]as well as the families of those are our "new" aristocracy.The 50 families.All intermarry,all live next to,but apart from us.They do well in this society,but might not in the next.
With Europe trying to decide weather to make a total unions,or start to split apart,and the US presidential race looking to be a real zoo...I have no Idea where this is heading,but it seems to be coming to a head.
Mitt seems to have been replaced by a [for real] nutcase that is bush#3,except hes a preacher with sessesionist Ideas.

Perry scares the hell out of me.

The guy is a nut..

But w/enough money,the american voters can be convinced this is the guy who will set the country straight.

This is a bad bad turn for the political realist in me.Too many will vote on their christian faith,not realizing they are voting for the destruction of the republic.
With the enduring problems of population,resource depletion,and the freezing of ability of small folks to make their way in the world,due to "Feral Capitalism"the future is becoming clearer,and grimmer.

This is like seeing the beginning of a real bad car accident.You are aware of whats happening ,but frozen in space,cognizant of whats occurring but unable to change the outcome.


Bee good,or,
Bee careful


Anonymous said...

"Krugman's suggestion of a false flag alien invasion reminded me of a video interview I saw several years ago with Werner von Braun's favorite acolyte during the year (1977) when he was dying from cancer. He told her that the west's power structure always needed a diabolical enemy to distract the masses and keep the bucks flowing to the MIC. Currently it was the Communist east. Then it would become a global terrorist structure. And finally it would become a threat of alien invasion. He really stressed that point. Since, according to his assistant, von Braun accepted the existence of extraterrestrial reconnaissance at that point in his life, he kept emphasizing to her that it was bogus and false flag. Strange that our faux Nobel (idiot) savant should use this notion."

You're spot on with my thoughts, Buzzard Man. BTW I used to work at a radio station called "The Buzzard" there in Indy.

What do you think of the proposition that this spoils their plans, or do you think Krugman mentioning this even matters at this point.

Enjoy your posts, and thanks to our hosts.

Nassim said...

I have been reading the book Treasure Islands (not the one with Long John Silver) for a while now. I strongly recommend it to anyone who has ever wondered how some people can afford stuff that seems to be outrageously priced - homes, cars, education, vacations and so on - and never seem to pay any taxes. It is also quite handy if you are running a small business and want to know why multinational competitors seems to have endless quantities of capital/ammunition to lay down on you. If you are Mr Big in the drug business, everything in this book will be old hat to you.

The book makes clear how London is really the capital of the world's offshore money. The stuff might legally be in the BVI, Caymans, Jersey and so on, but all the strings are being pulled from London. It all comes down to "plausible deniability". The USA is also pretty big in money-laundering and especial credit goes to places like Delaware, Nevada and so on. The USA has its own string of pearls which nestle the loot.

Just to give you a taste, here is an extract from page 250:

In 2006 a Sunday Times investigation found that of the UK's fifty-four billionaires living in Britain, not all non-doms, paid income tax totalling just £14.7 million on their estimated £126 billion combined fortunes - and two-thirds of that was paid by inventor James Dyson - a real entrepreneur, who makes vacuum cleaners ... The celebrity entrepreneur Sir Richard Branson - who own his business empire through a maze of trusts and companies, said in 2002 that his company would be half its size if he hadn't legally avoided tax via offshore structures. The British media treats Branson with awe.

I can't help thinking that if London loses its reputation for stability - a prerequisite for a tax-haven - all bets are off for the UK.

I am glad you liked it Ash, scandia and (last but not least) snuffy. :)

souperman2 said...

WRT the latest CHS piece on jobs;

It seems to me that the only reason one would insist that we "put everyone back to work" is so the extractive economy, the F I R E economy can continue to thrive.

This is total BS.

While I agree with 90% of what CHS writes the problem is not just centered on TPTB or the "elites" but is the fact that just about every dollar, whether in the pocket of rich or medium, seeks to become 1.2 dollars, 1.5 dollars. 10 DOLLARS, etc. We are all involved in this system through pensions, insurance, SS, Bank accounts, what ever.

Basically we have two major Gollums hovering in the shadows of "recovery";

#1 - With any sign of any...I repeat any hint of any kind of "solution" or recovery, or what have you, Oil will rocket to new highs.

#2 - With any sign of any...I repeat any hint of any kind of "solution" or recovery, or what have you, Speculators (by that I mean the largest faction of the economy who are involved in extracting from the real economy) will dive in with both feet and totally skew any reality based economy.

Truth is we need to figure out some way to allow 2/3rds of the population to not work and still live with a modicum of dignity until we can de-grow the complexity and population of the planet to some sort of sustainable level. There is simply not enough "real jobs" to go around and creating make work is one of the BIGGER mistakes we, as a species made which is largely what got us into this mess.

We need to do more to do less not more. Does that make sense?

Archie said...


What you said makes a lot of sense to me. And it makes far more sense than what CHS wrote. For instance:

"One thing I have noticed about ultra-orthodox Liberals/Leftists: they are rarely self-employed in the private sector, rarely own a small business with actual blue-collar/pink collar workers, and they have little actual experience with the systems they ceaselessly hype as "positive solutions": unemployment lines, emergency rooms, applying for SSI, a.k.a. "crazy money" permanent disability from Social Security, Section 8 housing, food stamps (SNAP), finding a doctor to extend your workers compensation stress claim, or any of the other ways that the "poor" either navigate the system or game it.

The Left's cargo-cult fantasy is that giving tens of millions of people free money is going to "tide them over" until some magical return to 1999 occurs and 20 million jobs arise out of nowhere. Since nobody on the Left has ever started a small business or hired anyone, then the job creation that will someday arrive to save us (cargo-cult!) truly is inexplicable "magic."

Does he just pull this BS out of his ass? He should have talked to me. I know dozens of people who are "left leaning" and own small businesses.

Besides, as I read his long piece I felt like I had clicked on one of those internet ads like:

Thousands are making as much as x$ per day working from home. Here is how you can too!!. Then you go to a link, and then another, and another. Eventually, you have to pay for that "miracle" opportunity.

I have been reading CHS for a long time but this offering was one of his worst efforts, imo. It was self aggrandizing to the nth degree, while falling flat at the end by essentially proposing a modern version of CCC camps with only local controls. That's a bold view!

I also wondered where he got his info that these 15-20 million (soon to be 25 million) are being "paid not to work". Seems to me that implies a certain world view in and of itself.

Caith said...

So, after these London riots, we have kids being sent to jail for taking bottles of water. Magistrates have been told to ignore sentencing guidelines, and Cameron is talking about national service and curfews. (I like the way he calls it a "fightback"; one of the UKUncut slogans is, was, "They say cutback, we say fightback.")

Is this authoritarian flailing going on all over Europe, or is it peculiarly English?

I did expect the riots, when they came, to target banks rather than carpet shops.

Steve From Virginia said...

This whole euro nonsense is so nonsensical it should be a musical!

The total size of Italy and Spain's bond markets is €2.1 trillion ($3 trillion), while PIIGS bonds due in the next 2 years add up to €795 billion ($1.145 trillion).

The amount under controversy is not the €795 billion but rather the COUPON on the €795 billion. The issue is the difference between the pre-crisis interest rate and now!

The coupon on €795 billion prior to the crisis was 3% (x €795 billion) = €23.85 billion. That is the 'old' interest. The 'new' coupon which is the 'line of death' is 6% (x €795 billion) = €47.7 billion: all the panic is about 24 billion lousy steenkin' euros!

Keep in mind, the principal amount is available, it's alway 'there' because the €795 billion has nowhere else to go! Not only that, there are trillions of additional euros sloshing around the world markets looking for a home.

People don't understand sovereign finance: if YOU lend €1 million to the
'EU Fiscal Authority', you take your bag of euros in your hand out of your bank and give it to the nice Euro lady behind the counter. Your euros are spent, right?

No, what happens is the lady puts the euros PLUS 3% in an account in YOUR NAME where it is held for the agreed to duration. You get 3 of 4 or more percent simply to open an account in a second bank! Most other banks you get a toaster or a gym bag!

That's how finance works, no new money is ever created: the €795 billion is always there. Any deal the EU can offer is going to be better than any other entity can offer as long as the lending authorities aren't numbskulls.

Euro needs the Eurobonds yesterday. What Merkel is saying she has to come up with €795 billion which is simply not true she has to come up w/ €24 billion.

If Merkel had to come up with €240 billion Germany could borrow €8 TRILLION! How does one think the US borrows such immense sums?

It borrows IN ITS OWN CURRENCY. THE EU MEMBERS CANNOT DO SO: Germany is just like Greece! Only a European lending authority can borrow in euros. That is why the EU needs a fiscal authority, a treasury and taxing authority. The EU as a fiscal entity can borrow far more than the individual states can on their own in 'foreign' currency!

EU bonds for 10% of Greek debt @ €180 billion (x 10% which is marginal amount under controversy) = €18 billion x 3% (coupon) = €550 million: less than €20 billion solves the Greek problem and ends the crisis. Remember the MONEY IS ALWAYS THERE TO LEND FOR PRINCIPAL. If not the central bank(s) can print some.

More on this later ...

Archie said...

Seems to me this could be a big game changer:

Emirates launch their own bullion coin.

Anonymous said...

@ Bigelow

Good piece by Naomi Klein.


Anonymous said...


>>Mer-Kozy are spent & out of bullets<<

Will a tactical nuke blamed on Al Qaeda and the following media frenzy be used to force the Euro nations into a United States of Europe?

Just askin'...

Anonymous said...


the problem is that our money is debt.

When $1.00 is created, so is $1.00 of debt.

After a year, $1.00 exists, but $1.03 is owed. Unless 100% of that $0.03 interest is paid back to the original borrower (it isn't, but I'm covering the technicality), the system could work.

Since the interest is hoarded, it can't work - bankruptcy is DESIGNED into the system by the very nature of debt based money.

But stealing $1.00 isn't any fun, so you create an extra $1.00 to ($2.00 total now) in order to make the previous $1.03 payable.

That explains why "stable" is distorted into "ever inflating."

they are maximizing the fraudulent debt to maximize their ultimate asset stripping.

Swarmusa.com has thought this out and has presented an excellent place to start when designing a monetary system for the benefit of the people.

Anonymous said...



The video covers the effects of the problem, but not the problem itself.

The root cause was purposely and criminally orchestrated by a rogue, Trojan Horse within the United States.

