Archive for September, 2011
“Stimulus only adds more DEBT and none of it is helping poor people or people on the edge.”
“The bond market is totally manipulated by the Fed and it is saying the country is broke. All it reflects now is people speculating on the Fed.”
“Some day the real two traders are going to wake up…”
“We’ve gone through a 30 year bubble period that is now coming home to roost. It was created by the massive leverage built up by the 1980s.”
“There has been a $32 TRILLION net gain in the top 5%; they had $8 Trillion of net worth in 1985 and now they have $40 TRILLION….and I blame the Fed for turning our financial system into a massive speculative bubble built on debt leverage.”
I don’t usually write on rumors, but this one simply will not go away.
Germany is rumored to have ordered printing plates to resume printing Marks, and is intending to walk. This does make sense, although the Germans would have to find a way to shield their banks from the impact of a massive shift off the Euro and into the Mark by Germans, which would spike the Mark higher and positively trash the Euro’s value.
The usual answer to “why they won’t” is that the Mark would become ridiculously strong and that would kill Germany’s export industry, which being goods based (rather than the faux “export industry” that is often mostly services) would get plastered. The core of most commentators’ thesis is that this fact would preclude Germany from doing it.
But here’s the problem – playing the bailout game is a tax exactly identical to the impact of that stronger currency, and the bailout game costs you the decision-making power you retain when you are the one in control of your own destiny.
The German people are tired of the crap and with good reason. They should not have bailed out Greece in the first place; they effectively rewarded cheating, as Greece was caught cooking the books. Rather than prosecute the banks involved and yanking their charters, along with saying “No Mas!” they knelt down and performed an obscene act – more than once. There is a political limit to how far you can go with these acts before the people act in whatever manner is necessary to put a stop to it, and the Germans have a long and painful history of what popular tolerance of political stupidity leads to.
I think there’s at least some credibility to this rumor. I can’t put a percentage on the bet, but it’s not pure tinfoil nonsense. Whether Germany actually goes ahead and does it likely depends on whether there is a further contagion – and I think there will be. In fact, as I noted yesterday in an interview (to be published as a podcast next week) I have a nasty suspicion that Europe will ultimately “resolve” this problem the way Europe has in the past – via the business end of a bunch of hot lead-chuckers.
That would be disastrous but not surprising, given historical precedent.
Here’s the problem, when you get down to it – there comes a point where further bailouts have to be refused, simply because there’s no money to fund them. I don’t know exactly where that line is, but I do know it exists. Believing it doesn’t is the stuff of fantasy, and yet that’s exactly what the “Troika”, the IMF and others are all running.
The market says “BS!” to all of this; the sell-off in the equity markets is bad, but the implied forward view looking at high yield credit is far worse, and that looking at credit-default spreads is even worse than that. The latter on a number of institutions are showing the sorts of numbers that immediately preceded Lehman’s failure, implying the potential for a “no-notice” liquidity seizure.
If it happens, and if it does it is likely to come almost without warning if not literally without warning, Germany would find it very expedient to leave the Euro.
Note that the treaties that formed the Euro left no means to expel a misbehaving “member.” But there’s no way to restrain a nation from deciding to quit as opposed to being expelled.
Many believe that Greece will leave instead. They may, but only when it’s clear that there will be no more “bailouts” forthcoming. Their departure would destroy their banks instantly, unless it was coupled with a simultaneous “by declaration” re-denomination at par of all Euro-denominated debts in the nation into the Drachma.
That, incidentally, is not beyond the realm of possibility. What other nations in the Euro would think of it, and the sort of tectonic reaction it would generate, is another thing entirely.
I think we’re weeks to months away from a catastrophic failure somewhere in Europe, and the slowdown in Asia is much worse than is being reported. Any belief that we’re going to avoid the repercussions of these events is pure folly.
That is a light you see down the tunnel, now that we have walked in well over a mile from the mouth.
Unfortunately that light it is a train and there is no chance we can run the other way fast enough to avoid being flattened.
I’m going to add to Mr. Denninger’s excellent post by mentioning that at least one prominent financial/economics advisor wholeheartedly agrees with the idea that Germany will leave the Euro. Dr. Philippa (Pippa) Malmgren, President and founder of Principals Asset Management based in London had this to say earlier this month:
News to expect in the coming days and weeks:
- Greece defaults
- Germany protects German banks but other countries cannot do the same thus quickly provoking multiple sovereign defaults and or bank failures, all of which may easily lead to a payments crisis in the global banking system. Derivatives are particularly at risk in terms of operation and execution.
