Monday, December 5, 2011

December 5 2011: Look Back, Look Forward and Look Down. Way Down.

WPA Federal Art Project poster from New York, 1936

Ilargi: At the start of a week that has been dubbed "historical" and "one of the most important moments in Europe's history", I can't seem to forget the statements by Merkel and Sarkozy sometime mid-October, when both solemnly pledged that by the end of that month the euro crisis would be resolved.

We know where that went. And we also know that establishing stronger fiscal ties across the continent, the somewhat vague "plan" that seems to be worked out in all haste, even if it can be accomplished, which is by no means guaranteed, will take a lot of time. Time that Europe almost certainly won't be allowed.

Merkel, Sarkozy, Monti, Draghi, they've lost all credibility in the eyes of the markets. The only thing they still trust them to do is throw more of their people's funds and future funds as free money at the fire, which the markets can then lap up. At some point, though, the free money will run out.

Satyajit Das has some nice quotes:

The Sovereign Debt Train Wreck
The US is in serious, perhaps irretrievable, financial trouble. Peter Schiff, president of Euro Pacific Capital, identified the state of the Union with characteristic bluntness:

"Our government doesn’t have enough spare cash to bail out a lemonade stand. Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover."

There is a lack of political or popular will to take the action necessary to even stabilise the position. The role of US dollars and US government bonds in the financial system mean that the problems are likely to spread rapidly to engulf other nations.

As John Connally, US Treasury Secretary under President Nixon, beligerently observed: "Our dollar, but your problem."

Connally's observation is about to be thrown right back into the face of America: "Our euro, but your problem."

Europe doesn't have the means to save itself. It will look to the rest of the world, especially the US, to do it instead. The same US that "... doesn’t have enough spare cash to bail out a lemonade stand. Nice dilemma.

As former broker Ann Barnhardt observes: Europe is mathematically impossible. It cannot be saved. [..] You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start. [..] if you were going to bail out the entirety of Europe - you would now be talking about hundreds of trillions of dollars.

Whatever concocted statements or plans come out of the EU summit on Friday, December 9, it doesn't really matter anymore. The best the Europeans can do is extend and pretend the can down the road for a few more days or weeks. So how about it, America?

Here's Stoneleigh with our 1000th post on TAE:


Look Back, Look Forward, Look Down. Way Down.

This is the 1000th post at The Automatic Earth, so it seems appropriate to review our message and update our projections - to look back and then look forward. Since the beginning of TAE in January 2008, and before that at The Oil Drum Canada, our purpose has consistently been to warn people that a decades-long credit expansion is ending, and that, as a consequence, we are in the grip of a very serious financial crisis.

The first leg down (October 2007- March 2009) was just a foretaste of what credit crunch really means, and the long sucker rally of March 2009-May 2011 was enough to put people back to sleep again, secure in the mistaken belief that supposedly omnipotent central bankers could postpone any kind of reckoning indefinitely. Now in early December 2011, we are seven months into the next phase of contraction, but most have yet to recognize that the trend has once again turned down.

Financial bubbles are not a new phenomenon, but are in fact quite common in the historical record. Every few decades, a new generation rediscovers the magic of leverage, igniting a rapid expansion of credit, and therefore debt. Every time humanity experiences a bubble, it fails to recognize the pattern.

The lessons of the past are sadly never learned. Each time the optimism is highly contagious. In the larger episodes, it crescendos into euphoria, leading societies into a period of collective madness where risk is embraced and caution is thrown to the wind. Sky-high valuations are readily rationalized - it's different here, it's different this time. 

We come to believe that just this once there might be a free lunch, that we can have something for nothing. We throw ourselves into ponzi finance, chasing the mirage of speculative gains, often through highly questionable and outright fraudulent practices. Enron, Lehman Brothers, and recently MF Global, are but a few egregious examples of what has become an endemic phenomenon.

The increasing focus on chasing speculative profits parasitizes the real economy to a greater and greater extent over time. After all, why work hard for small profits in the real world, when profits on money chasing its own tail are so much greater for so little effort?

Who even notices the hollowing out of the real economy, or the conversion of large amounts of capital into waste, or the often pointless depletion of non-renewable resources, or the growing structural dependency trap, when there is so much short term material prosperity to pursue? 

In such times, the expansionary impulse drives the development of multiple engines of credit expansion. The reserve requirements for fractional reserve banking (already a ponzi scheme) are whittled away to almost nothing. Since the reserve requirement effectively determines the money supply multiplier effect, that multiplier becomes almost infinite.

The extension of credit through the shadow banking system removes the semblance of central bank control over monetary expansion. Securitization and financial innovation also create putative wealth from thin air, using underlying collateral to derive layers of additional illusory value. In this way, excess claims to underlying real wealth are created. The connection between the rapidly expanding virtual worth of the derivative instruments and the real value of the underlying collateral becomes ever more tenuous.

In 2007, Bill Bonner of Agora Financial produced a descriptive example of this process.

Imagine a man who makes his living digging ditches. He may hire himself out at a daily rate of, say, $25. The old capitalists would have paid no attention to him – he is just one of millions of small entrepreneurs getting by in life.

But today’s financial hustlers will spot the opportunity. Let’s take him public, they will say. We’ll raise his daily rate to $30…pay him his $25…and the rest will be our "profit." We’ll sell shares to the public at a P/E of 20…let’s see, 20 x $5 x 250 days per year = $25,000. All of a sudden, the ditch digger has a capital value of $25,000.

Then, they borrow $20,000 from a hedge fund…and pay it to themselves for structuring the deal. Now, the hustler has $20,000 in his pocket; the hedge fund has a high-yield bond worth $20,000; the shareholders have $25,000 worth of stock; and the poor man is still digging his ditches.

Then, an even more ambitious wheeler-dealer will come along and decide to "roll up" the whole industry – bringing the ditch diggers together into a multi-national consortium. Now they can all do cross-border transactions…including derivatives.

And now ditch-digging is a major business, suitable for large investors…with more investment coverage and a higher P/E ratio. Soon all the world’s banks, pension funds, insurance companies, and hedge funds have some of the ditch digging paper – debt or equity – and billions in fees and commissions have been squeezed out of ditches by the financial industry.

That, patient reader, is the way (the world-over) that industries and assets are now being bought, sold, refinanced, leveraged, re-jigged and resold. In the old days, companies went to investors or to banks for capital and cultivated a relationship with them that was long and fruitful.

Now, it’s all wham-bam-thank-you-ma’am capitalism. Inquiring capitalists now only want to know one thing – how fast can we do this deal? How many points can we get out of it and how much leverage can we get? And whom can we dump it on, when we’re done?

This is - the proper definition of - inflation : an increase in the supply of money plus credit relative to available goods and services. In times of speculative mania, when people no longer care what they pay for something on the grounds that someone else will always pay more, and money is being created with abandon in order to satisfy the acquisitive impulse, credit hyper-expansion constitutes inflation on a massive scale.

Expansion is the only reality many of us have known, hence it is no wonder we imagine it can be a permanent condition.

As John Rubino wrote, credit gains 'moneyness' as during periods of ponzi finance, creating excess claims to underlying real wealth:

As the global economy expanded without a hic-up, more and more instruments came to be used as a store of value or medium of exchange or even a standard against which to value other things—in other words, as money.

Thus mortgage-backed bonds and even more exotic things came to be seen as nearly risk-free and infinitely gained "moneyness," which sent the effective global money supply through the roof.

This in turn allowed the U.S. and its trading partners to keep adding jobs and appearing to grow, despite debt levels that were rising into the stratosphere. For a while there, borrowing actually made the world richer, because both the cash received and the debt created functioned as money.

In the process of credit expansion, we borrow from the future through the creation of debt. Our focus on virtual wealth has very significant real world effects, as it distorts our decision-making in ways that guarantee bust will follow boom. We bring forward tomorrow's demand to over-consume today, frantically building out productive capacity in order to satisfy that seemingly insatiable demand.

As money supply increase leads the development of productive capacity during this manic phase, increasing purchasing power chases limited supply and consumer prices rise. Increasing virtual wealth also drives up asset prices across the board, strengthening speculative feedback loops that inevitably strain the fabric of our societies, all too easily to the breaking point. 

However, concern about the inflationary trend continuing into the future is misplaced. That is where we have come from, but it is not where we are going. Simply extrapolating past trends forward is tempting, but does not constitute meaningful analysis and has no genuine predictive value. It is far more important to be able to identify coming trend changes and to understand where these will lead.

Decades of inflation lie behind us. It is deflation - the contraction of the supply of money plus credit relative to available goods and services - that lies ahead. The threat we are facing is the rapid and chaotic extinguishing of the myriad excess claims to underlying real wealth created during our thirty years of credit hyper-expansion.

Here is another illustrative parable of financialization run amok, looking this time at the real world consequences that follow. Whereas credit expansion pushed up both demand and prices, creating the perception of great wealth in the process, the inevitable bust crashes prices and ruins businesses. The artificial demand boost disappears, but rather than return to its previous level, demand crashes and remains depressed for a long period of time.

The greater the scale of the credit expansion, the greater the effect of bringing demand forward during the boom years, and the greater the crash thereafter. With little demand, there is no price support at anything like previous levels, so prices also fall and remain low, potentially for years, as we saw in the depression of the 1930s.

Helga is the proprietor of a bar.

She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).

Word gets around about Helga's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar in town. By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helga's gross sales volume increases massively. 

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the debts of the drinkers in Helga's bar as collateral. Helga, flush with borrowed money, gives in to the increasing demands from her employees and dramatically increases their rates of pay and installs what are the community's best working conditions.

At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" then are bundled and traded on international securities markets. Naive investors don't really understand that the securities being sold to them as "AA" "Secured Bonds" really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by Helga's bar. He so informs Helga. Helga then demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga's 11 employees lose their jobs and all their accumulated entitlements.

Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community. The suppliers of Helga's bar had granted her generous payment extensions and had invested their firms' pension funds in DRINKBOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers. Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who have never been in Helga's bar.

When a credit expansion reaches the point where the debt created can no longer be serviced by a hollowed-out real economy, and the marginal productivity of debt becomes negative, continued growth is no longer possible.

Ponzi schemes which can no longer grow implode. The first stage of this process began in 2008, with the first reversal of M3 plus total credit market debt since WWII.

The process of monetary contraction following a ponzi expansion is implosive because it involves the destruction of virtual value - the fairly abrupt realization that the emperor has no clothes. A pertinent analogy is that of a giant game of musical chairs where there is only one chair for every hundred people playing the game. Imagine what happens when the music stops. A few will be lucky and secure a chair. The rest represent excess claims, and those claims are then extinguished.

Credit only functions as a money equivalent during times when the suspension of disbelief can be maintained. Once confidence is lost and a toxic combination of fear and suspicion takes hold, a pile of human promises that obviously cannot be kept ceases to hold the illusion of substance. At that point one can expect is significant contraction in the scope of what constitutes money.

As John Rubino wrote of the 2008 crisis,

When the U.S. housing market—the source of all that mortgage-backed pseudo money—began to tank, hedge funds found out that an asset-backed bond wasn't exactly the same thing as a stack of hundred dollar bills.

The global economy then started taking inventory of what it was using as money. And it began crossing things off the list. Subprime ABS? Nope, that's not money. BBB corporate bonds? Nope. High-grade corporates? Alas, no. Credit default swaps? Are you kidding me?....

....No longer able to function as money, these instruments are being "repriced" (a slick little euphemism for "dumped for whatever anyone will pay"), which is causing a cascade failure of the many business models that depend on infinite liquidity.

No market moves only in one direction. The tug of war between greed and fear, and consequent ebb and flow of confidence, mean that the scope of what constitutes money can demonstrate periods of reflation as suspension of disbelief temporarily reasserts itself. The two year sucker rally from March 2009 saw the monetary contraction process reverse temporarily, and a number of factors resumed trajectories characteristic of the expansion years.

As we have said many times, rallies are kind to central authorities, because the supportive psychology of a rally, complete with suspension of disbelief, allows their actions to appear effective, temporarily. Stimulus packages seemed to achieve the desired ends, at least in terms of elevating the markets, suggesting that we were facing a relatively simple problem with a straightforward solution.

A dangerous perception has developed that central bankers are so much wiser and better informed than their predecessors in other times and places, that the lessons of the past have been learned and the pitfalls of the past avoided. This is of course the height of hubris. If a predicament such as this could be so easily resolved, then there would be no similar crises in the historical record. We cannot simply assume that previous central authorities were blind, ignorant, unimaginative or disinterested in self-preservation.

Now that the downtrend has reasserted itself with a vengeance, the supportive psychology of a rally no longer exists. Confidence is ebbing again, and fear is sharply in the ascendancy. We can already see how ineffectual the actions of central authorities are under such circumstances. Everything they do is too little, too late, and every failed attempt to stem staunch the financial hemorrhage only makes them look more desperate, which undermines confidence further in a vicious circle.

Europe is leading the contraction this time, providing a telling example of the powerlessness of central authorities in the face of a collapsing credit ponzi. The stability fund (EFSF) was originally to be €220 billion, but it was obvious long before that was agreed that €220 billion would be grossly insufficient.

Agreement , at the expense of the Slovakian government, was obtained to increase the fund to €440 billion, but by this time there were already public discussions of the need to leverage the fund by a factor of five.

A further agreement to extend the facility to a trillion euros was already behind the curve, as it was common knowledge that at least €2 trillion would be needed, and that would cover only Greece. Clearly, several other members of the eurozone would require the same treatment, and there is no provision for their difficulties. 

At the heart of the problem lies the loss of money equivalence of credit instruments previously seen as risk free. As 'moneyness' is lost, the effective money supply contracts, and does so very rapidly. This is deflation by definition.

CNBC's John Carney explains:

It’s easy to miss the contraction of the money supply because it involves a destruction of financial assets that we do not usually think of as "money" but that, in fact, operate as money — or did until relatively recently. The fundamental characteristic of modern fiat money — as opposed to commodity-based money under a gold standard — is that it serves as a medium of exchange. This means dollars or euros, for example. Basically, the local currency.

Within the banking system, however, other financial assets also serve as money. These assets can be used to meet margin calls, collateralize obligations, and make payments. U.S. Treasury bonds are the most obvious example of this kind of money-equivalent financial asset. The U.S. government recognizes the equivalence of Treasury bonds and dollars within the banking system by not requiring banks to hold any reserves against the bonds. They are counted as "cash or cash equivalents" on balance sheets of U.S. public companies.

Over in Europe, sovereign debt  issued by euro zone nations also served as a money-equivalent inside the banking system. Banks were not required to hold reserves against sovereign debt. They used them as collateral for obligations, and made inter-bank payments with sovereign bonds. The bonds were, in short, as good as euros.

When the markets turned against nations like Greece and Italy, the cash-equivalency of their bonds came into doubt. It was obvious that they could lose value, and quite rapidly. The debt could no longer be used as collateral, except at extreme discounts.

The discounting of sovereign debt, then, meant that there was less money in the European banking system. If a one million euro bond previously held as a money-equivalent is now worth just 600,000 euros, the holder has lost 400,000 euros. Multiply that across the banking system, and you have millions of euros of money-equivalents simply vanishing.

It is exactly as if some paper-eating plague just started rotting physical euros. The money supply of Europe is vanishing

The attempt to ring-fence Greece, allowing a one-off 50% haircut for them alone, is also clearly insufficient, given the obvious predicament of Portugal, Ireland, Spain and Italy, and the mounting problems of Belgium, France and Austria. The contagion is rapidly reaching the core of the eurozone, the actions of governments being overtaken by events at every step.

In addition, a decision to declare a 50% haircut not to represent a credit event, thereby triggering credit default swap payouts, is very dangerous. If a 50% haircut is not a credit event, then what protection is afforded by a CDS contract, and what therefore is its monetary value? On the other hand, allowing CDS contracts to be triggered would reveal the huge extent of counter-party risk in the CDS market, similarly demonstrating the worthlessness of this supposed form of insurance. 

The CDS market has a built-in meltdown mechanism, and is destined to be a significant factor in credit implosion. The authorities were damned if they did and damned if they didn't. The price of being in a position of perceived power at such as time is to see one's reputation go down in flames for being unable to solve the insoluble.

The scale of the European debacle is not yet generally understood. While it is agreed that current stability funding is woefully inadequate, there are few people taking a realistic look at the scale of the potential losses across countries and asset classes.

Ann Barnhardt, who ran a brokerage until recently (when the MF Global collapse led her close it on the grounds of no longer being confident of the safety of her clients' funds) is one individual who pulls no punches in her assessment of the losses Europe is facing, and the impossibility of repayment. 

In an interview with Jim Puplava she looks at the scale of the problem as a whole:

Well, if anybody out there understands fourth grade arithmetic you know from metaphysical certitude that Europe is done. Europe is mathematically impossible. It cannot be saved.

You want to make a start. You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start.

And it would then - if you were going to bail out the entirety of Europe - you would now be talking about hundreds of trillions of dollars.

Okay, people, there isn’t that much wealth or money on the surface of the earth. The total gross domestic product of the entire planet earth is I think just under $70 trillion. And we are talking about in excess of $100 trillion to bail out Europe? This is now mathematically impossible.

It's not a matter of if the global financial system is going to collapse. Oh, it's going to collapse. You better trust and understand that. It's just a matter of when. And these piddling little maneuvers that these people are making, that the Fed is doing.

Oh, we are going to give Europe some money. Okay. What I saw this morning, what the Fed is getting ready to do in terms of Europe, is keep Europe going for another seven days. Well, fantastic. Thanks for that. That is literally the brain dead mindset of these politicians.

All they are doing is looking to kick the can down the road. At first it was kick the can down another 10, 12 years. Then it is kick the can down the road for another year. And then it was well, let’s kick the can down the road for another few months. Now we're literally to the point where all we can do is kick the can down the road for a matter of a few days. It's not going to make it.

I will be very surprised if we make it until Christmas.

Over the next year and beyond, we will discover what credit crunch really means. It is an economic seizure, and its effect is devastating. Credit in its myriad forms represents the vast majority of the money supply, and it is about to lose its money equivalency. This will leave only cash, and that cash will be extremely scarce.

Aggravating the effect of crashing the money supply will be a substantial fall in the velocity of money, meaning that money will largely cease to circulate in the economy as people hang on to every penny they can get their hands on.

Money is the lubricant in the engine of the economy in the way that motor oil is the lubricant in a vehicle engine. Attempting to run any kind of engine with insufficient lubricant will result in that engine seizing up.

Without the monetary exchange that we have built into our system at every level, it will not be possible to connect buyers and sellers, producers and consumers. 

Nothing moves in an economic depression. This is the polar opposite of the frenetic activity of the inflationary boom years. Instead of the orgy of consumption to which we have become accustomed, we will experience austerity on a scale we cannot yet imagine.

Demand will evaporate, not because people do not have wants, but because they will lack the purchasing power to turn those wants and needs into consumption. Demand is not what we want, but what we can pay for.

We will be looking at falling prices as lack of demand undercuts price support, but because purchasing power will be falling much more quickly than prices, everything will become far less affordable, even as prices fall. As a much larger percentage of the much smaller money supply begins to chase essentials, those will receive relative price support, and will be the least affordable of all.

We must prepare right now for the onset of a long period of deflation and depression. Many people are reluctant to make preparations until they see the roof on fire, but by then it will be too late to take action.

To reiterate the advice TAE has been offering since its inception - hold no debt, hold liquidity in order to maintain freedom of action, gain some control over the essentials of your own existence, and build social capital in your own communities.

There is no time to waste in securing what you have, under your own control to the greatest extent you can manage. The future is at our doorstep, and it does not look like the past as we have known it. 

Let Them Eat π
by Alex Andreou - Sturdyblog

Some months ago I tried to explain that the crisis in Greece concerned the entire globe directly and that what was happening to my country was nothing short of an economic coup d’état. Naturally, I was accused of doom-mongering and over-dramatising. It pains me to have been proven absolutely right on both points.

If we are to learn lessons from the events of the last three years, it is vital to challenge dominant and convenient narratives on the issue. They range from, at worst, malicious propaganda and, at best, distracting fairy-tales.

The first of those is the idea that the current crisis is made in Greece. It is not. It is the inevitable fallout of the global crisis experienced in 2008. But do not take my word for it.

Here is what Angela Merkel had to say on the matter in February 2010, when the “Greek problem” started to rear its head, as reported by Bloomberg:

German Chancellor Angela Merkel criticized market speculation against the euro, saying that financial institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere.

In a speech in Hamburg, she hit out at currency speculators, who she said are taking advantage of debt piled up by euro-area governments to combat the financial crisis.

"The debt that had to be accumulated, when it was going badly, is now becoming the object of speculation by precisely those institutions that we saved a year-and-a-half ago. That's very difficult to explain to people in a democracy who should trust us."

Do you understand that? The debt was piled up to bail out banks. Those same banks then bet against nations being able to repay it, amplifying the crisis. This is not a purely Greek phenomenon. It is happening everywhere – read this article on the UK position. Greece was in a particularly vulnerable position because of the proximity of an incredibly expensive Olympics in 2004 which left a huge legacy of debt.

I really wish knowledgeable commentators would stop perpetuating the idea of another or second crisis. We are still experiencing the global crisis which started in 2008.

The second is the notion that the current crisis is a financial one. It is not. It is a political crisis and an ideological one. The demise of an economy the size of Greece (1.8% of Eurozone GDP, 0.47% of World GDP according to 2010 IMF figures) should hardly register as a blip on the global radar.

The primary reason it is causing such a panic is the interconnectedness of the banking system – the very same systemic relationship which caused the domino effect in 2008 and which we have failed to address or regulate. The secondary reason for the widespread nature of the problem is the Eurozone’s refusal to allow Greece to proceed with what most commentators have seen as an inevitable default for some months now.

Both these factors are down to political decisions, not sound fiscal policy. The panic over the proposed Greek referendum a few weeks ago, exposes much deeper tensions between Democracy and Economic Policy. The announcement of a referendum – the ultimate exercise of democracy – sends economic indicators into a nose-dive. As soon as it is scrapped, they recover. Tensions between the US executive and Congress over budget issues – an integral part of their democratic process – resulted in their debt rating being downgraded.

In Greece, the man who presided over our entry into the Euro – seen universally as a huge error at the root of current troubles – has been appointed to solve the problem. In Italy, an advisor of Goldman Sachs – seen by many as the crooked firm who cooked the books of Southern European economies at the root of current troubles – has been appointed to solve the problem. The blind leading the fucked.

So, we have ended up with two EU countries with appointed, rather than elected leaders. And nobody seems to find this disquieting. Yes, times are very difficult. Yes, they both succeed incompetent and disastrous governments. Yes, they come at a time when urgent action was required. But all three of those excuses have applied to every junta that has ever taken control of a nation by force. But, no matter. Markets like them.

And that is precisely the third issue: our obsession with markets and the theory that markets do not lie. Markets are the collective expression of individual greed. They are the overview of a no-holds-barred fight of  individual interests, scrambling to make money. They position themselves, posture, exaggerate and lie all the time. They exist based on the economic theory that they are “self-correcting” and yet they have shown themselves repeatedly not only to be unable to correct their flaws but also to cause or exacerbate systemic errors.

We increasingly humanise them in the language that we use – “markets are jittery”; “markets have reacted with anger”; “markets seem to have confidence”. Meanwhile we dehumanise and objectify real people who are, right now, suffering untold misery.

Famines in Africa, created and perpetuated by financial speculation on food commodities, become mathematical equations. Pensioners in Greece having to live on 400 Euros a month, an increase of 40% in suicides and 60% in immigration and 20% in homelessness in a three month period, become figures to be fed into an economic model. Whether we should or should not treat patients on the NHS with a particular condition (for which treatment exists) becomes an accounting exercise of considering cost versus benefit.