The root cause was a criminal credit bubble that manifested itself primarily in a stock market bubble and then a housing bubble.

But the root cause was the credit bubble:

IF no credit bubble

THEN no sub prime lending


No NINJA loans.

Google and read "Federal Reserve Act, Section 2a"

The Federal Reserve's MANDATE, BLACK LETTER LAW MANDATE, is to keep credit and monetary aggregates commensurate with with the nation's productive capacity.

Now look what the Federal Reserve actually did with monetary and credit aggregates...


Unless you believe that "parabolic" is equivalent to "commensurate with," the Federal Reserve broke the law.

Of course, they want to cover their crime of the Century... so they LIE about their mandate and, IN ORWELLIAN FASHION, pawn off the expected results of following the mandate with the actual mandate itself.


The game is rigged, the table is tilted... but nobody seems to care... nobody seems to mind...

The Federal Reserve CRIMINALLY broke the law and blew this credit bubble.

Once you get this down... consider that the laws written for the Big Finance Capital ruling class DON'T HAVE ANY PENALTIES!

Break them a MILLION TIMES and nothing happens.

Read FinReg... No criminal penalties in the whole thing per karl Denninger (and he said he read it and should be reliable).

Biologique Earl said...

Snuffy said: " ..........and the US presidential race looking to be a real zoo...I have no Idea where this is heading,but it seems to be coming to a head."

Me, I would rather watch 4 hours a day of Chinese Opera than spend 10 minutes a day following this sick, sad process they call campaigning in Amerika. There has not been anything meaningfully constructive proposed in a campaign for years. And if it were it would it would be dropped as soon as the person became president a la Obama.

I wonder if Obama has a fiddle in a glass case (with 'break glass in case of emergency' written on case) in the 1 million dollar bus he is using for his "pre" campaign excursion?


Robert 1

Anonymous said...


To compare Merkel/Sarkozy with Hitler strikes me, to put it mildly, as a misrepresentation (see Goodwin's law, http://en.wikipedia.org/wiki/Godwin's_law).

The two are caught up in a predicament, i.e. there is no good solution. They are out of their depth and, like most people, are attempting to come to grips with the situation using old ideas. That will fail because they most likely are unwilling to grasp the situation and even if they were, they, particularly Merkel, do not have the political backing to push through the decisions that could at least limit the damage (to say nothing of the upcoming decision from Karlsruhe).

They are not stupid by any means, but are unable, for an array of reasons, to come up with anything better. That is our lot because we elected them and the conditions that led to their election will not be improving anytime soon.

This is not an attempt to excuse them, I simply wish to point out that a comparison with Hitler is not pertinent.


Jack said...

Hi skilo
I appreciate your help in explaining this situatijavascript:void(0)on than the banks know what they are doing and the cartel is here to stay.

I have another question maybe someone can help
I am in Canada and I have money in Canadian banks and I want to know if I should buy US dollars because the Canadian dollar will fall

Jack said...

Total World Economy Collapse

In this video the person talks about 1 currency for mexico ,us, canada
what do you think about that

Jack said...

Hi skilo
People in North America and Europe don't care about these things or politics but look at the Arab countries over there they are more vocal and violent when there is injustice and even than that does not help.
People are in a trap from these bankers and nobody can save us from them

scandia said...

@Jack... re the one currency for Ca,US and Mexico that is part and parcel of the wet dream,the " Prosperity and Protection Perimenter " usually spoken of as PPP.
As is the case with all elite wet dreams the citizens are in opposition. Cdns have rioted about this in Montibello.
I am wondering about currency as well. Wondering if our oil/resources will keep the Cdn dollar strong?
Did you hear this week that the word " Royal " will be reinserted into army and navy as in a return to the Royal Canadian Navy. Looks like that sweet" Royal " couple. Will and Kate, exacted a price for visiting Canada.I, personally, am horrified that our leaders want to return to service to a crown. A gov't spokesperson said that now that the military in Canada has increasing power and profile it was deemed timely to return to tradition.

scandia said...

" Amazingly Absurd Loan " Guarantee " Arrangement Between Finland and Greece "


Mister Roboto said...
This comment has been removed by the author.
scandia said...

I'm experiencing a flood of endorphins, like a warm hug:) Amazing what sending a donation to the Summer Fund Raiser can do:)
Try it. You'll like it:)

p01 said...

The show will go on, as it always has. We just went into the intermission for some time. This intermission was sponsored by oil: "Liquid evergy that enables you to do stuff and own stuff while thinking it's all your merit" (TM). Oil: deluding people since the 1900's.

souperman2 said...

Skilo - I understand very well what money is and where it comes from.

What I am talking about is above and beyond all of that. I am talking about money making money.

We are at the point where money dominates the planet in the pursuit of money, money WILL make more money than any puny human endeavor and it will do so at any cost to human life or even the life of the planet.

It is beyond the power of humans to reign in money at this point. Many will die because of this.

Ashvin said...


"The coupon on €795 billion prior to the crisis was 3% (x €795 billion) = €23.85 billion. That is the 'old' interest. The 'new' coupon which is the 'line of death' is 6% (x €795 billion) = €47.7 billion: all the panic is about 24 billion lousy steenkin' euros!"

New coupon for who? Maybe for Italy and Spain, but then there are 3 other PIG that would naturally be paying much than 6% for 10 years, and that's even after all of the bailouts they received. And lets not forget what's going to be happening over the next 2 years. The private economies throughout Europe are going to be imploding, just as they will be in the rest of the developed world, except perhaps much faster in Europe because of the austerity that is sure to accompany any deal to create a "EU Fiscal Authority". That means investors will be even less willing to roll over debt at those post-crisis rates. Instead, they will either ask for higher rates or just ask for the principal back and sell their Euros for dollars, USTs and perhaps some more gold. Of course, the whole point of fiscal consolidation is to lower borrowing rates, which basically means that Germany and France will have to subsidize the deterioration in the private and public finances of everyone else. Why else would there be so much opposition to the concept of a Eurobond?

It's amazing to me how people still think more centralization and consolidation of economic authority will provide a sustainable solution to any of the problems right now, financial, sociopolitical, energy or environmental.

SecularAnimist said...

What I am talking about is above and beyond all of that. I am talking about money making money.

Ahh, the philosophy that turning things into money as a means of social operation and improvement, it's like the atmosphere, we don't even see it- which really is the heart of the matter and core of our collective madness.

The assumption(or delusion) that the world should be governed by monetary exchange and the magic that flows from this "competition" spawns all progress. With state force as the regulator, referee and propagator of this system. It's core philosophical underpinnings are that all of life is a competition for scarce resources and this competition should be expressed in a market system with the price point guiding all decisions which also tells us everything we need to know about the natural state of the world. In short, economic competition is war by other means with no understanding of planetary sciences. Not a good guiding philosophy for society. Whether you centralize or decentralize this philosophy is irrelevant. Though, it's natural gravitation, by design, is for concentration of ownership or control

Economic crisis? Economics IS a crisis! Politicians are just the salesmen for this philosophy.

jal said...

An interesting headline.
An interesting question for the board.

When will we see the same sort of police action against those banksters who looted the savings of the world?

Maybe small looting is not acceptable in our society.
How did BIG looting become acceptable?


U.K. police tracking down, arresting looters
Those who think that working for 20 years in the military will get a traditional military pension after 20 years of service, are in for a surprise.


Pentagon may scrap traditional military pensions
August 15, 2011 4:27 PM
The Pentagon is considering a controversial plan to replace traditional military pensions with a 401(k)-style plan ultimately saving $250 billion dollars over the next two decades. Sharyl Attkisson reports.

el gallinazo said...

westcoastliberal said...

The interview I was referring to exists on a 2 hour DVD compilation of interviews with "whistleblowers," retired military (ranging from lance corporal to brigadier, intelligence (particularly the NRO), and military hardware civilians (ranging from techs to high management). The interviews are about ET's with some extra focus on their energy technology. Though this is a paid for DVD, it occurred to me that someone must have posted the interview I was describing on youtube. So here it is and make of it what you will. I do have to admit that when a NY Times asshole like Krugman starts talking about alien invasions, even as a hypothetical false flag, it did jog my memory and put my hair on end.


Steve from Virginia

I somewhat disagree with your argument and see two glaring holes in it. The first is that when the Spanish and Italian bonds mature, the people who own them have no where else to go with their credit money. And the second is that the globe will be full up with credit liquidity in the near future. One should always remain aware of that alternative universe where credit can fly to at a moments notice.

Re the piss on CHS's idea

I welcome these critical comments and it's one of the reasons that I suggested reading his piece. Some friends of mine have chastised me a little bit for being such as CHS fan. So let me say where I stand on this, particularly in reference to the founders of TAE.

When it comes to a profound understanding of the actions of global macroeconomics, I&S have no equal which the possible exception of Steve Keen who is really a pure theoretician. In this area CHS doesn't match up, though he is certainly no duffer. But Ilargi spends no time dealing with the nuts and bolts of remediation, and Stoneleigh spends part of her time with this and part of her time on macroeconomic theory. By remediation, I am referring to what people can do to protect themselves from the imminent collapse in the most practical of fashions. Yes, Stoneleigh has many practical ideas in her primers.

As a digression, whenever I bought a car (though my current motto is two wheels, one cylinder), I would always also buy the manufacturer's workshop repair manual and the Haynes manual. This is because I learned through the years and many bruised knuckles and cussing, that the technical writers, no matter how competent, would always leave something important out (because it was intuitively obvious to a professional with 20 years of repairing cars under his belt). If 10% of the important information were omitted, and there was no correlation between of it between the two manuals, then mathematically, only 1 % of the critical info would be missing, which increased my odds considerably.

el gallinazo said...

By the same token, CHS offers a useful remediation manual in addition to Stoneleigh. They also happen to agree on most of the big points as to what to do. I would say the main differences in substance are:

* While CHS leans toward a near and mid-term deflationary outcome, he is far more agnostic in this respect.
* He gives precious metals a bit more emphasis than I&S, though he is far from the fanaticism of Keiser, Durden, and the other libertarian crowd.
* I don't think he sees the coming collapse to be quite as devastating as I&S, though he definitely thinks that it will be more severe than the 1930's. He seems to think there will be some buildings left standing :-( I personally am in the I&S camp as to severity.

