Friday, August 19, 2011

August 19 2011: One Step Up and Two Steps Back

Dorothea Lange Spud October 1939
"Tavern on main street of potato town during harvest season. Merrill, Oregon"

Ilargi: In the past few weeks, I’ve provided you with a series of stats on financial institutions. I was drawn back to thinking about them when I saw a headline earlier today in the Daily Telegraph that said something in the vein of: "Wall Street recovers...", a headline based on the fact that the Dow and S&P were -temporarily- out of the red.

Since this to me represents a pretty gross misrepresentation of actual facts, I thought I’d get back to my numbers series, and add a few, in order for you to be able to understand still better what is really happening. A recovery it's not, not even close.

Here's from August 3:

The Next Bank Bailout Bloodbath is Here
US banks:
  • Bank of America: -34.1% over the past 12 months, -34.51% over the past 6 months, -14.2% over the past month alone.
  • Citigroup: -9.78% YoY, -22.64% over 6 months, -13.22% over the past month.
  • Morgan Stanley: -24.23% YoY, -30.12% over 6 months, -12.33% over one month.
  • Goldman Sachs: -13.95% YoY, -19.93% over 6 months, -3.53% over one month.
  • JPMorgan: -3.21% YoY, -12.54% over 6 months, -4.38% over one month.

Foreign banks:
  • Société Générale: -34.82% YoY, -36.39% over 6 months, -30.28% over one month.
  • Crédit Agricole: -30.9% YoY, -31.66% over 6 months, -30.8% over one month.
  • Deutsche Bank: -31% YoY, -17.61% over 6 months, -16.48% over one month
  • RBS: -35.61% YoY, -25.12% over 6 months, -17.73% over one month

Ilargi: And this from August 16:
Europe on the Verge of Breaking
  • 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

Ilargi: The reason why I wanted to revisit the stats is that it's important to understand to what extent what we see happening is a structural, rather than an incidental or circumstantial turn of events. To wit:
The Domino Effect of Europe Bank Woes
by John Carney -

There’s also the problem with hedge funds trying to hedge exposure to European banks. The short-selling ban on European banks makes hedging exposure more difficult. One response by some hedge funds will be to short U.S. banks as a proxy.

Ilargi: I'm sure you can agree that that is funny, no matter how tragic it is.

The tragedy that's unfolding is shed in an even clearer light when we expand the stats series to include the longer term, in this case 5 years.

In the past 5 years (dating back to August 25 2006, a date I took from Google Finance), these are the loss numbers for financials, as taken at noon, August 19 2011:
  • Bank of America : - 86.68%
  • Citigroup: -94.33%
  • Morgan Stanley: -70.72%
  • Keycorp: -83.46%
  • Fifth Third Bancorp: -76.06%

  • Barclays: - 76.85%
  • RBS: -96.83%

  • Société Générale: -83.57%
  • BNP Paribas: 60.64%
  • Crédit Agricole: -81.39%

  • UBS: -75.27%
  • Credit Suisse: -52.92%
  • Deutsche Bank: -65.26%

The numbers are made even more poignant when we look at losses at the Dow and the S&P in the same time period.
  • Dow Jones: -3.97%
  • S&P 500: -12.81%

Ilargi: Now we can see where the real problem really is: in the financial world. Banks are down way more than other companies. As we've long known, the sole and only reason many banks are still standing is that they have been given your money. But we can also see where the money you have so graciously donated to them has led.

Namely, to more and further gigantic losses, into the deep dark hole of a bottomless pit where not a penny shall ever return from -and you can disregard any statements from any politician claiming that the money is being repaid-. Sure, it may be on paper, but when you lose 80%-90% of your market cap, as Bank of America, Société Générale and Citigroup have done, that is but a meaningless gesture, good only for propagandistic purposes.

Now there will be those who say that market cap is not the same as cash flow, but that is only partly relevant. Once your share price dives down into penny stock territory, it's your market cap that is very relevant. To put it in a somewhat humorous way, Reuters had this today:
Apple is worth as much as all 32 biggest euro zone banks
Technology company Apple is now worth as much as the 32 biggest euro zone banks.

That's the stark result from a steep fall in the share price of banks including Spain's Santander, France's BNP Paribas, Germany's Deutsche Bank and Italy's Unicredit, compared to a steady rise in Apple's valuation, according to Thomson Reuters data.

Earlier on Friday the DJ STOXX euro zone banks index fell 4 percent, valuing its 32 members at $340 billion. That's based on the market capitalization of their free-float shares, which for some French banks in particular is less than 100 percent.

The index has crashed by a third since the start of July, hammered by fears banks will lose billions from their holdings of euro zone government bonds and a failure of policymakers to stop a euro zone debt crisis from spreading. The euro zone banks have lost three-quarters of their value since peaking in May 2007.

Ilargi: Look, yeah, we can talk cash flow here, but we'd be better off talking sheer survival. How will France, Britain and the US keep their banks afloat? After transferring trillions of dollars to them in a period during which they have lost ever more of their market value?

Recent developments throw a wrench into every single bail-out deal agreed on over the past few years. These deals all use certain valuations in order to come up with the numbers deemed necessary for a deal to be struck. And now the numbers just ain't there anymore. The name of the game will turn into "margin calls". The banks will only be able to meet these calls by holding up their hands to governments.

But the people who elected these governments will look much less favorably upon the next bail-out, if only because the prior ones have not worked at all. That is to say, they have kept banks alive a bit longer, but they haven't solved any of the underlying issues. Which thus and therefore always keep coming back.

So, when you see the Dow temporarily out of the red, that has zilch to do with recovery. Markets never only go in one direction. It's one step up and two steps back. But, as the numbers above show unequivocally, the numbers that count are going down, fast, over the medium and longer term. Just like we at The Automatic Earth have been saying for years now.

We’ll do a gloating chest-thumping session of schadenfreude one of these days. But not today. Still, it's crucial that you latch on to the themes of deflation and the flight into US dollars and Treasuries as they play out on the back of the plunging stock markets. Just as we said they would.

As evidenced by Ambrose Evans-Pritchard for the Telegraph:

Bond markets signal 'Japanese' slump for US and Europe
The global credit markets are braced for deflation and perhaps depression.

Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in modern American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.

The Bank for International Settlements said German, Dutch, Swiss and British banks together have a US dollar funding gap of around $1 trillion.

The global dollar gap is $5 trillion, reflecting the continued use of the greenback as the base for international finance. This means that severe market stress sets off a scramble for dollars, akin to a global margin call
. "It won't take much for the interbank market to collapse," said Lars Frisell from Sweden's Riksbank. "It is extremely important that we don't see a repeat of the situation in 2008."

Ilargi: And Larry Kudlow for the National Review:

The Deflationary M2 Explosion
Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.

This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.

"The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets," writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.

So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, "The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt."

Grannis concludes, "In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice."

Ilargi: This is your reality. Not inflation, or hyperinflation. And not a flight FROM US Treasuries and the US dollar, but a flight TOWARDS them. Yes, gold is higher; a totally predictable knee-jerk reaction. Once the bank stocks lose another 10%-20%-30%, which could happen in a manner of days at the rate we're going, that will change too.

That is because the plummeting bank stocks represent the vanishing into nothingness of what I've named "zombie money". In other words, it's not a matter of people, investors, talking their money out of one place, asset, and into the other, it's instead a matter of -virtual- money disappearing. That will take down the price of gold. An important issue to wrap your brains around. More about that later.

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Bond markets signal 'Japanese' slump for US and Europe
by Ambrose Evans-Pritchard - Telegraph

The global credit markets are braced for deflation and perhaps depression.

Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in modern American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.

Investors scrambled to buy the bonds of strongest industrial states on Thursday on fears of a double-dip recession on both sides of the Atlantic and a European banking crash, driving down their returns to investors. German yields fell to 2.08pc and Switzerland's 3-month rates have turned deeply negative.

Markets were stunned by a plunge in the manufacturing index of the Philadelphia Federal Reserve to minus 30.7 in August from plus 3.2 in July, one of the most violent falls ever recorded. "It is a catastrophic collapse," said Rob Carnell from ING. "Markets are in a fearful state right now, and data like this gives them plenty of excuses to panic."

Andrew Roberts, credit strategist at RBS, said investors are haunted by fears that European banks may have lost full access to America's $7 trillion markets, leaving them at imminent risk of a dollar squeeze.

An unidentified European lender had to tap $500m from the European Central Bank's (ECB) swap line with the Federal Reserve, indicating that it had been shut out of the markets. US investors have brought down the guillotine since the EMU debt crisis spread to Italy and Spain, and Germany vetoed any form of eurobonds or fiscal union. "This is what has kicked [off] the latest turbulence," Mr Roberts said.

Ewald Nowotny, Austria's central bank governor and an ECB member, told newspaper Wirtschaftsblatt there was a "growing reluctance" within US money market funds to finance the Europeans, though he blamed the cut-off on a change in US banking regulations.

Mr Nowotny said a global double-dip recession was unlikely but said nobody should be complacent because "we have learned painfully from history" that a global slump can strike unexpectedly. His personal fear is an insidious slide towards "Japanese" stagnation in Europe.

The Bank for International Settlements said German, Dutch, Swiss and British banks together have a US dollar funding gap of around $1 trillion.

The global dollar gap is $5 trillion, reflecting the continued use of the greenback as the base for international finance. This means that severe market stress sets off a scramble for dollars, akin to a global margin call
. "It won't take much for the interbank market to collapse," said Lars Frisell from Sweden's Riksbank. "It is extremely important that we don't see a repeat of the situation in 2008."

Morgan Stanley warned that both Europe and America are "dangerously close to recession". The banks said a repeat of the Lehman meltdown in 2008 is unlikely since households and companies have healthier debt levels today, but the risk is there if the eurozone drifts into a policy blunder and allows the default of a sovereign state. "This could bring down the whole financial system," it said.

Elga Bartsch, the bank's Europe economist, said euroland remains the "weakest link" in the global chain. "The risks of another shock pushing the region over the edge are significant," she said.

The southern European states cannot resort to emergency stimulus to cushion the downturn and may have tighten fiscal policy to satisfy the bond vigilantes. Ms Bartsch said the ECB may have to reverse its tightening cycle and start cutting interest rates in early 2012. European bank shares were crushed in a cascade of selling, with Societe Generale off 12pc, Commerzbank 10pc, and Intesa Sanpaolo 9pc, Credit Agricole 7pc, and Deutsche Bank 6pc. Curbs imposed by several exchanges on the short-selling of equities appears to have had no relevant effect.

Andreas Schmitz, head of the German banking federation, called on Europe's leaders to stop dithering and accept that there will have to be changes to the Lisbon Treaty and a profound reform of the Maastricht system if monetary union is to survive. "In the end it comes down to the question of whether we're willing to move to a 'transfer union', or whether we let the euro break down or we retreat to core-euro. Monetary union is not going to collapse because of the weaker members, but because of the stronger one," he said in a thinly-veiled criticism of German leadership.

Jacques Delors, the ex-president of the European Commission and the euro's "godfather", pleaded for a "partial mutualisation of debts" to save the European Project and prevent the EU degenerating into a "mere free-trade zone". "Open our eyes: the euro and Europe are on the brink of the abyss. From the start of the crisis Europe's leaders have refused to face reality," he told Belgium's Le Soir, saying it was staggering European leaders had gone on holiday after the EU's July summit without activating the emergency measures agreed.

Mr Delors said French policy had been reduced to "trying to stop Germany abandoning ship: but the oversized ego of Nicolas Sarkozy is proving an impediment." "Besides, it has to be admitted that Europe is no longer a motivating issue for the French," he said.

The Deflationary M2 Explosion
by Larry Kudlow - National Review

Fears over the safety and solvency of European government debt and banks are haunting the stock market.

Amidst the financial flight-wave to safety, with stocks plunging, gold soaring, and Treasury bond rates collapsing — and all the European banking fears which go with that — there’s an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits, and retail money-market funds, has been soaring.

According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.

What’s going on here? There’s a flight to government-guaranteed accounts. Some people believe Europeans are withdrawing from their own banking system and parking their money in the U.S. banking system, guaranteed by Uncle Sam. Kelly Evans reports in her Wall Street Journal column of a $30 billion outflow from equity mutual funds that has probably gone into cash.

This is a very disconcerting development. Normally, big M2 growth would signal a faster economy, and maybe even higher inflation. But as economist Michael Darda points out, the velocity, or turnover, of money seems to be plunging.

"The recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets," writes Darda. He also notes that widening corporate-credit risk spreads and shrinking government-bond rates signal a recession risk, not a coming boom.

So contrary to monetarist theory, the M2 explosion seems more closely related to a deflation/recession risk. Economist-blogger Scott Grannis writes, "The recent growth of M2 surpasses even the explosive safe-haven demand for money that accompanied 9/11 and the financial crisis of late 2008. Something big is going on, and it can only be the financial panic that is sweeping Europe as money flees a banking system that is loaded to the gills with PIIGS debt."

Grannis concludes, "In short, it looks like there is a run on the European banks and the U.S. banking system is the safe-haven of choice."

On the other hand, all may not be lost — at least from the standpoint of the American economy. Economist Conrad DeQuadros, who acknowledges the precautionary demand for high cash balances in the current financial uncertainty, believes that the economic data do not yet signal recession. DeQuadros points out that jobless claims, hours worked, retail sales, and industrial production are all picking up. He also notes that profits are still rising, even though their growth is slowing. And C&I business loans have grown at an 8 percent annual rate over the past three months.

I would just add to all this: The biggest problem for the plunging stock market is coming out of Europe. Fears over the safety and solvency of European government debt and banks are haunting the stock market. I still don’t believe it’s 2008. But yes, like everyone else, I’m worried.

That said, we are awash with liquidity everywhere. U.S. banks and companies have more cash than they know what to do with. The problem is they are immobilized by fiscal policy run amok. We desperately need a regulatory rollback and flat-tax reform to boost asset prices and to get banks to loan, companies to invest, and America back to work.

The Domino Effect of Europe Bank Woes
by John Carney -

Concerns over the health of European banks are rattling markets Thursday. So it’s worth taking a closer look at which dominos are likely to start tumbling.

Investors are still quite spooked about the financial sector. When bad news about banks hits the headlines, there is a knee-jerk tendency to sell shares, redeem funds with exposure to the banks, and seek safe-haven.

Today’s Wall Street Journal story said that officials at the Federal Reserve have been in talks with the heads of European banks with U.S. businesses. This could be taken as a reassuring sign that regulators are proactively attempting to address potential problems. Lots of investors are probably going to take the most conservative view, however, viewing it as a sign of real problems.

This leads to selling, not just European bank shares, but U.S. bank shares. Why? Part of the reason is that we just don’t know how interconnected various financial institutions are with each other. But 2008 taught us that just because we don’t see the connections, it doesn’t mean they aren’t there.

There’s also the problem with hedge funds trying to hedge exposure to European banks. The short-selling ban on European banks makes hedging exposure more difficult. One response by some hedge funds will be to short U.S. banks as a proxy.

Large depositors are also likely to flee, withdrawing money out of European banks and putting them in U.S. banks. There’s no evidence of anything like a bank run underway, though at the margin, it’s likely the European banks are seeing withdrawals.

Then we have the prime money-market funds . The yield on these funds is so small right now that some smart people on Wall Street wonder why anyone has money in them at all. If you are being paid 0.04 percent for any amount of risk, why not just stick it in a risk-free account, perhaps a money-market fund that owns only Treasury bonds, or just buy Treasury bonds directly.

Yet there still is a lot of money in prime funds. Some of that is likely to be withdrawn by investors concerned about the exposure of the funds to the financial sector. Money-market funds are ordinarily a big source of short-term funding for both U.S. and European banks with dollar obligations. So fears about Europe or the financial sector translate into redemptions at money-market funds.

Imagine for a moment that you are a corporate Treasurer at a company sitting on $100 million. The Wall Street Journal lands on your CFO's desk. Now he wants to know what the company's exposure to Europe is. Do you want to tell him you have tens of millions in funds that may be exposed to Europe, and that those millions are earning you pennies? Not if you want to keep your job.

So you do the rational thing. You redeem out of prime funds. You put the money in the bank. Or in government funds. Or maybe you go buy some Treasury bills. The good news is that money-market funds have a lot of liquidity right now. The U.S. banking sector is so flush with cash that it doesn’t really need to borrow short term. And the funds have been decreasing their exposure to European banks.

In fact, there’s a bit of circularity to this. Money-market funds concerned about redemptions move to assets with very short durations in order to stay liquid. This drives up the funding costs of European banks, who decide to just run down their reserves at the Fed instead. The running down of reserves worries investors with money in the prime funds, which leads to redemptions.

Fortunately, this is unlikely to become a death spiral. The liquidity positions of the prime funds are solid. The reserves of the banks are enormous. There’s a lot of room for a credit crunch to run behind the scenes before it actually threatens the health of any but the weakest financial institutions.

European banks: new funding fears
by Lex - FT

The eurozone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500m to a bank – the biggest sum since October 2010 – shows that one eurozone institution is struggling to raise dollars.

No wonder the Federal Reserve Bank of New York wants to check how big European banks fund their US operations. If traditional funding sources have been spooked by their eurozone debt exposure, the banks might struggle to meet their US obligations. The New York Fed’s concern should remind eurozone politicians that their failure to resolve the sovereign debt crisis is a risk to global financial stability.

US money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with US retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as US sources hug the sidelines.

In July alone, their usage of ECB repo lines increased by €40bn to compensate, Morgan Stanley notes. French banks are also big users of US money funds (perhaps €50bn for BNP Paribas and €38bn for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.

Italian and French banks are outliers in terms of their overall funding needs. Europe’s big banks have, on average, raised 90 per cent of their 2011 requirement, but need €80bn more. Italian banks, led by Intesa Sanpaolo and UniCredit, need the most (€16.4bn). French banks, led by BPCE and Crédit Agricole, are €14.9bn short; the UK’s Lloyds Banking Group and Royal Bank of Scotland need €14bn.

The Fed – and investors in bank shares – are right to be worried about funding. Eurozone politicians are still dithering, so it looks as if the ECB’s job has only just begun.

Fed Eyes Cash European Banks Have in U.S.
by David Enrich and Carrick Mollenkamp - Wall Street Journal

Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.

The Federal Reserve Bank of New York, which oversees the U.S. operations of many large European banks, recently has been holding extensive meetings with the lenders to gauge their vulnerability to escalating financial pressures. The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Officials at the New York Fed "are very concerned" about European banks facing funding difficulties in the U.S., said a senior executive at a major European bank who has participated in the talks. Regulators are seeking to avoid a repeat of the 2008 financial crisis, when the global financial system began to seize up. This time the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U.S. While signs of stress are bubbling up, the problems aren't yet approaching the severity of past crises.

Some of Europe's biggest banks—including France's Société Générale SA, Germany's Deutsche Bank AG and Italy's UniCredit SpA—have major operations in the U.S. and rely heavily on borrowed funds to finance those operations. There is no indication that regulators are focused in particular on those banks.

Foreign banks that lack extensive U.S. branch networks have a handful of ways to bankroll U.S. operations. They can borrow dollars from money-market funds, central banks or other commercial banks. Or they can swap their home currencies, such as euros, for dollars in the foreign-exchange market. The problem is, most of those options can vanish in a crisis.

Until recently, that hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets. Fed officials recently have held meetings with U.S.-based executives from top European banks to discuss their funding positions, according to the people familiar with the matter. Officials also are in contact with regulators in the countries where the European banks are headquartered.

The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter. The state regulator supervises the New York outposts of many major European banks, and it has the power to force them to keep more money on hand in the U.S. Mr. Lawsky's office has been getting near-daily updates from examiners embedded in European banks' New York offices about their funding positions.

Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U.S. arms, these people said. Regulators recently have ramped up pressure on European banks to transform their U.S. businesses into self-financed organizations that are better insulated from problems with their parent companies, a senior bank executive said.

In one sign of how European banks may be having trouble getting dollar funding, an unidentified European bank on Wednesday borrowed $500 million in one-week debt from the European Central Bank, according to ECB data. The bank paid a higher cost than what other banks would pay to borrow dollars from fellow lenders. It was the first time for that type of borrowing since Feb 23.

Anxiety about European banks' U.S. funding comes amid broader concerns about whether Europe's struggling banks will be able to refinance maturing debt in coming years. Investors, wary of many European banks' holdings of debt issued by troubled euro-zone governments, are shunning large swaths of the sector. While top European banks already have satisfied about 90% of their funding needs for 2011, they still need to raise a total of roughly €80 billion ($115 billion) by the end of the year, according to Morgan Stanley.

Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing—the Fed's $600 billion bond-buying program, which brought more money into the banking system in the U.S., including foreign banks' coffers.

In July 2010, non-U.S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total had more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U.S. regulatory filings.

On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.

In recent weeks, though, the cash piles at foreign banks' U.S. arms have diminished. While individual banks haven't reported data after June 30, foreign banks' overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it's still up sharply from the beginning of the year. The latest Fed data "could be telltale signs that foreign banks are in need [of dollars] again, or institutional investors are getting concerned about foreign bank credit," said George Goncalves, a rates strategist for Nomura Securities.

Why we cannot inflate our way out of debt
by Raghuram Rajan - FT

We are experiencing financial panic. A downgrade of US debt has triggered a flight to liquidity towards the very assets downgraded. Ultimately, the cure for market paranoia is strong economic growth. Several commentators propose a sharp, contained bout of inflation as a way to reenergise growth in the US and the industrial world. Are they right?

To understand the prescription, we must understand the diagnosis. Recoveries from crises that result in over-leveraged balance sheets are slow, and are typically resistant to traditional macroeconomic stimulus. Over-leveraged, households cannot spend, banks cannot lend and governments cannot stimulate. So why not generate higher inflation for a while?

This will surprise fixed income lenders who agreed to lend long term at low rates; bring down the real values of debt; eliminate debt "overhang"; and spur growth. Yet there are concerns. Can central banks with anti-inflation credibility generate sharply higher inflation in an environment of low rates? Will it work as intended? What could be the unintended consequences? And are there better alternatives?

Japan’s central bank tried and failed to generate higher inflation. Banks were too willing to hold the reserves that the central bank put out as it bought back bonds. Perhaps if a central bank announced a higher inflation target, and an asset purchase programme financed with unremunerated reserves, to continue until the target were met, it could have some effect. More likely though, any target would lose credibility once it became changeable. Market participants might conjecture that the programme would be abandoned once it reached an alarming size, and well before the target is reached.

Moreover, the central bank needs a rapid, sizeable inflation to reduce real debt values quickly. A slow increase will have very limited effect because lenders will demand both higher nominal rates and an inflation risk premium to roll over claims. But a sizeable inflation may be hard to contain: if a central bank abandons its inflation target for growth, will markets believe it has the stomach for high, growth-killing interest rates to reduce inflation?

Turn next to whether it will work. Inflation will do little for entities with floating rate liabilities (many households that borrowed near the peak of the boom) or relatively short term liabilities (banks). The US government, with debt duration of about 4 years, is unlikely to benefit much from a surprise inflation unless it is huge; and the bulk of its promises are social security and healthcare that cannot be inflated away. Even distressed households that have borrowed long term could be worse off – with unemployment likely to subdue nominal wage growth, and higher food and fuel prices cutting disposable income.

Moreover, inflation will clearly make debt holders worse off. Who are they? Rich people, but also pensioners who moved into bonds as the stock market scared them away, banks that will have to be recapitalised, state pension funds that are already deeply underwater, and some insurance companies that will have to default on their claims.

Will inflation just shift the problem, ensuring the malaise persists? In the best of worlds, it would be foreigners with ample reserves who suffer the losses, but they may be needed to finance future deficits. Of course, if central banks regain credibility for being anti-inflation hawks soon after subjecting investors to a punishing inflation, there is no problem, but …

This does not mean nothing can be done. The US experienced periodic debt crises during the 19th century and Great Depression. Its response was to offer targeted, expedited debt relief – often by enacting temporary bankruptcy legislation. In this vein, a recent proposal* to facilitate mortgage debt renegotiation could help reduce the household debt overhang and avoid value-destroying foreclosures without government subsidies. It is less clear that shifting the burden of bank and government debt to others will help the economy.

Too many of our problems come from impatience with the pace of past recoveries and overconfidence in adventurous macro-policy responses. Rather than grand macroeconomic plans, we need many microeconomic actions. Unfortunately, they are disregarded because, as Daniel Burnham said, they have little ability to stir people’s blood.

* A Loan Modification Approach to the Housing Crisis, Eric Posner and Luigi Zingales, University of Chicago

The writer is professor of finance at the University of Chicago and author of ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’

Global markets take fright at the return of the zombie banks
by Larry Elliott - Guardian

Two and a half years ago, financial markets rallied strongly on the assumption that the worst of the slump was over – now the talk is over a double-dip recession

The activities of financial markets are often irrational. Prices go up for no apparent reason and then suddenly the mood changes. What's worrying about the latest spasm that has convulsed bourses in Europe, Asia and North America is that the sell-off is grounded in real and ever-more pressing concerns. Make no mistake, something serious is going on here.

That something can be divided into three parts. The first cause for anxiety is the global economy, and in particular the United States. The report released on Thursday by the Philadelphia Federal Reserve covers only a small part of the Eastern US but it has a good track record for charting the ups and downs of the world's biggest economy. The Philly Fed's barometer has just plunged deep into recession territory.

There are also simultaneous slowdowns going on in the rest of the world. Europe's economy has slowed to stall speed, the UK is still operating way below its pre-recession level and activity has come off the boil in China, even though to western eyes growth still looks amazingly strong in China.

Two and a half years ago, financial markets rallied strongly on the assumption that the worst of the slump was over. There was relief that Great Depression 2 had been avoided. Now the talk is over a double-dip recession.

Concern number one has re-ignited fears about the health of the global financial system. Again, markets have been operating for the past couple of years on the assumption that large dollops of financial help from the taxpayer and a return to growth have made the global banking system immune from a fresh collapse. This always looked questionable, and now that activity is slowing markets suspect that some banks may go under.

In the 1990s, the Japanese government prevented its financial system from collapse but only at the expense of creating zombie banks, neither alive nor dead but kept functioning thanks to the largesse of the state. The reason the sell-off in financial stocks has been more pronounced than the fall in stock markets as a whole is that investors believe Europe and North America now have their own zombie banks.

Reports that US regulators are taking a close interest in European banks and comments from Sweden's chief financial regulator that it wouldn't take much for European interbank markets to freeze only serve to bring back memories of the long descent from credit crunch in August 2007 to the collapse of Lehman Brothers in September 2008.

At least then, though, governments were in a position to ride to the rescue. Today, governments are seen not as the solution but as part of the problem. The debt burden accumulated by the banks was, in effect, nationalised during the crisis. It was hoped this would prove temporary, but the persistence of weak growth means that a private debt crisis has now become a sovereign debt crisis. What's more, the markets sense that policymakers have run out of bullets to fire. They can't cut official interest rates, they find it hard to justify more quantitative easing when inflation is at current levels and almost every Western government is currently trying to cut its budget deficit.

Put all that together and you get the full Japanese package: weak growth, weak banks, weak policy response. That is not a good recipe for shares. Today Tokyo's Nikkei market is at less than 25% of its level at the peak of the stock market boom in the late 1980s.

Euro-Style Anxiety Spreads
by Eric Dash and Jack Ewing - New York Times

European banks are continuing to show signs of strain, making investors increasingly skittish about American financial institutions.
Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago.

But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers. Among investors, anxiety has been intensifying over the soundness of European banks despite repeated efforts to contain the sovereign debt crisis. The latest fears flared up after an unspecified lender tapped an emergency borrowing program set up by the European Central Bank to ensure that firms had ample funds in dollars.

On Wednesday the bank, which officials would not identify, borrowed $500 million, considered a relatively modest sum in global finance. But the move was widely viewed as a sign that Europe’s financial problems were deepening, given that it was the first time a European bank had used the dollar pipeline since February. Investors are also nervous that the world economy may tip back into a recession, putting new pressure on big American banks just as they appear to be finding their footing.

After a few fleeting days of relief, stress levels across the industry are once again rising. Credit-default swaps on major banks, which pay out in the event of a financial collapse, have again widened in the last few days. Borrowing costs are notching slightly higher. Tension on trading floors is palpable — especially for the usually relaxed month of August.

To be sure, fears are nowhere near the levels reached at the depths of the financial crisis. Still, even measures taken to stave off another crisis are feeding the panic. Here in the United States, news reports of heightened regulatory scrutiny have further eroded confidence and caused investors to dump their bank shares. In Europe, temporary bans on short-selling of financial stocks, imposed last week by regulators in France and several other European countries, provided only a bit of relief.

Traders say the measures have caused them to place some negative bets on bank stocks in countries that did not impose such measures, like the United States and Britain. "There’s a general climate of apprehension," said Jean-Pierre Lambert, a senior bank analyst with Keefe, Bruyette & Woods in London. "When you have doubts about names, it can turn into a vicious circle."

On Thursday, Citigroup shares plunged 6.26 percent, to $27.98. Bank of America was down 6 percent, to $7.01. Morgan Stanley and Goldman Sachs shares sink 4.76 percent and 3.51 percent, respectively. Bank stocks are down about 30 percent since January, and have swung wildly over the last few weeks.

The pounding was even more pronounced in Europe, where talk about the short-term financing challenges of the banks swirled through the stock market. Shares in Dexia, a large Belgian bank, dropped 14 percent. Société Générale fell 12 percent. Two British giants, Royal Bank of Scotland and Barclays, each had sharp declines.

American regulators have stepped up scrutiny of both United States and European lenders over the summer, with officials holding more frequent conference calls with individual firms alongside their counterparts at other central banks, according to people briefed on the phone calls.

William C. Dudley, the president of the Federal Reserve Bank of New York, described the inquiries as routine bank supervision. "We’re always scrutinizing European banks, U.S. banks and foreign banks in terms of how they’re doing, capital, liquidity, credit quality — so this is standard operating procedure," he said in remarks at a New Jersey business conference, according to The Star-Ledger of Newark.

For now, American banks appear to be sound, and are probably in better financial shape than they were on the eve of the 2008 crisis. But the fear is that the troubles brewing among European lenders could ripple across the Atlantic.

European banks have amassed vast holdings of government and corporate bonds from Italy and Spain, two countries whose debts have worried investors. Doubts about the stability of these European institutions, in turn, are generating concerns about American banks, which are among their biggest lenders and trading partners. That is prompting investors on both sides of the Atlantic to unload their shares while also ratcheting up bank borrowing costs.

The short-term credit markets, where European banks turn for billions of dollars in financing, have been under serious strain, although nowhere near the levels of three years ago. Most European banks can borrow dollars only overnight or as long as a week; banks elsewhere can take out loans for as long as several months or more.

"Currently many banks cannot access term-funding markets at reasonable rates," Morgan Stanley analysts wrote in a report on European banks. "If these term-funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further."

Still, several short-term credit traders and analysts said that suggested little has changed while the talk has been flying. A crucial barometer of bank stress — the rate banks charge each other to swap euro-denominated assets into dollars — is at roughly the same level it was a week ago. "A lot of this concern around the European banks is overstated," said Alex Roever, a short-term fixed income analyst at JPMorgan. "We are not looking at another 2009, although investors are obviously being cautious."

Investors in bank stocks have been pummeled by the bad news. Weak data for the housing and job markets suggests loan growth will not pick up anytime soon. Consumer confidence has plunged to record lows, while big corporations are so nervous that analysts expect many to delay hiring and expansion plans. On Thursday, Morgan Stanley economists warned that both the United States and Europe were "hovering dangerously close to a recession."

The prospect of twin recessions is perhaps the biggest worry for analysts who follow large American banks. JPMorgan Chase had about $49 billion of loans and other commitments to customers in France, Italy, Spain and several peripheral countries, according to research from Barclays. Citigroup had about $44 billion, while Bank of America had about 20 billion.

"The banks’ loans and commitments to European customers appear manageable," said Jason Goldberg, the Barclays analyst who did the analysis. "To the extent issues in Europe lead to a slowdown in global economic growth, the U.S. banks aren’t immune."

A Shaken Europe Looks for Bolder Fixes
by Charles Forelle - Wall Street Journal

A dramatic selloff in European financial markets on Thursday renewed fears that Europe's banks are too weak to withstand the Continent's debt crisis, increasing the chances that the region's leaders will be forced to pursue radical steps toward fiscal union in order to preserve their common currency.

For more than a year and a half, the euro zone's strategy has been to buy time for its weak nations to regain the confidence of financial markets, while taking tentative steps toward closer cooperation on the bloated budgets that got them in trouble.

That strategy was on full display on Tuesday in Paris, where the leaders of Germany and France presented the latest in a series of initiatives aimed at bolstering the euro zone's architecture. Investors immediately criticized the plan, which included steps toward tax harmonization and stricter budget controls, as inadequate. The Franco-German proposals, critics complained, laid bare the political inertia within the euro zone that has allowed the crisis to fester for months.

If the region's banks remain under pressure, however, the countries at the euro zone's core, in particular Germany and France, will be left with no choice but to embrace the deeper fiscal union that they have rejected for more than a year. If they don't, the common currency could collapse, thrusting the Continent into political and economic chaos. "There remains an ongoing tension between a quick fix regarding the debt crisis on the one hand and on the other the policy makers that are working on a step-by-step process," said Nick Matthews, economist at Royal Bank of Scotland. "You are going to have market dynamics forcing the action."

That realization has in recent days prompted Germany, the region's economic powerhouse and an opponent of fiscal union, to reconsider proposals that would force it to accept responsibility for the debts of its neighbors. Thursday's markets rout, the worst in Europe in more than two years, suggests Berlin and Paris may have to act quickly. If investors lose confidence in the region's banks, Europe's financial system could seize up, tipping the euro zone into another recession.

