Currency and credit report for the week ending February 17, 2012
1) … The USD/JPY traded up this week; Japan Shares traded up on surprise BOJ liquidity operation; and the LTRO rally took emerging market infrasturcture, EMIF, US business services and small cap value shares, RZV, and Chinese real estate, TAO, to new heights.
Bloomberg reports "Japan's economy shrank an annualized 2.3% in the fourth quarter, more than economists estimated, as slumping exports undermine a recovery from last year's record earthquake."
Bloomberg reports "Japan's central bank unexpectedly added 10 trillion yen ($128bn) to an asset-purchase program and set an inflation goal after an economic slide fueled criticism it has been slower to act than counterparts. An asset fund increased to 30 trillion yen, with a credit lending program staying at 35 trillion yen… The BOJ also said that it will target 1% inflation 'for the time being.' Stocks rose and the yen weakened against the dollar as the central bank expanded stimulus for the first time since October to revive an economy that shrank an annualized 2.3% last quarter."
Bloomberg reports "Bank of Japan Governor Masaaki Shirakawa said that setting an inflation objective was a better policy option for Japan than following the Federal Reserve in crafting a time-frame for the end of policy stimulus. While the Fed pledged to keep exceptionally low rates through late 2014, it 'holds significant reservations with regard to such anticipation being subject to change depending on economic and price outlooks,' Shirakawa said… 'We judged it's more effective and credible to set an inflation goal rather than specifying the timing of an exit as Japan faces high uncertainties for the outlook of the economy and prices,' he said…"
The chart of the USD/JPY shows its trade higher; its inverse, JYN, traded lower. Kubota, KUB, traded vertically higher, with Japan, EWJ, rising parabolically higher, as the Bank of Japan announced a liquidity operation.
Bloomberg reports on terrific credit expansion "Brazilian state-controlled banks are boosting credit four times faster than non-government lenders, making it harder for policy makers to lower interest rates while meeting the country's inflation target. Government-run banks including Banco do Brasil SA and Caixa Economica Federal, which accounted for almost half of all lending in December, boosted credit by 4% that month, compared with 1% for non-state lenders."
The Finviz ETF report communicates energy and emerging market infrastructure rose on LTRO neo liberal finance
INXX 6.6, led by SLT, TTM,
EWZS 4.8 led by GFA
BRXX 4.2, led by FBR, SBS, CPL
RSX 3.8, led bySNX
ERUS 3.2 led by MBT
EWD 3.2 led by VIP
RZV 2.3 led by SNX
2) … Credit for airline deals is currently guaranteed by the US Government; this stimulates sales at Boeing.
Reuters reports U.S. Loan Guarantees Part Of Lion Air Deal For Boeing Jets
How do you stump up the money for a $22 billion aircraft deal? The case of Indonesia's Lion Air, which signed a record order with Boeing this week, is typical of many mega-aircraft deals: with a little help from the taxpayer.
The U.S. government is offering loan guarantees to help the low-cost carrier buy 230 jets, under a system operating on both sides of the Atlantic to promote exports of strategic goods such as the jetliners built by Boeing or rival Airbus. In theory, it means U.S. taxpayers could pick up part of the tab if the deal falls through.
Bankers and officials involved in such transactions say experience suggests this is unlikely to happen, or any losses could be recouped by recovering assets.
Indonesian entrepreneur and Lion Air co-founder Rusdi Kirana blazed a trail at the Singapore Air Show, signing deals for 259 aircraft worth $23 billion this week, including Boeing and Hawker Beechcraft jets and European ATR turboprops.
The three-day splurge left some wondering how an airline little known internationally, and banned in Europe over safety concerns, could afford to pay for the planes.
Similar questions swirled in 2005 when Lion Air placed what was then considered a huge order for 60 aircraft. This has since propelled it to become Indonesia's top domestic airline.
A senior U.S. official familiar with the deal dismissed concerns about the airline's ability to pay.
"We believe Lion Air has a good business model and a management team that is successfully implementing it," Robert Morin, vice-president of the transportation division at the Ex-Im Bank, told Reuters.
"Rusdi Kirana won't have trouble financing Lion Air's new big order because the deliveries are stretched over several years and he will probably tap a variety of sources of financing."
The methods cannot be verified in detail, because Lion Air has declined to open up its finances. U.S. airlines says deals involving U.S. backing should be more transparent.
"We are the custodians of U.S. taxpayers' money and we take that role very seriously," Morin said. "Rest assured, Ex-Im Bank does its homework."
In practice, industry sources say only a fraction of the $22 billion touted for the Boeing deal will be paid any time soon.
So how does it work?