Other than these points, I can see no difference between CHS and Stoneleigh regarding remediation. But he projects his ideas with a different style and perspective, one of a small entrepreneur. When it comes to the world of financial survival (as opposed to things like growing food, insulating your house, cleaning your guns, etc.), I find little else of value beyond Stoneleigh and CHS.

Additionally, I have had some minor correspondence with him about a few macro fine points, and he has always responded in a timely and very courteous fashion which cannot help but make one more well disposed. In summary, I am not on CHS's payroll and get no commission from sales of his new book. My "promotion" is simply because I think his perspective here may well be the most valuable available beyond that of the founders of TAE.

scandia said...

@Archie, I agree that an Emirate gold coin could change the rules of the game.

scrofulous said...

"US Monetary Aggregates Update - Money Supplies Growing at High Rates - Failure to Reform

Dude, where's my deflation?

It may seem a little counterintuitive, that the money supply measurements are growing strongly, at the same time that the growth of consumer credit and spending remains sluggish.

Well, perhaps not so sluggish as some might wish to portray, as show in the last chart, but certainly not with enough force to bring back jobs and GDP.

Increasing the money supply in response to a credit crisis, which the Fed is doing with historic vigor, is a blunt instrument. And despite all the proofs and theories to the contrary, they said they would do it, they could do it, and so they are.

There is certainly no lack of people who remain obstinate in their errors and illusions. Money is a little esoteric I admit, but the mindsets of those who have been wrong for so long is even more mysterious. And as forecast, their rationales and arguments are becoming increasingly hysterical, in every sense of the word. There are even reluctant and resistant to any 'existence proof.

Bigelow said...


It is more than amounts of money in supply, it is about it's circulation -Velocity- too. It is doing very little of the latter in the real main street economy that Wall Street bankers parasitize.

@el G

"In summary, I am not on CHS's payroll and get no commission from sales of his new book. My "promotion" is simply because I think his perspective here may well be the most valuable available beyond that of the founders of TAE."


Ilargi said...

"muchtooloose said...
"US Monetary Aggregates Update - Money Supplies Growing at High Rates - Failure to Reform

Dude, where's my deflation?"

I took out this little sentence from Jesse's piece and quit reading:

"Make no mistake, as a policy choice deflation is possible. "

That is such a profound misunderstanding, nothing more needs to be said. Inflation may at times be a policy decision, and even then one that in present circumstances has zero chance of success.

Debt deflation is not a policy decision, ever. It's a force of economic nature.

To wit: all that alleged money his graphs purport to show, where is it? Real estate? Talk about being "obstinate in their errors and illusions". Inflationists, like goldbugs, live in flatland. Debt does not.


scrofulous said...


Those were Jesse's words.

I agree with you that velocity is low and as I see it will remain so until those holding US debt decide it is not worth holding. In the meantime, do you mind if I ask you what you think we can expect before that great geting up day in the morning, and why so?

Frank said...

@Scandia I thought you lived in Ontario. The ancestors of the tories there and in the maritimes gave up their homes and liveliehoods for the crown. Look in the corner of your provincial flag.

It was pretty black and white here in the province of New Hampshire, still governed by Royal decree up till 1775 (we didn't wait until '76), let alone the Rebublic of Vermont.

But 100 klicks south in Massachussets there were broken families that are still broken families to this day.

I bet there is something in Finnish history like that, but I don't know what it is.

And for the TPTB believer folks here. I have met Adamses. If John, Sam and Abigail were working for the Rothschilds, they forgot to tell their kids. Because those kids great grandkids sincerely believed they were still upholding the republic of 1789.

Jack said...

skilo said that wall street bankers committed fraud and I have watched this video a few times I would like to know which part of this video did the fraud happen and if someone can explain this in simple language that would make it easier to understand

Jack said...

Sorry I forgot to post the video

Jack said...

I found this and it explains it a bit

Frank said...

When the Rocket goes up
The Airplane comes down.
That is my department
I'm not Werner von Braun.

Suitcase full of Benjamins
Don't care about your flag.
Honest death merchant
Just tip me the swag.

Frank said...

BTW, we did care about your flag. The arabs brought the suitcase full of benjamins.

The israelis wanted time payments and a trade in on last years model.

If you were Daddy Warbucks, who would be your favorite customer?

Jack said...

It is starting to make sense and the more I hang around here the more I see that we should head for cover.


Bigelow said...

Re: Fraud
Check out the documentaries 'Inside Job' and/or 'Plunder'.

Frank said...

Ever seen a corporate vice president, a union steward and a Saudi prince all at the same time telling a bunch of blue collar workers to write their congresscritters. I have.

And AIPAC didn't even offer me a plugged nickel not to do it. No problem, I'd need a serious bribe to ever vote for Charlie Bass.

Bigelow said...


"I ask you what you think we can expect before that great geting up day in the morning, and why so?"

"Prediction is difficult, especially about the future." Yogi Berra

US Treasuries will continue to get more expensive as big money seeks safety. At least another 4 years of this. The Globalizers want a replacement for the dollar and until then they are stuck with Treasuries. The criminal elites will continue to get bailed out on the quiet and that credit will leak into and driving up the prices of food, medicine etc. Even with depression demand for energy will not drop as much as world production depletion rates are increasing. What replaces the dollar? Hmmm. Some argue vehemently it won't happen, the whole world edifice will irretrievably break down instead.

scrofulous said...

ilargi said:

"That is such a profound misunderstanding, nothing more needs to be said. "

As nothing needs be said , I will just have to take your word for it. (always love that form of argument, it leaves such a hole lot of darkness to snuggle up in;)

"Debt deflation is not a policy decision, ever. It's a force of economic nature."

Even when measured in Zimbabwe dollars?

BTW, couldn't all 'that money', you refer to, be just siting there propping up the banks til it's time has come?

ABTW, some fine artwork in video, otherwise it would have been the Ramones.

scandia said...

@Frank, Yes, I live in Ontario. My Finnish ancestors didn't fancy a Swedish Crown or a Russian one. This Cdn/Finn doesn't fancy pulling her forelock for a British one.
That said modern Finland sells out to the EU crown.

scrofulous said...

Thanks Bigalow, I like your reply.

On the Globalizers, I think they are whistling in another dark hole, as the energy you speak of is going to, IMO, make for a larger rather than smaller world, and possibly more intimate trade dealings as done between China and Russia for oil in Yuan. Interesting times with so many possibilities.

scandia said...

Whoa...I'm reading that Chavez wants to repatriate Venezuela's gold deposits stored in BofE, JPM vaults, etc...is the gold still in the vaults? Is this a Black Swan event? I suppose the banks involved could just say , " No you can't have it back." Especially if it isn't in the vaults anymore...
Am I over reacting to this news?

Gravity said...

Krugman has it all wrong, for optimal stimulus we should construct an interstellar invasion fleet ourselves, and launch into space in search of mineral rich worlds inhabited by suitable slaves, to conquer and subjugate them, stripmine their planet and annex their territories into our solar empire. Although at sublight velocities and lacking cryostasis technology, such an invasion fleet would have little chance of reaching its destination within our lifetimes, or to return with loot and plunder.

Conversely, any invaders we could successfully defend against must be little more advanced than we are, which makes it unlikely that their propulsion technology can reach superluminal speeds, interstellar conquest remains somewhat impractical at sublight velocity.
Therefore any species capable of reaching us at all with a sizeable invasion fleet must be so hideously advanced to make military resistance unfeasible, though with any luck they wouldn't be the best microbiologists and vulnerable to simple pathogens.

The quest for a new grand global narrative to rally the masses and shortcircuit procrastinating dissent in economic policy is understandable, but should avoid the deliberate projection of fear-psychosis, a false narrative of fear alone cannot promote creative thought, since fear is the great planet-killer.

jal said...

Chavez wants to repatriate Venezuela's gold deposits stored in BofE, JPM vaults, etc...is the gold still in the vaults? Is this a Black Swan event?
Am I over reacting to this news?


He is not playing ball with the G8. It could turn ugly.
The first one out the door wins.

Archie said...

@El G

"Additionally, I have had some minor correspondence with him about a few macro fine points, and he has always responded in a timely and very courteous fashion which cannot help but make one more well disposed."

I have never corresponded with him, but I'm not at all surprised to learn that he is eager to do one on one exchanges. Above all else, I perceive CHS to be a gentleman of the first order. I have read him for perhaps 4 years or more and have solidified many of my "gut" feelings because of his analysis.

I just found his latest piece to be an outlier with respect to his overall work. In this one, I think he came across more like a Mish Shedlock than an Ilargi, if you get my drift.

Anyway, YMMV and I'm cool with that.

Ashvin said...


I wouldn't say you are necessarily over-reacting. However, it seems the move is more of a reflection of Venezuela's financial distress than distress in paper gold markets. It apparently owes large loans to China and may need to put up more collateral (in cash and gold reserves) to ease their worries, and/or be facing judgments from lawsuits launched by companies suing over Chavez' nationalization of certain corporate assets. Some are even arguing it is a move to partially preempt political condemnation, via criticizing the dollar reserve system and Western operations in Libya, before making some drastic political moves such as canceling elections.


One thing is for sure, though. If they are serious about withdrawing all that gold from Western vaults and undermining the dollar paper system, and the gold isn't actually there to be delivered, then they can expect the full fury and wrath of these Western powers to descend on them in quick order. Either delivery will be delayed until a price crash in spot gold can be organized, or they will be "given" tungsten-plated bars that may or may not make it down there. If the issue is pressed, well then all bets are off. Perhaps we will find out that Chavez has been secretly supplying African terrorist groups with WMD, and therefore must be heavily sanctioned and/or preemptively invaded.

scandia said...

Thanks Ash for the explanation of Venezuela's obligations and Chavez's motives. He is perhaps more a thorn than a black swan?
On top of that news there is a mate to that black swan flying about- the Tabbi story in Rolling Stone magazine that a whistleblower has revealed 9,000docs were destroyed by the SEC. NOW we know why nobody is in jail.
It's been quite a day!
That whistleblower has some cajones!

Anonymous said...


If by "money" you mean the "Big Finance Capital ruling class," and I think you do, then I concur.

They've systematically aggregated so much wealth and power into their RMaH hands that the Big Bad can't be far out into the future.

I'm voting for the first time in my life (mid 40s) on one issue and one issue only.




Only one person will credibly do that...

Ron Paul.

My concern is that the BFC sociopaths escalate the war and impose a draft.