The soundings on Thursday were bad across the board. Morgan Stanley cut its euro-zone growth forecasts for this year and next. Plans for the second Greek bailout, once thought firm, were jostled by demands from Finland, Austria and others that Athens post collateral for its rescue borrowings. The benchmark indexes in Paris and Frankfurt both fell more than 5%; each suffered its steepest one-day percentage drop since late 2008. The Milan bourse fell 6.1%. Some of the worst carnage hit Europe's banks. France's Société Générale SA fell 12%. Germany's Commerzbank AG fell 10%. In Italy, Intesa Sanpaolo lost 9%.

That is particularly dangerous. Weakening banks could choose to hoard cash, crimping liquidity. In the extreme, banks could require money for recapitalization from their governments. (The cost of massive bank recapitalization doomed Ireland last year.) With the euro zone's weaker countries scrambling to find low-cost financing, the currency union can't afford either of those things.

Economists and analysts say the bloc is running out of small steps. The shockingly sudden rise in the yields of Italian government bonds earlier this month made clear how quickly an indebted country could unravel if markets freeze it out of financing. For now, the European Central Bank is propping up bond markets in peripheral countries by stepping in to buy government bonds. But the ECB has made clear it won't do this indefinitely.

Among potential steps debated in Europe is a system of centralized borrowings by all 17 members of the euro zone, with debt issued by an EU agency and every member vouching to stand behind the bonds used by its peers. Such euro bonds would dispel concerns Italy or Spain might not be able to get the financing they need, as it would be provided centrally. As a unit, the euro zone has relatively attractive fiscal prospects: Government deficit of 4.3% of gross domestic product is expected this year and debt of 88% of GDP.

But euro bonds would come with a huge political cost. French President Nicolas Sarkozy on Tuesday rejected them, saying they would lead to strong countries being "in the position of guaranteeing debt they do not control." That, Mr. Sarkozy said, would be politically difficult to justify in strong countries—but also ineffective at curbing the fiscally imprudent. As they could borrow freely at low cost, there would be little incentive to stop. Thus, Mr. Sarkozy said, a euro-bond system would need to come with strictures: each government saying to its peers what it can and can't borrow, and thus what it can and can't spend.

Butpowers of taxation and spending are prerogatives of national governments, and, Mr. Sarkozy said, European institutions "don't have the democratic legitimacy" to forbid individual states from spending. Without a euro bond, European policy makers must craft a solution that achieves three aims: Removing the need for the ECB to buy bonds continually on secondary markets; ensuring that troubled countries have access to financing; preventing the strong countries from being dragged down by the weak.

A number of solutions are under consideration but all of them carry risks. In Europe's wealthier northern tier, discontent over paying for the profligate south could give rise to populist far-right parties that reject putting Europe's needs above national interests. And Europeans in the south would likely bristle at being forced to relinquish national sovereignty over government spending as a condition to receiving support.

A Trail of Turbulence
Euro-zone efforts to buy time for weaker nations have fallen short.

  • July 21 European leaders agree to a second bailout of Greece after insisting that private-sector banks shoulder some of the costs, which will likely lead to a default rating for Greece.
  • July 29 Under pressure for more economic reforms, Spanish Prime Minister José Luis Rodríguez Zapatero sets early elections for November.
  • Aug. 2 Yields of Italian bonds reach crisis highs compared with German benchmarks.
  • Aug. 3 Italian Prime Minister Silvio Berlusconi disappoints investors with an economic speech that sets out little new action to repair Italy's finances.
  • Aug. 4 The European Central Bank restarts its dormant bond-buying program, but excludes Spanish and Italian bonds. It also extends lending programs for banks until at least the end of 2011.
  • Aug. 5 U.S. loses triple-A rating from S&P, raising concerns that Europe's triple-A countries such as France could be at risk, too. Italian 10-year bond yields hit euro-era high.
  • Aug. 5 Mr. Berlusconi, in a bid to shore up confidence, pledges to balance the Italian budget a year earlier than planned.
  • Aug. 7 The ECB agrees to buy Spanish and Italian bonds.
  • Aug. 9 The cost of insuring German bonds against default rises above the cost of insuring U.K. bonds for the first time.
  • Aug. 16 Data show German and euro-zone economic growth slowed sharply in the second quarter, adding to worries about the economic outlook. French-German summit yields no action on euro bonds, disappointing investors.
  • Aug. 10 Shares of French bank Société Générale lose 15%.
  • Aug. 18 Stock markets plunge on concerns over the global economy, European banks and the debt crisis.

Source: WSJ research

Greece growth to be worse than thought
by Kerin Hope - FT

Greece’s finance minister has warned the country is sinking deeper into recession, with revised forecasts indicating negative growth of close to 5 per cent this year.

The new projection came as experts from the European Union and International Monetary Fund started assessing progress with fiscal and structural reforms before a decision is taken on releasing another €8bn slice of bail-out funding.

Evangelos Venizelos said in an interview on Friday with an Athens radio station: “There’s now a range of forecasts suggesting growth could shrink by above 4.5 per cent – and we have yet to see where it will stop.” “The truth is that a mix of domestic and external factors is intensifying the recession and this is our biggest problem,” Mr Venizelos said.

Earlier EU-IMF projections, used as the basis for Greece’s revised fiscal programme approved by parliament in June, assumed the economy would shrink this year by about 3.8 per cent and show modest positive growth of some 0.8 per cent in 2012. Economists at Kepe, a Greek state thinktank, warned at the time the forecasts were over-optimistic given plunging domestic demand. They said the contraction would be at least 4.5 per cent followed by flat growth next year.

Mr Venizelos also warned that while €45bn of funding is still available from Greece’s first EU-IMF loan package, a second more complex bail-out agreed with European partners last month would not be ready before “the first or second week in October.” “If it’s not complete, there’ll be a transitional arrangement,” Mr Venizelos said in a bid to calm fears in Athens that the government may not be able to meet debt-servicing and other payments due at the end of September.

EU officials had expected the new package, which includes bond buy-backs as well as debt rollovers and swaps to be agreed with private bondholders, would be in place in time for next month’s planned disbursement. Mr Venizelos played down Greece’s bilateral deal with Finland to provide collateral in return for its share of the new loan, saying,”this has still to be discussed at the political (EU) level.”

But Greece’s worsening economic position may encourage other eurozone countries to seek similar arrangements, analysts said. A flash annual growth estimate for July showed output contracted by 6.9 per cent. Revenues fell by 6.4 per cent in the first seven months on an annual basis, according to the Greek statistical authority.

Yet Mr Venizelos said Greece could still achieve its target of cutting the budget deficit by three percentage points of gross domestic product this year, without having to take additional measures. “We’ve already voted through measures that, if they yield the full results, would ensure that we can out-perform this target….And we are also moving to address the spending side,” he said, signalling that further cuts would be made in public investment to bring the budget back on track.

The Great Debt-Brake Swindle
by Stefan Simons and Carsten Volkery - Spiegel

Germany and France want all the euro-zone countries to enact balanced-budget amendments. While that might sound sweet to Angela Merkel's conservative coalition, the plan is triggering massive resistance in southern euro-zone countries. Even if they get their bombshell wish, it could ultimately be a dud.

German Chancellor Angela Merkel calls it a "debt brake" in dry, technical terms. French President Nicolas Sarkozy raves about the "golden rule" of a balanced budget. As they announced on Tuesday, the two leaders want all of the 17 countries in the euro zone to enshrine binding balanced-budget clauses into their constitutions by mid-2012. Obligatory applause came from Brussels. Debt brakes would strongly commit politicians to making public finances sustainable over the long term, said European Commission President José Manuel Barroso and EU Economic and Monetary Affairs Commissioner Olli Rehn.

But the reactions to the German-French proposal among EU member states were much more reserved. Of course, most of them weren't as over-the-top as the one found in Britain's Daily Mail, which ranted about a "Fourth Reich" and commented that Germany was once again subduing the Continent -- this time under the pretext of debt brakes.

Still, it will be a tough battle to get all of the euro-zone countries' parliaments to adopt balanced-budget amendments. In France, the Socialist opposition has already signalled its resistance. Martine Aubry, a presidential candidate for the Socialist Party, calls the proposal a "propagandistic smoke grenade" and "a vague rule that doesn't really regulate anything." François Hollande, a rival candidate within the party, warns that the debt brake is "maybe a trap."

Indeed, Sarkozy plans to make the Socialists look like fools in the presidential campaign. To pass an amendment to France's constitution, he will need some opposition votes to obtain the necessary two-thirds majority. "If the Socialists vote for the 'golden rule,' we will look like Sarkozy supporters," says Manuel Valls, yet another presidential hopeful for the Socialists. "If we vote against it, we will seem dangerously irresponsible." As economic expert Christophe Borgel put it in the French news magazine Marianne, the real issue for Sarkozy is "juxtaposing a left of spendthrifts with a right of good administrators."

Too Tough for Spain and Italy ?
The amendment's chances of success in Spain are equally uncertain. As the daily El Pais sees it, the debt brake is the "most controversial proposal" to come out of the summit Merkel and Sarkozy held in Paris earlier this week. The paper also predicts that battles over whether to adopt the amendments could drag on in the parliaments of euro-zone states. The issue is complicated even more in Spain given upcoming elections in November. If the past is anything to go by, such issues can paralyze a parliament for months.

Given these circumstances, Merkel and Sarkozy's goal of having debt brakes enshrined in national constitutions by mid-2012 seems rather ambitious. Nevertheless, Guntram Wolff, deputy director of the Brussels-based economic think tank Bruegel, thinks the message itself is already important and that just having a discussion on the behaviour of heavily indebted countries like France and Italy has already made a noticeable difference. What's more, he believes that having nationally anchored debt brakes will have a "disciplining effect" in budget debates at the national level.

Indeed, the Berlusconi government has already announced that anchoring a debt brake in Italy's constitution is part of the country's most recent cost-cutting plan. Still, there is some question over just how serious the Italians will be about remaining true to the letter of the law. Indeed, the amendment would have major effects on Italy and force its entire political culture to radically change. As one commentator in the daily La Repubblica put it: "The proposed implementation of the balance budget 'golden rule' would be tantamount to a brutal detox for many of the chronic deficit offenders in the euro zone."

'Pure Symbolism'
Merkel and Sarkozy are betting that pressure from the financial markets will be able to eliminate political resistance by mid-2012. But even if debt brakes find their way into state constitutions, they might quickly prove to be dull weapons. Indeed, economists point out that the astronomically high levels of state debt in many euro-zone countries would make having a debt brake completely meaningless. "Under current conditions, the debt brake is pure symbolism," says Thomas Straubhaar, director of the Hamburg Institute of International Economics (HWWI). "Debts have a momentum of their own. Their size makes it impossible to decree them away with political announcements."

Indeed, the IMF estimates that, even with severe belt-tightening, Italy's debts will still amount to 110 percent of GDP in 2016. At that time, it also predicts that Spain and France will continue to have a debt level of about 60 percent of GDP, the upper limit set by the Stability and Growth Pact.

For this reason, Straubhaar views Merkel and Sarkozy's call for euro-zone countries to present a plan by the end of 2011 for how they will push their state-debt level under the 60 percent mark as complete eyewash. "The governments will present their plans," he says, "but none of them will stick to it." He also points out that the Maastricht Treaty already dictated that euro-zone countries maintain balanced budgets and that the first to violate these stipulations were Germany and France. "Countries will always invoke extraordinary circumstances to take on more debt," he says.

Austrians, Dutch follow Finns, seek Greek collateral
by Sylvia Westall and Gilbert Kreijger - Reuters

Austria, the Netherlands and Slovakia said Thursday they want collateral on loans to Greece after Finland secured a commitment, raising question marks over a second bailout agreed for Athens last month.

The three countries said their positions were not new and echoed the view of some other euro zone states. They and the Finns account for only something like 11 percent of the new Greek bailout which totals 109 billion euros ($153.5 billion). But new signs of discord will do nothing to encourage markets that euro zone politicians are getting on top of the debt crisis, after a blueprint from the leaders of Germany and France underwhelmed investors earlier this week.

"With more of Greece's euro zone partners asking for collateral for their contribution to the second rescue package, the available pool of money becomes smaller, rendering the success of the second package more difficult," said Theodore Krintas, head of wealth management at Attica Bank in Greece.

Athens and Helsinki agreed on a deal for collateral this week -- proposing that Greece offers Finland a cash deposit to back loans made under the July 21 bailout deal. Finland has said the deposit plus interest would be comparable to the contribution it makes to Greece via Europe's temporary bailout fund.

Francois Cabau, economist at Barclays Capital, said Finland's insistence on collateral could threaten the process. "By agreeing to (collateral) ... you actually do the opposite of what you originally set out to do, withdrawing cash from ... somewhere that doesn't have any," he said. "This is likely to provoke some annoying political noise in the market."

The Finnish finance ministry said officials from euro zone countries' finance ministries would discuss the plan at a meeting in Brussels Thursday and Friday. Austria's Finance Ministry said it had made its position clear before and that its latest comments were in line with what euro zone leaders agreed at the July 21 summit. "If there is to be a model for collateral, Austria would also make a claim," spokesman Harald Waiglein said.

"Unbelievable Pandering"
The Netherlands took a similar line. "Even if it was not a hard demand from parliament we, together with some other countries, have always indicated to Brussels and Finland that if Finland gets collateral our credit ranking position cannot worsen, and that we ourselves also want a collateral agreement," a finance ministry spokesman said.

Analyst Sassan Ghahramani at SGH Macro Advisers took a skeptical view. "There was an explicit carve out agreed at the July 21 summit. For them to now put their hand up and say we kind of wanted it all along is unbelievable pandering to their domestic base. It must be frustrating, Brussels has to draw the line, crack the whip," Ghahramani said. A Greek finance ministry official declined to comment and referred to upcoming talks on the Greek-Finland deal in a working group.

The July summit of euro zone leaders, which sought to prevent market instability spreading through the region, agreed to give Europe's financial rescue fund new powers to help Greece to overcome its debt crisis. But since then euro zone states have squabbled over measures to stabilize the region. Bold plans from France and Germany this week to move toward fiscal union in 2012 got a cool response from Austria, Finland and Ireland.

And the failure by Nicolas Sarkozy and Angela Merkel to address burning issues such as common euro zone bond issuance or beefing up the bloc's rescue fund left investors cold, although the European Central Bank's reluctant agreement to buy the bonds of Italy and Spain has tempered the latest market onslaught.

Waiglein said Slovenia, Slovakia and the Netherlands shared Austria's view on Greek collateral during expert talks. In Ljubljana, the Slovenian finance ministry said only it aimed to ensure its share of guarantees within the joint euro zone framework in talks about possible insurance mechanisms. Slovakia's finance ministry was not immediately available for comment but Bratislava has previously made clear that it would want collateral.

Sarkozy, Merkel Propose a Euro-Zone Chief
by Nathalie Boschat, Bernd Radowitz and Gabriele Parussini - Wall Street Journal

The leaders of France and Germany said Tuesday they would propose electing a permanent head of the euro zone to shore up governance of the monetary union, but stopped short of more fundamental steps toward refashioning the area into a federal entity with its own debt agency. "We want to state our absolute will to defend the euro," said French President Nicolas Sarkozy after a meeting in Paris with German Chancellor Angela Merkel.

The debt crisis that left Greece, Ireland and Portugal seeking financial assistance from the European Union and the International Monetary Fund has exposed fundamental flaws in the euro-zone construction: 17 countries share the same currency but have limited oversight over each other's budget spending policies. As a result, a profligate nation can run into budget woes and damage trust in the common currency.

Market jitters have recently spread to Italy and Spain, where governments now rely on assistance from the European Central Bank to raise debt at affordable costs. Investor attention has also moved toward the core of the euro zone, with economic growth stalling in Germany and France in the second quarter and questions being raised about the financial health of the large French banks and of France's own triple-A credit rating.

Some economists say the time has come to recast the architecture of the euro zone and accelerate the pace toward deeper fiscal integration by creating a single entity that can issue debt on a euro-zone level and keep a tight leash on national finances. The entity would mirror the ECB in a similar fashion to the Federal Reserve's relationship with the U.S. Treasury.

The Franco-German tandem, which has a track record of finding breakthroughs at times of gridlock in the region, both said they were convinced that the euro zone must move toward deeper integration but added that it was too early to introduce euro-zone bonds. Mr. Sarkozy said any such move would have to "crown" the euro-zone integration process, but couldn't constitute a foundation.

"Again and again, I feel that people are looking for the one event, the one method with which all comes good again and we get out of the crisis," said Ms. Merkel. "I don't think that we are dependent on the last-resort measure, nor do I believe that we can solve problems" using a magic wand.

Mr. Sarkozy said the euro-zone heads of state and government would meet more often and would represent "veritable euro-zone economic governance." He said that the group would meet twice a year, and more if necessary, under a single leader; the Franco-German leaders proposed EU council President Herman Van Rompuy to lead the council for a period of 2.5 years.

The leaders said their finance ministers will propose in September a plan to European institutions for a tax on financial transactions, and they also said they would make proposals to align corporate-tax regimes between France and Germany. "We want France and Germany to move closer in terms of fiscal integration," Ms. Merkel said. Also, finance ministers from both countries will get together twice a year to make sure that the hypotheses underlying the presentations of their respective budgets are consistent. "France and Germany must converge, the status quo is impossible," said Mr. Sarkozy.

The two countries will also push for all 17 euro-zone members to adopt a "golden rule"—the obligation to balance their public finances—before next summer. The Franco-German proposals will be included in a letter to be sent to Mr. Van Rompuy on Wednesday. In turn, Mr. Van Rompuy will sound out other euro-zone members.

Paranoid in Paris: France Fears Loss of Top Rating
by Stefan Simons - Spiegel

With rumors of a downgrade, the French are deeply worried about the potential loss of their top credit rating. The market turmoil and share price losses last week show how nervous investors have become. Does France have the political will to impose the strict austerity measures needed to save its rating?

They are gamblers in the service of the state. Their open-plan office is similar to that of an investment bank: The telephones have a direct line to the financial centers, and monitors flicker with columns of numbers. Specialists at the Agence France Tresor, as the treasury in Paris' Rue de Bercy is called, manage the French government's assets and liabilities, "in the best interest of the taxpayers."

There is growing concern not just in the treasury, but in the whole of France, about the solidity of the country's finances. Since doubts about France's creditworthiness surfaced in financial markets, the "historic earthquake," as French daily Le Point has called the euro debt crisis, has also engulfed Paris. Speculation that France might be facing a downgrading of its top AAA rating has shaken the trust of investors, and rumors about a possible bank bankruptcy have caused deep plunges in French share prices.

Ever telegenic and prepared to offer up a soundbite, President Nicolas Sarkozy broke off his summer vacation and rushed back to the Elysee Palace to lead a crisis meeting on Aug. 10 attended by ministers and the head of the French central bank. It had been intended to calm markets, but it achieved the exact opposite.

There is nothing new about doubts over France's willingness to implement tough savings, and the Organization for Economic Cooperation and Development and the International Monetary Fund have repeatedly warned that the country needs to take extra steps to reduce its deficit. Despite pithy political rhetoric, nothing has changed in terms of France's structural problems: weak economic growth, a chronically negative trade balance and a creeping loss of competitiveness.

A €1.7 Trillion Mountain of Debt
During the past four years, France's budget deficit rose from €50 billion to €137 billion, with its mountain of national debt climbing from €1.2 trillion to a lofty €1.7 trillion between 2007 and 2011. The labor market, business climate and other indicators are all in the red zone.

Just how highly sensitive the markets have been to these developments was highlighted last week in the case of Societe Generale. Share prices in the French bank collapsed after the British Daily Mail tabloid reported over the weekend that the bank was in a "perilous state" and possibly on the "brink of disaster." In less than two hours, shares in France lost €3.8 billion in market capitalization.

The hysteria twittered its way throughout the financial sector until other Parisian financial institutions were also gripped by paranoia. But the reason for the shock had actually been an incorrect report. A Daily Mail journalist had mistaken a summer novel in the culture section of the French daily Le Monde as a real, reported article. The London tabloid issued a correction and apologized for the error, but in this case it was fiction that could become reality soon enough.

France is expected to approve austerity measures by the end of August, but only eight months ahead of the next presidential election, it remains questionable whether Sarkozy will be willing to risk his re-election by imposing tax increases or cuts in social spending -- especially given that a recent poll showed that more French people trust German Chancellor Angela Merkel to steer them out of the current crisis than their own president.

Instead of radical cuts to the health care system, pensions or social spending, the most likely path for 2012 cuts will be the elimination of superfluous tax breaks. "Perhaps additional efforts will be necessary," conceded French Budget Minister Valerie Precress. Meanwhile, China's state-owned rating agency has already taken action: Last year, it downgraded France to AA-.

European markets hit by eurozone Robin Hood tax plans
by Graeme Wearden - Guardian

Plans for a new Robin Hood-style tax on financial dealings hit shares in stock exchange operators on Wednesday, as the financial markets balked at the latest proposals to rescue the eurozone.

The prospect of tax rate harmonisation and a new financial transaction tax, as pledged by German chancellor Angela Merkel and French president Nicolas Sarkozy, did not ease fears over the stability of the region. The FTSE 100 fell 77 points in early trading to 5279, with other European markets also losing ground.

Shares in the FTSE 250-listed London Stock Exchange fell by 6% at the start of trading, with Germany's Deutsche Bourse and pan-European exchange NYSE Euronext suffering similar falls. The three exchanges would all be affected if traders were forced to pay a small fee every time they bought and sold stocks or currencies.

Sarkozy and Merkel pledged to create a "true European economic government" following their mini-summit in Paris on Tuesday. As well as a transaction tax, the pair agreed to harmonise taxes across their two countries and push for tougher deficit reduction across the eurozone. Euro bonds, though, remained off-limits – to the disappointment of some analysts who believe that European countries must combine their borrowing needs to get through the financial market turbulence.

Michael Hewson, market analyst at CMC Markets, said the measures announced in Paris were "all profoundly disappointing". "The tax harmonisation plan will not go down well with other European Union countries, particularly Ireland where it has been a red-line issue. There was no talk about boosting the European financial stability fund and no talk about euro bonds, all rather disappointing, but not altogether surprising, given the political obstacles against them," said Hewson.

"The main concern is about where future growth will come from, if Germany as the main heartbeat and cash generator of Europe catches a cold," he added. GDP data released on Tuesday showed that the German economy barely grew in the second quarter of 2011.

Robin Hood on the horizon
Tax expert Richard Murphy welcomed the commitment to a transaction tax, calling it "a welcome and overdue move that needs replication way beyond the eurozone if the feral banking economy is to be brought under control".

The Robin Hood Tax campaign was set up in the aftermath of the financial crash, and it lobbies for a small levy on each financial transaction to fund public spending in the UK and development work abroad. Max Lawson, the campaign's spokesman, said the UK should now respond to France and Germany's lead.

"This is a major step forward which leaves the UK increasingly isolated in insisting that a financial transaction tax must be global to work. Rather than standing on the sidelines, David Cameron should join Sarkozy and Merkel to make banks pay their fair share," said Lawson. "Europe now has an historic opportunity to make the financial sector work in our interests and help millions of people here and in poor countries who have been hurt by a crisis they did nothing to cause," he added.

Irish finance minister Michael Noonan said that any such tax should be imposed across the EU rather than just the eurozone. He also argued that the Franco-German plan to harmonise their corporation tax levels would not affect Ireland's current rate of just 12.5%.

Swiss franc in demand
Investors continued to flock to safe havens such as the Swiss franc, which gained 2% against the euro despite the Swiss central bank pledging to take steps to lower the currency's value.
Jane Foley, senior currency strategist at Rabobank, said the markets should have learned that the eurozone crisis would not be solved quickly, particularly as domestic political pressure prevented Merkel from moving swiftly into full fiscal union across the zone.

"Chancellor Merkel remains tied down by moral hazard. Even if she recognises that significant fiscal integration will be needed to save European monetary union she cannot openly admit this at this point," said Foley.

In Defence of PIGS
by Ambrose Evans-Pritchard - Telegraph

Readers have asked for a quick verdict on the Merkel-Sarkozy deal.

I have nothing to say. There was no deal. It was a vacuous restatement of clauses that already exist in the Lisbon Treaty, or an attempt to pass off retreads such as the Tobin Tax and harmonization of the corporate tax base as if they were new. No eurobonds, no fiscal union, no boost to the EFSF rescue fund, no change of policy on the ECB’s mandate. Zilch. More fiscal austerity for laggards, without even the Marshall Plan we had on July 21. It is all a step backwards into the black hole.

As for appointing EU president Herman van Rompuy head of a eurozone panel, I find it remarkable that anybody should take this seriously (much as I like the poet Van Rompuy, among the best of the lot). There is already a Eurogroup, headed by Jean-Claude Juncker. The emptiness of the summit – coupled with Sarkozy’s deliciously absurd theatrics – tells us all we need to know. Neither Merkel nor Sarkozy seem capable of rising to the occasion. Europe is drifting towards its existential crisis.

The ECB can hold the line for now by purchasing €20bn of Spanish and Italian bonds each week. But once the ECB nears €150bn or so, the markets will brace for the next crisis. Italy alone has to raise or roll-over €68bn by the end of September. You can be sure that a great number of investors will take advantage of ECB intervention between now and then to lighten their holdings, and switch the risk to eurozone taxpayers. The ECB may have to buy at least €100bn of Italian bonds alone by late September to cap the 10-year yield at 5pc.

Perhaps the Chinese and Gulf states will keep buying. Perhaps not. So enough on the summit.

What is exercising me more is an interview by George Soros in the German press calling for Greece and Portugal to prepare for an "orderly exit" from the eurozone. "The EU and the euro would get over it," he said. ("Mit dem griechischen Problem ist so grundlegend falsch umgegangen worden, dass jetzt ein möglichst geordneter Ausstieg vielleicht wirklich der beste Weg wäre. Das gilt auch für Portugal. Die EU und der Euro würden es überleben").

This is of course music to German ears. It conforms to the Bild Zeitung narrative that Europe’s crisis is a morality tale, a debacle caused by Greco-Latin debt addiction and fecklessness. It is the Big Lie of EMU. Mr Soros does Portugal an injustice. The country has behaved OK over the last eight years (having had its credit bubble in the late 1990s when the EMU effect caused rates to drop from 16pc to 3pc, destroying Portugal’s economy).

It has worn a hairshirt for since 2003, no little avail. By then the country was trapped in slump with chronically low productivity, the victim of an intra-EMU currency misalignment against the German bloc and an extra-EMU misalignment against the Chinese yuan. Yes, Portugal made plenty of mistakes – didn’t we all – but it did not violate the Maastricht rules or lie about its budget figures or persistently break the EU Stability Pact.

Nor did Spain violate Maastricht. It ran a fiscal surplus of 2pc of GDP during the boom (So did Ireland). It had modest public debt. The Bank of Spain tried heroically to stop the ECB’s uber-loose monetary policy (double-digit M3 growth) from fuelling a property and credit bubble. It pioneered `dynamic provisioning’.

Italy has a primary budget surplus, mid-level total debt at 250pc of GDP, and a reformed pensions system. The European Commission estimates that on current policies Italy will have the lowest public debt to GDP ratio in Euroland by the middle of the century. I kid you the not. The lowest.

We all agree that these countries should have shaken up their labour markets. No doubt the boom-busters (Greece, Ireland, Spain) could have done more to "lean against the wind" – ie, by copying Hong Kong, which gets around the problems of the dollar peg by slashing mortgage ratios to choke property booms – but neither the ECB nor the European Commission pushed particularly hard for such measures, if at all.

The complacency was endemic in the entire EMU system. So there is something unpleasant about the attempt to blame the victims now. The German claim that Euroland’s crisis is caused by Club Med profligacy is intellectual chutzpa. None of us should give this self-serving argument any credence.

The problem is deep and structural. These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates. The Maastricht rules targeted one variable (debt) but missed all the others.

The damage was compounded by the ECB. It ran a loose monetary policy in the early Noughties, breaching its own M3 and inflation targets year after year, in order to help Germany when Germany was in trouble (for cyclical reasons, obviously)

This greatly aggravated the credit bubbles in Ireland and the South. There are no innocents in this story. All countries share blame. Germany is a sinner in all kinds of ways, not least because it seems to think it can lock in a permanent structural trade surplus, and then order others to stop running deficits.

Dr Merkel, you have a PhD in nuclear physics. You must know there cannot be good imbalances (your surplus) and bad imbalances (the Spanish, Italian, French, Portuguese deficits). The maths have to add up within a currency union.

In the old days these intra-EMU imbalances would have corrected naturally. The D-Mark would have risen. The lira and peseta would have crashed. The drachma would have crashed even more. Problem solved. That corrective mechanism has been jammed by political forces.

We now have a remarkable situation where Merkel is pushing Southern debtors into drastic fiscal tightening without offering any offsetting stimulus in the North. This is so stupid (within a currency union) it leaves you breathless. German policy risks a self-feeding implosion of the whole system, much like the early 1930s Gold Standard – unless the ECB counters this with QE a l’outrance, which is also against German policy.

Yes, I know, a lot of readers favour fiscal austerity as an end in itself. Fine up to a point. But don’t conflate the morality of family finances (saving is good) with the entirely different imperatives of macro-economics (too much saving is extremely bad, and leads to depression).

Sarkozy has not shown much imagination or leadership. Instead of acting as Chancellor Merkel’s sidekick, he might usefully take charge of the crisis and lead a Latin liberation. If all else fails, he should draft a letter from the leaders of France, Italy, Spain, Portugal, Ireland, Cyprus (plus Belgium, Malta and Slovenia, if they want) requesting the withdrawal of Germany and its satellites from monetary union. Germania would get the strong currency it wants and needs.

If the German bloc thought the new super-Mark would rise too far – and cause huge losses to Teutonic banks with Club Med exposure – they could peg the currency to the Latin euro at a 30pc premium and use capital controls until things calm down.

My guess is that Europe would start to recover remarkably fast once the boil had been lanced. The Latin bloc would become the growth region, and eat Germany’s lunch for a decade or so. The debt crisis would fade away like a forgotten nightmare. Sarkozy would walk tall, so to speak.

Germania can accept this or keep stumping up rescue loans and pay transfers for year after year until their citizens revolt. What they cannot expect is to have it all their way by retaining export share through a rigged currency system forever.

Ah, but what if Germany refuses either to back fiscal union or leave EMU?


Let Greece, Ireland, Portugal Default So Spain, Italy Won’t, Kashkari Says
by Joe Ragazzo and Margaret Brennan - Bloomberg

European politicians should let Greece, Ireland and Portugal default while taking steps to ensure Italy and Spain won’t, according to Pacific Investment Management Co.’s Neel Kashkari.

"They are delaying and denying as long as possible because the medicine to actually put out this crisis tastes so bad," Kashkari, head of new investment initiatives at Pimco, said in an interview on "InBusiness With Margaret Brennan" on Bloomberg Television. "They are always behind, always trying to play catch-up, and the crisis is always getting worse."

Germany, France, the International Monetary Fund and the ECB should unveil a "massive" bailout package and announce it’s available to the entire euro zone, except for Greece, Ireland and Portugal, effectively letting them default, according to Kashkari.

That would create a firewall protecting Italy and Spain, said Kashkari, who joined Pimco in December 2009 after serving as head of the U.S. Treasury Department’s bank-rescue program. Pimco, based in Newport Beach, California, operates the world’s biggest bond fund.

"One, two or three countries may have to take a sabbatical; this is where we are going," Mohamed El-Erian, chief executive officer of Pimco, said in a Bloomberg Television interview on "Surveillance Midday" with Tom Keene. "You cannot converge financial variables without converging economic variables. The most important compromise is to stabilize the core."

Euro Bonds
German Chancellor Angela Merkel and French President Nicolas Sarkozy yesterday ruled out steps such as the issuance of euro bonds or expanding the bailout fund in their latest strategy to counter the euro debt crisis.

Sarkozy and Merkel spoke after a two-hour meeting in Paris as investors called for signs that they would do more to end the debt storm after reports showed an unexpected slowdown in their economies. Unprecedented bailouts by governments and the European Central Bank have failed to stamp out concerns that began in Greece almost two years ago and rattled markets in AAA- rated France last week.

Greece "has too much debt and is not competitive enough," said El-Erian of Pimco, which runs the world’s biggest bond fund. "It’s difficult to see Greece overcome these issues within the euro zone."

Rescue Fund
According to Kashkari, a system in which AAA-rated countries such as Germany ultimately guarantee the debt of higher-risk governments is a solution that is "elegant conceptually, hard politically." Merkel and Sarkozy also rejected an expansion of the 440 billion-euro ($633 billion) rescue fund yesterday, a decision Kashkari said was the wrong one.

"If we tripled the fund, then at the next press conference you would ask us why didn’t you multiply it by four," Sarkozy said. "We’re trying to manage it seriously and reasonably. We believe the fund is sufficient."

The announcement from the German and French leaders came after a report showed the euro-area economy grew 0.2 percent in the second quarter, the worst performance since emerging from recession in 2009. "How do you get the German taxpayers to write these checks?" Kashkari said. "It may be easier politically to have the Germans bail out the ECB than the Greeks and the Irish, but that may ultimately be what happens, and the economic effects may be similar."

The ECB’s shouldering of the burden of the region’s debt and being bailed out by Germany is a more likely scenario than the issuance of euro bonds, Kashkari said. "Some people will say it will never happen," El-Erian said in reference to a smaller euro zone. "I suspect it will be bilateral. We will have an ad hoc way to do it because that’s going to be what’s in the interest of the euro zone, but ultimately also in the interest of a country like Greece."

The Price of the Pact - What Will a European Economic Government Entail?
by Stefan Kaiser - Spiegel

German Chancellor Angela Merkel and French President Nicolas Sarkozy want to create a European economic government. The idea sounds good, but it is unclear exactly what it means. If the proposal is serious, it will lead to significant changes -- especially for Germany.

The words sound mighty enough: A "true economic government" will be created to coordinate economic and finance policies in the euro zone in future to make the currency union more resistant to crises. That's what German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to at their summit on Tuesday afternoon. But neither leader offered much more than that during their joint press conference, and they left completely open precisely what this economic government is meant to do.

