Moral Hazard

Guarantees based on extracting higher taxes, borrowing trillions of dollars and creating trillions more out of thin air only guarantee eventual systemic implosion.

Either Greece will stop trying to save the failed past and look into the future, treating the crisis and the adjustment program as opportunities to finally implement urgently needed reforms, or the country will be eventually forced to exit the euro, in our view.  Economics 101 teaches us that an economy can survive within a monetary union only if it has fiscal policy room and structural flexibility to respond to asymmetric shocks. In our view, Greece had none and has none. We see no solution for Greece within the Eurozone without reforms.

"I'm not sure [European QE] is going to do anything - certainly, nothing that's good. The fundamental problem here, as I see it anyway, is that the European banking system is still broken... I think, increasingly, bankers are discomforted more than anything else (it's not just the ex central bankers but increasingly the people that are still holding the levers)... they are starting to ask whether they have somehow been backed into a place where they don't really want to be.... Unfortunately, [it] is getting bigger and bigger. There is a possibility at least that this whole exercise could end very badly."

It matters not who is in charge of the Fed or what rules Congress may insist that it adopts. Once money printing, via fiat or fractional reserve credit creation, is seen to be both feasible, justified, and legal nothing and no one can stop it. The political pressure to fund government programs will be irresistible. Everyone knows that the Fed seemingly has the ability to solve their problem by monetizing the federal debt. Should it refuse to do so, we would see riots in the streets similar to what is happening in Europe as protesters target the European Central Bank. The only solution is to destroy the monster that makes it all possible, the Fed.

The BoJ may now run into the same inconvenience in its efforts to control the stock market that it encountered on the way to monopolizing the JGB market: there’s only so much out there to buy. "BOJ held 3.85t yen ($32.0b) of ETFs at end-2014 and plans to boost these holdings by 3t yen per year; at this pace, the current market value of 11.5t yen in ETFs would be entirely bought by BOJ by end-2017," Bloomberg notes.

"Dear President Obama, Senators, and Members of Congress:

Americans now owe $1.3 trillion in student debt. Eighty-six percent of that money is owed to the United States government. This is a crushing burden for more than 40 million Americans and their families.

I urge you to take immediate action to forgive all student debt, public and private."

Financial markets are upside down.  Financial repression and belief in the “Fed put” pushed investors further and further out the risk curve over the past six years.  Too many asset managers have remained fearful of underperforming peers and benchmarks; a powerful incentive to stay ‘risked-up’.   The psychology of bullish, and faith in Fed abilities, have been too firmly embedded in the investor class. Given that markets don’t seem to want to believe that a June hike looks probable, we expect an outsized market reaction to a hike, lower long yields to accompany it, a flatter curve, wider credit spreads, higher market volatility, and materially lower equity markets.

Government mandated fiat currency simply does not work in the long run. We have empirical evidence galore – every fiat currency system in history has failed, except the current one, which has not failed yet. The modern fiat money system is more ingeniously designed than its historical predecessors and has a far greater amount of accumulated real wealth to draw sustenance from, so it seems likely that it will be relatively long-lived as far as fiat money systems go. In a truly free market, fiat money would never come into existence though. Greenspan was wrong – government bureaucrats cannot create something “as good as gold” by decree.

After yesterday's FOMC Minutes, despite a huge dovish reversal by the Fed - one which increasingly puts its "credibility" and reputation at risk - stocks were unable to close green, or even above 2100, for one simple reason: uncertainty with the fate of Greece. Overnight there has not been much more clarity, when as previously reported Greece submitted a 6 month extension request to its master loan agreement but not to its bailout extension, a nuance lost in the annals of diplomacy. But is this the much-awaited Greek capitulation? Or will the Eurogroup reject this too? The answer may be available in a few hours after an emergency Eurogroup meeting due later today. However, as usual stocks are ready to "price in" yet another Greek conflict resolution, and after futures were lower by 7 points overnight, were up 4 points at last check: a rebound which will not correct if the latest Greek "compromise" fails to deliver.

"Our era is a strange one when considering how social attitudes have developed in such a contrary fashion to the rest of history. I think that our forefathers would look upon our current culture with bewilderment when confronted with the fact that our generation has all but abandoned the option of physical rebellion as a tool for social change. I believe a revolution is indeed necessary, a final revolution to remove the influence of the globalist cult once and for all — not only their puppet governments, puppet political parties and puppet despots, but the globalists themselves. Will bad men still exist in this world? Of course they will. But the kind of advanced and well-organized internationlist machine that thirves today will no longer exist. To save a patient poisoned to the extreme, the patient must be purged until his body can recover on its own. The elites are a poison that must be physically removed from the human system."

The politicians of Europe are plunging into a form of ideological fratricide as they battle over Greece. Accordingly, all the combatants - the German, Greek and other national politicians and the apparatchiks of Brussels and Frankfurt - are fundamentally on the wrong path, albeit for different reasons. Yet by collectively indulging in the sum of all statist errors they may ultimately do a service. Namely, discredit and destroy the whole bailout state and central bank driven financialization model that threatens political democracy and capitalist prosperity in Europe - and the rest of the world, too.

Greece’s problem can only be truly solved if large scale debt restructuring is accepted and executed. But that would initiate a chain of events that would bring down the bloated zombie that is Wall Street. And it just so happens that this zombie rules the planet. We are all addicted to the zombie. It allows us to fool ourselves into thinking we are doing well – well, sort of -, but the longer term implications of that behavior will be devastating. We’re all going to be Greece, that’s inevitable. It’s not some maybe thing. The only thing that keeps us from realizing that is that the big media outlets have become part of the same industry that Wall Street, and the governments it controls, have full control over. And that in turn says something about the importance of what Yanis Varoufakis and Syriza are trying to accomplish. They’re taking the battle to the finance empire. And it should not be a lonely fight. Because if the international Wall Street banks succeed in Greece, some theater eerily uncomfortably near you will be next. That is cast in stone.