Thursday, September 29, 2011

September 29 2011: All you need to know about what's real and what's not

Alfred Palmer War Girl October 1942
"Women become skilled shop technicians after careful training in the school at the Douglas Aircraft Company plant in Long Beach, California. Planes made here include the B-17F Flying Fortress heavy bomber, A-20 assault bomber and C-47 transport"

Ilargi: It’s time to make one thing clear once and for all: the financial institutions at the heart of our economic system are finished, broke, bankrupt. Since 2008, they have been kept alive only by gigantic infusions of our, the public's, money. We have been, and still are, told this is only temporary, and that the money will help restore them to health and then be repaid, but temporary has been 3 years and change now and there’s no restored health anywhere in sight.

The opposite is true: Obama launches another -even more desperate- half-trillion dollar jobs plan, and Europe is devising another multi-trillion dollar plan aimed solely at keeping banks from going belly-up, because these banks have lost anywhere between 50% and 90% of their market capitalization in the past few years, despite the multi-trillion capital infusions(!), and are still loaded to the hilt with investments, in sovereign bonds, in each other, in derivatives, that are so toxic they could blow them up at any moment.

If this were not true, if there were any possibility left that the banks at the heart of the system could indeed be saved and restored back to health with public funds, their assets would all long have been marked to market, and market confidence would thus be fully restored. The fact that mark-to-market is still religiously shunned 3 years after Lehman should tell you all you need to know about what's real and what's not.

There is no hope, no indication, and no possibility, that pouring even more taxpayer and future taxpayer capital into the leaks would stop the floodwater from entering. The leaks are both too big, and too numerous. If a possibility existed to seal the leaks with public funds, it would have been implemented by now, everyone -from banks to governments- would have taken their share of losses and we would now be talking about preventing the next crisis, not about how to deal with the present one, which has only gotten deeper as we've gone along.

The meme that comes from our "leaders" is that by saving the banks -and that way only-, we will be able to save ourselves. The reality is, however, that the banks are being saved at our expense, and we get poorer fast because of it.

And it's worse that that: the banks are beyond salvation, which means there can and will be no end to the constant flood of money from us, from the public coffers, towards the financial system, as long as present leadership, and their meme of saving banks to save ourselves, remain in control.

It's only when we drop that meme that we can start moving towards a world that, though admittedly much poorer and simpler than the one we inhabit today, will be less depressing, and less prone to saddle us with our present widespread mental burden of paralyzing powerlessness.

What we see in the media today is that markets are rising because the German Bundestag voted Yes to expanding the EFSF with another €200 billion or so. The news is received with relief. But it should be received, by ordinary people, with a reaction that's 180 degrees different. Because it means another €200 billion of their money is wasted on a bottomless pit, money that could have been used to alleviate the trials and tribulations of the weak among us.

It means we are moving one more step closer to ourselves being the weak among us.

The interests of the banking industry are not our interests; the two are, in the present instance, incompatible. There are situations possible where this is not the case, but our present situation is not one of them. Indeed, our interests are today diametrically opposed to those of the banking system because that system is drawing its last breath, choking on an overkill of debt, and trying hard, aided and abetted by our political leadership, to drag us down with it.

If we are to have a feasible shot at building a future that's humane, we must leave those banks to die that have no chance of survival, and we must rid ourselves of those "leaders" amongst us who refuse to build that future with and for us and who persist in taking our money only to hand it to a deeply bankrupt industry, which can subsequently use it to finance their election campaigns.

It's one thing to ask people to make sacrifices in order to save their health care and education systems. It's quite another to force, instead of ask, them to make sacrifices in order to save their banking system. And people will only take this lying down to an extent.

Greece’s austerity measures, both budget cuts and tax increases, will add up to some 20% of GDP. In comparison, US GDP is some $15 trillion. If the US were to adopt austerity measures equal to Greece, it would have to do so to the tune of $3 trillion per year. If memory serves, it presently has enough trouble trying to push through anywhere from $1.2 trillion to $4 trillion over 10 years.

The Greek bailout is built upon severe austerity measures. It is perhaps more than anything else a clear indicator of how the transfer of wealth takes place, from never-will-haves to never-will-have-enoughs. And the demands for further cuts just keeps on coming, in a vicious circle. The more cuts, the more the economy shrinks, the more demand for cuts there will be from the EU/ECB/IMF troika.

The day will come when the Greeks decide that if they have to go through hardship like this, they might as well at least be masters of their own fate. It’s one thing to decide amongst yourselves that you need to do with less so your children can do better. It's another to have others decide it for you, and with no guarantees for the children either.

Austerity will be with all of us in the western world. That's not something we can choose not to partake in. We can though, like the Greeks will soon, opt to take matters into our own hands. Let the banks go where banks go to die but protect people’s deposits as much as we can. This might make things worse for a while than continuing on the present path, but that is by no means even certain.

One thing must be clear though from now on in: the road we're traveling on today leads nowhere. Well, nowhere good. The banks at the core of the system can not be saved, and even if they could we should wonder out very loud if we would do wise to save them, given the price we would need to pay, and the reward we would get for doing so.

Whatever our choice would be in that regard, we need to become masters of our own fates again. Then we can mark all assets to market, both our own and the banks', add up the losses, restructure what must be restructured, cut what must be cut, but still while trying to preserve the institutions that keep us together as societies: our health care system, our schools, all the things that bind us together. Banks are simply not in that category.

We must get back to the core, preferably before it's all we have left. We need to ringfence our basic needs. Banks are not included in that. Don't let them fool you -any longer- into thinking that they are.

Obama's Euro-Crisis Lecture Is 'Pitiful and Sad'
by Kristen Allen and David Gordon Smith - Spiegel

US President Obama has given the Europeans a harsh lecture on the dangers of their ongoing debt crisis. Offended by the unsolicited advice, Europeans have suggested the US get its own house in order first. Obama's remarks were "arrogant" and "absurd," German commentators say on Wednesday.

Europeans are well aware of the seriousness of their ongoing debt crisis. But they don't, it seems, like to receive lectures from other countries -- especially the United States, which is struggling to deal with its own mountain of debt.

On Tuesday, German Finance Minister Wolfgang Schäuble curtly rejected recent American criticism of Europe's approach to solving its debt crisis. "I don't think Europe's problems are America's only problems," said Schäuble, who has become increasingly sharp-tongued as the euro crisis deepens. "It's always easier to give other people advice."

Schäuble was referring to strongly worded comments made by US President Barack Obama and US Treasury Secretary Timothy Geithner in recent days. At an event in California on Monday, Obama warned Europeans that their inaction was "scaring the world." The Europeans, he said, "have not fully healed from the crisis back in 2007 and never fully dealt with all the challenges that their banking system faced.

It's now being compounded by what's happening in Greece." He continued: "They're going through a financial crisis that is scaring the world, and they're trying to take responsible actions, but those actions haven't been quite as quick as they need to be."

Distracting From Problems at Home
Those comments came hot on the heels of Geithner's remarks over the weekend. Speaking in Washington Saturday at the annual meeting of the International Monetary Fund and the World Bank, Geithner warned that the European debt crisis represents "the most serious risk now confronting the world economy."

He said Europeans needed to do more to create a "firewall" against further contagion and talked of the threat of "cascading default" and runs on banks. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe," he said.

German observers have reacted angrily to the comments, saying that the US is in no position to criticize other countries, given its own $14-trillion pile of national debt and ongoing wrangling over the country's debt ceiling. Others claim that Obama is just trying to distract attention from the US's problems and point out that the US president was in California to raise funds and voter support ahead of his reelection campaign next year.

But perhaps the Europeans simply don't like a taste of their own medicine. When a US default was looming back in July when Congress was unable to agree on raising the debt ceiling, European commentators were quick to weigh in and give Obama and the US unsolicited advice. "The global economy needs an American agreement," said a French government minister at the time.

On Wednesday, German media commentators slam Obama's criticism of Europe.

The mass-circulation Bild writes:
"Obama's lecture on the euro crisis … is overbearing, arrogant and absurd. … In a nutshell, he is claiming that Europe is to blame for the current financial crisis, which is 'scaring the world.' Excuse me?"

"The American president seems to have forgotten a few details. The most important trigger of the financial and economic crisis was US banks and their insane real-estate dealings. The US is still piling up debt … The American congress is crippled by a battle between the right and the left. The banks are gambling just as recklessly as they did before the crisis. The president's scolding is a pathetic attempt to distract attention from his own failures. How embarrassing."

The center-left Süddeutsche Zeitung writes:
"One needs to remember the context within which Obama's scolding of the Europeans took place. It was an event where the president was raising money for the Democrats and where he wanted to explain to voters why the US economy is much worse off than he and his economic experts had believed until recently. Hence his criticism of the EU was simple electioneering."

"The problem, however, is that the US president is absolutely right. For far too long, the Europeans -- including the Germans -- treated the financial crisis as a purely American problem. They have still found no solution for their own debt crisis. Now Europe's problems are having a negative impact on growth and jobs around the world, including in the US. It would not be an exaggeration to say that Europe is threatening Obama's already precarious chances of reelection in 2012.

That is something that surely does not leave Obama cold. In that respect, it doesn't help much to point out that, once the Europeans have got their house in order, the financial markets will return their attention to America's debt crisis and its ailing political system. Financially, Europe is currently the most dangerous place in the world."

The center-right Frankfurter Allgemeine Zeitung writes:
"Dark clouds have gathered over the American president. The gloomy state of the economy is putting a dampener on Obama's future prospects. The optimism of the past is gone, replaced by a cheap search for a scapegoat."
"Obama thinks he has found one. He blames the Europeans for reacting too late to the debt crisis. We Europeans are apparently taking on too little new debt to get out of the crisis. But we are already feeling the wonderful effects of borrowing too much money."

The financial daily Handelsblatt writes:
"That's not how friends talk to each other. That applies particularly to friends who have themselves failed to get a handle on their own, self-made crisis. Barack Obama governs a country where, despite billions in state aid, the economy is stagnating, companies refuse to invest despite calls for patriotism, and which gets embroiled in one political trench war after another … Now this country is dispensing advice, suggestions and finger-pointing."

"These are suggestions that have already failed to work in the US: Money is supposed to save Europe -- quickly and in the largest quantities possible. US Secretary of Treasury Timothy Geithner has been trying for more than two-and-a-half years to suffocate his crisis with money. But aside from the lack of success, the collateral damage is immense. It manifests itself in a loss of government credibility, a loss of trust in the currency and the paralysis of any sort of dynamism -- because the crushing debt mountain is robbing the famously optimistic Americans of their confidence."

"The fact that Barack Obama, who is a brilliant thinker, knows full well that things are much more complicated in reality does not help. Indeed, it does the opposite. In the desperate battle for his re-election he'd rather construct myths, such as claiming that the Europeans alone are responsible for the American mess. Not only is this fundamentally wrong, but -- coming as it does from a friend -- it's downright pitiful and sad."

Germany slams 'stupid' US plans to boost EU rescue fund
by Ambrose Evans-Pritchard - Telegraph

Germany and America were on a collision course on Tuesday night over the handling of Europe's debt crisis after Berlin savaged plans to boost the EU rescue fund as a "stupid idea" and told the White House to sort out its own mess before giving gratuitous advice to others.

German finance minister Wolfgang Schauble said it would be a folly to boost the EU's bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank. "I don't understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense," he said.

Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is "scaring the world". "It's always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government," he said.

The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into "cascading default, bank runs and catastrophic risk" without dramatic action.

The danger for Germany is that America will lose patience, with unpredictable consequences. The US Federal Reserve is currently propping up the European banking system in a variety of ways, including dollar swaps. Markets across the world ignored the mixed signals about the true scope of EU rescue measures, convinced that EU leaders have a "grand plan" up their sleeves and will unveil the details after the Bundestag has voted on Thursday on the earlier July deal to revamp the fund.

France's CAC-40 surged by 5.7pc, led by a 17pc rise for Societe Generale. Germany's Dax was up 5.3pc. The FTSE 100 jumped 4pc in London, the biggest one-day rise this year. Oil jumped almost $4 in New York to $88 a barrel.

In Berlin, Chancellor Angela Merkel was fighting for her political life as the rump of lawmakers from her coalition vowed to reject the EFSF package, though the latest tally suggests she may squeeze by with her own majority. Angry dissidents suspect that secret plans are being withheld until after the vote.

Greek premier George Papandreou told German business leaders that his country would honour its austerity pledges, but also issued a veiled warning. "The persistent criticisms levelled against Greece are deeply frustrating, not only at the political level, where a superhuman effort is being made to meet stringent targets in a deepening recession, but frustrating also for the Greeks, who are making these painful sacrifices."

"Drastic measures have had a dramatic impact on the living standards of our citizens. Many Greeks feel they have little left to give. If people feel only punishment and scorn, this crisis will become a lost cause," he said.

Mr Papandreou's Pasok party passed a crucial vote on Tuesday to raise property taxes, but at a high political price. The party's approval rating has fallen to 15pc in the latest Mega poll. However, Greece was confronted with a new threat as it emerged that several eurozone members are demanding the private sector absorb bigger losses than originally agreed as part of a second bail-out.

A deal struck in July would see creditors taking 21pc losses on their Greek debt holdings, adding around €45bn to the €109bn proposed second rescue. However, more than a third of the 17-member single currency bloc are now said to be demanding bigger haircuts for the private sector. Talk of revisions to the second bail-out may renew default fears as the IMF has yet to re-engage with Greece over the latest €8bn tranche of its initial €110bn rescue. Greece is at risk of running out of money by October 8, though analysts say the payment is almost certain to be made whether or not Greece has complied fully with the terms.

Greece has a trump card in rescue talks with the IMF-EU "Troika". If it opts for a "hard default", it could set off a chain reaction. Lorenzo Bini-Smaghi, an ECB board member, said those arguing that Europe's banks could withstand a Greek default are misguided. "Similar views were held before Lehman. Those who say this have no idea how contagion works," he said.

Analysts say the Troika will have to approve the next €8bn tranche of aid for Athens in October whether or not Greece has complied fully with the terms. It cannot risk a showdown before Europe's banks have beefed up their capital base, or before the EFSF is fully equipped to defend the rest of the system. Like a forced marriage, Europe and Greece must kiss and pretend.

German Parliament Passes Euro Fund Expansion
by Spiegel

Chancellor Angela Merkel got the majority she needed on Thursday as German parliament passed the expansion of the euro backstop fund, the EFSF. With fewer conservative renegades than feared, Merkel can breathe a sigh of relief. But with more difficult decisions approaching, the respite may not last.

German parliamentarians on Thursday approved the planned expansion of the European Financial Stability Facility (EFSF) with 523 voting in favor, 85 against and three abstentions.