That's little wonder, either. After all, the term "economic government" can be interpreted in different ways. The French have been using it for years to describe government intervention in the economy through, for example, state holdings in important companies. But the German chancellor appears to have an altogether different understanding of the term. "The member states of the euro zone need to ensure, with a greater degree of commitment, that they adhere to the existing Stability and Growth Pact," Merkel said after her meeting with the French president.

In fact, Tuesday's agreement does seem to largely take into account German concerns over stability. The proposal calls for the 17 euro-zone member states to anchor balanced-budget provisions into their constitutions, and to take account of European Commission concerns when setting their national budget plans. Of course, the idea isn't entirely new. Already back in March, the euro-zone states agreed to the so-called "Euro Plus Pact," which would lead to closer coordination of budget, tax and social policies -- albeit non-binding.

Jean-Claude Juncker Would Be Stripped of Power
"Up until now, the term had been a pretty empty one," said Henrik Enderlein, professor of political economy at the Hertie School of Governance in Berlin. He said it was now a task for the euro-zone countries to fill the term with meaning. "What is needed is a change in mentality. The governments have to see that they can no longer create national economic policies, but rather only European ones in the future."

Enderlein said he could imagine a kind of European finance minister who would monitor and coordinate the policies of euro-zone states. "There has to be someone who tells the individual governments: What you are doing right now is damaging to the euro zone. Unfortunately, an institution like that doesn't exist yet."

Until now, the Euro Group has been in charge of coordinating economic policy among the 17 euro nations and checking whether they are adhering to the Stability Pact. It consists of the finance ministers of the euro countries as well as representatives of the European Commission and the European Central Bank. Its chairman is the prime minister of Luxembourg, Jean-Claude Juncker.

According to the plans presented on Tuesday by Merkel and Sarkozy, the future economic government would comprise the 17 heads of government and would meet twice a year. It is set to be chaired by Herman Van Rompuy, the current president of the European Council. "The proposal for an economic government is an attempt to sideline Jean-Claude Juncker," says Enderlein. "That is a pretty open snub."

Germany Must Strengthen Domestic Consumer Demand
The new economic government will have to do more than the Euro Group did, analysts believe -- and more than Merkel has indicated so far. "It wouldn't be much if a European economic government only watched out for stronger budget discipline," says Gustav Horn, director of the IMK economic institute, which has links with German trade unions. "This is really about imbalances in the current accounts."

The imbalances are regarded as one of the main reasons for the crisis. Countries like Germany have run very high trade surpluses for years, while other countries like Greece, Portugal or Spain are less internationally competitive and import far more than they export. If they had their own currencies, they could even out these differences through interest rate policies and currency fluctuations.

But in a monetary union, such imbalances aren't tenable in the long run. That would be a job for the economic government, says Horn. "Countries with current account deficits would have to commit themselves to a more restrictive fiscal policy." That means they would have to cut government spending, raise taxes or limit wage increases. "How the countries do that should be left up to them."

But countries with surpluses, like Germany, would also have to adjust their policies. Horn says these countries would have to strengthen their domestic demand through higher wages or benefits, or via tax cuts.

If Merkel and Sarkozy are serious about an economic government, they will have to sign up to something else too. "In the medium term in a common economic area, one will have to levy joint taxes and have a significant common budget," says Enderlein.

France and Germany have made a start: They plan to harmonize their corporate taxes and introduce a pan-European tax on financial transactions. But that can only be the first step on the road to an economic government.

The signs are clear: No more stimulus
by Neil Reynolds - Globe and Mail

Harry Koza figured that the market crash of 2008 was coming when U.S. banks started to write 110 per cent loan-to-value mortgages. This, he said, was the financial equivalent of "running with scissors." He figured the crash was imminent when California licensed 500,000 new real estate agents in a single year. In other words, he read the signs. When the housing bubble burst, he surveyed "the wreckage of the worst credit mania in history" and figured that the next mania was already taking shape: the great stimulus mania.

Mr. Koza, senior market analyst for Thomson Reuters in Toronto, concedes that he can sound a bit pessimistic. (He once said that he regarded economist Nouriel Roubini – the celebrated "Dr. Doom" – as "kind of a Pollyanna.") But if so, Mr. Koza says, that’s where the signs directed him. And he is a serious student of signs. It was early in 2009, in a paper he wrote for the Halifax-based Atlantic Institute for Market Studies (AIMS), that he anticipated the next mania.

To understand the future, Mr. Koza wrote, you need to appreciate the fact that people relive the same Master Mania – "like Bill Murray in Groundhog Day" – over and over again, though, perhaps, with progressively darker consequences. This mania rests on the assumption that governments can reverse the business cycle. "They can’t," Mr. Koza wrote. "[Yet] each crisis is met with the same policy prescriptions that begat the last bubble and that will beget the next one." "The same folk that helped create the mess are now vowing to cure it," he said, "by doing even more of the stuff that created the problem in the first place." In other words, the solution to excessive debt is more debt.

Mr. Koza enumerated the easy-money credit bubbles of the last generation, each one coming fast on the heels of the one before. Since 1980, he said, nine credit bubbles had burst: (1) the LDC (less-developed country) crisis of 1983; (2) the crash of 1987; (3) the S&L crisis of 1989; (4) the Japanese bubble of 1990; (5) the Mexican bubble of 1994; (6) the "Asian contagion" of 1997; (7) the LTCM (Long-Term Capital Management) crisis of 1998; (8) the "tech wreck" of 2000; and finally (9) The great debt bubble of 2006 – and beyond.

Were these crises the product of market failure? Mr. Koza thought not. He cited one sign that strongly suggested otherwise: the ratio of private sector income (wages, earnings, dividends) compared with public sector income. Before the Great Depression, the ratio was 12:1. During the New Deal, the ratio was 5:1. During the debt bubble, the ratio was 3:1. What would the ratio be in the days ahead? Would it be 2:1? Or 1:1? Or worse? Mr. Koza speculated that it would soon be 1:3 – the reverse of the ratio only five years earlier. One day soon, he said, the public sector would dwarf the private sector.

"Governments seem to view a recession as a pause in a never-ending pattern of economic growth, a pause which they are compelled to attempt to shorten," Mr. Koza wrote. "But a recession is, in fact, a time when excess debt is wrung out of an oversaturated economy. Bailouts, subsidies and government fiscal stimulus programs retard this process."

By consensus now, the U.S. Federal Reserve has done almost as much damage as it can do. In 2008-09, it injected $1.7-trillion (U.S.) in quantitative easing (euphemistically designated Monopoly money, really) into the global economy. This was QE1. In 2010-11, it injected another $600-billion: QE2. Now Fed chairman Ben Bernanke is apparently contemplating another round, QE3. This time, the markets are more skeptical. Morgan Stanley’s Stephen Roach neatly expressed this sober consensus the other day: "QE1 didn’t work," he told CNBC. "QE2 didn’t work. QE3 will not work. And QE12 will not work."

Even The Economist, an advocate of stimulus spending and QE manipulation, agrees: "Governments in the rich world," the magazine said, "have painted themselves into a corner." Harry Koza read the signs perfectly two years ago. He was right: The world didn’t need more money. It needed less debt. Mr. Koza, master semiotician, gave good advice: Stop. Let it be.

EMU crisis deepens as slump reaches Europe's AAA core
by Ambrose Evans-Pritchard - Telegraph

The German economy slowed drastically over the early summer and may be on the cusp of a double-dip recession, dashing hopes that Europe's industrial engine would eventually lift EMU's southern bloc out of slump.

Growth in both Germany and The Netherlands fell to 0.1pc in the second quarter as exports faltered. France reported earlier this week that growth in its economy had sputtered out altogether. German Chancellor Angela Merkel insisted the economy was doing fine and needs no extra support. "I think we're on the right track," she said. The sudden downturn replicates the pattern seen before the Lehman Brothers crisis in 2008 and threatens to play havoc with the debt dynamics of vulnerable countries. It also marks ominous new turn in the eurozone crisis.

Europe's survey data point to a manufacturing contraction over the early autumn, making it even harder for the struggling debtors of southern Europe to claw their way back to viability. The two fear gauges in the credit markets – the iTraxx Crossover index and the Euribor/OIS spread – are both issuing warning signals. "We have reached the tipping point," said Andrew Robert, credit strategist at RBS. "All the props have been knocked away from global growth, the eurozone and Europe's banking system. The risks of global recession is far higher than markets are discounting."

The grim data came as Chancellor Merkel and French President Nicolas Sarkozy emerged empty-handed from their Paris summit, offering nothing concrete to restore crumbling confidence in the eurozone project. The two leaders ruled out eurobonds and refused to boost the firepower of the eurozone bail-out fund beyond €440bn (£386bn). Mr Sarkozy said eurobonds could be "imagined one day" but have no democratic legitimacy at this stage and would not work without much deeper EMU integration.

The two leaders called for eurozone states to include a "debt-brake" in their constitutions and pushed ahead with plans for a financial transactions tax, but these measures do nothing to convince markets that Germany is willing to throw its full weight behind the monetary union. "Today's meeting produced nothing," said Kathleen Brooks from "The markets are likely to be highly underwhelmed. The only thing we do know is that Sarkozy and Merkel aren't willing to ditch the eurozone and let the peripheral nations drown just yet."

A chorus of critics say the European Central Bank (ECB) has misread the economic landscape and shares blame for aborting Europe's fragile recovery. The bank may have repeated the error in made in mid-2008 when it raised interest rates into the teeth of the crisis after the underlying economy had already buckled.

Simon Ward from Henderson Global Investors said the eurozone's M1 money supply data has been flashing red warning signs for months, especially in Italy. "The ECB should never have tightened when real M1 deposits were contracting, not only in the eurozone periphery but in the core as well. A rapid reversal is now required to prevent a eurozone recession, and ideally they need to start quantitiative easing too. It's not too late," he said.

Nobel laureate economist Paul Krugman said the Europe's authorities had lost the plot. "It really is a race between America and Europe: who can make the worst of a bad situation. And both competitors are giving it their all," he said.

Christine Lagarde, the head of the International Monetary Fund, hinted that Europe's headlong dash towards budget cuts was making matters worse. "Slamming on the brakes too quickly will hurt the recovery and worsen job prospects. Fiscal adjustment must be neither too fast nor too slow. Shaping a Goldilocks fiscal consolidation is all about timing," she wrote.

An International Monetary Fund study of austerity policies around the world published earlier this year showed that such strategies are almost always "contractionary" unless offset by very easy money and a big devaluation. Neither have occurred in the eurozone.

The debate over eurobonds continued to rage in Germany yesterday, with key members of Angela Merkel's Chrisitan Democrats (CDU) opening the door to some form of EMU debt pool in the long run. "It makes no sense to wage a black-and-white debate," said CDU lawmaker Johann Wadephul. The party's group in the European Parliament said Germany must stop blocking everything and focus on what conditions might be acceptable.

However, the coalition's Free Democrats (FDP) and Bavarian Social Christians (CSU) continued to dig in their heels, leaving it unclear whether the government could survive if Chancellor Merkel were to yield to European pressure for concessions at a later date. Rainer Brüderle, the FDP's group leader in the Bundestag, lambasted eurobonds a "form of rate socialism".

Nobel Laureate Joseph Stiglitz said that if Germany is not willing to embrace eurobonds and some form of fiscal union, then it should consider withdrawal from monetary union as the least damaging way to resolve the crisis.

Sarkozy and Merkel call for 'true economic government' to save eurozone
by Polly Curtis - Guardian.

France and Germany have set out plans to create the first "true European economic government" headed by a single appointed leader, as part of major moves to synchronise tax and spending to save the failing eurozone.

The French president, Nicolas Sarkozy, and German chancellor, Angela Merkel, announced the dramatic proposals after a two-hour mini-summit. They also called for the imposition of tighter restrictions on member country's deficits and announced a synchronising of the tax policies of their own two countries. Sarkozy has also secured the support of Merkel for a Tobin tax – a financial tax on all international transactions – to raise funds to ease the crisis engulfing the European economy.

The establishment of an economic government for the eurozone will be regarded by eurosceptics as a political power grab for Europe. On Tuesday night, the British government gave a cautious welcome to the move, saying they would adopt a "watch and see" policy. A treasury source said: "This looks like the right direction but we need to see how it pans out. We will continue to advance UK interests at every opportunity." The government has no formal position on the Tobin tax, but has stressed that any such tax would need to be truly international to be successful and not disadvantage participating countries.

The proposals, on the day of dire growth figures for Germany, normally considered one of Europe's safest economies disappointed the markets. Sarkozy said the most important element was the plan "to create a real economic government for the eurozone". Merkel said "there has to be a stronger coordination of financial and economic policy" to protect the euro, adding: "We will regain the lost confidence. That is why we go into a phase with a new quality of cooperation within the eurozone."

The European Council president, Herman van Rompuy, will be asked to head the new economic government, and will set and enforce a deadline for all 17 eurozone members to reduce their deficits, putting pressure on countries such as Greece and Portugal to shore up public spending.

Merkel said they had rejected for now the idea of euro bonds, which would have pooled the members states' governments' debts to reduce the overall risk of the eurozone,but neither leader ruled their use out in the future. George Osborne has raised euro bonds as a possible mechanism for shoring up the eurozone, but the idea was politically unpalatable in the German coalition. There was also no movement on the expansion of the zone's €440 billion rescue fund, the European financial stability facility, seen by some as crucial to the future of the zone.

Merkel said all countries in the eurozone should enshrine balanced budgets in their constitutions. "I do not really think we can solve problems with stop-gap solutions," she said. "We are looking at real, realistic step-by-step measures that we can use to gain back the trust that has been lost, and I do not think that euro bonds would help us in this. "It's quite right that 17 countries need to make a step-by-step progress."

Raw Data on Economic Growth Paints Fuzzy Picture
by Binyamin Appelbaum - New York Times

When the government announced in April that the economy had grown at a moderate annual pace of 1.8 percent in the first quarter, politicians and investors saw evidence that the nation was continuing its recovery from the depths of the financial crisis. The White House called the news "encouraging" and the stock market extended its bull run.

Three months later, the government announced a small change. The economy, it said, actually had expanded at a pace of only 0.4 percent in the first quarter. Instead of chugging along in reasonable health, the United States had been hovering on the brink of a double-dip recession.

How can such an important number change so drastically? The answer in this case is surprisingly simple: the Bureau of Economic Analysis, charged with crunching the numbers, concluded that it had underestimated the value of vehicles sitting at dealerships and the nation’s spending on imported oil. More broadly, politicians and investors are placing a great deal of weight on a crude and rough estimate that has never been particularly reliable.

"People want the best information that we have right now. But people need to understand that the best information that we have right now isn’t necessarily very informative," said Tara M. Sinclair, an assistant professor of economics and international affairs at George Washington University. "It’s just the best information that we have."

The growth rate that the government announces roughly one month after the end of each quarter — news much anticipated in Washington and on Wall Street — has been off the mark over the period from 1983 to 2009 by an average of 1.3 percentage points, compared with more fully analyzed figures released years later, according to federal data.

The second and third estimates, announced at subsequent one-month intervals, are no more reliable. The first quarter this year offers a typical example. The government estimated the annual growth rate at 1.8 percent in May and 1.9 percent in June before issuing its most recent estimate of 0.4 percent.

Perhaps more important, the government underestimated the depth of the recession by a wide margin, initially calculating that the economy contracted by an annual rate of 3.8 percent in the last quarter of 2008. It now estimates the contraction rate at 8.9 percent. Instead of an annual growth rate of 0.2 percent from the fourth quarter of 2007 through the first quarter of 2011, the government now estimates that the economy contracted at an annual rate of 0.2 percent during that period.

The basic problem is easy to understand: More than half of the ingredients in the first estimate are based in whole or in part on projections from past months. The government doesn’t actually know how much people spend on their cellphone bills or how much companies spend on construction. It simply makes an educated guess based on past spending. Even in the third estimate, 22 percent of the data still comes from projections.

If basic assumptions start changing rapidly — business failures during a recession, start-ups during a recovery — the estimates can quickly lose touch with economic reality. "When we most want timely information is when they’re least able to give it to us," said Professor Sinclair. "That’s exactly when those historical patterns are breaking down."

The Bureau of Economic Analysis, an arm of the Commerce Department, makes some efforts to warn users about these problems. It emphasizes transparency and is uncommonly open to public questions. It says it provides a valuable public service, but that the data reflects only the best available information. But policy makers, investors and the public continue to treat the data as highly significant.

"These are really not much more than educated guesses and yet the marketplace puts enormous weight on them because financial markets are high-frequency trading places based on immediate data," said Madeline Schnapp, director of macroeconomic research at TrimTabs Investment Research.

A growing number of economists say that the government should shift its approach to measuring growth. The current system emphasizes data on spending, but the bureau also collects data on income. In theory the two should match perfectly — a penny spent is a penny earned by someone else. But estimates of the two measures can diverge widely, particularly in the short term, and a body of recent research suggests that the income estimates are more accurate.

Justin Wolfers, a professor of business and public policy at the Wharton School of the University of Pennsylvania, publicly predicted earlier this summer that the government would sharply reduce its estimate of first-quarter growth, simply by looking at the income estimate buried inside the bureau’s initial release.

The income data also captured the depth of the recession much sooner. "It is appalling how little attention we economists pay to measurement issues," Professor Wolfers said. "The expenditure data looked bad but not dreadful. The income data was dreadful. And it subsequently turned out the absence of urgency among policy makers was largely a result of looking at faulty data."

Professor Wolfers said that in his native Australia, the government estimates growth by averaging the two techniques with a third, related approach. Private firms use similar methods.

Officials at the bureau have said that measuring expenditures has proved to be a more reliable methodology. The estimates are very accurate in one important respect: it is exceedingly rare for the bureau to estimate that the economy is shrinking when it is actually growing, or that it is growing when it is actually shrinking. The bureau meets that standard 98 percent of the time.

What went wrong in the first quarter? The largest change was because of an annual event. The Census Bureau completed an estimate of the value of vehicles awaiting sale in 2010, based on data collected directly from dealers.

Until July, the bureau had relied on an estimate from a private company, Ward’s, which counts vehicles but estimates their values. Based on that data, the bureau estimated that inventories had declined by $30.3 billion in the fourth quarter as sales outpaced the arrival of new cars.

Last month, based on new data, it concluded that inventories fell by only $17.9 billion. The bureau estimates that inventories shrank by an even smaller amount in the first quarter — although it won’t get equally accurate data until next July — but the effect of the revision was to reduce the difference between the two quarters, and thus to reduce the rate of growth.

The bureau estimates that this change alone is responsible for nearly half the difference between its initial estimate of 1.8 percent first-quarter growth and its current 0.4 percent estimate. A second major change involves the value of imported oil. The bureau announced a permanent change to its methodology last month to improve the way that it calculates the value of oil, and it concluded that spending on imported oil was higher than it had originally estimated. The details are byzantine but the result is clear enough: roughly 0.5 percentage points of growth vanished.

Europe need not wait for Germany
by Martin Sandbu - FT

Size matters. That is the lesson to draw from Washington’s debt ceiling debate and the downgrade of its sovereign credit rating by Standard & Poor’s, neither of which drove up US bond yields. It is also the lesson to draw from Japan, which combines the world’s lowest bond yields with one of its largest public debt stocks.

This lesson has a plain implication for eurozone countries: they should pool their debts – with or without Germany’s participation. The benefits from creating a debt market of a size to rival those of the US and Japan would clearly outweigh the costs.

Size underpins the affordability with which these states can borrow. The total stock of US government securities outstanding is $9,500bn (€6,600bn). For Japan the figure is Y875,000bn (€7,900bn). Even adjusting for the share of obligations held by the two countries’ public sectors (especially Japan), the tradable stock is enormous. Indeed, it is virtually impossible for investors to avoid these bonds. So they do not: they are currently willing to fund Washington for 10 years at 2.3 per cent and Tokyo at 1 per cent a year.

Compare this with Europe’s nationally fragmented sovereign debt market. At the end of 2010, Italy had €1,500bn of bonds outstanding; Germany, €1,400bn; France, €1,300bn. (UK debt securities amounted to £960bn, or €1,100bn.) These are still sizeable markets. But investors can abandon them much more easily than they can US or Japanese bonds. Put differently, a given size of investor outflow from a European country’s bonds will be far more disruptive than from bigger markets.

This has two effects. One is to make most, if not all, European states pay higher yields than they would as a single entity. The other is to make them far more vulnerable to market panic once investors begin to worry about refinancing risk. That, more than anything, accounts for the toppling of Irish and Portuguese debt markets and contagion to Spanish and even Italian and French bonds.

When such panic threatens, only draconian fiscal steps can reassure markets, such as those the UK took pre-emptively last year, and eurozone members have been forced to take since. But since these depress the economy, they are far from certain to work. Prolonged stagnation worsens public debt burdens and undermines creditworthiness as effectively as fiscal incontinence.

If you are big enough, however, this self-fulfilling dynamic can be put in reverse. The US and Japan retain fiscal space for short-term demand stimulus. They can use this fiscal space to restart growth, which would in turn improve the fiscal outlook.

This option is also available to eurozone countries, if they choose to avail themselves of it. Replacing all national sovereign bonds (although not loans) with common eurobonds would create a market worth €5,500bn. It would be backed by governments that together owe less debt, run a lower combined deficit and have greater tax-raising capacity than the US and Japan. It would almost certainly lead to lower yields than the current eurozone average and virtually eliminate the possibility of a bond buyers’ strike.

So what is the eurozone waiting for? The formal answer is that since eurobonds require joint and several guarantees, they are politically unfeasible. Also – so the argument goes – they are economically risky, since prudent and profligate states would pay the same yields, and since they add to the liabilities of core countries that still enjoy relative safety. But these objections are less impressive than they seem.

There are all sorts of ways to limit the joint guarantees’ riskiness. Total Eurobond issuance could be decided by a suitable supermajority. National constitutions could enshrine priority of Eurobond obligations. The stock of common debt could be capped, for instance along the lines of the "blue" (common) and "red" (national) bonds proposed by Bruegel, the think-tank. Debt service costs could easily be differentiated by charging states as a function of their borrowing share.

The true answer is that Europe is waiting for Germany, whose public is allergic to anything like a "transfer union" and whose leaders think the state would pay higher yields on eurobonds than Bunds.

The solution is to leave Berlin behind. Take the eurozone without Germany and its most like-minded partners – the Netherlands, Austria, Finland and Slovakia. Also exclude Greece, which in any case needs special treatment. The remaining 11 countries can create a €3,500bn bond market with macroeconomic figures only marginally worse than those for the eurozone as a whole.

There is no economic hindrance to gaining the advantages of size in this way, nor any insurmountable legal obstacles. Willing states presumably would need to sign a new treaty that was compatible with their duties in respect of monetary union as set out in the Lisbon treaty. This need not run afoul of the "no bail-out" clause: to agree to borrow jointly is not to assume another country’s debt.

That leaves the politics. It would fly in the face of Brussels etiquette for a subset of the eurozone to go it alone. But it is no less contrary to the European spirit for those willing to pool sovereignty to protect their well-being to be held up by German recalcitrance. This would be justified if Berlin had to pay for the project – but the point is that it would not.

How would such a move go down in Germany? Economically, Berlin may find its borrowing advantage eroded if investors see an alternative euro-denominated bond market that is bigger and economically attractive. Politically, voters may fear being left behind by European integration even more than they fear becoming the paymasters of Europe. If so, the power is really in the hands of the eurozone’s other members. They should use it.

The Sinister Power of the Rating Agencies
by Michaela Schiessl, Christoph Schult and Thomas Schulz - Spiegel

As the debt crisis worsens, governments fear the rating agencies, which have the power of life and death over whole economies. The Big Three helped to cause the 2008 financial crisis and are now accused of worsening the euro zone's woes. But a look behind the scenes shows that there are few alternatives to the mighty agencies.

The man who will decide on the financial health of entire countries this summer wears dark suits and square wire-rimmed glasses. He has graying hair, but his face is youthful. He speaks in a sonorous baritone tinged with a southern German accent. Yes, this ratings guru is from Germany.

His name is Moritz Kraemer and he makes a friendly and relaxed impression. But when his critics talk about Kraemer's work, they characterize him as "highly dangerous" and a "firebrand," one of those murderous men "who destabilize all of Europe." His powerful opponents include the German chancellor, the president of the European Commission and the French head of state, to name just a few.

Kraemer is the head of the European sovereign credit ratings unit at Standard & Poor's. Together with his colleagues at the rating agency, he has helped ensure that Greek government bonds are now seen as "junk" and those from Portugal and Ireland are rated only slightly better. Being saddled with such a low rating makes it far more difficult for these countries to take out additional loans.

Kraemer and his team have repeatedly downgraded Greece's credit rating over the past two years -- and each step down the rating ladder has escalated the European debt crisis. "That was really rough," Kraemer admits in a surprisingly calm manner, "but we're simply obligated to promptly inform investors of our opinion of the risks involved." Kraemer assesses the creditworthiness of countries and addresses the question of how likely it is that they will become insolvent.

Working with his colleagues, he takes hundreds of pieces of data, combines this with people's views and opinions, and finally distills this to a rating. The highest rating, AAA, has become the ultimate seal of approval. From there it goes downhill over nearly two dozen rungs to D, for default. Germany is rated AAA. Greece is hovering just above D.

Repercussions for Whole Continents
Kraemer's job is normally a rather low-profile position that is only important for bond dealers, central bankers and other financial professionals. But these are no ordinary times. The currency market is teetering on the brink of disaster and suddenly everything Kraemer does has repercussions for entire countries -- and even continents.

Ever since he and his colleagues downgraded the US government's AAA sovereign credit rating on the Friday before last, shockwaves have been reverberating around the globe. Stock markets are plunging and politicians are dashing from one crisis summit to the next. When the rating agencies give the thumbs-down, the markets are obliged to follow. Indeed, most investors have no choice but to rely on the assessments of rating agencies. Their role is enshrined in countless statutes and regulations stating that institutions such as banks, insurance companies and pension funds may only invest in companies, financial securities and government bonds that are classified as practically risk-free. If the rating falls, they are forced to sell.

This gives enormous power to this tiny sector. The agencies' verdict decides whether, and at what price, a country can raise money on the capital markets -- and if the crisis will continue to escalate. If a country is downgraded, this price rises, which exacerbates its plight -- which could in turn lead to the next downgrading.

The governments of the euro zone, which are struggling to find a way out of the crisis, are forced to watch helplessly from the sidelines as the rating agencies make life more difficult for them. When they moved to have private-sector creditors shoulder part of the burden of a new aid package for Greece, the rating agencies threatened to give Greece a "default" rating, which would have caused renewed turmoil in the markets. It took intense negotiations to hammer out a compromise.

To make matters worse, all of this power lies largely in the hands of three private companies that have their headquarters in the US: Standard & Poor's (S&P), Moody's and Fitch (which has dual headquarters in New York and London). They form the infernal trio of the financial world.

Is it acceptable for so much power to be concentrated in private companies whose objective is not a stable financial system, but their own profit? Or is this precisely what global public finances need: an independent oversight that forces governments to tighten their belts and keep their budgets in order? Americans are only beginning to truly ask these questions now. The debate has been raging in Europe for months, however. European politicians across the political spectrum have harshly condemned the agencies, arguing that they are a threat to the global financial system and that they fuel the bloodletting on the markets.

These critics contend that in the run-up to the 2008 crash, the agencies helped spark the crisis by giving far too lenient ratings to American mortgage-backed securities. Now, they say that the agencies are being too harsh -- and are thus again responsible for widespread misery.

b<>'You Need to Have a Thick Skin'
What effect does this have on Kraemer? Can he still sleep at night? And when he sees protests and street battles in Greece and Spain, does he feel partly responsible? "No," says Kraemer. "You need to have a thick skin in that respect. Countries don't have to trim their budgets for our sake, but because they have accumulated too many debts."

Kraemer's office is located on the 27th floor of the Frankfurt Main Tower. The view extends all the way to the Taunus mountain range, but Kraemer is rarely here. Instead, he spends much of his time traveling around the world. "At least once a year we send a team to every country that is rated by S&P," he explains.

Many doors are opened for Kraemer, right up to the heads of government: "Ministers brief us on policy guidelines." He says that this dialogue with the governments is part of the rating process. "We of course listen to what they have to say -- anything else would be unreasonable." At the same time, he adds, the rating agency doesn't rely too much on the plans and data presented during these visits. "We make our own analytical decisions."

'There Were No Calculation Errors'
That's hardly surprising. After all, many official figures are questionable. It's been common knowledge for some time that Greece's deficit figures were unrealistic. But how do you rate a country in such cases? "If the flow of information is too slow, we don't pull a rating out of a hat," says Kraemer, explaining that S&P withdrew its rating for Libya for this very reason. In the case of Greece, he adds, "there was, in our opinion, sufficient information available for an assessment."

Apparently, the information didn't shed a positive light on the country: In only 500 days, S&P downgraded its rating of Greece by seven notches. "The situation in Greece deteriorated much faster and more dramatically than was initially apparent," says Kraemer. "From today's perspective, though, no one would say that these steps were exaggerated."

Generally speaking, Kraemer also sees very few problems with the work of his agency -- not even with the fact that S&P initially apparently misinterpreted the US federal deficit. When analysts decided to lower the long-term sovereign credit rating for the first time from AAA to AA+, the US Treasury immediately sounded the alarm and contended that S&P had made a $2 trillion (€1.4 trillion) error in its calculations of the country's future debt. The agency asked for a few hours to think it over. It then confirmed the downgrade, but the reason had suddenly changed. Now, instead of highlighting its financial calculations, the agency cast doubt on the country's political leadership.

"There were no calculation errors," Kraemer says. "We only used an alternative scenario to examine the anticipated growth in expenditure." The reaction from politicians is not surprising, he says: "If there is bad news, they often first try to play it down and discredit the analysis." The US Treasury sees things differently: "They (S&P) have handled themselves very poorly and they've shown a stunning lack of knowledge about basic US fiscal budget math," said Treasury Secretary Timothy Geithner.

History of Past Mistakes
It wouldn't be the first mistake made by the Big Three. They have made errors time and again in the past, not only in evaluating countries, but also with companies and securities, which are their main business.

This hasn't harmed the growth of this miniscule industry, however. Ever since John Moody began to publish systematic ratings of railway bonds in 1919, things have gone mostly uphill. The more the world was dominated by numbers, the more important the ratings became. And sometimes they were completely wrong.

Shortly before the collapse of the Lehman Brothers investment bank, for example, the agencies gave it an A rating, which is in the third-best category of ratings and well within investment grade. The American International Group (AIG), which required an enormous bailout from the US government, was rated as safe. A Senate investigations panel has concluded that the rating agencies were primarily responsible for triggering the financial crisis. S&P is "the last place anyone should turn for judgments about our nation's prospects," Nobel laureate economist Paul Krugman recently wrote.

But they are continually being asked to do just that -- including by the investors around the world who stock up on US government bonds. Nearly one-third of all US debt is held abroad, mainly in China.

Hunger for Capital
The insatiable cross-border hunger for new capital is the reason why rating agencies began to play a role in the fortunes of entire nations. From the Great Depression of the 1930s until the 1970s, there was virtually no international market for government bonds. American bonds were held by American institutions. For most countries, it was impossible to acquire money abroad. It was only when developing countries began to raise money on global bond markets, and investors had to assess which countries to grant loans to, that the agencies came into play.

"There was a huge increase in ratings because international finance changed significantly and created enormous demand," says Vincent Truglia. Back in the early 1970s, Truglia was already working for large banks doing country risk analysis. He came fresh from university. They needed him not so much for his degree in economics but for his linguistic abilities. In addition to English, he also spoke German, Italian, French and even Greek.

Truglia had to fly around the world to gather information. "There was almost no data. You had to guess what debt levels were. They were considered secret," Truglia recalls. "Nobody knew how to do sovereign risk analysis. So I created a sovereign risk department." Truglia became one of the world's leading experts. He went to work for Moody's and from 1996 to 2008 served as the global head of the agency's Sovereign Risk Unit, which was responsible for evaluating over 100 countries.

Today, Truglia is a principal in an investment firm in Manhattan. It only takes about 45 minutes to travel by ferry to the small coastal town in New Jersey where he lives, only 50 meters (165 feet) from the beach, in a four-storey house full of heavy, leather furniture. Back then, when he was a Moody's man, he could meet anyone, including "presidents, heads of government and heads of central banks," he says. "But most governments came to us," he explains. They came to New York, where the agency has its headquarters.

"Access to people was remarkable," he says. "But in all those decades I never got a single thing from a government that was not publicly available." Rather, he says, governments explained their point of view.

'You Can't Allow Yourself to Get Emotionally Attached'
Did they also perhaps mention the consequences that a downgrade could have for millions of people? Truglia says he had "never given it a thought or consideration." He says that you can't allow yourself to get emotionally attached to a rating. "Ratings do not judge whether a country is good or bad. They just assess creditworthiness." This isn't decided by a large team of experts, but rather just a handful of people: "When I left, there were 22 or 23 of us." Each lead analyst works with a junior analyst at his side and handles 10 to 12 countries.

At Moody's, ratings are not determined by the country analysts alone, but by a more or less spontaneously assembled committee that varies in size and membership -- and usually consists of eight to 15 analysts. The only ground rule is that the majority of participants have to be responsible for a region that differs from the one where the country being assessed is located. In the end, a vote is held and decisions are passed by a simple majority.

The criteria for classifying a country are also far from clear at Moody's. There is no uniform basis for decisions. "It will vary from country to country," says Truglia. "When it comes to an emerging market, you have to pay close attention to current account balances, debt service ratios, international reserves, the net liquidity position of the country and its banks, and exchange rate policies, to name just a few aspects."

It's another story altogether when rating industrialized countries: "The more important drivers for advanced industrial countries were always the domestic numbers, what was the nature of general government debt," he says.

Screaming and Yelling
But which criteria are ultimately decisive? "The rating committees were going on for hours, screaming and yelling at each other with passion" says Jerome Fons, who also once had a position high up in the hierarchy at Moody's. Until 2007, his job included serving as chair of Moody's Standing Committee on Rating Symbols and Practices, which established the methodology. Now, risk consultant Jules Kroll has hired him to help establish a new agency.