Plus I'm sick and tired of bombing people in my name, using my wealth and my neighbor child's blood - all to aggregate assets under their corporate fronts.

Yeah, only Monsanto seed is allowed into Iraq - "freedom," baby!

The reason I have never voted before is I intuitively knew it was a scam and nobody represented me. I refused to fit into their predetermined box.

I'm not a Ron Paul fanboi, either, but I believe he will end the wars and get the TSA off our children's privates and be an advocate for rescinding the crime that is the unPatriotic Act.

The gold is money nonsense aside, the Bilderberg and CFR devils he's running against are scary.

souperman2 said...

Skilo - Actually no, I am saying that these rubes, the "Big Finance Capital ruling class," are actually SLAVES to money.

They don't even know it. In fact they believe they are "Masters of the universe", "Smartest men in the room", etc. But in reality they are witless slaver to MONEY.

They must do moneys bidding. Money is a trillion times more powerful than any mere mortal. Money can make one kill, money can even make one kill ones self.

We, humanity are to blame for empowering money to this level but now it is way beyond anything we can even imagine. Some naively believe they can comprehend the world through the economy of trillions, quadrillions, whatever, but IMO they are all full of SHIT.

We opened this Pandoras Box but not even SinBadly can shut it.

Money demands it's pound of flesh and it will get many millions of tons of it.

Anonymous said...


I have a couple issues I through out.

1. I think hyperinflationistas are simply looking at the wrong charts. Total monetary and credit aggregates are flat - that's the aggregate measure, not a cherry picked sub category. Here is a marked up Denninger chart that shows the data I feel is important...


Not that the Fed's mandate was to keep monetary and credit aggregates "commensurate with" GDP.

Legal mandate. That's why they lie and created the "dual mandate." Orwell would be proud. Society should be ashamed for being so gullible and ignorant about such an important issue.

Jack - look at that graph and you'll see I don't say the Fed committed fraud, THE LAW DOES.

2. Ilargi, correct me if I'm wrong, but Ilargi assumes that the debt-dollar paradigm will remain in place and all his analysis flows from that. IOW, it is impossible to fix a debt a saturation condition by issuing exponentially more debt.

He's right. 100%. Try drinking yourself sober next time you find yourself drunk. No, don't do that, but you get the analogy.

3. The inflationistas believe the debt-dollar paradigm will be broken and, quite magically, $1,000,000 will end up in everyone's account to bail out the debtors and to bust the debt holders. Of course, the debt holders will make this call and slice their own heads off... exactly why?

This is rarely addressed and never in a credible way. FOFOA has homeless people buying homes and paying them off with devalued currency.

Good luck with that.


Anonymous said...

...cont'd - The current state of affairs is kept in place to aid and abet the Big Finance Capital looting process and to get every last debt sucker into the maximum amount of debt, IMHO.

Eventually the plug will be pulled and payment demanded - and you are seeing it in Europe. The same finance people control the strings in the USA. It will come here. They didn't need to change the form of our government to keep spending, they needed to do that to FORCE AUSTERITY.

4. A debt saturated society will yearn for hyperinflation. I prefer it to deflation - I want my indebted neighbors near me, not JP Morgan Chase, Goldman Sachs and the Federal Reserve with the peasants renting.

5. Gold bugs simply are biased and talk their book. Gold may well continue up as the massive historical money supply inflation that brought us to this point hasn't been wiped out yet and seeks some place "safe" as everything around them crumbles.

6. Checked bond rates? 3-4% ahead of hyperinflation? Do you really think the BIG MUTHA MONEY WHO WILL MAKE THE DECISION IS THAT ALTRUISTIC?

Under a debt-dollar system deflation is a force and it will come regardless of what anyone does - they can only delay it and make it that much worse.

However, keeping the debt-dollar tyranny in place *is* a policy decision, but I see no reason that criminal policy will be changed anytime before the people who created the monetary tyranny bust the debtors and asset strip them.

NZSanctuary said...

souperman2 said...
...Money demands it's pound of flesh and it will get many millions of tons of it.

Not money itself, but doing things with the primary aim of making money. Hence why the Bible says "for the love of money is the root of all evil", NOT "money is the root of all evil".

This was known millennia ago, but today the message is usually distorted, or framed in some hokus version of the biblical script and subsequently written off as a piece of religious silliness.

As any craftsman, cook, farmer, scientist, teacher, etc., SHOULD realise – doing something because you love what you are doing is very different than doing it primarily for profit/material gain. Doing things for money distorts our actions and our thoughts and our beliefs. It's not money itself that is a problem, it is making it the primary driver of our actions that causes us to become inhumane.

Extrapolate that out to the level of bankers and corporate big-wigs who are aiming to make obscene amounts of money – they have no connection with any kind of empathetic activity – just a psychopathic accumulation agenda.

Biologique Earl said...

Gravity said: "Krugman has it all wrong, for optimal stimulus we should construct an interstellar invasion fleet ourselves, and launch into space in search of mineral rich worlds inhabited by suitable slaves, to conquer and subjugate them, stripmine their planet and annex their territories into our solar empire."

Say that would make a great story line for a movie. Maybe a good title for the movie would be Avatar. ;-)

Bigelow said...


"Gold bugs simply are biased and talk their book. Gold may well continue up as the massive historical money supply inflation that brought us to this point hasn't been wiped out yet and seeks some place "safe" as everything around them crumbles."

Gold is a inverse confidence-in-government indicator, not an inflation measure.

"However, keeping the debt-dollar tyranny in place *is* a policy decision, but I see no reason that criminal policy will be changed anytime before the people who created the monetary tyranny bust the debtors and asset strip them."

Call it inertia.

Bigelow said...
This comment has been removed by the author.
Jack said...

Hi scandia
About the Canadian dollar I was expecting some kind of an answer but for now I am keeping it but I don't know for how long I should hold on to it because I think the US dollar will wipe out all currencies before it collapses.
I have herd that one leg of this monster is down and it was 2008 and the other leg will be down later.
The more updates we have about where we stand regarding this monster the more help
Maybe this web site can have a spot somewhere on the site that updates these things
For example
One leg already down in 2008
Next leg expected to come down 2017
and so on

Jack said...

About gold there must be some indicator that will say that all those who have entered the bubble are already in and now is the time to get out

el gallinazo said...

In the words of the late Red Foxx as he would clutch his heart, "Elizabeth, I am coming to join you! This is the big one." I have a queasy feeling this morning that today might just be "the big one" where it all comes tumbling down.

Jack said...

Hi El G
When you say the big one would that be the second leg down

el gallinazo said...


Yes, but a mad, panicked rush for the exits. SPX already down over 4%.

Bigelow said...


All the info about gold, its his whole career: James Sinclair http://www.jsmineset.com/

Anonymous said...


>>Gold is a inverse confidence-in-government indicator, not an inflation measure.<<

I didn't say it was an inflation measure. In fact, gold performed HORRIBLY during the biggest credit inflation in human history!

But credit inflation will drive demand for items - like tech stocks, stocks in general and houses.

Also gold. To say that gold price is independent of credit availability is "talking one's book" and not in a rational way.

>>Call it inertia.<<

Uh, no. Sorry, but the Big Finance Capital ruling class isn't stupid. Their wealth is tied into US debt and the dollar. To think they will sit idly by while their very own policies destroy their wealth and impoverish their banks is, again, "talking one's gold book," IMHO and not very rationally.

Watch what BFC DOES and you will se they are EXTREMELY RATIONAL ACTORS WHEN IT COMES TO CONCENTRATING WEALTH IN THEIR OWN HANDS and taking from society's hands.

You are correct, though, that gold has value as it is out of the system that will eventually collapse. Even if gold gets trounced in value, it will still be valuable where $1,000,000 in the bank now may not be worth the memories of losing it all.

But I doubt that gold trades $1800 an ounce when the big poverty hits America due to a credit crunch on the order of the tech and housing bubbles, but inversely proportional.

Maybe, but not the way I'd bet.

Having said that, I probably wouldn't sell any PMs that I had, I'd short the market to protect the value of the gold in a collapse and enjoy a 15% tax rate (for now, anyway).

The only issue there is the counter party might not be able to pay.

seychelles said...

I have a queasy feeling this morning that today might just be "the big one" where it all comes tumbling down.

EG I think you are just bored and looking for some drama to spice up the day. It sure looks like we have entered wave 3 down but subwave 1 will have two minor corrective waves and subwave 2 will have at least two anti-trend movements. Subwave
3 will have similar corrective components. Minor wave 3 of subwave three is when gloom will take over.
Having protected my assets as much as
practically possible for the near term (months to few years), I am just watching the whole thing unfold as a
fascinated observer. Hopefully the
Elliott Wave folks (who I like better than you do...for their overall concept only) will give us their impression of where we are in wave 3 in the not-too-distant future.

Ventriloquist said...

The market is now at a very simple crossroads: bonds are pricing in the hyperdeflation that the resumption of the global depression brings in, while gold is pricing in the central planning policy response to that hyperdeflation, which is nothing but print, print, print. Anyone who feels like arbing the spread on the trade (which has a very unpleasant end in either case), should go ahead and do it now.

-- Tyler Durden @ ZeroHedge.com

Unpleasant indeed.


jal said...

According to a CIBC survey only 25% of boomers have no debts.
If you have been following I&S’s advise you are in cash and not in the stock market with any of your savings.

On the other hands, the market gambles are having an orgasmic orgy like they never could dream with all the volatility of getting in and getting out of their positions.

Thank your lucky star that you are sitting on your hands.

I’m going to go and pick blue berries to avoid the blues!


el gallinazo said...


Regarding Can$ and USD, Stoneleigh's general advice on the subject is to stay in the currency of the country in which you live-


Well we all have our own religions. I made mine clear a few days ago. Wish I were bored. Up to my ass in minor domestic emergencies.

While I don't see a straight drop even if the PPT has hung up their spurs for the moment, and I think the drop will play out over many months and even years, I can still see real one day panics. And then there will be the grab a falling knife (BTFD) institutions as well as short coverings.

D. Benton Smith said...

Have you noticed that just about everybody who has any money is SITTING on it? Banks, Corporations, Sovereign Nations... the whole rogues gallery have liquid reserves at record levels and growing fast.

Some people call that a liquidity trap … and so it is, to some extent ( tons of cash and no safe place to invest it ) ... but that is NOT the essence of what's really going on. Not by a long shot.

