FedUpUSA

Archive for November, 2011

Wow, now we have “more complete” data…. and of course the revisions always go the same way…

The “second” estimate of the third-quarter increase in real GDP is 0.5 percentage point, or $15.0 billion, lower than the advance estimate issued last month, primarily reflecting downward revisions to private inventory investment, to nonresidential fixed investment, and to personal consumption expenditures that were partly offset by a downward revision to imports.

In other words we were entirely too optimistic in pretty much all the things that mattered.

This should not surprise, of course….. just like we see the same pattern with the jobless claims every week that are virtually always “revised up” later on, making the current week report look better.

And here comes Uncle Sam:

• IMF APPROVES CREDIT LINE PROGRAM CHANGES TO PROVIDE LIQUIDITY
• IMF CREDIT LINE CREATES NEW SOURCE OF FUNDS FOR MEMBER NATIONS
• IMF ADDS EMERGENCY FUNDING TOOL TO ASSIST COUNTRIES IN CRISIS
• IMF NEW CREDIT LINE AVAILABLE FOR SIX MONTHS TO TWO YEARS
• IMF CREATES PRECAUTIONARY AND LIQUIDITY LINE
• IMF SAYS ACCESS UNDER 6-MONTH LIQUIDITY LINE COULD BE UP TO 500% OF
  MEMBERS QUOTA

And here is the math: Italy’s quota is 7,882.3SDR; Spain is 4,023.4 SDR. Multiply by 5 and you get 40 Billion and 20 billion SDRs respectively, which  translates to $61 billion and $31 billion. A total of $91 billion in additional capacity? And that’s it: enough to fund Italy and Spain for… two months. This is the best the regime can come up with?

Good thing America can get its own house in order so it can go out and fix the world next, not with one, but two credit lines. Incidentally, absent the US ratifying these two credit lines they are as good as useless because with 17.7% of the total allocation, the US is the defacto lender of only resort (since this is used to bail out Europe, which effectively means Europe will not be lending into these credit lines). And good luck passing a global bail out vehicle through the Frankenstein monster that is the US legislative body.

And the final nail why this move is completely irrelevant:

The IMF board of governors agreed December to roughly double quotas from around $375 billion to around $750 billion. But out of the 187 member countries, only 17 have legally accepted the increase, including Japan, the U.K. and Korea. Most of the countries with the biggest quotas, such as the U.S., China and Germany, haven’t yet gone through the legal process, such as parliamentary or congressional approval, need to hand over their promised dues.

Q.E.Dead

The precautionary Credit Line:

Precautionary Credit Line     The Precautionary Credit Line (PCL) has been established to provide effective crisis prevention to members with sound fundamentals, policies, and institutional policy frameworks that have no actual balance of payments need at the time of approval of the PCL, but moderate vulnerabilities that would not meet the FCL’s qualification standard. Members may request an arrangement with duration of between one and two years. Access under an arrangement with one-year duration shall not exceed 500 percent of quota, with the entire amount being made available upon approval of such arrangement and remaining available throughout the arrangement period subject to an interim six-monthly review. Access under an arrangement with a duration of more than one year shall not exceed 1000 percent of quota, with an initial amount not in excess of 500 percent being made available upon approval of the arrangement and the remaining amount being made available at the beginning of the second year of the arrangement subject to completion of the relevant six-monthly review. Purchases under PCL arrangements are repayable in 8 quarterly installments 3¼ – 5 years after disbursement.

And the Flexible Credit Line:

Flexible Credit Line     The Flexible Credit Line (FCL) has been established to allow members with very strong track records to access IMF resources based on pre-set qualification criteria to deal with all types of balance of payments problems. The FCL could be used both on a precautionary (crisis prevention) and nonprecautionary (crisis resolution) basis. Members may request either a one-year arrangement with no interim reviews, or a two-year arrangement with an interim review of qualification required after twelve months. Upon expiration, the Fund may approve additional FCL arrangements for
the member. Access is determined based on individual country financing needs and is not subject to a pre-set cap. Purchases under FCL arrangements are repayable in 8 quarterly installments 3¼ – 5 years after disbursement.

Source: IMF

ZeroHedge

“…. as a result of a clearing member default at CME Group”

Except….. now it appears that’s not true any more, right?

The “Trends Journal” says it has uncovered critical information that – in light of the MF Global bankruptcy – casts doubt on the fitness of CME Group to serve as a trustworthy derivatives and commodities exchange, and on the credibility of its Executive Chairman, Terence Duffy.