Most other rating committees would need maybe half an hour for their meetings, Fons recalls. "But the sovereign rating committees would be these calamitous affairs." This was despite the fact that country ratings don't bring in much money for the agencies: Each country pays between €50,000 and €200,000 for a rating. Usually these are developing and emerging countries. Western industrialized nations such as Germany and the US don't have to pay anything, but they are powerless to influence the ratings.

Fons says that there exists a clear methodology for many rating categories that is "highly modeled and technical," with defined variables, ratios and formulas. He says that he told them he also wanted to see a clean methodology from them. But they weren't able to agree on anything, he says.

This is precisely what is lacking in the agency's decisions: confirmability. That, at least, is the opinion of Michel Barnier, the EU commissioner responsible for financial services. "We need more transparency and tighter regulation of the agencies," says the 60-year-old bureaucrat. He is sitting in the back of his official limousine on the way from Strasbourg to the southwestern German town of Schwanau, juggling two iPhones and ranting about the rating agencies.

He says that the agencies are "one of the reasons for the crisis," and that they "have failed in their mission." The EU commissioner welcomes plans to establish a competing European agency. For over a year, Roland Berger, a German consulting firm, has been lobbying banks, insurance companies and financial service providers to support the plan. But setting up the necessary analytical structures is expensive, and €300 million will have to be raised for it to become reality.

The proposal has not been enthusiastically received by either the financial industry or experts. After all, it is highly probable that such a European agency would become a political instrument -- or at least be perceived as one by financial markets, and not be taken seriously as a result.

Driving Up the Fever
The case of Greece has shown just how much Europe's political leadership is willing to ignore reality when it suits their purposes: They have striven to delay the country's bankruptcy as long as possible and blatantly demanded that the agencies back them up with sympathetic ratings.

Now, by taking a hard line with the US, Standard & Poor's has proven that it won't allow politicians to dictate anything. European Commissioner Barnier also wants a new agency to be free of any political influence: "It cannot be a public agency." He says it's equally important that the inspectors themselves be inspected, in other words, that there is clear regulation of existing agencies. This will be the responsibility of the Paris-based European Securities and Market Authority (ESMA), which was established at the beginning of this year. Barnier says that's not enough, though. He wants to submit a draft law with tighter regulations in November.

Brussels wants to force the agencies to disclose their data and methods. The ratings should "be reduced to the essentials," he says. Barnier is even considering having ratings banned for countries that are drowning in debt and currently benefiting from a bailout package. He says that it is "not normal and not fair when countries are downgraded while they are being monitored by the European Central Bank and the International Monetary Fund."

He has a nice analogy for the excessive power of the agencies: "If the thermometer is driving up the fever, something is wrong." But nothing can be sold on the bond market without some kind of rating system. After all, a total lack of any rating is primarily a sign to investors that they should avoid something like the plague.

Too Closely Linked
The main problem is that, for far too long, lawmakers themselves have promoted this link between ratings and every form of financial investment. As early as the 1930s, in response to the Great Depression, policymakers began to integrate ratings into financial market regulations -- as a security measure to primarily force large financial institutions to make less risky investments.

This idea has long since become an accepted practice everywhere. For decades, lawmakers around the world have made rating certificates an integral part of an increasing number of financial market regulations. Their importance has steadily grown, but the accuracy of the ratings has not always kept pace with developments.

The most obvious solution -- perhaps even the only solution -- to break the power of the agencies without also destabilizing the entire financial system would be to remove the rating stipulations from the regulations. This would allow investors to seek alternative sources of information without being bound, for better or for worse, to the agencies' opinions.

Surprisingly, support for this idea comes from the Big Three: "It wasn't our desire for the ratings to be so tightly entwined with regulations," says S&P's Moritz Kraemer. "Politicians have forced this importance upon us. We perceive it as a burden, one that our ratings weren't designed to handle."

Switzerland Increases Efforts to Weaken Franc With Flood of Bank Liquidity
by Simone Meier and Klaus Wille - Bloomberg

The Swiss central bank toughened its fight to counter what it called a "massively overvalued" franc by boosting liquidity. The franc gained.

The Swiss National Bank decided to expand liquidity to the money market, expanding banks’ sight deposits to 200 billion francs ($253 billion) from 120 billion francs, it said in an e- mailed statement from Zurich today. It will also continue to repurchase outstanding SNB Bills and use foreign-exchange swap transactions to create liquidity.

The franc has been pushed to a record against the euro, reflecting investor concern that the euro region’s fiscal crisis may continue to worsen. While the SNB trimmed borrowing costs to zero on Aug. 3, the currency continued to appreciate. SNB Vice President Thomas Jordan has said policy makers are assessing "a whole range of options" to protect the economy.

"Markets are relatively disappointed," said Caesar Lack, head of economic research at UBS AG’s Wealth Management Research in Zurich. "They hoped for an intervention or a currency peg. We didn’t share that assessment, however."

Tax the super-rich or riots will rage in 2012
by Paul B. Farrell - MarketWatch

6 reasons we can’t stop coming economic meltdown

What a year. Rage in London, Egypt, Athens, Damascus. All real. Just a metaphor in the new "Planet of the Apes" film? No, much more. Warning: More rage is dead ahead. Across our planet a new generation is filled with rage. High unemployment. Raging inflation. Dreams lost. Hope gone. While the super -rich get richer and richer.

Listen to that hissing: The fuse is rapidly burning, warning us. Wake up before the rage explodes in your face. This firestorm is endangering America’s future. From forces outside, yes. But far more deadly, from deep within our collective psyche. We have lost our moral compass. We are self-destructing.

Crackpot warning? No. This warning comes from the elite International Monetary Fund. A recent IMF report looked at "the causes of the two major U.S. economic crises over the past 100 years, the Great Depression of 1929 and the Great Recession of 2007," writes Rana Foroohar, an economics editor at Time magazine. 

"There are two remarkable similarities in the eras that preceded these crises. Both saw a sharp increase in income inequality and household-debt-to-income ratios." And in each case, "as the poor and middle-class were squeezed, they tried to cope by borrowing to maintain their standard of living."

But the rich "got richer, by lending, and looked for more places to invest, bidding up securities that eventually exploded in everyone’s face. In both eras, financial deregulation and loose monetary policies played roles in creating the bubble. But inequality itself — and the political pressure not to reverse it, but to hide it — was a crucial factor in the meltdown. The shrinking middle isn’t a symptom of the downturn. It’s the source of it." Today the consequences of the meltdown still haunt us — there’s more to come.

The next bubble
There’s a new bubble blowing. No one can stop it ... soon it will explode.

Get it? There’s enormous "political pressure not to reverse" inequality till it "explodes in our faces." We deny the inequality between rich and the other 99%. The rich are addicts. More is never enough. They thrive on greed, blind to the needs of others. Worse, they have no commitment to America as a nation. From Forbes billionaires and signers of "no new taxes" pledges, to Mitch McConnell’s un-American willingness to sabotage the economy to deliver on his main promise to make Obama a one-term president.

Yes folks, the new "Rise of the Planet of the Apes" film delivers a powerful warning paralleling the IMF red flags. Listen to reviewer Zaki Hasan in HuffPost. Here’s the scenario. What’s ahead for America as the inequality gap gets bigger, the job market stagnates, inflation rages, a double-dip recession nears. Hasan’s vision goes beyond metaphor. We see a psychological profile of America as an addict lost in an addiction. And like all addicts, we cannot see, nor stop, our self-destructive behavior:

"The Apes series has always been about self-inflicted wounds — the idea that man’s unquenchable hubris inevitably leads to catastrophic consequences both for himself and those around him, whether manifested through cruelty to animals or cruelty to himself." In the new film, our world is facing "the twin threats" of genetic engineering and a super-virus. But the central theme remains: "Man’s downfall comes as a result of his own actions."

The original "Planet of the Apes" went deeper, speaking more to America’s fatally flawed mind: "Beware the beast Man, for he is the Devil’s pawn." In this early scene, Dr. Cornelius, the anthropologist, an orangutan, is reading aloud from the ancient sacred scrolls of the Apes: "Alone among God’s primates, he kills for sport or lust or greed." Yes, that reminds us of Goldman’s war to dominate the great Wall Street jungle.

He keeps reading from the scrolls: "Yea, he will murder his brother to possess his brother’s land. Let him not breed in great numbers, for he will make a desert of his home and yours. Shun him; drive him back into his jungle lair, for he is the harbinger of death."

Yes, evolution is reversing. Here a prophecy comes true. The Apes knew our brains were saboteurs, destroying our rightful place at the top of the jungle’s food chain: "Man is a nuisance. He eats up his food supply in the forest, then migrates to our green belts and ravages our crops. The sooner he is exterminated, the better." Warning: The rage is sweeping London, Damascus, Tripoli, the spreading Sahara desert. Is America next?

Tax the super-rich, or revolution will overrun America next
Yes, tax the super-rich. Tax them now, before the other 99% rise up, trigger a new American Revolution, another meltdown, a new Great Depression. Historically, revolutions build over long periods, bubbles growing to critical mass. Then, "something happens." Suddenly. Unpredictably. A flashpoint triggers ignition. Nobody saw it coming in Egypt. A suicide in a remote village uploaded on a young Google executive’s Facebook page. Goes viral, raging out of control. Cannot be stopped. So think hard about these six warnings blowing a new mega-bubble that will soon explode in our collective faces:

1. Warning: High unemployment is a global ticking time bomb
An earlier special report in Time, "Poor vs. Rich: A New Global Conflict," warns that a "conflict between two worlds — one rich, one poor — is developing, and the battlefield is the globe itself." Just 25 developed nations with 750 million citizens "consume most of the world’s resources … enjoy history’s highest standard of living." But now they face 100 poor nations with 2 billion people, many living in poverty, all demanding "an ever larger share of that wealth." A British leader calls this a "time bomb for the human race."

2. Warning: Tax cuts for the rich increase youth unemployment
In a New York Times column, Matthew Klein, a 24-year-old Council on Foreign Relations researcher, saw the parallel between the 25% unemployment among Egypt’s young and the 21% for young Americans: "The young will bear the brunt of the pain" as governments rebalance budgets. "Taxes on workers will be raised, spending on education will be cut while mortgage subsidies and entitlements for the elderly are untouchable." And more tax cuts for the rich.

3. Warning: Rich get richer on commodity inflation, poor get angrier
USAToday’s John Waggoner warned: "Soaring food prices send millions into poverty, hunger." The "rise in food prices means a descent into extreme poverty and hunger, warns the World Bank." One Pimco manager warns that commodity inflation exposes "the underlying inequalities and issues related to the standard of living that boil beneath the surface."

4. Warning: The super-rich are blinded by their addiction to money
In "Free Lunch: How the Wealthiest American Enrich Themselves at Government Expense (And Stick You with the Bill)," David Cay Johnston warns that the rich are like addicts, and to "the addicted, money is like cocaine, too much is never enough." Recent data: 300,000 Americans in "the top tenth of 1% of income had nearly as much income as all 150 million Americans who make up the economic lower half of our population."

5. Warning: Politicians are corrupted by this super-rich addiction to greed
In "Washington’s Suicide Pact," Newsweek’s Ezra Klein warns: "Congress is careening toward the worst of all worlds: massive job losses and an exploding deficit." And the debt-ceiling drama just made things a lot worse. Millions of jobs were lost during Bush years, his wars, tax cuts for the rich. Yet, today the GOP is in total denial of that legacy, blinded by an obsession to destroy Obama’s presidency, no matter the consequences.

6. Warning: Soon the revolutionaries will rage, then dominate ‘Third World America’
Yes, we are ripe for a surprise revolution. In "Third World America" Arianna Huffington warns: "Washington rushed to the rescue of Wall Street but forgot about Main Street." Now Bernanke’s promise of cheap money through 2013 is just one more "free lunch" to the richest 1%. Meanwhile, "one in five Americans unemployed or underemployed. One in nine families unable to make the minimum payment on their credit cards. One in eight mortgages in default or foreclosure. One in eight Americans on food stamps. Upward mobility has always been at the center of the American Dream … that promise has been broken… The American Dream is becoming a nightmare."

Wake up folks. Super-rich addicts are destroying the American Dream for everyone. They’re destroying the American economy. They don’t care about you. Yes, they hear the ticking time bomb. They’re stockpiling cash. Don’t say you weren’t warned. The IMF sees a new collapse sweeping across the planet. Open your eyes. You’re not watching a film. This is not a metaphor. Plan now for the revolution, class warfare, market crash, economic collapse, plan for another depression.

Daylight Robbery, Meet Nighttime Robbery
by Naomi Klein - The Nation

I keep hearing comparisons between the London riots and riots in other European cities—window smashing in Athens or car bonfires in Paris. And there are parallels, to be sure: a spark set by police violence, a generation that feels forgotten.

But those events were marked by mass destruction; the looting was minor. There have, however, been other mass lootings in recent years, and perhaps we should talk about them too. There was Baghdad in the aftermath of the US invasion—a frenzy of arson and looting that emptied libraries and museums. The factories got hit too. In 2004 I visited one that used to make refrigerators. Its workers had stripped it of everything valuable, then torched it so thoroughly that the warehouse was a sculpture of buckled sheet metal.

Back then the people on cable news thought looting was highly political. They said this is what happens when a regime has no legitimacy in the eyes of the people. After watching for so long as Saddam and his sons helped themselves to whatever and whomever they wanted, many regular Iraqis felt they had earned the right to take a few things for themselves. But London isn’t Baghdad, and British Prime Minister David Cameron is hardly Saddam, so surely there is nothing to learn there.

How about a democratic example then? Argentina, circa 2001. The economy was in freefall and thousands of people living in rough neighborhoods (which had been thriving manufacturing zones before the neoliberal era) stormed foreign-owned superstores. They came out pushing shopping carts overflowing with the goods they could no longer afford—clothes, electronics, meat. The government called a "state of siege" to restore order; the people didn’t like that and overthrew the government.

Argentina’s mass looting was called El Saqueo—the sacking. That was politically significant because it was the very same word used to describe what that country’s elites had done by selling off the country’s national assets in flagrantly corrupt privatization deals, hiding their money offshore, then passing on the bill to the people with a brutal austerity package. Argentines understood that the saqueo of the shopping centers would not have happened without the bigger saqueo of the country, and that the real gangsters were the ones in charge.

But England is not Latin America, and its riots are not political, or so we keep hearing. They are just about lawless kids taking advantage of a situation to take what isn’t theirs. And British society, Cameron tells us, abhors that kind of behavior.

This is said in all seriousness. As if the massive bank bailouts never happened, followed by the defiant record bonuses. Followed by the emergency G-8 and G-20 meetings, when the leaders decided, collectively, not to do anything to punish the bankers for any of this, nor to do anything serious to prevent a similar crisis from happening again. Instead they would all go home to their respective countries and force sacrifices on the most vulnerable. They would do this by firing public sector workers, scapegoating teachers, closing libraries, upping tuitions, rolling back union contracts, creating rush privatizations of public assets and decreasing pensions—mix the cocktail for where you live. And who is on television lecturing about the need to give up these "entitlements"? The bankers and hedge-fund managers, of course.

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. Of course London’s riots weren’t a political protest. But the people committing nighttime robbery sure as hell know that their elites have been committing daytime robbery. Saqueos are contagious.

The Tories are right when they say the rioting is not about the cuts. But it has a great deal to do with what those cuts represent: being cut off. Locked away in a ballooning underclass with the few escape routes previously offered—a union job, a good affordable education—being rapidly sealed off. The cuts are a message. They are saying to whole sectors of society: you are stuck where you are, much like the migrants and refugees we turn away at our increasingly fortressed borders.

David Cameron’s response to the riots is to make this locking-out literal: evictions from public housing, threats to cut off communication tools and outrageous jail terms (five months to a woman for receiving a stolen pair of shorts). The message is once again being sent: disappear, and do it quietly.

At last year’s G-20 "austerity summit" in Toronto, the protests turned into riots and multiple cop cars burned. It was nothing by London 2011 standards, but it was still shocking to us Canadians. The big controversy then was that the government had spent $675 million on summit "security" (yet they still couldn’t seem to put out those fires). At the time, many of us pointed out that the pricey new arsenal that the police had acquired—water cannons, sound cannons, tear gas and rubber bullets—wasn’t just meant for the protesters in the streets. Its long-term use would be to discipline the poor, who in the new era of austerity would have dangerously little to lose.

This is what David Cameron got wrong: you can't cut police budgets at the same time as you cut everything else. Because when you rob people of what little they have, in order to protect the interests of those who have more than anyone deserves, you should expect resistance—whether organized protests or spontaneous looting. And that’s not politics. It’s physics.

China feels after-effects of economic stimulus
by David Pierson - Los Angeles Times

Housed in a five-story glass cube with a multiplex cinema and western brands like Gap and Sephora, the Care City Shopping Mall in southwest Beijing has all the ingredients for a great retail experience — except actual shoppers.

The visitors milling around on a recent muggy afternoon appeared most interested in the free air-conditioning and the food court. Salesclerks had little to do but nap, yawn or fiddle with their cellphones. "It gets better on weekends," said a hair-clip vendor flipping through a magazine.

Opened last year amid a nationwide construction frenzy, this sleepy mall may ultimately prove successful. But for now, the project shows why China won't be spending big in the event of another global recession: It's still paying for the last one.

To shield its economy from the fallout of the 2008 financial crisis, Beijing orchestrated a massive economic stimulus. It invested billions in infrastructure projects and encouraged banks to open the credit spigot to fund construction of apartments, office towers and retail centers.

The strategy catapulted China past Japan to become the world's second-largest economy; its growth helped keep the global slump from deepening. China splurged on Australian iron ore, Chilean copper and Saudi Arabian oil to fuel its construction boom. While the U.S. economy was mired in recession, with negative year-over-year growth in gross domestic product in 2008 and 2009, China's economy expanded by more than 9% annually over the same period.

But like taking steroids, there were side effects. The burst of credit has fueled inflation, which is proving painful for average Chinese. Soaring prices for pork, vegetables and other staples have authorities worried about the potential for social unrest. So has a property bubble that has put home ownership out of reach of millions, exacerbating the gulf between rich and poor.

Meanwhile, the nation's debt levels have reached new heights. A national audit released in June found outstanding loans to local governments, among the biggest players in the building binge, amounted to $1.65 trillion, or nearly a third of China's GDP.

There are also serious questions about how much new investment China needs. Although the construction blitz created millions of short-term jobs, there is slack demand for some of the resulting projects. Apartment towers in some cities are largely empty, as are malls and skyscrapers in others. China's steel industry is saddled with so much extra capacity that it has been accused of dumping product overseas.

"If all this investment remains unprofitable for the long term, there will be serious risk to the banking system," said Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, a government think tank. "The problem is it's become a tool for local government officials to compete and a hotbed for corruption."

Faced with these risks, China has been trying to gradually cool its economy by hiking interest rates and tightening lending standards. Signs of a slowdown are already emerging in lower auto sales, factory closures and scuttled real estate deals.

But the big concern inside and outside of China is a so-called hard landing. If Europe and the U.S. fall back into recession and demand for Chinese-made goods declines, Beijing won't be able to juice its economy like it did the last time around.

"It's a lesson on the limits of stimulus. The more you do it, the less and less you'll get out of it," said Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing. "You've already tapped all the good investments out there. A second time, you'd just be shoveling money out the door.... It will just compound their problems."

The best solution for China, analysts said, is to turn its own citizens into shoppers whose buying power can drive the economy forward. Personal consumption accounts for about 40% of GDP in China, compared with about 70% in the U.S.

But closing that gap won't be easy, given that China's development model favors industry over consumers.

Beijing has deliberately kept the value of the country's currency, the yuan, weak to keep its exports cheap and give Chinese factories an edge over foreign competitors. But a weak currency exacerbates inflation and erodes the buying power of Chinese households.

Consumption in China is growing — at a robust 8% a year. Crowds at Apple stores and Pizza Hut outlets in the country's biggest cities point to pent-up demand. China's newly minted millionaires are attracting luxury brands including Porsche and Cartier.

Yet China's per capita annual income of $7,600 ranks below Angola and Albania. Although disposable income is rising, most households remain obsessed with saving because the social safety net is so flimsy. Individuals must shoulder most of the expense for their own healthcare, education and retirement.

A recent uptick in the value of the yuan against the dollar has some observers speculating that China is moving more aggressively to fight inflation and ease trade tensions with the West.

The country may be better able to weather any global recession when ordinary citizens such as Cheng Yaohua start opening their wallets at the Care City Shopping Mall instead of using it as a place to cool off on summer afternoons.

A migrant from central Henan province, Cheng earns $300 a month. He admired the styles on display in the window of the Gap store. But he shops in flea markets instead.

"The clothes over there cost a tenth of my monthly salary," said Cheng, a 22-year-old cellphone salesman, nodding at the multi-story Gap. "After I paid for rent and food, I'd have nothing left if I bought something there."

Chinese Hunger for Corn Stretches US Farm Belt
by Scott Kilman and Brian Spegele - Wall Street Journal

China's struggle to meet the growing demands of its middle class is fueling a sudden surge in demand for corn, sending vast ripples across the U.S. farm belt and potentially upending the grain's trade flows around the world.

China's need for corn—which forms the basis of sweeteners, starch and alcohol as well as feed for livestock—was on stark display in July when the nation ordered 21 million bushels of U.S. corn in one hit, more than the U.S. government thought the country would buy in a year. The purchase surprised the market and came as an intense July heat wave was shrinking the potential size of the Midwest crop. China bought another 2.2 million bushels of U.S. corn early this month.

Corn prices, which have nearly doubled over the past year, climbed another 1% Tuesday. The corn futures contract for December delivery at the Chicago Board of Trade rose 7.5 cents to settle at $7.275 a bushel. China's influence on corn demand underlines how its fast-growing economy is reshaping global commerce. The nation, with its growing population of 1.3 billion people, has been a major player in commodities markets in recent years.

China already buys about a quarter of all U.S. soybeans. But its sudden demand for corn caught many off guard. China, which hadn't been a net importer of corn for 15 years until last year, has a vast corn belt of its own and for many years strove to be self-sufficient. And because China is secretive about the levels of commodities it holds in its strategic reserves, the rest of the market can only guess what its supply needs are.

Many attribute the larger-than-expected demand to a growing middle class that is changing its tastes more quickly than anticipated. As the Chinese population becomes wealthier, for example, it is eating more pork. And the Chinese government is pushing its farmers to adopt Western methods of raising their pigs, including feeding them more corn. Citizens are also slurping up juices and other products that include corn-based sweeteners: Coca-Cola Co. said that its volume in China spiked 21% in the second quarter.

Ma Liangfeng, a 69-year-old retired engineer living in Shanghai, says the array of packaged products lining store shelves was "unthinkable" just 30 years ago. Back then, families had to reserve staple meats like pork for special occasions.

The changes have created big shifts throughout the food chain, including U.S. companies and farmers putting in place infrastructure that will enable massive shipments of grains and other products to Asia.

Many U.S. traders and economists believe the recent purchases signal U.S. sales will grow so rapidly that China could become the biggest foreign buyer of U.S. corn within five to 10 years, dethroning Japan, which bought about 610 million bushels of U.S. corn last year. "We think this is the inflection point," says Brian Schouvieller, a grain marketing executive at CHS Inc., the U.S.'s biggest farmer-owned cooperative. "We believe that, from now, China is going to be a steady buyer."

To be sure, Western executives have been wrong before about China's appetite for foreign corn. A sudden surge of Chinese buying in the mid-1990s sparked talk of a trade boon for U.S. farmers, but it was a blip. While China's middle class is far bigger now, and its gross domestic product grew a blistering 9.5% in the second quarter, economists predict turbulence. Much of China's breakneck growth is fueled by government-led investment, not entrepreneurs, and China's housing market appears to be overheating.

Still, the threat of instability might well work in the favor of U.S. farmers. China's ruling Communist Party worries in particular about food inflation, which could put social stability at risk. In an effort to preserve domestic supplies, the government has already stopped construction of factories that convert Chinese corn into ethanol fuel. But rising pork prices, thanks in part to higher demand and the rising cost of feed, accounted for more than a quarter of the 6.5% jump in China's consumer price index in July from a year earlier.

In the eastern province of Zhejiang, pig farmer Qian Fanghua's operation has grown to about 2,000 animals today, from less than 200 pigs four years ago. Mr. Qian's hogs require about 4,000 kilograms of corn-based feed each day. His growing farm, and others dotted around the country, is one of the reasons domestic corn prices have climbed so high as to make U.S. corn seem affordable.

This year, China is expected to use about five billion bushels of corn to make feed, a growth of 20% from five years ago, according to the U.S. Department of Agriculture. The USDA now forecasts that China will import 79 million bushels of corn from all sources for the 2011-2012 crop year. But some grain traders are much more optimistic. They said in interviews that they think China wants to buy 200 million bushels of corn from the U.S. alone.

U.S. companies are already investing with China's ever-expanding appetite in mind. Decatur, Ill., grain exporter Archer-Daniels-Midland Co. said in July that it would build a shuttle-loading grain elevator near St. Cloud, Minn., with the capability of loading trains that are 110 cars long. And Minneapolis-commodity processing giant Cargill Inc. is expanding its corn sweetener factory in Pinghu.

A port terminal in Longview, Wash., scheduled to open this fall is the nation's first in at least two decades for loading ocean-going ships with grain. Grain giant Bunge and two Asian partners invested $200 million to build it. "The Asia market is the fastest growing market in the world," says Larry Clarke, the venture's chief executive. "We're working to get our infrastructure ahead of it."

Biotechnology giant Monsanto Co. has had talks about deepening ties with Sinochem, the state-owned chemicals conglomerate with which it has had a corn seed-breeding venture in China since 2001.
Ron Litterer, a Greene, Iowa, farmer, says he's paying close attention to China's growth and while he hasn't yet decided to increase his corn planting, that could change. Mr. Litterer raises 1,000 acres of corn and 500 acres of soybeans. "It just makes sense to think they will have to depend more and more on [food] imports," says Mr. Litterer.

For now, the amount of Chinese business confirmed by Washington is relatively small alongside America's total foreign sales. The U.S. exports about 1.8 billion bushels of corn globally. While nobody in the West knows for sure how much corn China will want to import and how soon, the possibilities fascinate grain traders. According to Michael Swanson, a Wells Fargo & Co. economist, doubling of per-capita meat consumption in China so that it matches the U.S. level would require the country to use an additional 24 billion bushels of corn, or about twice what the U.S. produces in a year.

"There's not enough grain in the world for them to do that," Mr. Swanson says. "But just moving in the direction is staggering to consider."

UK unemployment jumps as economy falters
by Heather Stewart - Guardian

• Nearly 2.5 million people unemployed
• Benefit claimants rise to 1.56 million
• Number of women out of work highest since 1988
• Record number are self-employed or working part time
• Youth unemployment pushes back towards 1 million

Britain's lacklustre economic recovery is taking its toll on the labour market, with unemployment increasing by 38,000 over the three months to June - the largest jump since spring 2009, when the UK was in recession.

Official figures released on Wednesday revealed that 2.49 million people were out of work on the government's preferred International Labour Organisation measure. The number of people claiming jobseeker's allowance also rose by 37,100, to 1.56 million in July.

With GDP growth sliding to just 0.2% in the second quarter of the year, analysts had been warning for some time that weaker growth and fragile confidence could deter firms from hiring new workers and lead to a renewed rise in unemployment. "Business confidence clearly needs to rise before employment growth will pick up again, but at the moment the surveys suggest that companies remain worried about economic growth both at home and abroad and are generally erring towards cost-cutting rather than expansion," said Chris Williamson, chief economist at Markit.

Women continue to bear the brunt of layoffs, many of which are concentrated in the public sector. Of the 38,000 increase in unemployment over the quarter, 21,000 were women. The number of women out of work is now 1.05 million, the highest since the spring of 1988. A record number of people – 1.26 million – are now self-employed or working part-time, not because they want to, but because they cannot find a full-time job. This total increased by 83,000 over the three months to June.

For those who have managed to stay in work, there was some evidence that pay deals are starting to creep up, with average earnings growing at an annual rate of 2.6%, up from 2.3% in the three months to May. Youth unemployment is also rising again, after dropping in recent months, the Office for National Statistics revealed. A total of 949,000 16 to 24-year-olds, or 20.2% of the young workforce, were unemployed. Excluding those in full-time education looking for a job, the total is 671,000, or 18.8% of the workforce.

Britain's Society Broken by Greed
by Thomas Hüetlin - Spiegel

The blazing infernos which took hold in the UK's biggest cities have shocked British society. It wasn't a desire to protest that drove the brutal looters onto the streets, but pure consumer greed. Bankers, politicians and media moguls have made this greed socially acceptable.

Ashraf Haziq is 20 years old, a student from Malaysia. He was fasting during Ramadan and had the misfortune to be cycling on his bike in Barking, an area in East London, last week. First there was a gang of kids. They threatened him with knives, broke his jaw and stole his bike. As he sat dazed on the sidewalk, staring at the blood that was dripping from his face onto the ground, the next gang appeared. Its members were older; some were masked. One helped him to his feet and supported him, but this supposed aid was merely a diversion as another helped himself to the contents of the injured man's rucksack at the same time; throwing away some of what he stole and pocketing the rest. He grinned broadly, prancing with joy.

It was pictures like these that disproved the theory that the riots were protests, or a youth rebellion like those that have taken place in other European countries against government austerity packages.

It was nothing of the sort. The events which unfolded on the streets of London and other English cities last week were brutal and full of an enthusiasm to inflict the greatest possible damage, even on mere passers-by who had the bad luck to get in the way. It was as if the gang from Stanley Kubrick's classic film "A Clockwork Orange" had left the screen and become real, only this time armed with BlackBerrys.

The victims included, for example, three sons of Pakistani immigrants who had stood on a sidewalk in Birmingham in order to protect a friend's gas station, but who were then mown down by a car and killed. There were other victims, like the 68-year-old man in a plaid shirt who had tried to put out a fire started by rioters and who was subsequently so badly beaten that he later died from his injuries. Then there was the old black woman who, standing on a litter-strewn East London street at night with her back to a wall smeared with obscene graffiti, scolded the rioters: "You lot piss me the fuck off! I'm ashamed to be a Hackney person. 'Cause we're not all gathering together and fighting for a cause -- we're running down Foot Locker."

A Sale from Hell
In other words, it was like a sale from Hell. The greedy paid not in pounds, but with the destruction of their own neighborhoods.

Above all, the rioters zeroed in on brand name products, and if they could attack a policeman or two while they were at it, all the better. "Everyone up and roll to Tottenham," someone calling themselves "English Frank" wrote on Twitter. "Fuck the 5-0 (police). I hope 1 dead tonight (sic)." Meanwhile, someone called "Sonny Twag" tweeted: "Want to roll Tottenham to loot. I do want a free TV. Who wudn't (sic)."

No sooner tweeted than done. But the looting could get even more expensive than that. In the London borough of Camden, a mob broke through the windows of an O2 shop and stole mobile phones, singing as if they were at a soccer match: "O2, O2, O2, O2." In Manchester, phone store T-Mobile, clothes shops French Connection and Miss Selfridge, department store Marks and Spencer, jeweller Swarovski and the newly-opened boutique owned by former Oasis singer Liam Gallagher were all looted. In Clapham in South London, an entire shopping center was taken apart -- the only business that was spared was a bookstore. Not because they wanted to protect the books, but because they had absolutely no interest in them.

People with a romanticised ideal of revolution couldn't believe their eyes. This was not "destroy what is destroying you", but the Marxist idea of commodity fetishism in its most toxic form. Some even tried on looted clothes before stuffing them into their designer bags.

As the inferno raged, politicians, the media and commentators rubbed their eyes in disbelief. At the same time, there were critics who had heard David Cameron declare, before he became Prime Minister, that Great Britain in the first decade of the new millennium had become a "broken society." Once he was in power, however, he didn't want to know.

Education grants for children from low-income families -- abolished. Also abolished in many areas were youth centers and help centers for the unemployed and pregnant. In the Lewisham area alone, five libraries were closed. What happens next? Where does it end? What is the limit? There is none. In the London borough of Haringey, which includes Tottenham, 75 percent of funding for youth services will be cut over the next three years.

So can the " broken society " be repaired? There is an awful lot to be done. Great Britain, a country where the gap between rich and poor is wider than almost anywhere else in the Western world, can still be a miserably tough place to live, especially for the children of the poor. According to a UNICEF study, the UK is ranked as the most child-unfriendly of 21 major industrialized nations. There are 3.4 million children living below the poverty line in Britain, a seriously distressing number. And for anyone who has the misfortune of growing up in a bad neighborhood, beatings and assaults are merely part of everyday life. Some 60 percent of children between the ages of 10 and 15 become a victim of crime at least once.

"Fists to Knives and Knives to Guns"
The average age of those for whom such a violent confrontation is deadly has declined form 24 to 19 in recent years. The escalation of violence among teenagers in inner cities is "like evolution", according to one veteran gangster from Nottingham, "from fists to knives, from knives to guns."

The causes are inane. Often it is to do with drugs, a cell phone or simply a pair of sneakers. This dramatically lower threshold for violence can affect anyone including innocent bystanders, like for example the young man who found it unacceptable that youths had thrown a half-eaten chocolate bar into his sister's car. He confronted them, and was promptly stabbed.

The list of such incidents goes on and on, and it is hardly surprising that the British police already advise people to avoid confronting violent youths. Those who do it anyway, like London writer Andrew Anthony, not only suffer the rage of the thugs attacking them, but also the anger of other passers-by. Anthony had intervened when he saw ten girls attacking the face of another youth with a broken bottle. When the gang had taken flight, he asked another bystander why they had not done anything. The answer came back: "Leave me alone, you pompous arse. Why should I get involved? This whole thing has nothing to do with me."