It is no secret that airlines often get discounts. But Boeing and Airbus never comment on them and buyers are sworn to secrecy over their deals, so their size is hard to determine.
Classified documents released by WikiLeaks gave glimpses of aircraft deals as seen by U.S. diplomats, and spoke of discounts as high as 50 percent, though industry sources dismiss this.
Lion Air can expect a hefty discount for two reasons: it has placed the largest commercial order ever received by Boeing and it is a launch customer for the revamped Boeing 737 MAX 9.
On the other hand, airline industry sources say, launch pricing can mean airlines get a less generous support package.
One person familiar with industry practices speculated the discount for part of the Lion Air order could reach 40 percent, but acknowledged the real amount was anyone's guess.
Buy Now Pay Later
Airlines mainly pay for aircraft when they take delivery, not when they order them. Deliveries won't start until 2017.
By the time the later planes are delivered, some of the previously ordered ones may be coming up for retirement, which means they can be parked, scrapped or sold, potentially releasing equity to go back into the purchase of later planes.
Kirana said he would take delivery of 30-40 planes a year.
Initially, all Lion Air is likely to have to pay is a deposit to secure slots on the production line in Renton, Wash.
Deposits are typically 5 percent or more, experts say.
Pre Payment Deliveries
Airlines have to make further down payments as the clock ticks down to delivery, especially from about 24 months out.
However, some banks offer financing products even for these "pre-delivery payments" (PDPs).
By delivery day, an airline has typically paid 20 percent of the aircraft's net value but this can be as high as 50 percent.
Since they eat into cash flow, PDPs are an important item for the health of an airline. "More than one airline has gone bankrupt just because of PDPs," an industry banker said.
Each aircraft is fully paid for on delivery.
Usually airlines have financing in place for some 80 percent of the price. Some sell the aircraft simultaneously to a leasing company and rent it back, a process called sale-and-leaseback.
Others take a commercial loan or go to the capital markets, but the latter option is little used outside the U.S.
Export Import Credit Financing
Many commercial loans are backed by guarantees given by Ex-Im bank, France's Coface and others. Ex-Im Bank covered about half the fleet already ordered by Lion Air, and is expected to step up for a similar proportion of the new deal.
The agency rarely loans from its own balance sheet. It issues a guarantee against which commercial banks lend funds. It charges for the guarantee and says it has only lost on one deal.
The cost of such finance is rising after a pact between Organisation for Economic Co-operation Development (OECD) member countries last year. The agency typically guarantees up to 85 percent of the value of the U.S. content of the aircraft
Helen Cooper of the NYT reports On Boeing's Stage Obama Pushes Exports, President Obama, wrapping himself in one of the country's most glamorous exports, Boeing's new 787 Dreamliner, vowed on Friday to boost government help for American companies seeking to sell their goods overseas.
I want us to sell stuff," Mr. Obama said as he finished a trip to the West Coast, calling on Congress to continue supporting export financing agencies and announcing an array of plans aimed at helping manufacturers.
As this is an election year, Mr. Obama went for the ultimate photo op, using the spectacle of a new United Airlines Dreamliner as his backdrop to ask Congress not to cut financing for the Export-Import Bank, the American export credit agency.
The event exceeded the standards of the usual presidential factory tour. Boeing's plant here, Mr. Obama said, is the biggest building in the world, and the president seemed to delight in his tour of the new plane, marveling at windows that tint turquoise at the touch of a button.
Mr. Obama even struck a nostalgic chord, telling workers that the plane he arrived on - Air Force One - was made at this Boeing plant 25 years ago. "One of the guys I met on the tour worked on the plane," Mr. Obama said. "I told him he did a pretty good job. It's flying smooth."
For Mr. Obama, export growth is one area where he can point to success. Two years ago, he said in his State of the Union speech that he would work to double United States exports in five years, an announcement that sparked incredulity among trade economists. At the time, Mr. Obama had yet to articulate a trade policy.
Since then, the president's goal seems less pie-in-the-sky, thanks in part to, of all countries, China. While China still serves as a foil for American politicians who want to talk about unfair trade practices and to score points with labor unions and manufacturing companies simultaneously, the reality is that China's economic growth - and the ascendance of its middle class - have enlarged the market there for American goods. United States exports last year hit record levels, buoyed by export growth to China, the Commerce Department reported.
The Obama administration has had some success in its efforts to pressure the Chinese government to allow its currency to appreciate; administration officials took up the issue again this week, when China's presumed next leader, Vice President Xi Jinping, was in Washington.
