It's becoming clear that there is only one sensible solution ahead of us as the Eurozone’s problems evolve: Germany and the other countries suited to a strong currency should leave. If they do, the European Central Bank (ECB) will be free to pursue the easy money policies recommended by Keynesians and monetarists alike. It's increasingly clear that Germany has no option but to behave like any creditor seeking to protect its interests – and do its best to defuse the growing resentment against her from the Eurozone’s debtors. If Germany is to abandon the euro, it has to do so as quickly and elegantly as possible. It must be able to demonstrate that it has no alternative and that it is the best solution for all parties involved. Germany’s politicians know this. For the moment they are frozen in a state of inaction, but there is a general election to concentrate their minds in about a year’s time - and Germany’s electorate is becoming acutely aware of the enormity of the task. It has become obvious to many people from all walks of life in Germany that the euro has done them no good, and, far from reaping benefits, they are actually less wealthy as a result of it.
Hitting the tape are leaked detailes obtained by Bloomberg detailing what the ESM will focus on as it is unleashed on the world. From Bloomberg: Europe’s permanent rescue fund will invest the core of its assets in AA or higher-rated debt issued by governments, central banks, euro-area agencies and international institutions, with the power to diversify into bank debt as it grows, its draft investment guidelines say, Bloomberg’s Brian Parkin, Rebecca Christie and James G. Neuger report. The ESM will keep at least 15% of its maximum lending volume, or EU75b out of an ultimate EU500b, in “assets of the highest creditworthiness” as per guidelines obtained by Bloomberg News. Does that mean all countries rated AA or below are ineligible? Because that pretty much invalidates Spain and Italy? Or is the draft going to be releaked with the AA revised to A, then to B then to CCC until finally the EURUSD sustains an upward move for at least 10 pips? But the funniest headline of all:
- ESM PLANS `PLAIN VANILLA' BORROWING STRATEGY TO LURE INVESTORS
Lure is truly such a great word here. After all nobody will ever get their money back.
Following closely on the heels of our recent (now must read) discussion of the potential illegality of Draghi's OMT, Reuters is reporting the somewhat stunning news that the ECB and Bundesbank are getting lawyers to check the legality of the new bond-buying program. Germany's Bild newspaper - via the now ubiquitous unnamed sources - said in-house lawyers were checking both what proportions the program would have to take on and how long it would have to last for it to breach EU treaties (that specifically ban direct financing of state deficits). While Draghi - full of bravado - likely said whatever he felt was necessary at the time to stop the inversion in the Spanish yield curve, it is becoming clearer that, as usual, the premature euphoria (in the complacent belief that central banks can solve every problem with a wave of the magic CTRL-P wand) was misplaced. Bild goes on to note that this matter could be referred to the European Court of Justice - and the ECB/Buba were preparing for such an event. Of course, since every other rumor in recent months, most of which have originated in credible media, has proven to be a lie, it is likely this is also merely leaked disinformation to push the German case, i.e. anti-Europe.
It is always amazing to observe how people become less risk averse after risk has markedly increased and more risk averse after it has markedly decreased. The stock market is held to be 'safe' after it has risen for many weeks or months, while it is considered 'risky' after it has declined. The bigger the rally, the safer the waters are deemed to be, and the opposite holds for declines. One term that is associated in peoples' minds with rising prices is 'certainty'. For some reason, rising prices are held to indicate a more 'certain' future, which one can look forward to with more 'confidence'. 'Uncertainty' by contrast is associated with downside volatility in stocks. In reality, the future is always uncertain. Most people seem to regard accidental participation in a bull market cycle with as a kind of guarantee of a bright future, when all that really happened is that they got temporarily lucky. Perma-bullish analysts like Laszlo Birinyi or Abby Joseph Cohen can be sure that they will be right 66% of the time by simply staying bullish no matter what happens. This utter disregard of the risk-reward equation can occasionally lead to costly experiences for their followers when the markets decline.
