Jeff Nielson's  Instablog

In the make-believe world of U.S. “business news” reporting, we are currently witnessing a sham of epic proportions. The lame-duck, U.S. dollar has bounced up by 5% - based completely on the false assertion being spread by the U.S. (and British) media that the European Union is currently experiencing worse fiscal stresses than the hopelessly insolvent U.S. economy.

The latest farce began with U.S. propagandists jumping on news of Greece's fiscal stress to grossly exaggerate the significance of this news – suggesting it could literally tear the EU apart. GEAP, the fine European web-site which was one of the few news sources to correctly anticipate the bursting of the U.S. housing bubble, and the collapse of the U.S. economy had this to say about the efforts of U.S. propagandists:

“...this news was not based upon anything credible and that it was only a deliberate attempt on the part of Wall Street and the City [i.e. London] to create the belief of a crack in the EU and instill the idea of deadly risk weighing on the Eurozone, in continually publishing false stories on the banking risk from Eastern Europe and trying to stigmatize a Eurozone cowardness [sic] compared to American or British willful measures.”

GEAP went on to point out two important (and obvious) factors which made it obvious the news item was being blown completely out of proportion. To start with, Greece's dysfunctional fiscal policies date all the way back to its admission to the EU in 1982 – so there is nothing new here. The second and more important observation is that Greek GDP represents less than 2% of total EU GDP.

In other words, the hatchet-job done by American and British “news” sources is the equivalent of a European publication claiming that fiscal problems in the state the size of Oregon could totally destabilize the entire U.S. economy. GEAP prefers to compare Greece to California.

With the Californian economy representing 12% (or1/8^th ) of total U.S. GDP), and teetering on the verge of bankruptcy, there has been far less talk of California's problems leading to an economic collapse, or even a disintegration of the United States than the exaggerated clamor over Greece.

However, perhaps the best pairing with which to compare the current plight of Greece is with a 'Third World' economy, where unemployment among adult males was recently estimated at about 50%: the state of Michigan. Even after the collapse of its economy, it still represents a larger share of U.S. GDP (over 2%) than Greece represents compared to the EU.

Has anyone heard any estimates of 50% unemployment among Greek, adult males?

Furthermore, the Michigan economy has always been a one-industry economy (the auto sector), with most of that industry now only been kept alive through government “life-support”. Greece's economy has no similar vulnerability.

Today, a Goldman Sachs talking-head added a new prong of attack to this smear campaign: Spain. Clearly, Spain is a deeply troubled economy. With arguably Europe's most-extreme housing bubble, and an economy that had become nearly completely dependent on housing sector growth, there is obviously plenty to criticize. However, once again American hypocrites are leaping at the opportunity to undermine Europe, while ignoring their own “back yard”.

“If you start having serious problems credit-wise with the likes of Spain, then the issue for the euro's credibility and its pricing against other currencies becomes a much bigger issue,” pronounced Goldman Sachs “chief economist” Jim O'Neill.

Yes, Spain's housing bubble was almost as extreme as California's housing bubble. As people must surely remember, Californian operated without a budget for two months this year – as state legislators grappled to close a $20 billion funding-gap – and only part of the $80 BILLION in new debt taken on by California in 2009, alone.

In contrast, Spain's government issued a total of $120 billion in new sovereign debt in 2009. There are two big reasons why Spain's larger issuance of debt is a smaller concern than California's enormous shortfall. First of all, Spain is a national government – responsible for many, major funding obligations (such as national defense) which mere states or provinces do not have to cover. Secondly, as a national government, Spain has a printing press (although admittedly its use of its printing press is constrained by the euro). California does not - but that hasn't prevented Governor Schwarzenegger from trying to “print money” (in the form of those dubious “revenue anticipation warrants” and the state's IOU's).

However, refusing to allow facts to get in his way, O'Neill continues. “The really important thing for the broader issue is whether we're going to see a cascading game, where Greece loses another notch...and the market just starts going after Spain and Portugal.”