The president lavished praise on Boeing during his visit for helping to lead American export growth. But the White House also carefully calibrated the optics of the trip, choosing to visit a unionized Boeing plant in Washington State just a few months after the National Labor Relations Board dropped a lawsuit against Boeing over complaints that it built a nonunion plant in South Carolina to retaliate against the union in Washington State for strikes.
The case was dropped after the machinists' union approved a contract extension with Boeing, but the issue has been trumpeted on the Republican presidential campaign trail as an example of the government - and Mr. Obama - trying to beat up Boeing. A spokesman for Boeing said there was no connection between the dropped labor complaint and Friday's visit by the president.
Labor leaders were buoyed by Mr. Obama's visit, interpreting it as a sign of presidential support. During his remarks, the president steered clear of the labor-management fight, filling his visit with oratory about Boeing, and its new 787, as the perfect example of American ingenuity. But he also managed to entwine his remarks with homages to American workers.
"In December 2009, the first Dreamliner took off on its maiden flight right here in Everett," Mr. Obama said. "It was a cold and windy day, but that didn't stop more than 13,000 employees from coming out to see the product of all their hard work finally take to the skies."
He spoke of one Boeing worker, Sharon O'Hara, who was there, and who was in the audience on Friday, and quoted her as saying: "I had goose bumps and tears. We said we would do it and we did."
Mr. Obama concluded: "You said you would do it, and you did. That's what we do as Americans."
3) … In the soon coming currency depleted and credit evaporated world, regional global governance will change the nature of credit; credit will come through diktat as regional stakeholders work with monetary cardinals and the monetary pope, to finance industry critical to the region's security and stability.
Mike Mish Shedlock reports a Germany draws up plans for Greece to leave the Euro. What's likely early next week is a debt swap in which the ECB gets new bonds guaranteed in Euros, then immediately transferred to the EFSF making the ECB whole. Some relatively short time later, the Troika will refuse to lend more money to Greece forcing Greece to go back on the Drachma
Ambrose Evans Pritchard writes just as Greece complies at last, Europe pulls the plug.
Nick Beams writes Euro zone ministers tighten screws on Greece
Christopher Brooker writes The European project is splitting apart at the very core. A gulf is growing between France and Germany over the future of the eurozone. What makes this moment so significant is not just that the disintegration of the eurozone will be by far the most serious check to the hitherto seemingly irresistible drive for "ever closer union", but that it marks the rending apart of that Franco-German alliance which has been seen, ever since the Elysee Treaty of 1963, as the central "motor" of European integration. As the slow-motion crisis inches towards breaking point, France and the European institutions are on one side of an unbridgeable divide, and Germany and its increasingly restive people on the other. The latter see that the gamble of the euro has failed just as dismally as the Bundesbank had warned it would back in the 1980s, before being ruthlessly outmanoeuvred by Jacques Delors and Helmut Kohl.
Anna White of The Telegraph reports Greek rescue threatens eurozone structure. European leaders are working through the weekend to finalise the details of a second €130bn (£108bn) bail-out package for Greece, ahead of a key meeting on Monday. A conference call is expected to be held on Sunday by finance ministry officials from the 17 eurozone countries. If the package is adopted, Greece's finances will be placed under stringent watch to ensure it delivers deep cuts and meets loan requirements. The respected Ernst & Young ITEM Club said: "This could be the template for a future European fiscal union." Marie Diron, economic advisor to the ITEM Club, said: "In practice countries will watch closely over the finances of others, ensure laws are passed and implemented, and corrective measures can be taken to avoid future debt contagion between member states."
Ms White continues, Chancellor Merkel's government indicated its determination to avoid separating the timetable of the aid from the writedown of Greek debt to private bondholders, and agree to the deal as one package. Greece's cabinet approved a final set of austerity measures yesterday ahead of a key deadline on March 20 when the debt-laden country must pay €14.5bn or trigger sovereign insolvency. A government official said the cabinet had agreed to launch a debt swap for private creditors by March 8 with the aim of completing it by March 11. The swap is intended to accompany the rescue deal and will mean creditors take a 70pc cut in the real value of their holdings. The sands of time run out on March 20 when debt-laden Greece must pay €14.5bn or trigger sovereign insolvency - the first of its kind in the 13-year history of the single European currency.