If one were to assess world economies by purely market criteria, the most successful of the large players (by a long way) would be China – huge surplus, record growth, productivity and innovation. The USA and the EU, those self-appointed beacons of democracy, are currently begging China cap-in-hand for some of their spare cash. Or put a different way – the one surviving authoritarian, communist state is a model of capitalist success. Another topical example is Libya. At the very moment its people were getting shot in the street for rising up against its oppressive regime, it was the only country in the world with zero sovereign debt.

Markets are the ultimate victory of applied science on human consideration. They have become the new Marie Antoinette – an entity standing on a balcony, presiding over its people – who when confronted with news of war, suffering and death, invariably responds with “let them eat π”.

There appears to be an inverse relationship between democratic deficit and economic surplus; an unbearable tension between human suffering and economic health. To not devote the intellectual capital to exploring this paradox with urgency, is a dangerous form of elective blindness.

Welcome to the living dead economy
by Larry Elliott - Guardian

A eurozone that somehow stays afloat but can't be reformed, banks awash with cash that don't lend, and incoherent economic policy. We've only found a sticking-plaster solution to our crisis

The longer the economic crisis goes on, the less credible sticking plaster solutions become. Four years in, Europe is heading into a nasty recession, China is flirting with a hard landing, the governor of the Bank of England is warning of a systemic banking crisis and George Osborne has announced spending cuts that will continue for the next six years.

The United States is the one part of the world where the news has been better recently, with signs of life returning to the housing market and a welcome fall in unemployment.

What's happening in America – where the Federal Reserve has used two rounds of quantitative easing (QE) to boost the money supply and announced its intention to keep interest rates low – has encouraged the belief that recovery will eventually come, provided the policy response is big enough for long enough.

It remains to be seen whether this is indeed the case, since there have been false dawns galore since the financial system froze in 2007. The real strength of the US economy will be revealed early next year, when tax breaks supporting consumption and investment are removed and when the world's biggest economy starts to feel the impact of the slowdown on this side of the Atlantic.

Deadly limbo
An alternative way of looking at the crisis goes like this. We now inhabit a world of the living dead: a eurozone that will not collapse but cannot be reformed; banks that are kept alive by gigantic quantities of electronically generated cash but do not lend; homeowners who are sitting in homes worth more than they paid for them but are able to stay put because interest rates are so low and lenders have no desire to crystallise losses, and policy that is neither one thing nor the other.

There is a story, almost certainly apocryphal, that John Maynard Keynes and Friedrich Hayek used to discuss the state of the world while sharing on air raid warden duties on the roof of King's College Chapel in Cambridge during the second world war. Were they alive today, the great economists would – from their different perspectives – no doubt have harsh things to say about the way the global economy is currently being managed.

Hayek would say that the zombie-like state of affairs has been due to the refusal to allow banks that lent irresponsibly to go bust. His analysis of the crisis would be that too much easy money led to too much unproductive investment. While not cavilling at the suggestion that spending should be maintained during a slump, Hayek would argue that the aim of policymakers should be to return to a situation where production was sustainable and profitable. If that meant letting banks go under, then so be it. If nature's cure took time, then so be it.

Since the crisis began, policymakers in the west have prided themselves on avoiding the mistakes made by Japan in the 1990s. Hayek would say that western leaders have repeated the big policy error made by the Japanese – allowing over-leveraged banks crippled by non-performing loans to stay in business – with the same baleful results.

The US did allow one bank to go bust, when it failed to save Lehman Brothers in September 2008. Market mayhem ensued, amid fears that other banks would go under as well, and there was a complete change of approach. Banks were recapitalised courtesy of the taxpayer and provided with unlimited quantities of cheap money to keep them afloat.

Hayek would say that this was merely a sticking-plaster solution, albeit the biggest and most expensive piece of sticking plaster the world has ever seen, and would point out that last week – more than three years after the Lehman bankruptcy – the only thing that had changed was that the centre of the problem was no longer the US but Europe.

Italian banks are even more dependent on their financial lifeline now than they were in 2008; last week's co-ordinated action by six of the world's leading central banks was prompted by evidence that Wall Street was no longer prepared to lend money to European banks. Sooner or later, Hayek and his followers would say, there has to be a purging of the system to remove the rottenness, and what has happened over the past few years is merely deferring the inevitable.

Interestingly, it is not only free-market economists that believe in the power of creative destruction. The term, although it came to be associated with Joseph Schumpeter, originally came from Marxist economic theory, which held that each phase of development emerged out of the wreckage of a system that no longer worked. Socialism would follow capitalism, just as capitalism followed feudalism. The Marxists believe the attempts to muddle through are doomed to failure.

Creative destruction
There is, of course, not the slightest possibility that policymakers will opt for the creative destruction approach, at least not willingly. Nor, though, is there any great appetite for adopting a pure – as opposed to pseudo – Keynesian approach. If he were alive today, Keynes would caution against a Hayekian catharsis, but would also be critical of blanket austerity at a time when demand is weak and confidence low.

Keynes would have approved of the action to slash official interest rates. He would have approved, also, of the attempt to manipulate market interest rates lower using QE. But he would be alarmed at the weakness of private-sector investment, particularly given the large amount of cash sitting idle in company bank accounts. Keynes would conclude that the "animal spirits" of commerce are currently low, and so it is up to governments to prime the pump through higher public spending.

In the early stages of the crisis, that is what happened. Monetary policy and fiscal policy were supportive and – Keynes would say – the result was the tentative recovery seen in the second half of 2009 and early 2010. Then, however, the financial markets started to look askance at the size of government budget deficits and spooked finance ministries into taking over-hasty remedial action.

The result has been that public demand has been sucked out of western economies at a time when private demand is weak. The result has been a slide back towards recession. Keynes would say that instead of worrying about deficits, governments should be worried about unemployment: get growth going again, and the deficit will look after itself.

Policymakers' riposte to Keynes would be the same as it would be to Hayek: get real. If we take no action to rein in deficits, we will be slaughtered by the markets; bond yields will go up sharply, negating the impact of cheap money. Keynesian fiscal policy, in other words, will only be possible when the markets share Keynes's belief that jobs matter more than the level of national debt, and given the way economics has been taught in universities for the past 30 years, that moment may be a long time coming.

As things stand, economic policy lacks intellectual coherence, monetary policy is governed by a belief in the need for unrestricted credit, and fiscal policy by a belief in "expansionary contraction". It is a mishmash based on one big assumption; given time, the grown-ups can fix things. There are three possible responses to this: they can fix it given time; they can fix it if they use a different toolkit; they can't fix it at all because the system is bust. You decide.

Ann Barnhardt: The Entire Futures/Options Market Has Been Destroyed by the MF Global Collapse
by Jim Puplava

Jim Pulava interviews Ann Barnhardt.

The Interview

The Transcript

Jim Puplava: Joining me as my special guest on the program today is Ann Barnhardt, formerly of Barnhardt Capital Management. And Ann, you were a commodity broker for eight years and then you formed your own independent brokerage for six years. A couple of weeks ago you made the painful decision to shut your doors because you felt your clients’ money and positions were no longer safe. What led you to draw those conclusions?

Ann Barnhardt: Well, obviously, it was the MF global collapse and more specifically the fall out after the MF Global collapse and the reaction by the CFTC, the SEC and most especially by the Chicago Mercantile Exchange [the "Merc"]. The actions, specifically by the Merc after the MF Global collapse were unprecedented, unfathomable and completely and totally intolerable.

The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade.

And I cannot over-emphasize the importance of that, the risk that those people were exposed to in the cattle business (and my forte is cattle. I am actually a cash cattle person. My brokerage business was geared almost exclusively towards livestock and grade. I have a lot of contacts in the cattle industry who didn’t necessarily do their futures business with me but were contacts of mine who did do business through brokers that cleared through MF) who lost tens of thousands of dollars on hedge positions that they wanted to get out of but could not get out of in the week and a half after the MF Global collapse.

This has never happened before. This was a complete breach of fiduciary duty by the Chicago Mercantile Exchange itself to the point that it literally has destroyed the entire paradigm. I got to the point where I could no longer tell my clients that their free cash customer funds, not even exposed to the market place—just their cash sitting in their account, non-margined—was not safe. I couldn’t tell them that their money was safe.

At that point it was morally incumbent upon me to get my client out of this completely dysfunctional, basically destroyed marketplace. Get them off of those railroad tracks and get them away from the risk. Now, I didn’t clear through MF, but with the European collapse and knowing what we know about how these financial entities are leveraged in European paper and the cascading nature of all of this I had to act before the proverbial poop hit the fan because if you sit around and you wait until after the poop hits the fan it is too late. You wouldn’t get anybody out. To me, it wasn’t really a painful decision. It was a complete no brainer.

Jim Puplava: In the past, when firms went under customer funds were intact and the exchanges would step in, as you mentioned earlier, to backstop everything to keep customers 100% liquid. And normally, a quick transfer from the bankrupt firm, the bankrupt firm would be immediately replaced. Why do you think they did not allow that to happen this time?

Ann Barnhardt: You tell me. I will use the word again, it is suicidal. What they did was suicidal. So you are absolutely right. Up until last month on Friday, October 31st, the customer segregation of funds rule was utterly sacrosanct.

Even when Refco imploded and imploded quite dramatically in 2005, no customer funds were gone. It was on the prop trading side of the company but the customer funds were there, were accounted for, and it is the onus of the Mercantile Exchange to audit these FCMs [Futures Commission Merchant]. MF Global was under the auspices and under the supervision, of the auditing supervision, of the CME. And I believe that MF was audited not just annually, but quarterly. Also, there is the question of how in the world can the Merc miss the margin being posted.

The Merc is supposed to be moving equity and doing margin wire transfers twice a day every day. How could those customer funds be "missing". They aren’t missing. They were stolen. They were stolen by Jon Corzine and his cadre of associates at MF Global. So yes, again, to your listeners who may not fully appreciate the gravity of this, this has never, ever happened before.

Nothing even close to this has ever even happened before and it is the function of the Mercantile Exchange itself—the reason why the exchanges exist is that they stand in the middle of every transaction and they act as the de facto counterparty to every single transaction so that, for example, my clients never had to worry about the credit worthiness of the other individual, whoever it might be, who is on the other side of any trade that they did.

Now, for every buyer there is a seller and it is a one-for-one, zero-sum game; but to ensure the credit worthiness and the integrity of the market, the function of the Mercantile Exchange itself is to stand in the middle of every transaction and be the guarantor. So a year ago when Terry Duffy held a press conference [watch it here] and said never in the history of the Mercantile Exchange has a customer ever, ever lost funds resulting from the collapse of a firm, he was telling the truth a year ago.

Everything changed on Halloween of this year though. And that's why I had to shut the doors of my brokerage because I could not in good conscience continue forward knowing that the Mercantile Exchange was no longer going to fulfill their fiduciary duty.

Jim Puplava: In the futures market, which is highly leveraged, if you open up a futures contract you are usually leveraged 10-to-1, so they require an exceptional firm base on which to function. And the major integrity of the whole system is the segregation of customer funds. That was breached by MF Global. And let’s not sugar coat this, Ann, basically management stole all of the non-margin cash, invested it in highly speculative securities and what has astonished me has been the reaction of the exchange and regulators—where is the investigation into Jon Corzine?

Ann Barnhardt: Well that is the point of this. We are now living in a lawless, Marxist, Communist, usurped, what used to be a representative republic but is no more. This is no longer a nation of laws. This has now transformed into a nation of men. It doesn’t matter what crime you commit. In the case of Jon Corzine, this man has stolen in excess of a billion dollars.

I think by the time it is all panned out it is going to be closer to $3 billion of customer funds that he stole. Why did he do it? Is he stupid? Well, of course he’s not stupid. This is a former head of Goldman Sachs. This man doesn’t have a low IQ per se. Why in the world would a man wake up in the morning one day and say you know what, I think I am going to steal all the customer seg funds in this FCM that I’m running, which is the biggest FCM in the country.

Yeah, that sounds like a good plan. No. Why would a man like that even engage in a nefarious plot like this? Because he knew going into it he could get away with it. And the reason he could get away with it is he is in tight with the Obama regime. He is one of Obama’s highest fundraisers. Earlier this year Jon Corzine had a fundraiser dinner at his New York City apartment for Barack Obama where it was charged at $35,000 a plate. Okay? He bundled high six figures for Obama in one evening! He is a crony of the regime.

This is Marxist Communism. There is no rule of law. And these people, these poor MF customers are just sitting out here helpless to do anything because there is no law enforcement because this is no longer a nation of laws. The rule of law no longer exists. There is no longer justice in this nation. And no nation, no culture, no society can survive if there isn’t a foundation of justice. That is why we are teetering on the precipice of collapse and I foresee civil war coming within the next several years.

Jim Puplava: You know, we had Gerald Celente on this program and he had an account with Lynn-Waldok, which was eventually taken over by MF Global, and he's been trading futures in gold. He had a plan when he built up enough he would eventually take delivery. Well, they stopped him out of his trade, sequestered his margin (or his cash) and forced him out of a trade and closed his account.

So what you are talking about—because the exchange did not backstop and then froze customer accounts—is they forced, would you say, millions if not hundreds of millions of dollars of losses on these customers?

Ann Barnhardt: Absolutely. If we are talking several billion in customer seg funds then the losses that were incurred could easily by the customers in that week, week and a half that they were frozen out could easily, easily get into the hundreds of millions it might even breach into the low billions. No question about that. And yeah, and even with options.

You know, I talked to cattleman who have put options on as hedges to put a floor underneath the price of the cattle in case—so imagine this, you buy a put option four months ago, you pay the premium. You post that money. Then this happens, you are frozen out of your account. Your account gets transferred to another firm, without your consent. By the way, none of the customers were allowed any input into this. Their accounts were just sent to RJ O’Brien and other firms like that without their consent.

And then once the positions were transferred, even if it was a risk limited position like a long put option, then the new clearing firm called them the next morning after the trade settled and said there was no equity in your account because all that money got stolen. So you are going to have to pay the premium for this put option again. So it's doubling the cost essentially for a lot of these people out here who are dealing in what is supposed to be the very risk limited paradigm of long options.

The entire situation could not have been handled any worse. In fact, I would take it a step further. It was handled so poorly I can’t imagine that these people are that stupid at the Merc and at the CFTC and so forth. I can’t believe that the bankruptcy trustee is that stupid. This almost seems like it was so bad that it had to have been nefarious.

Jim Puplava: You know, Ann. You believe that MF Global is just the tip of the iceberg. That there is massive industry exposure to European sovereign debt. In fact, the day you and I are doing this interview the Fed just engineered a major swap with central banks. It was a central bank love fest on Wednesday of group money printing. That tells me that central banks acting in unison the way they did shows they are afraid that there's something big out there that is about to happen and that they are trying to maybe plug a hole in the dyke.

Ann BarnhardtWell, if anybody out there understands fourth grade arithmetic you know from metaphysical certitude that Europe is done. Europe is mathematically impossible. It cannot be saved.

You want to make a start. You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start.

And it would then - if you were going to bail out the entirety of Europe - you would now be talking about hundreds of trillions of dollars.

Okay, people, there isn’t that much wealth or money on the surface of the earth. The total gross domestic product of the entire planet earth is I think just under $70 trillion. And we are talking about in excess of $100 trillion to bail out Europe? This is now mathematically impossible.

It's not a matter of if the global financial system is going to collapse. Oh, it's going to collapse. You better trust and understand that. It's just a matter of when. And these piddling little maneuvers that these people are making, that the Fed is doing.

Oh, we are going to give Europe some money. Okay. What I saw this morning, what the Fed is getting ready to do in terms of Europe, is keep Europe going for another seven days. Well, fantastic. Thanks for that. That is literally the brain dead mindset of these politicians.

All they are doing is looking to kick the can down the road. At first it was kick the can down another 10, 12 years. Then it is kick the can down the road for another year. And then it was well, let’s kick the can down the road for another few months. Now we're literally to the point where all we can do is kick the can down the road for a matter of a few days. It's not going to make it.

I will be very surprised if we make it until Christmas.

Jim Puplava: You know, one would have thought Ann, after the 30 to 40:1 leverage leading up to the financial crisis of 2008, pre-Lehman, that financial firms would have learned. And especially a guy like Jon Corzine that saw Goldman have exposure to AIG with $13 billion in credit default swaps which we bailed him out 100 cents on the dollar. Apparently, this lesson was not learned at MF Global because the leverage, what was the figure? I think it was 100:1—it was just astounding.

Ann Barnhardt: The only lesson that these criminal degenerates learned from the 2008 situation was that they could do anything they want and that pimp daddy government would bail them out. You have to understand, people like Jon Corzine, these are evil, evil people. He went into MF Global looking to rape that company personally for his own good. And that's what the motivation of a lot of these people are. You have to get your heads around this.

You have to get your heads around the fact that there are truly evil people in the world who do not give a crap about anyone or anything except themselves, their own personal wealth and their own personal power. And they would sell their grandmother to the Nazis for a nickel without hesitation if they thought they could get away with it. It's the same with people like Jon Corzine, and then we have talked about the fact that Jon Corzine is tied into the Obama regime.

And we now know that the government is absolutely stuffed to the gills almost exclusively with this same type of moral degenerate culture. These people that are in the government—not just the Congress and Executive Branch but also in the bureaucracy—they are in it for themselves. They are in it for the money. And two weeks ago when we had the 60 minutes exposé on the insider trading, those of us who have been in the business have known intuitively that that was going on for a very, very long time.

We knew that there was front running going on by politicians. A great example of this is someone like Harry Reid. When he entered Congress, Harry Reid had a low six-figure net worth. He now has an eight-figure net worth. And he's never done anything except be a United States Senator. The salary I think of which is something like $170,000 a year. How does that happen? How does a man with $170,000 a year salaried position go from having a six-figure net worth to an eight-figure net worth? That doesn’t make any sense unless he is doing nefarious, illegal, insider trading type deals.

It is obvious what's been going on. You have to start acknowledging these people for what they are, and that is moral degenerates who are basically sociopaths and psychopaths. Meaning they don’t feel any sympathy or empathy for other human beings. The only thing they care about is themselves. They will do anything. They will steal. They will lie. They will cheat. They will lie to your face.

They will look in the camera with this tremendous earnestness and lie with fork tongues through their teeth in order to advance their wealth and power. And if we, as a people, don’t get real about this, if we keep having these Pollyanna visions that these people are all on our side and they are really looking out for us. And they are doing the best they can. We will be cork screwed into the ground and this nation will be reduced to a smoldering rubble. You've got to wake up.

Jim Puplava: I would like to go back to MF Global for a second. There is something even worse as you look into the details—it's been hinted and that there could be possible clawbacks. I’m wondering if you might explain that possibility and what a clawback means for, let’s say you had an account at MF Global and, I don’t know, you didn’t feel comfortable with the commodities market—the volatility. So you pulled the money out. There is a possibility they can go after you.

Ann Barnhardt: Oh, absolutely. Clawback is a fairly common tactic in bankruptcies. And what it is is looking at the bankrupt entity and looking at the money that went out of that entity in the time period immediately preceding the collapse. And I don’t know what time frame they would look at MF. I don’t know if it would be 30 days or 60 days or 90 days—I have no idea. But the trustee has in the last two weeks said that yes, clawback is on the table.

So what that means is, let’s say for example, you are a savvy individual and you are a good steward of your money. And you are doing business with a firm that clears through MF Global. You are looking at MF Global’s publicly available bond yields. And you see in the six weeks before the collapse that their bond yields spiked parabolically.

They went from 6% to 18%. That is a sure, sure sign of massive trouble. And so being an intelligent, informed, aware person who is a good steward of their wealth, what do you do? You say I’m getting out of this company. I am getting my money out of MF Global because something bad is about to happen looking at these bond yields. You can also do the same thing looking at the stock price. You could do the same thing looking at downgrades by the ratings agencies. There's all kinds of ways that you can come to these conclusions.

The other thing is if you're a hedger. If you are a bonafide hedger—if you had positions on and the market moves in favor of your hedge position on the futures side, you don’t leave that equity sitting in your account. What your broker like me does is they wire that money home because you are using that money probably to either offset a cash transaction or to pay down a revolving line of credit.

You're not getting any interest on your money sitting at MF Global so you might as well get that equity out of there, send it home and pay down your line of credit so you are not paying interest on that money. So there would organically have been lots and lots of money flowing out of that company in the period immediately before the collapse. Either due to natural hedges, organic in and out functions or due to intelligent people looking at the bond yields and saying uh oh we better get out of here.

The bankruptcy trustee can legally claw that money back. Say okay, I am going to go and I am going to dive into your pocket now. And I am going to claw back your money which you, in your responsibility and in your good stewardship pulled out of a company that you knew to be in trouble. Oh yeah, so these MF customers will essentially be raped three times—they will have their cash stolen out of their accounts, they were then locked out of their position so they couldn’t trade and were fully exposed to market risk, paralyzed, unable to do anything for excess of a week.

And then, number three rape, is having the bankruptcy trustee come back and literally seize money out of your own personal checking accounts and business accounts and so forth. And clawing it back to feed this bankrupt entity. And you know what the cherry on top of the sundae of all this is? And this is what blows my mind—the bankruptcy trustee, right now, as this is being recorded on the 30th of November. The bankruptcy trustee is still allowing MF Global to trade proprietarily for itself, for the company proper.

It is unbelievable. The rule of law is dead in this country.

Jim Puplava: You know, adding to this just prior to that was the restructuring of Greek debt, where the derivatives association announced that it was a voluntary restructuring so therefore the bankers didn’t have to pay out on credit default swaps. So what you have here, Ann, I believe is a system where the government is protecting the too-big-to-fail at the expense of the customers. And with it, the rule of law is thrown out to protect Wall Street, what does that say about the integrity of the system? It is no wonder people are losing faith.

Ann Barnhardt: There is no integrity in the system. And let’s make it simple—it is not just about the government protecting the "too big to fail banks". It is about criminal oligarchs as individuals protecting each other. They don’t give a crap about the customers of JP Morgan or you know, Citi or Goldman or anything. What they care about is each other.

The Obama regime is protecting Jon Corzine proper, the individual. Because he is one of them. He is one of these criminal oligarchs. And for your listeners who may not remember, Jon Corzine is a former congressman. But immediately preceding MF Global he was the Governor of New Jersey and he just cork screwed Jersey into the ground. It is Chris Christy who beat Jon Corzine to become the governor of New Jersey.

So yes, this Republican, Chris Christy, was elected in New Jersey—uber liberal, blue state New Jersey—because Corzine financially destroyed this state. And again, this guy Corzine is former head of Goldman. He is not stupid. You have to stop thinking that these people are just misguided or that there is some sort of a difference of opinion on economic theory. These people are nefariously trying to destroy everything in this country.

It's called the Cloward-Piven strategy. Go in and destroy and collapse the entire economy, everything and then rebuild a new Marxist, Socialist, fascist state out of the burning rubble of this destruction. This is intentional. This is nefarious. This is not a function of incompetence. It's a function of malice of forethought and conscientious theft and destruction.

Jim Puplava: What would you advice? I am a long term believer in the bull market in commodities, but how do you play commodities when the futures market is no longer secure? And what does this do to the proper functioning of the markets? In other words, now that you've closed your firm because you don’t believe in the integrity of the system and we just listed a series of reasons why—not honoring contracts, appropriating funds, not allowing trades to go off.

Not one investigation, in fact, this goes even further than that. We had Bill Black on the program recently, who helped make prosecutions in the S&L scandal. And at that time, 2,000 individuals went to jail. There has not been one criminal charge brought by the justice department since the 2008 crisis. So given that this is where we are, what do you advise and what will you do personally?

Ann Barnhardt: Well get the hell out. Get out of all paper and it's not just the commodities markets. This is going to cascade through everything. It is going to get into the equities. It is going to get into 401ks and IRAs, it is going to get into pension plans and so on and so forth. Total systemic collapse. Get out! I don’t know how I can be anymore plain about this.