The “Trends Journal” says not only has the scandalous MF Global bankruptcy (the eighth-largest in US history) wreaked financial havoc on thousands of individuals, it has single-handedly destroyed faith in the commodity markets. CME’s reputation as the financial Rock of Gibraltar, upon which the commodity markets are anchored, has now been undermined. By its recent actions, CME’s claim of being committed to guaranteeing the transactions undertaken by its members has been called into question.

As recently as 2010, Terrence Duffy boasted, “No customer has ever lost a penny as a result of a clearing member default.”* Moreover, in the same press conference, Duffy stated unequivocally, “Since we are the guarantor of every transaction that happens in our markets, we have to guarantee the performance of each and every one of these contracts … To do this, we hold more than $100 billion of collateral to support the transactions that are being done on our markets.”

So let’s ask the question: What’s the truth and why should anyone be trading through an allegedly transparent “guarantor” of contracts when segregated customer funds wind up “missing”?

It is at times like this that we find out if the alleged transparency and exchange trading guarantees actually mean something.  I have long been a strong proponent of the regulated futures and options markets on the premise that even during severe events like 1987, 2000 and the 2008 crashes — even when the solvency of clearing members has been called into serious question (or they’ve failed outright!) nobody has gotten rooked as a consequence.

That is the function of a regulated and transparent exchange.  The regulation of margins and supervision of the cash that backs transactions and provides collateral against non-performance is the primary function of such an institution.

It is not clear at this point point exactly what happened with MF Global.  But this much is quite clear — the rapid transfer of open positions to other firms along with the cash margin deposits held on behalf of customers to guarantee trades did not happen in a reasonably-expeditious (like “right now”) basis when MF Global failed.  Some customers were forced to come up with a second margin deposit and if they were unable to do so their positions were forcibly liquidated.  Significant amounts of that margin money appear to have disappeared outright, despite the fact that it is the CME’s job to guarantee performance through the enforcement of margin deposits.  Indeed, they call these margin requirements performance bonds — because they are.

Well, if they were and are performance bonds then perhaps CME would like to explain why they did not demand a full accounting of them on a nightly basis from all clearing firms (including MF Global), how it is that MF Global managed to evade proving up their customer performance bonds, and why their failure to supervise the presence and legitimacy of these performance bonds should not fall on them.

If this alleged supervision and guarantee is in fact worthless then the role of a neutral “referee” that CME Group has asserted has been abdicated and there is no reason to believe that any transparency, any guarantee of fairness in execution is real or any alleged “performance bond” money actually exists.

Indeed, the entire purpose of CME’s existence has been rendered null and void by their own hand.

The entire premise of my endorsement of exchanges — and for forcing derivative contracts onto exchanges as a means of de-fanging the CDS monster — rests on the integrity of this performance bond process.  An exchange, due to the fact that it is paid a relatively small amount of money to handle each contract that passes through it, has a very strong incentive to make sure nobody is cheating and that all margin money is actually there because if they don’t they face losses that are radically outsized when compared to the fee they collect for facilitating the trade itself.

It appears, however, that in the MF Global case this supervisory function failed.  That’s bad.  What’s worse is that it appears CME Group has, at least thus far, successfully dodged taking responsibility for that failure and the apparent non-presence of alleged “performance bond” deposits that in fact disappeared.

There are only two possibilities: Either CME knew the alleged “performance bonds” were not present or they were tricked into believing they were present when they were not.

CME’s thus-far successful dodge of responsibility to make good on these alleged “performance bonds” that were not where they were represented to be makes a mockery of the premise that an underwater position is fully collateralized by the customer who has the losing position and thus the customer with the winning side of that trade will, with certainty, get paid.

That is the entire purpose of requiring margin deposits in the first place!

If we are to have actual regulated markets and a known safe place to trade where customer “performance bonds” actually mean something that must not occur.  If CME was either tricked or worse, allowed MF Global to close a single day’s trading book while the allegedly deposited customer performance bond funds were missing then CME must promptly make good on the missing funds as this is the premise on which a regulated exchange rests!

The literal existence of safe and sound markets is at stake here.  If CME successfully dodges  responsibility for failure to actually guarantee that performance bond funds are real and are where they are represented to be in each and every case then no end user, industry group or other person can reasonably believe that their trades are in fact “money good” anywhere on any United States exchange.

PERIOD.

Well, that’s not precisely the headline over at Business Insider, but I take exception to theirs; so, I fixed it for them.

ECONOMIST: Bernanke Is Going To End Up Bailout Out All Of Europe

Federal Reserve Chairman Ben Bernanke’s apologetic take on the Fed’s negative  role in causing the Great Depression may translate into a willingness to bail  out Europe, writes economics blogger James Pethokoukis.