The NY Times writes Europe's failed course. Struggling euro-zone economies like Greece, Portugal, Spain and Italy cannot cut their way back to growth. Demanding rigid austerity from them as the price of European support has lengthened and deepened their recessions. It has made their debts harder, not easier, to pay off. This is not an issue of philosophical debate. The numbers are in. As The Times's Landon Thomas Jr. reported this week, Portugal has met every demand from the European Union and the International Monetary Fund. It has cut wages and pensions, slashed public spending and raised taxes. Those steps have deepened its recession, making it even less able to repay its debts. When it received a bailout last May, Portugal's ratio of debt to gross domestic product was 107 percent. By next year, it is expected to rise to 118 percent. That ratio will continue to rise so long as the economy shrinks. That is, indeed, the very definition of a vicious circle. Meanwhile, shrinking demand and fears of a contagious collapse keep pushing more European countries toward the danger zone of unsustainable debt.
Bloomberg reports ECB said to negotiate with Greece on investment portfolio bond exemptionn. The European Central Bank is negotiating with Greece on behalf of its member central banks to exempt the Greek bonds in their investment portfolios from a debt restructuring, two euro-area officials said. The ECB wants to swap the investment portfolio bonds for debt that's exempt from collective action clauses, or CACs, to avoid losses in a private-sector debt restructuring, the officials said late yesterday. The central bank has already swapped Greek bonds it bought as part of its asset-purchase program for such securities, a third official with knowledge of the situation said. Greece wants the bonds in the central banks' portfolios to be included in a private-sector deal aimed at slicing 100 billion euros ($132 billion) off its debt, the officials said. The central banks are arguing they would have dumped the bonds if they were normal investors and that they shouldn't be forced to take losses on them, the officials said. An ECB spokesman declined to comment. Greek government spokesman Pantelis Kapsis wasn't immediately available to comment. The tussle comes as euro-area finance ministers gather in Brussels on Feb. 20 to decide on a second bailout for the embattled nation and sanction the private-sector bond swap.
Soon fears of debt contagion will arise again as they did in July 2011 where investors feared that a debt union had formed. And new fears that the world central banks credit will no longer stimulate and liquefy financial assets will cause investors to derisk out of stocks and delever out of commodities and sell the currencies globally; the fastest fallers will likely be the Swedish Krona, FXS, the South African Rand, SZR, the Brazilian Real, BZF, and the Indian Rupe, SZR. In as much as hot money has recently flowed once again into the BRICS, especially Brazil, Russia, and India, overheating their exports relative to their imports, the Brazil Small Caps, EWZS, the Russian Small Caps, ERUS, and especially the India Small Caps, SCIF, are likely to be the fastest stock fallers.
With trust fleeting credit will turn bad, and interest rates on all types debt will rise. Soon there will be money good, and no sustainable level of debt.
Out of financial armageddon, that is a credit bust and financial system collapse, sovereign leaders will arise from regional framework agreements to replace sovereign nations. Lacking any money good, people will place their trust and faith in the word, will and way of these leaders. The people will give their allegiance to the diktat of the new sovereigns, who will meet in summits, waive national sovereignty, and establish a Federal Europe, with the ECB or the Bundesbank empowered as the EU's bank, appoint monetary cardinals as stakeholders to manage the factors of production and provide credit as necessary; and appoint a EU wide technocratic government featuring fiscal commissioners who oversee structural reforms and manage government spending, as well as impose austerity measures for regional security and stability.
Angela Merkel has heard and heeded the 1974 Club of Rome's Clarion Call for regional global governance and will act with its authoritarian imperative to establish a fiscal and federal Europe.
Fate is working through Angela Merkel to bring forth the rise of the Beast Regime of Neoauthoritarianism, aka, the ten toed kingdom of regional global governance, to replace the Bank Regime of Neoliberalism, aka, capitalism.
Fiat money and credit will soon die, putting capitalism in the grave. Diktat will serve as both credit and currency in the new economy of regional global governance.
The debt economy of capitalism is coming to an end, with the result that the dynamos of growth and profit are failing. The driver of investment reality is that the European Central Bank's long-term refinancing operations has provided cheap three-year liquidity to banks, which has fueled fiat asset purchases across the board including Portugal, Italy and Spain Sovereign Debt.
The power of neo liberal finance will soon be exhausted, this will be seen in the chart of ITLY, EMFN, EMMT, EMIF, KRE, PKB, RZV, where the debt of ITLY will likely be sustained by the ECB's LTRO 1 and LTRO 2, yet, the rally in the current safe haven stocks fizzles. The reach of ECB credit liquidity will soon fail to continue supporting S&P Materials, MXI, and S&P Global Financials, IXG, as is seen in the chart of SPY, MXI, IXG.
Political capital will soon command economic transactions, as the dynamos of regional security and stability gain traction, providing order out of chaos. Investment capital that fueled growth and profit will literally be washed away into the pit of financial abandon as regional global governanc replaces capitalism.