The bill's passage is a vital hurdle in euro-zone efforts to increase the fund's lending capacity from its current €250 billion ($338 billion) to €440 billion. Germany's share of guarantees for the fund will rise from €120 billion to €211 billion, though several other euro-zone parliaments must still vote on the expansion.

The result also means that Merkel can breathe a sigh of relief. There had been concern that renegades within her center-right coalition could mean that Merkel would be forced to rely on opposition votes to pass the legislation. Had that come to pass, her power would have been severely curtailed .

In the end, however, 315 parliamentarians from Merkel's conservatives and from her junior coalition partners, the Free Democrats, voted in favor of the EFSF expansion. Fewer than 311 would have severely curtailed Merkel's power as it would have made her reliant on opposition votes and indicated that she could no longer rely on the support of her own coalition.

To sweeten the deal, the law passed on Thursday includes a provision which gives the German parliament a say in future EFSF decisions. In a recent verdict, Germany's highest court had demanded greater parliamentary involvement in decisions relating to euro-zone bailouts. And now, a special committee will be established in the Bundestag to ensure parliamentary involvement even in hurried EFSF resolutions.

Additional Powers for the EFSF
European Union leaders agreed to expand the EFSF in July once it had become clear that the fund as originally designed was insufficient should the debt crisis which has befallen Greece continue to spread. The fund was also granted new powers, enabling it to buy up bonds from debt-stricken euro-zone countries in order to keep their borrowing costs down. So far, the European Central Bank has been tasked with such purchases . In addition, the EFSF will be able to indirectly bail out banks that run into trouble as a result of overexposure to bonds from indebted states such as Greece.

The expansion of the EFSF still faces some significant hurdles, with several countries left to vote. Most significantly, Slovakia has threatened to reject the expansion -- a move which, given the need for unanimous approval, could torpedo the enlargement of the fund. France passed the expansion several weeks ago and both Finland and Austria passed it earlier this week.

The reform of the EFSF is just one step in the ongoing effort to prevent the common currency from collapsing as a result of the sovereign debt crisis which has struck several euro-zone member states. On Wednesday, the European Parliament passed far-reaching measures to strengthen the Stability Pact in an effort to prevent lax fiscal policy in euro-zone capitals.

Later this autumn, a second bailout package for Greece, worth €109 billion, is to be voted on. And at the beginning of next year, the German parliament will have to vote on the European Stability Mechanism (ESM), the permanent euro backstop which is set to replace the EFSF in 2013.

Several analysts, however, have said that even if the EFSF is expanded to €440 billion it still won't be large enough to convince investors that Europe is serious about stopping the ongoing debt crisis. Indeed, this week many European leaders have indicated that further changes to the EFSF may be in the offing.

Expanding the Expansion?
One idea involves leveraging the fund by allowing it to borrow heavily against its assets, thus increasing its impact to as much as €2 trillion. Others have intimated that the fund could be further expanded.

Both moves, however, are not without risk. And German politicians have been quick to deny that the second option, that of further expansion, is on the table. Both Merkel and Finance Minister Wolfgang Schäuble have clearly denied that such an expansion is possible. In the floor debate on Thursday, Schäuble reiterated his opposition, saying that an increase to Germany's €211 billion guarantee "is not up for debate."

Horst Seehofer, head of the conservative Christian Social Union, also said on Thursday in an interview with the Süddeutsche Zeitung, that his party would not agree to further expansion. Berlin is concerned that, should it pledge additional guarantees to help indebted euro-zone countries, its own credit rating could be at risk. Standard & Poor's indicated as much this week. But S&P also suggested that extensive leveraging of the EFSF could likewise have a deleterious effect on Germany's credit rating.

Still, stock markets across the world have risen this week on comments over the weekend and earlier this week indicating that the EU was planning to "maximize the impact" of the EFSF. On Thursday, the euro rose rapidly against the dollar in early trading on the expectation that German parliament would pass the EFSF expansion bill.

Shiller: House Prices Probably Won’t Hit Bottom For Years
by Henry Blodget - Daily Ticker 

The July numbers for the most widely followed measure of house prices, the S&P/Case-Shiller Index, were released this morning. The numbers weren't terrible--on a seasonally adjusted basis, July was basically the same as June--but one of the creators of the index, Professor Robert Shiller of Yale University, isn't taking much solace in them.

The economy has deteriorated significantly since July, Professor Shiller observes, and he suspects that the housing market has followed suit. And, from a broader perspective, house prices are still down more than 4% year over year.

In February, Professor Shiller startled those looking for an imminent "bottom" in house prices by suggesting that house prices could still fall 10% to 25%. He's standing by that assessment.

House prices won't necessarily plunge from here in nominal terms, but in real terms--after adjusting for inflation--they could still drop significantly, Professor Shiller says. And the bottom might not arrive for years.

Split opens over Greek bail-out terms
by Peter Spiegel and Quentin Peel - FT

A split has opened in the eurozone over the terms of Greece’s second €109bn bail-out with as many as seven of the bloc’s 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials.

The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July.

While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt.

Shares in French banks have rallied in recent days following signs that eurozone officials are preparing to increase the financial firepower of the bloc’s €440bn bail-out fund, which could within months be able to inject capital into eurozone banks and purchase sovereign bonds.

On a visit to Berlin, George Papandreou, the Greek prime minister, urged Germans to recognise the "superhuman effort" his country was making to impose drastic austerity measures in a deepening recession. "I can guarantee that Greece will live up to all its commitments," he said.

Senior European said there was significant division over the move to re-open the bondholders’ deal, which could trigger a bigger and earlier restructuring of Greek debt. Even within Germany, officials are split over whether to press for a bigger "haircut" for private sector creditors. "In Germany, there are the hardliners and there are the moderates," said one senior European official. "This is the hardliners’ stance."

Because of the recent economic downturn and Greece’s slow implementation of austerity measures, officials estimate Athens’ funding needs over the next three years have grown beyond the €172bn forecast this summer. The scale of the shortfall will be determined by international lenders over the next few weeks.

Berlin has long wanted bondholders to make a bigger contribution to a new bail-out, a point reiterated publicly in recent days by Wolfgang Schäuble, Germany’s finance minister.

German insistence has recently intensified, according to people briefed on the talks. Eurozone finance ministers had originally hoped to sign off on the next aid tranche to Greece on Monday, but a decision is now expected to delay the next €8bn payment until an emergency meeting in two weeks.

Berlin is expected to back the disbursement eventually. But a senior official said some German policymakers then want the banks to take a larger haircut on their bond holdings or renegotiate bond swaps, reflecting the sharp fall in Greek bond values since July.

Under the terms of the July bail-out, bondholders agreed to trade about €135bn in bonds that come due through 2020 for new, European Union-backed bonds that would not be repaid for decades. This deal implied a haircut of 21 per cent for bondholders, but many German officials say they were forced to agree a deal that was too beneficial for the banks.

On Tuesday, eurozone banks and German and French stock markets had their biggest gains since the first Greek bail-out was unveiled in May 2010.
France’s Société Générale surged 17 per cent, BNP Paribas was up 14 per cent and Crédit Agricole gained 13 per cent while the broader eurozone bank sector increased 9 per cent. BNP and SocGen shares have now risen by a third in the past three days.

Frau Merkel, it really is a euro crisis
by Ambrose Evans-Pritchard - Telegraph

Angela Merkel told German industry today that we are not facing "a euro crisis, but a debt crisis."

She is wrong. Total levels of private and sovereign debt in the eurozone are lower than in the UK, the US, and far lower than in Japan.

Greece’s debt levels are around 250pc of GDP, at the lower end of the developed world. Spain’s sovereign debt is admirably modest at around 65pc. Italy’s household debt level is the envy of the rich world. It has a primary budget surplus. Italy has many problems, but the budget deficit is not one of them.

So why is there such a destructive and long-festering crisis in the eurozone? Why have three countries required an EU-IMF bail-out? Why is the ECB having to shore the debt markets of five countries — soon to be six — with direct bond purchases, including Spain and Italy? Not because of debt, except in the most superficial sense.

The reason this crisis keeps grinding ever deeper is because the euro itself is a machine for perpetual destruction. The currency is fundamentally warped and misaligned. It spans a 30pc gap in competitiveness between North and South. Intra-EMU current account deficits have become vast, chronic, and corrosive. Monetary Union is inherently poisonous.

The countries in trouble no longer have the policy tools — interest rates, QE, liquidity, and exchange rates — to lift themselves out of debt-deflation. Just as they had few tools to prevent a catastrophic credit bubble during the boom. Their travails were caused in great part by negative real interest rates set by the ECB (irresponsibly) for German needs. Their fiscal deficits (and remember, Spain and Ireland ran big surpluses in the boom) have exploded because of the Great Recession itself — as they have in the UK, US, and Japan.

Draconian fiscal tightening might be manageable for these countries if the Teutonic bloc is willing to offset the contraction in demand by cranking up their own stimulus, allowing the intra-EMU imbalances to close from both ends. But the Teutons instead cling to their pieties, and their morality tale. The result is the downward spiral that we can all see.

Germany imposes austerity alone, seemingly convinced that there are good imbalances (German trade surpluses) and bad imbalances (Club Med trade deficits). Well sorry, Frau Merkel, this is intellectually childish. Both imbalances are equally bad. Booth sides are equally "guilty", to borrow your morality language.

As I have written many times, this austerity fetishism repeats the fatal error of the 1930s Gold Standard when surplus states (France and the US then) failed to recycle their gold hoard and instead imposed the full burden of adjustment on the deficit countries — until these countries broke free and inflicted condign revenge.

Larry Hatheway and Stephane Deo at UBS have just issued a sequel to their report warning of violence or civil war if the eurozone crisis leads to break-up. They take Berlin to task for its primitive policy prescriptions.

"We believe the Eurozone sovereign debt crisis has entered a more dangerous phase. The main reason the Eurozone has been incapable of addressing its long-running sovereign debt crisis satisfactorily is because leaders have framed an in appropriate agenda. Focused on the need for harsh and widespread fiscal austerity, policy makers have lost sight of the underlying cause of the crisis."

"That comprises the absence of institutions to manage the ‘imbalances’ problem between creditors and debtors within the monetary union, and the systemic flaws in the Eurozone’s financial and banking system, exposed by the 2008/09 financial crisis.

"Obsession with fiscal austerity to the exclusion of all else is not credible in an environment of weakening growth in Europe’s core and recession in the periphery. The immediate problem, which policy makers have been unable or unwilling to address successfully, is the negative feedback loop between diminishing sovereign credit worthiness and weak, undercapitalized banks. Improving sovereign credit though austerity is a long process, and, in any case, hard to pull off in recessionary conditions and when all one’s major economic partners are also in austerity mode. The weakest link, Greece, is now in a debt trap, which threatens to engulf other nations."

Yes, bail-out machinery is also needed:

"A robust commitment to substantial bond purchases by the ECB and bank recapitalization are the most important and urgent tools to break the vicious circle of deteriorating creditworthiness between sovereigns and banks. "Without these steps, we believe the lurch from crisis to worsening crisis won’t stop. But the crisis is also one of growth."

UBS is right about this. They are however completely wrong to keep arguing that a eurozone break-up would be catastrophic, nixing 20pc to 40pc of GDP in a year and leading to social carnage. That is a variant of the scare story now being propagated by the euro-elites.

The reality is the opposite. It is the existing status quo that risks bringing about the economic depression, social collapse, street populism, nationalistic backlash, cross-border hatred, and the violence so feared by the bank.

EMU should not be saved. It should be broken in two, or dismantled, in an orderly fashion of course. If the authorities can hold together 17 countries in EMU, they are surely capable of holding together a Teutonic Union and a Latin Union — each reduced to a more manageable fit and each more viable.

They are surely capable too of fixing the exchange rates of the two blocs, with a 25pc to 30pc devaluation for the Latin tier. This rate could be held long enough to stabilize the system and nurse the South back to health. If this was managed with an ounce of common sense and a firm hand, the apocalyptic outcomes so much in vogue could easily be avoided. The risk is that EU leaders will not entertain such blasphemous thoughts, and will not prepare the ground for any coherent solution at all.

Dr Merkel, what we have is the crisis of a foolish monetary union that ought to be shut down but is being kept alive because the priesthood has endowed it with sacred significance. Let stop this absurd quasi-religious charade. The euro is nothing but a currency. It has no intrinsic importance. None. To claim that Europe fails if the euro fails is hollow rhetoric. The great democracies of Europe will march on serenely.

Greek Debt Review May Mean More Bailout Talks, Merkel Says
by Tony Czuczka and Maria Petrakis - Bloomberg

German Chancellor Angela Merkel signaled policy makers may review Greece’s second bailout after international debt inspectors rule on whether the country is meeting the terms of its current aid package. Greece’s "numbers in September, as it now seems, were again different from what we expected under the program," Merkel told Greek broadcaster NET when asked whether the second bailout agreed by European leaders on July 21 will be revised.

"We must now await what the troika, that is the expert mission, finds out and tells us: do we need to renegotiate or don’t we need to renegotiate?" Merkel said, according to a transcript provided by her press office late yesterday. "What we would like the most, of course, is that the numbers stay as we know them. But I can’t pre-empt the outcome of the troika."

Experts from the European Commission, European Central Bank and International Monetary Fund will return to Athens tomorrow as officials race to put in place a package of measures that will ring-fence Greece. Euro-area finance ministers will hold an extra meeting on Greece in October amid international concerns that a default could plunge the global economy into recession.

Greece won’t be repay all of its debt and will have to leave the euro area, Otmar Issing, the ECB’s former chief economist, was quoted as saying by Stern magazine. The country needs to write down its debt by at least 50 percent, the German weekly quoted him as saying in an interview published today.

'Sustainable Footing'
The restart of the so-called troika review in Athens will "constitute an important step toward achieving the 2012 agreed fiscal target and putting the Greek public finances on a sustainable footing," commission spokesman Amadeu Altafaj told reporters in Brussels.

Merkel’s remarks came as a person familiar with the matter said German banks are resisting pressure to accept larger writedowns on their holdings of Greek government debt. German lawmakers have called on lenders in recent days to accept a larger writedown than the 21 percent proposed by the Institute of International Finance, an industry lobby group, said a person briefed on the talks.

Earlier, the Financial Times Deutschland reported that euro members have started talks on renegotiating the second bailout. Banks and insurance companies might have to increase their contribution to the rescue package as Greece’s economy has deteriorated, the German newspaper said, citing unidentified people familiar with the situation.

Property-Tax Vote
Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default, prompting an offer of support from Merkel in Berlin, where the two had dinner yesterday.

"We want a strong Greece in the euro area and Germany is ready to offer all kinds of help that is needed," Merkel told reporters at a joint briefing with Papandreou. "I have heard so far that Greece is ready to meet the conditions" set by the IMF, the ECB and the EU commission.

Euro-area governments are withholding approval of the next loan installment under Greece’s May 2010 110 billion-euro ($150 billion) bailout until officials from the three institutions rule whether the government is meeting its targets. The next aid payment is due in October.

