To give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization. The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Krugmann fails to address even a single one of the arguments forwarded by Spitznagel. This is no surprise, as he has often demonstrated he does not even understand the arguments of the Austrians and moreover has frequently shown that his style of debate consists largely of attempts to knock down straw men. After appraising us of his economic ignorance (see the idea that time preferences can actually 'go negative' implied by his argument on the natural interest rate above), he finally closes a truly Orwellian screed by claiming that everybody who is critical of the Fed and the financial elite is guilty of being 'Orwellian'. As we often say, you really couldn't make this up.
If the now failed monetary union is the soul that Europe sold to the devil countless of times in the past decade just to plunder from the future as greedily as possible, consequences of unsustainable leverage be damned, the heart of Europe was the visa-free and customs unions that allowed the continent to be as one for the vast majority of people. Yet while the end of the monetary union will not be permitted as long as there are banks which stand to go out of business should that transpire, the end of visa-free travel will hardly impact banks much if at all. Which, unfortunately, explains why while the soul of Europe, already rehypothecated countless times to the lowest bidder, is still out there somewhere, the heart has just begun what may be terminal arrhythmia which has only one sad conclusion.
Does believing in the "recovery" make it real? The propaganda policies of the Federal Reserve and the Federal government are based on the hope that you'll answer "yes." The entire "recovery" is founded on the idea that if the Fed and Federal agencies can persuade the citizenry that down is up then people will hurry into their friendly "too big to fail" bank and borrow scads of money to bid up housing, buy new vehicles, and generally spend money they don't have in the delusional belief that inflation is low, wages are rising and the economy is growing.... Data is now massaged for political expediency, failure is spun into success, and consequences are shoved remorselessly onto the future generations. The entire policy of the Federal Reserve and the Federal government boils down to pushing propaganda in the hopes we'll all swallow the con and believe that down is now up and our "leadership" is a swell bunch of guys and gals instead of sociopaths who will say anything to evade the consequences of their actions and policy choices.
The European Central Bank prints money and hands it to the banks in undiminished size and at an interest rate which compels massive carry trades. The European banks buy sovereign debt that helps to lower the price of the sovereign’s funding costs, the banks use some of the money to increase their own capital and lend some of the money to individuals and corporations in the nations where they are domiciled. The money gets used and eventually dries up and a some of the capital is used to come into compliance with Basel III. The yields of the periphery nations fall but then begin to rise again. Germany, using Target-2, keeps lending money to the other central banks which use part of the money to support their currency, the Euro. The circle is then completed and the equity markets, notably in America, trade off of the strength of the Euro and some days at almost a point by point movement. Never before in the history of the world has such a grand scheme been implemented and in such an all-encompassing fashion. The unlimited amount of money that is available, because they can print all the money they want, has allowed Europe to game the world’s financial system while no one looked or caught on to the scheme. The world’s fiscal system has been rigged by Europe.
When they see you as a chicken breast, you know your vote matters little and your life even less.
It must be difficult for the BRICS countries today. On one hand, they continue to jockey for respect among the Western powers, insisting on participating in quasi-European bailout funds like the IMF. On the other hand, they are also clearly aware of the Western nations' continuing efforts to surreptitiously devalue their domestic currencies, and the pernicious effect that has had on them as exporters and as lenders of capital. In that vein, it was interesting to note that during the latest BRICS Summit held this past March in New Delhi, the main topic of discussion centered on the creation of the group's first official institution, a so-called "BRICS Bank" that would fund development projects and infrastructure in developing nations. Although not openly discussed, reports suggest what they were really talking about was creating a type of BRICS central bank - an institution that could facilitate their ability to "do more business with each other in their local currencies, to help insulate from U.S. dollar fluctuations…" Given the incredible scale of western central bank intervention over the past six months, the BRICS' increasing frustration with their printing efforts should be a given by now. The real question is what they're doing about it, and what assets they're accumulating to protect themselves from the inevitable, which brings us to gold.
In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."
Americans consume 20 million barrels of oil per day and FutureMoneyTrends asks what will happen when the price of gas reaches $4, $5, or $6 per gallon. Between exponentially rising fuel prices and stagnant wage growth for those employed, American consumers were broken in the lead up to the start of the depression recession in 2008. The situation is massively worse now than at the bottom in March 2009 (from $2.00/gallon to $3.92 currently) and that is where they take up the narrative of where we go next as the cost to drive has more than doubled in the space of three years and is on an unsustainable path; either as a nation of consumers facing de minimus wage growth, or the lack of firms' ability to pass this cost on to consumers leading to more unemployment. As the unreality of the S&P 500 passing back above 1400, a reflection back on the real economy is sobering to say the least.