- The Euro falls in value especially against the US dollar
- The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.
- The Euro falls even more on any news that Germany is withdrawing from the Euro.
Meanwhile, it may be that Germany is not alone in this line of thinking. Anyone remember the Irish bank crisis that was in the news for months earlier this year? Well, they haven’t solved anything, it’s just that with Greece’s imminent default, the focus was shifted. That little crisis is still bubbling away in the background. So much so that there is at least one report of their secretly printing their old currency.
Ireland’s central bank reportedly is printing Ireland’s old currency in case the country leaves the eurozone. At least that’s the rumor circulating in Dublin, notes Alan McQuaid, chief economist at Bloxham stockbrokers in that city.
McQuaid, writing a guest commentary for The Guardian, says he’s not sure if the rumor is true. But he does hope Ireland has contingency plans in case the euro disintegrates.
Then again, given the record of European leaders, a lack of backup plan wouldn’t be surprising.
As Greece struggles to remain solvent, the European monetary union is scrambling to stop the debt crisis from spreading. If the crisis does spread, Ireland might be next in line.
Some pundits say Ireland should drop the euro.
Being master of your own destiny does have appeal, McQuaid admits. If it returned to the punt, Ireland could boost exports by devaluing the currency and reduce its debt burden.
But if it had its own currency, the Irish would move their deposits overseas, which could destroy the country’s banks.
All is not well in the Eurozone. I think it is not much longer before the detonations begin.
Time to pull your deposits and close your accounts folks.
Bank of America To Charge $5 Monthly Fee For Debit Card Usage $BAC @BofA_News – DJ
From CNBC Breaking Tweets.
Now why would you pay $5/month (that’s $60/year!) just to use your debit card? Uh, no.
Credit union folks.
Better service, better price, kill the TBTF financial rapists.
The entitlement mindset includes much more than government benefits programs.
The word entitlement commonly refers to government benefits to which we are entitled as taxpayers and/or citizens/residents.But there are layers of entitlement in the American psyche far beyond government benefits programs.
Let’s start with the government benefits entitlements. The programs most people refer to as entitlements are Social Security and Medicare, which taxpayers pay for with payroll taxes (even if the money just goes into one giant Federal pot).
Beyond these “I paid into them” entitlements are the “welfare” entitlements of Medicaid, Section 8 Housing, SNAP/food stamps, etc., which are paid out of general tax revenues and which are available to anyone who qualifies, regardless of their status as taxpayers.
Buried within Social Security is another large entitlement program for the disabled and dependents (widows and orphans).
Veterans are entitled to benefits as a result of their military service, as are their families.
Employers pay for other employment-related entitlements: Federal and state unemployment, workers compensation and disability insurance, etc.
The entitlement mindset is thus firmly established in the American psyche.If we experience bad luck and/or the negative consequences of poor choices, we have been trained to expect the government at some level to alleviate our suffering, cut us a check or otherwise address our difficulties.
The poisonous problem with the entitlement mindset is intrinsic to human nature:once we “deserve” something, then our minds fill with resentment and greed, and we focus obsessively on creating multiple rationalizations for why we “deserve our fair share.”
Eventually this leads to a government that has been reduced to a competitive stripmining operation in which the spoils are divided up amongst the most politically powerful Elites: in other words, the government we now have.
The entitlement mindset atrophies self-reliance, adaptability and flexibility, all key survival traits. If the government will “fix” our health, we no longer feel responsible in the way one does if there is limited government/employer-provided healthcare. If we expect our Social Security retirement regardless of what other conditions may be affecting the global economy or our nation, then we stop being responsible for managing our financial affairs in the same way as one does when there is no “guaranteed” retirement entitlement.
The question isn’t whether entitlements are a “right” or not, the question is their sustainability now that the demographic, financial and energy foundations of those promises has eroded. Clearly, the government has a role in providing for public health and safety, but to claim that entitling every citizen to hundreds of thousands of dollars in healthcare is “public health” spending is absurd.
Based on projections of high-birthrates/cheap-oil/high-growth in the 1940s – 1960s, entitlement programs were promised basically forever, with no recognition that conditions might change. Now conditions have changed, demographically, financially and in terms of energy input costs.
We might usefully think of the government as a ship in a sea governed by forces too planetary to influence: the tides, currents, winds, etc. Entitlements are essentially a claim that the small ship of government “should” be able to bend the sea to its will, regardless of what tidal forces, winds and currents are at work.
we can claim it’s our “right” not to sink, but gravity and the ocean do not respond to our claims of permanent “rights.”