Merkel didn’t elaborate in the television interview on possible changes to the second bailout, which includes an accord for banks and insurers to reduce the value of their Greek debt holdings. Merkel’s chief spokesman, Steffen Seibert, didn’t reply to requests for comment by phone and text message today.

Greek Bonds
The yield on 10-year Greek government bonds fell 4 basis points to 23.27 at 12:30 p.m. in Athens today and the two-year note yield climbed 38 basis points to 70.43 percent. Greek bonds have tumbled in recent weeks and credit insurance has soared, putting the chance of default at more than 90 percent, as Papandreou struggled to rein in the deficit and a recession deepened in its third year.

"Implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will mount significant resistance, raising the risk of inertia and inaction," Wolfango Piccoli, an analyst in London at Eurasia Group, said before the vote.

The property tax was part of a package of cuts announced earlier this month after officials from the European Union and IMF told Greece it wasn’t meeting the terms of its rescue. European Commission President Jose Barroso called today for Europe’s permanent rescue fund to be speeded up, saying the debt crisis had reached a "serious" stage.

Due to be set up in mid-2013, the European Stability Mechanism will wield a 500 billion-euro war chest that could be used more flexibly than the current guarantee-based temporary financial backstop.

The European Union also proposed a financial-transaction tax that would take effect in 2014 and raise about 57 billion euros a year. The plan would set minimum tax rates for trading of stocks, bonds and derivatives contracts throughout the 27- nation EU, the commission, the EU’s Brussels-based executive, said today.

German turmoil over EU bail-outs as top judge calls for referendum
by Ambrose Evans-Pritchard - Telegraph

Germany's top judge has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new constitution and a popular referendum, vastly complicating plans to boost the EU's rescue machinery to €2 trillion (£1.7 trillion).

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent. "The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said.

"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people," he told newspaper Frankfurter Allgemeine.

The extraordinary interview comes just days before the Bundestag votes on a bill to revamp the EU's €440bn bail-out fund (EFSF), enabling it to purchase EMU bonds pre-emptively and recapitalise banks. Tensions are running high after it emerged over the weekend that officials are working on plans sketched by the US Treasury and the European Commission to "leverage" the firepower of the EFSF to €2 trillion, in conjunction with lending from the European Central Bank.

Carsten Schneider, finance spokesman for the Social Democrats, demanded that Chancellor Angela Merkel and finance minister Wolfgang Schäuble clarify their "true intentions " before the vote on Thursday. "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable," he said.

Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's deputy president and finance chief for the Free Democrats (FDP) in the ruling coalition, expressed outrage over the secret plans. "Unless the German finance minister can give an immediate assurance that there will be no leveraged formula, I will not vote for this law. We might as well dispense with months of negotiations if all this means is that the Bundestag will be circumvented and served cold left-overs," he said.

The accusation that German leaders are conspiring with EU officials to emasculate the Bundestag is highly sensitive, going to the core of the raging debate in recent months over EU encroachments on German democracy.

Dr Vosskuhle said that the improvisation of far-reaching policies had become "dangerous", and warned against schemes to circumvent the rule of law with backroom deals. "Germany has a great affinity for the rule of law. People expect the political class to obey the rules." He reminded leaders that the court had set clear boundaries to EU bail-outs in a ruling earlier this month, although it gave the go-ahead for the package of measures agreed so far.

"Our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states," he said. When asked whether eurobonds are off limits, Dr Vosskuhle said any ruling by the judges would be "pretty clear".

Ewald Nowotny, Austria's central bank governor, said it would be a grave error for Europe to try to bounce Germany into decision of huge scope and significance without the assent of the people. "It is quite dangerous when a feeling builds up in Germany that the country is being overrun, and specifically, that such an important country is being outvoted in the ECB," he told Der Standard.

There is little doubt that Chancellor Merkel can pass the EFSF bill with the help of the Social Democrats and Greens. It is less clear whether she can survive the vote without an absolute majority from her own coalition. Green leader Jurgen Trittin said her government would be "finished" if it has to rely on opposition votes. Her task has become that much harder after Standard & Poor's hinted Germany itself might loose its AAA rating if the rescue machinery is greatly expanded.

"There is no cheap, risk-free leveraging option for the EFSF any more," said David Beers, S&P's head of sovereign ratings. "We're getting to a point where the guarantee approach .. is running out of road," he said, adding the various options under discussion could have "potential credit implications".

The Social Democrats are using their political leverage over the EFSF vote to push for greater "haircuts" for banks holding Greek debt. This creates a fresh set of dangers. Deutsche Bank chief Josef Ackermann implored politicians not to open "Pandora's Box", warning of a domino effect across Europe if the existing deal for writedowns of 21pc on Greek debt is breached. "If the financial sector is further weakened, the real economy will pay a high price," he said.

Pavan Wadhwa from JP Morgan said a bigger restructuring of Greek debt could backfire badly unless proper defences are in place. "If this occurs without a simultaneous and credible plan to recapitalise the banking sector, it could prompt a full-blown crisis," he said. The bank said the eurozone is "falling into recession" as austerity policies bite deeper. It expects the ECB to cut interest rates by 50 basis points to 1pc in early October.

Euro Is Beyond Rescue in Debt Crisis, Szalay-Berzeviczy Says
by Andras Gergely - Bloomberg

The euro is "practically dead" and Europe faces a financial earthquake from a Greek default, according to Attila Szalay-Berzeviczy, global head of securities services at Italy’s biggest lender UniCredit SpA.

"The euro is beyond rescue," Szalay-Berzeviczy said in an opinion piece for, a Hungarian news portal, which he signed as former chairman of the Budapest Stock Exchange. The article described a "worst-case scenario," he said in a later telephone interview from Budapest today. "The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits," he wrote.

A Greek default will trigger an immediate "magnitude 10" earthquake across Europe, he predicted. Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty "within minutes," Szalay-Berzeviczy wrote.

The impact of a Greek default will "rapidly" spread across the continent, possibly prompting a run on the "weaker" banks of "weaker" countries, Szalay-Berzeviczy said in the article. "The panic escalating this way may sweep across Europe in a self-fulfilling fashion, leading to the breakup of the euro area."

'One Scenario Among Many'
"It’s one scenario among many, one which may lead to the breakup of the euro area via a banking crisis," he said in the interview. "This can still be averted. It primarily depends on the Germans, and secondly on European citizens, especially on how much the Greek population can tolerate."

The euro strengthened versus most of its 16 major counterparts, advancing to a one-week high against the dollar, as European leaders signaled they will do what is necessary to aid debt-strapped regional nations. The European Union proposed a financial-transactions tax to take effect in 2014 and Finland’s parliament approved an expansion to the region’s rescue fund..

EU Split Over Push for Bigger Bank Haircut in Greek Rescue
by Rebecca Christie - Bloomberg

The European Commission is resisting a push to impose bigger writedowns on banks’ holdings of Greek government debt than those agreed on at a July 21 summit, a European official said.

The commission, the European Union’s executive body, opposes ideas being floated by some government officials to get banks to accept bigger so-called haircuts and doesn’t want to have talks about any such attempt, the official said on condition of anonymity because the deliberations are private. Germany and the Netherlands are leading a drive by as many as seven euro-area countries for more private-sector involvement in the second Greek package, the Financial Times reported today.

The German Finance Ministry said it wasn’t "putting pressure on anybody" over haircuts after Chancellor Angela Merkel signaled in an interview with Greek television broadcast today that policy makers may review Greece’s second bailout depending on the results of an international progress report.

Experts from the commission, the European Central Bank and the International Monetary Fund will return to Athens tomorrow as officials race to put in place a package of measures that will ring-fence Greece. The experts will resume their review of whether Greece has met the conditions for the next slice of the initial, 110 billion-euro ($150 billion) bailout package engineered last year.

Troika Findings
Euro-area finance ministers will hold an extra meeting on Greece in October amid international concern that a default could plunge the global economy into a recession. That meeting is likely to focus on the 8 billion-euro aid installment from the first package, without tackling questions about the second bailout and broader framework that was agreed in July.

"We must now await what the troika, that is the expert mission, finds out and tells us: do we need to renegotiate or don’t we need to renegotiate?" Merkel said in the interview with Greek NET television, according to a transcript.

The Financial Times Deutschland reported earlier today that euro members have started talks on renegotiating the second bailout. Banks and insurance companies may have to increase their contribution to the rescue package as Greece’s economy has deteriorated, the German newspaper said, citing unidentified people familiar with the situation.

"It’s way too early to talk about this," Bertrand Benoit, a German Finance Ministry spokesman, said by phone, denying that Germany is behind the efforts. "We want to take everything one step at a time and the priority now is the sixth tranche" of Greece’s current aid package.

Bondholders will take a broader role in the second Greek package, a 159 billion-euro bailout that includes more public funding, a debt swap, bond buybacks and broad changes to the terms of the EU’s main rescue fund.

The package must be ratified by the euro area’s member states and is making its way through the region’s legislatures. Finland today became the ninth country to ratify the package designed by EU leaders to prevent the region’s debt crisis from spreading. The measures must be approved by all 17 countries that share the euro.

Bondholders are in the midst of consultation with authorities on the debt swap, which aims to include 90 percent of eligible bonds and contribute at least 50 billion euros to the rescue effort. "Participation is firmly building," Charles Dallara, managing director of the Institute of International Finance, said in an interview on CNBC today. The IIF is a Washington- based trade group that has been coordinating the debt swap and helping design its technical details.

"I’m sure there are a few authorities in Europe who would like to see a bigger contribution for the private sector, but the overwhelming majority in Europe are focused on moving this thing through the parliaments," Dallara said.

The dangerous subversion of Germany democracy
by Ambrose Evans-Pritchard - Telegraph

Optimism over Europe’s "grand plan" to shore up EMU was widely said to be the cause of yesterday’s torrid rally on global markets, lifting the CAC, DAX, Dow, crude and copper altogether.

This is interesting, since Germany’s finance minister Wolfgang Schäuble has given an iron-clad assurance to the Bundestag that no such plan exists and that Germany will not support any attempt to "leverage" the EU’s €440bn bail-out plan to €2 trillion, or any other sum. "I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense."

All of this was out in the open and widely reported. Markets appear to be acting on the firm belief that he is lying to lawmakers, that there is indeed a secret plan, that it will be implemented once the inconvenience of the Bundestag’s vote on the EFSF tomorrow is safely out of the way, and that German democracy is being cynically subverted. The markets may or may not right about this. Mr Schäuble has a habit of promising one thing in Brussels and stating another in Berlin.

But it is surely an unhealthy state of affairs. One of the happiest achievements of the post-War era is the emergence of a free, flourishing, and democratic Germany under the rule of law. Carsten Schneider, finance spokesman for the Social Democrats, spoke for many last week, denouncing the shabby back-room dealings as a scandal. "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable."

Indeed it is.

Mr Schäuble has now been forced to give a categorical assurance that the EFSF will not be expanded. He cannot break his word without very serious consequences, or before the financial crisis turns deadly.

We have reached the point where the unseemly scramble to find ever more inventive and extreme ways to save monetary union – yet without coming clean, and invariably by trying to deceive German citizens about the real implications of each deal – is clashing directly with the integrity of German democracy.

Andreas Vosskuhle, head of the constitutional court or Verfassungsgericht, specifically warned this week that Germany is entering treacherous waters. He said that the improvisation of far-reaching policies to shore up EMU had become "dangerous", and warned against schemes to circumvent the rule of law with backroom deals. "Germany has a great affinity for the rule of law. People expect the political class to obey the rules."

"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people," he told the Frankfurter Allgemeine.

Dr Vosskuhle reminded politicians that they do not have the legal authority to sign away German constitutional prerogatives. "The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said.

He repeated that the Court had set clear boundaries to EU bail-outs in a ruling earlier this month. "Our judgment makes clear that the Bundestag cannot abdicate its fiscal responsibilities to other actors. And no permanent mechanism may be created that entails taking over the liabilities of other states," he said.

Otmar Issing, the ECB’s founding guru, has gone even further in recent weeks, warning that the current course must ultimately provoke the "resistance of the people" and perhaps civil wars. Dr Issing is not a German nationalist. He is open to the idea of an authentic union with a "European government controlled by a European Parliament" on democratic principles.

What he opposes is the deformed halfway house that is now Europe, where supra-national bodies – accountable to no elected body and taking decisions behind closed doors – are usurping legislative primacy over tax and spending. As he reminds us, it was monarchical assault on the power of the purse that led to England’s Civil War, and America’s Revolution.

Large matters.

As for the assurances of Mr Schauble, either he really is lying, in which case there will be all Hell to pay in the Bundestag, and most likely a massive political backlash that will change German politics profoundly. Or he is not lying, in which case there is no plan to save the eurozone, and we therefore face the mounting risk of a spiral into a banking crash, serial sovereign defaults, and a disorderly break-up of EMU.

Not pretty.

Financial markets face 'severe strains', warns Bank of England
by Jill Treanor and Heather Stewart - Guardian

Financial Policy Committee says banks might need to eat into capital cushions to keep credit flowing

The Bank of England yesterday warned of "severe strains" in financial markets and told banks they should cut staff and axe any dividend payouts to shareholders to boost their capital cushions. But at the same time the Bank's new Financial Policy Committee appeared to concede that banks might need to eat into their capital cushions to keep credit flowing into the stagnating economy.

The second report by the FPC – set up by the coalition inside the Bank to be responsible for financial stability – shows it has considered the need for "short-term measures" to try to prevent a re-run of the 2007 credit crunch.

In a two-page update of its latest meeting, on 20 September, the FPC said: "The committee had advised UK banks in June that, if their earnings were strong, they should seek to build capital levels further, given the risks to the economic and financial environment. But events had lowered the likelihood that banks would be able to strengthen their balance sheets in this way over the short term."

Even so, the committee said it was recommending banks take "any opportunity" to strengthen their capital and stock of liquid assets to "absorb flexibly any future shocks without constraining lending to the wider economy". This could be done by raising long-term funds on the markets and reducing dividends and bonuses in line with any fall in profits.

The Bank's quarterly credit conditions survey, issued alongside the committee's report, said lenders were warning that the shaky state of financial markets could constrain credit in the coming months. The credit conditions survey showed that the supply of loans to households increased modestly in the third quarter of the year, while the availability of lending to businesses was flat; but, "lenders pointed to adverse wholesale funding conditions as a key factor which might constrain future lending".

The FPC, which is chaired by Bank governor Sir Mervyn King, also advised the Financial Services Authority to encourage banks "to manage their balance sheets in such a way that would not exacerbate market or economic fragility". "For example, at the present time, some actions taken to raise capital or liquidity ratios could potentially worsen the feedback loop between the financial sector and the wider economy and so should be avoided," the committee said.