Bernanke will not be willing to let the European Central Bank’s  ineffectiveness infect U.S. banks and destroy the global economy.

He points to statements from well-known independent economist Ed Yardeni to  elaborate on that idea:

Given the ECB’s reluctance to act, I suspect  that the Fed will spearhead the formation of a Global Liquidity Facility  (GLF) to avert a global financial meltdown. Fed Chairman Ben Bernanke  demonstrated that he is a master at putting together such emergency measures  back in 2008. In effect, it would act as the world’s central  bank. Mr. Bernanke is clearly very worried about the prospect that the  European sovereign debt crisis is a contagion that could spread to the US, as  evidenced by his bizarre town hall meeting with troops returning from Iraq on  November 10. The GLF would receive deposits from the Fed and other participating  central banks, including the ECB. The funds would be used to buy the bonds of  debt-challenged governments that would be required to accept strict supervision  of their fiscal and regulatory policies by the IMF.

Regardless of Bernanke’s avowed commitment to save the  United States from a repeat of the Great Depression, the political will to truly  prop up the rest of the world doesn’t seem to exist in the U.S.

If Congress is breathing down the Fed’s neck, just wait until the “U.S.  taxpayer” is absorbing the fiscal profligacy of Italy and Greece.

Here’s the problem:  Bernanke doesn’t HAVE anything with which to bailout Europe.  Yeah, yeah, he’s got his ‘printing press’ but you see, the thing doesn’t work without DEBT.  He can only fire that thing up when there is actual demand for debt.  Except no one can afford a loan.  No one wants a loan and no one is going to borrow in this economic depression.  So, Bennie’s printing press has a big old crow bar stuck in it.

So, what will he do?  What bankers have been doing since they came into existence.  Use the governments they control to force the taxpayers to supply the debt demand.  Since 99% of us cannot take on any  more debt, the government will do it for us.  They’ll just spend money they don’t have, creating more demand for debt, and the Federal Reserve, in its benevolence, will oblige and provide the loans.  More debt on the backs of the US taxpayer.  Thus my change in Business Insider’s headline.

One must understand that the Federal Reserve and its member banks (the primary dealers all private, for-profit, institutions), which are responsible for the creation of our money through demand for debt, are lending to our government, which in turn, allows our government to spend money it doesn’t have.  The reason that the private banks do this is because control of the government is how they can get to the taxpayer.   The taxpayer is an ‘infinite’ source for the payment of interest, even as the money for payment of that interest is never created.  In essence, the leverage, from their perspective, is unlmited.  The banks profit off of all Americans regardless of whether or not Americans personally borrow money.  This is why you see our US Treasury Secretaries working hand-in-hand with the Federal Reserve, which is completely contrary to the US Treasury Secretary’s job description, which is supposed to be to protect the assets (that would be the taxpayers) of the United States.

Bankers never intentionally lend at a loss.  Never.

We’re done folks.

CNBC reporting that there are now clients running out of the markets entirely because they do not believe their customer funds are safe.

That’s the end of it.  The belief that there are more MF Globals has now taken hold.  The thieves have pushed it too far and now we’ve got the start of a global liquidity run, and with good reason.

The authorities both in the regulatory side and on the prosecutorial side have reufsed to put a stop to the thievery and now the risk factors have turned into realized risk.

The market is done folks.  You can be right but if you make your bet in the markets, are right, and then get screwed anyway when someone steals the money and nobody goes to jail there comes a time when people begin to understand that it can happen to them and will unless they depart the market.

We’re there folks.

Oh sure, there will be rallies and there will be selloffs.  But there is no longer a market, there is no longer a thing to trade, and there is no longer a reason to believe that superior analysis will lead to profit or even safety.

This isn’t just about speculators – it is also about farmers, shippers, airlines, manufacturing concerns, everyone in business who has a need to hedge.

More than four years ago I said that the government had to step in and demand that both off-balance sheet games be ended permanently and in all forms and that all derivatives had to be put on an exchange, without exception, and that every dollar of underwater position had to be backed by an actual dollar of capital in real money, held and known to be safe.

The regulators refused and now it appears that what was put up on a regulated exchange was effectively stolen.

Well folks, then none of your investment accounts — not your IRA, 401k, not even your bank account — is safe.

Diversification is a strategy but the risk remains.  It is up to you to decide how much you’re willing to risk losing to a crook.  If the answer is “none” or you cannot reduce the at-risk portion of your assets to what you’re willing to lose to fraud then you can no longer participate in the market at all, in any form, nor even do business with a bank.