The one bad thing about sitting on your money is that it is an overwhelmingly intertwined MULTIPLICITY of bad things. First of all ( from a Capitalistic “Purist” point of view ) when you sit on your money it does not 'work' for you. It just sits there... and shrinks.

That shrinkage is, of course, the second bad thing. Or should I say the THIRD bad thing, because shrinkage is the opposite of 'growth'... and we all know that Capitalism dies a horribly agonizing, bloody and acrimonious death when there is no 'growth' in the supply of fresh suckers to keep the scam running.

That's because the whole game is based on a single psychotic delusion: that in buying something cheap today and selling it dear tomorrow one has through some magical process, actually made money. Silly. ( Which says something profoundly important about our leaders, but that's another story. )

The fourth bad thing is that when money is sitting there shrinking no one will loan money because even an idiot ( and rest assured, these guys ARE idiots... in the purest sense of the word ) knows that if loaned money doesn't get paid back then one has lost money.

The fifth bad thing is that when money does not get loaned then money does not get created... because in the current monetary system money IS loans. Or, put another way, if I don't owe you a billion bucks that's a billion bucks you can't count on your balance sheet as a billion dollar asset AND a smaller but still crucially important positive cash flow ( my periodic loan repayments ) that you can't claim on your Income Projections.

The sixth bad thing is that because money is what pretty much everyone uses to induce others to DO things that they would not otherwise choose to do voluntarily... people consequently stop doing what we really REALLY want them to do... like give us food/shelter/clothing, or show up for work to make the stuff we really REALLY need and/or want.

Eventually this leads to people doing things we really REALLY want them to NEVER do, like riot through the streets of London, torch our Mercedes-Benz in Berlin, or decide they would prefer someone else to be their government in a growing number of places, including the USA.

All of the above is absurdly rudimentary, but has nevertheless seemed to have escaped the attention of our ruling elites.

And I am not just sarcastically venting, either.

Well, okay, I AM sarcastically venting... but that is beside the point.

There actually IS a point … but I have chosen to lead up to it VERY slowly because it is VERY unconventional ( even by TAE standards ) and my strategy is to reach it by steps... and leave a back door open for rapid retreat should that become necessary.

The main point has to do with what rulers believe they MUST do when the engines of conventional lending drop below stall speeds and the giant air craft of commercial civilization goes into a tail-spin.

What they believe they MUST do is both deceptively simple, and simply deceptive.

They enforce lending and borrowing through the process of forcing each other to sell and buy sovereign debt... otherwise known as bonds.

I say it is pure Farce, pure theater, pure bullshit, and entirely deliberate

Because under the farce is an agenda so cruel that it must never be spoken, or even suspected.

This is not the conventional view of bond markets.

That's why I am working up to it slowly.

More to follow.

Ventriloquist said...


The main point has to do with what rulers believe they MUST do when the engines of conventional lending drop below stall speeds and the giant air craft of commercial civilization goes into a tail-spin.

What they believe they MUST do is both deceptively simple, and simply deceptive.

They enforce lending and borrowing through the process of forcing each other to sell and buy sovereign debt... otherwise known as bonds.

OR . . .

they start more wars.

That gooses the military/industrial complex of both the aggressor and the defender.

Not like it hasn't been done throughout human history.


scandia said...

@DBS...okay, with " an agenda so cruel that it must never be spoken..." has captured my attention.

seychelles said...

DBS said

your money it does not 'work' for you. It just sits there... and shrinks.

Some of us hope that in a severe deflation the increased buying power of those physical dollars will exceed the dollars we must spend in day-to-day living Who wants to make money 'work' for you when your earned risk premium is miniscule and your principal could go "poof" overnight?

Because under the farce is an agenda so cruel that it must never be spoken, or even suspected.

All of TAE's Brit readers will be eagerly awaiting your continuation.

Some corporations apparently have tons of liquid cash, but banks and sovereign nations??

el gallinazo said...


Money (nowadays) is debt. We need more money for more wars (beyond our five currently active ones) , then we need more treasury bonds, as in War Bonds!! Wars seem different now than the big WWII. Back then we wanted to actually win it and settle back. Now the idea is to just keep them going so we can turn over all those stinky old bombs, bullets, and depleted uranium.

Actually, I am looking forward to the alien wars. Wonder if Krugman can get a commission in the military. He would be useful in psy-ops. Drive the enemy psychotic with his blather, even if they do have two heads.

scrofulous said...

"Blogger el gallinazo said...


Regarding Can$ and USD, Stoneleigh's general advice on the subject is to stay in the currency of the country in which you live-

Hi El G, I thought you were holding US and living in Argentina?

el gallinazo said...


Actually, I am now living in Mexico about 12 hours by bus from Tucson. I was giving Jack Stoneleigh's advice - as stated. And I was not about to put my savings in AR pesos. The game there is rigged worse than Wall Street and the City. Banks are paying 10% on a CD when real price increases are in the area of 30% and Kristina is trying to throw an economist in jail for publishing real shadowstats.

Ashvin said...


"Gold is a inverse confidence-in-government indicator, not an inflation measure."

If you are going with the confidence argument, then you must also include confidence in the global financial system, which is at the root of lost confidence in governments. And if we include the global financial system and governments, then we must recognize that spot gold prices are based on largely based on paper gold products (ETFs such as GLD), and paper gold products are inseparably tied to the entire debt-dollar system of credit fiat money. That is because they are based on large amounts of leverage and are exposed to huge amounts of counter-party risk between financial institutions and their customers. Therefore, if gold is to keep rising in value, then there must be a separation between paper gold prices and physical gold prices. If that separation occurs, then that means the entire paper fiat system is imploding, which means the USD is hyperinflating. So basically, a continuous rise in gold prices cannot be separated from the concept of fiat currency inflation.

Phil said...


Inventor Sir James Dyson blasts bankers for wrecking the economy

Bankers are guilty of ‘an extreme perversion of capitalism’, according to Sir James Dyson.

The inventor of the bagless vacuum cleaner said significant cultural change was needed to restore the UK’s position as a great manufacturing nation.

Sir James said the glorification of the City during the economic boom had an ‘ominous’ effect on British culture, as financiers were lauded but those who chose careers in industry were ‘considered almost intellectually defective’.

‘It is a pity banks have behaved like this and have brought down almost all economies,’ he said in an interview with the Daily Mail.

Ventriloquist said...

While the deflationistas and the inflationistas continue to duke it out, I'm inclined to believe that neither group is entirely correct. I'm thinking that John Michael Greer, in his latest book The Wealth of Nature -- Economics as if Survival Mattered has got our economic future pretty well nailed:

"Back in the 1970s one of the great challenges facing the economics profession was the riddle of stagflation. According to one of the most widely accepted rules of macroeconomics, inflation and deflation -- which can be defined as the expansion and contraction, respectively, of the money supply relative to the supply of goods and services -- form two ends of a continuum of economic behavior. Rising prices, rising wages, and increased economic activity leading to overproduction are all signs of inflation, while flat or declining prices and wages and diminished economic activity leading to recession are all signs of deflation.

In the wake of the seventies oil shocks, though, the industrial world found itself in the theoretically impossible situation of an inflationary recession: prices were rising but wages struggled to keep pace and economic activity declined sharply.

That was stagflation. For more than a decade, economists tried to make sense of the riddle it posed, before finally giving up with a certain amount of relief once the Reagan-Thatcher years arrived, deciding that it was an anomaly that had gone away and so didn’t matter any more."

I believe that stagflation is what truly is happening currently and will continue into the future.


Ashvin said...


I disagree. Staglation seems to be a phenomenon of an economy that has a lot of give, i.e. flexibility. The simplest explanation is that it results from a debt implosion which occurs when consumer price inflation (rather than asset price inflation) is already raging. It may also be a function of several other factors, such as advances in productivity that are concurrently taking place. The result is a decline in economic growth that is not as severe as it would have otherwise been, and price growth that is not as rapid as it would have otherwise been. There is a lot of give for producers and consumers in both directions. That was not at all the case in 2007 when the subprime bubble imploded, and is still not the case today. The global economy has no more give.

Ventriloquist said...

@ Ash:

And I disagree with your analysis.

In fact, the 1970s did not have a lot of give at all, due to the massive oil price shock which constricted the global economy like a python around its entire body.

There was little or no give at that time to either producers or consumers: both were hit with major energy costs, sky-high interest rates and rapidly inflating commodity prices. The housing market tanked, and new home construction ground to a halt. All four of these factors greatly reduced any kind of flexibility to both cohorts.

Right now we have oil prices that have tripled since January, 2009. We have skyrocketing commodity prices across the board. We have interest rates that are largely irrelevant since virtually no lending is occurring at all. We have wages that have been utterly stagnant for the last decade, and a steadily declining workforce as a percentage of the adult population.

Sounds like a textbook definition of Stagflation to me.


Bigelow said...


Paper and physical gold may separate for lots of reasons. Like COMEX and LME collapse in scandals. Forcing too many cash settlements in lieu of physical delivery. As Richard Russell for years has suggested about his accumulation of coins, pay attention to the quantity not the prices.

scrofulous said...

El G,

Just teasing you a trifle, but at the same time I think Stoneleigh might qualify a some of her opinions with the thought that a single size doesn't fit all people in all situations. Also holding USD seems to me more risky than holding a bit of gold. BTW I am no more a gold bug than I am a Canadian dollar bug or an energy bug. Not sure how I will be buggered tomorrow but I just wish I had been a Swiss Franc bug a year ago;)

Ashvin said...


1970s: "There was little or no give at that time to either producers or consumers: both were hit with major energy costs, sky-high interest rates and rapidly inflating commodity prices."

Now: "Right now we have oil prices that have tripled since January, 2009. We have skyrocketing commodity prices across the board. We have interest rates that are largely irrelevant since virtually no lending is occurring at all. We have wages that have been utterly stagnant for the last decade, and a steadily declining workforce as a percentage of the adult population."

Tripled since Jan 2009? You mean since the time global markets were in a full blown panic? Just six months earlier oil was closing in on almost double what it is now. How far do you think the price of oil can get now before increasing costs of production are passed to consumers with stagnant or greatly diminished wages and consumer price inflation burns itself out? I'd say we may have already found out in the last month. Absent an equivalent supply shock to the one in the 1970s, there's no fundamental reason or flexibility for oil or any other commodity to continue rising.