After its first meeting in June, King described the eurozone as posing the "most serious and immediate" single threat to financial stability and the committee acknowledged that since then there had been "severe strains" in financial markets. The FPC does not yet have powers to intervene in markets but yesterday spelled out some of the powers that it would like to be able to deal with the crisis, including the ability to intervene on bank balance sheets and putting limits on loan-to-value ratios on mortgages.

It also urged the Treasury to resist attempts by the EU set a maximum threshold for capital ratios which might prevent it from requiring banks to hoard even more capital than the regulatory minimum,

Is the New Euro Backstop Fund Just the Beginning?
by Charles Hawley - Spiegel

Markets are convinced that Europe is preparing to massively increase the reach of the euro backstop fund known as the EFSF. But politicians have been just as quick to deny it. What is going on? Even before the EFSF is approved, it would appear that additional steps are under consideration.

Who is one to believe these days? On the one hand, there are the global stock markets which have been surprisingly buoyant this week. Analysts are insisting that the positive mood is the result of renewed efforts in Europe to solve its ongoing debt crisis, with some reports indicating that European leaders are considering expanding the euro backstop fund and others saying that the fund could be leveraged to the tune of €2 trillion ($2.72 trillion).

On Tuesday alone, share prices for French banks BNP Paribas and Societe Generale, both of which are highly exposed to Greek and Italian debt, rose by 16.8 percent and 14.2 percent respectively. Risk premiums on Italian bonds, which have been steadily rising this year, have fallen back.

On the other hand, though, Europe's politicians are denying that any grand plan -- beyond the ongoing ratification of the €440 European Financial Stability Facility -- is afoot. German Finance Minister Wolfgang Schäuble said on Tuesday that an expansion of the EFSF beyond €440 billion isn't planned, adding that "a lot of nonsense" comes from Brussels. In separate comments, he called the idea "stupid" due to the pressure it could put on Germany's AAA debt rating.

What is clear, as became apparent over the weekend, is that Europe has come to realize that -- with the futures of several banks likely hanging in the balance should Greece topple, and the threat of contagion spreading elsewhere as a result -- the EFSF as currently constituted is insufficient. And the idea of leveraging the fund, by using its assets as collateral to borrow tens of billions more, would seem to be gaining support.

'Increase the Firepower'
Olli Rehn, European commissioner for economic and monetary affairs, admitted as much on Saturday during a semi-annual meeting IMF meeting in Washinton. He said that the EU was considering ways to "increase the firepower" of the EFSF.

It is not an uncontroversial idea, which explains why there is so much confusion at the moment as to what Europe's next move might be. With euro-zone parliaments currently in the process of passing the initial EFSF expansion, to €440 billion, few seem willing to speak openly about what the immediate future might hold. Austria approved the plan on Tuesday and Finland is set to vote on the plan on Wednesday.

On Thursday, it is Germany's turn and the vote has developed into a crucial one for Chancellor Angela Merkel. A test vote on Tuesday revealed that several members of her Christian Democrats plan to oppose the EFSF expansion along with a handful of legislators from her junior coalition partners, the Free Democrats.

While passage of the bill is a foregone conclusion due to widespread opposition support, Merkel's power would be drastically curtailed were she forced to rely on help from the center-left Social Democrats to pass the bill. Indeed, her shaky coalition majority partially explains the vehemence with which Merkel and Schäuble have denied rumors of further EFSF expansion.

Furthermore, the FDP has made it a condition of their support that no further EFSF expansion be undertaken. The ceiling for German obligations must remain €211 billion, as currently planned, said FDP head Philipp Rösler on Tuesday. "That is the common position of the governing coalition," he said.

Given the continued rise of global markets on Wednesday, it would seem that investors are not taking such statements at face value. And French Finance Minister Francois Baroin implied earlier this week that they were right to have their doubts. "It is out of the question to put forward, three days before the Bundestag vote, the issue of whether we should increase the fund. Let's not open Pandora's box on something that is a red flag for Germany."

'All Kinds of Help'
Markets, of course, aren't just responding to expectations that Europe will maximize the impact of the EFSF. The Greek parliament this week passed a controversial new real estate tax and the country now appears to be on track to receive the next tranche of the €110 billion bailout fund passed in the spring of 2010, forestalling insolvency for now.

Furthermore, during a visit of Greek Prime Minister George Papandreou to Berlin on Tuesday, Merkel reiterated German support for Athens. "We want a strong Greece in the euro area and Germany is ready to offer all kinds of help that is needed," she said.

Still, Standard & Poor's made it clear earlier this week that there may be limits to what Germany can do when it comes to propping up the euro. In comments to Reuters, David Beers, the head of S&P's sovereign rating group, said that either leveraging the EFSF or boosting it further could have "potential credit implications in different ways."

Whereas analysts have indicated that some €2 trillion might be needed were Italy and Spain to run into significant trouble, Beers said that "we're getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road."

In addition to looking at ways to increase the effect of the euro bailout fund, there have also been indications this week that euro-zone countries were looking into an extensive haircut on Greek debt. The Financial Times on Wednesday reported that several members of the common currency union would like to see private investors take a bigger hit, with some saying that bond investors should be forced to accept losses of 50 percent or more.

'Baptism of Fire'
The calls imply revisiting a deal struck just two months ago as part of a second €100 billion bailout package for Greece, to be finalized later this fall. But with worries increasing that Athens' cash needs have actually risen since the agreement was struck, some have advocated a new look at losses investors should be forced to absorb. Even Otmar Issing, a former chief economist of the European Central Bank, said that writedowns of 50 percent or more are necessary. "Greece will not get back on its feet without a serious reduction in debt," he told the German news magazine Stern on Tuesday.

Clarity on the euro zone's plans is not likely to come soon, despite a Wednesday warning from European Central Bank head Jean-Claude Trichet that "now is the time for effective action, implementation, verbal discipline and a stronger team spirit." Several more member states must still approve the EFSF and the process isn't expected to be completed until the second half of October.

And once it is, there are, it would seem, several more questions to be addressed. European Commission President Jose Manuel Barroso hinted as much during his state of the union speech on Wednesday morning.

"If we do not move forward with more unification, we will suffer more fragmentation," he said in Brussels. "I think this is going to be a baptism of fire for a whole generation."

Debt crunch threatens China and emerging markets
by Ambrose Evans-Pritchard - Telegraph

Europe's banking woes have begun to set off a funding crunch in the emerging markets of Asia, Latin America, and Eastern Europe, leaving them nakedly exposed as the rich world slides into a double-dip downturn.

Corporate bond issuance has collapsed by three-quarters over the past three months in these regions, touching the lowest level since depths of the Great Recession in early 2009, according to Bloomberg data.

Contagion has spread to Chinese "Dim Sum" bonds issued in yuan on the offshore market in Hong Kong, where companies linked to China's property market and building sectors have taken a beating. Yields on Dim Sum bonds jumped by 105 basis points to 5.85pc in August, the worst month since the instruments were created.

While China dances to its own tune, fears are growing that a global relapse could strike as the country's debt excesses come back to haunt it. The Shanghai bourse tumbled on Wednesday to a 14-month low and is now 60pc below its 2008 peak.

Property groups China Vanke and Poly Real Estate have led the falls. Some developers have already cut home prices by 20pc to clear the glut. Standard & Poor's expects credit conditions for Chinese builders to "become increasingly severe". The Industrial and Commercial Bank of China said on Wednesday that it plans to raise up to $11bn in fresh capital to shore up its defences. Morgan Stanley said emerging economies have $1.5 trillion of external debt that has to be rolled over on a 12-month basis. Most of it is owed by companies and issued in dollars.

Most developing countries lack a proper bond market so firms rely on global finance to raise capital. Almost 80pc of the money come from European banks, which have lent $3.4 trillion to emerging markets. Part of the funding comes from US money markets – which have effectively pulled the plug on Europe. This adds a nasty twist to what is already a very twisted nexus.

Data from the Bank for International Settlements show that Europe's banks have lent $1.3 trillion to Eastern Europe, $900bn to emerging Asia and almost $500bn to Latin America. The danger is a "sudden stop" in lending. This threat is acute in Russia, where companies have to refinance $30bn by December, a tricky task as investors flee after the messy dismissal of finance minister Alexei Kudrin – viewed by Westerners as the rock of credibility in Moscow.

The International Monetary Fund (IMF) warns that emerging markets face the risk of "sharp reversals" in capital flows if Europe fails to contain its debt crisis. The process has already begun. The currencies of Brazil, India, Indonesia, Korea, South Africa, Turkey, Poland and Hungary have all plunged over the past month, some by 10pc or more, dashing the hopes of a "decoupling" from the travails of the Old World.

The so-called "currency wars" of recent months have taken on a different character as the central banks of Brazil and Korea intervene to stop their exchange rates falling too fast and aggravating inflation. Just weeks ago Brazil was complaining bitterly that the real was too strong.

The IMF said the biggest danger is an abrupt halt to this year's corporate debt boom, especially in Latin America and Eastern Europe. "The volatile nature of portfolio flows means that they could reverse rapidly if investors take fright or valuations are perceived as too stretched," it said. "Over the past year, flows into emerging market corporate external debt have surpassed flows into US high-yield debt. Gross issuance accounted for nearly half of all new private credit in some regions," it said.

Manoj Pradhan from Morgan Stanley said emerging markets should outperfom the West "handsomely" over time but will not been immune in this crisis as botched policy responses push Europe and the US "dangerously close to recession".

Developing nations should act pre-emptively and loosen fiscal policy to cushion the blow, he said. That will not be easy for all. High-spending India has already hit the fiscal buffers, while Hungary cannot safely let the forint fall because most home mortgages are in Swiss francs or euros.

China is a special case. It has foreign reserves of $3.2 trillion. It is deliberately choking credit to stop property speculation and slow inflation, mostly through loan curbs. Beijing clearly has leeway to reverse course and launch a fresh blast of stimulus, but not on the scale of 2008 as off-balance sheet lending.

The IMF warns that loans have doubled from less than 100pc of GDP to nearly 200pc over the past five years, when off-books lending is included. The surge in credit is greater than during the US housing boom or Japan's Nikkei bubble in the late 1980s. China's local governments have racked up $1.7 trillion of debt through arms-length vehicles, while the Chinese railways have run up a further $300bn.

Credit default swaps (CDS) measuring risk on China's sovereign debt jumped 16 basis points on Wednesday to 170, the highest since the blackest month of the crisis in March 2009.

Is that a canary in the coal mine?

Rousseff Crisis Spurred by Lula Debts as Brazil Boom Diminishes
by Alexander Ragir - Bloomberg

On a cool July evening, Brazilian President Dilma Rousseff hosts a cocktail party for 50 leaders of her governing coalition, Bloomberg Markets magazine reports in its November issue. Speaking from the foot of a red-carpeted staircase in the living room of Alvorada Palace, where she lives with her mother and aunt, Rousseff tells the gathered politicians that these are the best times for Brazil, according to four people who attended.

"The world is going through economic and financial turbulence," says Rousseff, who’s dressed in a black pantsuit. "But we’re living through a great moment." In a toast, Dilma, as she’s known to almost all Brazilians, juxtaposes the task of managing the country’s new economic prosperity with U.S. President Barack Obama’s struggle with the Republicans to get the U.S. government budget under control.

"And up there, they only have two parties," she jokes. Brazil has 27.

Rousseff, 63, inherited just about everything a president could want from her mentor and predecessor, Luiz Inacio Lula da Silva: an economy growing at a 7.5 percent annual pace and unemployment, at 5.3 percent, that was the lowest since at least 2001. Brazil’s Bovespa stock market index rose six-fold during Lula’s eight-year tenure, as iron ore, soybean and sugar exports boomed, driven in large part by demand from China.

Lula pulled 24.5 million people out of poverty in his years in office, according to data compiled by the Getulio Vargas Foundation, and Rousseff says that in the next four years, she will eliminate extreme poverty in Brazil.

A Miracle Subdued
Yet Rousseff took office in what has turned out to be a rocky period for Brazil’s economic miracle. Her government and Brazil’s economy have been hit with a series of setbacks. Brazil’s subdued mood may be best captured by the swoon in its stock prices: The Bovespa index was down 22 percent in 2011 as of yesterday.

The bad news spills over into politics. From June to September, five of Rousseff’s cabinet ministers resigned, four of them after the police or the press made allegations they had misused public money.

On Aug. 17, Agriculture Minister Wagner Rossi stepped down after Veja magazine alleged he had illegally used his influence for personal gain. Rossi denies wrongdoing. His PMDB party, with 80 deputies in the 513-member lower house, is a crucial part of the 15-party governing coalition led by Rousseff’s Workers’ Party, which itself has just 86 Assembly seats.

Inflation Affliction
On the economic side, Brazil is once again suffering from an old affliction: inflation. Consumer prices, as measured by Brazil’s IPCA index, rose 7.2 percent during the 12 months ended in August. Though mild compared with the country’s legendary hyperinflation -- which peaked at an annual rate of 6,821 percent in April 1990 -- the price increases are eroding some of the progress Lula and Rousseff, who used to be his chief of staff, have made at reducing poverty and building a middle class.

The dilemma for Rousseff’s government is that officials don’t want the fight against inflation to choke off economic growth. From January to July, central bank President Alexandre Tombini responded to the inflation threat by raising Brazil’s benchmark interest rate five times.

Then, on Aug. 31, to the surprise of analysts, the central bank lowered the rate, to 12 percent from 12.5 percent. Even after the cut, Brazil’s rate was the highest among the Group of 20 nations, representing the world’s largest economies.

Global Downturn
The central bank’s rationale for the rate cut was that a "substantial deterioration" in global economic growth will also slow Brazil’s expansion and push down inflation. "Even assuming that they’re correct on their overly bearish view on Brazil’s economy, they’re clearly putting growth above their inflation target," says Tony Volpon, Latin America strategist at Nomura Securities International Inc. in New York. "The outcome in the long run will be higher overall inflation."

Despite the global economic gloom, Will Landers, who manages $8.5 billion in Latin American stocks at New York-based BlackRock Inc., sees only blue sky for Brazil’s economy.

"The natural resources aren’t going away, global food demand isn’t going anywhere and the middle class will continue to develop," Landers says. "The domestic consumption story is unparalleled. It’s still a great place to invest."

There are two immediate culprits behind what is the worst inflation in six years: skyrocketing credit and heavy spending by the government. Bank lending to businesses and consumers stood at 47 percent of GDP as of July, up from 24 percent when Lula took office in 2003, according to the central bank.

Lula’s Mixed Legacy
And in the run-up to the Oct. 31, 2010, election that put Rousseff into the presidency, Lula spent lavishly. Government spending in 2010 jumped 22.3 percent to 700 billion reais ($378 billion).