I say this over and over and over again and then I get scads of emails saying, well I can’t get out of my 401k. Yes, you can. Yes, you can. Take the penalty and get the hell out of there. What would you rather do? Would you rather pay the 10% penalty or would you rather have it all go up in smoke? Because that's what we're staring down the barrel of. Number two, we seem to have this backwards. In terms of what I do, cattle and grain specifically, the futures markets are the derivatives.

The futures markets are derived from the actual cash commodity market. Now, I am blessed because my area of expertise is actually in the physical cash market, actual cattle on the hoof. So I have a consulting firm and I'll continue to teach cattlemen how to trade actual physical cattle. But, yeah, to all the people out there listening—you are going to have to get away from paper and get back into physical commodities, the real deal.

Anything that is on paper anything that involves a promise or a commitment is no longer valid because as we said there isn’t a rule of law anymore. People can steal from you. Your money can be confiscated. And think how easy now it is to confiscate people’s wealth. Most of our wealth in this society exists as zeroes and ones on a computer server. It takes no effort whatsoever to steal zeros and ones on a computer server.

So what I have been telling people is you need to get into physical commodities. And the rule of thumb is if you can stand in front of it with an assault rifle and physically protect it, then it's real—it's a real commodity. That includes food, that includes water, that includes long guns and ammunition. That includes fuel. That includes precious metals—gold and silver coinage.

Most especially silver coinage because silver is the metal of barter and transaction and currency. Gold is the storage metal because it's so valuable per ounce. And also, silver is extremely undervalued relative to gold because that market has been synthetically suppressed for the last several years by again, these nefarious actors. So yeah, reallocate into physical commodities.

Jim Puplava: How do you know that somebody like just as we saw in 2008 or recently with MF Global—that is somebody like a Goldman, a JP Morgan that is writing credit default swaps on European debt—how do you know if you have an account with this group that they pledge your assets for collateral or they comingle them with the firm’s assets and then what do you do?

Ann Barnhardt: Oh, exactly. Corzine isn’t alone in this. The reason the MF Global situation happened the way it did is as we eluded to earlier because Corzine had that company just suicidally leveraged. He took those customer funds and then leveraged it into European, sovereign, junk paper at about 100:1 ratio. Massive. Massive leverage. That is why his collateral call was the first one to come and why it took him out because he was so heavily leveraged.

Don’t kid yourself. These other entities are doing the same thing. It is just that they are not as heavily leveraged as Corzine was. So yes, the entire paradigm is no longer trust worthy. There is no meaningful government or industry wide regulation and I have been saying this for years. That regulation in the financial industry in the United States both government based and private regulation—private industry regulation—is a monstrous, monstrous joke.

The top tier of those organizations are evil, nefarious people. The mid level are halfway stupid, halfway evil who again, are just there to collect their salary paycheck and will say and do anything that they are told and who really don’t understand the business that they are trying to regulate. And then the lower level, the grunts, the actual auditors who go out on site, a lot of those people are super incompetent, affirmative action hires.

And yes, I said it and I am not ashamed of it. They are affirmative action hires. They have no business being there doing what they are doing. They are also hiring a lot of kids 15 minutes out of college who are literally reading off the script and couldn’t audit a company if their life depended on it.

So what they do is they send these incompetent people out into the field and into lower management. And then when the poop hits the fan, they blame them. It is absolutely evil and it is a complete joke. And Madoff was the first proof of that. There have been other ponzi schemes since Madoff happened that haven’t gotten as much notoriety, but there was a big one in the futures industry that all of the FCMs were invested in.

And the regulatory body of the futures industry the NFA, they audited that Ponzi scheme, they totally missed it. They even admitted that they signed off on it because they really didn’t understand what they were doing. I mean, that is the level of incompetence and evil that we are talking about in terms of these regulatory bodies.

The only way to fix this is to shut the whole damn thing down and start from scratch. I am personally looking in the next decade for the emergence of a new exchange within the United States [that is, a replacement of the Chicago Mercantile Exhange]. Word on the street is it might happen in Dallas and I would be fully in favor of that. Start over from scratch.

Jim Puplava: Alright. Well the message: get physical and protect yourself. We have been speaking with Ann Barnhardt, formerly of Barnhardt Capital Management. Ann, I want to thank you for coming on the program and sharing your thoughts.

Banks face risk of financing freeze
by Tracy Alloway and David Oakley - FT

It was a number to strike fear into the hearts of any banker.

On Wednesday morning, shortly before the world’s central banks announced a co-ordinated move to flood the system with dollars, the premium that banks had to pay to convert their euros into the US currency shot higher.

That level – 1.6 per cent – had not been seen since October 2008, the month after Lehman Brothers collapsed. Known as the euro-dollar basis swap, the figure is one of many closely watched indicators of stress in the European banking system. And, at 1.6 per cent, it was flashing red.

It is this increasing difficulty eurozone banks have had in funding themselves that spurred central banks to act this week by cutting the cost of the financing they offer.

Analysts say that such stresses have become more worrying. Despite numerous lifelines since Lehman, the interbank market, where the world’s banks trade vast sums of currency and lend money to each other, is at risk of freezing.

"If we’re at the stage where everything has to be done through a central bank, then you have to conclude that we have interbank markets that don’t work," says Marc Ostwald, at Monument Securities. "And then you have to ask the question: what have we been doing for three years?"

All this points to a fundamental problem for the banking system: a loss of trust in banks.

The interbank market is starting to disintegrate because of the worsening eurozone crisis, say analysts. US money market funds, in particular, are wary of lending to Europe because of the escalating credit risk. The funding squeeze risks becoming a self-fulfilling downward spiral, a repeat of the credit crunch.

Even after this week’s action, the situation in the interbank markets has scarcely improved. Since Wednesday, the euro-dollar basis swap has eased to 1.25 per cent, but Euribor-OIS remains stuck at almost 0.99 per cent.

On Friday the European Central Bank disclosed that banks had borrowed more than €8bn from it overnight, the highest overnight lending since March. Markets are debating whether the jump is a result of technical factors or a genuine deterioration in funding conditions. "We are very concerned," says Richard Batty, at Standard Life Investments. "We are very close to a bank run on many of the banks in Europe."

European lenders need to be able to source dollars, and other types of funding, to help finance hefty liabilities that are denominated in the US currency. US money market funds, traditionally a big source of dollar funding, have trimmed their lending to Europe’s banks to record lows in recent months, cutting off a traditional source of financing.

Wednesday’s move, which will see central banks including the Federal Reserve and the ECB lower the rate at which they lend dollars by half a percentage point, is aimed at relieving some of these dollar funding pressures.

"Banks can feel more comfortable about extending the term of their loans as they know they – and their counterparty – have access to forward funding at a reasonable level," Michael Cloherty, of RBC Capital Markets, wrote in a note to clients.

Banks have been trying to tackle this increased counterparty risk. Since the financial crisis they have increasingly lent to each other through secured markets, making loans that are collateralised with assets such as government bonds. If a trading partner goes down, a lender has recourse to those bonds as added protection against losses.

In recent weeks, though, even such secured lending has come under stress, a more worrying development for policymakers. "We are aware of the continuing difficulties for banks due to the stress on sovereign bonds, the tightness of funding markets and scarcity of eligible collateral in some financial segments," Mario Draghi, ECB president, said on Thursday.

That is one reason the ECB has moved to relax its rules on collateral, this week cutting the initial margin, or discount, it takes for dollar loans from 20 per cent to 12 per cent. That could ease collateral pressures on banks, many of which have been tying up more and more of their assets in recent months in an effort to obtain financing.

Market participants say a solution to Europe’s debt crisis is needed for the interbank market to heal. In the meantime, they expect a continued stream of liquidity from central banks, and potentially other measures.

The ECB is widely expected to offer Europe’s banks two-year or three-year loans to ease financing pressures. It could also accept more types of collateral in return for its loans.

However, as Mr Ostwald at Monument Securities puts it: "This is not just a liquidity crisis – it’s a solvency crisis... At what point are we going to have banks trusting each other again? Wanting each other as counterparties? It still appears to be a remote event at this moment in time."

Now on Broadway! Waiting for Euro
by Edward Luce - FT

It used to be that when American policymakers looked across the Atlantic they would quote Henry Kissinger: "Who do I call if I want to call Europe?" Nowadays the answer is obvious – Angela Merkel. The problem is that she doesn’t always pick up. And when she does, Barack Obama’s advice is not always welcome.

Whether or not Ms Merkel and her colleagues manage to pull Europe back from disaster in the next few days, the euro-crisis has offered the US a sobering lesson in the changing ways of the world. To put it bluntly, American advice comes at a deep discount nowadays – even if, ironically, Washington’s strictures have been bang on target about fixing the eurozone morass.

A few weeks ago Tim Geithner, the US Treasury secretary, was treated to a chorus of hisses when he urged Europe to get its act together. Mr Obama was treated more politely at the G20 meeting in Cannes last month. But there is no disguising America’s waning leverage. Short of bigger and bolder emergency moves by the Federal Reserve to boost dollar liquidity, there is little Washington can do to affect what happens across the pond.

By contrast, it is on continual tenterhooks about the disastrous things Europe could do to America. In recent months it has been hard to have a conversation in Washington that does not begin or end with the observation: "That depends on what happens in Europe." Such worry has secreted an unaccustomed passivity into the Washington outlook. Instead of Godot, America is waiting endlessly for Euro.

Last week Mr Obama told a gathering of donors that he spends "an awful lot of time making transatlantic phone calls." It is time understandably spent. The Republicans could nominate a loose cannon for the White House and leopards could lie down with baby goats in the Middle East. But if Europe fails to stave off a collapse, Mr Obama’s re-election prospects would be downgraded to junk.

Waiting for Euro comes in three acts. In the first, we discover that few people take US advice any more. In the 1990s, when the US economy was at full throttle, America’s counsel got a close hearing, even if people resented the hectoring tone in which it was sometimes delivered. Whether it was the need for more flexible labour markets, or financial deregulation, the "Washington consensus" held sway.

The US model no longer looks exceptional. Last week’s welcome fall in the US jobless rate – from 9 per cent to 8.6 per cent – illustrates why. On the surface, it looked like a big drop in unemployment. But more than half the fall was due to the number of people dropping out of the labour market, which exceeded the number of new jobs created.

US employment as a proportion of the population now stands at 58.5 per cent – the same level as in Europe. In the 1990s, America stood out as having both the highest proportion of employed workers and the most dynamic jobs turnover rate. Nowadays it is average.

To be sure, there are signs of a steady, if anaemic, recovery in the US economy. Europe permitting, US growth could hit 2.5 per cent next year. But the US no longer towers over others. Ms Merkel’s Germany has far more rigid labour laws than the US and yet has engineered consistently lower joblessness since the onset of the Great Recession.

In the play’s second act, America gradually wakes up to the impotence of its leaders. All democracies impute a mythological potency to their elected heads. For most of the last century, Americans have had far better cause to do so. In practice, the US presidency has never had as much power to affect the economy as the public believes of it.

Any assessment of the world’s murky economic outlook leaves the White House looking particularly helpless today. That may explain why Mr Obama has referred only cursorily to the crisis in Europe over the last few months. Instead of educating Americans about the hyper-connectedness of the global financial system, Mr Obama has mostly preferred to avoid the topic.

Paradoxically, dawning recognition of America’s inability to stop a faraway event with the potential to plunge the country back into recession may help explain why Newt Gingrich is surging in the Republican polls. The first response to loss is denial. Next comes anger. The Tea Party, whose enthusiasm has assisted the former Speaker’s surge, is nothing if not angry.

Americans on left and right pine for a world in which their leaders had control over events. Mr Gingrich’s defiance is well-calibrated to the conservative version. It does not matter how many times Mitt Romney promises to "make America great again". The base suspects that he lacks spine.

Which brings us to Act Three. In these closing moments, we have no idea what is going to happen. The flawed Mr Gingrich could yet emerge with the nomination – it is hard not to believe Mr Obama would be happy with that. The US economy could keep adding jobs at a modest rate. Ditto. And Ms Merkel could empower the ECB to act more like the Fed. Or vice versa.

Few scenarios are ruled out. At this point Waiting for Euro merges well with the play that inspired it. "I sometimes wonder if we wouldn’t have been better off alone … we weren’t made for the same road," says Mr Obama. "It is not certain," his companion replies. "No, nothing is certain," says Mr Obama.

Plan Z: IMF Could Set up Euro Aid Fund with EU Help
by Spiegel

European governments might channel hundreds of billions of euros to the International Monetary Fund to enable it to tackle the euro crisis, German newspaper Die Welt reported on Monday. The US Federal Reserve may also contribute.

European governments are considering boosting the funding of the International Monetary Fund to enable it to tackle the debt crisis more effectively, German newspaper Die Welt reported on Monday.

Citing unnamed sources close to the negotiations, the newspaper reported that the 17 national central banks of the euro zone would pay "a three digit billion sum" into a special fund which would fund programs for crisis-hit nations.

Die Welt also said that other central banks such as the US Federal Reserve were prepared to finance part of the costs. US Treasury Secretary Timothy Geithner is scheduled to travel to Europe this week to meet politicians and central bankers.

The plan could be on the agenda of talks between Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris on Monday. The two leaders are meeting to discuss plans for a change in the European treaties to force euro nations to maintain budget discipline, and to agree a common position ahead of what is being billed as a make-or-break EU summit for the euro on Thursday and Friday.

Falling Creditworthiness
The plan for the special fund under the auspices of the IMF is aimed at calming financial markets where fears of a break-up of the euro zone have been mounting in recent days. The borrowing costs of those countries, as measured by the interest rates on their sovereign bond issues, rose to unsustainable levels in November as investor confidence in their creditworthiness fell. The rates for Spanish and Italian bonds have since fallen back.

The fund could be modelled on two funds the IMF set up in the 1970s for countries hit by the surge in oil prices at the time. Die Welt reported that the IMF currently only has $390 billion (€290 billion) in funds available, which would not be nearly enough to prop up Italy or Spain if they needed bailing out.

The paper said the US was pressuring the Europeans to channel funds to the IMF to beef up its capacity to handle the euro crisis. The size of the fund injection had not been decided yet but could amount to €200 billion, which would be available in addition to the €440 billion provided by the euro bailout fund, the European Financial Stability Facility.

But the special IMF fund could end up even higher than €200 billion, Die Welt reported. "If Italy were to be financed over three years, we're talking about quite different sums," said one person familiar with the matter, according to the newspaper.

Fiskalunion is worst of all worlds for Europe
by Ambrose Evans-Pritchard - Telegraph

Be careful of the German term 'Fiskalunion', the next phase of Europe’s misadventure. What Chancellor Angela Merkel means is increased powers to police the budgets of EMU sinner states.

She means prior vetting of fiscal plans. She means automatic fines, cuts in EU development funds, and loss of EU voting rights for alleged violators, all justiciable before the European Court.

The correct term is 'Stability Union', as the Chancellor calls it at home. It certainly entails unprecedented intrusion into the internal affairs of sovereign states, but in one direction only: discipline, without transforming help.

The Greeks have had a taste of this with EU commissars lodged in each ministry under the occupation terms of their loan package, and it may come back to bite Germany itself one day as the economic cycle plays its trick.

Nor is the idea going down well in France, where Leftist MP Jean-Marie Le Guen compared President Nicholas Sarkozy’s kowtowing to the Iron Chancellor with Daladier’s capitulation at Munich in 1938, and where Le Front Nationale’s Marie Le Pen is running near 20pc in the polls with calls to "let the euro die a natural death."

"The time has come to take on the political confrontation with Germany and defend our values," said socialist doyen Arnaud Montebourg, equating Mr Sarkozy’s epic humiliations with French defeat at Sedan in 1870.

Even socialist leader Francois Hollande is dipping his toe in these nationalist waters. "Merkel decides and Sarkozy follows," said the man most likely to be France’s president next year. The Latin revolt is underway.

None of Mrs Merkel’s proposals - whether enshrined in EU treaties or not - offer any meaningful solution to the crisis at hand. They continue to ignore the cancer in the EMU system: the corrosive 30pc currency misalignment between North and South, and the German-Dutch trade surplus.

Her plan clings to the Wagnerian myth that Club Med fiscal extravagance is the cause of all the trouble, though Spain had a budget surplus of 2pc of GDP five years ago and never broke the Stability Pact - unlike Germany - and Italy has long had a primary surplus.

But you can bang your head against a wall trying to convince the Puritans that their morality tale is bad science, or that enforced contraction in the South without offsetting expansion in the North can only push Italy, Spain, Portugal, and Greece deeper into suffocating debt deflation and ultimately lead to a 1930s black hole for everybody. The Puritans want pain. Only suffering cleanses.

It is an inescapable truism that monetary union must balance internally over time, either by trade or by capital flows. If the German bloc cuts off capital for the South - the "sudden stop" of 2009-2011 - then the same German bloc must accept a lower trade surplus. It can be done gently, or it can be done brutally - and especially brutally for the surplus states - but it will happen as surely as night follows day, one way or another.

Historians can only smile, or weep. Germany is unwittingly doing to Spain exactly what America did to Weimar Germany after flooding the country with cheap capital in the late 1920s. When Wall Street cut off funds and ended the credit boom, Germany collapsed.

There was a chorus of self-righteous pedants in Hooverite America who turned this into a question of cultural ethics, reproaching the Germans for lack of discipline and failing to work hard enough. Sound familiar?

Be that as it may, the German plan is not for fiscal union as understood in any other country. Mrs Merkel stands at the edge of the Rubicon: she has not crossed it. She has not agreed to joint debt issuance, eurobonds, fiscal transfers, or shared budgets, and nor can she do so lightly given that Germany’s constitutional court ruled in September that the sovereign powers of the Bundestag may not be alienated to an EU body.

"The sovereignty of the German state is inviolate and anchored in perpetuity by the Basic Law. It may not be abandoned by the legislature," said chief justice Andreas Vosskuhle at the time. "There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit … then Germany must give itself a new constitution. A referendum would be necessary," he said.

This is why Mrs Merkel can only nibble at the edges of fiscal union, hoping to use the EU "ratchet clause" for limited treaty changes without need for a referendum.

As of this weekend, Mrs Merkel was still saying that "joint liability is not possible" and that "eurobonds cannot now be used as a rescue measure in this crisis. Whoever does not understand this, does not understand the nature of the crisis."

She proposes a sinking fund for each state to pay down public debt above 60pc of GDP over the next twenty years. This looks at first sight like the proposal by Germany’s five "Wise Men" for a €2.3 trillion (£1.97 trillion) scheme to help Club Med run down excess debt. In reality it is no such thing. Her plan entails no cross-border debt pooling at all.

This may change. Events are moving fast. Germany’s EU commissioner Günther Oettinger said Eurobonds cannot be "categorically" ruled out. "There are negotiations going on. Nobody wants to lay all their cards on the table," he said.

Bavaria’s Social Christians (CSU) in Mrs Merkel’s coalition have hinted that they might hold a special "party day" to discuss variants of eurobonds, just two months after they vowed to die in a ditch to stop such an assault on German democracy.

So yes, if investors wish to believe that a game-changing Grand Bargain will emerge from this week’s EU summit, there are certainly straws to clutch, perhaps more than straws. They can hold out hope that Mrs Merkel will agree to a disguised form of joint debt issuance and an equally disguised deployment of the European Central Bank as lender of last resort - through the International Monetary Fund - once Europe submits to her stability police.

It is an open question whether the rest to the world will acquiesce in abuse of the IMF to rescue rich states that refuse to clean up their own mess. Europeans tell us that their aggregate debts and deficits are lower than in the US or Japan. If so - and it is less true once you factor in Europe’s bank debts, three times the sovereign burden - why then must they embroil the IMF at all?

Why should the default risk on Italian debt be shifted from a dysfunctional ECB onto Asian, Latin American, and African taxpayers, and why should the world pay to help the ECB cover up its humiliating recourse to money printing after so much braggadocio? Nor have we heard the last word from Beijing, Tokyo, Brasilia, Ottawa, and above all Washington, where Capitol Hill is seething at the idea.

Brussels has warned that Europe will "disintegrate" unless leaders grasp the nettle this week. It is a scare tactic. There is no necessary linkage between a euro break-up and the end of the EU. One might equally argue that the surest way to bedevil Europe is to persist in trying to hold this unworkable currency together with coercive powers.

But having cranked up the rhetoric, Europe’s leaders will have to conjure some pro-forma triumph for the headlines, as they have at each of the last seventeen crisis summits. No doubt there will be a "bazooka" of sorts, a mish-mash of big talk on the EFSF bail-out fund, with IMF flanking operations, and accompanying ECB action to keep banks afloat for longer, all cloaked in a fiscal union that isn’t what it seems.

Mandarins will slip the figure €1 trillion somewhere into the communiqué to nourish a hungry media. In other words, we may just have to hunker down yet again and wait for Germany to blink at last, or detonate the fuse.

Monti outlines tough measures for Italy
by Guy Dinmore - FT

Italy’s new technocratic government plans to raise an extra €24bn through tax increases and spending cuts over the next two years in order to meet its target of balancing the state budget by 2013.

The planned package of tough fiscal measures has met with resistance from Italy’s trade union leaders but acceptance by the country’s main business lobby as vital "for the salvation of Italy and the euro" in what promises to be a crucial weak for the single currency.

Mario Monti and his ministers briefed leaders of the main trades union federations and Confindustria, Italy’s employers association, on the measures which could be passed by cabinet decree, possibly later on Sunday.

The government made no official statement, but according to those briefed the package is aimed at consolidating €24bn – more than expected – through tax increases and spending cuts in order to meet the target of balancing the state budget by 2013.

The reported measures include raising the age of retirement, a freeze on pensions next year except for low earners, increased income tax for high earners, €2.5bn in cuts on health spending, and imposition of a property tax.

Labour market reforms aimed at boosting Italy’s stagnant economy are expected to be proposed in separate legislation after the fiscal measures are in place. "It is a tough package," commented Emma Marcegaglia, head of Confindustria, calling the situation very serious. "But it is fundamental for the salvation of Italy and the euro."

Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, will meet in Paris on Monday in a bid to finalise joint plans for EU treaty changes as part of a comprehensive package of measures.

In a speech to the Bundestag on Friday Ms Merkel spelt out her determination to create a legally enforceable "fiscal union" to restore confidence in the eurozone, rejecting "quick fixes" to Europe’s debt crisis.

Tim Geithner, US Treasury secretary, will travel to Europe this week to cajole leaders into striking a confidence-boosting deal to stabilise the eurozone’s financial system at a summit of eurozone leaders on Friday.

International markets were reassured last week by signs of progress in tackling the eurozone crisis and co-ordinated intervention by the world’s largest central banks to ease tensions in the European interbank lending market.

Comments from Mario Draghi, new president of the European Central Bank, that the central bank would be prepared to take a more aggressive response to solving the eurozone crisis if measures for closer fiscal integration between the 17 countries of the eurozone can be agreed. The ECB holds its monthly rate setting meeting on Thursday.

Mr Monti, appointed prime minister last month after Silvio Berlusconi resigned under pressure from debt markets and the international community, was quoted as saying that Italy was faced with the choice of taking "necessary sacrifices or the situation of an insolvent state and of a euro destroyed by the infamy of Italy" after the meeting with trade unions and Confindustria.

Trade union leaders harshly criticised the proposed pension reforms, but there was no talk of immediate strike action in response. Susanna Camusso, leader of CGIL, the largest and most leftwing union federation, called the measures a "severe blow". She said the CGIL would lobby for changes when the decree comes before parliament.

The government decree will take immediate effect with the signature of the head of state but must win the approval of parliament within 60 days to become law.