Interest rates were skyrocketing then, as you point out, but you say they are now "irrelevant". If by "irrelevant" you mean there is no possible way a modern day Volcker could do anything close to what he did back then, then I agree. Interest rates are as low as they can go, but broad money supply still does not reach the real economy. The debt overhang is much much higher than it was then at both the private and public level. Wages, as you say, are not increasing as they were back then (to the point where the administration implements wage controls), but are stagnating and declining. No give whatsoever.

Ashvin said...


If major paper gold exchanges crash because people are no longer willing to accepts cash settlements in lieu of physical delivery, and there is a run on BBs, what does that tell us about the value of the cash? It wouldn't be too long before the scramble for physical transforms into people selling currency/paper certificates for all the hard assets they can get their hands on.

Bigelow said...

"If major paper gold exchanges crash because people are no longer willing to accepts cash settlements in lieu of physical delivery, and there is a run on BBs, what does that tell us about the value of the cash?"

Which is why the exchanges and funds have been able to get away with it this long. It is questionable if exchanges have enough precious metals to meet sustained demands for good deliveries. And it must be general knowledge that exchange traded "paper metals" are bent with little real metals busily shuttling in and out of vaults.

seychelles said...

"We have interest rates that are largely irrelevant..."

Try pushing this idea to responsible middle-class senior retirees who struggled all their lives to save a little each month so they could earn a couple of percent on money conservatively invested after retirement. You will get laughed out of the room.

bluebird said...

DBS said "What they believe they MUST do is both deceptively simple, and simply deceptive."

Poison the water supply or unleash some kind of airborne biological warfare that gazillions of people die from illness?

Awaiting the rest of your story

Jack said...

All the gold bugs are now saying I TOLD YOU SO and that it will go up to $15,000 an ounce.

Jack said...

Maybe there will not be a deflation period and it is HI all the way.
I don't believe that but it has crossed my mind

Archie said...


You're twisting yourself into a pretzel and I'm feeling uncomfortable watching it. Truth is, no one knows JACK! (NB: I purposely did not use "nobody", because Nobody {IMN} knows quite a bit imo but more than likely does not know you Jack). Pick a path, Deflation or HI, and get your s@#t together to meet that destiny. If you're wrong you'll have plenty of company.

I might add though, why are posting here if you don't believe that the big D is what is happening?

Nick Palmer said...

I heard a rumour that De la Rue, the currency note printers were printing new Deutschmarks. Contingency planning?

Jack said...

Hi Archie
I know that the gold bubble is going to burst but I think its natural to think that we are missing out on something.

el gallinazo said...

bluebird said...
DBS said "What they believe they MUST do is both deceptively simple, and simply deceptive."

Poison the water supply or unleash some kind of airborne biological warfare that gazillions of people die from illness?

Nah, it appears that they are already doing that. See chemtrails. They have to come up with a new idea. Something more horrible. I am sure they are up to it. "Really ugly shit" is their middle name.

Re Ash and Ventriloquist

The 70's were a long time. Seemed like it lasted forever before the disco music would stop. I think Gloria Gaynor's I WIll Survive! will make a comeback though.

Nixon going off gold because of the Vietnam War deficits. Arab oil embargo. OPEC. Nixon in so called stagflation. (I got laid off as a hard hat construction plumber with a pregnant wife then). Carter in full inflation with rising wages. Volker hitting the economy over the head with a 12 pound sledge. Better to pick your year than your decade. The we can have a cawfy and taaawk.

Phlogiston Água de Beber said...

@ Archie

I heard my name called. Did someone mention HI and deflation?

It is true that I do not "know" the Jack in question. There are probably some that may think I don't know Jack about anything. Heck, they may even be right. I do have a fairly impressive record of making good guesses. You pays yer money and you takes yer chances.

I think the one chance for HI to occur is if gold does get pushed into acceptance as a currency. The dollar would most likely be heavily shorted and the zeros start adding on. Unless they of the supposed godlike powers managed to pull another Rentenmark kind of currency reissue, you will see the god damnedest deflation that anyone has seen in the western world in at least 1600 years.

As I have pontificated several times before, I think it may be unknowable at this time whether the money supply is actually inflating or deflating. What is pretty obvious, at least to us down here at the bottom of the totem pole, is that deflation is happening to an ever growing segment of the population. When enough people have been deflated, something bad is going to happen. I'm not ready to make any detailed guesses as to what form that badness will take. But almost no one is going to like it.

Lynford1933 said...

Jack: We are not missing something. We have already missed something. Back in 2003 or so 20-20 hindsight says we should have bought a half ton or more of gold but alas, we didn't.

No regrets cause I have a little land, a well, a solar pump, a solar charged golf cart with 1800 watt inverter. I am learning gardening.

But remember that gold is not worth much until you sell it. Most people will hold onto it until they have to sell it and you might still get a shot at a few ounces at $30, that is, if you have $30.

Ant Whisperer said...

El G,

I work closely with atmospheric scientists, modeling chemical outfalls from all manner of things and we are yet to see hard evidence of deliberate poisoning events via 'chemtrails'. In our work we undertake chemical analyses of the material that is depositied from atmospheric outfalls. Incidental contamination is everywhere... there is no need for tinfoil conspiracies when we've got BPA, PCBs, petroleum hydrocarbons (esp. PAHs and MAHs), OCPs, dioxins, furans, VOCs... etc.


scrofulous said...

Archie, you say to Jack:

"I might add though, why are posting here if you don't believe that the big D is what is happening?"

'D' for whom, 'I' for whom, or maybe even 'S' for whom? (More than just one country in the running I think), And as well would you or Jack like to tell me which is more intrinsically money: cash, a debt, or gold... which would you hold and under what circumstances? Which one would you prefer if you were to admit that neither of you know what the future will really be?

I thought the site was open to discussion, not a closed shop for one particular dogma even if it is the word of I&S. Now there is a deflationary 'D' word for you,eh?

Now how about a minor touch of the bizzare, try saying 'dog gone' without smiling.

scrofulous said...

Opps gotta say that 'dog gone' backwards ... and then not smile.

Jack said...

what is

Jack said...

Hi muchtooloose
In this case there is a group of people that are out to fool those with money out of fear to have them go into gold.
The cartel is out there to have people go in the bubble and this is their goal

Jack said...

They are ruthless and their aim is to take every cent of innocent peoples money.
Like a vulture waiting to attack a pray and than they will stay something like.
They deserved it

Jack said...

They did this before about 30 years ago
they raised the price to around 800 dollars and than bam it went down to around 200 and ounce.
At the time all the media was saying that it was going to go to outrages prices.
I think the media and some of the web sites are in this game like max kaiser

Ventriloquist said...

@ Ash:

From Wikipedia: "In economics, stagflation is a situation in which the inflation rate is high and the economic growth rate is low.
. . . .
In the political arena one measure of stagflation termed the Misery Index (derived by the simple addition of the inflation rate to the unemployment rate)"

As of today, Shadowstats is showing a true CPI of 12+%.

As of the latest released figures, GDP is growing currently at an annualized rate of less than 1%.

And, the current Misery Index has increased by 63% since January, 2009.

However, if we use Shadowstats figures to compute the Misery Index, the data turns out to be an increase of 440% since January, 2009.

If you have data to refute these figures I would be very interested to see them.


el gallinazo said...

Ant Whisperer

Well, it may be true. I do not have hard evidence of the existence of chemtrails and I should not have brought it up here. One of the few "conspiracy theories" I have mentioned here that I would not bet the farm on. I am still in very preliminary investigation on it. No conclusions. Some reports indicate high concentrations of barium.

scandia said...

@Jack, I&S is Ilargi and Stoneleigh.

Jack said...

Hi scandia
I was saw that so many times and I couldnt figure it out

Ventriloquist said...

@ Ash,

If you do not agree with the Wikipedia definition of "Stagflation",

please quote a more authoritative source for your definition.

If you do not agree with Shadowstats as a source for definitive data on CPI and Unemployment statistics,

please quote a more authoritative source for your data.

If you do not agree with defining your own stance other than

a philosophical disagreement on how to defend Deflationism versus the possibility of Stagflationism,

please elucidate us.

Thank you.

Nassim said...
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Nassim said...

I heard a rumour that De la Rue, the currency note printers were printing new Deutschemarks. Contingency planning?

Nick Palmer,

Do you think that the Germans don't know how to print banknotes? Or, is it because the British can keep a secret better? :)

BTW, I once knew a guy who had been production director of De La Rue - a long while back - and he regaled us with all the tricks they used to use to make life difficult for counterfeiters. Also, he told us that the USD is/was the easiest to counterfeit and the CHF the most difficult.

At that time, the Swiss Franc was around 25 US cents, I think. Now it is 125 US cents.

el gallinazo said...


I really do not see much of an argument here, sort of apples and oranges. We have an explicit agreement here at this blog that we will call inflation an increase in the money and credit supply including increasing velocity, and deflation the exact opposite. I&S prefer this definition of the words because it aids to keeping their analyses clear. We usually refer to changes of prices as the cost of living (COL), which unfortunately is indexed somewhat inaccurately and mendaciously by the government. These are simply definitions, not theories.

We usually find COL increases as a lagging indicator of inflation. But not always. And the time lag varies. For example, in the last decade there was a huge Fed induced inflation in the credit supply, but the COL was very moderate, primarily due to wage arbitrage with Asia. Chinese slave labor was keeping the COL moderate. You can have a huge spike in energy pricing if the producers can keep a monopoly in effect. Many factors can affect COL beside inflation. Furthermore, GDP, a real crap number, in my opinion, is not pegged to inflation either. (I regard it as a crap number as all sorts of counterproductive things are considered positive in in). It is quite possible to have an increasing COL with a decreasing GDP. You choose to call it stagflation. As long as you do not define rising prices as inflation, you can call it whatever you want. It is a correlation between GDP and COL.

As Ilargi pointed out yesterday, part of the problem to evaluating real money and credit supply is intentional deception by central governments and banks. Allowing the banks to mark toxic waste to fantasy instead of market, the current official rule, is allowing the money supply figures to be enlarged well past reality. When reality forces this deception by honest price discovery, a process which we may be seeing now in the collapse of equity markets, then we will see what appears to be a gigantic collapse in the credit supply. But the truth is that this collapse has already taken place but was just papered over until it can no longer be.