To tame inflation, Rousseff pledged on Feb. 9 to cut 50 billion reais from the 2011 budget. She also needs to cut the government subsidies that allow the National Development Bank to lend money at cheap rates, says Paulo Vieira da Cunha, a former central bank director who’s now a partner at New York-based hedge fund Tandem Global Partners LLC. The bank handed out a record $101 billion in loans last year for projects such as building nuclear power plants, dams and roads and improving the electrical grid -- 40 percent more than the $72.2 billion loaned to countries around the globe by the World Bank.

Carry Trade
Commercial banks have also contributed to the inflation spiral. With near-zero interest rates in the U.S. and Europe, banks have been borrowing at low rates abroad and then lending at higher rates in Brazil, prompting Tombini to tighten bank liquidity requirements, a move that he says has removed 61 billion reais from circulation and helped prevent a credit bubble.

Brazil’s high interest rates have attracted speculative investors to Brazil’s bond market, adding fuel to the 27 percent rise in the value of the real against the dollar since the end of 2008. The strong real makes exports more expensive and imports cheaper, which has resulted in a flood of Chinese goods filling store shelves, hurting local manufacturers.

The real has fallen 13 percent this month against the dollar as investors have fled emerging market assets on concern Europe’s debt troubles will stall the global economy. The decline may improve Rousseff’s image with exporters and manufacturers, although it will fuel inflation by increasing prices for imported consumer goods, says Mauricio Rosal, an economist with Raymond James Financial Inc. in Sao Paulo.

"The real fell because of problems with Europe, but if a solution is found, the currency will bounce back," Rosal says. "What’s happening in Europe isn’t going to solve Brazil’s structural problems."

World Cup Costs Rise
Rising borrowing costs make government financing more expensive for the road improvements and other construction projects Brazil is undertaking to prepare for hosting the 2014 World Cup and the 2016 Summer Olympics. The government is building stadiums, housing and other facilities for the games and is also upgrading transportation and other infrastructure as part of an $886 billion investment plan through 2014.

Rousseff can attack all of her problems at once with a single measure: reducing the huge and growing government budget, says Alberto Ramos, a New York-based economist at Goldman Sachs Group Inc. (GS) specializing in Latin America. Since Lula took office, public spending has tracked GDP upward, with the economy growing to $2.1 trillion in 2010 from $552 billion in 2003.

Need for Austerity
"I’ve never seen an economy with so many macro issues that can be addressed with just one instrument," Ramos says. "If they would cut the fiscal budget significantly, they’d let the central bank loosen monetary policy. Lula rode the wave of rising commodity prices and forgot to make the reforms needed to make it sustainable."

By cutting government spending, Brazil could both lower taxes and reduce the cost of its $1.73 trillion debt by making more room for policy makers to cut interest rates, Ramos says. In 2008, the last year for which data are available, Brazil’s federal, state and local governments collected taxes equivalent to 35 percent of Brazil’s GDP, with half of the money spent on pensions, corporate subsidies and welfare programs and 16 percent spent on debt payments.

Both public and private projects are expensive to bring off because of what Ramos and other analysts call the Brazil Cost. The price of doing business is driven up by taxes, graft, a turgid bureaucracy and high borrowing costs, Ramos says.

Unfriendly to Business?
Brazil, the world’s seventh-largest economy, ranks 127 out of 183 countries in the ease of doing business, according to the World Bank’s Doing Business 2011 survey. It takes an average of 120 days to complete the 15 procedures to start up a company.

Persuading the legislature to spend less will be an uphill battle, according to an Aug. 10 report on the economy by Bank of America Corp. The most Rousseff can hope for, the report says, are modest changes in the tax code and a rise in the time younger government employees need to work before they get their pensions.

The generous pension system is an important component of government overspending, says Simon Nocera, founder of San Francisco-based hedge fund Lumen Advisors LLC, who studied the subject while working as an economist at the International Monetary Fund in the 1990s.

Public servants can retire with 100 percent of their final salary after as few as 25 years of service, though men must be 60 and women 55 before they can collect. In 2010, the government spent 333 billion reais on pensions -- almost the GDP of Ireland.

Generous Pensions
"If they reformed the pension system, they could lower taxes and interest rates," Nocera says. "It’s the easiest way to lower costs, but there’s no political will." Rousseff, who had never run for any office before being elected president, has little experience in negotiating the political deals that will be needed to reduce the budget and push down inflation and interest rates. And the recent cabinet resignations don’t help.

One victim was Antonio Palocci, Dilma’s chief of staff, an experienced Workers’ Party leader who stepped down in June after a news report that his consulting firm had earned 20 million reais in 2010, most of it when he was running Dilma’s electoral campaign. Opposition lawmakers claim he was selling access to the future president. Palocci denies wrongdoing.

Palocci Departs
Rousseff replaced Palocci with Senator Gleisi Hoffmann, a woman with almost no heft within the party, according to David Fleischer, a political analyst at the University of Brasilia. Rousseff also lost her tourism minister -- who resigned on Sept. 14 after federal police arrested 38 people for the illegal use of money from his ministry.

Alfredo Nascimento, her powerful transportation minister and a leader of the Party of the Republic, also resigned amid allegations of kickbacks and overbilling in a ministry that doles out $15 billion a year for public works projects. He also denies wrongdoing. With the pressure on to root out corruption, in the following two months Rousseff forced out about 20 more officials from the Transport Ministry, prompting Nascimento’s party to pull out of the government coalition.

Rousseff’s July cocktail party was one attempt to keep the government together so she has a chance to fight off the demon of inflation. At one point, Rousseff raised her wine glass for a toast to "fraternity" and "harmony" before noticing that not everyone had a drink. Waiters scurried to give glasses to those who were empty-handed before she continued.

Toasting Together
"It was very important for President Dilma to make sure we could all toast together," Minister of Institutional Affairs Ideli Salvatti says. Her coalition might be fragile, but given the economic powerhouse that Lula bequeathed her, Dilma’s glass is still more than half full.

As Scorn for Vote Grows, Protests Surge Around Globe
by Nicholas Kulish - New York Times

Hundreds of thousands of disillusioned Indians cheer a rural activist on a hunger strike. Israel reels before the largest street demonstrations in its history. Enraged young people in Spain and Greece take over public squares across their countries.

Their complaints range from corruption to lack of affordable housing and joblessness, common grievances the world over. But from South Asia to the heartland of Europe and now even to Wall Street, these protesters share something else: wariness, even contempt, toward traditional politicians and the democratic political process they preside over.

They are taking to the streets, in part, because they have little faith in the ballot box. "Our parents are grateful because they’re voting," said Marta Solanas, 27, referring to older Spaniards’ decades spent under the Franco dictatorship. "We’re the first generation to say that voting is worthless."

Economics have been one driving force, with growing income inequality, high unemployment and recession-driven cuts in social spending breeding widespread malaise. Alienation runs especially deep in Europe, with boycotts and strikes that, in London and Athens, erupted into violence.

But even in India and Israel, where growth remains robust, protesters say they so distrust their country’s political class and its pandering to established interest groups that they feel only an assault on the system itself can bring about real change.

Young Israeli organizers repeatedly turned out gigantic crowds insisting that their political leaders, regardless of party, had been so thoroughly captured by security concerns, ultra-Orthodox groups and other special interests that they could no longer respond to the country’s middle class.

In the world’s largest democracy, Anna Hazare, an activist, starved himself publicly for 12 days until the Indian Parliament capitulated to some of his central demands on a proposed anticorruption measure to hold public officials accountable. "We elect the people’s representatives so they can solve our problems," said Sarita Singh, 25, among the thousands who gathered each day at Ramlila Maidan, where monsoon rains turned the grounds to mud but protesters waved Indian flags and sang patriotic songs. "But that is not actually happening. Corruption is ruling our country."

Increasingly, citizens of all ages, but particularly the young, are rejecting conventional structures like parties and trade unions in favor of a less hierarchical, more participatory system modeled in many ways on the culture of the Web.

In that sense, the protest movements in democracies are not altogether unlike those that have rocked authoritarian governments this year, toppling longtime leaders in Tunisia, Egypt and Libya. Protesters have created their own political space online that is chilly, sometimes openly hostile, toward traditional institutions of the elite.

The critical mass of wiki and mapping tools, video and social networking sites, the communal news wire of Twitter and the ease of donations afforded by sites like PayPal makes coalitions of like-minded individuals instantly viable.

"You’re looking at a generation of 20- and 30-year-olds who are used to self-organizing," said Yochai Benkler, a director of the Berkman Center for Internet and Society at Harvard University. "They believe life can be more participatory, more decentralized, less dependent on the traditional models of organization, either in the state or the big company. Those were the dominant ways of doing things in the industrial economy, and they aren’t anymore."

Yonatan Levi, 26, called the tent cities that sprang up in Israel "a beautiful anarchy." There were leaderless discussion circles like Internet chat rooms, governed, he said, by "emoticon" hand gestures like crossed forearms to signal disagreement with the latest speaker, hands held up and wiggling in the air for agreement — the same hand signs used in public assemblies in Spain. There were free lessons and food, based on the Internet conviction that everything should be available without charge. Someone had to step in, Mr. Levi said, because "the political system has abandoned its citizens."

The rising disillusionment comes 20 years after what was celebrated as democratic capitalism’s final victory over communism and dictatorship. In the wake of the Soviet Union’s collapse in 1991, a consensus emerged that liberal economics combined with democratic institutions represented the only path forward.

That consensus, championed by scholars like Francis Fukuyama in his book "The End of History and the Last Man," has been shaken if not broken by a seemingly endless succession of crises — the Asian financial collapse of 1997, the Internet bubble that burst in 2000, the subprime crisis of 2007-8 and the continuing European and American debt crisis — and the seeming inability of policy makers to deal with them or cushion their people from the shocks.

Frustrated voters are not agitating for a dictator to take over. But they say they do not know where to turn at a time when political choices of the cold war era seem hollow. "Even when capitalism fell into its worst crisis since the 1920s there was no viable alternative vision," said the British left-wing author Owen Jones.

Protests in Britain exploded into lawlessness last month. Rampaging youths smashed store windows and set fires in London and beyond, using communication systems like BlackBerry Messenger to evade the police. They had savvy and technology, Mr. Jones said, but lacked a belief that the political system represented their interests. They also lacked hope. "The young people who took part in the riots didn’t feel they had a future to risk," he said.

In Spain, walloped by the developed world’s highest official rate of unemployment, at 21 percent, many have lost the confidence that politicians of any party can find a solution. Their demands are vague, but their cry for help is plaintive and determined. Known as indignados or the outraged, they block traffic, occupy squares and gather for teach-ins.

Ms. Solanas, an unemployed online journalist, was part of the core group of protesters who in May occupied the Puerta del Sol, a public square in Madrid, the capital, touching off a nationwide protest. That night she and some friends started the Twitter account @acampadasol, or "Camp Sol," which now has nearly 70,000 followers.

While the Spanish and Israeli demonstrations were peaceful, critics have raised concerns over the urge to bypass representative institutions. In India, Mr. Hazare’s crusade to "fast unto death" unless Parliament enacted his anticorruption law struck some supporters as self-sacrifice. Many opponents viewed his tactics as undemocratic blackmail.

Hundreds of thousands of people turned out last month in New Delhi to vent a visceral outrage at the state of Indian politics. One banner read, "If your blood is not boiling now, then your blood is not blood!" The campaign by Mr. Hazare, 74, was intended to force Parliament to consider his anticorruption legislation instead of a weaker alternative put forth by the government.

Parliament unanimously passed a resolution endorsing central pieces of his proposal, and lawmakers are expected to approve an anticorruption measure in the next session. Mr. Hazare’s anticorruption campaign tapped a deep chord with the public precisely because he was not a politician. Many voters feel that Indian democracy, and in particular the major parties, the Congress Party and the Bharatiya Janata Party, have become unresponsive and captive to interest groups. For almost a year, India’s news media and government auditors have exposed tawdry government scandals involving billions of dollars in graft.

Many of the protesters following the man in the white Gandhian cap known as a topi were young and middle class, fashionably dressed and carrying the newest smartphones. Ms. Singh was born in a village and is attending a university in New Delhi. Yet she is anxious about her future and wants to know why her parents go days without power. "We don’t get electricity for 18 hours a day," she said. "This is corruption. Electricity is our basic need. Where is the money going?"

Responding to shifts in voter needs is supposed to be democracy’s strength. These emerging movements, like many in the past, could end up being absorbed by traditional political parties, just as the Republican Party in the United States is seeking to benefit from the anti-establishment sentiment of Tea Party loyalists. Yet purists involved in many of the movements say they intend to avoid the old political channels.

The political left, which might seem the natural destination for the nascent movements now emerging around the globe, is compromised in the eyes of activists by the neoliberal centrism of Bill Clinton and Tony Blair. The old left remains wedded to trade unions even as they represent a smaller and smaller share of the work force. More recently, center-left participation in bailouts for financial institutions alienated former supporters who say the money should have gone to people instead of banks.

The entrenched political players of the post-cold-war old guard are struggling. In Japan, six prime ministers have stepped down in five years, as political paralysis deepens. The two major parties in Germany, the Christian Democrats and the Social Democrats, have seen tremendous declines in membership as the Greens have made major gains, while Chancellor Angela Merkel has watched her authority erode over unpopular bailouts.

In many European countries the disappointment is twofold: in heavily indebted federal governments pulling back from social spending and in a European Union viewed as distant and undemocratic. Europeans leaders have dictated harsh austerity measures in the name of stability for the euro, the region’s common currency, rubber-stamped by captive and corrupt national politicians, protesters say. "The biggest crisis is a crisis of legitimacy," Ms. Solanas said. "We don’t think they are doing anything for us."

Unlike struggling Europe, Israel’s economy is a story of unusual success. It has grown from a sluggish state-dominated system to a market-driven high-tech powerhouse. But with wealth has come inequality. The protest organizers say the same small class of people who profited from government privatizations also dominates the major political parties. The rest of the country has bowed out of politics.

Mr. Levi, born on Degania, Israel’s first kibbutz, said the protests were not acts of anger but of reclamation, of a society hijacked by a class known in Hebrew as "hon veshilton," meaning a nexus of money and politics. The rise of market forces produced a sense of public disengagement, he said, a feeling that the job of a citizen was limited to occasional trips to the polling places to vote. "The political system has abandoned its citizens," Mr. Levi said. "We have lost a sense of responsibility for one another."


A moderator said...

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Stoneleigh said...

Comments are open again.

Nassim said...

I sometime have the impression that people in the Northern Hemisphere sleep for 16 hours :)

Nassim said...

BBC red-faced over 'idiot' interview

I guess he got fed up with being fed BS.

Nassim said...

Not infrequently, on this site and elsewhere, bartering is mentioned. The standard, textbook, story is that people were bartering for a long while before some smart person came up with the idea of money (conches, precious metals and so on) which later improved further with the introduction of standard coins.