Never try to teach a pig to sing, advised Robert Heinlein. It wastes your time and it annoys the pig. Similarly, never try to convince a central banker that his policies are destructive. After five years of enduring crisis, market prices are no longer determined by the considered assessment of independent investors acting rationally (if indeed they ever were), but simply by expectations of further monetary stimulus. So far, those expectations have not been disappointed. The Fed, the ECB and lately even the BoJ have gone “all- in” in their fight to ensure that after a grotesque explosion in credit, insolvent governments and private sector banks will be defended to the very last taxpayer. Conventional wisdom is that such moves are justified during this period of economic slowdown, as everyone agrees that the market is ’deleveraging’. But as the consistently excellent Doug Noland points out, this idea of deleveraging (i.e. reduction of available credit) in the US is a myth.
In a system that depends on lies and the credulity of the citizenry, the greatest lie is that the Federal Reserve's "quantitative easing" bailouts of the banks somehow help our citizens and communities. To clarify this, ask yourself this question: what else could we have bought with the $29 trillion the Fed loaned or backstopped to the banks? If you enjoy quibbling about the total sum of Fed support, be my guest; the Levy Institute came up with $29 trillion after poring over all the data, while the Government Accountability Office’s (GAO) tally topped $16 trillion. That's 100% of the nation's GDP and roughly 100% of the $16 trillion national debt. While we're asking about opportunity costs, let's ask what else we could have bought with the $10 trillion that the Federal government has borrowed and blown in the past 11.7 years. The national debt was $5.727 trillion when G.W. Bush was sworn into office on January 20, 2001. It had risen to $10.626 trillion when President Obama was sworn into office in January, 2009. It is now $16.016 trillion, an increase of $5 trillion in less than four years in "debt held by the public" (i.e. the Chinese central bank, the Japanese central bank, the Federal Reserve, etc.)
Shortly after posting the latest "balance sheet" of the US consumer we received requests to show how this looks in a global context, in other words, what do the balance sheets of the global households outside of the US look like. We show what this look like below, courtesy of the Bank of Japan, which presents the distribution of household financial assets in context then (5 years ago) and now. It also shows why whereas to Joe Sixpack the level of the S&P is the most important, with 32% of total assets in stocks, in Japan and in Europe, the average person could not care less where the stock market is, with just 6.5% and 14.7% of assets held in equities. The US E-Trade baby: keeping the Ponzi dream alive.
Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, L.P. and one of the most successful hedge fund managers of all time told Maria Bartiromo last week that he owns gold and that he sees no “sensible reason not to own gold”. The interview was part of the Council on Foreign Relations (CFR) Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of wealthy and influential CFR members. The respected hedge fund manager suggested that a depression and not a recession was likely and warned of social unrest and the risk of radical politics as was seen with Hitler and the Nazis in the Depression of the 1930’s. Dalio spoke about how “gold is a currency” and when asked by Bartiromo “do you own gold?”, he smiled and said “Oh yeah, I do.” The admission elicited a laugh from the CFR audience. Dalio’s interview is important as it again indicates how slowly but surely gold is moving from a fringe asset of a few hard money advocates and risk averse individuals to a mainstream asset. Wealthier people and some of the wealthiest and most influential people in the world are slowly realising the importance of gold as financial insurance in an investment portfolio and as money. This will result in sizeable flows into the gold market in the coming months which should push prices above the inflation adjusted high of 1980 - $2,500/oz. The interview section where Dalio is asked about gold by an audience member begins in the 43rd minute and can be seen here.
Former ECB Chief Economist Says ECB Is In Panic, As Czech President Warns The End Of Democracy Is ImminentSubmitted by Tyler Durden on 09/22/2012 21:16 -0400
If anyone thought the bad blood between Germany and the rest of the insolvent proletariat, aka the part of the Eurozone which is out of money (most of it), and which has been now confirmed will be supporting Obama (one wonders what the quid for that particular quo is, although we are certain we will find out as soon as December), complete collapse of the Greek neo-vassal state of the globalist agenda notwithstanding, had gone away, here comes former ECB chief economist Juergen Stark to dispel such illusions. In an interview with Austrian Die Presse, the former banker said what everyone without a PhD understands quite well: "The break came in 2010. Until then everything went well..."Then the ECB began to take on a new role, to fall into panic.... Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally. "It can't be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously... It gave in to outside pressure ... pressure from outside Europe" Why, whichever bank headquartered at 200 West, NY, NY might he be referring to?