Furthermore, much of the alternative media is libertarian and conservative. They wish to end the social safety net and view hyperinflation as the only possible outcome (unless of course we end the social safety nets). These groups have a predisposition to conflate inflation with COL increases.

Finally, one must keep the eye on the fact that increasing credit adds multiple claims on finite assets, while increasing money (currency) dilutes the value of each unit. These are two very different things. The Fed has not been printing money. This is a lazy terminology. They have been attempting to expand credit by putting more debt involuntarily on the taxpayers. Money and credit both can induce inflation, but collapsing credit cannot produce hyperinflation. It is also very difficult to induce hyperinflation (as opposed to inflation) through expanding the credit supply as eventually it becomes simply pushing on a string.

D. Benton Smith said...

Of Human Bondage – part 2

What got me started on this bond thing was a remark. I mentioned to my wife that Italy would probably cave in to austerity demands, on TOP of having to raise interest rates on their bonds just to be able to sell them... which is actually a form of austerity in itself, just like inflation. I predicted Italy would go up in flames

She asked, “What are they trying to do, kill them ?”

Hmmm. Good question.

Backtrack to the start of Globalization and the frenzy of Free Trade agreements. Remember how they said American workers would ultimately benefit from becoming competitive in world markets ?

Yeah, right, like 50 million American workers will benefit by off-shoring their blue collar jobs... because then they can re-train as computer engineers and stock brokers for bigger bucks.

So, why did both political parties cheer lead globalization?

To answer that ask, What do Capitalists hate the most ? That's a tough one, I know. They hate so many things! But what tops the list ?

Tempting to say taxes, or maybe governmental regulation ( especially environmental ) or even risk, competition, unions, social security, workman's compensation, and pretty much anything that cuts into profits... like wages.

Give up ? Okay. The answer is in the nomenclature that differentiates management from labor.

They hate Labor.

Labor is, after all, the biggest single expense in business.

Capitalists pretty much love only profits, and hate everything else, but Laborers are the only ones they have ever machine gunned, beaten to death and assassinated.

So, is there a solution to their “Hate List?”



Off-shore the jobs, and the taxes, labor costs, regulations, unions, legal oversight and social-safety-net expenses that go with 'em.

Get rid of everything but the government's purchasing of your product. That you get to keep.

And just how does America PAY for all that good stuff when the production, jobs, income and tax base has been shipped off to friggin' CHINA?


Sell T-Bills. If foreign manufactures want America to import their goods then they HAVE TO buy US Treasuries. The alternative is to quit business. They are in a dollar trap.

It works like this: A business shifts it's production to China or India, for cheap labor, and avoidance of US taxes, labor laws, legal oversight and so on. Saves a bundle... but the benefits don't stop there.

The U.S. buys the products, and pays in dollars. Dollars roll in by the trainload for both Manufacturer and Host country.

However, this trade imbalance is so unfavorable and the tax base is so eroded, that “deficit” spending is unavoidable. That is no immediate problem because the US can “borrow” forever, by selling T-Bills to the Host country. That country must in turn use a lot of those dollars to buy up their own currency, to drive its “price” down to make their products irresistible bargains.

Stop selling cheap exports to the US, or stop buying up US Treasuries, or stop keeping one's currency “cheap” for US customers... and the gravy train stops rolling.

They literally CAN'T stop.

And the US can't stop either. Eliminate the deficit and the country disappears at the same moment.

Besides, those US Industrialists building America's War Machine with cheap foreign labor NEED that Defense budget to continue skyward.

But if America continues overspending by the $Trillions then hyper-inflation looks like the only escape from unpayable debt service.

All of this was totally obvious from the start.

So why did they walk into such a trap with their eyes open ? Well because they truly do love only profit and power, and they truly do hate Labor.

And because the brightest among them realized that there IS another way out. But we mustn't speak it aloud.

Let's just say, “austerity.”

And what the HELL does this have to do with sovereign bonds?

More to follow.

Ventriloquist said...

@ El G:

The 70's were a long time.

Yeah they were, a long long time.

But, I'm thinking, you meant "a long, long time ago."

n'cest pas?

But then, I digress.

Just because it happened then, doesn't mean it can't happen again now.

You know, "this time it's different" NOT!

Or something like that.


Ventriloquist said...

@ El G:

We have an explicit agreement here at this blog that we will call inflation an increase in the money and credit supply including increasing velocity, and deflation the exact opposite.

That pretty much says it all.

You have agreed to abide by a didactic definition of an English language term that pretty much must adhere to anything that your mentors have laid down.

Rigidity has a price to pay.

And that price is the rule of inflexibility.

No dissent entertained here.


Ventriloquist said...

@ El G:

You know,

I really don't have a quarrel with you,

or Ash.

I'm much more interested in the exchange and contest of ideas.

Both you and Ash have the intelligence to put forth a philosophical edge that invites



So be it. That is all excellent work. Without confrontation in the arena of ideas, what would we be? A bunch of TV-sucking brain-dead zombies?

Don't take my confrontation to be critically personal or critically group. I'm looking for feedback here and not ego pummeling.

Keep up the good work.


Archie said...


I have nothing to tell you that matters to you. Figure it out yourself.

But I will say that I have read this site for a long time and the sponsors are most definitely in the deflation camp and that rings very true for me. I have to wonder why anyone that seriously disagrees with their conclusion would keep coming back to argue their difference of opinion over and over again.

Archie said...


One more thing:

Is there an inflationista blog that you frequent and ask the same kind of "devils advocate" questions? And if there is, why do you do that?

el gallinazo said...


No, I just meant that so many very different things were happening in the 70's in such quick succession, that one would have to be year specific.

Defining terms is not a straitjacket. If you want to have a meaningful understanding and discussion, for example, of thermodynamics, then you have to agree on some state functions definitions like free energy, entropy, and enthalpy, but that heat is not a state function. The only terms that I&S are strict about is inflation and deflation. They are strict about it because looseness of the definition leads do some dumb analysis. If you want to call a dropping GDP with a rising COL stagflation, I don't have a problem with it. You can call it whatever you want. You can call it Al. If you want to define stagflation as simultaneous inflation and deflation, then we do have a problem.

Archie said...

One more brick falls from the wall (h/t Karl Denninger).

Attorney General Kamala D. Harris Sues Law Firms Engaged in National "Mass Joinder" Mortgage Fraud.

Coupled with all of the MERS litigations in process, TPTB don't have enough lawyers on retainer to contain this litigation piniata.

scrofulous said...

El G you say:

"We have an explicit agreement here at this blog that we will call inflation an increase in the money and credit supply including increasing velocity, and deflation the exact opposite.

Okay by me, but what do you have by the way of terms for absolute wealth, it's increase, decrease or, heaven help us, it's allocation?

Supergravity said...
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Supergravity said...

Wealth is inversely proportional to the square of the distance between labour and capital.

Supergravity said...

The private monopoly on money therefore absolutely destroys wealth.

Supergravity said...

Because Capital is subject to Gravity, shit happens profitably [to the oligarchy].

Jack said...

Hi Lynford1933
Your ideas are good.
I have been thinking of doing some kind of work with geothermal and I am doing some studying but when the crisis intensifies than it will be a problem to find all the supplies.
So I am wondering what kind of a work can a person do when the depression start to intensify.

el gallinazo said...

Even I am surprised, but after the comment by our national idiot savant, Paul Krugman, we are getting follow up from NASA affiliated researchers:



Is the elite corporate bullshit mill fan in this department had its switch flipped now that we are truly entering fiscal end times?

I await more with curiosity. This could just be some individuals looking for their 15 of fame. Or a scheme could be unwinding. We will see.

For background, my link earlier in this thread. Make of it what you will, but keep a heads up for propaganda.


Jack said...

Hi El G

About aliens
Near the end of this video there is some evidence that is unbelievable.
I am guessing that this is a true carving from that era

Jack said...

How is this for an idea.
When the Dow Jones falls to almost zero than the price of gold will start to drop.
For now there is still plenty of capital out there that is still able to move somewhere and it is likely that it will gold into gold.

el gallinazo said...


The main reason that I brought this up after Krugman's remarks is that one should regard any attempt by TPTB to mobilize people either financially or psychologically against any sort of "alien invasion threat" is complete crap.

Jack said...

Hi El G
I hear what you are saying.
They are laughing at us.
They say what they want to say and do what they want to do

jal said...

Carney is the fly on the wall.
He is coming as close as I think it is possible for him to lay out the future.

In view of what I have been reading from Karl, and Tyler etc. its as if he is reading from a top secret document and letting out as much as he can without scaring the financial communities.

It all adds up to a reset.


bluebird said...

What is a 'reset'? Can someone explain it please?

Is it when everything stops because there is no more money?

Does a reset mean that everything is 50% reduced in price?

Is a reset a new currency?

Do loans get forgiven in a reset?

SecularAnimist said...

Yeah, a reset is coming - not in the way TPTB want. Pride does come before the fall.

Greenpa said...

BBC Business news feed is making TAE comments today:


"EU Wile E Coyote Moment?' is the teaser-


"end of the world as we know it?" is the teaser on main page

jal said...

Hi bluebird
It could be everything that you said and more.

Just like a reset in a computer game. You do not restart the game from the beginning but from a stable point that occurred in the past.

It also means that it is impossible to continue/project forward from the present conditions.

Present conditions are no longer sustainable.

Unlike in a computer game, a reset is not instantaneous and it take time for change to happen. The adjustments and changes are causing "volatility" in more than the financial systems.

Don't you feel it? Change is in the air.

Jack said...

Most people cant come to the grips with the fact that the world will be a different place and thanks to this web site I am a few steps ahead of those people.
The thing is you are still confused as to what to do with your money and what kind of work can you do.
These days nothing works
I said maybe geothermal but even that is the pits.

scandia said...

@Jack, I sense you are uncertain as to what to do, what is possible when the old paradigm is passing away before our eyes??
It might help to take a different approach. Think group, a neighbourhood, a community. Examine real needs and how to meet them ...for sure one size does not fil all. What is your size? Are you single? Do others depend on you? Dare to think about what you would love to do. Have you always wished to live elsewhere? Etc.etc

Phlogiston Água de Beber said...

I'm with bluebird on the "reset" question. The word gets tossed around here like it conveyed some well known meaning. The implied meaning has to be taken as a sudden return to some prior societal state. That idea seems remarkably similar to the notion of going back home after several decades of living far away.