I have been reading sporadically the book Debt - the first 5,000 years, by David Graeber, and it seems that the above is a fairy tale. There is no archaeological or anthropological evidence that it happened that way at all. All the writers who reiterate this fiction are wrong - including Adam Smith. It seems that debt existed for an awfully long time before money came along. Furthermore, coins only came about when the need arose to pay soldiers to fight.

The only evidence of bartering is relatively recent and usually involved hostile peoples dealing with one another.

Here is an extract - The Myth of Barter (PDF)

I am quoting all of this because I have had to re-examine my own outlook and preconceptions. Clearly, if you want to have something, you will need to be prepared to get into debt - which means that someone has to trust you. Interesting.

lautturi said...

Golem XIV delivers a strong text - again. Very much in tune with TAE.

Nassim said...

With the market’s attention focused on the eurozone, many traders seem to have forgotten about the yen.

The Japanese unit has sat for eight weeks in a 2-yen range just above its record high to the dollar of Y75.93. On Friday it is weaker by 0.1 per cent at Y76.86.

The chart evokes a standoff between the irresistible force (yen appreciation) and an immovable object (the interventionist Bank of Japan).

Is something about to pop?

Possibly. Japanese bank Mizuho, in comments likely to give the BoJ palpitations, reckons the US dollar could fall to Y60.

Chief technical analyst Hiroyuki Tanaka, according to a Bloomberg report, says the US dollar has bottomed out around 30 per cent below the preceding low on four occasions since 1971.

With the previous trough of Y79.75 the yen may hit Y60 in 2013, he concludes.

A more fundamental approach from Capital Economics plumps for a weaker yen, however. The research boutique argues that Japan’s oft-cited and interlinked debt and demographic burden will finally take their toll.

“We continue to expect the yen to depreciate gradually against the dollar, to Y85 by the end of this year and to Y90 by end-2012.”

Trading Post (FT)

It seems to me that range of the forecasts at the end of this piece are enormous. One person thinks the dollar will only be able to buy 60 Yen and the other that it may go to 90 - all of this in the next 18 months or so. It is currently 76.80.

In this monumental deflation, will the Yen drop against the dollar? I mean, the Japanese government has been effectively bankrupt for decades and totally dependent on borrowing from the Japanese people. How long can this continue when the demographics are not favourable?

Any ideas I&S?

Stoneleigh said...


I think both the dollar and the yen will go up against almost everything else, but as for which goes up by more, it's hard to say. The drivers are different. The yen still has to unwind its huge carry trade and the USD will benefit from a flight to safety and the deflation of dollar-denominated debt. The Australian and NZ dollars were a large part of the counter part of the yen carry trade, which means both are very likely to fall on a carry trade unwind. The Australian dollar also has the problem of being partly a resource currency at a time when commodity prices are very likely to fall.

Jim R said...

This is a note to the newcomer in the previous post who was asking how to trade this calamity. (there was an article on ZH the other day suggesting that traders are crazier than the sociopaths in charge)

Five or six years ago, when this fact came to my attention (that we are looking at the end of growth), I started to worry about how to deal with it. I was not a trader at the time, just had the 401K and such, and still about 10 years from retirement.

For a while, I was into oil and gas royalty trusts. Nice little dividend, and although they will eventually deplete and dissolve, they should go up as oil goes up. That worked for a while, until 2008 and oil went through a speculative boom/bust. It was at that point, I became aware of what Stoneleigh had been saying on The Oil Drum.

Scarcity does not mean prices go up forever; scarcity means wild crazy swings as the "market" flails around looking for a price point.

And at this point, there is so much notional "money" chasing these price swings that it is extremely difficult for that price point to be found.

The message of I & S is this: be assured that the notional "money" chasing ever more ephemeral notional "markets" will soon settle down. They wisely refrain from giving advice on the exact day the price of Palladium will go through $250, for example.

I must confess that I have been attempting to trade these swings, and do not have whatever it is that makes a trader. That is all.

Wolf at the Door said...

@ Snuffy
“I think I have figured out the game...or enough to want to reach for my 6 tine pitchfork....”

I think your right. I think that the end game is for the bankers and PTB to have as many debt "claim checks" (illegitimate as they may be) on as many assets and on as many peoples sweat, blood and labors as possible prior to the big deflationary bust. And from then it will be all about advancing knowledge (and law) in the direction of creatively improving their ability to extract blood from a stone (or taxes from an electric bill).

They will translate these debt-claims through the medium of the captured political process into the ownership of enough to provide for the continued maintenance of their own undeserved relative positions all within the context of a much leaner and meaner, collapsing “first” world. But one in which position and powers are still relative not absolute.

The Banker-Pol Juggernaut looks unstoppable from here.

Nassim said...

Thank you Stoneleigh for that quick reply. In so far as is possible, I am out of the Australian dollar.

The Yen has always puzzled me. I spent a while working in Tokyo around 1981 and there were 230 yen to the dollar at that time - three times as many as today.

g-minor said...


Clearly, if you want to have something, you will need to be prepared to get into debt - which means that someone has to trust you.

Only, I think, if what you want "belongs" to someone else. Does debt, therefore, only follow upon alleged ownership? Is the claiming or seizing of property the inevitable precursor to enslavement? Is there any way out of this box?


Jack said...

I bought some USD last week and thanks to Stoneleigh for that.
The thing is I only bought a bit because she said it will be difficult to convert USD to Canadian money if I am living here.
I am thinking of buying real estate with land but the thing is if the Canadian currency falls to 60 cents than I don't know if that would be a smart thing to hold Canadian money

Ilargi said...

Now that we're talking about it:

New Zealand Downgraded
"In its review, Fitch said New Zealand’s high level of external debt is “an outlier” among comparable developed nations, a situation which is likely to continue given that the current account deficit is projected to increase. A current account deficit typically shows that a country is spending more than it earns and relying on borrowing to make up the gap."


Jack said...

I just gave credit to Stoneleigh
I should also say Ash and Ilargi

Ashvin said...


"All the writers who reiterate this fiction are wrong - including Adam Smith."

I would also add just about every economist to this list. It is especially a heralded myth of many Austrian economists, who follow the logic of Mises' "Regression Theorem" and Menger's theory of money. Graeber did an excellent job responding to critiques by such people on the Mises Economics Blog and then responding again to a subsequent response on Naked Capitalism.

To be fair, Marx also adopted a similar theory of money from barter from the classical economists. Although, he believed that long-distance barter between societies is what eventually led to the use of money, rather than internal barter within a society. However, his dynamic analysis of capitalism does not rely on the underlying concept of a "rational, self-interested" economic agent or collective, while neoclassical and Austrian economics clearly do.

scandia said...

@Lautturi...the image of rats in a cage in the Golem article is chilling,haunting...I'm trying to erase it from the mind screen:)
Just reading Nokia laying off 3,000 and closing a factory. Which Finnish town will be scrambling to absorb this blow and how will they do it? Seems crazy to me tht Finland will give monies to other countries when Finnish unemployed are going to be in need.
Also what is the mood in the streets these days?

Jim R said...

@Wolf at the door,
"The Banker-Pol Juggernaut looks unstoppable from here."

I think the forecast from here is that it will inevitably stop as the infrastructure which supports it declines. The trick, of course, is staying out of its way as this happens. It will certainly throw some temper tantrums along the way.

John said...

What happens when Greek default causes major banks to go bankrupt? How specifically will it play out in the US? Will we get bank runs? Does the economy still grind along without banks or does business come to a standstill?

jal said...

Ilargi said ...
“... we need to become masters of our own fates again. Then we can mark all assets to market, both our own and the banks', add up the losses, restructure what must be restructured, cut what must be cut, but still while trying to preserve the institutions that keep us together as societies: our health care system, our schools, all the things that bind us together. Banks are simply not in that category.”

For over 30 years, the debts of the western world has been growing faster than the wealth has been growing.
There is not enough wealth to pay off all the debts.
Global growth is over. Regional growth can only happen at the expense of an other region. The future will have many derelict cities like Chicago.
In order to hide the severity of the problems, the financial systems have been doing “funny bookkeeping”.

“... we need to become masters of our own fates again.”
I ask, “Where are the people that were masters of their fates?”

75% of the population are up to their neck in debt and would drowning if they missed one paycheck.
Only 25% of retirees are on high ground and have no debt.
48 million people are living below the poverty line in the USA. Unemployment, food stamps and social security payment are the only thing preventing social unrest.
The homeless living under the overpasses and in tent cities are master of their fate. Unfortunately, its a subsistence fate, just as it is in most of the world.
Those that are about to lose “being master of their fate” are not among the 90% in the western society.
When the 10% start “infighting” they will be using the systems of the common people to do their proxies financial battles.
The 10% can afford their own health care, and schools. They don’t need unemployment insurance or pension plans, they can live off their accumulated wealth. They will vigorously fight to continue their lifestyle by showing up at those $1,000 rubber chicken fund raising campaigns. If they are lucky, the poor will be serving the chicken and eating out of the dumpster after the diner. The systems for 90% of the population will be degraded even more.

We were taught that we were master of our fate. That was cool aid.
If you are in debt, you are not the master of your fate. Ask the Greeks.

el gallinazo said...


"If you are in debt, you are not the master of your fate. Ask the Greeks."

What do you mean "if." We are all involuntary debtors. Particularly if you hold USA citizenship where you are subject to paying taxes regardless of where in the universe one resides.


Thanks for that chapter from Graeber's book. I saw him interviewed twice recently, on Keiser and RT. I will read the chapter shortly and be better informed. But one must be careful how one defines debt in societies without explicit money. I like how Orlov described it in his recent hour long video. He stated that things were transferred among peers as gifts but the gifts had implicit obligations to be gifted back with certain parameters.

Graeber was an assistant professor at Yale and recently denied tenure which speaks well in his favor.

Greenpa said...

"The interests of the banking industry are not our interests."

We've understood that here for years. But- to the extent that "good news" is possible; I have good news.

Other folks are catching on- in large numbers. Take a look at this NYT article, basically about how sad it is to be a banker in this tough world; then make a random sampling of the 500+ comments so far.

Also note the number of "recommends" for the comments.

My basic statistical guesses; 95% of the comments are virulently anti-bank. Those kinds of comments usually have high recommend numbers- like, hundreds. Of the 5% that are pro-bank- they have 0 to 3 recommends.

Similar banking articles, on other media I watch- are identical. And yeah, this is a change. Just a month ago, the stats would have read more like 50-50 pro anti, and recommends the same.

My impression. There may be actual effects in the real world from this attitude shift. We'll see.

Weaseldog said...

There is archeological evidence of trade among American Indians. Archeologists find shells adorning clothing and jewelry far from the sea and flint, far from the locales were it comes from.

There is evidence of trade caravans criss-crossing the Middle East, going back thousands of years.

I don't see how debt could be used as a means of exchange with peoples that visit and may never return.

Greenpa said...

Nassim: "Furthermore, coins only came about when the need arose to pay soldiers to fight. "

Not so sure. Native Americans had multiple kinds of "money" counters, "wampum"; I'm more familiar with Pacific Islanders, who besides the Big Money on Yap, had extensive money counters in cowries (including the species called the "money cowrie", and various kinds of meticulously manufactured beads.

Pretty old, widely dispersed, widely ignored by westerners, "wampum" being actively pejorative, for no reason except racism; it was actually used as money by early Urps.

Greenpa said...

Weaseldog- synchronicity!

From the Wikipedia entry on wampum:

"While the Native people did not use it as money, the New England colonies used it as a medium of exchange. Soon, they were trading with the native peoples of New England and New York using wampum. The New England colonies demonetized wampum in 1663.[8]"

As a behaviorist, I would disagree with the statement that the natives "did not use it as money" - I think the writers are using only very strict Urpish definitions for "money" there; and I would argue that pre-Urp contact, wampum was used to store, transfer, and display, various forms of "value". You could buy things, do things, with it. Sound like money to me.

soundOfSilence said...

There is archeological evidence of trade among American Indians.

There is the tradition that the island of Manhattan was "purchased" for goods worth about 60 Dutch guilders.

lautturi said...

@ Scandia
I hear you, nasty mental picture that slow death by Pol Pot -banker bought politicians. Things will get way, WAY uglier, no doubt about it. "Progress" and "evolution" obviously need some refining as terms.

People here are still quite interested in distractions (TV shows like American Idiot etc.) but many are waking up. Most are losing their belief in "democratic" system fast as sock puppets are "flipping-their-jackets" all the time. The Left is sad, sad example about this - somebody should remind them to "update" their website and erase pre-election promises about NOT going along with bail-outs in any shape or form. On-the-street -lefties are mostly rolling their eyes in disbelief...

I'm actively undermining belief systems with my texts and videos. Latest is a bit long with 30min (in Finnish, sorry) but compacts pretty much everything into the same clip - bubbles, economics, energy, ethics - with numbers from official sources (ie. hard to deny). Those who have watched it are "blessed" with either thumbs-up or let's-hide-our-heads-into-bushes -mood.

Not sure what my future holds but being quite stubborn don't know how to stop myself anymore (^_^) Maybe a Giordano Bruno -moment awaits me somewhere down the road, we'll see.

AdvanceHeating said...

Taking advice from here I have some cash already out of the bank, but not so much that a home robbery would be a disaster. However when the bank runs start, leaving the rest of my savings in HSBC doesn't seem so smart as they're part of the lending system. Can contributors confirm this thinking:

a) during a crash, suppliers of essential food stuffs do well, but only really low-cost foods

b) here in the UK none of the ultra low cost supermarket offer bank accounts (Asda, Lidl, Aldi, "Iceland") but Tesco's does, so this may be safer than HSBC because they have a trade to offer during a crash when the banks have none.

If it is to be a switch to Tesco, can any reader who is familiar with company analysis work out whether Tesco's is particularly solvent? I only know of certain sound bites, such as 1 in every £7 spent in the UK, goes through a Tesco's till, but when it comes to growth in a crash, they do also sell lots of inessential stuff such as furniture, TV's and insurance, so my gut feeling is that Aldi (95% basic foods) would have been a dead cert - had they had a bank division to go to - but Tesco Bank is not so certain.

Another candidate is our "Co-operative Society", or Co-op, here in the UK who sell predominantly food although not at the discount end of the market. They have a well established banking service but also an option to become a share holder with an "account book". They confirmed this week you can put very large amounts of money into your share account book. I have no expertise on judging this, but my gut instinct is that the Co-op is good for Fair Trade, sympathetic treatment of its staff, and general ethical behaviour, but much as Stoneleigh points out, in a crash niceties such as the environment and Fair Trade organic Kiwi fruits get forgotten quickly.

Analysis of the resilience of a Tesco bank account or any other UK option anybody? Surely not just more cash concealed in solvent welded plastic chests buried under the beach?

el gallinazo said...