Instaforex writes Ralf Nelson Elliott And His Wave Analysis. Ralf Nelson Elliott was an American accountant. In 1938 appeared the book "The Wave Principle" where he detailed the results of his studies and described his method. His next book entitled "Nature`s Law - The Secret of the Universe" was published in 1946.
The monthly chart of S&P, $SPX, traded by SPY, communicates that we are at the crest of an Elliott Wave 2 high, and are going to enter an Elliott Wave 3 Down, as is seen in Daneric's Elliott Wave article 15 February 2012. These are the most destructive of all economic waves as they destroy practically all of the wealth accumulated on the way up. The Great Deleveraging, that is Great Depression 2, is about to commence.
Tim Price in Sovereign Man relates Warren Buffett's most irritating thing ever said: stocks beat gold and bonds. For value investors of a certain age (e.g. mine), discovering that Warren Buffett could be wrong is like suddenly not believing in Father Christmas.
Buffett's latest advertorial (for himself and for Wall Street), "Why stocks beat gold and bonds," adapted from an upcoming version of one of his legendary shareholder letters and published in Fortune, may be the most irritating thing he's ever written. As an investor, he rightly draws attention to the critical requirement to maintain one's purchasing power in the face of rampant state inflationism. He accurately highlights the staggering reduction of real value in the US dollar since 1965 (some 86%). He fairly declares a dislike for currency-based investments in a world of rapidly inflating, unbacked fiat. And he then goes on to rubbish gold using the tired and specious argument that purchasers are simply displaying "greater fool" theory, eagerly awaiting new rises in price that will suck in new purchasers ad infinitum. It looks suspiciously as if Warren Buffett, for all his undoubted investment success, has never actually studied any monetary history.
The reason why Buffett's views of gold should be ignored can be seen in the following charts, all courtesy of James Bianco at Bianco Research. The first shows the extent to which the eight largest central banks (China, the ECB, the US, Japan, Bank of England, Banque de France, Swiss National Bank, and Germany's Bundesbank) have allowed their balance sheets to explode, in a desperate attempt to compensate for banking and private sector deleveraging since the debt crisis began. As Bianco points out, "If the basic definition of quantitative easing (QE) is a significant increase in a central bank's balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE." What's particularly shocking about the data is that while every major central bank is busily printing money like it's going out of fashion (which it is), one of the biggest culprits is the one most widely associated with sound monetary policy, namely the Bundesbank, which has been one of the biggest inflationists of all. Buffett's preference for equity investment may have nothing to do with expectations regarding things like economic growth or profits, just money printing. This is not founded on sound economic reasoning, rather simply shifting capital into an ever-rising bath. What happens when central banks stop filling the bath? Or worse, take the plug out? Or worse yet, find that they are no longer in control of the water? The investment world does not come down to an all-or-nothing decision between debt (mostly rubbish, now, admittedly) and equity. While the bigger picture is fraught with monetary mismanagement in response to a grave crisis, there are plenty of other investment choices out there, and a growing argument underpinning the ownership of real assets.
In a destabilizing world, regionalization will be the key to security and stability. Soon banks will be nationalized, better said regionalized, and integrated into the government, and become known as the government bank, or gov banks for short. Moody's Investors Service announced that it was placing more than 100 European banks under review for possible downgrades. The credit rating agency also said that it was putting more than a dozen banks with significant global capital markets operations under review for possible downgrades. Those banks included Barclays, BCS, HSBC Holdings, HBC, and Royal Bank of Scotland, RBS. These banks as well as Lloyds Banking Group, LYG, will be regionalized into a single UK bank, most likely the latter, as they are under the authority of the UK government, which has the British Pound Sterling, FXB, as a currency.
In Europe, leaders will meet in summits and waive national sovereignty, and announce that the European Financial Institutions, such as Ireland's IRE, will be integrated into the Bundesbank or the ECB, which will become known as the Euro's bank.
In Switzerland UBS and CS will be integrated into the Swiss Central Bank
In Japan, MFG, MTU and SMFG will be merged into the Bank of Japan. In each of the world's ten regions, diktat will serve as both money and credit
In India, IBN, HDB, will be integrated into the India Central Bank
In Brazil, BSBR, ITUB, BBD, will be integrated into the Brazil Central Bank
In Argentina, BBVA, BMA, BFR, GGAL, will be integrated into the Argentina Central Bank.
In Chile, BCH, and BCA, will be integrated into the Chile Central Bank.
In South Korea, KB, WF, SHG, will be integrated into the South Korea Central Bank.
A Eurozone guarantee will backup national bank deposit insurance schemes, to reduce retail bank runs. And in Japan, a national bank deposit scheme will act as capitol controls on retail bank accounts.