Another American “domino theory”. Gee, I haven't heard one of those for a few weeks.

Of course when it comes to teetering dominoes, clearly it is the U.S. which is already set up for a “cascading game”. It was only a few weeks ago when it was divulged that ten U.S. states are already experiencing acute fiscal crises. In addition to California and Michigan; Arizona, Florida, Illinois, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are all facing their own financial Armageddons.

Meanwhile, as U.S. banking oligarchs are set to pay themselves record “bonuses” exceeding $30 billion, both the city and the state of New York openly discuss their own battles against bankruptcy – yet New York doesn't even crack the top-10, U.S. fiscal doomsday list. More than half of these states are major cogs in the U.S. economy, rather than merely “bit players” like Greece is to the EU.

Only two U.S. states are described as “fiscally solvent” and able to “meet their 2010 budgets”: Montana and North Dakota. Call me a “skeptic” but I strongly doubt that these two 'economic juggernauts' can prop-up the U.S. economy by themselves.

Given that the U.S.'s fiscal catastrophe is far more severe than that experienced by Europe (either by comparing individual states, or collectively), this begs the question: why has this flimsy propaganda campaign been so successful?

The answer is obvious: EU officials are extremely grateful for this U.S. hatchet-job. Only a few weeks ago, with the U.S. dollar in free-fall, with nothing to prevent a further steep decline, and the euro already trading at $1.50US, leaders in the EU were frantically searching for some means to weaken their currency.

At the same time, the U.S. government was equally desperate in attempting to stop the dollar's collapse. The result: a lie “made in heaven”.

Concurrently, the rise in the (temporarily) less-weak dollar has also resulted in a correction of more than 10% in the prices of both gold and silver. Again, the buyers in this market are only too happy to allow U.S. smears to bring the price of these metals down to a much more favorable buying-level.

While current, U.S. machinations suit the interests of almost everyone (those of us holding precious metals are not amused), clearly this current scheme will not be allowed to continue. To begin with, while a weaker euro is strongly desired by many of Europe's individual, member nations, wild swings from one extreme to another are not conducive to stable economies.

I suspect that once the euro gets within sight of the $1.40-level versus the dollar that this current propaganda campaign will be terminated. This is in the interests of both the EU and U.S. As I have pointed out on many occasions, with $60 trillion in current public/private debt, and an additional $70 trillion or so in “unfunded liabilities”, the only way for the U.S. to delay national default for any significant period of time is to dilute the value of the U.S. dollar down to a real-dollar level where it can continue to service these massive debts for a few more years.

In addition, buyers in the gold market (led by China) are probably comfortable renewing their accumulation of large-scale buying – at, or perhaps slightly below current prices. Even after this 10% correction, the price of gold is still higher than when the government of India jumped into the market (in a big way) with the purchase of 200 tons of IMF gold.

With the thin trading in markets at year-end, bizarre moves which have little to no connection with fundamentals are not uncommon. In this instance however, there was nothing random or fickle about current moves. This was totally and exclusively the work of the U.S./U.K banking cabal – and their servants in government and media. Anyone proclaiming that these recent currency moves are suggestive of any king of long- or medium-term trend is going to look extremely foolish in a couple of weeks – given it does not suit anyone's interests for this current manipulation to continue.

[Disclosure: I hold no position in Goldman Sachs]

With Friday's latest salvage operation – this one involving six zombie-banks – this brought the number of U.S. banks buried by the FDIC so far in 2009 to 140. With roughly ten days remaining in the year, the final tally of U.S. bank-failures is on pace to reach 144 for 2009, or a “gross”. This is a fitting number of failures for a sector which is still overflowing with the unburied dead.

As we hover on the brink of a New Year, one fact is painfully obvious: 2010 will be a much worse year for U.S. banks than 2009. The reasons for the continued decay of this sector are numerous, so I hope readers will forgive me if I inadvertently omit a few of those factors.