"No One has Ever Given Me a Chance"
This miserable life of drugs, loitering and weapons in neighborhoods which were devastated by the policies of Margaret Thatcher in the 1980s and never fixed by Tony Blair or Gordon Brown, is the fate of those dubbed "NEETs" in the UK. It stands for "not in education, employment or training", and there are about 1.2 million people who fit the description. They rule their local areas under the law of the jungle, with a deep sense of uselessness in a world where almost every recreational activity costs money; money which they don't have.

Louis James is one of these "NEETs", and reporters from the New York Times spoke to him after he had stolen a pullover worth 120 pounds during the looting. James, 19, lives in North London. The state pays his rent, and he gets 77 pounds jobless benefit every two weeks. He has given up looking for work, he left school at 15 and has only been able to read for the past three years. His mother has barely enough money for herself and her other children, and his father, a heroin addict, is dead. "No one has ever given me a chance; I am just angry at how the whole system works," James said. "They give me just enough money so that I can eat and watch TV all day."

The values that once made Britain an example for the rest of the world were never instilled in James: personal responsibility, individuality, common sense, stoicism, understatement, discipline. Who could have taught him them? His parents? His friends? The elites, who shut themselves off in expensive private schools, then get 70 percent of the well-paid jobs and would probably prefer to visit a leper colony than Tottenham?

The true public tone of the past 30 years has been set by one man: Rupert Murdoch, the Australian media mogul who has shaped modern Britain more than any British politician, businessman or intellectual. Murdoch and Margaret Thatcher together broke the power of the trade unions in the 1980s and forged ahead with the liberalization of the markets. Flanked by the resurgent financial sector in the City of London, Murdoch made greed socially acceptable and turned the Britons into a nation of shoppers in which only one thing counted: "Loads of Money."

Everyone Afraid of Murdoch
Everyone was swept up in this loud, raucous consumer culture. The bankers, of course, with their yachts and helicopter landing pads, but many politicians as well, as the scandal over MP expenses a couple of years ago showed. Labour MPs claimed expenses for glittering toilet seats and silk pillows. It led to the first resignation of a Speaker of the House of Commons since 1695 -- because he had claimed 4,000 pounds worth of taxi trips which his wife had used to go shopping.

They were all scared, not of the voter but of Murdoch and his media empire. When former Prime Minister Gordon Brown was told by the editor of The Sun newspaper that it would run a dubiously-researched article about his son's serious disease the next day, he and his wife spent an afternoon in tears. But after that it was back to business as usual with the Murdochs.

"Get rich quick." "You are what you buy." That was the swirling, money-driven nihilism that descended on London like the infamous fog of former times. Few managed to escape its lure; not the royal family, not parliament, not the police, not the talented singer Amy Winehouse. She too embraced the Paparazzi; fame was an additional drug for her.

"Consumer society relies on your ability to participate in it," says Alex Hiller, a marketing expert at Nottingham Business School. "What we recognise as a consumer now was born out of shorter hours, higher wages and the availability of credit. If you're dealing with a lot of people who don't have the last two, that contract doesn't work." So they just went shopping anyway, like the Beckhams. Except they were wielding a flamethrower rather than a black American Express card.

Financial world dominated by a few deep pockets
by Rachel Ehrenberg - Science News

Economic "superentity" controls more than one-third of global wealth

A central core of extremely powerful actors (red dots) dominates international corporate finance, a new mathematical analysis finds.

Conventional wisdom says a few sticky, fat fingers control a disproportionate slice of the world economy’s pie. A new analysis suggests that the conventional wisdom is right on the money.

Diagramming the relationships between more than 43,000 corporations reveals a tightly connected core of top economic actors. In 2007, a mere 147 companies controlled nearly 40 percent of the monetary value of all transnational corporations, researchers report in a paper published online July 28 at "This is empirical evidence of what’s been understood anecdotally for years," says information theorist Brandy Aven of the Tepper School of Business at Carnegie Mellon in Pittsburgh.

The analysis is a first effort to document the international web of relationships among companies and to examine who owns shares — and how many — in whom. Tapping into the financial information database Orbis, scientists from ETH Zurich in Switzerland examined transnational companies, which they defined as having at least 10 percent of their holdings in more than one country.

Then the team looked at upstream and downstream connections, yielding a network of 600,508 economic actors connected through more than a million ownership ties. This network takes on a bowtie shape, with a large number of diffuse actors in the wings and a few major players tangled up in the tie’s knot. So while it’s true that ownership of publicly held corporations is broadly distributed, says complex systems scientist James Glattfelder, a coauthor of the new work, "take a step back and it’s all flowing into the same few hands."

While any man on the street may have predicted this outcome, the economic literature portrays markets as so dynamic that they lack hot spots of control, Glattfelder says. Researchers aren’t sure what to make of the core’s interconnectedness. On the one hand, it could expose the whole network to risk. "Imagine a disease spreading," says Aven. "If you have a high school where everyone’s sleeping together and one person gets syphilis, then everyone gets syphilis."

But on the flip side, she notes, interconnectedness can lead to better self-policing and positive behaviors, such as fair labor practices or environmentally friendly policies. And even though the status of many players in the analysis has changed drastically since 2007 (now-defunct Lehman Brothers is a key element of the core), the analysis shows that ownership is becoming increasingly concentrated and increasingly transnational, says Gerald Davis of the University of Michigan in Ann Arbor.

Because interpreting and analyzing these kinds of data is difficult, he says, the analysis serves more as "an impression of the moon’s surface you get with a telescope. It’s not a street map." Ownership can be difficult to study internationally because holding shares in a mutual fund doesn’t necessarily mean the same thing in the U.S. as it does in communist China. And even within a single country ownership can be hard to tease out, says economist Matthew Jackson of Stanford University. For example, when an individual invests in a mutual fund or even purchases shares through an institution like Merrill Lynch, the firm is often still the official owner of the assets. And even when shareholders do have voting rights, they may not exercise them.

"This becomes worrisome if everyone is like me and says I’ll let Vanguard do the voting," says Jackson. "Maybe we should be a little bit worried. I don’t know if we should be."

U.S. Inquiry Is Said to Focus on S.&P. Ratings
by Louise Story - New York Times

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

During the boom years, S.& P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

Since the crisis, the agencies’ business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits.

The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

Ed Sweeney, a spokesman for S.& P., said in an e-mail: “S.& P. has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.” S.& P. is a unit of the McGraw-Hill Companies, which is under pressure from some investors and has been considering whether to spin off businesses or make other strategic changes this summer.

The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington. Now members of Congress are investigating why S.& P. removed the nation’s AAA rating, which is highly important to financial markets.

Representatives of the Justice Department and the S.E.C. declined to comment, as is customary for those departments, on whether they are investigating the ratings agencies.

Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case.

The government has brought relatively few cases against large financial concerns for their roles in the housing blowup, and it has closed investigations into Washington Mutual and Countrywide, among others, without taking action.

The cases that have been brought are mainly civil matters. In the spring, the Justice Department filed a civil suit against Deutsche Bank and one of its units, which the government said had misrepresented the quality of mortgage loans to obtain government insurance on them. Another common thread — in that case and several others — is that no bank executives were named.

Despite the public scrutiny and outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries — but not the United States — pay the agencies to receive a rating, the financial market’s version of a seal of approval. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp for investing decisions — which bolstered the agencies’ power.

A successful case or settlement against a giant like S.& P. could accelerate the shift away from the traditional ratings system. The financial reform overhaul known as Dodd-Frank sought to decrease the emphasis on ratings in the way banks and mutual funds invest their assets. But bank regulators have been slow to spell out how that would work. A government case that showed problems beyond ineptitude might spur greater reforms, financial historians said.

“I think it would have a major impact if there was a successful fraud case that would suggest there would be momentum for legislation that would force them to change their business model,” said Richard Sylla, a professor at New York University’s Stern School of Business who has studied the history of ratings firms.

In particular, Professor Sylla said that the ratings agencies could be forced to stop making their money off the entities they rate and instead charge investors who use the ratings. The current business model, critics say, is riddled with conflicts of interest, since ratings agencies might make their grades more positive to please their customers.

Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid upward of $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, and several hundreds of thousands of dollars for the more complex structures known as collateralized debt obligations.

Ratings experts also said that a successful case could hamper the agencies’ ability to argue that they were not liable for ratings that turned out to be wrong.

“Their story is that they should be protected by full First Amendment protections, and that would be harder to make in the public arena, in Congress and in the courts,” said Lawrence J. White, another professor at New York University’s Stern School of Business, who has testified alongside ratings executives before Congress. “If they mixed business and the ratings, it would certainly make their story harder to tell.”

The ratings agencies lost a bit of ground on their First Amendment protections in the recent financial reform bill, which put the ratings firms on the same legal liability level as accounting firms, Professor White said. But that has yet to be tested in court.

People with knowledge of the Justice Department investigation of S.& P. said investigators had made references to several individuals, though it was unclear if anyone would be named in any potential case. Investigators have been asking about a remark supposedly made by David Tesher about mortgage security ratings, two people said. The investigators have asked witnesses if they heard Mr. Tesher say: “Don’t kill the golden goose,” in reference to mortgage securities.

S.& P. declined to provide a comment for Mr. Tesher.

Several of the people who oversaw S.& P.’s mortgage-related ratings went on to different jobs at McGraw-Hill, including Joanne Rose, the former head of structured finance; Vickie Tillman, the former head of ratings; and Susan Barnes, former head of residential mortgage bond ratings. Investigators have told witnesses that they are looking for former employees and that has proved difficult because so many crucial people still work at the company.

One former executive who has been mentioned in investigators’ interviews is Richard Gugliada, who helped oversee ratings of collateralized debt obligations. Calls to his home were not returned.

Is the SEC Covering Up Wall Street Crimes?
by Matt Taibbi

A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation's worst financial criminals.

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – "Hey, chief, didja know this guy had two wives die falling down the stairs?" No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed.

By whitewashing the files of some of the nation's worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – "18,000 ... including Madoff," as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency's records – "including case files relating to preliminary investigations" – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term "Orwellian," devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation.

Amazingly, the wholesale destruction of the cases – known as MUIs, or "Matters Under Inquiry" – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission's internal website. "After you have closed a MUI that has not become an investigation," the site advised staffers, "you should dispose of any documents obtained in connection with the MUI."

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission's records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission's improprieties.

As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC's inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating.

In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.

Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."

The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It's a symptom of the agency's terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America's banks fell and hit their head on a big pile of Wall Street's money – a blow from which the agency has never recovered.

"From what I've seen, it looks as if the SEC might have sanctioned some level of case-related document destruction," says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. "It doesn't make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law."

How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency's most sordid secrets to Congress? In a way, they asked for it.

On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency's staff with the subject line "Lawyers Behaving Badly." In it, Khuzami asked his subordinates to report any experiences they might have had where "the behavior of counsel representing clients in... investigations has been questionable."

Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers "behaving badly" anywhere, including within the SEC. And he had a story to share he'd kept a lid on for years. "Mr. Khuzami may have gotten something more than he expected," Flynn's lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.

Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn's career, back in 2000, when he was working with a group of investigators who thought they had a "slam-dunk" case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank's CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.

A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding. 

In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty of übernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an "Action Memorandum" to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche. 

Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued that übernahmegespräche only means "advanced stage of discussions." Nevertheless, the request to proceed with the case was approved by several levels of the SEC's staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.

But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, "Inquiry in the above-captioned matter has been terminated." The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency's usual practice, it provided no explanation for its decision to close the case.

On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency's director of enforcement was handed a cushy, high-priced job at Deutsche.

Deutsche's influence in the case didn't stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn's new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami's own mentor.

The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency's enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.

Even a cursory glance at a list of the agency's most recent enforcement directors makes it clear that the SEC's top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency's enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients.

He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as "SEC West." McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker's former protégé at Deutsche Bank.

This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan's move to buy up Bear Stearns.

In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency's ethics office. "Every lawyer in Texas and beyond is going to get rich on this case, OK?" the official later explained. "I hated being on the sidelines."

Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn't approve an investigation, the documents often wound up being destroyed – as Flynn would later discover.

After the Deutsche fiasco over Bankers Trust, Flynn continued to work at the SEC for four more years. He briefly left the agency to dabble in real estate, then returned in 2008 to serve as an attorney in the enforcement division. In January 2010, he accepted new responsibilities that included helping to manage the disposition of records for the division – and it was then he first became aware of the agency's possibly unlawful destruction of MUI records.

Flynn discovered a directive on the enforcement division's internal website ordering staff to destroy "any records obtained in connection" with closed MUIs. The directive appeared to violate federal law, which gives responsibility for maintaining and destroying all records to the National Archives and Records Administration. Over a decade earlier, in fact, the SEC had struck a deal with NARA stipulating that investigative records were to be maintained for 25 years – and that if any files were to be destroyed after that, the shredding was to be done by NARA, not the SEC.

But Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency's staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence.

To read through the list of dead and buried cases that Flynn submitted to Congress is like looking through an infrared camera at a haunted house of the financial crisis, with the ghosts of missed prosecutions flashing back and forth across the screen. A snippet of the list:

One MUI – case MNY-08145 – involved allegations of insider trading at AIG on September 15th, 2008, right in the middle of the insurance giant's collapse. In that case, an AIG employee named Jacqueline Millan reported irregularities in the trading of AIG stock to her superiors, only to find herself fired. Incredibly, instead of looking into the matter itself, the SEC agreed to accept "an internal investigation by outside counsel or AIG." The last note in the file indicates that "the staff plans to speak with the outside attorneys on Monday, August 24th [2009], when they will share their findings with us." The fact that the SEC trusted AIG's lawyers to investigate the matter shows the basic bassackwardness of the agency's approach to these crash-era investigations. The SEC formally closed the case on October 1st, 2009.

The episode with AIG highlights yet another obstacle that MUIs experience on the road to becoming formal investigations. During the past decade, the SEC routinely began allowing financial firms to investigate themselves. Imagine the LAPD politely asking a gang of Crips and their lawyers to issue a report on whether or not a drive-by shooting by the Crips should be brought before a grand jury – that's basically how the SEC now handles many preliminary investigations against Wall Street targets.

The evolution toward this self-policing model began in 2001, when a shipping and food-service conglomerate called Seaboard aggressively investigated an isolated case of accounting fraud at one of its subsidiaries. Seaboard fired the guilty parties and made sweeping changes to its internal practices – and the SEC was so impressed that it instituted a new policy of giving "credit" to companies that police themselves. In practice, that means the agency simply steps aside and allows companies to slap themselves on the wrists. In the case against Seaboard, for instance, the SEC rewarded the firm by issuing no fines against it.

According to Lynn Turner, a former chief accountant at the SEC, the Seaboard case also prompted the SEC to begin permitting companies to hire their own counsel to conduct their own inquiries. At first, he says, the process worked fairly well. But then President Bush appointed the notoriously industry-friendly Christopher Cox to head up the SEC, and the "outside investigations" turned into whitewash jobs. "The investigations nowadays are probably not worth the money you spend on them," Turner says.

Harry Markopolos, a certified fraud examiner best known for sounding a famously unheeded warning about Bernie Madoff way back in 2000, says the SEC's practice of asking suspects to investigate themselves is absurd. In a serious investigation, he says, "the last person you want to trust is the person being accused or their lawyer." The practice helped Madoff escape for years. "The SEC took Bernie's word for everything," Markopolos says.

At the SEC, having realized that the agency was destroying documents, Flynn became concerned that he was overseeing an illegal policy. So in the summer of last year, he reached out to NARA, asking them for guidance on the issue.

That request sparked a worried response from Paul Wester, NARA's director of modern records. On July 29th, 2010, Wester sent a letter to Barry Walters, who oversees document requests for the SEC. "We recently learned from Darcy Flynn... that for the past 17 years the SEC has been destroying closed Matters Under Inquiry files," Wester wrote. "If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report within 30 days."

Wester copied the letter to Adam Storch, a former Goldman Sachs executive who less than a year earlier had been appointed as managing executive of the SEC's enforcement division. Storch's appointment was not without controversy. "I'm not sure what's scarier," Daniel Indiviglio of The Atlantic observed, "that this guy worked at an investment bank that many believe has questionable ethics and too cozy a Washington connection, or that he's just 29." In any case, Storch reacted to the NARA letter the way the SEC often does – by circling the wagons and straining to find a way to blow off the problem without admitting anything.

Last August, as the clock wound down on NARA's 30-day deadline, Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn's notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability. "We could say that we do not believe there has been disposal inconsistent with the schedule," Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.

"There are implications to admit what was destroyed," Storch chimed in. It would be "not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability." When the subject of how many files were destroyed came up, Storch answered: "18,000 MUIs destroyed, including Madoff."

Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. "The Division is not aware of any specific instances of the destruction of records from any other MUI," the letter states. "But we cannot say with certainty that no such documents have been destroyed over the past 17 years." The letter goes on to add that "the Division has taken steps... to ensure that no MUI records are destroyed while we review this issue." Translation: Hey, maybe records were destroyed, maybe they weren't. But if we did destroy records, we promise not to do it again – for now.

The SEC's unwillingness to admit the extent of the wrong doing left Flynn in a precarious position. The agency has a remarkably bad record when it comes to dealing with whistle-blowers.

Back in 2005, when Flynn's attorney, Gary Aguirre, tried to pursue an insider-trading case against Pequot Capital that involved John Mack, the future CEO of Morgan Stanley, he was fired by phone while on vacation. Two Senate committees later determined that Aguirre, who has since opened a private practice representing whistle-blowers, was dismissed improperly as part of a "process of reprisal" by the SEC. Two whistle-blowers in the Stanford case, Julie Preuitt and Joel Sauer, also experienced retaliation – including reprimands and demotions – after raising concerns about superficial investigations. "There's no mechanism to raise these issues at the SEC," says another former whistle-blower. Contacting the agency's inspector general, he adds, is considered "the nuclear option" – a move "well-known to be a career-killer."

In Flynn's case, both he and Aguirre tried to keep the matter in-house, appealing to SEC chairman Mary Schapiro with a promise not to go outside the agency if she would grant Flynn protection against reprisal. When no such offer was forthcoming, Flynn went to the agency's inspector general before sending a detailed letter about the wrongdoing to three congressional committees.

One of the offices Flynn contacted was that of Sen. Grassley, who was in the midst of his own battle with the SEC. Frustrated with the agency's failure to punish major players on Wall Street, the Iowa Republican had begun an investigation into how the SEC follows up on outside complaints. Specifically, he wrote a letter to FINRA, another regulatory agency, to ask how many complaints it had referred to the SEC about SAC Capital, the hedge fund run by reptilian billionaire short-seller Stevie Cohen.

SAC has long been accused of a variety of improprieties, from insider trading to harassment. But no charge in recent Wall Street history is crazier than an episode involving a SAC executive named Ping Jiang, who was accused in 2006 of enacting a torturous hazing program. According to a civil lawsuit that was later dropped, Jiang allegedly forced a new trader named Andrew Tong to take female hormones, come to work wearing a dress and lipstick, have "foreign objects" inserted in his rectum, and allow Jiang to urinate in his mouth. (I'm not making this up.)

Grassley learned that over the past decade, FINRA had referred 19 complaints about suspicious trades at SAC to federal regulators. Curious to see how many of those referrals had been looked into, Grassley wrote the SEC on May 24th, asking for evidence that the agency had properly investigated the cases.

Two weeks later, on June 9th, Khuzami sent Grassley a surprisingly brusque answer: "We generally do not comment on the status of investigations or related referrals, and, in turn, are not providing information concerning the specific FINRA referrals you identified." Translation: We're not giving you the records, so blow us.

Grassley later found out from FINRA that it had actually referred 65 cases about SAC to the SEC, making the lack of serious investigations even more inexplicable. Angered by Khuzami's response, he sent the SEC another letter on June 15th demanding an explanation, but no answer has been forthcoming.

In the interim, Grassley's office was contacted by Flynn, who explained that among the missing MUIs he had uncovered were at least three involving SAC – one in 2006, one in 2007 and one in 2010, involving charges of insider trading and currency manipulation. All three cases were closed by the SEC, and the records apparently destroyed.

On August 17th, Grassley sent a letter to the SEC about the Flynn allegations, demanding to know if it was indeed true that the SEC had destroyed records. He also asked if the agency's failure to produce evidence of investigations into SAC Capital were related to the missing MUIs.

The SEC's inspector general is investigating the destroyed MUIs and plans to issue a report. NARA is also seeking answers. "We've asked the SEC to look into the matter and we're awaiting their response," says Laurence Brewer, a records officer for NARA. For its part, the SEC is trying to explain away the illegality of its actions through a semantic trick. John Nester, the agency's spokesman, acknowledges that "documents related to MUIs" have been destroyed. "I don't have any reason to believe that it hasn't always been the policy," he says. But Nester suggests that such documents do not "meet the federal definition of a record," and therefore don't have to be preserved under federal law.

But even if SEC officials manage to dodge criminal charges, it won't change what happened: The nation's top financial police destroyed more than a decade's worth of intelligence they had gathered on some of Wall Street's most egregious offenders. "The SEC not keeping the MUIs – you can see why this would be bad," says Markopolos, the fraud examiner famous for breaking the Madoff case. "The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, 'You know, I've had five MUIs – they're probably doing something. Let's go tear the place apart.'" Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.

Regulation isn't a panacea. The SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago. And even if SEC staffers from top to bottom had been fully committed to rooting out financial corruption, the agency would still have been seriously hampered by a lack of resources that often forces it to abandon promising cases due to a shortage of manpower. "It's always a triage," is how one SEC veteran puts it. "And it's worse now."

But we're equally in the dark about another hypothetical. Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs. What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm's executives were suspected of insider trading in September 2008?

It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to  garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. "Street-level law enforcement is increasingly data-driven," says Bill Laufer, a criminology professor at the University of Pennsylvania. "For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation."

We'll never know what the impact of those destroyed cases might have been; we'll never know if those cases were closed for good reasons or bad. We'll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street's dirty laundry and dumped it in a lake, never to be seen again.

Editor’s Note: The online version of this article has been amended from the print version to reflect that the SEC’s case against Deutsche Bank proceeded beyond a Matter of Inquiry to a full-blown investigation.


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Ric said...

The reason why I wanted to revisit the stats is that it's important to understand to what extent what we see happening is a structural

Great overview, Ilargi. Thanks.

Ashvin said...

Quite a boring week on the roller coaster, huh? No sharp turns, curls or double reverse flips; just straight down. A lot of people (on ZH) are saying another week of continued selling will provide Benny B and crew to slap down a healthy dose of QE3 at Jackson Hole. I'm still not persuaded that anything has changed since a few weeks ago, when 3 Fed members dissented from a decision to simply keep rates low for another 2 years. Backdoor swap lines with Europe? Sure. But QE3 asset purchases of even a few trillion would probably wear off on the markets before TPTB open their Christmas presents, aka envelopes with big fat bonus checks.

zenyata said...

Thanks Ilargi for pointing out the one step forward and (at least) two backwards nature of what we are currently witnessing. Of course the desperate cheerleading from the likes of CNBC constantly points out the 400 point stock market gains as "happy days are here again" events - conveniently ignoring the previous day(s) where the market lost at least double that amount.

Re: the Larry Kudlow editorial - he marches out his typical platitudes about getting rid of regulations and putting Americans back to work... Doing what Larry ? Do we need a bunch more financial analysts, banksters, and hedge fund managers ? Or do you think we should make the effort and the Masters of the Universe should cough up some money for jobs in fields that are productive and really matter ? Yeah didn't think so - investment in jobs that are part of the long drawn out components of "progress" are not nearly sexy enough for those used to get rich quick scams of the moneychangers and house flippers...

Jack said...

Hi Ilargi
Thanks for that helpful post.
I am not sure but in the 1930 depression the market got wiped out in one day or 2 days and now it is happening in intervals of about 500 800 points a week.
At least those people who are waking up to this thing late are having a chance to recoup some money and already most stocks have lost so much that already it would be too late to get out.
This depression is going to be different and for sure there will be many things that will be like the last depression but it will have things that will be unique

scrofulous said...

"We’ll do a gloating chest-thumping session of schadenfreude on of these days. But not today."

A little humility might be more in order, Chee! For such an erudite economic dynamic duo you guys could not even figure out that they would push the effects of the mortgage collapse down the road as far as possible. Only lately have you started jumping up and down about cans being kicked down the road, this after all your calls about a double dip went further and further west. I guess you should have done a bit of studying and read Bernanke's book, instead of playing cowboys and bond vigilantes, HO, HO!

scandia said...

@muchtooloose, " A little humility might be in order " for you too, for all of us who sit back while Ilargi and Stoneleigh put themselves out front.

SecularAnimist said...

In case anybody didn't know

Nassim said...

The stampede to sell gold is so intense that shops buying the precious metal are struggling to cope and are even having to turn some disappointed customers away.

Tokyo struggles to keep pace with gold rush

From today's front page:
Put all that together and you get the full Japanese package: weak growth, weak banks, weak policy response. That is not a good recipe for shares. Today Tokyo's Nikkei market is at less than 25% of its level at the peak of the stock market boom in the late 1980s.

I guess the Japanese are not the world's smartest investors.

BTW, the family SMSF (self-managed superannuation fund) gave in its end-of-year accounts recently (EOY is 30th June in Australia). The accountant is very worried as it is overweight in PM's. He referred me to their investment manager to get some advice about putting it to work in the mining sector. :)

Greenpa said...

As Tom Lehrer put it "It's been a good year for the war buffs..."

A fun military advance; noted on the front page by the BBC (the brits are definitely war buffs) - but I can't find it anywhere else in the MSM:

"The US Office of Naval Research says that it has successfully tested a new type of explosive material that can dramatically increase weapons' impacts.

"Missiles made from the high density substance can explode with up to five times the energy of existing armaments.

"The material mixes metals and polymers and is said to be as dense as steel but have the strength of aluminum.

"US Navy scientists say that projectiles made from the new compound are less likely to kill innocent bystanders."

Basically the bullet itself is an explosive. The "less bystander death" idea is; if the bullet explodes, it can't carry over/through and hit something behind.

Thank goodness.

Anonymous said...

You're not going to beat gold. Not you, not anybody.

We are in it for real. We are in it for the long haul. We are in it until the end.

What about this don't you understand?

But you are so arrogant in your beliefs that you willingly lead people to the dollar graveyard.


Phlogiston Água de Beber said...


It may be news to some that capital hates labor, but it is certainly not that big a secret. The killing of laborers at the behest of the Mammonitic clones of Narcissus have been going on roughly since their emergence as a class. In what we now like to think of better times, any increase in unemployment was nearly always met with a nice bump at the stock markets. I commend you for speaking its name.

Some good info on various things we've been wearing out the intertubes about were posted today.

Michael Hudson on rating agencies.
The Case Against Rating Agencies

Uri Avnery on what I suspect is a pseudo false flag event.
The Return of the Generals

What Gallinazo's associates are up to these days. :)
Dances With Vultures

Greenpa said...

re: UK riots: my understanding is that historically, in slave revolts- typically the slaves savage their fellow slaves; not their masters.

any of you erudite historians got information on that?

Phlogiston Água de Beber said...

GS said...
But you are so arrogant in your beliefs that you willingly lead people to the dollar graveyard.

I'm just guessing here, but the implied message seems to be that there are no graveyards on the Yellow Brick Road. Should your wet dream come true, you will find that you were wrong. They will be real graveyards rapidly filling up with real dead people.

Good luck with that.

Skip Breakfast said...


It's possible that unforeseen events send gold to infinity and beyond. But most gold bugs are basing their predictions on currently available information. And as such, I believe they will be disappointed.

Imagine: the worst has just happened (which is why you were hoarding gold in the first place). You've lost your job. Your partner lost her/his job. Your friend and neighbour hasn't had a job in two years. Your 75-year old parents' home, which was their retirement nest egg, is worth 20% of what it was five years ago, so they are in no position to give you a loan, since the bank won't give them a loan. And your rent is due. Not to mention groceries in the fridge would be nice, and gas in the car. So you have lost almost ALL capacity to make/get/borrow cash. Poof. It's gone. And it doesn't take many days for you or your family to get hungry. You go to the bank to withdraw some money for food. But the bank is closed, and it's Tuesday in the middle of the afternoon. The newspaper says the bank will be closing for several days, "until confidence in the marketplace is restored." Other journalists are speculating your bank is bust, and that little bit of cash you have not put into gold might be gone. Poof. The bank might re-open and give you 25 cents on the dollar for your deposits. When it does open, you take out as much money as you can. But you still have your gold. Great. You need it. Because y ou need to eat, drive and sleep somewhere warm without any income to maintain that lifestyle. So you sell it. But you're not the only one. Everyone has had to sell "some." Just a little bit, you tell yourself, to tide you over. To put food in the fridge. That's what every gold bug tells themselves. Sure, gold just dropped some 30% in value, but it will go up again when the "real" problems start. As if starvation and eviction aren't real problems. You do find a buyer for your gold. And maybe it's better than the measly 25 cents on the dollar the bank is covering. Except a couple months later you need more food, and more rent, and you still don't have a job, and you have a surprise expense beyond normal costs, like a dental emergency, or a theft for which you had no insurance because none is practicably available. And you sell more gold. Good thing you have more gold. Except it's gone down another 30%. That's okay, it will go up again when the real problems start.

Meanwhile, your uncle--the real "crazy" one--the one who did things against the heard, did not buy gold. Because make no mistake every "shoe-shine girl and boy" is buying gold at the moment. I know this because the really dumb lady next door gloated yesterday over the fence how much her bullion has gone up. But your crazy uncle didn't. He socked away cash. Bills that the banks no longer have anymore apparently. Bills you don't have. And they're going further than they used to. When he buys gas for the car, he's surprised to find that the cost has gone down since last week. Because a lot less people have any cash for gas. And gas stations still need to sell the stuff. Your crazy uncle doesn't need to find a buyer for his cash before he shops for food or pays his rent. He doesn't need to talk the landlord into accepting a single gold coin in lieu of six months rent (at which point your landlord will look at you like your nuts, cuz he's hungry too, and you might has well be offering him your awesome big screen TV set).

The world is unpredictable. But it's hard for me to see how the gold-bug's sure-fire scenario is 100% guaranteed to play out. There is no asset that is a sure bet forver. Remember real estate?

Nassim said...

Lest anyone should misinterpret my previous posting.

I am simply trying to say that "investment advisers" hate PM's. As to whether PM's are a good idea or not, I suspect that they are better than mining shares - I don't claim to know any more than that.

Nassim said...

Skip Gold,

... make no mistake every "shoe-shine girl and boy" is buying gold at the moment.

Sorry, I had to laugh when I saw that one.

Joe in NC said...

We are in it until the end.
What about this don't you understand?

Have you taken a peek at a ten year chart of gold recently? The recent upward thrust sure looks like it may be the parabolic blow off top?

Have you been to Zero Hedge this afternoon or evening? No chest-thumping in the headlines. Do you suppose this could be because Tyler Durden understands margin calls and blow off tops and most importantly - their theme needs to change to the "Bear Market"?

Partial Disclosure: I currently own physical gold and mining stocks. Just waiting for the "correction".

jal said...

@ Nassim

I guess these scoundrels are the same everywhere.

Why did the financial advisors not tell their clients that "Its time to take out some profits. The indices that I follow are going negative".

Instead of getting people out of the market here is what they are saying. ( A real honest to goodness e-mail.)

The one thing to keep in mind is that income producing investments will still continue to be strong as most companies have strong balance sheets so I do believe this correction will not be as long or as severe as 2008. If you have any questions or want to come in to review where your investments are at give me a call and we can book some time.
Have a great weekend!

A few of the factors that had investors heading for the exits:

(He then list what were all know from reading I&S and the reasons put out by MSM.
That's why he gets a pay check ... to keep you from taking your money out of his hands.)


Groov'nor said...

Now the second leg is on its way down we are seeing commentators increasingly spit out the "revolution is nigh" claptrap. True enough, if one uses a broad definition of revolution the signs are all around us: Tunisia, Lybia, Egypt, Yemen, Bahrain, Middle-East et al. In all these countries, autocratic regimes are being challenged by vocal tracts of the population, with varying degrees of success. But what exactly were these challenges? They were simple demands out of desperation: those people blamed all their misery on bad governance. Take the evil away, and life will get better... somehow. See, these so-called revolutions don't have a clear objective, they don't have a brain, they don't have an aim. They follow the gut feeling of the masses and when the masses decided they had enough of that old government, they threw it out. Now what? No one knows. The head of government and his cadre are gone. But the government remains, the public workers are still the same, the policemen are the same, everything is just the same. This is not a revolution, this is a forced face-lift on a seventy years old grandmother.

Of course, that happened and is happening in the Middle East, but the Middle East is nowhere near Europe, much less the United States. The illiterate masses subject to chronically pauper States are not the semi-literate masses subject to once-rich States of the West. And that's just on the surface. Profound differences in temperament, political structure, culture and religion make this Spring a very localized event. That does not mean there is a strong tendency towards global unrest, it just means that kind of government face-lift is specific to the Arab/Berber nations.

There are a good reasons for why we won't see anything close to this kind of face-lift in the West. We will see riots, we will see cities burning, we will see mass protests over and over again. True change? Only in your wildest dreams. Governments in the Western world are entrenched and fortified to an extent it will take full economic collapse plus a couple of massive catastrophes to create the possibility for a regime change. Massive protests and riots will only incite those who call the chips to force the government to become a little bit more pro-active, which means turning into full-fledged police states. Unrest is bad for business, the proles must be shown their places by force, if necessary. And by force they will. Don't ever doubt the effectiveness of a repressive government when they are fully backed by the super-rich. Not that they are fundamentally threatened anyway. There is no underlying ideology behind the protests, no grandiose plans for the future except the now meaningless word of "change". People want change... the only problem they don't know what kind of change they want or if they do, they can't agree on which to push.


Groov'nor said...


The worst that will happen in Western countries will be elected public officials forced to resign, leaving the main body of the government and its backers largely intact and quite content indeed. See, in the Middle East the deposed leaders were in fact the leaders before their heads were put at a premium. In the West, the leaders are merely figure heads who hold little power whatsoever. Not even a face-lift, a facial massage instead.