Soon a rising US Dollar, $USD, UUP, and competitive currency devaluation, as is seen in the chart of UUP, FXE, FXM, FXC, ICN, FXB, SZR, BZF, FXA, FXRU, CEW, will turn world stocks, ACWX, VSS, EWX, lower. Gasoline Futures, UGA, have risen strongly through LTRO Financing. These are likely to have an ongoing upward wave structure, while commodities, DBC, and USCI, trade lower.
Open Europe Blog The Greek crisis: Five key developments
Open Europe reports Die Welt reported that the ECB is planning to swap its holdings of Greek debt for new bonds, which would allow Greece to introduce collective action clauses into its bonds, while protecting the ECB from potential losses. The FT reports that the Bundesbank objected to the move, wary of the precedent it would set for special treatment of ECB bond holdings.
Open Europe reports German Chancellor Angela Merkel has been forced to postpone her meeting with Italian Prime Minister Mario Monti due to the resignation this morning of the German President, Christain Wulff, following a long-running scandal involving a low interest euro loan from the wife of a wealthy businessman, which he tried to conceal. BBC Times Welt FAZ FTD Les Echos Le Point Corriere della Sera Il Sole 24 Ore Liberation
MSN Philippines News EU's Van Rompuy calls special euro summit March 2 Eurozone leaders will hold a special meeting on March 2 to discuss the currency's debt firewall and elect a new eurozone boss, with EU president Herman Van Rompuy favoured to win the job. European Union leaders stage their next summit on March 1-2, 2012.
There will be a eurozone summit over lunch dedicated to the European Stability Mechanism (ESM) and the selection of the president of the euro summit," Van Rompuy's office told the 27 EU governments on Wednesday, internal EU papers seen by AFP on Thursday showed.
EU and governmental sources confirmed Van Rompuy's plans, and his likely dual appointment as chairman of bi-annual summits of the 17-nation eurozone agreed under a new cross-border economic governance drive. He would work in tandem with Luxembourg's head of the finance ministerial Eurogroup, Jean-Claude Juncker.
Despite Slovakia reiterating its opposition during this week's talks, the ESM debate will focus on boosting the effective lending capacity of a new rescue fund that enters service in July, paving the way for governments to increase its 500-billion-euro effective lending capacity.
One way leaders are considering doing this is by adding in monies left over in the 440-billion European Financial Stability Facility (EFSF) that was due to be phased out in the summer of 2013.
The discussion comes amid efforts to raise the resources available to the International Monetary Fund via extra loans mainly from the Group of 20 major and emerging economies.
This debate follows fears that the eurozone might not have enough firepower at its disposal should debt-crisis contagion spread once again to Italy or Spain.
The summit, which will also focus on whether to grant Serbia EU accession candidate status, will see the bloc's new inter-governmental Treaty on Stability, Coordination and Governance presented for signing on March 2. Twenty-five of the 27 governments, minus Britain and the Czech Republic, have said they will implement a "golden rule" (a debt brake) enshrined in the treaty to move quickly towards balanced budgets.
The treaty negotiations have closed, with an EU source adding that two contentious questions have been resolved by a "special agreement" among leaders behind the scenes.
The first, concerning the right for an unhappy government to take another state to the European Court of Justice if pledges are not carried through, has been resolved "so you don't see the smoking gun", or the country calling the shots, he said.
The second, which may cause ructions in Ireland, whose highest legal officer has yet to declare whether the treaty will need endorsement by a referendum, would see, this official said, the treaty regarded as "non-referendum compatible" under a "gentleman's agreement".
Nature Economist Elaine Meinel Supkis writes on the soon coming debt servitude for the masses. Here is an EU report about the crisis that tries desperately to explain the housing and government credit collapse but can't figure out any solution except to crush the workers and savers and then make them all pay dearly for this mess, Alert Mechanism Report 2012. This Alert Mechanism Report (AMR) marks the first step in implementing the newsurveillance procedure for the prevention and correction of macroeconomic imbalances (hereafter called the Macroeconomic Imbalance Procedure - MIP). This report also contains the final design of the scoreboard of indicators (presented in Table 1 and Section 2). Surveillance to prevent and correct macroeconomic imbalances under the MIP is a new instrument of the strengthened framework for economic governance in the EU. It was adopted as part of the so-called 'six-pack' governance package which also provides for asignificant reinforcement of surveillance on fiscal policies. Surveillance on macroeconomic imbalances under the MIP forms part of the "European semester" which takes an integrated and forward looking approach to the economic policy challenges facing the Union in ensuring fiscal sustainability, competitiveness, financial market stability and economic growth. So, the world's top elites want to have macroeconomic controls! More and bigger and presumably, better! The gross failure of all the dominant imperial systems was due to it not being a big enough imperial system with some kindly emperor at the helm, no? HAHAHA. We live and never learn.