The over-arching basis for the continued disintegration of the U.S. financial sector is the relentless downward spiral of the U.S. economy. Yes, I know: the U.S. economy is supposedly “growing”. However, once the rhetoric and fraudulent statistics are subtracted from this picture the truth is painfully clear.

The U.S. is a consumer-economy, where the consumers aren't consuming. The U.S. is a credit-based economy – dependent on its economic growth for the last 30 years on ever-expanding credit – which is currently seeing available credit shrink every month. U.S. employers aren't hiring, after the largest/fastest disgorgement of workers in the United States in more than 70 years. With its consumer-economy populated by consumers with no jobs, no savings, and no credit, it is obvious that the U.S. economy can't grow. Statements (or “statistics”) to the contrary are merely the relentless brainwashing of the U.S. propaganda-machine.

In a consumer economy based upon credit, the health of the financial sector should be the least of the U.S.'s worries. Financing the world's most reckless consumers has always been an extremely lucrative proposition for American banks. Therefore, with this economy supposedly returning to “growth”, the health of U.S. banks should be automatic – especially given the new, fraudulent accounting rules in the U.S., which allow banks to bury losses in their books essentially forever.

However, even being able to hide all their losses, and being able to “borrow” infinite amounts of money at 0%, the collapse of this sector is steadily accelerating. By mid-year, U.S. bank failures had accelerated to 10 per month. By the three-quarter mark, that number had risen to an average of 11 per month, and by the time the year ends, that average will have moved up to 12 per month.

The 'gross' number of failures does not begin to describe the sickly state of U.S. banks. Jim Sinclair had some very interesting observations on his own site about this trend of ever-increasing decay. It was pointed out there that when U.S. banks began failing in this current cycle that the FDIC was eating losses which averaged about 5% of the bank's deposit base, while recent failures have been causing losses for the FDIC of closer to 25% - a quintupling of losses on each and every failed institution.

In other words, not only is the rate of U.S. bank-failures steadily accelerating, but the banks being put out of their misery by the FDIC are roughly five times less-healthy than when this financial catastrophe commenced. Clearly, the fraudulent accounting rules approved by the Financial Accounting Standards Board were not enacted solely to allow Wall Street oligarchs to pretend to be “profitable”, but also to allow the thousands of U.S. zombie-banks the ability to retain a veneer of “solvency” - allowing the FDIC to stretch-out these rescue operations over many years, rather than being forced to wind down 500 or 1,000 banks this year alone.

The FDIC salvage operations also provide additional evidence that U.S. bank-failures are just getting started, as opposed to reaching any sort of peak. To begin with, despite assuming ever-larger losses on these banks (and a “growing” economy), the FDIC is having more difficulty finding buyers for these corpses – not less. Two more failed institutions failed to find any buyers, this week alone.

However, perhaps the most blatant indicator that the U.S. banking sector will continue to deteriorate next year (and for many years to come) was the nature of the banking business for one of those two “orphans”. The FDIC failed to find a buyer for Independent Bankers' Bank. IBB was not a standard bank, but was rather a “bank for other banks” - which handled banking services on behalf of other institutions such as cheque-clearing and credit card operations.

In other words, IBB was actually a clerk for other banks – assuming the function of performing much of the “paper work” of the daily operations for other U.S. banks. The fact that this institution could not attract a buyer, despite the ever more-lucrative deals which the FDIC is offering to those who cannibalize these corpses says a great deal about the health of the U.S. financial sector.

When there simply aren't enough banking transactions taking place for a subsidized buyer to be willing to take on the operations of IBB, we know what 2010 is going to look like: much like 2009 – but worse. While the quantity of business being handled by U.S. banks continues to erode at a sickening rate, the quality of their “assets” is still more disturbing.

Delinquency and default rates continue to remain at or near all-time, record-highs for every category of personal debt: mortgages, credit-card balances, auto loans, etc. Meanwhile, in 2009, the commercial banking sector began to rapidly catch-up to the collapse in the various categories of personal debt.