While the yen carry trade has been around for 20 years and is huge, the USD carry trade has only been around for three years but is also probably quite huge. I do not know where to find accurate numbers on their sizes. The carry trade of both currencies will unwind together, both having OZ and NZ as their major counterparties. So it's hard to figure the relative USD-Yen strength, but both of them should strengthen against all other currencies other than the Swiss Franc perhaps.

My guess is that the yen will continue to deflate and appreciate against most other currencies until such a point that it goes supernova and loses its forex position suddenly. Same for the USD, but I think Japan will go first by an appreciable amount of time. I think the USD will be the last fiat standing in this king of the hill. The collapse of the others will buy it a lot of time. As we enter the world depression more strongly, resource country currencies such as OZ and Canada will lose rapidly on the forex.

There will be a lot of volatility and I still am following Stoneleigh's advice to keep currency in one's native country. One may argue that I am not doing this because I am currently living in Mexico, but

a) Mexico has defaulted on its debt something like 18 times since independence (from a challenged memory and too lazy to recheck it).

b) I keep my bags packed :-)

Bigelow said...

@Wolf at the Door

"The Banker-Pol Juggernaut looks unstoppable from here."

Bet Louis XVI thought something along similar lines.

Herbal Floyd said...

Chase now back

BofA still down

Herbal Floyd said...

Bank of America Site Crashes, Day After $5 Debit Fee Rule

Hilarius said...

TAE crew: Have you seen this Boston Consulting Group report suggesting remedies for US and Eurozone debt overhang?

Whilst so drastic to be perhaps politically impossible (because the big banks and other larger creditors would not want to face the reality of mark-to-market and a "qualified Jubilee"), it seems realistic in its conclusions that only such drastic measures will really address the systemic problems now facing us.

Wasn't it Galbraith or someone that suggested that any fiat+fractional reserve banking system must have mechanisms for bankruptcy to reset accounts and correct the excesses of mal-investment?

Anyway - first time poster - but thought this report might fit with the article (and have a place at the bottom of it) and might be of interest if you missed it.


Supergravity said...

That Myth of Barter does make an interesting point, in that barter systems cannot function without barterable goods floating against a unit of creditable account which is culturally fixed to a positive value flux density, mostly expressed as a ratio of food.

Herbal Floyd said...

Emergency Money and Budgets during Nominal Price Declines.

What is your budget during a period when nominal prices fall? Assume no new income and you're living off savings.

During good times, your living standard required you to spend $2500/month. In 2009, due to falling nominal expenses, you only needed $2000 for the same living standard. In 2010 and 2011, nominal living expenses rose again, so you once again needed $2500/month to maintain a fixed living standard.

What is a yearly budget during a deflationary collapse when nominal prices fall dramatically and emergency money becomes necessary?

If the yearly budget is currently 2500/month, then large nominal price declines will raise purchasing power and a similar living standard could be supported by maybe 1250/month, perhaps even eventually 500/month.

As the deflationary punch accelerates, doesn't the yearly budget to maintain current living standards also recede outwards toward that horizon, at least until supply collapses at some point along the lonely highway and nominal prices rise again.

Herbal Floyd said...

Punchline: If my current 1-year emergency budget assumes $2500/month based on current nominal expenses.

Then wouldn't the emergency pool realistically last many years (versus 1-year) due to dramatic nominal declines in expenses during deflationary collapse.

Again, assume no new income. I'm living from savings.

Herbal Floyd said...

@ I&S

Question regarding an earlier post by Ilargi. Ilargi wrote:

"Where we find ourselves today has just about all been entirely predictable.....The essence is the very simple fact that a debt crisis can't be averted with more debt (again, barring warfare, zero-point energy and meteor strikes)."

My question: I've been thinking about these sentences over the past week and I'm confused.

How would warfare avert the debt crisis?

This question strikes at the heart of the debate regarding the role of World War 2 and the end of the depression. Is it true, as Krugman often says, that massive worldwide government spending and debt during world war 2 ended the Great Depression?

Here, I'm assuming the Great Depression was equivalent to a "debt crisis". Perhaps that's the mistake, perhaps the Depression was more a consequence of the late 1920's debt crisis.

Nevertheless, I don't understand how the massive government debts and spending associate with warfare would solve the current debt crisis.

I'm raising this issue because I know there's a piece to this puzzle that I'm missing. Could anyone help to clarify?

Herbal Floyd said...

One final point:

This issue of warfare and the debt crisis eats at me because I've watched Jim Cramer for entertainment every so often.

I've been struck by how often he seems to use the WW2 reference as a message to scare his viewers into supporting more bank infusions.

Cramer's scare tactic message: The government needs to get its act together and support the banks, otherwise we get another depression and another world war. It all boils down to: You either support the banks or you're asking for world war.

Skip Breakfast said...

I would be grateful if someone here could clarify the safety of holding US dollar cash outside of the USA. If you're in Canada or Australia, is it risky to hold US cash, in the sense that it may become really difficult to convert it to native currency when TSHTF?

Gravity said...

Im confused as to the difference between a store of value and unit of account, or whether a good which is used as medium of exchange can store its own value by being a unit of account.

It may be that a medium of exchange which is not fixed to a unit of account, or is itself such a unit, cannot function as a stable store of value, whereas any unit of account that is not a store of value will not function as medium of exchange without coercion.

It remains unclear whether a given good may be used as medium of exchange without the cultural inception of a unit of account which is not itself a store of value. To account for the value of a good in its utility as exchange medium should require a unit of account functioning as a store of value by cultural coincidence of trust.

Jack said...

Skip Breakfast
Holding the currency of your native country.
That is what Stoneleigh said.
Remember this is her opinion and the choice is ours.
I feel very confused about this issue.
I think you have to ask yourself what it is you want to do with the money and will you be able to convert the canadian money to USD and to do what.
If you want to buy gold and you can convert the thing than buy USD.
But if you want to buy real estate than you have to keep it in the bank and in Canadian currency because if you withdraw it and than reaper with the stuff than the Canadian gov will ask you questions.
I don't know I am very confused about this stuff.

Stoneleigh said...

Comments open.

lautturi said...

@ Nassim

Methinks a few witches (or rather misfits) were drowned in icy lakes in wintertime. Obviously being a bit of misfit myself occasionally gives me strange thoughts... I'm rather confident (hopeful?) that people are busy in other activities than burning lunatics, though. Then again you never know (>_<)

Anyway, that Bruno fellow was quite an interesting character - I thought maybe somebody would find his story interesting, predicting infinite universe in 1500s and all that. Not that my ravings are anywhere close to such insights (^_^)


Mad Max Keiser had some fun words mentioning Finland, too. On the opposite side, Fox News aims rather low.

bosuncookie said...

Gravity, what if the unit of account AND the store of value were a CALORIE?

When we were setting up our Community Exchange System, we originally toyed with the idea of making the unit of exchange/value store a calorie, with the notion that 2000 calories was roughly equal to 8 hours work.

The concept of the Community Exchange System itself, however, was too complicated (or perhaps too unfamiliar) without adding an energy-based accounting.

Skip Breakfast said...

I have to post again, because I just read a rather unsettling article by Dr. Pippa Malmgren. It sounds a lot like what TAE predicts, but also calls for a highly inflationary outcome. The biggest bombshell is the notion that Germany will bail out of the Euro much sooner than the market expects. Like real soon. The writer is fairly respected, I believe, as a former economic advisor to the US President Bush. The part where it diverges from TAE is where she writes that debt write-offs free up the economy to start quickly inflating asset prices. Hm....

Article is here:

lautturi said...

@ Skip Breakfast

Such a move by Germany would literally kill German exports. Then again staying with €uro kills the confidence of German people. Moreover, being ex-Bushite doesn't really give much credit to Pippa if you ask me...

As we say in Finnish - "swamp over there, bog in here".

Ilargi said...

Skip B.,

I've written on this topic multiple times, and Malmgren simply doesn't do the work, she takes the fast road and forgets the speed bumps that derail her thinking:

"The markets are very likely to have to contend with the re-introduction of Deutsche Marks in the near future. This is bound to mean a collapse in the value of the Euro for those countries that will remain in it (devaluation for the rest of Europe)."

Germany can't leave the Eurozone on its own. Holland would never accept being left inside on those terms. Finland and Austria are also highly unlikely to remain if Germany and Holland go.

The departure of those four would leave France in a situation it will find unacceptable: being the richest partner in a federation of have-no-longers.

France, then, would inevitably insist on joining the group of four mentioned above. That in turn would clearly be the end of it all.

This picture still ignores the reaction of countries like Slovenia and Slovakia, who see themselves as being above the median.

In other words: Germany can't leave. Ergo, if the top can't be cut off, it'll have to be the bottom. But that scenario carries its own bear traps.

If Greece leaves, it will do so under comparatively benign circumstances. Ireland and Portugal too will then look good and hard at doing the same. Leaving Italy and Spain as the weakest links. Which these two won't accept.

And so on and so forth.

One thing is for sure, no matter what happens: this is all going to either take a real long time, replete with endless negotiations, or be incredibly messy, with unforeseen consequences all over the place.


Hombre said...

@ Skip - Just a thought...
A part of the reason we face the predicament that we now find ourselves in is by following the advice of "well respected advisors" of former presidents.
In any case most of us actually care little about the compared validity of the inflation vs deflation debate, but rather, how we may better prepare for any and all possibilities.
Most of the inflation I detect among those who think they know the future is in that person's particular ego.

Skip Breakfast said...

Interesting. Thanks for the response.

After posting my question, I kept thinking about the article. And I suppose maybe she's in greater aggrement with TAE than I originally believed. In the sense that she is calling for inflation in certain countries like Canada and Australia, since this would be due to a lower currency making imported goods higher priced. In terms of US dollars though, I suspect it would still be a deflationary scenario. Even then, however, I don't think Malmgren is sufficiently accounting for the need/desire to liquidate everything in such an unstable and unpredictable scenario, driving prices down even in Australia and Canada. I'm trying to put myself there: if the Euro collapsed and the banks froze up and no one knew what was coming next, would I want diamonds, as Malmgren suggests?! Really? I jsut can't imagine wanting diamonds unless I needed to run out of a country in the dead of night. At least you can sew a diamond in to the hem of your dress. But otherwise, in such a scenario, I wouldn't want land either. I would still want cash I think.

Nassim said...


I thought my remark a little distasteful so I removed it. Of course, I know what you really meant.

Giordano Bruno was way ahead of his time. I remember arguing with people only 20 years ago that many other stars probably had planets and there were few takers. Of course, there was no chance of the Dominicans getting hold of me so I was not risking myself.

Nassim said...

this is all going to either take a real long time, replete with endless negotiations, or be incredibly messy, with unforeseen consequences all over the place.

I cannot see how it is going to take a long time. IMHO, the bond markets can flip really fast.

lautturi said...

@ Nassim

Don't worry mate (or gal?). People are people... and I don't get offended easily (^_^)

Nassim said...

or gal?

I guess the pink flower is not to your taste. :)

progressivepopulist said...

It seems to me that some folks here are employing a money-as-unit-of-exchange paradigm when trying to understand barter systems. My understanding is that whereas the money paradigm dictates that exchanges of goods and services are either zeroed out by full payment in cash or by the extension of credit (with interest), the barter paradigm was built on a system of reciprocity and social relations.

Bartering seems to have operated according to somewhat complex principles of community and intercommunity relationships. Exchanges were not zeroed out as in our money system of exchange. To do so would carry the implication that the relationship was ended and/or that future interactions would be uncertain and possibly unpredictable. Exchanges operated to foster interdependence and good social relations. I might give you a pig and accept nothing or something less valuable in return, knowing that you would then think well of me and that I could expect generous treatment at some future date. This would apply to intertribal trade, just as much as to trade with neighbors.

In some societies, my ability to always give more than I got in return would earn me great prestige and affection. I would encourage folks who (like me) will probably never get around to reading Graeber's book to check out some of the recent interviews he has given.

Here's a link to a google search page with several, the one with Thom Hartmann was a pretty good one:

Reciprocity and Barter were the currencies of many pre-money and money-poor societies. Where I live in Western North Carolina, there is still a living memory of life with almost no money. It doesn't sound too awful- in the end we don't always have to make individual fair deals with our neighbors, if in the larger context we all benefit socially and materially from helping each other out.

Jack said...

Information Overload
I cant agree with her because sometimes there is too much stuff to read and not enough time.
Society without banks is a good idea.
Look at the way they cheated the people these bastards.

Jack said...

I didn't even read the article.
This is what info overload does.
Something people that write articles should consider.
Make it short and sweet

Jim said...

Time and time again I have read about how bad the banks are, but surely if we protect the banks aren't we also protecting our deposits? If a bank goes under don't the depositers lose their money? I know that it is assumed that the Government will/may step in to protect deposits, but what if the Government is also bankrupt as is the case in Greece? Could somebody please clarify this for me.

Joe in NC said...

Good interview of Gary Shilling on Bloomberg:

Shilling's Forecast

He is forecasting deflation...the 30yr T-note at 2.5%...hard landing in China...and more.

He and Jeremy Grantham were very influential to me when I decided to dump stock investments in '06. They are older gentlemen and there was something comforting in knowing that their opinions came from many years of experience...and both have very proven track records.

Here's a link to a paper that Grantham wrote back in April:

Full PDF:
Paradigm Shift

From the Oildrum with comments:
Paradigm Shift

I'm pretty sure a good number of folks at TAE have seen this paper before but in case you haven't, Mr. Grantham has better than average "writing skills".  He also has the resources to do some hardcore research. This paper is interesting to me because it is about a "paradigm shift" he sees happening and the very idea of this basically goes against the investment philosophy that he founded his firm on - that ALL prices revert to mean.  So at the spry age of 73, he has realized (or finally decided to make public) that this shift can happen.

My favorite review/comment from the Oildrum (tstreet):

"Even if he had only pointed out the absurdity of endless growth , this would have been an amazing article coming from someone esteemed in the financial community. Nice counter to the endless ignorance and B.S. we get fed daily from the likes of CNBC. The economists and financial people have to come around before any of this will get the attention of the powers that be. 

Yes one can profit from understanding reality as it has ever been so. But this does not detract from the importance and quality of this well documented message."

Jack said...

We have to look at what is wrong with banks in order to fix this mess.

When they get into the system and make rules that are outrages and the people don't even know about these rules than something needs to be done.

When the banks have the right to print money out of thin air just because they want to get rich than we have fraud.

Thats exactly what has happened and some might disagree but it is the truth.

Joe in NC said...

Good interview of Gary Shilling on Bloomberg:

Shilling's Forecast

He is forecasting deflation...the 30yr T-note at 2.5%...hard landing in China...and more.

He and Jeremy Grantham were very influential to me when I decided to dump stock investments in '06. They are older gentlemen and there was something comforting in knowing that their opinions came from many years of experience...and both have very proven track records.