That sucks, but it is what it is and if this meme spreads — and it will until it’s stopped — we run the risk of a “sudden stop” economic event.

I hope you’re ready for it — I am to the best of my ability, and you ought to be.

Does anyone need any additional evidence that our political system is completely broken?  The bipartisan congressional supercommittee that was given two months to come up with at least $1.2 trillion in deficit cuts over the next decade has failed to reach an agreement.  It is an epic failure and a national embarrassment.  The truth is that they never even came close to an agreement.  In fact, as you will read below, the two sides on the panel have been barely even talking to each other.  In the end, the supercommittee was a super joke.  Meanwhile, the U.S. national debt has passed the 15 trillion dollar mark and we are facing trillion dollar deficits as far as the eye can see.  We are heading directly for a national financial disaster, and our “leaders” seem powerless to do anything about it.

According to the supercommittee’s rules, any plan would have had to have been submitted to the Congressional Budget Office by Monday in order to give the CBO 48 hours to analyze how much the plan would reduce budget deficits over the coming decade.

When the supercommittee was announced, it made headlines all over the world, but now it is ending with a whimper.

The supercommittee was never a good idea in the first place, but you would have thought that they could have come up with something over the course of two months.

But instead all they are giving us are a whole bunch of excuses and a whole lot of hot air.

What a joke.

Is it really that difficult to come up with $1.2 trillion in cuts over a decade?

It isn’t as if they would even be cutting very deeply.  $1.2 trillion in cuts would not even cut the budget by $150 billion a year.  We would still be talking about trillion dollar deficits way into the future.

But instead of agreeing to some token cuts, they have chosen to do nothing and to blame each other.

So now $1.2 trillion in “automatic budget cuts” will go into effect starting in 2013.  But even that $1.2 trillion figure contains a lot of “fuzzy math”.  For example, it includes $169 billion in “projected savings” from “reduced interest costs” on the national debt.

I would love to see how they came up with that figure.

In any event, the truth is that none of these numbers really matter at all.

Why?

None of the budget cuts go into effect until after the 2012 election.  That means that this Congress can vote to repeal the automatic cuts well before then.

Some in Congress are already pushing for this.  For example, U.S. Senator John McCain said the following recently….

“It’s something we passed. We can reverse it.”

Or, even more likely, once the new president and the new Congress are elected in 2012 they will almost certainly choose to abandon this agreement.

When it comes to politics, the only thing that matters is what happens before the next election.

All of this talk of future cuts is just an illusion.  When the next president and the next Congress come to power, they will want to do their own thing.

So after all of the huffing and puffing over the last couple of years, what has actually been accomplished as far as reducing our horrific budget deficits?

Not much at all.

We racked up a $1.3 trillion budget deficit during the fiscal year that just ended, and this fiscal year we will be somewhere in the same neighborhood.

We have been living in the greatest debt bubble in the history of the world, and at some point all of this is going to end very, very badly.

The total amount of debt in this country (government, business and consumer) has been rising much, much faster than our national income has.  If you don’t believe this, just check out this chart.

In particular, government debt is totally out of control.  When Barack Obama first took office, the national debt was 10.6 trillion dollars.

It is now over 15 trillion dollars.

We are in debt up to our eyeballs and we desperately need our leaders to do something about it.

But according to a recent Politico article, the members of the supercommittee haven’t even been talking to each other….

The supercommittee last met Nov. 1 – three weeks ago! It was a public hearing featuring a history lesson, “Overview of Previous Debt Proposals,” with Alan Simpson, Erskine Bowles, Pete Domenici and Alice Rivlin. The last PRIVATE meeting was Oct. 26. You might as well stop reading right there: The 12 members (6 House, 6 Senate; 6 R, 6 D) were never going to strike a bargain, grand or otherwise, if they weren’t talking to each other. Yes, we get that real deal-making occurs in small groups. But there never WAS a functioning supercommittee: There was Republican posturing and Democratic posturing, with some side conversations across the aisle.

Can you believe that?

Could it really be true that they have not met since November 1st?

Is Congress really that much of a joke?

According to Real Clear Politics, the approval rating for Congress is sitting at about 12 percent right now.

After this, it may get even lower.

Instead of working on a solution to our problems, the members of the supercommittee have been busy going on television and telling us who to blame.

The following is a short exceprt from a recent article in the Washington Post….