The combination of a 40% collapse in property values and many years of “extend and pretend” debt roll-overs means that the devastation in this branch of the banking business will almost certainly be more severe (in percentage terms) than the catastrophic losses which U.S. banks have only begun to account for in their personal banking business.

There is absolutely nothing in place in the U.S. economy to stop this collapse from worsening (let alone actually reverse it). U.S. corporations will not be hiring in 2010. U.S. banks will certainly not be expanding their lending – given that they are bracing for the next down-leg in the U.S. housing market, which will commence no later than the spring of next year. This is when the next spike in mortgage resets takes place in the U.S. housing market.

This spike in resets will not only last for at least two years, but the largest component of those resetting mortgages are the infamous “option-ARM” mortgages – where most of those borrowers have been making only minimum payments (which don't/didn't even cover the accruing interest). With countless millions of U.S. homes in the “foreclosure pipeline” (and more than 20 million homes already sitting empty), the next down-leg promises to be at least as nasty as the first collapse – and very possibly worse.

In short, just as there are absolutely no fundamentals or dynamics to halt the collapse of the broader, U.S. economy, there are similarly no factors in existence which would/could halt the continued collapse of the U.S. financial sector. There can be no “rabbits pulled out of a hat” next year. U.S banks have already been given every possible means to hide their insolvency – so there will be no “miracle” as occurred this April, when the insolvent U.S. banking oligarchies suddenly became “profitable” again over-night (thanks to new accounting rules).

Instead, when April 2010 rolls around, we should expect this to be the likely date when U.S. banker-oligarchs begin their campaign for a new round of bail-outs/hand-outs. Given that the Obama regime continues to do its best to not only ignore, but to hide the suffering of the American people (with phony statistics), it is little wonder that the number of Wall Street oligarchs carrying weapons for their own protection has soared in recent months.

There is nothing simple or straightforward about arriving at a consensus on a binding and effective international agreement on limiting “greenhouse” gas emissions. Targets/limits cannot be assigned by simply requiring all economies to adhere to the (proportionally) same limits on greenhouse gases.

This is true whether nations are compared as polluters based upon population-size or based upon economy-size. The problem with attempting to assign quotas based upon a rigid, per-capita formula is that the world's nations have different levels of industrialization and different kinds of industrialization.

Some poorer nations have very large populations, but little industrialization. Requiring a major polluter, but highly-industrialized economy like the United States to adhere to the same per capita limits on greenhouse gases as a country like Bangladesh would obviously be punitive toward the U.S.

Conversely, imposing quotas based upon the size of an economy is at least as problematic – for many reasons. To begin with, developing countries with growing levels of industrialization are adamant that they must not be held to the same standard as already-developed industrialized nations. The reason for this position is clear: current pollution problems were caused primarily by the development of the first industrialized economies – primarily Europe and North America.

Thus, developing countries rightly argue that they should not have to sacrifice their own economic development, to pay the price for pollution caused by those earlier developers. In the case of Asian developing economies, there is a further dynamic at play: the dismantling of the U.S. industrial base, and its relocation in Asia.

Here, China (in particular) argues that countries like the U.S. want to “have their cake and eat it, too”. Not only did the U.S. export most of its “dirtier”, lower-tech manufacturing to China, but U.S. corporations that did this are reaping windfalls from cheap Chinese labour. Forcing China to “clean up” this dirty manufacturing would either force China to cease much of this manufacturing activity, or drive down the already-low wages of Chinese workers – to allow these companies the financial resources to modify these manufacturing processes.

At the same time, with China having already leaped into “first place” among the producers of greenhouse gases, the rest of the world (and China, itself) can't simply give China a “free pass” for the next 40 or 50 years – until it feels wealthy enough to address its pollution problems.

Compounding all these dynamics even further are the differing fiscal situations of the countries sitting around the negotiating table. Many developed countries have allowed their economies to be so badly ravaged by their bankers (the U.S. and U.K. immediately come to mind) that they lack any economic resources to devote to this problem. Barack Obama can talk about throwing around “$100 billion” to help developing countries reduce their emissions - but by the time other countries actually received those funds there may be very little difference between a U.S. dollar and the Zimbabwe dollar.