No, there won't be anything close to revolutions in the Western world. What we will see is a massive drive towards puppet democracy reinforced by hourly doses of propaganda. It won't change our society that much, except free speech will be considerably less free. The malcontents will be tamed and put on their places. No mention of them will ever reach the official and only media around. There will be no revolution and we will hardly notice the system collapsing around us. There will be misery, there will be hunger but again, there was hardly any period of human history in which those were absent. Poverty, even abject poverty, is not at odds with stability. Once people learn that fighting is useless, once they don't have the energy, the food, even the anger to fight back, they will accept their lot in life. And when they do revolt, it will be to destroy and never to build. Not that it will matter, for the Lords will never suffer an uppity peasant.

Archie said...

@skip breakfast

Good on you sir/madam! Shorter version of your parable to GS:

Shit happens and are you ready to deal with it? Really? Seriously? For real?

Jim R said...

Skip Breakfast:
Interesting story. I think silver/gold will still be tradeable for stuff going forward. Probably moreso than greenbacks, eventually. Cash will also be recognized for a while.

But with that said, a broken economy will mean worse than "can't afford food". It will likely mean that the big box stores, and the big grocery stores, will have empty shelves. Rent will be a problem if your landlord lives nearby. Mortgage payments may or may not be a problem, and could conceivably just stop being a problem when the servicer goes bust. Medical issues will simply go untreated unless you personally know a doctor.

So yeah, have some cash around. But it still ain't gonna be pretty.

Archie said...

@ Groov'nor

Thanks for your idiotic wisdom. Now move along and infect other websites. Better yet, give us your home address so that we can rub your nose in it when TSHTF and you are exposed to be just another pompous asshole looking for attention.

MrJones said...


Interesting peace you wrote there. But my imagination runs a different coarse. One that is more of a reflection of 1793 to 1794 in France. Where the elite are introduced to her lady the Guillotine. The great US Army can not quell the insurgents in far away lands. I do not visualize them doing any better in their own back yards. Don't assume the gold bugs are only about gold. I could be that is what they are only vocal about. I suspected they are acquiring more then just gold. A clever gold bugs would acquire many things beside gold.

Phlogiston Água de Beber said...

@ Groov'nor

That was a lot of words to deliver a quite anticlimactic conclusion. I am going to assert that most of the people I follow on the collapse of energy, money and hope think that will be quite revolutionary enough to satisfy most any notion of radical change. No massed infantry battles required.

During and after this revolution there will be violence. Most often it will be peasant on peasant. Just as it is now and has always been. The "Lords" will hunker down in their fortresses and hope like hell we don't find a way in.

The gravest danger will often be the gang of teens and twenty-somethings armed with automatic weapons manning a roadblock and searching every passerby for anything valuable or signs of belonging to the wrong group. If you saw any of the Al Jazeera coverage of the recent struggle in Cote d'Ivoire you might have seen such actions.

Jim R said...

It's worth adding:
Stoneleigh and Ilargi have not categorically stated that you must not own any gold. What they are trying to do is to save folks from putting their entire life savings into metals.

The problem being that, as of now, metals are not recognized in trade -- they currently have to be converted back into money, an awkward process involving a broker. Do not underestimate the longevity of the dollar economy.

Furthermore, as long as we have electronic communications, a _credit card_ will be a good thing to have. If the network breaks down, then cash will be a good thing, while gold/silver will be relatively illiquid. It may take ten years or so before the survivors of this correction are routinely trading in metal coins.

Spence Cooper said...

Great article, Ilargi. All we hear on CNBC is how healthy and well capitalized US banks are compared to European banks.

But like Mish, your silly, ego-driven textbook insistence on deflation and gold bashing is down right sad.

You've always claimed that when this day came everyone would run to the dollar and completely ditch gold; now you're claiming the run to gold is a knee jerk reaction, despite gold's continious, steady ascent in price for over three years.

Inflation and deflation can occur simultaneously. Yeah, sure housing is down, but the latest Rasmussen Poll claims 93% are paying more for groceries than a year ago. Food prices are up 40 Percent YOY. And for the 3rd month in a row, even Ben's bogus measurement of CPI has increased 3.6% year-over-year. Real CPI is 12% according to John Williams.

Commodity inflation has reduced corporate profit margins.

And all the while Gold (up over $600/oz since last August)keeps on climbing; that hardly represents a recent "knee jerk" reaction.

Only a compete idiot would dump money into treasuries as a safe haven when they can buy gold.

scrofulous said...

I.M Nobody, Skip breakfast.

Gold has been something to cancel debts and purchase goods for thousands of years, the current fiat system has lasted, what, 40 years? That I think is about par, or better ,for fiat.

I hold a small amount of gold, but, amongst other things, I also hold cash and am not above investing it, as well I have a garden and, because I am wary of those who proclaim to know the future, I try in my limited way to think for myself.


Scandia said:

"@muchtooloose, " A little humility might be in order " for you too, for all of us who sit back while Ilargi and Stoneleigh put themselves out front.

I quite agree with you and I wish I had more humility. It protects one from taking ones opinions over seriously. I will leave the out frontness of I&S for you to judge the value of. It would, I think, depend on one's situation.

Psalm 146:

Put not your trust in princes,
nor in the son of man,
in whom there is no help.
His breath goeth forth,
he returneth to his earth;
in that very day his thoughts

Chas said...

I think that the key through all of this mess is to stay employed. Unfortunately, my company will likely go through bankruptcy this year and it's uncertain how it will impact me. When I moved for the job, I wanted to rent, but my wife wanted to buy. You can guess what we did, sigh.

Phlogiston Água de Beber said...


The problem is with humankind and not gold or any other monetary thing is going to cure it. But with regard to gold's special properties. As an ornamental metal, it loves to be seen. As a trade intermediary, it loves to hide.

Since you are a person who has thoughts, I'm surprised that you give paper money such short shrift. It has been around quite a long time. It has been a long time since the big trading societies relied on PM coins for all their transactions. There are quite a few places on Planet Terra where it appears that gold has seldom if ever been used as money.

What money is made of hardly matters. What matters is who has it and who doesn't. That's the test we are currently failing. Our ancestors failed the same test when gold was money. In fact it is much easier to fail that test with gold. Because all there is is all there is and as I said above, it likes to hide. Mostly in the counting houses. I humbly suggest that you try mulling over this thought. The problem is in us, not in our money.

Archie said...

Chas said:

"When I moved for the job, I wanted to rent, but my wife wanted to buy. You can guess what we did, sigh."

It is the proverbial "water under the bridge", my friend. What matters most is what you (and your wife, I suppose), do next. And, in case you were unaware, you have lots and lots of company.

scrofulous said...

I.M. you say: "As a trade intermediary, it [gold] loves to hide."

And I quite agree, good money is driven out by bad money. Would you put, in your wee stash, money that can be counterfeited?

Chas said...

@ Archie

Fortunately, real estate is relatively cheap in my area. I bought a nice 90 yr old 2700 sqft, 4 bd, 2 ba house, in a great neighborhood for $145K including new appliances.

jal said...

@ Groov'nor

I assume that in your timeline scenario that you will not be around to see the total destruction.

I hope that you are prepared for an accelerated time line.


snuffy said...

This is one of the more interesting post...the comment section had some good links I just finished and i recommend to everyone, especially a good rant/interview with Dimitry Orlov,from his well-known hideout on-the-bay in Boston.Follow the links on the interview for some high-grade doomer-porn by "Transition Voice".[I had to take a break and go work enough to get my endorphin level back to feel human after reading a bunch of that stuff...]

Its staring to look like the financially sick countries of Europe will be the cause/trigger that will most likely set off the reality bomb no one wants to see...

Bee good,or
Bee careful


snuffy said...

the previous comment section,

Phlogiston Água de Beber said...


I didn't mention anything about bad money chasing out good money or counterfeiting. Gold hides even when it is the only money. Because it has intrinsic value, most people will find it hard to part with it. The lucky among us don't think twice about trading a banknote for a bottle of whiskey. Slapping down a gold coin might not come so easily to a person that doesn't have many of them. Even the rich bastard with tons of it will be reluctant to part with any. It was not for nothing that our ancestors kept that story about Midas alive.

If you are suggesting gold can't be counterfeited, I'll refer you to the conversations regarding plated tungsten.

Anonymous said...


I received an automated call touting inflation, the falling dollar and promoting information about "learning what gold can do for you..."

Reminds me of all those NINJA loan quote calls I received way back when.

Having said that, those calls lasted a loooooong time.

Unlike Ilargi, I think gold can keep rising for a while. We still have people who can access the "fruits" of the world's largest credit bubble and they are spending those "fruits" on gold right now.

Like Ilargi, I think that game eventually ends one day and most gold bag holders will end up hurt - just like they always do.

Then again, I think we all end up hurt when that time rolls around.

SecularAnimist said...

"The problem is in us, not in our money."
Money makes the heart grow less fond...
"[P]articipants' personal performance improved, and
interpersonal relationships and sensitivity towards others declined, when they were reminded of money."
"all participants who were reminded of money demonstrated behaviors consistent with decreased interpersonal skills. Specifically, those participants who were exposed to money spent less time helping
a person who needed it, sat farther away from another person and preferred solitary activities. In addition, they showed preferences for working alone and asked for help less frequently." Tuesday, December 05, 2006
The price of money - selfishness
"A series of experiments have shown that merely thinking about or looking at money changes the way people behave, causing them to be more selfish"
"[P]articipants left with more money after a Monopoly game helped pick up fewer pencils dropped by a passer-by; participants primed
with money-related sentences gave less money to charity; and participants sat in front of a money-themed computer screen-saver chose to sit further away from a another participant they were due
to chat with."
Scientists Find that Low Self-Esteem & Materialism Go Hand in Hand
Daily Galaxy
November 13, 2007
"Researchers have found that low self-esteem and materialism are not just a correlation, but also a causal relationship where low self esteem increases materialism, and materialism can also create
low self-esteem. The also found that as self esteem increases, materialism decreases."
February 10, 2006 at 03:31 PM
Buying crap makes you sad!
"Depressing new research proves what many Americans have learned the hard way: Buying more stuff doesn't make you happier. Instead, it often has the opposite effect."
"In her book "Born to Buy" (,
Boston College professor Juliet Schor studied "consumerist" children and found them far more likely to suffer from low self-esteem, depression, anxiety and even constant headaches
and stomachaches."
Materialism is bad for you, studies say
By Carey Goldberg The Boston Globe
"Using statistics and psychological tests, researchers are nailing down what clerics and philosophers have preached for millennia: Materialism is bad for the soul. Only, in the new
formulation, materialism is bad for your emotional well-being. In recent years, researchers have reported an ever-growing list of downsides to getting and spending - damage to relationships and self-esteem, a heightened risk of depression
and anxiety, less time for what the research indicates truly makes people happy, like family, friendship and engaging work. And maybe even headaches."
Are Our Bosses Becoming Meaner?
The staggering gap between CEO and worker pay has leftAmerica's workplaces still more nasty, brutish, and short.
July 17, 2010
"We already know, from psychological research, a great deal about power. We know, for instance, that environments where some hold far more power than others can "cause even normal people without any apparent prior psychological problems to become brutal and abusive towards those with low power."
... note in their Boston presentation, "exaggerated power asymmetry" can make people with power mean to people without."

Anonymous said...

"They cast their silver into the streets, and their gold is like an unclean thing. Their silver and gold are not able to deliver them in the day of the wrath of the LORD. They cannot satisfy their hunger or fill their stomachs with it. For it was the stumbling block of their iniquity."

Ezekiel 7:19

Anonymous said...

The problem is really simple.

People don't care for others equal to themselves. That's essentially the message of the Bible in one sentence, minus the part about caring for God (who helps you to care about others).

We don't do it, hence the world we see around us.

Seeming as how someone delved into Ezekiel, one of my favorite Bible chapters, and one of the most over looked chapters, is Ezekiel 37.

Ancient Israel was never offered spiritual salvation as a whole (a few minor exceptions). But that doesn' tmean they are somehow lost to whatever most people imagine "lost" to be.

No, God has not foresaken them, nor anyone else.

I observe that much of "traditional religion" has to do with population control by the people who control the religions (BFC - it is hard to shake that criminal group).

Nassim said...

The Greatest Trade of All Time

This report shows how much the US owes the rest of the world - i.e. how many dollars are owned by foreigners (and offshore US companies and individuals).

When you combine this with the I&S belief in severe monetary deflation (which I share), it suggests that these people and corporations will be well-positioned to buy up US assets in any fire-sale.

Anonymous said...

I didn't see my last post show up. I'll try again.

I'm not seeing any move into USD. In 2008, the USD was clearly a safe haven currency; the turbulence in the world resulted in a massive flow into dollars from other currencies.

As time has gone on, this has happened less and less. At this point, based strictly on price action alone, gold, to some extent silver, and treasuries are safe havens. dollars are not.

How can treasuries be safe havens when dollars are not? Money is moved from US equities and other commodities (like oil) into US treasuries. But no money is being exchanged from other currencies (such as the euro) into dollars. Its just dollar assets being moved around.

The I&S model does not seem to be borne out by actual price movements any longer. It was working properly in 2008, but not now. Gold seems to have undergone a transformation; in 2008 it was sold hard, but now, each crisis is causing it to be bid higher.

This isn't a matter of ideology with me, I'm just watching price and judging from that what people are actually doing. Fleeing stocks, PIGS bonds, and moving to gold and treasuries. But not dollars.

Jack said...

As long as there is available cash out there and panic it is going to be hard to see the price of gold come down.
When all that available cash disappears than we should see gold come down.
Always keep in my that the control of gold is in the hands of the cartel.
When these guys don't see anymore suckers than bam in goes down

Jack said...

Another thing the gold bugs dont make sense with is that we still need currency to live and it has not been wiped yet.
It is a scheme prepared by scam artists.

p01 said...

Good article, Ilargi.
On the other hand, the comment section has "improved", I see; with psalms. Oh, well...

Anonymous said...

Jack -

There was panic in 2008, and gold sold off hard. Now there's panic in 2011, and gold is going up. When behavior changes, that tells me something important is different now. Money flows don't lie.

What has changed since 2008? My guess: big money has lost faith in Central Banking. Example: Swiss and Japan central banks both printed money to cap their currency's rise. If you can't trust the SNB, what central bank can you trust?

So if not USD, where does big money go to hide? One answer at the moment seems to be gold. Price movements and money flows will tell us if and when this changes.

I'm not suggesting gold is the ultimate savings vehicle, nor am I suggesting any sort of investment strategy, nor am I trying to predict the future. I'm just reporting that it is now acting as a safe haven, based on price movements. And that's something new.

ogardener said...

Blogger p01 said...

Good article, Ilargi.
On the other hand, the comment section has "improved", I see; with psalms. Oh, well...

"You cannot petition the Lord with prayer!" -

Jack said...

I have not studied economics and I am not an expert in this field but you have 2 group of people and like you said big money and than there is small money.
big money is the central banks and the smaller banks that are under them and in all one big family of happy bankers and than you have small money which is you and me and probably those not in the big money family.
So when big money sees the flow of cash going into gold than they will drop the price.
This is my opinion and if I am wrong maybe someone can correct me

Jack said...

I made an error and I wanted to say when they see the flow of money going into gold stoped

Ilargi said...

" davefairtex said...
I'm not seeing any move into USD."

Hmmmm.... Wonder why... See above:

"On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million. "

And then add that to record low Treasury yields.

Not seeing ANY move into USD?


Jack said...

I am still not sure if I should change from Canadian dollars to US dollars

SecularAnimist said...

"Money flows don't lie."

Sure, they do all the time. They not only lie, but are also highly irrational and stupid.

Anonymous said...

Illargi - "Not seeing ANY move into USD?"

Based on price, no. USD is at 74, and during this whole crisis has moved very little. By comparison to the moves made in the panic of 2008, I stand by my comment.

USD moved from 71 to 90 in sep-oct 2008.
USD moved from 76 to 87 in jan-may 2010.
USD unchanged 74 to 74 in aug 2011.

Its possible that China has moved dollars to euros, and the the euro banks have moved from euros into dollars, keeping the flows neutral. It is also possible the Fed is doing monstrously large secret currency deals. But overall, no. No net flow into USD from other currencies, or else the USD would have appreciated vs. that currency. What evidence we have says - USD is not a safe haven at the moment. And gold is.

And we have to accept this is a new behavior. Just last year, things were quite different. Same thing with gold - its behaving differently. Last time around, gold got thrown under the bus. This time, new highs every week.

Anonymous said...

SecularAnimist -

"Sure, they do all the time."

Perhaps I wasn't clear. When more net money flows into a sector, all else remaining the same, the price goes up. Thats how we got the big property bubble. All that new money loaned into existence pumped prices.

Same thing with USD during the 08 crash. People around the world really wanted dollars, so the price of USD went up. If more net money wants to have USD, the price of USD will rise, like any other commodity.

And if the price isn't rising, then that means no new money is coming in - or supply of USD is increasing in exact proportion to the new money entering.

People lie, and markets are irrational, but prices don't lie. They reflect money flows.

SecularAnimist said...

"I observe that much of "traditional religion" has to do with population control"

It's pretty obvious what the new religion used to control the population - they even pretend it's a science.

Supergravity said...

@Ant Whisperer
" we are yet to see hard evidence of deliberate poisoning events via 'chemtrails' "

Search 'germany chemtrail radar'

It is incontrovertible evidence of deliberate aerosol spraying caught on radar, duly interpreted by the german weatherman as a military operation, but not necessarily deliberate mass poisoning. It qualifies as severe negligence under regulatory mandates for atmospheric pollution, with possibility of deliberate mass poisoning in the event authorities' reasonable foreknowledge of [any] aerosol contaminant pathogenity is established.

A member of the german green party has sued the german government for access to the [admittedly existant] classified information pertaining to such spraying projects, under environmental and public health concerns, which would establish that deliberate spraying under a false mandate has occurred repeatedly without justification, and must then at least entail criminal conspiracy to subvert justice.

Public condonation or advocation of provably hazardous aerosol spraying for the purpose of climate modification or military radar experimentation under national security, as deliberately negating environmental and public health mandates, would be an persecutable act of political extremism, if not criminally offensible.

SecularAnimist said...

People lie, and markets are irrational, but prices don't lie. They reflect money flows.

People lie
Market are irrational
but prices don't lie?

So lying, irrational money flows make honest prices?

Not sure mass panicking subjectivity, that is prone to pathological dishonesty is a good dynamic to create honesty.

SecularAnimist said...

Only the economic mind could make the mass subjective panicking of irrational liars into a symbol of truth.

Economics is brain damage

Spence Cooper said...

"davefairtex said...

USD moved from 71 to 90 in sep-oct 2008.
USD moved from 76 to 87 in jan-may 2010.
USD unchanged 74 to 74 in aug 2011.

USD is not a safe haven at the moment. And gold is. And we have to accept this is a new behavior."


And as long as the financial sector and their sovereign lifelines continues to crumble, as Ilargi has so astutely pointed out, GOLD WILL BE THE ULTIMATE SAFE HAVEN as the global fractional reserve banking system collapses.

scrofulous said...


No disagreement with your comment:

"Last time around, gold got thrown under the bus. This time, new highs every week. "

but you might read Jesse here. where he talks of possible margin increases in gold. (Silver seems to be recovering slowly after it was hit with that series of recent margin increases).

Just an opinion not a fact, but I think that Bernanke holding those negligable interest rates constant for next couple of years should be very good for gold.

Anonymous said...

SecularAnimist -

"So lying, irrational money flows make honest prices?"

You mis-stated what I said. Let me clarify again.

I said that people tell lies. So do governments. Lies are simply words that cost nothing, while prices are the result of actions. Actions are truth, pretty much. And prices (in an un-manipulated market) result from actions. That's why they reflect truth. Not Truth in a metaphysical sense, but truth in a historical sense.

If a large group panics out of euros into gold, the price of gold rises vs euros. The gold price is accurately and honestly describing the sum total of everyone's panicked actions. Its up to you (or me) to interpret WHY the price is rising. Thats when the lies can come in again - the interpretations.

"Its evil speculators causing the problem", or so says the euro leaders when the PIGS bonds drop, when actually it is euro banks dumping their bond holdings. Of course we only find this out later. Prices don't lie - someone is dumping bonds - but interpretations are most definitely subject to dishonesty.

SecularAnimist said...

Oh, please

Lying panicky irrational money flows make lying irrational prices. Period.

You're logic is akin to reading tea leaves

Of course, if gold precipitously drop every gold bug in the world would be claiming FOUL!

Jack said...

In the near future gold will probably go up maybe $2,000 and ounce.
But can the gold bugs tell me if there is speculation here and also what has happened in the past with gold prices
going from 800 to 200. and who was in control of gold than and who is in control now
I am trying to approach this in a very simplistic way

jal said...

Rising GDP are suppose to be representing the growth of the wealth/well being of the economy/population.

On the other hand, flat or sinking GDP is suppose to mean that the economy is faltering and that the people are not doing as well.

To put things in prospective, ask yourself what are the GDP of Egypt, ... Libya, ... Syria.
There is "broken glass" everywhere.

I don't even want to look at the GDP of the refugee camps.

NOT to worry, the middle class, (you), will be able to double bunk and even take shift using the bunks.

NOt to worry, conditions in the USA will not be as bad as elsewhere.


Jack said...

GDP is following the dow or vice versa

scrofulous said...

I.M. Nobody,

You did say this:"I'm surprised that you give paper money such short shrift. It has been around quite a long time."

US paper money is not backed by gold it is fiat ( See Wikipedia here). and only been around as such since Nixon did his deed.

souperman2 said...

D.B. Smith - I have been saying for years that money = tickets to live, no ticket, you die.

This system is already in place, has been for a long time.

I see no reason to believe that this time it would be any different.

Money is being freely distributed amongst the "Chosen ones", TPTB, the elites, whatever you want to call them, and increasingly withheld from the others from the bottom rungs of the economic ladder on up. How far up the ladder this will go before stopping no one knows. Some say that it will not stop and TPTB will be taken out too.

One thing I believe is certain...the pain and death will not be evenly distributed.

This is a fact and it is happening all around us. To not see this is naive.

In this way collapse is managed to a degree.

All of the witty armchair analysis and discussion of the many incidental symptoms of this process taking place on the internet seem to miss this big picture truth.

Jack said...

Hi muchtooloose
The US dollar was fiat currency a long time ago.
It is bad now but it was also bad than.
This is how speculators work.

All I want is to own a home and I don't care if the price is too high at least I will have my own property
This is the kind of talk people were saying before the crash and now they are running away from those homes.
Be my guest and pay these prices for gold

Jack said...

There is going to be time when the big boys are going to start buying the gold and do you think that they are going to pay you these outrages prices.

Jack said...

They buy low and sell high .
They are not stupid
They dont buy high and sell low

seychelles said...

More dirt on the ratings agencies

Has anyone noticed how NPR's financial commentary section prominently features
Mark Zandi??? Nauseating.

Orlov interview well worth reading if anyone missed it

However at one point he gets a bit Mate-ish with some "I feel your pain"
overtones which were a turnoff. And his judgment is not flawless...he's
living in Boston...

Jim R said...

Regarding "chemtrails" ...

While there is abundant evidence that the "government" does not care about rank-and-file citizenry, I agree with Ant Whisperer.

There are lots of interesting plane-trail videos on youtube, including one apparent fuel-dump by a commercial jetliner. If they are going to make an irregular or unscheduled landing, jetliners will dump most of their fuel before descending -- it lessens the chance of a fire. Most of the videos showed ordinary condensation forming in the wakes of planes, with no evidence of any spraying apparatus. There was a video showing a research plane with sampling tubes pointing forward out the front, and a sport plane with some special tubular hardware, apparently a sky writer.

Depending on conditions upstairs, ordinary jets can leave trails of water droplets or ice crystals that persist all day. (Currently in Central Texas, there are no sky trails at all... correlates with the drought, you know). Then of course, there are cropdusters operating in some agricultural areas. (Not here, since nothing is growing here this year).

And whatever the military is doing... I wouldn't put it past the military to attempt a climate- or population-control exercise (remember the anthrax thing?), but I don't think there is anything but wild speculation in the air right now.

As Ant was saying, there's plenty of other environmental stuff to worry about -- AGW, BPA, ocean acidification, fresh water depletion, and so on. And please don't start with the fluoride-is-a-commmie plot stuff. I actually like to still have most of my own homegrown teeth.

Groov'nor said...


The USA army certainly can't quell "Revolutions" abroad, but it certainly can quell unrest at home. As long the powerful, moneyed backers remain in place, riots will be merely riots, protests will be merely protests.

Revolutions are rare and dramatic historical events requiring a few conditions in order to brew and succeed: first conditions is a viable alternative to the current status quo; second condition is a significant parcel of the population disenfranchised; third condition is a weakened State, both politically and economically; fourth condition is a favorable Zeitgeist; and finally the fifth condition, which is the trigger.

Most successful Revolutions share these conditions. The Communist Revolutions had a powerful ideology construct behind them, targeted poor, unstable countries with large numbers of miserable people and generally followed the great wave of communism that swallowed the first half of the 20th Century.

The French Revolution was based on the Enlightenment and emboldened by the successful American Revolution, both being fed by the disenfranchised at home and living in the colonies, respectively. Abuse by the weak French State of the late 18th century and by the far, far away British of the mid 18th century led to successful revolutions.

The revolutions cited above, of course, are the ones most radical and most successful. Enshrined in their respective spirit of time, neighboring countries suddenly saw a viable alternative to their regimes, giving an instant model to every single unsatisfied citizen in existence to pursuit.

Naturally, the revolutionary furore is not lasting because the revolutionary governments don't often live up to the expectations. The political and social changes, however, can be quite lasting especially if one's revolution spread out far and wide.

Now, why did I write all this? Because I don't see the conditions being right for any sort of revolution today. Some conditions are met, true, but they are still very incipient. There are still no viable alternatives to our current political system. Individual governments are getting weaker economically by the day, but there are still strong relations between countries and very strong international organizations keeping the status quo (UN, NATO, World Bank, etc). Globalization is still on the rage and unless you can bribe your way up, no country will recognize radically new governments. Call that peer pressure if you will.

On the topic of disenfranchisement, people in most of the developed world are not still in dire straits. Not by a long shot. I knew poverty intimately. I lived in Brazil during the 90's and frankly, you can't believe how "stable" a country can be with half its population being poor. There was a proto-revolution in Brazil during the 60's. Guess what happened. A military coup. Organized violence triumphs over unrest most of the time. If Brazil and Latin America in general managed to stem the communist revolutions, which were organized and backed by practical ideology, how can powerful States such as the US fail to do so? Do you still think your politicians will abide by their morals when riots start spreading? Do you think the still employed population will sit idly when looters (be it a correct label or not) come to their houses?


Groov'nor said...


No, governments and the people who still are able to keep their standard of living will fight back savagely. All easier because there is no ideology, no brain behind the youth anger. It is just rage, cynicism and nihilism. There is no greater purpose on these riots, no desire to see any change, no palpable vision of the future. Suppose they find a focus, one of overthrowing the heads of government, similar to the Arab Spring. Then what? The Arabs, by expelling some autocratic regimes, were mere catching up with Europe. Instead of one man one country, now they plan to enact the same corrupt democracies that rule the rest of the Western world. The UK already lives in a democracy, the US just the same. What else is there?

But governments, the true bodies behind the talking heads on TV, won't fall. They can't falter unless the whole system crashes with them. All the remaining resources in the system will be allocated to shore the main governments of the world. Too big to fail. The billionaires of the world won't suffer their political and military arms to disappear or slip out of their influence at so critical a moment. There is so much to plunder still and without governments working for them, it is much harder! So yes, the governments will repress the riots violently, becoming more authoritarian by default.

This new police State won't be long lasting as controlling large populations demands way more resources than the system will have left. By this time, the rich would have plundered all that is and suddenly governments are no longer interesting to keep. Without backers, the system starts its long way down to anarchy, or a fast one, if the new Lords of the World decide they need free land ASAP.

If this goes like Rome, the Lords will suddenly realize their dreams are in fact nightmares as warlords swarm over the decrepit Empires. In a bold prediction, I state that southern US and Central America will be overrun by the Mexican cartels, Southern Europe will be consumed by immigrants coming all over northern Africa, Russia will become the Wild East and the petty remaining countries will fight each other to death. Feudalism 2.0 is the order of the day.

Pockets of civilization will likely remain, intact remnants of former Empires and perhaps even emboldened or strong enough to make some gains over the barbarians. City-states will become once again all-too-common, slavery will return and dormant initiatives may find space to thrive in this all new world.

Alas, maybe I'm just a fool reading way too much into the trends.

scrofulous said...

Souperman 2

How about adding that, as wealth moves to the top, so does control of the system. With money, the few make decisions while broad based decision making is lost, along with stability.

For instance, Globalism, by its very nature is designed to fail, much as did the USSR when it left the path towards broad based socialism and became a top down command economy.

Supergravity said...

Did you even watch it?

Look closelier; this is incontrovertible evidence of deliberate spraying, unless the radar images as televised are faked.

You may not realise the scale of that map, the trails are unbelievably huge and must have taken repeated spraying, all day long.
It is meteorologically impossible for this to be a contrail-effect, the german weatherguy there seems to agree, and mentions military aircraft, not commercial, as probable source.

The german government has admitted at least one incident of deliberate spraying as a military radar excercise, so doubt is untenable.
This incident is then a deliberate crime, not accidental pollution, which is a different category of concern.

Randomly associating conspiracy-flavored themes, such as the fluoride plot, in reaction to this serious evidence is rather disingenuous, a favored rhetorical tool of misdirection and negative association to discredit validity, you must have used it by accident or internalised it to enable denial.

Also, 9/11 was a Cheney job, and al-qaeda is a dialectic projection of the MIC. Sorry.

Ilargi said...

"NightBlogger said...
[..] as long as the financial sector and their sovereign lifelines continues to crumble, as Ilargi has so astutely pointed out, GOLD WILL BE THE ULTIMATE SAFE HAVEN as the global fractional reserve banking system collapses."

Nope, pointed out no such thing. Gold will go the way of oil.

I find it funny that people talk about the lies that are told in finance, but still believe the value of the dollar is decided by free markets only. Better to look at Treasury yields. They lie less.


el gallinazo said...

A few thoughts about gold:

I&S are not anti-gold, which is obvious if you read Stoneleigh's lifeboat primer. It seems pretty obvious to me that commenters who attack her for being "anti-gold" never bothered to read it and their comments are thus not worth the electrons they are written on. Her basic position is don't go overboard and keep it as a fairly small percentage of your over all assets unless you have big bucks and can bury it for 20 years.

Gold is a very poor hedge against deflation, an iffy hedge against moderate inflation, and a good hedge against hyperinflation. What IMO gold is really hedging against is a lack of confidence in the central state and the central banking authorities. Hyperinflation is caused by the same - thus the correlation.

Gold has tended to hold an approximate value over the last several thousand years though it can vary quite a bit under certain circumstances. An extreme example might be the buying power of gold versus food and tools in 1850 California.

The only real "gold bug" blog I read on a regular basis is ZH. The much of its readership based on their comments tend to libertarians. I have my problems with libertarians though I will take them any day over the NWO crowd currently running the show. They tend to hide their fear of the coming collapse by showing how cool they are with zany comments and also by placing an ontological faith in precious metals (and guns) to pull them through the crisis. Really mentioned is local community, which Stoneleigh and CHS regard as the cornerstone to increase your odds. But this is not surprising from this crowd, which has bought the Marlboro Man bullshit. It is also an American thing. You see this individualism much less in Latin America, and many people there regard it as the foundation underneath their distaste for gringos. Their faith in gold to save them reminds me of the faith of the vampire hunters in the old Dracula movies that if they pull out a huge crucifix, the Count will cringe and back away. Thus any question as to gold's efficacy as to taming vampires and the apocalypse is reacted to with knee jerk (fear based) hostility. Of course such a macho crowd will never admit it. Any suggestion that they are afraid is met with waving an assault rifle. As Frank Herbert wrote, "Fear is the great mind killer," and I think I see it in action there.

One thing I rarely see mentioned about PM's. The spot price is based on exchanges such as Comex which is 99% "paper" gold. And that the speculators are permitted to use enormous leverage in this regard. Controlling the leverage allows the Owners, to a large extent, to control the price. A case in point was silver this summer. The price was going parabolic which really bother the owners, presumably because some of them, the Morgue for example, held large short positions. Well Comex increased margin requirements something like 5 times in two weeks, and amazingly, the price dropped back over 20% and has remained somewhat stable (while gold has shot up).

In light of this, the $64,000,000 question is, what is the "honest" market discovery price of gold when 99% of leverage is eliminated from the exchanges?

Gold in no way necessitates free markets. If anything, it allows the banking cartel to control the supply of money more rigidly than fiat. Just look to Bill Still's The Money Masters focused on the period of 1867 to 1913 to see how this was done. When the bankers pull the gold back into their vaults, they can precipitate a depression in a matter of a few months. That is why the Populists and Grange under the banner of the Cowardly Lion wanted silver expanded as official money - the so called bimetalism movement (which failed). Many actually wanted greenbacks, but that appeared to be politically impossible.

el gallinazo said...

Interesting that the archdemon Chavez has chosen to nationalize his gold mines and repatriate his gold. The outcome of his command to send it back will be interesting to watch. He is not about to take dollars in its place. Also, interesting that the archdemons W and Chavez didn't seem to care for each other.

It is my opinion, that of DIYer also as I recall, and that of Bill Still, that the likelihood of their being any substantial amount of gold remaining in Fort Know is really quite small. An audit has not been permitted since Eisenhower. Also, with the ability to gold plate tungsten ingots, a major cottage industry in China, an audit would have to go beyond just counting ingots. The question of legal ownership, Treasury or Fed, of this hypothetical gold is also unclear. Most or all of it is probably sitting in the UK or Switzerland.

Other thoughts:

Why the forex rate of USD in relationship to the Europe has remained in the 140-145 range with a purported dollar shortage also is a puzzle to me.