Raffaele Bonanni, leader of the more centrist CISL federation, said raising the retirement age for women to 65 years by 2018 and the number of years workers must make contributions before retiring, would have a "devastating impact". "It seems to me the government has not calculated the social impact of its measures," he told reporters.

Mr Monti met leaders of the main political parties on Saturday. Reaction was mixed. Statements indicated that Silvio Berlusconi’s centre-right People of Liberty and the centre-left Democratic party of Pierluigi Bersani might try to introduce changes in parliament but that they recognise the gravity of the situation.

"The path to be taken is either a heavy fiscal correction today or the risk of bankruptcy tomorrow," Angelino Alfano, secretary of the People of Liberty, said. "The doctor is administering bitter medicine," commented Pier Ferdinando Casini, leader of the smaller centrist UDC party, pledging support to the unelected government.

Italian benchmark bonds rallied last week but with yields at just under 7 per cent, Mr Monti’s government remains under intense pressure to establish Italy’s credibility and its ability to pay down its €1.9tn public debt, equal to about 120 per cent of gross domestic product.

Italian Pass on Prosecco in Worst Christmas Since WWII
by Armorel Kenna - Bloomberg

Instead of prosecco and panettone, Italy’s Christmas will feature house wine and tighter belts as the country faces its worst holiday season in 60 years.

"Consumers just don’t have faith in tomorrow," said Pietro Giordano, secretary general of Rome-based consumer group Adiconsum. Sales over the Christmas period may decline as much as 15 percent from a year ago, the biggest drop since World War II, Giordano said in a telephone interview.

Many Italians will spend their "tredicesima," a December bonus equivalent to a 13th month’s salary, to pay bills rather than buy many gifts, he said. Those who can afford to spend are likely to trade down or hunt for a discounted Gucci handbag instead of the Jackie shoulder bag with tassels and light gold fastenings starting at $2,270.

Prime Minister Mario Monti announced 30 billion euros ($40 billion) of austerity and growth measures last night as he seeks to cut the euro-region’s second-biggest debt and prevent a breakup of the euro. The measures, including a tax on luxury goods and delayed retirement for many workers, were passed as the new prime minister rushed to reassure investors he is serious about taming a debt of almost 1.9 trillion euros.

Italian shoppers may cut budgets by 2.3 percent to 625 euros to spend on gifts, extra food for festive meals and entertainment during the Christmas season, according to Deloitte LLP. That’s almost three times the 0.8 percent decline predicted for Europe as a whole.

Blue Christmas
Consumer confidence in Italy is at the lowest point in the Christmas survey, now in its 14th edition, said Dario Righetti, a Deloitte partner in Milan, in a telephone interview. Spending on gifts will fall the most, with a 3.2 percent drop.

"I’m only going to be buying presents for the kids this year," said Manuela De Luca, a 33-year-old self-employed lawyer, outside Benetton Group SpA's flagship store near Milan’s 14th century cathedral. "I’m concerned about the future and what’s going to happen next year."

Shopkeepers share the pessimism, with an index of retailers’ confidence falling to the lowest since March 2009 in November. Retail sales for September, the most recent period reported, declined 1.6 percent from a year earlier, led by shoes and household appliances.

No Cheer
"The fact it’s Christmas isn’t going to change anything," said Tiziana De Pascalis, who runs a corner grocery shop in Milan’s Sempione district where sales are down at least 40 percent. "We’ve only seen growth for the past 15, 16, 17 years, but that’s changed and people just aren’t coming in."

Carrefour SA, which is featuring bottles of Verdicchio for 1.49 euros, said Oct. 13 that sales in Italy declined 6.2 percent in the first nine months of the year. The French retailer promises in its Christmas "Carrefour costs less" advertisements that "prices are near zero."

Sergio Menegazzo, whose family owns the Smile chain as well as running a high-end restaurant and food hall at Gruppo Coin SpA’s Excelsior department store in Milan, said in an interview that supermarket shoppers in the Veneto region are cutting back on food spending. "People are eating less pasta than a year ago," Menegazzo said. "They don’t buy pasta topping. They put off buying mayonnaise."

Some Italian families celebrate Christmas Eve, "La Vigilia," with a seven-fish feast. The consumer group estimates households may spend 1,000 euros on Christmas presents and food for Dec. 24 and 25.

The biggest ticket menu items for a family of eight are seafood antipasti at more than 50 euros; bass, bream and salmon for 35 euros; and clams with spaghetti at 24 euros.

And that panettone, a sweet bread studded with raisins, will set Italian consumers back 4.99 euros.

The Sovereign Debt Train Wreck
by Satyajit Das

Greece and the other debt burdened European countries are merely the first carriages in the derailment of the "Sovereign Debt" Express train service.

The failure of the congressional super-committee to reach agreement on $1.2 trillion in budget cuts means that addressing the problem of US public finances is unlikely in the near term. The failure also casts doubts on the ability of US policy makers to overcome political differences to take actions to stabilise US government debt with potential consequences for the US and global economy

At Debt’s Door…
Ralph Waldo Emerson wrote: "The World owes more than the world can pay." The US certainly owes more than it can repay. US government debt currently totals over $14 trillion.

The US Treasury estimates that this debt will rise to around $20 trillion by 2015, over 100% of America’s Gross Domestic Product ("GDP"). Even these dire forecasts rely on extremely robust assumption about US growth around 5-5.5% per annum. Lower growth will translate into higher debt levels.

There are other current and contingent commitments not explicitly included in the debt figures reported by the government. Since July 2008, the US government has supported Freddie Mac and Fannie Mae (known as government sponsored enterprises (GSEs)). This totals over $5 trillion in additional on or off-balance sheet obligations.

The debt statistics do not include a number of unfunded obligations – the current value of mandatory payments for programs such as Medicare ($23 trillion), Medicaid ($35 trillion) and Social Security ($8 trillion). Projections show that payouts for these programs will significantly exceed tax revenues over the next 75 years and require funding from other tax sources or borrowing. In addition to Federal debt, US State governments and municipalities have debt of around $3 trillion.

US public finances deteriorated significantly over recent years. Pimco’s Bill Gross observed: "What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter."

In 2001, the Congressional Budget Office ("CBO") forecast average annual surpluses of approximately $850 billion from 2009–2012. Instead, the US government has run large budget deficits of approximately $1 trillion per annum in recent years. The major drivers of this turnaround include: tax revenue declines due to recessions (28%); tax cuts (21%); increased defence spending (15%); non-defence spending (12%) higher interest costs (11%); and the 2009 stimulus package (6%).

German finance minister Wolfgang Schäuble told the Wall Street Journal on 8 November 2010 that: "The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base."

Drowning by Debt…
No borrower can incur debt on this scale without the complicity of its lenders.

The US government holds around 40% of the debt through the Federal Reserve ($1.6 trillion), Social Security Trust Fund ($2.7 trillion) and other government trust funds ($1.9 trillion). Individuals, corporations, banks, insurance companies, pension funds, mutual funds, state or local governments, hold $3.6 trillion. Foreigner investors hold the remainder including China ($1.2 trillion), Japan ($0.9 trillion) and "other", principally oil exporting nations, Asian central banks or sovereign wealth funds ($2.4 trillion).

Until the global financial crisis, foreign lenders, especially central banks with large foreign exchange reserves, led by the Chinese, increased their purchases of US government debt..

These reserves arose from dollars received from exports and foreign investment that had to be exchanged into local currency. In order to avoid increases in the value of the currency that would affect the competitive position of their exporters, the exporting nations invested the reserves in dollar denominated investment, primarily US Treasury bonds and other high quality securities. By the middle 2000s, foreign buyers were purchasing around 50% of US government bonds.

During this period, emerging countries, such as China fuelled American growth, both supplying cheap goods and providing cheap funding to finance the purchase of these goods. It was a mutually convenient addiction – China financed customers creating demand for exports and America received the money to buy cheap Chinese goods. Asked whether America hanged itself with an Asian rope, a Chinese official told a reporter: "No. It drowned itself in Asian liquidity."

Following the global financial crisis, foreign purchases have decreased to around 30% of new issuance. Around 70% of US government bonds (US$ 0.9 trillion) have been purchased by the Federal Reserve, as part of successive rounds of quantitative easing.

Foreign Alms…
Historically, America has been able to run large budget and balance of payments deficits because it had no problems in finding investors in US treasury securities. The unquestioned credit quality of the US, the unparalleled size and liquidity of its government bond market ensured investor support. Given its reserve currency and safe haven status, US dollars and US government bonds remained a cornerstone of investment portfolios.

The US dollar’s share of world trade and investment is extraordinary and out of proportion to its economic role. The dollar remains the principal currency for invoicing and settling trade. 85% of foreign exchange transactions involve the dollar. 50% of stock of international securities is denominated in US dollars. Central banks hold 60% of their foreign exchange reserves in dollars. All this is despite the fact that the US’s share of global exports is only 13% and foreign direct investment is 20%.

The US financing strategy is based on the "balance of financial terror". China, the major investor in US government bond investors, finds itself in the position that John Maynard Keynes identified: "Owe your banker £1000 and you are at his mercy; owe him £1 million and the position is reversed." Over recent years, Chinese concerns about the US debt position has become increasingly shrill.

In 2010, Yu Yongding, a former adviser to China’s central bank, mused: "I do not think U.S. Treasuries are safe in the medium-and long-run…Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves."

In 2011, a Chinese government spokesperson could only "hope the US government will earnestly adopt responsible policies to strengthen international market confidence, and to respect and protect the interests of investors." In 2010, US Treasury Secretary told a gathering of Chinese students that US government bonds were "safe" investments, eliciting derisive laughter.

But China has America right where America wants China!

Existing investors, like China, must continue to purchase US dollars and government bonds to avoid a precipitous drop in the value of existing investments. This allows America time to correct its deteriorating public finances and reduce its borrowing requirements. It also allows increases in domestic savings to reduce reliance on foreign investors. The US Federal Reserve remains a buyer of last resort, although the long term consequences of this "printing money" strategy remains uncertain.

For the moment, this tenuous strategy appears to be holding. Demand for Treasury securities from investors and other governments has continued. Domestic investment, primarily from banks who are not lending but parking cash in government securities, has been strong. US government rates remain low. The government’s average interest rate on new borrowing is around 1%, with one-month Treasury bills paying less than 0.10% per annum. This has allowed the US to keep its interest bill manageable despite increases in debt levels.

In effect, the US requires artificially low interest rates to able to service its debt. Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the US faces a debt crisis: "It’s not something that is 10 years away. It affects the markets currently…It is possible that the bond market will become worried about the sustainability [of deficits over $1 trillion] and we may find ourselves facing higher interest rates even today."

The current position is not sustainable in the longer term. Unless the underlying debt levels and budget deficits are dealt with the ability of the US to finance itself will deteriorate. The US treasury must issue large amounts of debt almost continuously – weekly auctions regularly clock in at $50-70 billion unimaginable a few years ago. America’a ability to finances its need may not continue. As English writer Aldous Huxley observed: "Facts do not cease to exist because they are ignored."

Debt Calm…
The solution to the US debt problems lies in bringing budget deficits down, through spending cuts, tax increases or a mixture of both.

In 2011, the major categories of government spending were defence (24%), social services (44%), non-defence discretionary (25%) and interest (7%). Interest costs, currently around 7% of total spending, are expected to increase by as much as three times driven mainly by the increase in the level of debt.

The major increase in spending will come from social service entitlement programs. If current policies are maintained, pensions and health care for the retired (Social Security and Medicare) and health care for the poor (Medicaid) will increase from 10% of GDP in 2011 to 18% by 2050.

Winding back military overseas commitments and also reduced stimulus spending, assuming the economy and employment improve, will help reduce the deficit. But any significant reduction in government spending requires decreased spending on defence and entitlement programs as well as tax increases. US Federal revenue is around 15% of GDP (down from 18-19%). Comparative levels of government tax revenues are Germany (37%) UK (34%) and Japan (28%).

The task is Herculean. Government revenues would need to be increased 20-30% or spending cut by a similar amount. In a nation where 45% of households do not pay tax (because they don’t earn enough or through credits and deductions) and 3% of taxpayers contribute around 52% of total tax revenues, it is difficult to see the necessary changes being made.

Reducing the budget deficit and reducing debt may also mire the US economy in a prolonged recession. In 2009, students at National Defence University in Washington, DC, "war gamed" possible scenarios for bringing the US debt under control. Using a model of the economy, participants tried to get the federal debt down by increasing taxes and reducing spending.

The economy promptly fell into a deep recession, increasing the budget deficit and driving government debt to higher levels. This is precisely the experience of heavily indebted peripheral European nations, such as Greece, Ireland, Portugal, Spain and Italy.

As one participant in the National Defence University economic war game observed about the process of bringing US public finances under control: "You’ll never get re-elected and you may do more harm than good."

Extortionate Privilege…
Given the magnitude of the US debt problem and the lack of political will, the most likely policy is FMD – "fudging", "monetisation" and "devaluation".

There is no shortage of creative ideas of financing government debts. Bankers suggested the US issue perpetual debt, that is, the government would not be obligated to pay back the amount borrowed at all.

Peter Orzag, former director of the US Office of Management and Budget under President Obama and now a vice-chairman at Citigroup, suggested another creative way to correct the problem – lotteries. To encourage savings, banks should offer lottery-linked accounts offering a lower rate of interest, but also a one-in-a-million chance of winning $1million for each $100 deposited.

As governments printed money to service their debts, US Post issued 44-cent first class "forever stamps" that had no face value but were guaranteed to cover the cost of mailing a first class letter, regardless of how high that cost might be in the future. Between 2007 and 2010 the public bought 28 billion forever stamps. The scheme summed up government approaches to public finance – US Post was cleverly hiding its financial problems, receiving cash up-front against the uncertain promise to pay back the money somewhere in the never, never future.

Debt monetisation – printing money – is the second option. The US Federal Reserve is already the in-house pawnbroker to the US government, purchasing government bonds in return for supplying reserves to the banking system. Expedient in the short term, its risks debasing the currency and setting off inflation.

The absence of demand in the economy, industrial over capacity and the unwillingness of banks to lend have meant that successive rounds of "quantitative easing" – the fashionable moniker for printing money – have not resulted in higher inflation to date. But the longer term risks remain.

Monetisation is inexorably linked to devaluation of the US dollar. The now officially confirmed zero interest rates policy ("ZIRP") and debt monetisation is designed to weaken the dollar.

On 19 October 2010, US Treasury Secretary Timothy Geithner told the Financial Times: "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and Competitiveness. It is not a viable, feasible strategy and we will not engage in it." The facts show otherwise.

Despite bouts of dollar buying on its safe haven status, the US dollar has significantly weakened over the last 2 years in a culmination of a long term trend which with minor retracements. In 2007 alone, the US dollar weakened by about 8% improving America’s external position by $450 billion, as US foreign investments gained in value but its debt denominated in dollars were unaffected.

On a trade weighted basis, the US dollar has lost around 18% against major currencies since 2009. The US dollar has lost around 30% against the Swiss Franc, 25% against the Canadian dollar, 37% against the Australian dollar and 16% against the Singapore dollar over the same period.

US dollar devaluation makes it easier for the US to service its debt. In the balance of financial terror, it forces existing investors to keep rolling over debt to avoid realising currency losses on their investments. It also encourages existing investors to increase investment, to "double down" to lower their average cost of US dollars and US government debt. The weaker US dollar also allows the US to enhance its competitive position for exports – in effect, the devaluation is a de facto cut in costs. This is designed to drive economic growth.

Valery Giscard d’Estaing, French Finance Minister under President Charles de Gaulle, famously used the term "exorbitant privilege" to describe the advantages to America of the role of the US dollar as a reserve currency and its central role in global trade. That privilege now is not only "exorbitant" but "extortionate". How long the rest of world will allow the US to exercise this "extortionate privilege" is uncertain.

No Exit …
The US is in serious, perhaps irretrievable, financial trouble. Peter Schiff, president of Euro Pacific Capital, identified the state of the Union with characteristic bluntness: "Our government doesn’t have enough spare cash to bail out a lemonade stand. Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover."

There is a lack of political or popular will to take the action necessary to even stabilise the position. The role of US dollars and US government bonds in the financial system mean that the problems are likely to spread rapidly to engulf other nations. As John Connally, US Treasury Secretary under President Nixon, beligerently observed: "Our dollar, but your problem."

Minor symptoms, often increasing in frequency and severity, can provide warning of a life threatening problem in a key organ, such as the heart. Since 2007, the global financial markets have been providing warnings of an impending serious crisis. Private sector credit problems have spread to sovereign nations.

Debt problems of smaller nations have flowed on to larger nations. The problems are gradually working their way to the issue of US debt. Without rapid and decisive action, which seems to be unlikely, a major organ failure within the global economy is now inevitable.

The magnitude of the problem and its effects are so large, market participants would do well to heed Douglas Adams famous advice in The Hitchhikers Guide to the Galaxy. Find dark glasses that go black in the case of a crisis and a towel to suck on.

Merkel, mistrust and the markets
by Richard Milne - FT

As Angela Merkel prepares for this week’s European Union summit on the euro, a visitor to Berlin is struck by how the German chancellor is struggling to reconcile two powerful forces: her commitment to 50 years of European integration and a deep mistrust of financial markets.

With one eye on the fallout from the global financial crisis, she believes that markets are not always right. Ms Merkel does not believe that markets are necessarily the enemy and she is also acutely aware of the pressure of financial expectations: without a credible deal this week many analysts predict a further decline in eurozone bond markets, or even the break-up of the single currency.

The fraught relationship between Ms Merkel and the financial markets can be explained partly by mutual miscomprehension. A Lutheran brought up in communist East Germany, Ms Merkel shares the view of Nicolas Sarkozy, the French president, that political legitimacy should trump the unelected power of Wall Street and the City of London. Yet France, Germany and other eurozone governments manifestly depend on market confidence to fund the sovereign borrowing required to sustain their economies.

As one senior figure who has long played a role in the euro negotiations says, politicians hate being pushed around by markets but "Trotskyists in London understand markets better than conservatives in Europe."

Ms Merkel’s scepticism also stems from bitter experience. She followed investors’ advice and called for private holders of Greek bonds to share the burden of a second bail-out for Greece.

Those who have spoken to the chancellor say she feels duped by those investors, who urged her to agree to a restructuring of Greece’s massive debt burden but then told the chancellor that she had also made all other eurozone bonds suspect. The European Central Bank and Mr Sarkozy had warned that such contagion would happen.

The Greek bond debacle explains, in part, Ms Merkel’s opposition to massive ECB bond-buying, the solution that markets would most like to see to restore confidence in sovereigns and therefore Europe’s shaky banking system.

Ms Merkel does not appear to be against quantitative easing per se. But with the ECB barely 12 years old and still fighting to establish its credibility and backed by 17 national governments with diverging public finances, Berlin is unwilling to sanction action.

Moreover, according to the thinking in the Chancellery, an investor unwilling to buy Italian bonds today would still be unwilling after several years of ECB purchases. Setting targets for eurozone bond yields or spreads – that, say, Italy’s interest rates should not be more than two percentage points higher than Germany’s – is similarly given short shrift, despite being debated at the ECB.

Such targets could well calm markets but, in Berlin’s eyes, would raise the risk of a political crisis. Conversely, if Mario Draghi, the ECB’s newly appointed president, does open the door to bigger purchases, as he hinted last week, Germany might disapprove but would never try to block the bank.

In the last resort, there remains a tension between the accelerated pace of financial markets and the painstaking slog toward political and economic integration followed by Ms Merkel and her European colleagues.

This is what David Mackie of JPMorgan calls the "intertemporal dimension" of the two-year-old crisis. Investors and elected government work on different timescales, according to different incentives.

Berlin believes that more money on the table now means fewer reforms in the eurozone’s periphery later. A precedent came in August when the ECB started buying Italian bonds only to see the government of Silvio Berlusconi begin backtrack on reforms as yields fell.

Similarly Ms Merkel’s efforts to find a long-term solution runs counter to the markets’ desire for clarity in the short-term. She rules out eurobonds today – another favourite of the markets which like the idea of common debt issuance for all 17 member states – and insists closer fiscal integration over time is the answer. That scarcely helps traders seeking to make decisions today, however.

Ms Merkel’s faith in the eurozone’s current and future bail-out funds, the European Financial Stability Facility and European Stability Mechanism, to provide firepower alongside the International Monetary Fund seem less likely to calm markets’ fears of a break-up of the single currency than an ECB intervention.

Markets are sceptical of the latest claims of an impending breakthrough after numerous false dawns. Mr Mackie’s intertemporal argument suggests that markets sometimes only seem interested in an urgent outcome. The time for the markets and Ms Merkel to discover a mutual comprehension of one another is rapidly running out.

Euro doomed from start, says Jacques Delors
by James Kirkup - Telegraph

The euro project was flawed from the start and the current generation of European leaders has failed to address its fundamental problems, Jacques Delors, the architect of the single currency, declares today.

In an interview with The Daily Telegraph, Jacques Delors, the former president of the European Commission, claims that errors made when the euro was created had effectively doomed the single currency to the current debt crisis. He also accuses today’s leaders of doing "too little, too late," to support the single currency.

The 86-year-old Frenchman’s intervention comes the day after France and Germany took another step towards the creation of a full "fiscal union" within the European Union and David Cameron insisted that Britain must remain a major player in Europe. Mr Delors, who led the commission from 1985 to 1995, played a central role in the process that led to the creation of the euro in 1999.

In his first British newspaper interview for almost a decade, he says that the debt crisis reflects a threat to Europe’s global role and even basic Western democratic values. Mr Delors claims that the current crisis stems from "a fault in execution" by the political leaders who oversaw the euro in its early days. Leaders chose to turn a blind eye to the fundamental weaknesses and imbalances of member states’ economies, he says. "The finance ministers did not want to see anything disagreeable which they would be forced to deal with," he says.

The euro came into existence without strong central powers to stop members running up unsustainable debts, an omission that led to the current crisis. Now that the excessive borrowing of countries such as Greece and Italy has brought the eurozone to the brink of disaster, Mr Delors insists that all European countries must share the blame for the crisis. "Everyone must examine their consciences," he says.

However, he singles out Germany for its strict insistence that the European Central Bank must not support debt-stricken members for fear of fuelling inflation. The euro’s troubles spring from "a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries".

Famous in Britain for his public clashes with Baroness Thatcher in the 1980s over closer European integration, Mr Delors says that he shares some of the concerns that were expressed by British politicians and economists about the euro before its creation.

When "Anglo-Saxons" said that a single central bank and currency without a single state would be inherently unstable, "they had a point", he admits. Because Britain is not in the euro, it is not "sharing the burden", Mr Delors says. However, he claims that the UK is "just as embarrassed as the Europeans by the financial crisis", not least because some of the measures put in place to deal with the crisis pose a threat to British interests.

For example, he says, the creation of a common "Eurobond" underwritten by all eurozone governments and traded in Paris and Frankfurt would be a "big worry" for the City of London. "I can see Mr Cameron’s worries," he says. Such is the scale of the crisis, he warns, that "even Germany" will struggle to find a solution. "Markets are markets. They are now bedevilled by uncertainty."

The Prime Minister was in Paris yesterday for talks with President Nicolas Sarkozy before next week’s EU summit. The meeting will begin discussions about changing the union’s basic treaties in response to the debt crisis.

Chancellor Angela Merkel of Germany insisted yesterday that such a treaty change was necessary and hailed what she described as concrete steps towards the creation of a "fiscal union". British diplomats are increasingly concerned that the 17 governments using the euro could try to strike an agreement on new rules between themselves, effectively excluding non-euro countries such as Britain.

Mr Cameron suggested that the fundamental economic reforms needed in response to the euro crisis did not require any treaty change, setting up a potential clash with Mrs Merkel. Despite British worries about the treaty change process and Mr Delors’s pessimistic analysis, financial markets are increasingly optimistic that EU leaders are edging towards a deal to support the eurozone.