What other countries want from the U.S. are not “bribes” with Federal Reserve, Monopoly-money but substantive changes within the U.S. economy. Once again, the U.S. government is trapped by its own lies. It continues to pretend it has a wealthy economy, which is steadily healing from last year's collapse.

The truth is that the U.S. is actually a very poor country (with respect to cash-flow), and its economy continues to shrink – not grow. However, by pretending that it is much healthier than it is, in economic terms, it creates greater expectations from other nations for the U.S. to reduce its own, massive levels of emissions. The fact that much of those emissions are derived from building and maintaining the U.S.'s gigantic war-machine only makes other nations even more adamant that the U.S. curb its excessive levels of greenhouse emissions. If the U.S. can't/won't reduce the massive “carbon footprint” created by its military, then it clearly should target the huge amounts of power-generation which it continues to produce through “dirty”, coal-powered plants.

However, among all the intricacies and competing agendas of the different nations, there is probably no country with a more complex role in global warming than Canada. On the one hand, Canada is clearly an “industrialized” nation. On the other hand, as one of the newest industrialized nations (but still well beyond the “developing” economies), Canada was not producing massive amounts of greenhouse gases in the 19^th or even 20^th century. With newer industries, and less “heavy industry” than countries like the U.S., U.K. and Germany, Canada was previously not a heavy polluter.

This has dramatically changed in recent years, however. Canada has suddenly become one of the world's largest producers of greenhouse gases (on a per capita basis) – and this entire turn-around can be summed-up in a single phrase: “tar sands”. The “heavy oil” in Alberta's tar sands is one of the world's largest remaining, known reserves of oil. Developing this source of production is an extremely dirty business, and producing that oil is equally damaging from an ecological standpoint.

Indeed, Canada has just won “awards” for being the “Fossil of the Day”. Yet, while Canada is clearly a nation that can and should do more to curb its own behavior, it is understandable why past and current Canadian governments have been unwilling to embrace simplistic formulas for assigning emission targets. In addition to Canada developing the tar sands as a major energy source for the world, Canada is the world's second-largest nation, with one of the world's most frigid climates.

These two factors have a significant impact on Canada's “carbon footprint”. The vast distances which Canadian travelers must cover in moving from one region to another means Canada will always have somewhat larger energy needs (on a proportional basis) for transportation. This can (and should) be mitigated by greater reliance on “clean” transportation. However, providing the infrastructure necessary to modify transportation comes with a huge price-tag and is an area of change which requires a long time-horizon.

Energy needs for heating are clearly another factor where Canada faces parameters grossly different from most of the rest of the world's population. Thus, when it comes to other nations demanding more concessions from Canada, the obvious response is “O.K., we'll shut down the tar sands projects.”

Obviously this is not a serious alternative for either Canada or the rest of the world. An oil-starved planet needs the tar sands production – as an energy “stop-gap” which will hopefully help the world meet its energy demands until cleaner forms of energy (on a very large scale) are able to replace those needs. Thus, reducing Canadian emissions to what the rest of the world would like to see could only be accomplished (over the short term) by living in frigid homes.

Putting all this together, the enormous difficulty in reaching a meaningful global accord on curbing climate change is that it is impossible to reach a deal based upon “equity” - since treating all nations the same would be extremely punitive to some nations, and politically unachievable for others.

Real progress will only come when the individual differences between nations are both understood and respected, and when the major “players” commit themselves to firm targets and honest representations of their own economies. Lastly, since real progress will require some level of sacrifice by most of the global population, we will probably know that we have come to a fair and workable framework when no one is happy with their own obligations under that agreement.

This means “selling” unpopular terms to the domestic populations which these politicians represent, which, in turn means demonstrating real “leadership”. In other words, achieving the consensus necessary to avoid the catastrophic consequences of melting polar ice caps, rising sea levels, and extreme weather phenomena remains a “long shot”.