But these direct government entitlements only scratch the surface of our sense of entitlement.We don’t just expect healthcare and retirement; if we’re honest with ourselves, don’t we also expect these other entitlements?
1. Cheap and abundant fuels and energy. We can debate whether this constitutes an implicit “right” or an entitlement, but the point is that Americans expect unlimited fuels and energy at low cost, and if cheap, abundant energy vanishes then they will demand “somebody make this right,” with the “somebody” presumably in government and certainly not the individual American or his community.
2. Ever-more government services and benefits, i.e. the entitlement mindset knows no bounds.
3. Full employment and bountiful employment opportunities. If we can’t find a job or create value that someone is willing to pay/trade for, then the government should create jobs out of thin air.
There are only two ways to fund “make-work” jobs: either take more money from existing wage-earners via taxes and redistribute the funds to potentially unproductive uses, or print/borrow the money into existence. Both have costs in terms of the productivity surplus of the entire nation and in the potential to destabilize the financial foundation of the economy.
4. An education suited to the demands of a global economy, etc., as opposed to providing the basic skills of learning, so the citizens can educate themselves throughout life. This distinction is lost in the endless debates over education, but in fast-changing environments and times, the only real value of any education is to learn how to learn. Though it seems “impossible” to the Status Quo educator, the world we are preparing students for–one dependent on consumer spending, cheap oil, globalization, ever-expanding government and healthcare costs, exponentially increasing debt to pay for everything, etc.–may not exist in 5 or 10 years.
5. An upper-middle class lifestyle for everyone who does what the Status Quo expects: get a graduate-level university degree, sacrifice for the corporation, remain politically silent/passive, etc. The idea that toeing the line will not result in a big-bucks secure profession/career is somehow a violation of the social/financial contract of Corporate America–once again, a right or an entitlement that is implicit in the American psyche.
6. Cheap and plentiful food. Once again, if food costs actually rose to “percentage of income spent on food” levels found in developing-world nations, Americans would undoubtedly demand that the “government do something.” Once again, this is like demanding the ship’s crew change the winds and tides. As oil prices rise, food costs will rise. There is no way out of this, as the primary input of agricultural costs is oil and petroleum-based fertilizers, chemicals, transport, etc. extremes of weather can ruin crops regardless of policy.
7. That the U.S. should be able to influence other nations to act in what we perceive as our best interests. The idea that we cannot persuade/force others to do what benefits us is anathema to the general entitlement mindset, e.g. “what’s our oil doing under their sand?”
There are undoubtedly many more layers of implicit entitlements, and the analogy that comes to mind is a worm-riddled, leaky wooden-hulled sailing ship approaching a coral reef. The only way into the relative calm of the lagoon beyond is to lighten the ship enough to pass over the reef, or the sand bar on the other side of the lagoon.
If the ship sails on fully loaded with the heavy baggage of the entitlement mindset, the reef will either rip out its bottom or the ship will be wedged on the sand bar, where the waves will break it apart.
In other words, the destruction of the ship is guaranteed in either scenario. The only possible way to save the ship and its passengers/crew is to throw most of the inessential baggage overboard. Everything that the passengers “can’t live without” will doom them if it isn’t jettisoned, and soon. Once the hull has been shredded by the coral reef, or the hull is stuck on the sand bar, it will be too late: jettisoning all the financial “rights,” entitlements and “essentials” will not save the ship or its crew/passengers.
The entitlement mindset is heavy baggage indeed, and the emotional content of the baggage– resentment, anger, and a debilitating focus on “what I deserve”–is toxic to the traits we will need in abundance to weather the decade ahead: flexibility, adaptability, open-mindedness, experimentation, community and self-reliance.
Charles Hugh Smith – Of Two Minds
Despite the growing Solyndra scandal, yesterday the Department of Energy approved $1 billion in new loans to green energy companies — including a $737 million loan guarantee to a company known as SolarReserve:
3/4 of a billion dollars. And who’s the #2 at one of the “investment partners”? None other than the brother in-law of Nancy Pelosi.
It sure pays well to be related to these crooks in DC, doesn’t it? Oh yeah, that’s your money they’re handing out, all the while telling us that we’re not paying enough in taxes.
Here is an excellent video on fiat currencies by my friend Dominic Frisby at Frisby’s Bulls and Bears.
Bear in mind we are in credit based economy, and credit markets can override the Fed’s ability to create inflation, assuming of course a definition of inflation that encompasses credit.
Please see Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over for a discussion.
Mike “Mish” Shedlock