Simon Black writes in Sovereign Man, Friedrich Hayek On Our "Dictatorship of the Proletariat".
John Embry, Chief Investment Strategist, Sprott Asset Management writes debt saturation will make for higher levels of gold and silver. Trade The relentless growth in debt throughout the world. In the wake of Global Financial Crisis 1 in 2008 (and I can assure you that the next one is coming very soon) there has been much talk of debt deleveraging. To be fair, in the private sector, there has been some evidence of that in the U.S. and Europe, although most of it has related to outright default rather than the old-fashioned practice of saving current income to pay down existing debt.
This minor event, however, has been totally overwhelmed by an explosion in sovereign debt as governments worldwide have been forced to step in to save their essentially insolvent banking systems and prop up their foundering economies.
I regret to say that it doesn't take more than a cursory examination of the facts to conclude that the problem is endemic throughout the industrialized world and is even affecting some of the key emerging economies. More importantly, I am afraid it will be terminal for the financial system we have known since the end of World War 2.
The poster child for this development has been the good old U.S.A., and in case you think I am anti-American, I must hasten to tell you that I was born in the U.S.A. exactly nine months before Pearl Harbor and spent the first eight years of my life in the environs of Washington, D.C. Since then I have lived in Canada, always within 100 miles of the U.S. border, and I have always viewed the country at close quarters with great fondness. Having said that, the dramatic financial deterioration that I have witnessed in this country over the past several decades has been truly astonishing and most discouraging.
There is always some arcane statistic that really makes a point and I think the one that resonates with me is that when Ronald Reagan assumed the presidency 31 years ago, the gross federal funded debt was $907 billion. This amount had been accumulated in a little less than 200 years, a period that encompassed two major world wars, a civil war, numerous other skirmishes, several financial panics, and a horrific depression in the 1930s. Now, a mere 31 years later, the U.S. is chalking up more than that amount in a six-month period.
It was just mid-summer last year that the agonizing debt limit debate was resolved and the limit initially rose by $900 billion in two tranches. Well, that has already been exhausted and now the hope is that another $1.2 trillion increase will get us through the November election. I think that is unlikely.
What I find amazing is that remarkably few people seem to find this unusual, although I must admit that I think very few people even actually think about it. However, I believe in the immutable law of mathematics and when you reach the point of no return, there is obviously, by definition, no going back. In my estimation, the U.S. debt situation is so far beyond the point of no return that you can't even catch a glimpse of it in the rear-view mirror.
The actual funded federal debt of over $15 trillion is just a small part of the problem. The state and local governments are in various states of disarray. As an example we are currently in the epicenter of dysfunctional finance, the otherwise wonderful state of California. Then there are the off-balance sheet items of the federal government such as government-sponsored entities like Fannie and Freddy which have many trillions of debt supported by very dubious assets. But the true elephant in the room is the unfunded liabilities for social security, Medicare, etc., which, using the most conservative estimates, easily exceed $50 trillion.
Thus, without even stretching, the total federal government debt liabilities in the U.S. are, at a bare minimum, more than five times the current nominal GDP. One of the few reasons that this remarkable debt edifice is still standing is the Fed's Z.I.R.P. undertaking (I love that acronym), the zero interest rate policy, which Fed Chairman Ben Bernanke recently announced, would be extended until 2014, in conjunction with massive Fed monetization of Treasury debt, has kept the interest rates on government debt ridiculously low, and thus the charade has been allowed to continue.
Mark my words, if the interest rates on U.S. government debt truly reflected both the real level of inflation in this country and the rising risk of some form of default, rates would already by sky-high and the U.S. would resemble a massive Greece.
I do believe that this whole process has a very limited shelf life at this point, which is neatly encapsulated in the economist Herbert Stein's timeless comment in 1986: "If something can't go on forever, it will stop." I think that we are very close to that unhappy moment and the implications for the U.S. dollar and economy are simply horrific.
To me, it all seems crystal clear at this point. To avert a near-term economic and financial implosion the authorities throughout the developed world will have to hold their noses and stimulate to whatever degree necessary. No politician today wants to see the system collapse on his watch, so the world will risk eventual hyperinflation and a collapse of the present currency regime rather than voluntarily accept a debt deflation.
Ironically this was all foretold many years ago by Ludwig Von Mises, the founder of the Austrian School of Economics, which, incidentally, is the only economics I have discovered in my lengthy search for reason that makes eminent sense to me.