The FTSE 100 index of leading shares yesterday jumped 62.95 points to 5552.29. British shares have risen by 7.5 per cent this week, the biggest weekly rise in almost three years. European markets also closed up, with the Dax in Germany gaining 0.74 per cent and the Cac 40 in France up 1.12 per cent. Earlier, Asian markets closed slightly higher, with Japan’s Nikkei index up 0.5 per cent and Hong Kong’s Hang Seng 0.2 per cent higher.

Jacques Delors interview: Euro would still be strong if it had been built to my plan
by Charles Moore - Telegraph

Former president of the European Commission Jacques Delors talks to Charles Moore about the fate of the euro.

To use that British understatement that Continentals enjoy, one might suggest that it has not been a good year for the euro. And now, some say, only about a week remains to put things right. So who better to question than the man who invented it? In Paris on Wednesday, I called on Jacques Delors.

Mr Delors, who was President of the European Commission from 1985 to 1995, is the only foreign bureaucrat ever to have become a household name in Britain. In 1988, he enraged Margaret Thatcher by coming to address the British TUC on the joys of the European "social dimension". Her famous Bruges speech later that month was her attempt to stand against the tide of European integration that he represented.

It was Mr Delors whose report produced the plan for what we now call the euro. He was such a demon figure for British eurosceptics that The Sun produced the headline "UP YOURS, DELORS" and invited its readers to turn, face the English Channel and make a rude gesture at him in unison.

I climb several twists of typical steep Parisian stairs to a modest office. The small, bespectacled figure who greets me is old in years — he was born in July 1925, three months before Mrs Thatcher — but with undiminished physical and mental vigour. We talk for two hours, and one feels he would happily continue for another two.

Mr Delors is known for his austerity, but the man I converse with is not stiff or pompous. He remembers his old adversary with a slightly amused respect, noting her immense capacity for work and her vision in looking for change in the Soviet Union before others did. He reflects on their difference of background and character: "I think for Mme Thatcher I was a curious personage: a Frenchman, a Catholic, an intellectual, a socialist."

Deciding not to beat about the bush, I ask the man who prides himself on being an architect of European Union whether he got it all wrong. Unhesitatingly, he denies it. It is a fault in the execution, not of the architects, which he claimed to have pointed out in 1997 when the plans for introducing the euro finally came together. At the time, he says, the best of the eurosceptic economists, whom he refers to as "the Anglo-Saxons", raised the simple objection that if you have an independent central bank, you must also have a state.

Mr Delors thinks "they had a point", but the way round this problem was to insist on the economic bit of the union as much as the monetary. As well as creating a single currency, you also had to create common economic policies "founded on the co-operation of the member states".

I get the impression from Mr Delors that he thinks Mrs Thatcher would have agreed with this view. She certainly would not have agreed, however, on the Delors version of what that co-operation should produce — the harmonisation of most taxes, plans to deal with youth and long-term unemployment, and that social dimension for which he always called because "it is not just a question of money. I said all these things, but I was not heard. I was beaten."

There was also a problem of "surveillance". The Council of Ministers should have made it its business to police the eurozone economies and make sure that the member states really were following the criteria of economic convergence. This did not happen.

For a long time, the euro did remarkably well, Mr Delors argues, bringing growth, reform and price stability to the weaker members as well as the stronger. But there was a reluctance to address any of the problems. "The finance ministers did not want to see anything disagreeable which they would be forced to deal with." Then the global credit crisis struck, and all the defects were exposed.

Whom does he blame most for this? He thinks that "everyone must examine their consciences". He identifies "a combination of the stubbornness of the Germanic idea of monetary control and the absence of a clear vision from all the other countries".

What of his own country’s role? Mr Delors patriotically declined to be drawn on this point, though I detect some dissatisfaction. He reminds me that he is, after all, speaking to an English not a French newspaper.

By way of a friendly aside, Mr Delors adds that Britain, though not in the euro and therefore not "sharing the burden", is "just as embarrassed" as the Europeans by the financial crisis.
"I can see Mr Cameron’s worries," he goes on, "It is a big worry for the British if we can create and trade eurobonds in Paris and Frankfurt.’ In general, says Mr Delors, among all the 17 member states of the eurozone, the reaction to problems from 2008 to today has been "too little, too late".

Surely, I say, that is exactly what you would expect from such a system faced with such difficulties. No, he replies sharply: look at what happened at the end of the 1980s with the fall of the Berlin Wall. Helmut Kohl, François Mitterrand, George Bush senior and Mikhail Gorbachev (Mrs Thatcher is not included in his gallery) "could all have spoken and acted too little, too late". But in fact "they reacted quickly to this revolution, thanks to the intelligence of these men. There was an aspect of sangfroid and political vision".

He clearly sees the fall of the Wall as the high-water mark of Western strength. He equally clearly sees no such political vision today. So will the euro survive? Mr Delors does not, of course, deviate from his belief in the European single currency. He is also very conscious of the danger of someone in his position saying anything that might help to destabilise the situation. I am struck, however, by his downbeat interpretation of events.

"Jean Monnet [the founding father of the European Union] used to say that when Europe has a crisis it comes out of the crisis stronger … but there are some, like me, who think that Monnet was being very optimistic. You must be very vigilant to make sure that you do come out of a crisis in a better state … I am like Gramsci [the Italian Marxist philosopher]: I have pessimism of the intellect, optimism of the will."

Right now, Mr Delors judges, "even Germany" will have great difficulty in sorting out the mess. "Markets are markets. They are now bedevilled by uncertainty. If you put yourself in the position of investment funds, insurance companies and pension funds, you will understand they are looking for a clear signal." All the heads of government need to give this signal together. Instead, there has been, at least until the end of October, "a cacophony of statements".

The euro can emerge from this crisis only if two conditions are met. "The first is that the firemen must put out the fire. The second is that there must be a new architecture. If you have one of these things without the other, the markets will be sceptical." The choice is "either to accept a greater transfer of sovereignty or to submit to a common discipline".

But surely, I ask, as someone who has always advocated more European democracy, isn’t he worried by the takeover of the technocrats? In Greece and Italy, leaders have been parachuted in without anyone asking the voters. This does not bother Mr Delors at all. "This is not the first time in history that we have put in a non-political person to ensure the transition. The markets are reassured that there is a man in place who knows what he’s doing. He can calm the many, many antagonisms."

Jacques Delors is a master of all the technicalities of the argument, and all the Byzantine structures of the institutions, and speaks confidently in their jargon, but his mind seems burdened by deeper thoughts, too. He sees the crisis of the euro as part of something deeper and wider even than the credit crunch itself. He believes that the main social and economic "players" have their doubts about European policies.

"You hear it every day. You hear it in the markets. This is reinforced by populism in certain countries. Whether we like it or not, we are part of the West, and the West could possibly lose its leadership, and it is important that we preserve the values that matter not only to Europe, but to Britain and the United States — the values that are Judeo-Christian in origin — Greek philosophy and Greek democracy and Roman law, and the Age of Enlightenment and the French Revolution."

Yet obviously, at the same time, we cannot "tell the President of China what to do. Other peoples want to preserve their values, and we want to preserve ours. This is the great challenge." So the crisis of the euro is all part of a crisis of the Western way of doing things? "Oui, c’est ça."

China to prepare for social unrest
by Patti Waldmeir and Jamil Anderlini - FT

Beijing has underlined its concern that an economic slowdown could lead to social unrest in China, with the country’s security chief urging local officials to do more to prepare for the "negative effects of the market economy".

Zhou Yongkang, a member of the politburo, told provincial officials that they needed to find better methods of "social management" – a euphemism which can include everything from better internet censorship and strategic policing of violent unrest, to a better social safety net.

"It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy," he told a seminar on "social management innovation".

"Especially when facing the negative effects of the market economy, we still have not formed a complete mechanism for social management," he said. Mr Zhou also urged officials to limit spending on wasteful "vanity" projects that trigger public anger.

His comments are the clearest sign yet that Beijing is worried that the global economic crisis could lead to serious domestic social unrest. Mr Zhou’s remarks, published by the state-run Xinhua news agency on Saturday, came at the end of a week which saw evidence of a slowdown in Chinese manufacturing, an easing in credit policy to avert a sharper slowdown, and two outbreaks of violence.

Recent months have seen a rise in unrest – apparently linked to economic grievances, including workers’ fears about the economic dislocation caused by Beijing’s long-term plan to move away from low-value manufacturing to more creative and innovative industries.

Workers in Shanghai clashed last week with police at a Singaporean consumer electronics supplier during a strike over mass job losses due to a company relocation, the US-based group China Labor Watch said.

Tension spilt over in the central Chinese city of Xian on Friday, with Xinhua reporting hundreds of people overturning police and government cars after officers took more than two hours to arrive at a scene where a girl had been killed by a building truck. Ordinary citizens often complain that the government does too little to protect them from safety risks like dangerous driving by such trucks.

More than 10,000 workers in Shenzhen and Dongguan, two leading export centres in southern China, went on strike last month to protest against cuts in overtime – which they rely on to supplement meagre basic pay.

The ruling Communist party relies on rapid economic growth as its main source of legitimacy and Chinese leaders assume that if the economy slows too much it will be unable to contain the resulting social unrest.

Many analysts believe double-digit inflation and an economic slowdown were important contributors to the 1989 Tiananmen Square upheaval and resulting massacre. In the midst of the 2008 global financial crisis the government identified 8 per cent gross domestic product growth as the level necessary to avoid political chaos and mobilised the entire state sector in a successful effort to "protect 8".


Ashvin said...

Spain's looking wayyy down.

(Guardian) "Its industrial output was down 4% in October, the sharpest drop since March last year. Its services PMI showed the fastest contraction since March 2009

That is fueling fears that the country's output will contract in the fourth quarter. The obvious consequence of that is that slower growth, or even a recession, means more borrowing and a reduced ability to pay off the country's debt."

lautturi said...

First link not working, here's the correct one.

Greenpa said...

We have a new contender in the "updates on fiddling while Rome burns" contest. From Japan-

"An outing of luxury sportscar enthusiasts in Japan ended in an expensive freeway pileup — smashing a stunning eight Ferraris, a Lamborghini and two Mercedes likely worth more than $1 million together."

Meanwhile, back at the meltdown:

The setup to reuse water out of the reactors to cool them which filters out cesium in the process; has leaked again- and this time they are a little nervous about the fact that the system does NOT filter out the strontium- and it "may" be leaking into the ocean-

"the water is believed to have contained 130,000 becquerels per cubic centimeter of radioactive strontium."

In case you haven't been paying attention, "it may be leaking", in TEPCO-speak, means "it has been leaking for weeks, maybe months, who knows?"

Ashvin said...


14.32 Sarkozy: Germany and France are in full and total agreement...

that eurobonds are no solution to the crisis at all.

snuffy said...

I am wondering now the how soon to do the dramatic things.I do not believe we will escape the ruin of the euro.My work appears to be relativity stable,and I think the cold winds of January might be the time we see things start to go sour here.
Lots to decide...

I have a little gold,a little silver..but bills bills ect.My tech job remains steady...12 hr shifts for the next two weeks,then a six week break..then three months of 12 hr shifts...

Traveling could become hard and dangerous again...But as Ferfal ,the Argentinean points out even when the world economy collapses,you still have to find, an do work ,still.

so many questions ...

Bee good,or
Bee careful


Mathias said...

So if I have almost no cash, would it be wise to buy gold for half of it and hold the rest in cash or keep all of it in cash to buy food and pay the rent?

Any suggestions?

Ashvin said...

ISM services looking down.

NEW YORK, Dec 5 (Reuters) - The pace of growth in the vast U.S. services sector slowed in November to the slowest since January 2010, according to an industry report released on Monday.

U.S. factory orders dip 0.4 pct in October. New orders for U.S. factory goods fell in October for the second straight month, suggesting a possible softening in the manufacturing sector, which has supported the economic recovery.

Shamba said...

A 100th post! Congrats!

Safe travels to Illargi and Stoneleigh as they spread the message.

Thanks for being brave enough to do it these past 4? or 5? years.

peace, Shamba

scandia said...

If it is agreed to write a new EU treaty does that mean there will be referendums held in all participating nations?
It is reported that the new treaty would contain strict penalties/punishments. Well, if there is no consequence now for breaking the rules what consequence with teeth exists?

scandia said...

@Shamba, Right, I meant to offer my congrats to TAE and the team as well! I'd better get a life as I've read all 1000 posts:) What an education!
I'll be sending in a donation to honour this significant milestone.

@Stoneleigh, I am repeating myself by saying I get so excited by your essays as they are always fit to send out on my network to people who don't play in the casino but will be impacted all the same through taxation. lost pensions/benefits.

scandia said...

A penny just dropped while thinking about contraction. It is not just about the loss of money and employment.
As Ann Barnhardt points out it is the destruction of a system of law. It is loss of liberty, the cancellation of human rights, the desecration of the landscape to keep the machine running.

@Greenpa, Your way forward for Hungary holds much appeal as it is doable.

pasttense said...

Mathias: In your situation it it probably best to keep part of the cash, and spend part of it on stockpiling food and improving energy efficiency.

tblood said...

USD is debt-backed fiat currency. Is it as susceptible to deflation as the other credit instruments you write about? In a worst case scenario, are precious metals the only true money?

jal said...

Stoneleigh said

"Financial bubbles are not a new phenomenon, but are in fact quite common in the historical record. Every few decades, a new generation rediscovers the magic of leverage, igniting a rapid expansion of credit, and therefore debt. Every time humanity experiences a bubble, it fails to recognize the pattern."

This time its different. You are here to enlighten the masses.

In the past only a few of the elites were able to see and take sound decisions about their finances.

The math and therefore, the consequences of exponential growth and leveraging will cause many tears for the ostriches.

The reset will happen.

Its good that you periodically repeat the message. More average people will eventually see far enough to take steps to alleviate their demise.


Ilargi said...

"scandia said...
If it is agreed to write a new EU treaty does that mean there will "

It differs per country. What I've seen is that Germany and Ireland both think they may have to do referendums, I really don't know enough about other nations. Doubt that anyone does. Constitutions can be tricky things.


Glennjeff said...

Oh bugger, I thought we had successfully exorcised Cheryl's mailgnant cynicism.

p01 said...

Please keep the "my watch is more expensive than your car" person's comments as the equities plunge into the abyss.

Franny said...

@Mathias -- I would not buy metals unless I had secured a substantial supply of food/water/cooking fuel, paid off debts, and had at least a year's living expenses in $US (which is where I live).
@tblood -- it sounds like you are asking can the $US hyperinflate. The answer is it can and it will, but a lot of deflation has to happen first. Why? Math -- there is an enormous amount of $US denominated debt that is going to be destroyed, causing demand for $US for a while.

el gallinazo said...

George Washington's post today on the real reasons behind Obama's potential veto of the unlimited detention and assassination bill is worth a read. Sounds right to me.

Ashvin said...

S&P says "look for downgrades".

(FT)"Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc.

The US ratings agency is poised to announce later on Monday that it is putting Germany, France, the Netherlands, Austria, Finland, and Luxembourg on “creditwatch negative”, meaning there is a one-in-two chance of a downgrade within 90 days. It warned all six governments that their ratings could be lowered to AA+ if the creditwatch review failed to convince its experts.

Markets have been braced for a potential downgrade of France but few expected Germany’s top rating to be called into question. With regard to Germany, S&P said it was worried about “the potential impact (...) of what we view as deepening political, financial, and monetary problems with the European economic and monetary union.”

Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc."

unkle.smokey said...

Hey folks,
re: Ann Barnhardt interview.
We are now living in a lawless, Marxist, Communist, usurped, what used to be a representative republic but is no more.

It's called the Cloward-Piven strategy. Go in and destroy and collapse the entire economy, everything and then rebuild a new Marxist, Socialist, fascist state out of the burning rubble of this destruction.

To me, this makes her sound like an idiot and posting this on TAE degrades the level of credible information normally found on this site. But, I could be wrong and I often am. Anyone care to offer their take on that interview? I have to say, I did enjoy the outrage.

Ashvin said...

Let's just downgrade Planet Earth already.


Breaking News

Ashvin said...

What's slower than snail mail?

(BBC) "The US Postal Service is shutting more than half its mail-processing centres in a £3bn (£1.9bn) cost-cutting drive expected to shed 28,000 jobs.

Vice-President David Williams told a news conference that the closures were designed to stave off bankruptcy next year.

Out of 461 mail-processing centres across the US, 252 will be shuttered starting from next April.

The move could spell the end for next-day delivery of first-class mail."

Herbal Floyd said...

Should I sell my silver coins now?

What does the board think about selling silver coins now with plans to buy them back in a few months? If deflation is on the horizon, then silver prices should fall substantially from here and I could buy back twice as many in about 6 months or so.

Will silver coins be a good long term hedge against hyperinflation?

Jack said...

The latest hot investment tip is to short Japan.
Once Europe defaults than it will be Japan.
I am not likely to do this because I have never bought any options before but it is tempting.
I guess In doing this thing timing is critical.

Stoneleigh said...

Unkle Smokey,

Ann Barnhardt hold some truly odious opinions on a number of issues, but on finance she's simply right. There are many people in history who have had both good ideas in some field and an obnoxious personality, or some crazy notions in another area. I think we need to filter out the useful information and ignore the rest.

Stoneleigh said...


I wouldn't follow hot investment tips that amount to recieved wisdom. They're backward looking, and that's dangerous. Better to get out of the casino altogether.

Ash said...


I'm with you. It's good to see these money managers close their ponzi businesses and express outrage at the system (and share their knowledge about how things work), but at the same time I can't help but feel that she symbolizes a large swath of stuck-up, brainwashed capitalist producers, consumers and middle-men(women) who are just now being rudely awakened to how meaningless their former jobs/lives really were. That in and of itself is not necessarily a bad thing, but its likely that many of these people will point their frustration and anger in all the wrong directions and attach all the wrong labels. Ann's probably one of the last people to worry about, but she clearly doesn't understand why scenarios like MF Global were almost destined to happen in this system, her ponzi clients were destined to get screwed out of their money and, of course, her remarks about "representative republics" and marxism/communism are just plain silly.

Stoneleigh said...

Silver Lady,

It depends on your circumstances. Silver will fall a long way, but it could be useful and will hold some value over the long term. You may not be able to buy it back later. If you can afford it (ie because you've already done the more important things like getting out of debt and holding liquidity), then it's not a bad bet, even though it will lose a lot of nominal value. Basically it's a good insurance policy IF you can afford it.

It would be a good hedge against hyperinflation, but that's years away. You need to get through deflation first.

Jack said...

Hi Stoneleigh
That is how I felt instinctively.

About Kyle bass
It seems like he has made smart investment decisions and he talks like he knows what he is talking about but there are times when his views seem to be a bit different than TAEs.

Stoneleigh said...


Agreed on the silly remarks, especially regarding marxism/communism. Those who truly understand the ponzi nature of the system wouldn't be surprised to see the rule changes go against them. The rule of law is a temporary phenomenon born of surplus, and sadly not at all characteristic of human history.

I still think what she said in this interview constituted a useful warning to many people, but I know she and I would disagree about almost everything else in life.

Ash said...


Just to be clear, I agree that the interview provided worthwhile information/perspective and was something that should be posted.

Mitesh Damania said...

How do you protect your cash? Will your deposits in a FDIC insured bank still be there or will they pull a MF Global? I suspect with all the crooks out there, they will find a way to get your money. Also, don't you think there will be a massive bailout that will save the elite's assets while destroying the assets of the middle and lower classes by printing money and rendering cash worth a lot less? I suspect they will allow the first class passengers off the Titanic while caging the rest.

Jerry McManus said...

I watched the movie "Downfall" the other night, a stark but compelling look at the last days of the Nazi regime in Hitler's bunker under Berlin. Produced by Germans with an eye to historical accuracy over caricature, what really struck me was how, well, HUMAN the people appeared.

The attitude of a frail looking (but still volatile) Hitler in his darkest most desperate moments was portrayed as "the German people have failed and deserve to die" and "those who have survived are the weakest and least deserving, all the best ones are already dead".

This sentiment reached it's most horrific when Mrs. Goebbels, unable to imagine a future without National Socialism, first sedated then poisoned her own six young children.

That nihilism really made me sit up and wonder, such a common foible in the human experience over the centuries, for people in general, but especially for those in power to resent their own unrecognized failures and lash out with "if I'm going down then I'm taking everyone one with me".

As our century of mostly Western industrial wealth and privilege rapidly unravels before our eyes, I can only pray that we do not likewise succumb to these more hellish aspects of our human nature.

Pennies from Heaven said...

Nickels are a fine investment but Pre-1982 pennies are an even better value. The 95% copper in pre-82 pennies represents 200% of coin face value, and the Mint will stop penny production long before nickels. Pre-82 pennies are still around 20% of penny circulation. Get them while you still can and stockpile that free copper premium.

Franny said...

Silver Lady,
Asking Stoneleigh to predict the availability of silver coins in the future seems like a bit of a silly exercise. Nobody knows. I view my silver as an insurance policy that I hope to pass down intact to the next generation.
Mitesh Damania: banks by definition gamble with their customers deposits. I would not keep any sizable amount of cash in any banking institution at current interest rates. It is easy to open a treasurydirect account and keep your cash there, either in short term T bills or zero interest certificate of indebtedness (useful when T bill rates are negative).

Franny said...

Silver Lady, Stoneleigh has spoken for herself many times on the subject of making short term predictions, you can read her words for yourself in prior posts, as I have done.

Ashvin said...

S&P downgrade warnings update via ZeroHedge.

(S&P) "We expect to conclude our review of eurozone sovereign ratings as soon as possible following the EU summit scheduled for Dec. 8 and 9, 2011. Depending on the score changes, if any, that our rating committees agree are appropriate for each sovereign, we believe that ratings could be lowered by up to one notch for Austria, Belgium, Finland, Germany, Netherlands, and Luxembourg, and by up to two notches for the other governments." [THIS MEANS FRANCE]

Full text for Germany -

Full text for France -

Full text for Austria -

Ashvin said...

comments open

el gallinazo said...


Barnhardt is an extreme right wing ideologue and jingoistic nationalist with more than a little smattering of Bachmann intolerance for everybody and racism tied in with some healthier sorts of libertarianism. She is a loose cannon. However, she is very clear and focused on the nature of the financial market scene and particularly the futures and options market. So as the Band sang it, "you take what you need and you leave the rest." Werner Heisenberg was a street thug Nazi but his Uncertainty Principle was brilliant and has endured.

But her rhetoric shows that the Owners were politically brilliant to back a pseudo liberal minority guy who is real good at taking orders as the Teleprompter of the United States. And now he is truly living up to his motto, "Chains We Can Believe In." Would the wingnuts be calling McCain a socialist though you wouldn't have been able to put a filet knife between what he and Obama would do in terms of finance, geopolitics, and war. The country is still full of head scratching liberals who can't quite get their limited brains around what Obama is really about. The Owners want to keep the left / right antagonisms going. The 99 to 1 meme scares the bejeesus out of them.



MF Global involves a great white attacking some barracuda as well as good sized bass. Shows how far things have gone in whom they need to eat. MF Global is only remarkable in that it wasn't TBTF, even though Corzine appears to be TBTJ (too big to jail). It is the first body to wash up on the beach from Europe.

el gallinazo said...

Jerry MacManus,

I recently reread all of Kurt Vonnegut's novels. As you may know, he was a private POW laborer in Dresden at the time of the firebombing, captured as a scout during the Battle of the Bulge, and he and his troop only survived because they were housed in an underground meat locker along with some deceased cows and hogs. One of his lesser known novels, Mother Night, deals with the ironies of Nazism in a fashion difficult to forget. I recommend it.