Regarding the SNB trying to control the rapid forex increase of the Franc. I do not view this as particularly "dishonest." Panicked Euro holders and speculators buying Francs could destroy their high tech industries and they have a valid interest in trying to maintain a certain equilibrium. That said, they have no way of succeeding.

The underlying value of the dollar is US Treasury debt. If the debt goes bad the dollar goes bad. However, being a sovereign currency and also the reserve currency, the US would never default unless the Owners want it to. There is substantial evidence that the Owners are now creating a deflationary depression in order to buy up the remaining assets of the world and also to institute a global reserve currency. As the great Rothschild once wrote, let me make the money and the politicians can go screw a duck.

DBS - Thanks for your current post series. I will have a comment about it later.

Jim R said...

Regarding the gold and silver bubble..

This economist has made a nice reference chart for the typical bubble. Compare the ideal bubble charts with a gold price chart by Jesse.

It looks kinda bubbly to me. To my mind, the only question is whether we are currently in the Greed or Delusion phase.

As for the Dollar, it is also an ephemeral phenomenon, but its arc is much longer. Its demise, so breathlessly anticipated by the "gold bugs", is probably still years out. By the time the dollar craters, there will be so much else wrong with the economy that the ability to have this discussion will be a cherished memory.

Frank said...

@el G You might also look into what happened to the gold standard economy of Europe when Spain looted the New World. Big time inflation, totally gold backed.

Jack said...

Hi DIYer
People love nature but when you say lets form a group and clean the lake near us,it will be a miracle if you get 1 person out of 1,000.
They will spend 3 hours washing their driveway sidewalk,lawn, car etc but not a second for something like that.
I have a neighbour who is exactly like that and I have complained to the city and nothing has changed.
People are selfish.
Therefore we will loose all of the nature around us.
I am a nature and I have tried things like forming groups and it does not interest people.

Jack said...

I live nature is what I wanted say before

SecularAnimist said...

""By the time the dollar craters, there will be so much else wrong with the economy that the ability to have this discussion will be a cherished memory.""

Exactly, by the time the dollar craters there won't be pricing mechanism to value it against/

The vast majority of the US doesn't give a shit about the price of gold because they don't have any. The idea that it is going to become some universal trading mechanism is fantasy land. You will need to get the propertyless, goldless masses out of the way for that to happen. And for that you need big government.

scrofulous said...


"Better to look at Treasury yields. They lie less."

Actually they lay low in the tall grass, all the better to jump up high and bite you in the thigh. ( I would have said ass but if you can't find that with both hands to cover it, how could poor treasury yields.

Also,I love these golden/oily weasel words of yours:

"Nope, pointed out no such thing. Gold will go the way of oil.

Jim R said...

Yes, I watched it. I took a little German back in secondary school, so I even understood a bit of it. And no, I can't remotely analyze every crop circle and tell you what's in it.

For what it's worth, here is my quick analysis: weather radar is 'tuned' to detect collections of water droplets -- clouds. A contrail is a cloud, albeit one made by a manufactured object. Therefore, the German weatherman was seeing contrails.

My other examples were there to show that, along with many of us, I agree that the MIC is capable of shenanigans. I just don't think "chemtrails", "haarp", or "fluoride" are among them.

Jim R said...

Yeah, I'm a naturist too. But I don't really care what you're wearing ;-)

I'm still trying to socialize the idea of country living with my SO. She thinks we'll just park a trailer on it and come visit from time to time as we spend our golden years traveling. As for the 'community' thing, that's a tough one. I also like to follow JMG's blog, as he is exploring some community ideas, albeit from a Druid perspective.

El G,
Yeah, I agree about Ft. Knox. It probably has a bunch spray-painted cardboard mockups from Goldfinger for long shots, some gold-washed tungsten for touchy-feely closeups (they're heavy!), and not much else.

jal said...

Things that they never told you about “THE GOOD OLD DAYS”.
A few quotes to get your interest.

New York City epitomized a city in crisis during the nineteenth century. A small city of approximately 30,000 in 1800, New York began to essentially double in size every 10 years. By the turn of the twentieth century the population had reached 4 million, almost all of whom lived either below 57th Street in Manhattan or along the border of Brooklyn--a tiny portion of the modern city's boundaries.

Such incredible human congestion combined with a primitive infrastructure to create ideal conditions for a dramatic increase in epidemic disease. The relatively healthful city of 1800 experienced an onslaught of infectious diseases. Cholera, typhoid, typhus, yellow fever, malaria and other mosquito- and tick-borne diseases festered. The city's mortality rate skyrocketed, and children died in large numbers. The city seemed to be coming apart.

At the turn of the nineteenth century, New York City's infrastructure relied upon disease-creating entities such as the horse. Between 100,000 and 200,000 horses lived in the city at any given time. Each one of those horses gave off 24 pounds of manure and several quarts of urine a day

In fact, New York City in the 1800s was built around supporting not only human beings but animals as well. Horses, pigs, sheep and cattle were all part of everyday city life. Pigs regularly roamed through the city in herds

Jim R said...

Oh, one other note about the "chemtrails" ... last summer, BP hired a bunch of cropdusters to spray corexit on the Gulf of Mexico. Not a military secret, not a secret at all, in fact. News coverage, of course, was limited to a few local stories from coastal communities.

Apparently the corexit (a powerful industrial detergent) made quite a few coastal residents ill.

But the planes were not high-altitude jets and they did not leave visible trails. So there ya go, all "chem" but no "trail".

Mister Roboto said...

Well, I think you might be engaging in a little bit of hyperbole by saying that gold could crater overnight. The bubble will likely pop sooner than the goldbugs think it will (of course those freaks have gold-fever so intensely, they refuse to believe it's in a bubble or ever will go down in price), but according to the most recent analysis of market technical data, it has at least a little way to go up before it starts going down.

I do plan on getting myself out of gold relatively soon. I was looking for safety in gold back in late 2008/ early 2009, but then it went and became a bubble. Bubbles may be pretty while floating over your lawn on a lazy summer afternon, but they're not permanent and therefore not safe.

I have a question about short-term treasuries, though. Did the fact that the Tea-Party freakazoids were willing to supposedly crash the financial system during the debt-ceiling debate, have any effect on your thinking that treasuries are best in a "flight-to-safety"?

el gallinazo said...


At the risk of being accused of being a CHS (Charles Hugh Smith) tout, I have to recommend his new book to you in particular since it deals in depth and specifically with the question of post apocalyptic businesses, which seems to be the brunt of your questions here. It is titled, An Unconventional Guide to Investing in Troubled Times and is currently only available on Amazon as a Kindle electronic book for about $10. You can download a Kindle app for pretty much any computer or smartphone from Amazon for free.

Re fluoride

I am anti-fluoride, though somewhat out of character, I don't consider it to be a conspiracy but just stupid bad science, based on the truly American idea that if a very little is good than a whole bunch must be great. The problem with fluoride is that in the amounts that the average American is actually ingesting due to redundancy with toothpastes and government issued water to keep his choppers strong, it is melting the rest of his body. Haven't researched this really thoroughly yet, but reached a strong, tentative conclusion. Check it out for yourself with google against peer reviewed medical papers. Don't want to get into a debate about it. When municipal water systems bite the dust, it won't be an issue.

Spence Cooper said...

Ilargi said...

"NightBlogger said...
[..] as long as the financial sector and their sovereign lifelines continues to crumble, as Ilargi has so astutely pointed out . GOLD WILL BE THE ULTIMATE SAFE HAVEN as the global fractional reserve banking system collapses."

Nope, pointed out no such thing. Gold will go the way of oil.

You pointed out that the financial sector is crumbling, which is what I wrote. As far as gold going the way of oil, I can't wait to read how you "knee jerk" rationalize $3,500/0z gold 2-4 months from now.

el gallinazo said...

Mr. Roboto

The Tea Party has long become an auxiliary arm of the Koch Bros billionaires' NWO neofeudal club for rare reptilian life forms. It is useful because it can co-opt the really stupid libertarian vote away from Ron Paul, who has some integrity and a few good ideas.. They were never about to push the USG into a real CDS triggering default. If you believe that, you should spend your days watching reruns of the last 7 minutes of TV 1950's Lassie episodes where the famed canine needlenose pulls babies from wells and does emergency appendectomies with only her (non-fluoridated) teeth.

The purpose of this huge, stupid charade was to psychologically prep dumbass Amerika to do its part to save the country through apparently self-imposed austerity while the bankers pay themselves bonuses (boni?, boners?) in the hundreds of billions for pulling off the greatest heist in the history of the planet, and quite possibly the galaxy. Kinda like watching those Italian religious fanatics flog their own backs with whips on special holidays.


The price of gold may shoot up as high as you are predicting at the start of the great leg down as money panics. As Stoneleigh points oiut, credit represents multiple claims on the same assets. One would like to put one's saving in a place where these multiple claims do not exist. Hidden physical gold could be such a place as long as Mr. Cleancut T-man or Vinnie the Nutcracker don't drop by to put a claim on it. Once the deflationary collapse is well under way and credit starts to truly disappear, also forbidding its pricing as a highly leveraged paper commodity idea on the exchange markets, it will stop bubbling like a lead balloon. I doubt this will happen within the next few months.

Anonymous said...

Secular Animist -

We don't seem to be able to communicate. That's ok, I did my best. I'd be happy to exchange ideas with you, except I make it a point not to try with folks who start their responses with "oh, please." That shows they're not really trying at all.

el gallinazo said...

As the old saying goes, copper is the money of the poor, silver of the middle class, and gold of bankers and kings.

I dreamed I saw St. Augustine,
Alive as you or me,
Tearing through these quarters
In the utmost misery,
With a blanket underneath his arm
And a coat of solid gold,
Searching for the very souls
Whom already have been sold.

"Arise, arise," he cried so loud,
In a voice without restraint,
"Come out, ye gifted kings and queens
And hear my sad complaint.
No martyr is among ye now
Whom you can call your own,
So go on your way accordingly
But know you're not alone."

I dreamed I saw St. Augustine,
Alive with fiery breath,
And I dreamed I was amongst the ones
That put him out to death.
Oh, I awoke in anger,
So alone and terrified,
I put my fingers against the glass
And bowed my head and cried.

- Bob Dylan

Bigelow said...

The average per year increase in price of gold for 8 non-US$ currencies (Canadian & Australian dollars, Swiss Francs, Chinese Yuan, Euros, British Pounds, Indian Rupees and Japanese Yen) from their 10 year averages is +14.65%
Table: Gold Price % Annual Change

Jack said...

Hi El G
This is for you

Spence Cooper said...

el gallinazo said...

"Once the deflationary collapse is well under way and credit starts to truly will stop bubbling like a lead balloon."

And when that time comes, it will be Gold's defining moment, finally ending all the speculation.

Anonymous said...

Illargi said - "Nope, pointed out no such thing. Gold will go the way of oil. "

I'm not smart enough to know which way "things will go." I think in that sense, you are smarter that me. I only know what is happening now. Gold and oil are diverging. I'm not sure why, but it intrigues me.

Its interesting to me that so many people are so sure which way things will go. Some of them say wildly different things. I try and look for the signs and see which way things are actually headed, because I do not have their firm confidence where things will end up.

I do notice, however, that when things head someplace other than where people assume they will go (i.e. gold drops for a gold bug, or oil goes down for a peak oil person) there are always excuses. I just watch, and look for further clues.

Jack said...

Hi NightBlogger and davefairtex
I am also not sure where gold will go but all I am saying is look at the kind of games that were played on the investors and look at who is controlling it.
How do you feel about investing in something that is controlled by one group

Jack said...

if they could bring the price from 800 to 200 than they could do the same again and I would really like to have answer to this because graphs and charts an historical data is not needed here

Jack said...

It is their game and they can do whatever they want and it is your choice to participate

Bigelow said...

Gold in US$ may respond to $ deflation and go down for a while. Deflation in the Great Depression held sway for 40 months (Consumer Price Index)till March 1933 in the US. Nothing is guaranteed unless you are one of the as Gerald Celente calls them "White Shoe Boys".

p01 said...

Never understood the gold fever. Fun to watch, nonetheless. Someone should sell tickets to this kind of threads.

Jack said...

All I am saying is can you trust those guys on wall street who rewrote the rules of law to swindle the whole country.

Jack said...

This is not a big secret ,it is all over youtube and they say what they want and do whatever you want and if you choose to be one of their gullible fools it is your choice.
Monday gold will probably go higher and that is possible

Jack said...

People forgive my mistakes I was writing too quickly

Spence Cooper said...


Gold plummeted because Volcker tightened the money supply in the eighties to subdue inflation and increased interest rates to 20%.

"These dramatic interest rate hikes led to the gradual decline of CPI from a peak of ~14.8% in Mar 1980. By June 1983, CPI was ~2.6%."

Look at where rates are now?

Phlogiston Água de Beber said...


I suspect it [Goldbuggery] is a lot like the tulip mania, but with intertube augmentation. Main difference being that tulips are much more enjoyable and reproducible.

Anonymous said...


>>Randomly associating conspiracy-flavored themes, such as the fluoride plot<<

Have you researched fluoride in the drinking water?

Let's talk facts.

1. No double blind studies have every been done to prove the efficacy of drinking fluoride (lobbying and bias can't be excluded from other forms of "tests.").
2. The EPA scientists Union opposes water fluoridation based on the science against it and the lack of science for it.

3. The FDA recommends that children under 6 months avoid fluoridated water due to its toxic effects...

4. Other studies have indicated links between fluoride and reduced IQ, up to a 7-fold increase in male bone cancers (my wife's coworker's son has bone cancer, BTW), a large increase in bone fractures and other bad side effects.

5. Big finance Capital turned a cost center into a massive profit center that effectively reduces the IQ of those they are robbing blind with their criminal debt-dollar system.

#5 isn't a conspiracy theory, it is a reasonable statement of of the available facts in play.

I suggest you research this one on your own - DO NOT trust those requesting Appeal to Authority conformity.

PS - No, I'm not saying that drinking fluoride will cause people to violently die after the first 3 ounces. That's absurd. A life time accumulation appears to have significant bad side effects. For those unlucky few, the side effects are much more harsh and come much earlier. All for unproven efficacy.

BTW, the flu shot has never been established effective in a double blind study, either. ;-)

Seems Big Finance Capital "assets" HATE true science.

Jack said...

Hi NightBlogger
There was a group who knew all this before it happened and they intentionally raised the price of gold by spreading fear into people and than they dropped the price.

Anonymous said...


>>I can't wait to read how you "knee jerk" rationalize $3,500/0z gold 2-4 months from now.<<

Once enough people feel that they will have automatic doubles every 2-4 months, poof - the bubble ends.

As I said before, I think there are more proceeds from prior monetary inflation and straight to hyperinflationary ignorance and fear mongering, to blow on the gold bubble to keep it going a while longer, but when the collapse comes, it will depress the price of gold, probably very dramatically.

After all, when nobody has any money, why would they spend what they don't have on gold instead of food, water, shelter, etc...?

but hey, enjoy the ride. Just get off when it becomes obvious to you the debt has to be paid back.


Jim R said...

I dreamed I saw St. Augustine,

But it was all brown and crunchy from the drought.

Anonymous said...

@el g,

>>As the old saying goes, copper is the money of the poor, silver of the middle class, and gold of bankers and kings.<<

And debt is the money of slaves.


I think you will enjoy and find value by listening to Gary K.

Like you, he listens to the markets... but he isn't a shil and calls the frauds, frauds.

Chas said...

Can anyone think of a good reason NOT to park money in SNGVX? I'm mostly in short-tern US Treasuries but it would be nice to get some return on my money.

Chas said...

Why is the Euro so strong vs the $US dollar?

Is it the carry trade? The Fed bailing out Euro banks? Something else?

How long will it last?

Nassim said...

Damn it or fear it, the forbidden truth is an insurrection in Britain

John Pilger (Australian writer and journalist living in London) at his best.

scandia said...

@Nassim, thanks for the Pilger article.Good one.

Supergravity said...

About that movie; contrails cannot form in that isolated pattern, no persistent trails appear in airline routes in the vicinity, just those three thick stripes. Conditions can't reasonably be so localised to allow for only those.

There are several split-second flashes of rapidly dissipating and far thinner contrails on that map,
disappearing at a vastly quicker rate. The three thick stripes are unusually persistent
without indication of other trails anywhere near.

Only those three trails persist with no others forming in the vicinity, the pattern remains structured while drifting south-east, yet there must have been dozens of other flightpaths crossing the observed map during the timelapse, but none leaving persistent trails.
That is admittedly a singular radar excercise there.

search 'chemtrail off'

Some movies might be showing prolonged fuel dumps in intermittent trails, they aren't filmed for long enough duration to see if they linger for hours. Some of those can't be showing fuel dumps, yet the trails are intermittent and therefore not contrails either.

@ skilo
Im aware that fluoridation is extremely bad, there's a body of serious medical evidence.

Phlogiston Água de Beber said...

From Pilger's commentary. Thanks Nassim.
This is fast becoming unmentionable as we succumb to propaganda once described by the American black leader Malcolm X thus: "If you're not careful the newspapers will have you hating the oppressed and loving the people doing the oppressing."

I don't think Frank Herbert ever mentioned it in his Dune works, but my observation is that hate is also a mind killer. It would explain a lot.

Nassim said...

el g,

I find it breathtaking how you mention that the market for gold is largely based on bits of "paper" that can be manipulated and your belief that the USA no longer has any gold reserves and yet, the gold price is in a bubble.

SecularAnimist said...

Secular Animist -

We don't seem to be able to communicate.

No, I did not agree with your "the price never lies" rationale. We communicated just fine, we just did not agree. You reasoning was deductive tautology, which is the nature of much economic reasoning where everything goes back to an assumption.

Your assumption is the "price never lies" and all logic leads to this assumption, regardless of what that logic is.

My rationale is lying irrational panicky money flows don't create honesty.

Regardless, gold seems to be a panic meter that, personally, I don't think will hold up in the medium term. It seems a bit bubbly and the gold bugs seems to have reached a new height fanaticism. I also don't really care.

Supergravity said...

I used to see only contrails at high altitude which would dissipate minutes after forming,
in recent years the lower hanging persistent variety is overwhelmingly common in my skies. These often spread out over time and turn into a sickly haze drifting down like dust, sometimes dozens of crossing trails will merge in an artificial cloud covering.
These persistent hazetrail meshes have started to appear often and never occurred before a few years ago as I recall.

There's a perception bias in looking for suspicious anomalies in the sky when contemplating chemtrails and contrails, causing one to detect otherwise unlooked for trails more often, which might cause memory contamination when reflecting on the percieved increase of occurence.
Otherwise, memory conformity might cause people to mistakenly recall that they've always seen such hazetrail meshes choking the horizon, and that its perfectly normal.

Nassim said...


Like you, I try to look at things the way they are (or the way they seem to be). I distrust my own judgement enormously. I just watch what is going on and try to understand why certain trends are no longer correlating (e.g. oil and gold).

It seems to me that this discussion about the dollar's future value is enormously skewed by the protagonists on this blog coming predominately from an English-speaking background. It is a shame that we cannot get the opinions of the peasants and near-peasants of China and India and the wealthy of Arabia because I think that their collective opinions may be decisive.

According to Fernand Braudel, pretty well all the gold and silver that the Spanish stole from the Americas ended up in the Far East. The flow has always been in that direction - barring very brief periods when the price of gold reached ridiculous levels and nominal interest rates were very much higher than they are today.

--- said...

Realizing this is anecdotal rather than hard science, nevertheless... a 72-year-old illiterate farmer in El G's vicinity had a conversation in Spanish with me. I asked him what changes had impressed him most in recent years. He said the climate had become much hotter. He said also that the clouds had changed. I asked what he meant by that. He said "the airplanes. They leave clouds behind." I asked him how long he had been seeing this happen. He replied about 25 years.

Illiterate. Guaranteed immunity to internet conspiracy theory.

But then farmers are people who spend their lives outdoors, looking at nature and the elements. What do they know_

scrofulous said...

davefairtex said...

"ilargi said - "Nope, pointed out no such thing. Gold will go the way of oil. "

I'm not smart enough to know which way "things will go." I think in that sense, you are smarter that me. I only know what is happening now. Gold and oil are diverging. I'm not sure why, but it intrigues me.

Considering that divergence, you rightly mention, why does ilargi give no time-line or future intersect but instead a rather 'stopped clock is right twice a day' statement?

With the possibility of looking a fool, I will at least hazard a guess on that divergence. During the 2009 dip they followed each other as that was a mortgage crisis, this time they are diverging because we are in a currency crisis ... the old grey mare of the USD may not be what she used to be so instead many are climbing aboard the Golden Phoenix or even putting on silvery gossamer wings in hopes of flying to the MOOOON!

For those interested, two graphs, here and here.

Ashvin said...

re: gold

There are 3 simple options:

1) USD and GLD rise together indefinitely

2) USD collapses, GLD collapses and physical gold skyrockets.

4) USD gradually rises, GLD/physical crash, and physical cash spikes.

As an exchange traded currency based on large amounts of leverage, we shouldn't necessarily expect USD to be skyrocketing from sell offs in Euro land and global risk markets. Those flows initially seek safe bonds, such as USTs, as a "risk-free" investment vehicle. Financial institutions have gradually been accumulating more and more dollars in reserves, but those are necessarily meant to sit still. We will not see a real flood into USD until the next Lehman-style event occurs for the global financial system, sending panicked investors, caught once again with their pants around their ankles, scrambling to get a hold of any physical cash (liquidity) they can. That's when USD will spike on the exchanges. At the rate of financial deterioration we are currently witnessing, the next trigger could go off at any moment, most likely before the year is up, if not by the end of September.

What does this mean for gold? Well, when that mass panic event occurs, investors will not be thinking about whether they can take delivery of gold from leveraged exchanges. They will want to cash out that gold in dollars before the dollar price crashes any further, and therefore there will be no run on the bullion banks. Both paper and physical gold will crash in dollar-denominated value as this collapse plays out over the next few years.

For those out there who think the USD and phys gold will continue to harmoniously rise in value for another 1-5 years, forget it. That's not going to happen. One of them must give and relatively soon at that. So choose which one, but if you find yourself on the wrong side of the trade, don't complain that others here didn't give you our best advice before hand.

el gallinazo said...


Well I said a couple of things which you seem to find very strange. I find them strange - but true.

I said that the world price of gold is set on a commodity exchange whose primary players are speculators who work it on margins of 10 to one and greater. As you eliminate leverage the price would drop, Look what happened to silver in June and July as the Comex reduced the margins just a bit. Similar to 100% NINJA loans on houses. If I&S are correct, there will not be enough credit left in the coming years to permit leverage, and then physical gold will have a non-fractional price discovery. If you find that absurd, so be it. Have a good laugh on the buzzard.

The gold in Fort Knox is like Schrödinger's cat . It is both there and not there at the same time since no one can open the box and take a measurement. I personally think that it was stolen long ago. Most people don't. So the markets act as if it were there, whether it is or not. Like the cat, it is both absurd and not absurd at the same time.

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Alan2102 said...

Gold: The Ultimate Un-Bubble

Anonymous said...

Jack -

"There is going to be time when the big boys are going to start buying the gold and do you think that they are going to pay you these outrages prices."

Its an interesting question you pose. My answer is valid only for the current moment: its an international marketplace, and there are more than one group of big boys out there. If there were only one group (and there used to be just one group, from 1945 through 1971), they could indeed control things the way you say. But right now, several groups want to have control over gold since its a place to store wealth.

So if one group of big boys hammers the price of gold down - entirely possible, dump 500 tons on the market overnight and that price WILL drop - the other groups will snatch as much gold as they can carry at that low price saying "thank you very much". China is quite interested in getting more gold, and if any western government dumped a huge amount on the market, China would most likely snap it up.

However, if the global marketplace for gold were eliminated, or fragmented, things change. Your government could decide to change the rules such that they simply dictate a price for gold (say, $42 per ounce) and require that all citizens sell the gold to them and nobody else "as a matter of national security." Of course they wouldn't get much gold at that bid, but it would eliminate price discovery and a competitor to their fiat currency, which would be the real purpose behind such an action.

And if all your money was in gold, where would you be? Things would suddenly get more complicated. It would not be the end of the world, but it certainly would make life more difficult for you.

If its one thing the 2008 crisis taught me, its that when governments don't like the rules anymore, they change them.

Of course you could always take your gold to another country where there was a marketplace, but - again, it makes life much more complicated.

My feeling is, it makes sense to diversify, stay nimble, be alert, and above all, don't be wedded to your own story of "what most assuredly will happen." That's just ego talking. If we can remain humble in the face of events, we should will be able to see the signs of what is coming clearly enough to figure out what actions to take.

For instance, notice that Venezuela is nationalizing their gold mines. Granted, Chavez is an outlier, but what's to stop nations from doing this very thing going forward to varying degrees? A special tax on resource companies - call it a "windfall profits tax" - would eliminate a big chunk of the upside. We ignore this sort of sign at our peril.

p01 said...

Bunch of upside-down charts made me dizzy at that link. Pheeew...I was close to fainting. Is the whole blog like that? Makes one wonder...

Jim R said...

The gold in Fort Knox is like Schrödinger's cat. It is both there and not there at the same time ...

Precisely. And every US fin-min since the Nixon administration wants it that way.

As for the chemtrail thing, this is my last remark. While aircraft certainly can, and have, squirted various things into the air including, but not limited to: silver iodide; parathion; titanium tetrachloride; and corexit, I haven't seen any convincing (to me) evidence in those videos of anything other than H2O and some related pollutants. The German environmental group may, or may not, be barking up a tree with a squirrel in it. YMMV.

Anonymous said...

Ash -

"As an exchange traded currency based on large amounts of leverage, we shouldn't necessarily expect USD to be skyrocketing from sell offs in Euro land and global risk markets. Those flows initially seek safe bonds, such as USTs, as a "risk-free" investment vehicle."

If big money that is currently hiding in euro bonds or euro bank deposits - say in a Spanish bank - and the money wants to move to US treasuries, it must first be exchanged from euros to dollars before it can hide in US treasuries.

And that exchange from euros into USD will cause USD to rise and euro to fall, if enough money wants to do this.

And most definitely, euro bonds are being sold. ECB bond purchases are masking price impacts of these moves. Some of the euros are moving to Germany, and some may be moving to US treasuries.

This discussion is really interesting. I'm now starting to seriously consider that some massive, behind the scenes currency intervention really is being conducted by the Fed. If money is leaving euroland, there should be some dollar reaction. The anecdotes suggest money IS leaving. But the buck hasn't moved at all.

The Fed would probably have do hundreds of billions - maybe more - "temporarily" swapping USD for euros to neutralize the money flow coming out of europe. Of course now they're taking on exchange rate risk: if the euro blows up, the Fed is left with a whole bunch of paper confetti, which is not so good.

But hey, they're the Fed. They're smarter than we are, and certainly smarter than the world marketplace. They know all the right moves to make. That's why they're allowed to print the money.

Phlogiston Água de Beber said...

@ davefairtex

Just to keep the record straight, the FED is NOT allowed to print money. That job is assigned to the USG Bureau of Engraving and Printing. The following quoted from their website.

The mission of the Bureau of Engraving and Printing (BEP) is to develop and produce United States currency notes, trusted worldwide. As its primary function, the BEP prints billions of dollars - referred to as Federal Reserve Notes - each year for delivery to the Federal Reserve System. The Federal Reserve operates as the nation's central bank and serves to ensure that adequate amounts of currency and coin are in circulation. The BEP does not produce coins - all U.S. coinage is minted by the United States Mint.

The Fed like any other bank has the power to extend credit. And they do buy the BEP's banknotes and sell them to the retail banks. I presume they would like to forget the whole banknote thing, but there are still a lot of people such as me that like to see our money.

Anonymous said...

I Am NObody -

"Just to keep the record straight, the FED is NOT allowed to print money"

Isn't it interesting? The Fed effectively subcontracts the printing out to the USG.

I think that's actually pretty much symbolic of all the actions of the Fed. They have the real power (creating bank credit, and also maintaining the rules under which bank credit can be extended), and they've subcontracted the relatively unimportant execution details to others.

I'd guess they subcontract out mopping the floors too. :)

scrofulous said...

El G
If you want to worry yourself sick about bubbles, I would look to US Treasuries. When that one blows your social security check might buy you a loaf of Yankee Wonder Bread. With gold you dine on caviar from Russia, Mushu pork from China and limitless breads worth eating from India. I would include Saudi Arabia but who gives a fig for figs. Of course I could buy their oil to drive to Import-o-Rama, something the dollar might have trouble doing for you.

Jim R said...

Oh really?

Which gas stations and restaurants around here take gold in payment? At anything close to the current stated exchange rate of ~$1850?

And do they return change in smaller-denominated pieces of platinum, silver, copper, etc?

Anonymous said...

It seems to me that if TPTB understand that global aggregate growth is done for in the medium term (at least), that control of physical assets then becomes paramount. If wealth/power can no longer be reliably measured in tertiary assets (paper), then what are the essential forms of secondary wealth/power? Water, Food, Energy, Natural and mineral resources, utilities and last but not least military infrastructure.

Gold, stocks, bonds, currencies- these are just a means to establish control of the aforementioned end(s), made all that much more affordable in a deflationary environment. That's not to say that clever small fry might not advantage themselves by savvy investment timing, but few if any will do anything other than remain small fry.

It's like Stoneleigh's metaphor of Musical Chairs. We are all being set up for a high stakes game of musical chairs, where powerful players position themselves to lay claim to chairs that small players think they have a shot at capturing. It is past time to waste your energies on this rigged game.

DBS is IMO spot-on with his assessment of the unspeakable game. For the elites the ends justify the means because chaos would "of course" be worse than the maintenance of the status quo structures of wealth/power. The System (which of course best serves the already powerful) must be maintained at all costs. The bigger picture is what us small fry can do to foster scalable survival strategies to cope with the inevitably disruptive and unpredictable changes that will result from the social, economic, and political realignments and distortions that will result from the Big Games that are being played on the national and global stages.

IOW, it matters little whether or not your gold allows you to maintain your personal fortunes if your community disintegrates around you. It doesn't make too awful much difference whether deflation gives way to HI next year or in ten years if your house gets burned to the ground by looters.

Anonymous said...

As much as I see value in trying to understand the whys and wherefores of macroeconomic forces, we should ultimately be far more concerned with how we can build/foster stable, safe, resilient local communities where we live. That lifeboat you are building will do you little good if someone takes it from you at gunpoint- and the kind of security that will be necessary to prevent this will depend on far more than how many guns you have. What we face are ultimately social problems, and they will require social, not individual solutions.

We need to be thinking along the same lines as TPTB- control of the vital physical resources that WE will need to survive in a broader social context. We must abandon the dying paradigm that says that our physical well-being flows from our financial well-being, that paradigm will go the way of the big box store. The individualist paradigm that has in large part brought us to this crossroads is not the vehicle to carry us to safety and security. Our physical well-being will flow from other more timeless currencies than even gold.

jal said...

I would encourage everyone to use Google earth and look at all the doomsteads/compound that exist in Libya.
Gadafi has the biggest and the most resources. You all follow the news.
Think about that when you are planning your future.


Anonymous said...

U.S. oil speculative data released by Senator, sparking ire

"Senator Bernie Sanders, a staunch critic of oil speculators, leaked the information to a major newspaper in a move that has unsettled both regulators and Wall Street alike."

snuffy said...

This evenings comments appear to be a little more tense than usual.I have a nice glow from hard work in 85-90 degree weather.My welder just died,so I took a extended break.[I am building a gate in the lower part of the property today.My gate "fence post" is 3/8"x8"x8"steel sq tube set 4'in concrete..14 ft Pipe gate w/wiremesh].

Souperman,I agree that the pain and death will not be spread equally.What I fear most now is a bio-warfare.They and we have lots and lots of toys that they test and play with.Some even work...
It only takes a lab with 50k of equipment,and a couple of reasonably bright bio-techy types to make a very credible stab at producing biological weapons.[This is w/o Genetic bio-engineering,just cookbook stuff.]
The fear of "The Future"is much more noticeably now.People are terrified of what is happening in .gov,the market[Wallstreet]and all of the other nooks and crannies of their life.Things are happening so fast,and policy decisions so quickly,that life seems to be a roller-coaster to hell.

There are a whole bunch of reasons why Brazil remains in poverty and the citizens do not revolt...which is not the case here.

The population has never seen "good times" the USA has.They are not taught from childhood that if you play by the rules,society will reward you with all of your dreams,in spades.Dashed lifetime hopes and dreams are what I see to be the trigger for revolt.

They have no second amendment,w/ 2to 300million guns floating around.

They do not have a built in expectation of getting ahead in life and always getting a better life.

When we all start to [really] see the ugly,nasty thing that is going to destroy American as we know it,I have little doubt that many who are "politically dead" will "come-to-life" radicalized with hate for whoever they pin their rage to.They will want buckets of blood.If they are sharp enough to know who screwed who,[and many are]It bodes ill for any and all of "the right sort".

When they start to cut foodstamps,SSN,un-employment,and medicare, the teeth will start to come out in the population.Thats when I expect bad things to start.

Tired now,

Bee good,or
Bee careful


Ka said...


While I also agree with DBS' assessment, I think you both are overlooking an option. TPTB are looking to downsize the industrial state, not eliminate it. Hence they will need lots of employees to do everything from grid maintenance to manufacturing (and using) weapons to taking garbage to the dump to keeping the books. Just fewer than now, and no doubt paid less. Let's say for the next ten years or so they would want a drop of 20% (which, whaddaya know, happens to be about the current unemployment rate). Then they'll have to watch how fast oil production is dropping, and possibly repeat. Eventually, of course, it will dwindle to nothing. But in the shorter term it means that if one chooses to submit (or rather, continue one's submission) one has an 80% chance of making the cut. That's probably better odds than one has of making it in a transition community, or whatever (the flight option), and certainly better odds than making it as a rebel (the fight option).

Of course, there are other reasons for taking the flight option, like living a more rewarding life, but that's another story.