Whatever one thinks of the practical implications of the Kalecki equation (and as we pointed out a month ago, GMO's James Montier sure doesn't think much particularly when one accounts for the ever critical issue of asset depreciation), it intuitively has one important implication: every incremental dollar of debt created at the public level during a time of stagnant growth (such as Q1 2012 as already shown earlier) should offset one dollar of deleveraging in the private sector. In turn, this should facilitate the growth of private America so it can eventually take back the reins of debt creation back from the public sector (and ostensibly help it delever, although that would mean running a surplus - something America has done only once in the post-war period). This growth would manifest itself directly by the hiring of Americans by US corporations, small, medium and large, who in turn, courtesy of their newly found job safety, would proceed to spend, and slowly but surely restart the frozen velocity of money which would then spur inflation, growth, public sector deleveraging, and all those other things we learn about in Econ 101. All of the above works... in theory. In practice, not so much. Because as the WSJ demonstrates, in the period 2009-2011, America's largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers. Those among us cynically inclined could say, correctly, that the US is incurring record levels of leverage to fund foreign leverage, foreign employment, and, most importantly, foreign leverage.
Guest Post: The New Drug of Choice In The White House, Federal Reserve and Treasury: Delusionol (tm)Submitted by Tyler Durden on 04/27/2012 10:45 -0500
Inside sources are reporting that there's a new drug of choice circulating in the hallways of power--the White House, Federal Reserve and the Treasury Department--and it's a perfectly legal prescription psychotropic: Delusionol (tm). Delusionol works by activating the parts of the brain that replace cognition and reasoning with positive fantasies. For example, a driver on Delusionol might run over a person in a wheelchair, bounce off a fire hydrant and send a baby carriage hurtling into a brick wall, and they would be happily convinced that they were an excellent driver. Now you understand why Delusionol is being gulped in vast quantities in the halls of power: the guys (and yes, it's mostly guys) really want to believe the "economic recovery" they've been hyping, and since it's rationally preposterous, they need a drug to suppress recognition that their policies have only made the financial disease worse and stimulate a delusional belief in the fantasy of "recovery."
There have been many grand experiments in social engineering during the past several centuries. We have witnessed the American Revolution, the French Revolution, the American Civil War, Communism and finally 1999 and the founding of the European Union. It is an interesting exercise to consider the long view as I have wondered what the world looked like in 1789 which was thirteen years after the commencement of the American experiment. It seems then historically that thirteen years after America began we were in a process of formation and working towards national goals as a coalition of individual States while we find the European Union, thirteen years after its inception, following quite a different route. May 6 may mark the date when the sleeper finally awakens as Greece and France may both vote in such a manner as to significantly change the political landscape on the Continent. We submit that we are quickly coming to a major reversal in both equities and in credit/risk assets and that instead of being aggravated that it took so long that you should be thankful that you had the luxury of time to prepare for it.
Futures are unchanged after dropping steeply overnight following the Spanish re-downgrade as the Italian 5/10 year bond auction was bad, but still passed (somehow the lack of the European bond market ending is good news). This is ironic with Europe very much on edge following the release of very disappointing EU data, with German confidence, French consumer spending, Spanish unemployment all worse than estimates. Offsetting all of the negativity to some extent is the gross JPY10 trillion and net JPY5 trillion injection by the BOJ, which is a harbinger of what will happen west of Japan when push comes to shove. And so now all eyes turn to US GDP, which, continuing the Constanza bizarroness, better miss for stocks to surge, as a beat of consensus of 2.5% will mean the Chairman was not joking when he told the world he was morphing from a dove to a hawk (if only for theatrical purposes).
- Hollande Says Germany Can’t Make Europe’s Decisions Alone (BBG)
- Monti Hits at Eurozone Austerity Push (FT)
- Firm that made loans to Chesapeake CEO defends them (Reuters)
- Bo Xilai's Son Doesn't Drive a Ferrari. He drives a Porsche (WSJ)
- Geithner Urges China to Loosen Hold on Finance System (BBG)
- and yet... Son of Bo Xilai Says Father’s Ouster ‘Destroyed My Life’ (BBG)
- U.S. growth slows as inventory accumulation wanes (Reuters)
- S&P 500 Dividend Payers Climb to Highest in 12 Years (BBG)
- Lacker Sees Fed May Need to Raise Rates in Mid-2013 (BBG)
- Ireland Passes Latest Bailout Review (WSJ)
In a week that Spain can't wait to end, the country was just hit with the bad news bears Trifecta, starting with the Real Madrid loss, following with the second S&P downgrade of Spain's credit rating for the year last night (or is that now SBBB+ain?), and concluding with economic data released this morning which showed that the economy is in a free fall that is approaching that of Greece, after retail sales fell for the 21st consecutive month, while Q1 unemployment soared to, drumroll please, one quarter of the working population or 24.44% to be specific, trouncing consensus estimates of 23.8%, and up nearly 2% from the 22.85% as of December 31. Which likely means that the real unemployment is far higher, and confirms not only that the economy is in free fall mode, but that Moody's, which delayed its downgrade of the country's banks to May, will proceed shortly.