Republicans on the supercommittee held a conference call Saturday morning, and aides said members from both parties continued to talk by phone. But neither side was predicting a last-minute breakthrough. Instead, seven panel members booked appearances on the Sunday talk shows, as both sides readied their best arguments for why the other is at fault.

Our politicians are obsessed with finding someone else to blame and with getting ready for the next election.

Meanwhile, the ship is going down and people are starting to panic.

And this is not going to look good to the rest of the world at all.  There is a very real risk that one of the other major credit rating agencies will decide to downgrade U.S. debt.

The second downgrade of debt is often more important than the first.  When the first downgrade happened, U.S. debt still had a AAA rating from the other two major credit rating agencies.

But after another downgrade, the average credit rating of U.S. debt will be less than AAA.  That will mean that U.S. debt will no longer be a cash proxy.  A lot of transactions that take place right now in the financial world would not be able to happen if that takes place.

So what do our leaders need to do?

Well, the truth is that we should recognize that they are in a really, really tough position.  Decades of nightmarish decisions have left us out of good options under our current financial system.

The reality is that members of Congress are damned if they do and they are damned if they don’t.

This is what I mean – if we don’t deal with our national debt now, everyone agrees that a massive day of reckoning is coming down the road.  Greece is an example of what happens when debt catches up with a nation.

However, if we did cut the federal budget very deeply right now, it would almost certainly bring on a huge economic contraction.

Right now, insane federal spending is one of the only things keeping this economy afloat.  If you were to suddenly pull half a trillion dollars (or more) of federal spending out of the economy, it would have a devastating impact.

A lot of people out there correctly argue for a huge reduction in federal spending, but they greatly underestimate the amount of pain that it would cause.

Let there be no doubt, all of this federal debt has enabled us to enjoy a “false prosperity” for several decades, and when we dramatically cut back on spending a lot of that “false prosperity” is going to disappear.

Our “real economy” is rapidly being gutted and America is becoming poorer as a nation every single day.  One way that we have been making up the difference is by going into almost unbelievable amounts of government debt.  When the government debt bubble pops, the pain is going to be enormous.

If you do not believe this right now, you will believe it soon enough.

Not that we should keep going into huge amounts of debt.

Every dollar that we “borrow” is actually being stolen from our children and our grandchildren.

In fact, that is what Thomas Jefferson believed.  According to Jefferson, when the federal government borrows money in one generation which must be paid back by future generations it is equivalent to stealing….

And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

We have got to stop stealing from future generations.  If they get the chance, they will curse us for what we have done to them.

Anyone out there that supports our current system of running endless budget deficits is supporting a horrific crime against our children and our grandchildren.

But once again, we all need to clearly understand that when the borrowed money stops flowing out of Washington D.C., our economy is going to get much worse.

Are you prepared for the unemployment rate to double?

Are you prepared for foreclosures to soar to unprecedented heights?

Are you prepared for economic pain unlike anything you have ever seen before?

According to the New York Times, there are 100 million Americans that are either living in poverty or that are considered to be among the “near poor” right now.

So how bad will things get if we plunge into a depression?

Anyone that believes that we can drastically cut the federal budget and improve the economy at the same time under our current system is not being rational.

Just look at what is happening to Greece.  They implemented substantial budget cuts (although not nearly big enough to bring them to a balanced budget) and they have plunged into a nightmarish economic depression.

Right now, we are in a position where we are going to experience a horrific amount of pain whatever we do.  If we keep piling up debt at this rate we will experience a nightmare, but if we pop the debt bubble and try to live within our means we will also experience a nightmare.

There is a way out of this, but our politicians are not talking about it.  As I have written about previously, if the federal government abolishes the Federal Reserve and starts issuing debt-free money, we could eliminate our federal budget deficits, cut taxes and improve the economy all at the same time.

But nobody is even talking about debt-free money.

Instead, all of our politicians are talking about “fixing” the current system.

Well, let me tell you, it is impossible to solve our problems under the current system.  If we insist on maintaining our current debt-based financial system, it will only end in a massive amount of pain.

The American people need to get educated about our financial system.  They need to learn that the Federal Reserve and the debt-based currency that they issue are at the very heart of our economic problems.

Back in 1913, prior to the passage of the Federal Reserve Act, the national debt was only about $2.9 billion.

Today, our national debt is over 5000 times larger.

Debt-based central banking is a perpetual debt machine.  It is at the heart of our financial problems and it is also at the heart of the financial problems that Europe is experiencing.

Unfortunately, the American people don’t understand this, and there are virtually no politicians out there that are even talking about this.

Very dark days are ahead for America.

You had better get prepared.

The Economic Collapse