Currently reading Huckleberry Finn, considered by many around the globe to be the all time greatest American novel. The economics are similar to Kunstler's novels. Someone asked in this thread if PM will be the only money in a worst case scenario. If this means a time past the deflation and hyperinflation, I would give it a qualified yes. However, communities or states may well start up their own scrip and by that time the Central Repressive State may be too weak to do much about it. It was the shutting down of the Pennsylvania scrip money that pissed off a lot of American revolutionaries beyond passivity.

Another thing to keep in the back of your head is that the two fairly recent examples of hyperinflation which are usually brought up, Weimar and Zimbabwe, are used as prototypes for the future. However, both these countries had still strong foreign currencies available to many of their citizens. The USD is now the official currency of Zimbabwe, as it is of Panama and Ecuador, two countries that I recently spent some time in. They latter two do mint their own coins however. I did a double take in Ecuador when I was handed an aluminum nickel :-) If one figures that the USD when it collapses, will be the last fiat standing on the planet at the time, it will make the situation different than the two just mentioned.

Re Kyle Bass

He is a brilliant global analyst. I think he has got Japan right. He only gives it a couple of months after Europe goes. One area where I think he is way off is USA real estate. He claims that he thinks it is close to bottoming and only has another 10% to fall before it stabilizes. But this can only happen if the treasury and the Fed keep pouring money down the GSE rathole to protect the TBTF, and this will stop eventually. Then it is bombs away again.

Ashvin said...

comments closed for the night

Ashvin said...

comments open

Alex_Bermondsey said...

Please correct your cross-post of my blog "Let Them Eat π"! It was written by me, Alex Andreou, and not by Andrew Lansley who is the Secretary of State for Health. Also, the html link is wrong. The correct one is

Franny said...

Where are all the trolls coming from?

Kicking in another donation to help defray imaginary legal expenses today.

Ilargi said...

And comments closed again...

Sorry for that glitch, Alex. Corrected.


A moderator said...


There is just one troll. Always has been just one troll, but he likes to use a lot of different ID's. Cheryl is one of his ID's.

Ilargi said...

Mish has some additional info -and thoughts- about he European decision making timeline.

Eurozone Treaty Changes to be Finalized in March, Then a Vote in May, Then Country-Specific Referendums, Then?

Also saw this in a November 23 article by him:

Eventually, Will Come a Time When ...

"Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Le Pen may be too early, and France may not be that country, but the time will come.

Greece, Finland, Germany, Belgium, and even France are possibilities. All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen."

Mish is very right. 5 European governments have already fallen over the debt crisis. More will follow. And at least one of them won't be led by a technocrat, but by a populist. Who will say what voters want to hear: we're not going to pay you back. And that will be it.


Ashvin said...

Yeah, this will go over well.


"Great scoop from our Europe editor in Brussels, Ian Traynor, who has got hold of a paper from the the office of European president Herman von Rumpoy detailing ways sinning eurozone countries could be punished for not meeting future fiscal rules. The full story is here but here is the top line. Ian writes:

'The European commission could be empowered to impose austerity measures on eurozone countries being bailed out, usurping the functions of government in countries such as Greece, Ireland, or Portugal. Bailed-out countries could also be stripped of their voting rights in the EU, under radical proposals being discussed at the highest level in Brussels before this week's crucial EU summit on the sovereign debt crisis.'

Ashvin said...

comments open

Joe in NC said...

TD's case for Germany to sever the cord:

Has The Imploding European Shadow Banking System Forced The Bundesbank To Prepare For Plan B?

"One may say that Germany, far more than the US and the UK, is the world's truly AAA-rated nation. All this means that the Bundesbank, if disambiguated from the ECB, where it currently is accountable for funding a major portion of deficit nations' funding deficiency, would regain its status as the world highest quality monetary institution. And going back to the beginning, it is the Bundesbank which is effectively depleting "good money" in exchange for "bad" either in the form of undervalued collateral through the repo markets, or soon to be devalued fiat."

Mitesh Damania said...

Blogspot lets you approve each comment.

Joe in NC said...

Anyone know the rate of global economic growth before the widespread use of petroleum products?  I would imagine the previous era (the particular difference being a lack of petroleum use) that preceded the current era had a modest rate of growth. 


Skip Breakfast said...

There are enough smart voices in the wilderness speaking about our debauched financial system so that we don’t need to lend more attention or credibility to Anne Barnhardt. She captured the financial blogosphere's attention because she was so categorical in damning the post-MF Global financial system, as she closed down her investment business. But where was she pre-MF Global? How much integrity does she actually have as such an active participant in "Satan's" designs (as she would now biblically call it).

As Stoneleigh says, while she may not agree with the rest of Barnhardt's views on life, Barnhardt makes good points about finance. Stoneleigh is very practical in this regard, and very generous. Fine, I'll give Barnhardt this much: she should be relegated to preaching to her niche of right-wing zealots, who admittedly also need a sound slap to wake them up so they protect themselves. We all need to be made safe. But make no mistake, I'm sure Hitler had some really good economic ideas among his much more odious ones too. And I am not going to support the likes of him or her having a wider platform.

The risk is that in the approaching chaos, which we are reminded by TAE will be accompanied by total panic, humans will do some nasty things. So we should do our best to guard against such fear-induced thinking as we simultaneously guard ourselves financially. The finger-pointing and scapegoating will quickly devolve into gun-pointing and guillotines. Which minority will be lined up first? Who will be seen as Satan's minions by the likes of Barnhardt? (Oh, right, she's already singled out Planned Parenthood, so prepare for more abortion-clinic bombings I guess, as though that has anything whatsoever to do with finance.)

The miracle of the Internet is that we have access to knowledge and, dare I say it, "truth", outside of a highly controlled mainstream media. This, along with the scale of the credit bubble, makes today's imminent financial collapse a historical first. Never in human history has a government had to deal with trying to control information as people around the world can independently share ideas and information instantly. How fast will panic spread today? As fast as electrons through fibre-optic cables I bet (that's the speed of light, of course). Governments can't pull the wool over our eyes so readily anymore (until they shut down the Internet? I won't be completely surprised).

I believe there are currently enough voices online who are delivering valuable warnings and ideas, like TAE, Chris Martenson, Tyler Durden, Marc Faber, David Rosenberg, Paul Farrel, or Mish Shedlock (oops, he blames everything on evil unions, but whatever), among others. They all have good ideas, amongst some misguided ones, while almost never devolving into bible-thumping claptrap. Indeed, I learn about a new independent financial blog almost every day, even while the mainstream press remains almost unmoved in their reporting of affairs. We don't need Barnhardt elevated to any sort of respectable status, as she is incapable of distinguishing between sound financial ideas and highly biased personal views couched in right-wing religious dogma. In fact, we need to reveal the insidious implications of people like her too, or things will just get even worse than they will be already.

Skip Breakfast said...

Or maybe it's photons through fibre-optic cable. Can't recall the physics. Same speed tho!

Joe in NC said...


I agree. And does TAE endorse her numbers? 25 trillion if I remember correctly? Not that I don't believe it, but let's try to be more specific in regard to this part of it.

Anonymous said...

"The fundamental characteristic of modern fiat money — as opposed to commodity-based money under a gold standard — is that it serves as a medium of exchange."--John Carney, CNBC.

I'll counter that the fundamental characteristic of modern fiat money (or any money) is that it distracts us from reality.

"Without the monetary exchange that we have built into our system at every level, it will not be possible to connect buyers and sellers, producers and consumers. "--Stoneleigh

"Demand will evaporate, not because people do not have wants, but because they will lack the purchasing power to turn those wants and needs into consumption."--Stoneleigh

These statements assume the continued use of money.

Let's at least acknowledge those assumptions regardless of how farfetched we might individually believe that ending the use of money would be.

This comment isn't a criticism of the writers, simply a reality check.

Ashvin said...

@Mitesh Damania

Not us, not now.

A Fall Guy said...

@ Skip Breakfast

I concur and don't have much else to add. While I agree that one should always filter relevant information from questionable opinions, Ann Barnhardt's promotion of Islamaphobia and absurd anti-Marxism makes it impossible for me to place confidence in anything she has to say. She is definitely trying to capture the spotlight and could be positioning herself for politics (is it really just now that the system broke?). And unlike Heisenberg, I don't see that she has much to contribute beyond more reasoned voices (like the fine hosts at TAE, who I appreciate for posting links from diverse perspectives).

Joe in NC said...


I believe you made some Important points in your comments.

seychelles said...

Congratulations and thanks to Ilargi and Stoneleigh for their continuing efforts to keep us grounded in reality.

A Fall Guy said...

I hesitated posting this because I didn't really want to re-open a gold debate, but I believe it is important to be aware of the environmental and social costs of gold extraction, such as the exploitation of child miners. In British Columbia, there is an ongoing fight against a gold/copper mine that first proposed to fill a pristine lake (with so many trout it's name is Fish Lake) with the tailings.

PM's might help maintain your health in the future, but we shouldn't ignore that these come at costs to other people or places. A bit might help endure hardship (and I freely admit to having a small amount), but a lot won't do wonders for your Karma.

A Fall Guy said...

@ Stoneleigh and Ilargi

I almost forgot: Happy 1000's posting-day! Thank you for shining a beacon to indicate direction in dark and stormy weather, and for providing ballast to hold steady in rough seas.

Nassim said...

Werner Heisenberg was a street thug Nazi but his Uncertainty Principle was brilliant and has endured.

el G,

There seems to be a little difference between that version and the one to be found in the Wikipedia - Werner Heisenberg

After Adolf Hitler came to power in 1933, Heisenberg was attacked in the press as a "White Jew" by elements of the deutsche Physik (German Physics) movement for his insistence on teaching about the roles of Jewish scientists. As a result, he came under investigation by the SS. This was over an attempt to appoint Heisenberg as successor to Arnold Sommerfeld at the University of Munich. The issue was resolved in 1938 by Heinrich Himmler, head of the SS. While Heisenberg was not chosen as Sommerfeld's successor, he was rehabilitated to the physics community during the Third Reich. Nevertheless, supporters of deutsche Physik launched vicious attacks against leading theoretical physicists, including Arnold Sommerfeld and Heisenberg. On 29 June 1936, a National Socialist Party newspaper published a column attacking Heisenberg. On 15 July 1937, he was attacked in a journal of the SS. This was the beginning of what is called the Heisenberg Affair.

Please bear in mind that it was very difficult under that sort of totalitarian system to say anything nice about "the enemy" without ending up at Dachau.

scandia said...

If the punishment for not obeying the rules of a new EU treaty is the takeover of a gov't I would think a military force of some kind will be needed to back up such an action.
Would the internal law enforcement agencies of a nation obey an EU directive? I have my doubts? The EU may need to form a military force and that may have been the intention all along. If the EU club turns out to be a Nato force I won't be happy that Canadian troops would become enforcers putting boots on the necks of poor Europeans.

Jack said...

Stephen Leeb says they will(Europe) absolutely cobble together some sort of an aggrement to save the Euro.

Also he says if there will be contraction in the Chinese economy than there will be a depression and that will not happen.

He is foolishly optimistic

Greenwood said...

Most banks 'sweep' all your account money and everyone else's entirely out of the bank each night at closing and try to earn some very short term interest on it before the bank opens the next day. Same goes for the weekends.

My suspicion is that one of this nights in the not to distant future, your account funds will get 'swept up' at 5:00 pm and won't return at 9:00 the next day. Oops (I Did It Again)

Banks are just like brokerage accounts. They are backed by flimsy promises and are just a passing fancy in a midnight dream.

Look to the far horizon on an empty stretch of straight road. Do you see it.

It's The Vanishing Point


Greenwood said...

As regards Ann Barnhardt.

Anyone still peddling the left/right conservative/progressive so called 'political' fairy tale is so un-evolved as to be useless in any intelligent decision about, well, anything.

The Tea Party, as a Koch Sucker construct, looks pitiful and contrived when contrasted to OWS and they know it.

Look for the Newt Gang-Ging-Richs of the world to hop on the 'Outrage Express' against "Wall St", that they explicitly helped to foster for the last couple of decades.

They won't be able to do the classic co-opt of OWS so they will have to hastily cobble together their own Frankensteinian version.

Look for slogans like "Wall Street destroyed Main Street" coming from the very fiends who made the dream come true.

That is the true pattern of history. The chronic psychopaths of humanity accusing everyone else of what they themselves are at their rotten core.

Expect that demagogue mentioned by Mish to be from the ranks between 1% and .01%.

They thought they were with "The Cool Kids" but found out they didn't 'make the cut' with the real Owners. They were just chattel dressed as vassals to be tossed under the bus with the other peasants. Poor babies.

Monsters like Ann Barnhardt know they missed the train and desperately, desperately need some 'street cred'.

All Big Lies need a big dollop of Truth poured over them to cover up the putrified meat.

She is the poster child for this phenomenon.

Ilargi said...


We're not elevating Barnhardt to any kind of status. And I'm sure she'd shudder to think she would need TAE to do any such elevation for her. But we will quote her on where she's right, as one of the few people thus far, which in this case concerns the way the MF Global collapse has been handled by the government.

The fact that she calls that government Obama communism, or something of the kind, doesn't interest me in the least, though it doesn make me chuckle, but I'm sure that offends someone somewhere as well while others would claim it doesn't go nearly far enough.

The entire financial world, as well as the political one, and the media that lick the heels of both, all are replete with people of questionable character. If we would select out every single one we don't agree with, either on topic, or, as in Barnhardt's case, off-topic, we would from one day to the next become incapable of doing what we set out to do: telling our readers what's going on out there.

Bringing up Hitler is such discussions is always a cheap low blow. You may feel you have reason to do so, but where does that leave us with regards to Berlusconi, or Wen Jiabao, Cheney? Are we to silence them all, or should we perhaps expose them, these fine people with their great morals? If one of Hitler’s economic advisors had some smart insight on finance 70 years ago, should I leave that out because mentioning him on topic would imply I want to murder gays and Gypsies?

I got a mail today complaining about a quote I used from an article that quoted Peter Schiff, who according to the sender should never be mentioned at TAE -something to do with Ayn Rand-.

Where do we let this scale slide us exactly? The fact that I post a quote by Schiff has nothing more to do with what I stand for than us quoting Barnhardt. But Shiff is still right in his assessment that the US couldn't bailout a lemonade stand. That is, if its books weren't so utterly cooked. And Barnhardt is largely right in her assessment of the CFTC vs Corzine and cronies. The entire US Republican race is full of ass clowns, but I would quote Gingrich if he says something that I think is to the point, either completely off or spot on.

There are people on the internet, too, and you name a few, whose political leanings are far from me. But I like Mike Shedlock and his economic analyses enough to temporariy put his union views aside. And I would love to have a conversation with him about that topic as well as many others. And besides, TAE is not a political site, we do finance. Which is in a deep crisis in which all decisions are taken by ass clowns. Ignore them all, and you’ll never know what happened to your money.


Ash said...

A Fall Guy,

I too hesitate to post this reply, but I think you and I both knew it was coming! Actually, since the last time we discussed this, I can better appreciate your environmental position on owning gold. The fact is that gold mining produces some very horrible socioecologic (?) consequences, and that is ideally the type of forces we should work against all of the time, with all of our words and actions.

On the other hand, we are practically talking about a very delicate balance, no? When it comes to the perceived survival of you and your family, at what expense are you willing to increase the probability of that survival? What about purchasing oil-based products, which supports the worst socioecologic influence of them all? What about the other factors involved, such as support of gold as a form of supporting the demise of the current global monetary system?

There is no doubt in my mind that a lot of social and ecological/environmental problems faced today stem from our economic/financial, political and cultural systems. If owning physical gold is a way of undermining those, then perhaps that is an offsetting factor we should consider. In short, I still do not believe its as simple of either a financial or karmic calculation as you imply it be. But this I totally agree with:

"PM's might help maintain your health in the future, but we shouldn't ignore that these come at costs to other people or places."

Jack said...

Joost Van Iersel from EESC
I listen to this guy and I am saying that the Europeans are really in bad shape

Ashvin said...

Eurofund hawks have perfected the art of destroying confidence.


"Ambrose Evans-Pritchard warns in his latest blog post that proposals to run the EFSF and ESM in parallel is not a reassuring step - it's a sign of failure.

'If you think that running together Europe’s old rescue fund (EFSF) with the new one (ESM) to double firepower to €880bn is a reassuring move – as some analysts apparently do – you should have your head examined. The idea of combining the two is an admission that attempts to leverage the fund to €1 trillion plus have essentially failed.

The clever ruse by German finance minister Wolfgang Schauble to circumvent the €211bn limit on guarantees imposed by the Bundestag has run into investor scorn.

That Bundestag ceiling remains – and those of us who watched the debate know how emotional it was – so how on earth can Germany’s share be bumped up in this fashion to over €400bn? No wonder a "senior German official" has rubbished the plan today in irate language.'"

el gallinazo said...


Your response has led me to research the question of Heisenberg's allegiance to Naziism more deeply, and I will admit my characterization of him as a "Nazi thug" was overstated and based on unreliable sources. He could better be described as a "soft Nazi German nationalist patriot" without personal indications of anti-Jewishness toward his colleagues. (I do not use the term antisemitism because, as you are well aware, the entire Arab world is also Semite). However, he has received more than a little political rehabilitation in the German and world press. I would argue that the Wikipedia entree represents a bit of this whitewash. He was attacked by the most rabid fringe of the Nazi physics community simply because he was deeply involved in relativity and quantum mechanics which they deemed as "Jewish physics," and they wished to bring German physics back to a strictly Newtonian basis which they would have found racially acceptable. This caused him to be hauled in for an interview before Himmler, head of the SS, in 1938 who apparently found his views acceptable. Some argue that Hitler's antagonism toward Jewish physics caused Germany not to pursue a fission bomb energetically, but the lack of intensity behind the German program appears to be more complicated and related to the the ebb and flow of German geopolitical advantage during the war. In brief, by the time Germany "realized that it needed an A bomb to win the war," it was too late.

I would also recommend the following article as a better balance to the Wikipedia article, though, once again, I will accept that I did overstate and over simplify Heisenberg's connection to Naziism. That said, I think it a good idea not to pursue it further in this venue.

Greenwood said...

In regards to gold and silver and the heart of the financial implosion and helping it to fall quicker and harder, an interesting theory about one aspect of MFG's collapse (link courtesy of Max K):

Jim Willie (Gold Bug), publisher of the Hat Trick Letter, "articulated his belief in a financial slight-of hand originating from “notice to deliver” requests for gold and silver submitted through MFG before the(ir) collapse, which had the potential to cause a Comex (major PM exchange) delivery default."

This oddly ties into Celente's story that he was just using his MFG ($600,000) account to accumulate gold futures until he would demand physical delivery in late Nov/early Dec.

Willie goes on to add:

“Comex was ready to default on gold and silver (physical delivery) in November, and rather than honor the notices for (physical) delivery, JP Morgan (found holding $500mn in MFG accounts in London, see link below) stole the MFG funds in the accounts that were calling for (physical) delivery (Celente)…notices for (physical) delivery were replaced by stolen accounts.”

The evidence of this according to Jim is that, “JPM increased the amount of silver in their registered vaults by precisely the amount that was suppose to be delivered…JPM effectively averted ... a Comex default...”

and this

"MF Global UK administrator KPMG confirmed last week that it had sold MF Global's stake in the London Metals Exchange to JP Morgan…"

MF Global cash 'is in London

"Investigators on the hunt for more than $1 billion (£644 million) of (MFG) customers' money that seems to have gone missing from collapsed broker MF Global reckon a chunk of it has turned up in the London accounts of JPMorgan."

What a shock

Maybe Max is right and JPM can't make their silver margin calls after all.


A Fall Guy said...

@ Ash

We generally agree. Most discussions on gold ignore the huge socio-ecological and energetic impacts of extraction. Quite rightly, oil and many other extractive resources have the same issues, which is why reduction in use and reliance is needed if humans want to continue their existence on this planet.

When it comes to the perceived survival of you and your family, at what expense are you willing to increase the probability of that survival?

That is the fundamental question. Many people are willing to do nearly anything. I am not - survival of me and my family is not worth destroying lives of children in Africa or a wild ecosystem in BC. But everyone is free to choose their path.

BTW I've been reading and becoming more interested in local currencies, such as Saltpring Dollars, which are in use on Saltspring Island in southwest BC, and created by the Saltspring Island Monetary Foundation (SIMF). PMs might help through a pinch, but debt-free local currency may provide much more hope for equitable local community resilience. I will give some thought about posting something longer on this, as it could lead to some interesting discussion.

Ash said...


I listened to the RT discussion you linked, and it was quite clear to me that Joost had no idea what he was talking about. He kept rambling on about how the banking system was not a root problem of our financial predicament, how fiscal integration was the only possible way forward for Europe and how European nations were still a bastion of representative democracy. Essentially, he embodied the simplistic "libertarian" mindset that manages to misdiagnose everything. Fortunately, RT had Ann and James on to overwhelm his ignorance and/or propaganda. That made it, overall, a very worthwhile segment. Thank you for the link.

el gallinazo said...


"And besides, TAE is not a political site, we do finance."


But you must have written in your articles a dozen times that this is not a financial crisis, but a political one.

While I can understand that you do not want the comment section to devolve into the stupid and mindless red team / blue team antagonisms that the Owners use to distract the proles, as you write repeatedly, the financial is a function of the political. So some sort of balance must be drawn, and total control of the topics of the comment section by the editors is not conducive to a vigorous exchange by the readership. Despite the interference of the troll, this is one of the best financial (and doomer preparation) comment sections on the internet.

As to Barnhardt, I agree entirely with you quoting her. However, it is useful to the readership to know also that despite her accurate analysis regarding the MFG fiasco, she is an extreme right wingnut ideologue, with more than a smattering of anti-gay and racist views.

And, for that matter, what does the details of solar heating and well pumps have to do with the financial press? Yet its discussion is allowed and approved here.

Greenwood said...


JPM only had $200mn not $500mn in MFG accounts in it's London crime headquarters (so far, who knows another shoe may drop)


Stoneleigh said...

The world of finance is basically shark-infested waters from start to finish. Unfortunately the sharks are the ones who understand the system and how to play the rest for fools. We need to listen to them on this narrow topic, whatever we may think of their odious or outrageous opinions on other issues, or, as Ilargi says, we will never know what happened to our money. Goings-on in the world of finance can disappear your life-savings before you wake up in the morning. It's not a system anyone can ignore, whatever we think of its practitioners.

When I decided I needed to understand finance in order to understand the how the world works (nearly 20 years ago now), I ignored the economists and read everything the traders read. I wanted to know how the people at the coal-face, who lived this reality every day, saw the system and profited from it. I had no interest in playing their game, but I very much wanted to understand the rules of that game. The prey needs to understand the modus operandi of the predators.

Ash said...

A Fall Guy,

That sounds like a great submission for the Diamond project as well, if you wish. Independent, local currency systems are indeed great longer-term alternatives.

I know our own lautturi has explored somewhat similar ideas in writing and videos.

Stoneleigh said...

A Fall Guy,

Please do. I was given some Saltspring currency when I spoke there last year. They might well get away with that system in the long term, since they are so isolated. It would be very useful to look into how it functions as a modern example.

By the way I'll be on Vancouver Island again at the end of January or beginning of February.

Greenwood said...

"However, it is useful to the readership to know also that despite her accurate analysis regarding the MFG fiasco, she is an extreme right wingnut ideologue"

I don't mind quoting anyone who has a useful insight into the financial clusterfukc.

Even a blind horse finds a carrot once in a while.

Mish and his irrational hatred of unions is a known quantity to anyone who's read this blog for any length of time and needs no 'full disclosure' clause after his name.

Springing someone new with a 'pearl of wisdom' and/or insight and no caveat beside their name (in parentheses) warning of their bizarre intellectual baggage is a disservice to clarity and discussion. The blind spots in the more well known personalities Mish, Karl D, Max K, Steve Keen...have been aired already.