Here's a link to a paper that Grantham wrote back in April:

Full PDF:
Paradigm Shift

From the Oildrum with comments:
Paradigm Shift

I'm pretty sure a good number of folks at TAE have seen this paper before but in case you haven't, Mr. Grantham has better than average "writing skills".  He also has the resources to do some hardcore research. This paper is interesting to me because it is about a "paradigm shift" he sees happening and the very idea of this basically goes against the investment philosophy that he founded his firm on - that ALL prices revert to mean.  So at the spry age of 73, he has realized (or finally decided to make public) that this shift can happen.

My favorite review/comment from the Oildrum (tstreet):

"Even if he had only pointed out the absurdity of endless growth , this would have been an amazing article coming from someone esteemed in the financial community. Nice counter to the endless ignorance and B.S. we get fed daily from the likes of CNBC. The economists and financial people have to come around before any of this will get the attention of the powers that be. 

Yes one can profit from understanding reality as it has ever been so. But this does not detract from the importance and quality of this well documented message."

lautturi said...

@ Nassim

Pink is nice color, no problem with that. I just don't remember if you have revealed your sex here. No offense meant (ó_ò)

Joe in NC said...

Looks like the shortcut to the full PDF in my previous post did not work, here's the url:

Joe in NC said...

Jack -

I think this may be an IPad/Safari glitch. The "f" shows up on Windows IE. Are you using Safari for your browser?

scrofulous said...


"Which these two [Italy and Spain] won't accept. [becoming low men on the EU totem pole]




as well as not trusting banks do not trust the spell check. The word you used 'reaper' had me puzzled for quite awhile:)

scrofulous said...

Oops 'John', in previous, should read 'Jack'.

As well as banks and spell checkers one should not trust one's memory. Especially at my age LOL

jal said...

Global action for a global recovery

“ ... we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth. But we need to act quickly – and together.”
- Christine Lagarde

I just contradicted her. Since I’m nobody then she must be right and I must be wrong.

“For over 30 years, the debts of the western world has been growing faster than the wealth has been growing.
There is not enough wealth to pay off all the debts.
Global growth is over. Regional growth can only happen at the expense of an other region. The future will have many derelict cities like Chicago.
In order to hide the severity of the problems, the financial systems have been doing “funny bookkeeping”.

el gallinazo said...

Hombre said...

In any case most of us actually care little about the compared validity of the inflation vs deflation debate, but rather, how we may better prepare for any and all possibilities.
Most of the inflation I detect among those who think they know the future is in that person's particular ego.

Afraid that I must part company with you on that one. The final preparation for economic collapse is essentially the same for hyperinflation or deflation - a tight knit local community and a largely self-sufficient doomstead with many redundant features. For those of us already there, your statement makes sense. For the vast bulk of us in transition, it does not. As I pointed out in a detailed comment a couple of months ago in response to The Anonymous, the majority of the 9 points in Stoneleigh's Lifeboat makes sense in a deflation and would be, at best, counterproductive in a HI. So for most of the readership on this blog, the pathway of collapse is quite important.

Which is not to say that the end point of the game is deflation, but deflation will reign until most of the debt is destroyed. HI is a political decision, so if HI will follow deflation will probably depend on each sovereign country assuming that any countries remain sovereign by then.

Re near cashless economies. The world that the late Joe Bageant's parents and grandparents were born into was near cashless and one can learn a lot about that by reading his two books.

Re truncated URL's such as the missing f

This is a problem for both Safari and Chrome in the Mac OS with Blogger. One of the reasons that I am fond of tinyURL. Blogger is buggy and Google, which once supported it and tried to improve it, has sent it off the the orphanage.

el gallinazo said...

The CA AG has joined the NY AG in nixing the sweetheart deal between the states and the TBTF regarding the Linda Green robo signing fraud. Major hit for Bank of America, Citi, WF, and the Morgue. Not sure how this will affect the MERS fraud if at all.

el gallinazo said...

Another Blogger bug that seems to affect only Macs is that if one refreshes the comment page on the last comment, the browser will usually, but not always, return to the top of the comments and one then has to search for the last one you read. Annoying. Originally only affected Safari, but now affecting Chrome as well. Have not seen this bug anywhere else but on a Blogger comment page.

Jack said...

On the subject of the Canadian currency.
Since the bond collapse will be in at least 2 years from now.
Would it be a good idea to buy USD for those living in Canada and convert it to Canadian just when you sense that the end is near for the bonds.
Maybe someone could tell me if this would be worth the effort.
I don't know where the Canadian dollar will go in the near future but even if it goes to .75 cents it would make sense.

jal said...

Its starting!
It seems that country music is going to be the leader in producing memorable songs and lyrics that will be passed down to the future generations.

Made In America - Toby Keith W/ Lyrics

Frank said...

@el G, the top of page bug affects both Firefox and Chrome, on both Windows XP and Fedora Linux.

bosuncookie said...

The Community Exchange System is not a bartering system. It is a way for two parties to make transactions via credits and debits extended and "collected" on behalf of the community. Parties to the system exchange goods or services for credits (or debits) on the system.

The denominated "currency" of the system provides a way of conversing about the value of an individual transaction. The credit/debit bookkeeping that is at the heart of the system provides a means of recording the limited storehouse of value that one may accumulate on the system. The system, however, is not a bank where one may accumulate infinite "wealth." It is designed to encourage exchange. Hence the name.

The beauty of this system is that allows people to sell or buy goods without hard currency and without the inconvenience or hassle of barter. In her lecture, Stoneleigh speaks of the Great Depression and how the absence of money gave rise to starvation because the people with food to spare could not find buyers with cash. A community exchange system. addresses that situation directly.

Please read more at the link above. I see great promise for this system as an approach to economic contraction.

jal said...

Here is my contribution to low tech solutions.

Soda bottle skylights

Here’s a way to brighten up enclosed spaces in an environmentally friendly way. The power of the sun is harnessed using a bottle full of water.
Quite simply they’re used 2-liter soda bottles. They’ve been filled with water along with two caps worth of bleach to keep microorganisms out. The cap is then covered with a film canister to protect it from the sun. They are installed through holes in the roof, and in full sun they put out the equivalent of a 50 watt incandescent light bulb.

el gallinazo said...


IMO which is probably worthless, the interconvertibility of the USD and the CanD will probably be a lot more fluid for longer than most other currency pairs because of the common border, language, trade, and "culture." I also expect the USD to firm up against the CanD for a variety of reasons including the "flight to safety" of the reserve currency and global deleveraging mainly in USD including the carry trade. Also, the real estate bubble in Canada, only superseded by OZ at the moment in terms of mortgage to income ratios, is about to blow up. I don't know the details, but it appears that the Canadian Government already holds a lot of the asset liabilities when this bubble blows which would result in massive QE. Finally, as the global depression sets in, natural resource countries will feel the effects most severely because they have been high on the hog for a while. So in summary, IMO as a total amateur, it would strike me as plausible that the USD will firm against the CanD in the next couple of years. Of course there are always the black swans looking to roost.

But one problem with a Canadian holding USD is that it can't be done directly through treasury bills because you need at least a US Social Security number to sign up. Also need an account in a US bank. It can be done through banks or brokerages, but if they go belly up, you could be screwed. UBS pooled my German bonds internally, for example, four years ago, and the German treasury had no record of me directly. In my opinion, the greatest danger to this is not whether the USD will firm against the CanD, but a safe way to do it that overrides the risk. Also, your personal desire to speculate in general to prepare for the collapse would be worrisome to me if I were your heir :-)

el gallinazo said...


The community exchange idea is great but it has one Achilles heel, at least in Usanistan. Careful records must be kept to make the system work and those records can and eventually will be seized by Turbo Tax Timmy or his "successor." The IRS will then assign arbitrary values to those work hours and tax the hell out of the participants. Maybe even imprison them for tax evasion if they did not attempt to declare it on their income tax returns. Forewarned is forearmed. Just a heads up.

Jack said...

Hi el gallinazo
I already have some USD in a Canadian Bank.
If I am not wrong it is a regular account and I can withdraw deposit just like a regular Canadian bank account.
The thing is I am confused.
Anyhow I appreciate your help.

scandia said...

@Lautturi, I do hope your comment about being punished at the stake for your beliefs is just a joke! At least you can escape offshore in the " muscle boat ":)

bosuncookie said...

El G,

Yes, the IRS could jump in and demand taxes on labor, etc. Here's how CES addresses the issue in their FAQ:

Q. Is this just a tax dodge?

Definitely not! Our motives are noble. We want to create a more equal and just society where wealth is distributed according to contribution, not according to your ability to 'make money'. In other countries where these systems have become big, the state has either ignored the tax angle because it saves the state money on welfare payments, or there is an agreement to provide services to the state. Our approach is that when we become big, the state should become a member of the CES and participate in the normal way. In this way the state could credit itself through the services it provides to all members and debit itself by purchasing the services of CES members.

Not sure the IRS would want to participate in a CES! LOL. Having said that, most exchanges keep their credit limits low, around $400 or so. The idea is to facilitate exchange and for each member to be active. A power-hungry, money-hungry IRS probably could or would attack any non-conventional approach to economic matters, but I suspect there are other, larger fish to fry first.

seychelles said...

UBS pooled my German bonds internally, for example, four years ago, and the German treasury had no record of me directly.

I think this is like Wells Fargo Advisors, who I inherited from AGE via
Wachovia, holding my IRA and Roth IRA assets in "street name". I don't like the possible risk of them using my funds for internal accounting needs, and my "broker" has assured me they would never do such a thing. Problem is, I have not found a place to park these assets that seems any safer. Did
you pull your bond funds?

seychelles said...

PS Those IRA assets are laddered one year
Treasury bills.

Lynford1933 said...

OT: A note from Reno NV. We went out this last Friday evening (typically payday) to a local casino for a family supper celebrating my daughter's birthday. If this seems peculiar, the casino restaurant is the best food and service for the least money in town. This was not one of the downtown casinos but a local’s casino in the east part of town. Children are allowed but not to hang around the gambling areas. The place was packed and we had to wait 30 minutes even though we got there rather early (1700). The 21, craps and roulette tables were about half full and more than half the slots were busy when we arrived and when we left about 1900 and the tables were full and the slots were mostly busy. Reno has 13% unemployment, housing in the toilet and casino spending is completely discretionary.

My feeling is that it will be a while before the locals are hurting enough to do some protesting or anything else about their financial condition. If there is a financial collapse then of course there will be additional hardship. Regardless of data, is doesn’t appear too bad as yet. The cognitive feature of the 30's depression was the ‘soup line’ and that has been hidden with 40+ million people with food cards.

It seems we are seeing societal death by a thousand cuts and even though many individuals are losing jobs, homes and position nothing really bad has happened to the whole of society here as yet.

el gallinazo said...

seychelles said...
UBS pooled my German bonds internally, for example, four years ago, and the German treasury had no record of me directly.

Did you pull your bond funds?


Yeah. They were 5 year bunds paying 4% which would have expired in 2010, so I lost a lot of potential income. But when things heated up in 2008, I realized that UBS was like 5 times bigger than the Swiss economy, had taken a loss of $60 B (?), it appeared at the time to be on the ropes, and it could never be bailed out, so I liquidated them, opened up a account and put the money into 13 weeks.

I don't have any deferred tax accounts. You cannot do direct with them as I am sure you know. I see real dangers now with deferred tax funds but if you are under 59.5 years cashing them out with a 10% penalty hurts. However, if you are old enough, getting the money out is a no brainer.

ogardener said...

Blogger bosuncookie said...

The Community Exchange System is

Yo bosuncookie. The hyperlink ain't workin'.

Greenwood said...


Max Keiser coined the term "Casino-Gulag' to describe the future US economy model that the Banksters are herding the Masses into.

He recently said half the public in the future will be forced to gamble online 16 hours a day for virtual Zynga currency to buy food and the other half will be picking cotton in the blazing hot sun.

Either way, it's slave labor as far as the eye can see.

I know dozens of retired people who are living, not on the interest of their retirement funds, but on the principle, right now.

They are rapidly depleting their assets, hoping things will turn around before they have spent every last dime.

There is no place outside of insanely risky investments to get any interest on your savings.

Max frames the whole situation, globally, as a war between savers vs gambler/speculators.

The whole casino gulag model has also been mentioned by James Kunstler as a 'something for nothing' mindset. Hitting Black on 13 replaces actually working hard, as a way of 'getting ahead".

Doubling down on a losing hand is one thing for an individual to risk (Their family's economic well being and future hanging in the balance)

When an entire country does it, it always ends in tears with total destruction of that economy.

But when the whole world does it, it's TEOTWAYKI.

john patrick said...

On war and improving the economy... the only thing that makes sense (insanity) to me is war wipes out the competition.

On cash. Last couple times I withdrew a modest sum from a local big name bank they had to rummage around in the back to get the bills, asked me if splitting the denominations was okay, and (innocently, i think) asked what the big event was I was spending it on.

Thanks, I&S for the blog. And to all the great comments.

p01 said...

As a kid we used to play with beer bottle caps flattened with a hammer. It was kind of a complicated game, but us kids had a system of values for each beer cap, and the unity was the regular most used beer cap. We did develop a (very rudimentary) monetary system, and even used the caps as "money" to trade for other items. It seemed to evolve naturally, and the caps themselves were just tin, no value whatsoever.

Stoneleigh said...

Comments closed for the time being.

Ilargi said...

New post up.

How The European Rot Entered Wall Street


TAE Summary said...

* Comments are open, comments are closed, blessed be the name of comments

* People in the Northern Hemisphere and ferrets sleep 16 hours a day

* Barter is myth and/or recent invention; Historians at Columbia have shown the first recorded barter happened on Craigslist; My uncles Bob and Ross claim otherwise

* We need to be master's of our own fate; We are rats in a cage lured in by trinkets in airports; Never leave home without your bolt cutters and/or scuba gear

* The yen is puzzling; The dollar may increase or decrease in value against the yen; The dollar and yen will jointly rise; The yen is Gilgamesh, the dollar is Enkidu and the looney is Humbaba

* Traders are hypersociopathic; Scarcity means wild and crazy swings in pricing; Trading is like spanking children: It is usually counter productive but go ahead and do it if it makes you feel better

* The TPTB want to own it all; Stealing doesn't incur debt; New Zealand has been down graded; Nokia lays off 3000; Stoneleigh still deserves credit

* Refusing tenure is good; What will happen when the Greeks default?

*There is not enough wealth to pay all the debts; American's moving to kolob are still required to pay taxes

* Wampum is used perjoratively; Everyone wants a good return on their cash; The interest of America is interest

* Manhattan existed before Goldman Sachs; Most people are now anti-bank; Only potholes can stop the banker-juggernaut;

* Safest way to hold US dollars long term: Put them in an empty Wheatabix box, take the box to the supermarket and put it on the top shelf of the cereal aisle; Oh, and don't tell anyone