Von Mises, in his epic book "Human Action," published in 1949, stated succinctly: "There is no means of avoiding the final collapse brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system."
Given that this credit cycle has dwarfed anything seen in the history of mankind, its resolution is going to be something to behold. Global Financial Crisis No. 1 in 2008 was merely the hors d'oeuvre and we are now awaiting the main course.
I envision something along the lines of a hyperinflationary depression accompanied by the final denouement of the latest experiment with pure fiat currency -- that is, the worst of all worlds.
In the event that I am right, I can assure you that the demand for physical gold and silver is going to overrun all possible sources of supply and even the most outrageously bullish price projections for gold and silver may be exceeded.
To conclude, I would like to quickly mention two other subjects.
The first is cognitive dissonance. When I try to convey the seriousness of this whole issue of monetary debasement and its disastrous impact on society, most people are resistant or, more often than not, seem indifferent to the whole subject. I attribute this to a state of cognitive dissonance, which unfortunately appears to affect the vast majority of society. Basically, most individuals when confronted with an unpleasant issue that is at odds with what they choose to believe go to great pains and extreme lengths to deny it. They are hugely biased to think of their choices as correct, irrespective of any concrete contrary evidence which is provided. My younger brother, who it pains me to say is a whole lot smarter than I am, has done a fair amount of research on this subject and has concluded that there is essentially some sort of blocking mechanism in most human minds which permits people to stick their heads in the sand rather than confront a difficult issue before it is too late.
I think a fascinating example of this phenomenon appeared in Michael Lewis' latest book, "Boomerang," which I highly recommend. The hedge fund manager Kyle Bass, who is rapidly becoming legendary, had arrived some time ago at the same malign conclusions about sovereign debt that I have just described to you. He took his findings to the Harvard professor Kenneth Rogoff, who along with Carmen Reinhard, was just preparing to release a new book, "This Time It's Different," about national financial collapse. When Bass revealed his numbers on the subject to Rogoff, the professor responded, "I can hardly believe it is this bad." Bass' reaction was: If this guy is the world's foremost expert on sovereign balance sheets and he isn't prepared to deal with reality, what hope is there? Bass was astounded.
Finally, I can't make a speech about our terminal financial state without a couple of points on derivatives, which continue to proliferate. The justly reviled ex-Fed Chairman Alan Greenspan used to extol derivatives as vehicles for spreading risk and making the system more resilient while he strenuously opposed any attempts to regulate OTC derivatives. This was just one of his many damaging initiatives and history has completely refuted him. In fact, derivatives have tended to concentrate risk as a large majority of them has ended up in a few hands, creating too-big-to-fail financial entities that are imperiling the whole system.
The idea that they net out and thus it is really a zero-sum game is equally ridiculous. Since every derivative has a counterparty, to suggest that an investor is satisfactorily hedged because derivatives offset a long with a short is simply wrong. If the counterparty fails on either the long or the short, the entire notional value is at risk. Given that the notional value of all outstanding derivatives would easily exceed a quadrillion dollars had not the Bank of International Settlements changed definitions to intentionally understate the true amount, the toxicity of this garbage is obvious.
It wasn't without reason that Warren Buffett many years ago termed them "Financial Weapons of Mass Destruction." If sufficient liquidity is not continuously made available in the entire global system, a potential implosion of derivatives would be activated and rapidly annihilate the entire global banking system.
Just another reason why quantitative easing to infinity is virtually assured.
I believe that investors can't own enough gold and silver
Simon Black writes in Sovereign Man Introducing the next best place in the world to store gold. It's official. Starting October 1, 2012, Singapore will be the best place in the world to store gold. As a major international financial center, Singapore is rapidly becoming THE place to invest and do business in Asia. Why? Because it's just so easy. Regulation is minimal, corruption is among the lowest in the world, and the tax structure is very friendly to businesses and investors. With one exception. Traditionally, physical gold and silver purchases in Singapore have been taxed at a 7% GST rate (like VAT, or a national sales tax). The only legitimate exception was purchasing (and subsequently storing) at the Freeport facility, adjacent to the main airport.
In just-released budget documents, however, the government of Singapore announced that it will begin waiving GST on purchases of investment grade gold, silver, and other precious metals effective October 1st. This is huge… and it should really make Singapore the best place in the world to buy and store gold. Prices are already incredibly competitive, with ultra-low premiums and very reasonable storage costs. The Cisco Certis secure storage facility, for example, is incredibly safe, insured, and open up to 14-hours per day. Annual charges for a box are as little as S$99 (roughly $75 USD).