"Ann Barnhardt (foaming at the mouth rightwingnut crazier than batshit homophobic bigot) reveals the dark underbelly of the MF Global fiasco, something she is intimately familiar with...."

Now that's context, not judgement.


Eliza Blue said...

Wikipedia has a decent overview of alternative currencies:

Ithaca Hours is a well-established example.

jal said...

"The prey needs to understand the modus operandi of the predators."

Bankers are our most needed friends.
sarcasm off

Eliza Blue said...

Infographic from the Seattle Times on the impact of the recession on the Puget Sound area:

I would like to see this replicated for all major US cities.

I give the writers credit for putting the term "recovery" in quotes here:

el gallinazo said...


I agree with you in general, but I believe that it is not up to the lead writers such as Ilargi, Stoneleigh, or Ash to put a general warning label on their quotes like a pack of cigarettes. This is a job for the comment section.

Ilargi said...

The main opposition party in Holland has demanded new elections in case the government transfers any sovereignty at all to Brussels. Only chaos is certain.


el gallinazo said...

Speaking of the interrelationship of politics and the financial markets, an interesting take by Graham Summers on how the Bernank's increasingly toxic public profile will effect the Fed's future actions. As usual, beer, popcorn, and a broadband connect required.

Greenwood said...

@Eliza Blue

Check out Elizabeth Warren's work on state owned banks which essentially are creating credit on a state level without the Vampire Squid of Wall St getting a piece of the action, North Dakota being exhibit number one.

Local currency initiatives need to mashup with state owned banking initiatives.

Something OWS should pursue as a local positive proactive action.

More so than just trying to withdraw your assets from major TBTF banks, help strangle them with local money circulation patterns via state owned banks with local currencies where the parasitic criminal class does not get their blood funnels into the mix.


Greenwood said...

@ el G

From your link

"If Blankfein is under investigation and hiring someone of Weingarten’s caliber, a massive legal storm is about to begin on Wall Street..."

I truly think that the 'let's investigate Wall St - many days and many, many dollars short' fad will be completely co-opted by the Right Wing in Congress as a bludgeon to beat the snot out of the Obama-nation for purely partisan reasons.

Just watch a Jiz Bag like Gingwretch ride the 'anti-Wall st' horse to the finish line next November.

Eric 'Place' Holder is this generation's John Mitchell.

Dereliction of duty doesn't even begin to describe this pitiful man.

He has handed the GOP the perfect example of aiding and abetting the Wall St crowd. Perp walking him down the Capitol steps would be a Gingwretch wet dream come true.

The image of a black Attorney General in an orange jump suit would be a racist fantasy come true and more than compensate for images of Watergate, which are rapidly fading into the memory plughole.

Ilargi said...

el gallinazo said...

"And besides, TAE is not a political site, we do finance."

But you must have written in your articles a dozen times that this is not a financial crisis, but a political one.

That is an interesting discussion for sure. But I think it does need defining.

Perhaps we should just say we don't do party politics here. Because the political crisis I'm talking about is one of the entire system, not of left vs right or blue or red or anything like that. Still, I think that is what it will still seem to be to many, if not most. Just elect someone else and things can recover. Ron Paul for president! That sort of thing.

That is no longer an option though. You need to build a very solid wall between money and politics, or this crisis will simply continue. The whole kit and kaboodle has been bought.

That real, underlying, political crisis is one that needs to be discussed very much here in my view. As should another part of the real political crisis, the recent advent of non-elected governments in Europe.

But this has very little to do with specific more or less extreme views of people who speak on topics other than those views. I'm not saying they shouldn't be mentioned at all, but that they shouldn't turn into the main issue when and if what they say is relevent to our discussion of finance. Without which they wouldn’t be quoted to start with. By us, at least. Still, Ann Barnhardt's political delusions threaten to do just that. Should we let them? Should we mention Peter Schiff’s "extremism" every time he gets mentioned?

Where does that whole slippery scale lead in the first place? Are we to incessantly publicize the political standpoints of all people we quote when quoting them on topics that have nothing to do with those standpoints? Or do we do that only for those whose views are perceived as extreme? And whose perception shall be the fine and fair judge of that? Smells like quicksand to me.


jal said...

Bankers love the following expression.

"Growing our way out of debt".

Every increase in growth must be supported by an increase of borrowing which is going to go to the increase of interest payments that must be paid to the bankers.

The only way to break the cycle is to have a decrease in growth.

el gallinazo said...


OTOH, the Republicans releasing this genie from the bottle (let's investigate Wall Street) for political advantage may just discover that it is not so easy to shove the toothpaste back in the tube. Just maybe. Also, I am truly frightened for the effects that Obama and PlaceHolder will have on the African-American community general welfare when TSHTF.

Glennda said...

As ever a very thought provoking post and comments. And congratulations on 1000 posts.

Stoneleigh said:
"To reiterate the advice TAE has been offering since its inception - hold no debt, hold liquidity in order to maintain freedom of action, gain some control over the essentials of your own existence, and build social capital in your own communities."

Social capital - that is where OWS comes on stage.

Yesterday was National Day to Occupy Our Homes. I went to part of the Oakland one in the very low income area of West Oakland. People had gathered earlier in the day to speachify and then march to several banks as they crossed downtown to West Oakland. For those of us who had to work, we gathered in the evening at a park near a home recently moved back into by the original resident. It was still partly furnished with her own furniture. She is there with potential continuous support in case she is evicted/removed. Text messages will go out to those who can go help defend her occupation.

Zerohenge posted a notice BAC sent out.

"While the general media may be ignoring the latest peculiar twist on the "Occupy" theme, or in this case the "", Bank of America is taking it quote seriously. As a reminder, "Tuesday, December 6th is the National Day of Action to stop and reverse foreclosures. The Occupy Homes movement is holding actions around the country in support of
homeowners and people fighting to have a home...."

And if you have not heard about today's protest on the conventional media that is understandable: as BAC says internally, this event "could impact our industry." Here are the specific warnings to BAC "field services" agents: i) Your safety is our primary concern, so do not engage with the protesters; ii) While in neighborhoods, please take notice of vacant BAC Field Services managed homes and ensure they are secured; iii) Remind all parties of the bank’s media policy and report any media incidents."

"Aside from the superficial implications, what is more important is that the big banks are showing precisely what the weakest links in the system are, and what makes them the most nervous: it is not protesters living in tents in a major metropolitan city: it is protesters disrupting the lifeblood of the broken banking system - the home selling/repossession pathway. Expect many more such protests now that Bank of America has tipped its hand."

freedom said...

Stoneleigh and Ilargi - thank you, thank you, thank you. You are humanity's treasures.

Ilargi said...

Freedom, thank you. bit much perhaps.

Glennda: It's an interesting move for Occupy. I hope they can maintain and spread it. I still fear instigators.

And banks tend to be far more fierce in their reaction than city governments.


Glennda said...

I really like the Diamond in the Rough topic of "Local currency initiatives" and State Banks. The abandonment of the Euro is on the table today and the abandonment of the Dollar may be on the table in the future. So preparing our ideas will be important.

I also suggest someone, more knowledgeable than I, step up to the plate to do a Diamond on Jubilee or Debt Forgiveness. The Zerohenge posts about that have gotten me thinking. I don't think these posts do much more than bringing the question to the table, but now we should look further.

I especially like the idea floating around about giving everyone $xxxxxx amount of dollars and those with debt would "have to" use it to pay off their debts and those with out debt could use it as they wished. This could easily be too big to monitor, but it wouldn't be any crazier than bailing out banks. In fact it would actually stimulate the economy.

The following are where the idea of Debt Forgiveness is introduced. I think Part 1 and Part 4 are the most useful for thought, but I post them all for inquiring minds. I've posted excerpts and my notes on some of them.




"...Younger generations are simply not willing to buy into entitlement and consumption at anywhere close to the same scale as their parents. They rightfully see these pyramid schemes as rigged: as generationally unfair (i.e. federal entitlements), environmentally untenable (heavily wasteful of energy and material), and undesirable from a lifestyle standpoint (requiring more money and tangential time and energy to purchase and maintain then they are worth): Welcome to the "De" Generation: De-Ownership, De-Materialization.

Even if they wanted to go the way of their parents, Millennials know they can’t. The world won’t support it. This massive decrease in consumption by the young will ensure a steep drop in the need for debt but require a radical creativity in world economic premises and organization...."


"By laboring under a “debt as natural/moral law” delusion, world economies are trying to essentially drain the sea of international debt by bailing the sea into the boats of national economies and on to the backs of productive citizens. This approach is not working; that sea of international debt is growing beyond control due to its colossal size coupled with compound interest. We know that national austerity cannot come close to solving this predicament, so why are we pretending? The truth is we, the regular citizens, are not pretending."


"How can we effectively administer debt forgiveness that breaks our habit of stealing from the future and creates surplus in health and social wellness? The following examples will
briefly analyze current primary debt arenas and dynamics, propose debt forgiveness strategies to confront parasitism (along with citizen strategies to break up monopolies responsible for most of the parasitism), and suggest viable alternatives going from the smallest to largest debt arenas—personal (credit cards), family (mortgages), generational (student loans), national (deficit spending), and global (environmental damage)."

[He only covers the first 3 topics - cc, mortgages, student loans]

el gallinazo said...

I also recommend Jack and Ash's Cross Talk link on RT.

Ties in nicely with today's discussion of where finance meets politics. The Englishwoman is very lucid. One must wonder what the mix is between this Joost fellow of stupidity and duplicity, but it really isn't important as it's 100% duplicity with the "euroleaders" who give him his marching orders.

It's also interesting how Russia Today has come to dominate alternative English language organized media. By that I am referring to an organization with real studios in various cities and professional engineers. I also listened to their report on the protests against the apparent fraud in the Russian national elections this week, and it seemed pretty balanced. While al Jazeera may still dominate the Arabic media, it's handling of Bahrain and Libya have delegitimized it for the English speaking world. It's been decades since my high school and university Russian would allow me to understand their native language broadcasts, but I am really impressed with what they are doing in English. Must really piss of the Owners.

Ashvin said...

ECB doves stepping up the pressure on Germany to let them print.

Dec 7 (Reuters) - "A suspected parcel bomb addressed to Deutsche Bank chief executive Josef Ackermann was intercepted at a Deutsche office in Frankfurt on Wednesday, a senior U.S. law enforcement official said.

The package was discovered around 1 p.m. Frankfurt time (7 a.m. EST/1200 GMT) in a mailroom, the official said. Initial analyses by investigators confirmed that it contained explosives and extra shrapnel, he told Reuters.

A spokesman for Deutsche Bank in New York declined to comment. After receiving reports about the package, the New York Police Department stepped up security around Deutsche Bank's offices in New York and also notified corporate security executives around the city, the law enforcement official said.

The official said the suspected bomb carried a return address from the European Central Bank, which is also headquartered in Frankfurt."

Ilargi said...

Junk Food Companies Say Eating More Fruits and Vegetables Is a 'Job Killer'

That along with the report that said sine the 50's we killed 90% of all predators in the northern Atlantic and Pacific entirely confirms my ideas of what we really are as a species.


Ilargi said...

Sorry, Jack, don't want that sort of stuff here either. For the same reasons as stated earlier.


Jack said...

Like I said before we will take care of this thing by ourselves because everyone else is afraid.

Ilargi said...

Europe's banks have £1.5 trillion (€1.76 trilion, $2.36 trillion) of toxic assets

Europe's banks must dispose of a pool of toxic assets larger than the entire British economy if they are to return to profitability and meet new capital rules.

Estimates from accountants Deloitte found that European banks currently hold more than £1.5 trillion of non-core and non-performing assets on their balance sheets.

Deloitte said that while banks will have to dramatically shrink the size of their asset books they are likely to face major challenges in doing so given the scale of the bad loan problems they face.

British banks, despite beginning their disposal programmes much earlier than their Continental European peers, still have by far the biggest pile of toxic assets.

Deloitte estimates the size of the non-core and non-performing assets held on the balance sheets of UK banks at £460bn, more than the combined total for Ireland, Spain and Italy. German banks come a close second with a toxic asset pool of about £447bn.

What ever comes out of the EU meeting in the next 2 days will be found lacking and wanting, even if not in spin-meister- ship.

The EFSF is €400 billion max, max. The incestuous efforts to combine it with its very own daughter, the ESM, were squashed down by Germany today. They can’t even get any of it up to €900 billion. And those are supposed to be used for countries anyway, not banks.

Questions, anyone?


Ilargi said...

One too many voices that don't trust pennies to rain from heaven.


Chas said...

I am amused by the characterization of Ann Barnhardt. Is the opinionated? Of course. Bombastic? You bet. But comparing to Hitler? Come on now.

I've watched her youtube videos and listened to her interviews, and I'm confused by the comment that she's a "jingoistic nationalist". She hasn't said anything about foreign policy so I don't know how you can called her a jingositic. I imagine her more as an isolationist. As far as being a nationalist, if she is one, what's wrong with that?

As far as her religious views, get over it. As I understand US history, our forefathers fought and died to protect out right right to express and practice our religious beliefs. If religion offends you, move to Cuba or Communist China.

Nassim said...

el G,

Thank you for accepting that Heisenberg is a bit more complex than many other people. I knew almost nothing about him and it was thanks to you that I looked him up. :)

I could not tie in the fact that he was a great scientist with his apparent behaviour. I think that anyone who survives in a state run by psychopaths comes out tainted. If you survived, it means that you compromised. I know this is historical stuff but the USA seems to be headed in a similar direction - "you are either with us or against us"

Nassim said...

Eliza Blue,

I think this link works better

The Great Recession's toll: Tallying the impact in the Northwest

Gravity said...

Congrats on that 1000th post and kudos for the consistently high quality of analysis. Thanks for your work, I've learned a lot from the 900+ posts I've read and from the commentariat.

As everything in finance is but a sham, default is the only sincerity.

@el gallinazo, ash
Thanks for replying with patience to my inane ramblings, your standpoints are much appreciated and are probably more reasonable than mine.

I also read huck finn recently, damn good read. The first-person narrative really does immerse, especially when huck struggles with the social taboo on helping escaped slaves.

Gravity said...

"The main opposition party in Holland has demanded new elections in case the government transfers any sovereignty at all to Brussels."

The dutch constitution, a hopelessly socialist framework which pretty much guarantees runaway statism, definitely needs amending to allow for binding enforcement of european budgetary oversight and restrictions as proposed.
It seems that article 105 must be altered by parliamentary supermajority vote. A popular referendum may additionally establish a clear legislative mandate to do so, but this may be optional.
Parliamentary elections must be held after dissolving the current constitution along with the parliament, in order to ratify proposed amendments as specified by article 137.

Article 106 curiously provides the shortest single sentence in the dutch constitution and concerns a vital element of national sovereignty. It states that 'the law governs the money system', which refers to such law as originates by the authority of domestic legislature as constricted within the same constitution. Accordingly, it does not provide grounds upon which the euro can be legal tender here without disavowing legislative sovereignty over the domestic money system, which seems contrary to the intent of said article.

Joe in NC said...

 In the past, I have put some of the "potential" problems with China's economy (#2 in world) up for discussion.  I guess nobody at TAE thinks this is very important because about alI I ever got back was a reply from El G acknowledging that he did not know much about China's real estate market.  I'll say it again - the markets will not break unless a second crisis develops in tandem with the Euro crisis.  The 2.36 trillion that Illargi brings up can probably be "taken care of" over time with printing, can kicking, rumors, etc.  I think the TPTB are very aware of these problems.  China's problems are more a mystery...

China's Impending Bust  

Stoneleigh said...

Joe in NC,

China's bust has already begun. There is a huge amount of bad debt in their system, and they have massively over-built productive capacity in a world where demand for exports is about to collapse. Their real estate market is hugely over-valued. Chinese demand will not be propping up commodity exporters for much longer.

Ash said...

David Harvey posits the following quote in a recent lecture:

"It is easier to imagine the end of the world than it is to imagine the end of capitalism."

He then goes on to explain why that is true for so many people, how the end of debt accumulation essentially means the end of capital accumulation in this system and therefore why it may be more easier to imagine the end of capitalism than we think. That is a fundamental reason why the sub-1% cannot allow mass amounts of debt to be retired, as evidenced by the increasingly ridiculous extend & pretend policies that are proposed every other day now.

He also explains why these policies must be enacted at increasingly larger scales (i.e. national to regional to global) in order to stave off credit collapse. That is quite obviously what we are seeing now with the European crisis, where they are [rather hopelessly] attempting to draw in funds and commitments from literally every large country in the world. The lecture is quite long and rather slow-moving at times (and in quicktime format), but I recommend people check out parts of it when they have the time.

The End of Capitalism

David Harvey's website can be found here.

Nassim said...

re: Barnhardt

I searched online to try to find a biography of this lady - without success. I was curious as to her family status since she seems to have strong views on abortion. I am always a little sceptical on that matter as the ones who seem to have the strongest views tend to have odd backgrounds - e.g. celibate priests and childless couples. The people she seems to be most against, the Moslems, tend to have a similar opinion on that matter. :)

Obviously, a lot of what she has to say about the world of finance chimes in with what TAE has been saying. Personally, I was most intrigued by this piece:

And then the lower level, the grunts, the actual auditors who go out on site, a lot of those people are super incompetent, affirmative action hires.

And yes, I said it and I am not ashamed of it. They are affirmative action hires. They have no business being there doing what they are doing. They are also hiring a lot of kids 15 minutes out of college who are literally reading off the script and couldn’t audit a company if their life depended on it.

I mentioned early this year that I had a friend, the best man at my wedding, who was somehow made "senior risk manager" for a huge British bank that went bust.

At that time I was more than a bit amazed as he really didn't have the qualifications for such a job. For starters, he was really bad at maths and information technology - let alone mathematical statistics, probabilities, databases and programming. What I didn't mention at that time was that he certainly fell into the "minority" category. I suspected that he was being set up to be a fall guy. He lost his job last April and is still looking for a job in finance in London. Obviously, he does not read TAE. However, I would never suggest it too him as it would be "heavy going" for him. I am sure he spends a lot of time on FaceBook. :)

Joe in NC said...


Thank you for the excellent summary.  Well, I just have to wonder why the markets have not broken yet - is it not known in the investment community world that China will be a drag?


qmorrissey said...
This comment has been removed by the author.
Ash said...

re: China

Harvey, in the lecture linked above, also makes a very interesting point about the geographical divide in policies right now. Essentially, the West has taken on a monetarist paradigm, in which CB intervention is coupled with fiscal tightening and "structural adjustment", while the East has taken on a rapid-fire Keynesian paradigm, attempting to achieve what the West did over a few decades in a few short years.

However, in the process of supporting global aggregate demand for industrial goods while Western demand remains weak, countries like China have created speculative credit bubbles so big and so fast that their imminent implosions will make our sub-prime look like a walk in the park. This implosion is being helped along by the government's response to unchecked inflation that has resulted from Keynesian policy on steroids.

So we have two different parts of the world attempting to maintain economic/financial growth and stability with two paradigms that have both epically failed in the last few decades to do either. It is a predicament for the global capitalist system that is almost beyond comprehension, certainly for those political elites running the show like chickens with their heads cut off.

Ash said...


Please send the idea with a brief explanation and any supporting links to [taediamonds at gmail dot com] if you wish it to be considered. Thank you.

Joe in NC said...


Thanks for the thoughts on China. Could not have said it better.


progressivepopulist said...

Stumbled across this quote from Twain in an interesting little essay by Phil Rockstroh:

‎"I wonder whether the world is being run by smart people who are putting us on, or by imbeciles who really mean it." --Mark Twain

Lately I get the feeling while I'm watching TPTB try to solve this crisis is like observing a troop of drunken unicyclists on tightropes juggling chainsaws- only instead of a safe seat in the stands, we are all sitting directly beneath the macabre spectacle. I keep holding my breath thinking any second, an errant chainsaw is going to bring the whole thing down on top of us, and then it doesn't, yet...

I don't think I like suspense anymore.

progressivepopulist said...

Wasn't there a post on TAE a few months ago on china? Seems like I remember a video on modern cities built, but not yet inhabited...

lautturi said...

We don't need no stinking referendums - from zerohedge.

el gallinazo said...

China's on the verge of many local insurrections. When the Chinese workers riot, managers die, it's a serious business. Factories are being moved to Vietnam and Thailand for cheaper labor, if that is possible. What goes around comes around. Don't you just love finance capitalism. Mish said on an audio podcast about a month ago that a friend of his reported that huge warehouses in New Orleans are filling up with Dr. Copper and they are running out of warehouse space. When China implodes, TSWHTF immediately in Oz and Canada IMO. Their overprice residential real estate will look that the twin towers coming down.

el gallinazo said...

I&S are deflationistas in the short and intermediate term because they maintain that when TSHTF, the central banks can print money at warp speed but it will still be just a piss in the bucket. If you have doubts about the house of cards, you have to read the Tylers' new expose, hot off the digital press.

Ashvin said...


makes for good late night reading.

Sleep tight TAE, and don't let the apocalypse bite!

comments closed.

Ashvin said...

comments open

Ashvin said...

Finally a bit of truth spoken in Europe.

DJ Schaeuble: No One Knows What Would Happen If Euro Fails

Ashvin said...

Silly markets, tricks are for kids.


"Back to the EU - Mario Draghi says he did not signal more bond purchases last Friday - language he used when he gave the ECB's annual report on Thursday created the impression among some in the market that he was indicating the ECB would intervene once changes to the EU treaty were made.

However Mr Draghi has quashed that today - he just told reporters he was "surprised" his comments were taken that way.

He also said "no" when asked whether more bond-buying would follow the agreement by eurozone nations to hand over more fiscal powers to central control."

Jack said...

There were lots of posts about holding the currency of the country you live in.
I remember most of them and also the detailed post by El G.
However I am getting uneasy about holding on to Canadian currency because it is seems very vulnerable at this point.
I am wondering why it would be so hard to make the conversion from US dollars to Canadian in a few years from now.
About Gasoline.
Oil will shoot up high that's for sure and people talk about alternatives to oil.
It is either ethanol or biodiesal and these things require the growth of plants and that means the destruction of our forests.

Joe in NC said...

Re: Apocalyptic reading

I suppose this means anyone with a brokerage account should check their customer agreement terms for any mention of hypothecation & re-hypothecation? Or do they all do this crap?


Stoneleigh said...

El G,

Great article - a must read! It all comes down to excess claims to underlying real wealth, as we've always said. Those are about to be rapidly and messily extinguished. This could hit the fan literally any day now. The 'bank run' would be electronic, and could happen from one day to the next. Whatever you have in the grip of the system is at risk.

Stoneleigh said...

Joe in NC,

I don't think the printed niceties in brokerage agreements will make the slightest bit of difference. Investors will be faced with a fait accompli once their money is gone. Complaining that agreements weren't adhered to will make no difference once the money has disappeared into a giant black hole of credit destruction.

Rules only exist in theory. Our shadow system has circumvented them in practice at every step. Rules will not protect you at all.

Biologique Earl said...

El G posted the following last night by Zerohedge indicating the enormity of fraud using multilayered leveraging:

Tyler's conclusion is that what has happened could have apocalyptic consequences to many of the worlds economies.

Today Karl D. has shown that the above news is spreading fast:

Yesterday KD posted some truly terryifying information of how funds investors may be able to force you to support their folly even if you closed your account with an account many days before collapse of the organization you had parked money in. See:

Briefly Karl said:

"Recently Bank of America transferred a bunch of derivatives into their banking arm. "A bunch" means somewhere around $80 trillion worth.

Now pay very careful attention, because part of the bankruptcy "reform" law in 2005 placed derivative claims in front of depositors in a business failure - including a bank failure.