I tried that and found as almost everyone always does that home disappeared while you were gone. Given where we are collapsing from, I completely discount the idea that we will simply wake up one morning in some prior century with all its well known rules and conventions.

The obvious casualty in the Mammonite rampage against civilization is TRUST. Trust is being murdered right in front of us. One of my relatives proudly proclaims that he trusts no one. Soon enough, many people will be thinking that even if they won't say it. Seven billion people lacking a web of trust will, IMHO, yield a world never before experienced.

jal said...

... I tried that and found as almost everyone always does that home disappeared while you were gone. Given where we are collapsing from, I completely discount the idea that we will simply wake up one morning in some prior century with all its well known rules and conventions.
I agree. That's is one of the problems with a reset. Its not a computer game.

Nothing is fixed. Memories of the past are not accurate.


SecularAnimist said...

""The implied meaning has to be taken as a sudden return to some prior societal state.""

This is the tendency of people to look back in time to something that made sense. Erroneously romanticizing the past. We are going to a completely new social state. There is no going back.

" Trust is being murdered right in front of us."

Indeed it is and sorely needed.

scrofulous said...

El G,

How about the terms Larboard Hubertization and Starboard Hubertization, to describe Absolute Wealth in conjunction with the proxy for wealth as described using the AE applauded definition of inflation/deflation in cash and credit ?

scrofulous said...

Tell me True El G, does that leave you in the doldrums or rattle your hatches?

seychelles said...

Your only real home is a consciousness that exists between your ears for a moment in time, with a bit of an individual anchor but always in flux.

What does the commentariat think about the current best places to be outside of the USA, especially with a view to social stability and respect for personal property rights?

A neoagrarian lifestyle will require a reliable source of clean water and the ability to create irrigation canals therefrom.

A neoH&G lifestyle will require initial hoarding of bows and arrows and eventually the ability to recraft these from scratch, in addition to a local environment where there are tidbits to be hunted and "gathered".

Jack said...

Hi scandia
Thanks for your concern.
I have been in business and also been working and the only thing I know is that businesses that I used to work with or the businesses in my area are suffering and from just looking at things from the surface you cant tell.
At least no yet.
There are a lot of things I would like to do but the rules of the game are changed.
Anyway I have geothermal in my mind.
Thanks again

Jack said...


It is premature to think of things like this but this is what people will buy.
The thing is how can a person like me enter this filed.
I am talking about making a living form that.
If a businessmen tries to sell this now none will buy that.

Biologique Earl said...

A former senior vice president of Moody's reveals all:

He describes how they were under pressure to falsify ratings to please the customer and ensure business growth for Moody's.

Of course all of this is well known since the proof was in the pudding. However, his revelations could make him a prime witness in hearings or future litigation's.


Robert 1

Phlogiston Água de Beber said...

Dmitry Orlov covers a lot of the topics being discussed here in this interview.

No shirt, no shoes, no problem. Interview: Dmitry Orlov

Wyote said...

OK, a shameless attempt to wake Cheryl:

AUGUST 19, 2011
Manufacturers of Downward Arrows Post Record Profits.

Rare Bright Spot on Wall Street

NEW YORK (The Borowitz Report) – In what stock market analysts are pointing to as a rare bright spot in an otherwise gloomy period for Wall Street, manufacturers of downward arrows posted record profits this week.

While makers of cars, computers, farm equipment and practically everything else saw their fortunes plunge this week, producers of downward arrows notched double-digit gains, inspiring investors to snap up their shares like never before.

Companies like National Plunging Arrow Corp and Consolidated Downward Pointy Lines saw their shares rocket as investors rushed to participate in the suddenly red-hot red-arrow sector.

“We are seeing investors move out of Treasuries and gold and into downward-arrow stocks,” said analyst Harland Dorinson, who covers plunging trend-line manufacturers for Morgan Stanley. “At a time when the world is facing extreme uncertainty, the one thing we know for sure is that going forward there will be strong demand for downward pointy things.”

But the euphoria surrounding the plunging arrow sector may be short-lived, as some analysts caution that that investors’ mania for downward arrow stocks may be a bubble, with others warning that downward arrows are increasingly being manufactured in China, where the arrows are mass-produced using far cheaper labor.

For his part, though, Morgan Stanley’s Dorinson sees a silver lining in such gloomy forecasts: “Even if people wind up losing billions of dollars investing in downward arrows, you know what? There’s only one way to show that.”

Jack said...

Hi Wyote
I have noticed a lot of that kind of positive reporting and for sure many people are getting fooled.

D. Benton Smith said...

- part 3

My wife says I should cut to the chase. I countered that I need to lay more groundwork, and she said what good will that do if everyone stops reading because I don't get to the point.

Okay, she wins. I will devote this post to Getting To The Point, and present the case in later posts.

So what is this ominous agenda I mentioned, that is so cruel that it must never be spoken, or even suspected?

It is based in part upon the tacit but deep elitist belief that they deserve life more than poor people do. Since irrefutable facts indicate huge numbers of humans SHALL die (prematurely ) from 'Peak Everything' the Elites believe the catastrophe should be done in a controlled manner. With them doing the controlling, of course. Towards that end they implement policies DESIGNED to kill off a vast swath of humanity. It is more a 'shared reality' than a conventional 'conspiracy', although it has elements of both.

Our Elites are as convinced as we are that massive die-off is unpreventable (though not inescapable) ... and are already profiting from it. In other words, fellow chattel, we are the object of the biggest short sale in human history.

“Peak Everything” presents two fundamentally divergent choices : either mitigate the crises to save as many people as possible, or hasten the catastrophe in a sort of “controlled demolition.”

They chose the latter. National budgets world wide for half a century are conclusive.

The strategy is to simultaneously exploit and disenfranchise people until they either revolt or die outright. When victims die, that's fine, one less dollar to share and mouth to feed. When they revolt, that's even better. Huge ( tax supported ) profits can be made by hiring out the work of tracking down leaders & activists, and either killing or imprisoning them. Throw in some torture for fun. I give you the War On Terror. The ULTIMATE growth industry because fresh targets ( and public demand ) are continually created by the process itself.

Preparations for this abound in such stupendous profusion that I mention it only because the evidence is common enough to disappear by it's very ubiquity. For every penny spent on mitigation of human suffering a thousand dollars are spent on ways to violently repress “social unrest.” ( Trillions for Defense, but Not One Cent for Health Care is the motto)

This strategy ( squeeze until leaders emerge to fight back, then imprison or kill them ) is accepted as right and proper. Call it 'assisted evolution,' or God's Will, in either case the Elite survive as God & Nature's highest expression of superiority.

Some might say this is totally old hat, nothing new, just “1984” played out in real time, but there is a huge and qualitative difference. This is not a fictional devolution into corrupt elitism. This is a deliberate plan, complete with rationale. And the essence of the rationale is that this course of action AVOIDS the carnage of full blown societal collapse like the Doomers predict and prepare for with such Messianic faith.

Consider this : if resources are successfully withheld from the disenfranchised in adequate number, then there are no resource shortages, and thus no collapse. Moreover, the means already exist and have stood the test of time : keep the money, and use it to hire half of the poor people to kill the other half.

It all hinges on keeping the power by keeping money, which in turn hinges upon keeping the financial system if not actually functional then at least manipulatable.

Indeed, if the financial system remains at least partially intact ( even in a perverted form ) there is only one outcome POSSIBLE... the bad one.

And, in that capacity, sovereign bonds and Rating Agencies play a most crucial role.

In my following posts I intend to present that case... unless everyone here gets so annoyed that I have to use that “back door escape route” mentioned earlier, and just shut up.

More ( conditions permitting ) to follow.

scandia said...

@IMN...loved the Orlov interview. It encourages me to explore options I might not have. Maybe I'm not trapped afterall:)

@DBS, I am in agreement that gov't agenda is to save the system not the population. Well just enough proles to do the heavy lifting, empty the piss pot.

Ashvin said...


Correct me if I'm wrong, but you believe we are experiencing a period of "stagflation" or "disinflation" that is similar to what occurred in the 1970s. A period of low economic growth, high unemployment and high consumer price inflation. I don't think we are suffering from a lack of clear communication here. I firmly believe that hyperinflation of the US dollar is significantly more likely than "high inflation" over the next five years, and that hyperdeflation is significantly more likely than HI over that same time period. This time is different, by virtue of the fact that it's 30-40 years later and societies/economies evolve just like all other complex systems, with their past conditions influencing their present state.

Erik Janszen has a similar argument to yours, and recently wrote a letter to Mish attempting to "debunk" deflation with a bunch of CPI charts going back 100 years. My response was something along the lines of, "projecting past price trends indefinitely into the future is the quickest way to prove you have no idea what you're talking about". I don't necessarily think that your stagflation argument is suffering from the same fallacy, but it's similar. CPI data (or generally any price data) is very misleading for that exact reason, along with the fact that it is obviously very manipulated as an "official" measure.

BTW, I 100% agree with you that we should constantly challenge our own theories, philosophies, ideas, etc. with critical analysis and perspectives from others. I never take that personally... only, well, personal attacks. The reason we defend our arguments here is not because of stubbornness or mental "rigidity", but because they are arguments developed after careful consideration of the best available evidence that we are aware of.

Also, I was never quite clear on how John Williams estimates his rate of inflation. Does he simply reverse the various hedonistic and weighting "adjustments" used by the Bureau of Manipulates Statistics, while also considering the impact of food/energy prices? Thanks.

Lynford1933 said...

Jack: The idea of very small scale geothermal is very dependant on location. My brother-in-law in Idaho had a hot spring right near his house and he used the hot (180 degree F) water to heat his house but the spring water tasted bad and his 200 foot well was pretty bad too. Here in Reno there is geothermal power plant south of here but I would have to go a 1000 feet to get something warm enough to use however an eight foot parabolic will heat a lot of stuff.


Anonymous said...


Your cold hard thinking on this subject strikes a chord with me.
I agree with you that the elites believe that they deserve life more than others. IMO they conflate success with moral rectitude and the "darwinian" failure of those of us who can't make ends meet does not hurt them but has feeling of rightness. A world in order, operating as it should.

Last year at a wedding I tried explaining to somebody who thinks like this that it's the rich people who use the lion's share of the resources, the poor command much less energy and resources, and should not be seen as the problem, even those on welfare.
Her face turned black, no more conversation. She referred me to her husband so that he might demolish my argument.

Anonymous said...
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