Anonymous said...

progressivepopulist -

"...We must abandon the dying paradigm that says that our physical well-being flows from our financial well-being..."

I have to say I'm largely in agreement with this, and a lot more of what you said. Stored wealth is just a part of the puzzle, and gold is only a part of that part. The whole current paradigm has been around so long, and programmed in so well, its hard to think past it sometimes even though I know better.

The ultimate solution to the overall problem must be social, as you say, not individual. And yet real change IS individual, person by person, coming from within not imposed from without. I find I can nudge my friends and family in a direction, but ultimately the only one I really can control is myself.

That said, a group of like-minded people working on the things you describe would likely be able to accomplish quite a bit more than one guy on his own. Makes me think, actually. All that capital, repurposed locally, focused on making an society that will be more likely to survive longer term. All great things are done by teams, not the lone wolf.

Food for thought.

Ashvin said...


"IOW, it matters little whether or not your gold allows you to maintain your personal fortunes if your community disintegrates around you. It doesn't make too awful much difference whether deflation gives way to HI next year or in ten years if your house gets burned to the ground by looters."

I generally agree with everything you said, as I'm sure most others do as well. However, outside of densely populated urban areas, your community disintegrating to the point where groups of people launch a siege on your land/home is a relatively low probability event, which is especially true if you have some means of protecting yourself and trust-based relations with your neighbors (the social "solutions" you mention). When I say "relatively", I mean relative to the almost assured impact that macro-economic and monetary trends will directly have on you and your family in the near future (next 5 years). The communal security issue is obviously a very important one, and the extent of its consideration is largely dependent on what part of the world you live in and other community-specific factors, but I don't think it can be used to justify the marginalization of macro-economic issues that are much more generalized across many parts of the world, and especially the developed world.

Alexander Ac said...

Poor John 'travelling the globe' Mauldin:

We will get through this decade and then be set up for the biggest bull market of our lives. Patience, grasshopper

It has to be like that, right? Wrong.


scandia said...

@Nassim, Re your comment, " It is a shame that we cannot get the opinions of peasants and near peasants of China and India and the wealthy of Arabia because I think that their collective opinion may be decisive."
Your insight matches my dis-ease as I realize that any understanding I have of events is western nations/US centric. Any understanding I have is confined to what is written in English. clearly limitation abounds. Recently I have been wondering what people in other parts of the world are saying around their kitchen tables. Are they delighted to finally see the colonizers on their knees? Are they fearful of the wounded beast? What are their strategies for survival, for maintaining assets? Etc,Etc...

Thanks also for the intro to Fernand Braudel. New to me. You are some well read " dude" :)

scandia said...

@ Nassim, a gold in the Far East the Emirates are now minting a 5oz gold coin.There are also gold vending machines in the east.

Jack said...

In one video I was watching the person said that the Federal Reserve never printed money and that job was in the hands of the central bankers

Anonymous said...

I notice many posts use acronyms that are not defined. It would be helpful if this site had an index to acronyms since most posters do not take the time to define their terms. It should not be assumed that everyone who comes to this site is steeped in economic and energy terms. In this pages comments I found these acronyms:


Jack said...

Jeffrey said...
That is a very good idea
For example I dont know what these are
HI Hyper inflation
USD US Dollar
GLD I am not sure about this but I think it is Gold on paper

Ashvin said...


We have to differentiate between assets to understand if the Fed is actually "printing money". When the Fed buys US government debt, it is more accurate to say that Congress is "printing credit money" in the amount that it decides to spend above incoming cash flows (the budget deficit). What the Fed is doing is similar to a bank loaning a borrower money, with the loan being secured by collateral (tax revenues, "entitlement" funds, other public assets, recycling of funds from other creditors), and the borrower (US govt/taxpayers) has an obligation to repay the loan at set dates with interest. The Fed, via the Primary Dealer banks, is both loaning the USG money and altering market demand dynamics for Treasuries, which in turn influences yields and incentives for investors in broader credit markets. However, it is not "printing" any money without corresponding liabilities, and at a certain point (right about now) its manipulation of yields becomes the equivalent of "pushing on a string", even with a Treasury asset purchase program. There is also the political limitation of what Congress is able/willing to spend into the economy (rather than into the coffers of large multi-national corporations).

On the other hand, when the Fed buys private sector debt-assets (such as MBS) without any discount reflecting its fair market value, and without any credible plan to soak up the excess liquidity, it is monetizing the difference in value. That is more accurately described as "money printing", as it substitutes freshly printed base money (with no liabilities attached) for debts that will not be repaid and are extremely under-secured by collateral (i.e. homes that have fallen X% in value). The limitation here is the relatively smaller and fixed size of specific private credit markets, as well as the political challenges of continuing to offload toxic debt from large banks. To the extent that the Fed is influencing private credit yields with these purchases, there is also the same "pushing on a string" problem that inevitably arrives in a debt-saturated environment.

Ashvin said...

Jeff and Jack,

For now, I can help you out with some of the acronyms you listed:

IMO - "in my opinion"
DBS - "D Benton Smith" (poster)
HI - "Hyper-inflation"
TPDB - "The Powers That Be" (I think you meant TPTB)
USD - "US Dollar"
GLD - Ticker for popular gold ETF
SNB - Swiss National Bank
NWO - New World Order
PM - Precious Metal
CHS - Charles Hugh Smith (blogger)
MSM - Mainstream Media
QE - Quantitative Easing
CNBC - Financial TV channel
ZH - Zero Hedge (financial blog)

I have guesses about the other ones, but am not quite sure.

Ashvin said...

Ah, SMSF - "self-managed superannuation fund"


EOY - "end of year",

as defined within Nassim's comments.

BEP - "Bureau of Engraving and Printing", as defined within IMN's ("I.M. Nobody") comment.

Anonymous said...


I'm not saying that our options are get out (via some independent transition commune or some such thing), or stay in (in a state of submission). It's just that even given what I think many would consider a best case scenario: a decade or so of macro-economic conditions resembling the Great Depression- the greatest threats we are likely to face in most areas will be a product of the fear, anger and desperation of those left with few options. TPTB are not going to be in the options business. That will be up to you and me. So yes, while it isn't easy to both participate in the still extant economy and work to build community resilience it is our challenge and our duty to try.

I don't mean to disparage attempts to understand and decipher the complexities of macroeconomics- I wouldn't be at TAE if I weren't a bit wonky in that general direction too. I just feel that too often in the comments section I see that debates go back and forth on speculation about the future of gold or the nature of the 'flations, and not enough time is spent on "how do we best deal with the inevitable, and inevitably unpredictable changes that we will need to adapt to individually and collectively. Sometimes it feels like an argument between one side predicting catastrophic flooding and the other side seeing catastrophic drought- in either case the crops are in serious danger. And yet clearly floods and droughts render far different challenges and require far different preparations than the differences we are likely to see resulting from masses of poor people and a few that are holding very valuable gold vs masses of poor people and a few that are holding slightly valuable gold.

I'm inclined to see the basic macro-themes outlined here in TAE as the most likely narrative and outcomes. The details surrounding the mass-impoverishment of much of the world will reveal themselves and I am thankful for all that the TAE folks are doing to analyse and chronicle these events. But while we need to understand what the trees are telling us, we need to maintain focus on the larger forest of challenges ahead.

Anonymous said...

And to the above I would add only that I find the brilliant analysis and elucidation of these macro-economic processes on the part of the TAE staff and many of the commenters here to be invaluable and enlightening and for that I extend my thanks to those who make this little online community hum with such fascinating discourse.

Alexander Ac said...

Ah, there we go:

House prices to rise 14pc to record highs by 2015

The housing slump is over, according to the Centre for Economics and Business Research (CEBR). The think tank has predicted that by 2015 house prices across the UK will have risen on average 14pc – to an all-time high.

EG forever and forever, and even longer (EG = ethernal growth)

p01 said...

TEOTWAWKI = The end of the world as we know it. Also Known As (AKA) the present.

Greg L said...
This comment has been removed by the author.
Biologique Earl said...

Jeffrey said...

"I notice many posts use acronyms that are not defined. It would be helpful if this site had an index to acronyms since most posters do not take the time to define their terms..... I found these acronyms: ....."

I understand the feeling Jeffrey. It can be very frustrating when first barraged with new acronyms. For example, I was working in an industry using such acronyms such as HTPB, NG, PEG, Double base, etc.

When important, ie on the job, I do just what you did - ask.

Someone posted this very useful site:

This useful site will usually will usually list the acronym you are unsure of. Normally one can decide which translation fits your specific need by how it is used in in your reading, ie by context.

However, acronyms such as DBS are so specialized one can not expect to find the answer on this particular link.

It seems to be particularly frustrating to the male reader who would rather keep guessing until finally he figures it out in some future situation.

Me, I never have this hang up. However, my wife says I would rather spend 20 minutes in a store to find some specific item than ask anyone to help. Not true - wellll a bit true. hehe ;-)

BTW, (ahem, by the way) I second your suggestion that TAD create such a list and have it attached to each and every post.


Robert 1

Greg L said...

>>>>When we all start to [really] see the ugly,nasty thing that is going to destroy American as we know it,I have little doubt that many who are "politically dead" will "come-to-life" radicalized with hate for whoever they pin their rage to.They will want buckets of blood.If they are sharp enough to know who screwed who,[and many are]It bodes ill for any and all of "the right sort".

When they start to cut foodstamps,SSN,un-employment,and medicare, the teeth will start to come out in the population.Thats when I expect bad things to start.<<<<

I've no doubt that once the crap hits the fan, we will see all sorts of anger, protests and radicalization of vast segments of the populace, but I think that Groovnor has raised some very excellent points about revolution and whether all of this will go anywhere unless there's some sort of philosophical underpinning to support an alternative political and economic system.

To a certain extent, the T-Party is a false attempt by TPTB to preempt and channel this brewing unrest in a direction that furthers their interest in continuing the rape of the nation's treasury, but there is no group that I aware of (it could be that it very well exists but not reported by the lamestream media) that has laid out a philosophical basis for an alternative. The lack of that means there's no strategic objective or purpose to fight for other than letting TPTB know that folks are unhappy and all that does is reinforce their position and power as they respond with whatever window dressing is needed (i.e. changing who occupies the political chairs) to mollify the unhappy masses.

I'm always reminded that ultimately revolutionaries must govern but doing so requires that much be thought out in advance. That's only being done by TPTB who wish to shape potential dissent towards their ends.

D. Benton Smith said...

Of Human Bondage part 4

What if you were a true, total and unrepentant Capitalist?

Of course, you are not. That you are here, reading this, and occasionally commenting, proves that you are not. But what if you were ?

What would you love? What would you hate? What would be your primary objective, and the secondary objectives required for its achievement?

And what if ( theoretically ) what IF … there were a single activity that gave you ALL of it, the complete wish list, the whole enchilada, in one tightly integrated self-reinforcing package ?

Pretty sweet setup is what I would call it.

I would also call it the Bond “Market.”

“Market” is in ironic quotes because it is not a 'market' at all. It is a war crime, plain and simple. (well, maybe not so simple. )

As an atrocity (a crime against humanity) it eclipses all others. Worse than murder, torture and war itself... because it embraces and nurtures all of those and adds slavery, humiliation and the degradation of humans to sub-human status as both objective and method of operation.

Here is the beginning of how it works.

That hypothetical Capitalist I spoke of loves a handful of things, but foremost are Power, Profit , and the unquestioning, absolute, Loyal Service of others TO that megalomania.

To achieve such autonomous authority there is only ONE requirement, which is point three above, “ the absolute loyalty and service of other persons. ” You can't be a tyrant without minions. Others must do your bidding or you are just a wannabe bully alone in the sand box.

You must have underlings. And for your authority over them to be absolute then THEY must be obliged to you, absolutely, … but with no enforceable obligation in return.

Towards this purpose, nothing serves as well as money, because that's what money IS. Money is the penultimate abstract symbol of obligation. The holder of 'money' is the holder of a strictly one-way ticket; THEE owe ME, period.

But money alone is not sufficient. Others still have the right ( for the time being, at least ) to simply decline to accept it. Nevertheless, if they are excessively greedy, or starving, or facing a gun, or threatened with imprisonment it is amazing what normal people are willing to do for the money that will 'save' them from that fate.

To close that route of escape requires another element. It requires debt, the OWING of money. When repayment of owed money is enforceable through the application of physical violence or credible threat of violence, then the circle is complete. The holder of debt is on the road to absolute power, and of course the absolute corruption so casually referenced in other material.

All that remains is a MEANS of acquiring sufficient quantities of debt, and keeping it.

That means exists in the most fundamental expression of Capitalism: the outrageously misnomered Bond “Market ” where the largest... and most violently enforceable... quantities of debt ( euphemistically called Capital ) are transacted. In those darkened halls, behind multiple layers of obscured ownership, the slaves of the world are bought and sold with complete impunity.

But it is no more a “market” than a back alley mugging is a retail sale, as I mean to show.

Well, since no one has shot me full of holes... yet... I will once again promise : More To Follow.

Anonymous said...

upon reading your last bit I was reminded of a recent interview on KPFA's Against The Grain, that I thought you (and maybe others) might find interesting.

"Corey Robin, author of "Fear: The History of a Political Idea," talks with Sasha Lilley about the ways that fear has been conceived by modern thinkers and the political uses to which it is put."

And thanks for sharing, count me among those who are enjoying your installments.

FrankSchoenburg said...

A bit off topic question: I was rewatching Century of Challenges and was looking at slide 20 US Debt to GDP ratio. The slide shows a 369% Debt to GDP for the U.S. in Q3 of 2009.

I sometimes like to research these numbers myself in order to make them more concrete in my mind.

I can't find a US debt to GDP ratio of 369%. Most charts I've come across are slightly under 100%.

Here is Wikipedia:

Can someone tell me how Stoneleigh came up with that chart on slide 20? I'm guessing that Stoneleigh is adding unfunded liabilities for Medicare/Medicaid and Social Security to the debt part of the equation. Am I correct?

Finally, if anyone has links to interesting graphs like debt/GDP by country, total credit categories by country, etc. I'd appreciate them.


August 21, 2011 10:57 AM

Ashvin said...


I think we are pretty much in full agreement. I would only add the following:

My view is that the deflationary macro perspective advocated here (and not necessarily by other analysts, such as Mish) is actually a means of getting people to focus on their localized circumstances of existence more. Many HI advocates (but not all), on the other hand, feel that the markets will eventually guide us back into a general state of equilibrium, where large scale "solutions" to various problems facing humanity can and will be derived. That also seems to underpin their anathema to anyone who suggests that gold may not be a means of near-term protection. When a legitimate deflationary foundation is set, it becomes clear that the current global economic, financial and monetary systems will not survive, and, as you point out, masses of people will be impoverished (financially, environmentally, socially, psychologically, spiritually, etc.) to the point where the value of an ounce of gold doesn't matter nearly as much as survival and the most basic level of human satisfaction. In fact, that reality will serve as a limitation on the value and importance of gold as a general medium of exchange or store of wealth throughout the world, which ties back into the deflationary perspective.

You are quite correct that macro monetary debates can and do often over-shadow other localized issues, but I view that as being a function of many people having an inaccurate macro perspective, and deeply-rooted emotional connections to certain ideological foundations (such as an eternal faith in unrestricted capitalism). So in that sense, I think its important to continuously stress the macro realities in a substantive and objective manner, because it provides a framework for understanding why the smaller-scale issues are so important. Of course, that must always be supplemented with a direct discussion of the issues of localized preparation themselves. Perhaps it's naive to think that anyone with a oppositional ideology will ever agree, but I'm the kind of person who will continue a back and forth discussion with someone forever, as long I believe the topic is an important piece of a more comprehensive picture and the discussion remains substantive.

That's just a little more clarification on how I think about it, anyway.

Jack said...

Hi Ash
Thanks for those helpful posts I like reading them and I copy and paste it.

We are also getting very helpful posts by others and I don't want to minimize their efforts

What is

Jack said...

the power that be
it was already said

el gallinazo said...

TPDB - The Powers Dat Be

jal said...

Groov'nor said...

Revolutions are rare and dramatic historical events requiring a few conditions in order to brew and succeed:
first conditions is a viable alternative to the current status quo;
second condition is a significant parcel of the population disenfranchised;
third condition is a weakened State, both politically and economically;
fourth condition is a favorable Zeitgeist; and finally the
fifth condition, ... the trigger.
... I don't see the conditions being right for any sort of revolution today.
Without backers, the system starts its long way down to anarchy, or a fast one, if the new Lords of the World decide they need free land ASAP. ( WAR?)
I don’t know which is the best way to teach, especially on a blog.
You, ( and there are others), who lay things out in a big glup, book form, for the readers to assimilate.

I’m probably at the other extreme, a small nibble at a time.
I give a dot and want the readers and also expect the readers to make a pattern.

You, (and others), lay out your whole picture.

I do know, that people will change their mind, (point of view), if they can rationalize the whole picture that they have created in their mind even if it does not agree with reality, (whatever that is).

Therefore, here is a point to reflect ... subject of revolution.

India ... doing a starvation demonstration to get a gov. to pass and enforce a strong law against corruptions/bribes etc.

Ben Lauden ... opposing the USA and western values.

Have a good time ... reflecting :-)


Jim R said...


Jack said...

p01 said...

el gallinazo said...
TPDB - The Powers Dat Be

You need D to fight the powers dat be. 20 Ds to be exact.

Phlogiston Água de Beber said...

I will have one more stab at the revolution question and then I'm done with it.

The collapse of a society by definition imposes a revolutionary change in essentially every aspect of its existence. Unlike a rebellious insurgency seeking to impose a different order based on some overblown philosophy, the result will be chaos. The survivors will presumably experiment with various organizational ideas within localities. At whatever remains of national power centers, given the propensity of most humans to worship gods (even ones that wear Armani), I presume most will be theocratic.

There is approximately zero reason to expect a rebel insurgency in Usanistan. We weren't that good at it as 13 colonies. We would certainly have lost without French participation. No reason I can see to think we would be any good at it now.

Usanistan is too big to bail out and too crazy to ever tidy up the mess it has made of itself. I am presuming that the hope for a rebellion is that a new order could prevent the collapse. It didn't work out that way in Rome. The trouble with Imperial structure is that, to use Gravity's favorite word, it is recursive, which is to say self-referential. When it collapses, it doesn't just do a transformer number and reorganize, it essentially evaporates. Leaving behind a big emptiness. The collapse of a global empire may be about the biggest disaster humanity has seen since the Toba eruption.

p01 said...

@I.M.N. (= I. M. Nobody)
The collapse of a global empire may be about the biggest disaster humanity has seen since the Toba eruption.

Worth mentioning that humans probably knew which plants were edible and which were poisonous at that time, and they still had hunting skills and communities. These are things that we now lack on the way down, and the chances of those skills developing are just a little bit above zero. I don't even see feudalism since the peasants should at least have a faint idea of how to work the land and raise some livestock (in the western world, and probably in most of the world).
Once the urban hordes destroy every farm and eat every animal (and not only) then what?

el gallinazo said...

DBS's series inspired me to download and watch the complete interview of the late Aaron Russo by Alex Jones. The reason for this is that a few years before his death, Russo was befriended by Nick Rockefeller. They had many hours of discussion between them socially and in this interview, which took place while Russo was in the process of dying from bladder cancer, he relates many of the things that Rockefeller related to him in their many dialogues. Rockefeller was also trying to "recruit" him to the NWO, starting with a membership to the Council on Foreign Relations and basically a "get out of trouble or jail" card good for anything. Russo diplomatically declined on the basis that his conscience just would not permit it. There then ensued a conversation where Rockefeller asked why should Russo care about these masses of people and their wellbeing. He doesn't even know them. Anyway, it is a very interesting insight into the philosophy of evil of the NWO. As Russo put it, they just don't care about people. All they care about is global control, and the control is based on debt money. I for one am convinced of Russo's credibility as he related these things.

A few words about Russo and Alex Jones. Russo did many things in his fairly short life, but he is best known for film production. He produced "Changing Places," arguably Eddie Murphy's finest film, "The Rose" with Bette Midler as a quasi Janis Joplin, and "America - From Freedom to Fascism." There are two types of everything in the universe, including two types of libertarians, and IMO Russo was the "good type." He believed in restricted government allowing the freedom to discover one's potential and to make mistakes along the way. But he also believed in a strong sense of social responsibility, that as individuals, we have to give each other a helping hand when needed. He is quite a distance from that other, Ayn Rand, I'm getting mine, vicious, greed is good, libertarian. He is also one of the few libertarians who actually knows the difference between socialism and fascism and usually uses the terms correctly, though he likes neither.

And then Alex Jones. IMO, you have to separate Jones's content and style. His style turns me off and I would imagine many of the readers here. He tends to be brash, self-aggrandizing, excessively combative and pugnacious, and, in general, somewhat obnoxious. OTOH, I find him an extremely valuable source of information, and this information to be more accurate than any major outlet in the widely distributed video area. He is in a death struggle with the NWO, and has a viewership of millions. Perhaps his overall obnoxiousness is required to do what he does.

Not that I agree with everything he says. He has areas of misinformation, which are the usual areas of people in his camp. He, for example, views the campaign of the NWO to reduce human population on the planet as ipso facto proof that the planet is under populated. He views the plan of the NWO to impose a global carbon tax to finance global government as proof that AGW is a deceit from the get go. The usual suspects. If the NWO is against it, then the problem doesn't exist. But other than these areas, he is, IMO right on and performing a valuable surface.

And back to the Russo interview. First, it is long, 1h35m. It can be downloaded from youtube:

Reflections And Warnings - An Interview With Aaron Russo {Full Film}

I think the entire video is worth watching, but Russo starts to discuss his relationship with Nick Rockefeller at 22:35, and comes back to it several times during the remainder of the interview.

Biologique Earl said...

I said:
BTW, (ahem, by the way) I second your suggestion that TAD create such a list and have it attached to each and every post.

I meant TAE.


Robert 1

Greenpa said...

" It should not be assumed that everyone who comes to this site is steeped in economic and energy terms. "

yep. Likewise; however; it should not be assumed that every newby who comes to this site is entitled to endless tutoring by those already up to speed.

There's this thing called "homework"; and another called "the google".

This isn't kindergarten here. Some of us are very fond of direct adult-adult conversation.

so neener neener neener. :-)

Phlogiston Água de Beber said...

p01 said...
Once the urban hordes destroy every farm and eat every animal (and not only) then what?

Recent events suggest the urban hordes will expend their initial efforts on destroying each other. Depending on their success, there may not be enough left to destroy every farm and eat every animal. But, if they were able to do that then I guess we would see something on the scale of the Toba eruption.

Jack said...

It took me a second to do this

seychelles said...

My best translation of TPTB: too powerful to break/bend. It worked in context so I stopped thinking about alternatives.

mikel paul said...

@El G

Always our reminders.
I, as you have, go back to the Russo interview I have always found compelling, not for it's proof of anything (altho there is plenty of good info evidence in Freedom to Facism), but instead for the human sensibilities of Russo. How he chooses not to accept Rockefellers offer that.... doesn't he "want to take care of his family....?".
It is almost as if we are, in our herculean efforts in discussing the myriad systemic causes of our modern day failure, simply caught up in and lack the sight of what is right in front of us.
I am certain of little, but find that Russo's offering that they simply "do not care" is about as close to the truth as we can be.

FWIW, my family and my friends are my 'wealth'. I believe Russo is, was, one of the good guys.

We prepare and adapt, each as best we can.

PS....on that unwritten list of people i come across who care, I respectfully note and mention here you are on it.

SecularAnimist said...
This comment has been removed by the author.
SecularAnimist said...

Alex Jones took old John Birch Society and Christian Fundamentalism conspiracies and found a whole new audience with "creative" narratives and the internet. He is obviously some sort of disinformation agent if only unknowingly(though I suspect more). Because we all know the Old World Order is so just and rational. We have to protect that at all costs. You won't find many homeless worrying about the New World Order - that is usually reserved for people with houses and computers. It all boils down to constitution worship and maintaining the pecking order. Where the only solution is to EXPOSE the new world order.

What is interesting, is now, it has come full circle around with fears of a population reduction to reach the Neo-Malthusian crowd(which has also always been associated with the reactionary religious right until peak oil). Of course the "billions must die" crowd is taken in by this. Talk about two worthless schools of thought - one quasi-scientific cover-story for racism, imperialism, and genocide, the other a "spiritual" story for "manifest destiny" - which was racism driven genocide.

The both add up to a paralysis of thought about social change. Which is also why these schools of thought do overlap and will solidify more in the future with Libertarians. "It can't be the system itself, by God, it has to be the Globalists"

These "theories" provide no deep systemic analysis of the social relations at play. They do not point to imperialism and capitalism as the major problems, instead ascribing society's ills to a few leaders from imperialist countries. Likewise the neo-malthusians lack any serious systemic analysis and point to only population(and they have no real understanding of modern demographics or a myriad of other systemic issues). Both, overly simplistic analyses that feed off of cultural mythology and stockholm syndrome. One screaming about a population reduction plan they other insisting it has to happen - what a perfect match.

Freedom to fascism = cultural stupidity

el gallinazo said...

Mikel Paul

Thanks for your kind words

Re Chemtrail - my last comment

Things I know:

1) The 5 brother Rockefeller branch of the NWO (Baum's wicked witch of the west) has been involved with attempts to limit population growth since the 1920's, with particular emphasis on the non-white races. This was the primary impetus for Rockefeller University research on the upper east side of Manhattan. The gory history and details are best described by William Engdahl in The Seeds of Destruction which also deals with GMO foods. In short, a prime directive of the NWO is to rid the world of a lot of us useless eaters.

2) The NWO banking cartel is without a moral compass of any sort. They will do anything that they conceive to be in their best interest. Since as Russo pointed out, they don't need more money as they make the money, their interest is ***total global control*** of the Üntermenschen (which includes 99.99% of the global population).

3) Their attempts to limit world population growth so far has been remarkably unsuccessful as any chart will show it to be in a positive exponential blow off.

4) Thus, if spraying toxic chemicals from airplanes was a technique that they regarded as technically capable of a new offensive to kill off us useless eaters, they would not hesitate to do so.

5) That said, I do not know if chemtrails are real and if they are doing it. I only know that they would do it if they thought it technically productive to their ends. Also, that the NWO is against further population growth or population staying at the current 7 billion level, in no way affects my belief that it is an ecological catastrophe which will result in even greater suffering from the collapse. SA may rant on from his pulpit but I have no desire to prove the world is round.

p01 said...

El gallinazo said
population staying at the current 7 billion level, in no way affects my belief that it is an ecological catastrophe which will result in even greater suffering from the collapse. SA may rant on from his pulpit but I have no desire to prove the world is round.

I find it puzzling how "will" becomes "must" in all aforementioned rants; it borders on surreal and event gets offensive at some point.

p01 said...

event gets offensive at some point

Should read even instead of event.

I might add that the point of being offensive instead of just harmless trolling is right about NOW!

CarolS said...

Dear Friends - I have been following along and trying to learn.. want to add that the problem we are seeing is called sociopathy. Please check out Political Ponerology. Down through history, groups of sociopaths have controlled power in countries after having conned/cheated/wrested control from legitimate leaders - thereby becoming legit themselves (i.e. Hitler). It seems like most empires end this way The sociopaths will do the bidding of the true psychopaths who remain hidden. They, by definition, lack empathy (soul - whatever you call it) and are unable to give a damn about even their own progeny. It is mental illness writ large. Small clans, tribes or groups have historically identified these people and marginalized them so they can not do harm. Large societies are not able to do this so well. Most of the empires I have studied have ended at the hands of the sociopaths.
Thank you all for the great conversations and insights. I also believe we are headed to extinction. And what an ugly trip down it will be. Only thing that I care about now is trying to inform, help and love the people I have access to.

SecularAnimist said...

"Their attempts to limit world population growth so far has been remarkably unsuccessful as any chart will show it to be in a positive exponential blow off."

Their attempts? What the hell are you babbling about.

Ahh, the church of NWO,neo-malthusians. It's an odd mix of simplicity and insanity.

How about reading current population studies, or is that too much to ask. You know, actually, studying the issue. Which you CLEARLY have not done.

Greenpa said...

CarolS - yep, many of us are on the same page there-

that blog post got discussed here a good bit at the time; lots of agreement.

At this point, we not only tolerate sociopathy, we teach it, and adulate it.

And essentially have no weapons to use against it.

SecularAnimist said...

"" in no way affects my belief that it is an ecological catastrophe ""

And where are all these intense material demands coming from causing the ecological catastrophe?

You are not a real critic of modern industrial society. Seriously, your not.

You have to make the CASE, not just point to a
couple graphs with lines going the same direction. That means cracking the books, at least a little, and figuring it out, or finding the work of scholars who HAVE figured it out and made a case. And there are a lot of them.

SecularAnimist said...

Interestingly, the Christian fundamentalism that spawned the NWO conspiracy was about the rapture and the formation of a "Global government" being the sign of the end of time.

Neo-Malthusianism follows in a similar vein like all apocalyptic eschatology, which is an attempt to escape from the imperatives of the present. It is a way of avoiding the difficult work that must be undertaken now, and escaping into the fantasy-land, the End Of The World, the Final Denouement at the End of Time.

It works pretty good for maintaining the status-quo, doesn't it. It ENCOURAGES the continuation of the destructive status quo

Ashvin said...

What we have here with the NWO crowd, IMO, is a set of intelligent and informed people who still fail to grasp the "biggest" possible picture, or at least one of them. When they talk about the Fed, central banking elites, private banking elites, war profiteers, etc., they are describing a very efficient component of the Capitalist system, but also failing to realize that it naturally evolved from the dialectic evolution of that system. Allow me to quote myself, as I'm feeling too lazy to write out my train of thought right now.

A Spectre Still Haunts Europe...and America

"There is an ever-present debate which occurs over big government vs. small government, public entitlements vs. privatized markets, public spending vs. austerity, etc. These concepts are typically perceived as independent ideas that exist so humans can choose one over the other, but they are actually two sides of the same coin, one side being necessary for the other side to exist.

...The opposing forces of modern times are different from those of Marx and Engels only in form, but never in function. It is the ongoing clash between the increasingly rich and increasingly poor, the extractors of economic rents and the sellers of debt, the oppressors and the oppressed. Whatever the specific characterization of the simple dialectic involved, it must be viewed as a direct product of historical processes that have evolved over time."

Highly Efficient Systems and Agonizing Death

"What's important to understand is that every systemic component of the body has a specific function that serves to keep the body alive, growing and relatively stable over periods of time. These functions take place without any regard to concepts of fairness or equality. If my individual skin cells had an emergent sense of self-aware conscience (like me), then they would probably be very upset with my brain cells, which are much fewer in number and receive a disproportionate share of my resource intake (the brain receives 20% of the body's blood). In fact, the comfortable brain cells typically remain alive for a person's entire lifetime, while the average skin cell lasts for about a couple of weeks before it dies off and is replaced.

This systems theoretical framework of understanding applies just as well to our global economic, social, cultural and political structures. These evolved systems are amazingly efficient at keeping the overarching human civilization "alive", growing and relatively stable. Consistent material growth is achieved by exploiting limited resources and concentrating such resources in centralized structures through various mechanisms of action. Just as a biological species must eventually adapt to its surroundings or go extinct, human socioeconomic systems that are inefficient at promoting consistent growth/concentration will be marginalized, modified or replaced.

Of course, socioeconomic evolution takes place much more rapidly than its biological counterpart. Over the last few hundred years, every dominant system of human civilization has evolved to efficiently maintain the status quo processes of material growth and wealth concentration. These systems will almost always sacrifice "fairness" and "equality" for efficiency, because the former have no role in preserving the overarching civilization as it has come to exist."

Ashvin said...


Constitutional democracy, in that sense, has simply been an efficient political mode of preserving the Capitalist relations, by providing the illusion of freedom and control. It was really the beginning in a long line of largely symbolic "concessions" that would be granted to the Proletariat. It has generally been more convenient and profitable (financially, politically, socially and culturally) to keep men in factories/offices/universities/barracks, women "in labor" and the population growing in the developed world, but such trends began to really pose an existential crisis for the wealth concentrating system a few decades ago. That's when the great pullback towards systematic oppression and destruction of labor took off in the developed world.

There are no doubt varying degrees of heartless sociopathy within the structures of Capitalist elites, but one common theme between all factions of the status quo is that concessions are no longer palatable options. What is needed to preserve the system's order must be taken through outright theft and force. That is where the "NWO faction" really comes in, because their methods are suddenly much more highly valued by the system than the strikingly cruel, yet more traditional methods. A systemic backlash by the masses is inevitable to occur as well at much larger scales than we currently see, but not necessarily to "succeed".

SecularAnimist said...

Yes, don't worry about the normal, killing, lying, manipulated, false flagging, thieving elite - Worry about the new group they are going to bring in. If you thought the old world order was bad, just until the new world order gets here. Fear change fear change fear change..... Cling to the status-quo cling cling cling

Remember folks, all the problems in the world are due to New World Order plans and population.

You can file that under Capitalist preservation propaganda (CPP)

scandia said...

The UK riots may be old news but there is still much to know about the leaders, their holier than thou stance. Priveleged sociopaths above the law.

p01 said...

I wish arrogant pampered western kiddies would see themselves for what they are and stop spamming the comment section with their krap. Or at least someone should moderate the utter nonsense.

SecularAnimist said...

""What we have here with the NWO crowd, IMO, is a set of intelligent and informed people who still fail to grasp the "biggest" possible picture, or at least one of them.""

It's cultural stupidity as opposed to general stupidity. Feeding the psychological need(probably with help of the same people they rail against) that it is not the system's gravitation itself, but a bad group that must be exposed to save the system. That what they are witnessing is not the normal systemic tendencies of capitalist-imperialism, but a dark sinister plan to ruin capitalism.

"Constitutional democracy, in that sense, has simply been an efficient political mode of preserving the Capitalist relations, by providing the illusion of freedom and control."

The modern nation-state's mechanisms were designed for capitalism. Which is to systemically maintain the class structure with force and protect the property of the wealthy against the masses. Period.

mikel paul said...



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