What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a "Repo to Maturity" trade is - it's a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank.

If a major bank blows up this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens -- say, 90 days before -- you're still exposed to the risk through clawback!"

Jack said...

There are clues but I will never be able to get a clear answer to my question

Stoneleigh said...

Robert 1,

Indeed, that's why whatever you have has to be out of reach (ie not in the banking system at all, but in cash and cash equivalents under your own control). Much easier said than done of course, especially all at once, which is why we've been telling people to do this for the last several years. Waiting until the last minute means being trapped and trampled in the stampede for the exits.

Frank said...


I agree with you about what my happen to the loonie internationally, which would be a reason to hold bucks. OTOH, the US has gone berserk. Schizophrenically berserk. When I was a kid in Michigan 50 years ago, you could spend either kind of money in any store within 50 miles of the border in either direction. Not so much now. If you need to buy groceries in Toronto, have loonies to do so.

For a Canadian the buck is now a trading play. Buy now, sell for gold at the top of the liquidity crunch, have twice as many ounces as if you had just bought Maple Leafs now. That's a play for someone who is already rich: If you win, you're really rich. If you lose, you kept enough in loonies and gold bought now, that you're still comfortable in 2040.

Ashvin said...

Chappelle pre-renders an impersonation of Jon Corzine testifying today.

Jack said...

Hi Frank
Thanks for your help I appreciate that.

Greenpa said...

Iceland. Heard of them?

I find the silence about Iceland, in the middle of the International 3 Stooges Fire Drill regarding Europe, to be- entirely understandable.

Of COURSE the Owners do not want anyone noticing that an entire country told them to stick it where the sun don't shine (Greenland, presumably) - and not only survived, but the people are thriving. Sh. Pay no attention to that sort of free country out in the ocean.

But I AM a tad puzzle by the uniform silence regarding the Great Icelandic Leadership Event among "alternative" economics blogs and writings.

Silly of me, probably, but I can't help feeling that a little banging of the Icelandic drum might eventually force some attention- even "thought" to occur -

Steve said...

I'm just curious, you guys seem really arrogant, have you ever considered even once they you could be completly wrong?

Jack said...

If you do your research you will see that it is all a matter of arithmetic's.

Greenwood said...

Humanity now has a global gangster financial economy.

JM Greer has is right that Adam Smith had it wrong.

The true hierarchy of economics comes from the Primary Economy of Nature, followed by the Secondary Economy of human goods and services (all of human economics is a subset of Nature) and finally, the new turd floating in the punch bowl of humanity, the Tertiary Economy of Virtual Wealth conjured up out of financial goods and services (talk about Black Magic!).

At this point, the virtual Tertiary Economy has a virtual form of AIDS.

The world's political leaders (humans) have allow this diseased Tertiary creation to flourish and establish itself as a deadly parasite in the Secondary Economy of human goods and services.

The Primary Economy of Nature is also feeling the strain of this virtual Tertiary disease created by the human mind.

Having essentially no reserves to back a banking system is the kiss of death.

Max K has ranted for years about this. He has said repeatedly over the years that we don't have a fractional reserve banking system, we have a zero reserve banking system.

From Robbie Robertson's Fallen Angel

"..I don't believe it's all for nothing
It's not just written in the sand
Sometimes I thought you felt too much
As you crossed into the shadowland.."

Shadowland Banking and the river Styx.

As reserves approach zero, leverage can approach Infinity and Beyond.

This is the event horizon humanity finds itself perched at.

In the Primary Economy of Nature, the resiliency of an eco system is in large part a measure of it's real reserve (not virtual reserves)

If there are no alternative sources of food for the players in a particular ecosystem because of climate or what have you, the ecosystem collapses. Pretty straight forward stuff.

This primary principle of economics is going to be visited upon the Tertiary Economy of Virtual Wealth, and then, as it collapses, it will enforce itself on the Secondary Economy of human goods and services. This will also collapse.

In large part, humanity's (that means everyone is guilty not just politicals and bankers) complete inability to grasp the true hierarchy of real economics lies at the heart of this disaster.

It's not lack of political correctness that has brought humanity to the edge, it's the hubris and arrogance of thinking that human actions are above the laws of Nature.

Nature > Humans > Finance

What we have at present is the mind set of: Finance > Humans > Nature, which is a philosophical and literal death sentence.

The Party never stops, and the Road goes on Forever.


Steve said...

@Jack, give me a break, an overwhelming number of financial experts on the planet are missing something so big that only a handful of apcolyptic bloggers could figger it out? LMFAO. I just believe the absolute certainty they speak of on this blog is dangerous, and could make otherwise reasonable people make really stupid financial decisions.

Jack said...

There are bills that due and also mass fraud that is bringing things to a halt.

Stoneleigh said...


Minimize the consequences of being wrong. If you assume bad things are coming and therefore prepare to have more control over your assets the essentials of your own existence (ie be less exposed to the actions and misdeeds of others), if things do not turn out so badly, what have you really lost? You're simply managing what you have conservatively and are not over-exposed. You're safer come what may. There may be a small amount of opportunity cost, but that wouldn't be the end of the world.

On the other hand, if you assume it's business as usual and therefore take no action to protect yourself, it's game over for you if things do unfold as we've said.

The first kind of risk is minor, but the second is catastrophic. Evidence that the catastrophic risk scenario is coming to pass is mounting by the day. All you have to do is open your eyes.

We are trying to protect people here. What you do or do not do does not affect us. We have no stake in it at all, which is as it should be. It means we do not have ulterior motives. We simply offer information and our interpretation. They are free to you as a gift to do with what you will. The choice is yours.

Greenwood said...

Yoa Steve

"an overwhelming number of financial experts on the planet are missing something so big that only a handful of apcolyptic bloggers could figger it out?"

How about some chapter and verse quotes from "an overwhelming number of financial experts" who accurately predicted the 1929 crash?

There must be a myriad of them from 'financial experts' of the 1920's

I just can't find any, you must know of some, aye?

Joanna said...

If you assume bad things are coming and therefore prepare to have more control over your assets the essentials of your own existence (ie be less exposed to the actions and misdeeds of others), if things do not turn out so badly, what have you really lost? You're simply managing what you have conservatively and are not over-exposed.

Like the difference between buying, stocking and abandoning a Y2K doomstead, as many people with more money than sense did, and learning to grow your own food on an affordable & well-placed piece of land, paying off debts, making connections with the neighbors, etc.

One way is just throwing money at a problem, the other is making a systemic lifestyle change that works as 'insurance' and also a lot of satisfaction.

My household will have no regrets if the 'apocalypse' doesn't come to pass. That would just allow us to engage more fully in our new life's work. But if we hadn't taken the years to learn what we're doing, we'd be completely buggered if we had to grow our own food right now.

Franny said...

In terms of minimizing the chances of being wrong, one very easy step that anyone with a brokerage account can do is make sure that your broker is not gambling in the casino a la MF Global. There are services that do not have a gambling arm. Vanguard is one. It is owned by its clients via the funds and it is not in the casino. It costs nothing to move your IRA and other accounts there and they have excellent service and prices.
It also costs nothing to move cash savings to Treasury Direct.

el gallinazo said...


Care to annunciate on how your "an overwhelming number of financial experts on the planet" missed the housing collapse in the USA, or the near melt down of the global banking system, only prevented (temporarily) by the Fed pumping trillions of dollars to the banks of citizen money.

Dissident views are welcome here if you can make any sort of case for your opinions. "Yuze is arrogant" and "the overwhelming experts blah blah blah," though, doesn't cut it. You have something of value to bring to the pot luck?


We are also starting to see currency controls being put into place. Because of the huge border between the USA and Canada, these will be harder to enforce with small sums in currency bills than in most other places, but would be enforceable for serious accounts. Also note that armed US police are now being allowed to roam Canada without restraint.

Frank said...

Also Jack, ethanol, biodiesel, forests.... Meadow, swamp, eagle, piglets.... Religion, ethics, thermodynamics.....

Can we just have the implosion please? I am so tired of being caught in the crossfire between Tyson and the abolitionist vegans.

I could write a book, and I need to go do some work.

Greenpa said...

Ah, the smell of fresh doom on the horizon. :-)

The combination of climate change and crumbling economics:

Murder rate in New Orleans - 10x average

"the U.S. in 2011 has seen more weather catastrophes that caused at least $1 billion in damage than it did in all of the 1980s, even after the dollar figures from back then are adjusted for inflation."

And that doesn't even bother including the rest of the world.

My contention; the murder rate in New Orleans is the result of climate change- massive economic destruction and accompanying social systems destruction; coupled with the intrinsic inability of the nation to "fix" what has been so thoroughly broken.

And this will only get worse.

Regarding the alleged "Steve"- the probabilities:

paid disruptor just fishing for your time: 50%

just a moron - 50%

For the board, my own experience has been that it is only the brain-dead arrogant who accuse others of being arrogant. Yes? no?

Biologically - all survivors have some measure of "self-confidence" - it's essential. Everyone who has ever approached self awareness has struggled with it- but eventually you move on or get sucked into your own navel.

Greenpa said...

oh, the guilty pleasure of a little quick schadenfreude -

"Associated Press

ST. PAUL, Minn. — Republican presidential hopeful Michele Bachmann’s new book has been slow to move off of store shelves, according to figures from the first two weeks of sales.

Tracking agency Nielsen Bookscan reports a mere 3,000 sales of Bachmann’s “Core of Conviction” since its release two weeks ago. "

Delusions ARE likely to come home to roost.

Ash said...

Steve, read the MSM headlines and stories lately?

In reality, those self-professed "financial experts" are all starting to parrot what "apocalyptic" bloggers have been saying for years. Most of them are shocked, just shocked, that the developed world could be facing a "double-dip recession", that the EMU could be facing imminent dissolution, that credit markets are freezing up, that so many banks are under-capitalized and over-leveraged to even greater extents than they were in 2008, that politicians and central bankers are struggling to find any "solutions", that sociopolitical unrest is spreading around the world, etc., etc.

So if by "arrogant", you mean we are very confident in our own views and general predictions, then sure. It's kind of hard not to be when many of those confirmed over and over again, with every passing day. In fact, it would be quite reckless of us to ignore those confirmations and remain skeptical of our own big picture perspectives. Maybe if you posted more concrete criticisms of those views, instead of popping up every once in awhile with general insults, we could be of more use to you, and you to us.

el gallinazo said...


While Max K will speak in newspaper headlines about the fractional reserve real requirement going to zero, Steve Keen proves it with detailed arithmetic. Bankers are not handing out toasters to new depositors anymore because they don't care. Why bother when you can leverage nothing to infinity?

With a quadrillion in derivatives floating around and the 2005 US law that makes them more senior than normal deposits, caveat emptor to the tenth power.

Stoneleigh said...

Here's a film about 2008 about to be overtaken by events in 2011/12. Perhaps they assumed they could talk about this with the risk safely in the rear-view mirror, only it isn't. It's larger today than it was then, and none of the lessons have been learned. The same practices have been used, but they doubled-down on their bets. There isn't going to be a happy ending.

Margin Call trailer

el gallinazo said...

This is mission control at Cape Kennedy

We have ignition and lift off in Italian and Spanish ten year bonds. Stay behind your blast barriers.

Ashvin said...



"Back to the potential stumbling block in Finland. The country's parliamentary law committee has ruled that proposed changes to the EU's permanent bailout fund would not be compatible with the constitution. Any such proposal would require a two-thirds majority in parliament - making acceptance of the package even more difficult.

Ahead of the crucial EU summit - due to start with an informal dinner in Brussels tonight - France and Germany have proposed that the permanent bailout fund be streamlined by allowing decisions to be pushed through by countries holding 85 percent of the European Central Bank’s capital.

Currently, decision-making is by unanimous vote.

But Finland's law committee has warned the changes would damage national sovereignty."

Our chief business correspondent, Louise Armitstead, has just tweeted:

"Not just the Finns: Netherlands don't want to lose their veto over the ESM either; Irish hate plans to "harmonise" corp tax"

Ilargi said...

el gallinazo said...
This is mission control at Cape Kennedy

We have ignition and lift off in Italian and Spanish ten year bonds. Stay behind your blast barriers.

Ditto Belgium, France and Ireland. "Safe" countries, US, UK, Holland, Germany, are all down quite a bit.


Ashvin said...


"I make it about 24 hours to save the euro. Are they going to make it? We've been building up to this moment for two years (since the Greeks fessed up to the scale of their debts) , or you could say five years (since the credit crunch); or 10 years (since the foundation of the euro); or 20 years since Maastricht and the single market; or 25 years since the Big Bang; or even 40 years since the end of the Bretton Woods agreement; or maybe even 140 years since Bismarck was in his pomp.

Anyway up, the suspense is killing me."

jal said...

I'm listening to C-Span re. MF Global.

We are finding out that there exist a photocopier that can print money without having any real money to copy.

Glennjeff said...

Hey Greenpa,

Steve may be in the "anger" stage of greif resolution also, just a thought.

TAE n Board.

Congrats on turning 1000

Ann Barndhart, WELL! I found her good food for thought. An interesting combination of astuteness, honour and psychosis.

What is it with these christians and guns? Too much exposure to cognitive dissonace will drive you batshit crazy.

Turn the other cheek? Love your enemies? Hmmm. Then blow their brains out! WEIRD.

DOW, S&P, NASDAQ market graphs reminding me of late 2008. PM's are saying something, does not look like a classic manipulation. Not that I would know anything.

All of the patient's vital signs are not looking good.

I will sleep well now being confident of our imminent doom. NOT!

Anonymous said...

Ilargi wrote: "That along with the report that said sine the 50's we killed 90% of all predators in the northern Atlantic and Pacific entirely confirms my ideas of what we really are as a species."

It's not about what we are but what we do. Specifically, we use money (unlike all other species.)

Glennda, debt forgiveness is a simple reset. The rules still stay in place and the game continues. Don't like the way Monopoly impacts your life? Quit and get enough others to quit so that we can all go do something fun for a change.

Glennjeff said...

Crash trolley stat!

el gallinazo said...

Iran TV releases short video of captured American drone. Voiceover in Farsi with subtitles in Arabic alphabet. It appears to be in perfect condition.

No video of the captured homoculus, but rumor has it that they are waterboarding him on a Snickers bar with an eyedropper.

Ashvin said...

EBA is competing with the BLS for most grossly under-estimated data.


"The European Banking Authority calculates that German banks need to raise twice as much in additional capital as first thought. It's now thought that they need €13.1 billion - more than twice the amount the EU's London-based financial regulator had estimated in so-called banking stress tests at the end of October."

Ashvin said...

comments closed for time being.

Stoneleigh said...

Comments are temporarily closed due to troll activity. This troll uses many identities in order to confuse people into thinking his views are widespread. Identities so far (and there may be more):

Treasury Boy
Wendle in Tallahassee
Jerry from Pasadena
Pennies from Heaven
Coin Roll Hunter
Silver Lady
Eric in Cali

He has also previously posted spoof comments supposedly by us, and has stolen the identities of regular commenters as well. This is a deranged individual with nothing better to do than to make threats and disrupt the conversation here. We will simply delete any comment he makes when the comments section is open.

Ashvin said...

We're fracked.

WASHINGTON, Dec 8 (Reuters) - "Fluids from a company employing a drilling technique known as "fracking" likely polluted an aquifer in Wyoming, the U.S. Environmental Protection Agency said in a draft report that countered industry claims the technique has never led to water

The EPA said "the best explanation" for the pollution seen in the deep monitoring wells in Pavillion, Wyoming, is a release of hydraulic fracturing, or fracking, fluids into the aquifer above the production zone. The pollution includes benzene, alcohols and glycols, the report said.

EnCana Corp , an energy company that owns the field did not immediately comment on the report, saying it had only just seen it."

Ashvin said...

Eurogeddon – fear not, it's under control

"So confident is he of this outcome that it would be "imprudent" to make contingency plans for anything else. His message is presumably aimed at the UK Treasury, Financial Services Authority, Bank of England, US Federal Reserve, People's Bank of China, Uncle Tom Cobley and everyone else who has recently admitted to just such planning. In any case, you'll be pleased to know that you can all stop right now. The "fiscal contract" under discussion at the latest "make or break" euro summit ought to be enough to do the trick.

It's easy to mock. Mr Draghi is more or less obliged to say such things. His position is comparable to that of Norman Lamont, the former British Chancellor, standing on the steps of the Treasury to deny that the UK had any intention of leaving the European exchange rate mechanism. Until it happens, to say anything else is merely to create a self-fulfilling prophecy. Imagine what would have happened if Mr Draghi had admitted to preparing for a Greek exit – which by the way it almost certainly has been – or any of the other break-up scenarios it's reasonable to imagine. It would be game over."

Ashvin said...

WASHINGTON (Dow Jones)--"Stock portfolios of U.S. households fell while company coffers kept swelling in the third quarter, undermining support for an economy that's struggling to break out of a slow-growth rut and create more jobs.

A Federal Reserve report Thursday showed households' total net worth declined a second consecutive quarter, shrinking 4.1% to $57.353 trillion over the summer. Net worth represents total assets (such as homes and stock portfolios) minus liabilities (such as mortgages and credit-card debt).

The central bank's Flow of Funds report -- an overview of U.S. household, business and government finances - also showed company holdings of cash and other liquid assets at nonfinancial companies climbing a fifth straight quarter, to $2.115 trillion in July through September.

In what might be a positive sign for the economy's growth prospects [TAE: apparently analysts/pundits still don't understand how debt deflation suppresses economic growth], the Fed report showed that household debt contracted 1.2% in the third quarter, continuing the decline that started in the third quarter of 2008. "Deleveraging is still very much ongoing, especially on the housing front with price declines keeping many potential buyers and sellers on the sidelines," IHS Global Insight economist Gregory Daco said."

Ashvin said...

Spiegel piece on China's socioeconomic unrest.

Unrest Spreads as Growth Stalls

"A police special forces unit appears suddenly. One moment, a worker named Liu* is marching back and forth in front of city hall in Dongguan, China, with about 300 colleagues from the bankrupt factory Bill Electronic. "Give us back the money from our blood and sweat!" they chant.

The next moment, their shouts turn to screams as a few hundred uniformed police with helmets, shields and batons, along with numerous plainclothes security forces, leap out of olive green police vans. The demonstration leaders, including Liu, are rounded up on the side of the street by police dogs. Within just a few minutes' time, the communist authorities have successfully suffocated the protest.

The men and women, most of them young adults, are packed into yellow buses and hauled back to their factory, where the government exerts massive pressure: By afternoon, they must consent to make do with 60 percent of the wages they are owed by the employment office. Anyone who refuses, officials warn, will receive nothing at all.

The new global crisis has reached China. Debt problems in Europe, the country's most important trading partner, are starting to dim prospects here in the nation that has effectively become the world's factory, as well. The unstable United States economy and threat of a trade war between the two superpowers make the situation even more uncertain. As the US presidential election campaign starts too heat up, American politicians are vying to outdo one another in protectionist declarations directed toward their communist rival.

This October was the third straight month Chinese exports decreased. Along with it, the hopes of German manufacturers that Asia's growth market might help lift them out of the global crisis as it did in 2008 are also evaporating. This time China faces enormous challenges of its own -- a real estate market bubble and local government debt -- that could even pose a risk to the global economy."

Ashvin said...

Clear enough for you?


...(10 minutes later)

*DJ Germany Rejects Draft Measures On Banking License For ESM -Reuters

The Anonymous said...

"Stoneleigh said...
Joe in NC,

I don't think the printed niceties in brokerage agreements will make the slightest bit of difference. Investors will be faced with a fait accompli once their money is gone. Complaining that agreements weren't adhered to will make no difference once the money has disappeared into a giant black hole of credit destruction."

So if thats the case, then why do you believe that the "printed niceties" on a promissory note (especially an unsecured one) will be ruthlessly enforced such that no one should ever go into debt?

el gallinazo said...

The Anonymous said...
"Stoneleigh said...
Joe in NC,

So if thats the case, then why do you believe that the "printed niceties" on a promissory note (especially an unsecured one) will be ruthlessly enforced such that no one should ever go into debt?


Because they have bigger and better guns, bombs, predators, waterboards, goons, etc. What's the point of being a debt slave if they don't collect the debt.

see Wikipedia: The Life and Times of Vinnie the Horse

Stoneleigh said...

If you look at what has happened in other financial crises (eg Argentina), savings are either drastically devalued or disappeared while debts remain enforceable. The little guy never gets a break. Of course many debts will not be repaid because thy can't be, but those who carry debt risk having someone come after them for everything they have of any value. If they have nothing of value, debt collectors might just take everything they do have out onto their lawn and burn it in front of them.

Some might get away with not repaying debt, but the thing is, why take that risk if you don't have to? The safest position to be in is with as little exposure to obvious risks as possible. There will be enough risks as it is, without adding exposure to ones that could have been avoided. If you owe someone, they have a claim over your future. If your debt free you have a better chance of remaining your own master. I think people will value whatever freedom they can salvage from this situation. As it is it will be less than they enjoy now.

Jack said...

He says we will have catastrophe and the markets are doing fine for now.

I liked what Kyle Bass said about the behaviour of investors when he observed the price of lehman brothers shares and that just minutes before the crash it was trading as if there was no problem to occur and many were talking about an impending crash.

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

Leaked Brussels draft.

Only 3 important parts:

"In order to ensure that the ESM is in the position to take the necessary decisions in all circumstances, voting rules in the ESM will be changed to include an emergency procedure

*The mutual agreement rule will be replaced by a qualified majority of 85% (1) in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed to safeguard the financial and economic stability of the euro area.

*The ESM will have the possibility to directly recapitalize banking institutions and to have itself the necessary features of a credit institution (2).

16. Euro area Member States stand ready to provide to the IMF additional resources up to [EUR XXX billion], under the form of bilateral loans (3), to ensure that the IMF has adequate resources to deal with the crisis. The Euro area is looking forward to parallel contributions from the international community"

1) Finland and Netherlands already very resistant to this, with former saying it is violation of its Constitution.

2) ECB already ruled out ESM acting as a bank.

3) ECB already said loans to IMF for EZ bond purchases is not allowed under existing EU law.

What next?

Ashvin said...

A scene from Downfall, with Hitler cast as Merkel...

jal said...

MF Global had 30:1 leverage.
That’s the same as saying to 30 people that you have the cash to pay them back when you have only the cash to pay one back.

Leveraging sounds like fraud and lying.

If 10:1 is the guide line for banks, why should they not try to find a way to increase their profit by leveraging at high numbers?

Joe in NC said...

Last Minute Summit Mutiny Threatens The Future Of The Euro; And Why A Wholesale S&P Downgrade Of Europe Will Be Devastating

TD going all out fight club mode:

"Incidentally, to all the pundits who claim a universal downgrade by S&P of Europe's sovereigns and banks will have no impact, we say it now officially - you are all a bunch of idiots and hacks. Unless one has read every single bond indenture and loan doc of the affiliated entities, and knows for certain that there will be no springing rate hikes, collateral demands or margin increases in the case of a downgrade (which is the case in about 60% of investment grade and AAA credits), then all those spreading baseless propaganda and a false sense of calm should be fired immediately for spreading blatant disinformation. Please go ahead and tell AIG, whose collateral call waterfall started once its was cut from AAA by the rating agencies, AIG's shareholders, and America's taxpayers that that particular downgrade was irrelevant."

Joe in NC said...

I'm speculating a new post in 10 9 8 ....

bluebird said...

Steve sounds like my 6 siblings. They have professional financial planners to manage their portfolios so that they have more time to pursue their own hobbies.

I sent both the ZeroHedge and Denniger's links for them to get a summary of what is going on in the global markets. None responded back to me. Either they were overwhelmed by the extensive fraud or, more likely they were pursuing their other priorities.

Ilargi said...

New post up.

You're either at the table or you're on the menu