According to Mario Draghi, OMT, or Outright Monetary Transactions, is a program of conditional bond buying targeted at specific countries to restore the perception of the euro's irreversibility and stability, and repair a broken monetary policy transmission mechanism. Once launched, OMT has no ex ante limits, it is within the ECB's price stability mandate, and it can be halted or interrupted based on achievement of its objectives or non-compliance with conditions imposed upon the targeted national government. We would posit that OMT is much more than what the party line states. Here are some alternative interpretations for your consideration. We challenge you to refute the logic of any of them.
Let’s review the tricks the central banks & governments have available to beat back any financial challenges presented by the debt reaper.
- Money tool # 1 = deficit spending. For years, the G7 countries have believed that spending more than you make, will create jobs and prosperity. To measure the success of this strategy, we invite you to hang out in Spain, Greece or Italy.
- Money tool # 2 = cut interest rates to 0%. All the really smart people in the World know that lower interest rates encourage people and companies to borrow more money and spend this money. To measure the success of this strategy, we invite you to hang out at the US Federal Reserve and help them count the $1.5 trillion in excess money held by the big banks.
- Money tool # 3 = when all else fails print money. Everyone knows by now the reason the Great Depression was great was because no one had the idea to print money to kick start the economy. To measure the success of this strategy, we definitely do not invite you to visit Japan. The Japanese have been printing money for over 10 years and that hasn’t shaken their economy from its funk one bit.
As we enter the always dangerous months of September and October, central bankers and governments just can’t get their heads around the fact that their cherished money tools are not shaking the World. Never one to quit, someone somewhere muttered “we must do something” – and something they did.
We believe an unsustainable new global financial architecture that arose in response to the US and European financial crises has replaced an older, more sustainable, architecture. The old architecture was crystallized in Washington- and IMF-inspired policy responses to the numerous sovereign defaults, banking system failures, and currency collapses. Most importantly, the previous architecture recognized limits on fiscal and central bank balance sheets. The new architecture attempts to 'back', perhaps unconsciously, the entire liability side of the global financial system. This framing is consistent with a purely political—institutional stylized—fact that it is nearly impossible to penetrate the US political parties if the message is that there are limits to their power…or that their power requires great effort and sacrifice. This is why Keynesians (at least US ones) who argue there are no limits to a fiscal balance sheet are so popular with Democrats, and why monetarists (at least US ones) who argue there are no limits to a central bank balance sheet are popular with (a decreasing number of) Republicans. Party on! Again, nobody chooses hard-currency regimes – they are forced on non-credible policymakers. Let me put it more positively. If politicians want the power of fiat money, let alone the global reserve currency, they need to behave differently than they have - or the consequences for Gold are extraordinary.
So after 2 hell of positive weeks with fairy dust sprinkled by the CBU (Central Banks United), things seem a little out of breath here.
Post-Central Bank intervention depression, so to speak, as the question on everyone’s mind is “What’s next?
Add to that soured geopolitics that stirred spirits in Asia, MENA and to some extend in regional Spain.
The single most often broached argument that Liberty Movement writers, analysts, and strategists are confronted with by skeptics alongside well meaning but cynical newcomers is the assertion that while we happen to be very effective at pointing out the dangers of globalism and centralization, we rarely seem to take the initiative to offer “solutions” to the problem. This same argument is also used by establishment shills as a way to distract the public’s attentions from the very real despotic enterprises of their elitist employers. In reality, the contention that the Liberty Movement offers no solutions is entirely false. We have constructed many. The problem is that these solutions are not the kind that the general American public wants to entertain. The bottom line is that there is little time left for top-down political fairytale dreams, and little utility left in standard street actions. The real solutions require blood, sweat, and tears, starting with a method I have discussed for quite some time: Decentralization.
One of the most astute financial analysts in the world, Jim Grant, founder of highly respected Grant's Interest Rate Observer, was asked by Maria Bartiromo on CNBC yesterday “how high can gold go”? Grant responded that "there is no telling."