United Kingdom

The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.

When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.  Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise? Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?

Just because it is never boring after hours:

• MOODY'S DOWNGRADES ITALIAN BANKS; OUTLOOKS REMAIN NEGATIVE

EURUSD sliding... even more. But that's ok: at some point tomorrow Europe will close and all shall be fixed, only to break shortly thereafter. And now.... Margin Stanley's $10 billion collateral-call inducing 3 notch downgrade is on deck.

When you were a child and did something wrong, the worse possible words your mom could say were "wait til your father comes home!" and that dreaded anticipatory angst is what Europeans must be feeling now as the threat of austerity hangs like the sword of Damocles over their heads. The reason we say this is that in fact, as Veronique de Rugy of National Review Online notes, the 'savage' spending cuts in Europe have yet to show up anywhere. All the rhetoric of how Europe's austerity has failed, all the hand-wringing and election-winning, and yet all the major nations are spending more than pre-recession levels; France and the UK did not cut spending at all, and even in Greece and Spain cuts have been small (and any meaningful reforms failed to be implemented). In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts? The trouble, of course, is that while the threat of austerity has struck fear in the hearts of every European voter, the action of raising taxes has hurt just as much and perhaps the "trumpeting the failure of austerity as a reason to go full-Keynesian again" chatter will recede as facts overtake fallacies. As Mark Grant recently noted, there's a big divide between austerity pledged and austerity implemented, as it appears its more about raising taxes than cutting spending.

Arguably, more millionaire money was made during the Great Depression than at any time in history. Well, if that's true then it looks as if history may be poised to repeat itself. The question is, who will be ready?

Can Low Doses of Radiation Cause MORE Damage than High Doses?

It appears that after months of abuse for their water-is-wet economic insights, the San Francisco Fed may have stumbled on to the cold harsh reality that this post-great-recession world finds itself in. The crux of the matter, that will come as no surprise to any of our readers, is credit and "its central role to understanding the business cycle". Oscar Jorda then concludes, in a refreshingly honest and shocking manner that "Any forecast that assumes the recovery from the Great Recession will resemble previous post-World War II recoveries runs the risk of overstating future economic growth, lending activity, interest rates, investment, and inflation." His analysis, which Minsky-ites (and Reinhart and Rogoff) will appreciate - and perhaps our neo-classical brethren will embrace - is that the Great Recession upended the paradigm that modern macro-economic models omitted banks and finance and this time it really is different in that the 'achilles heel' of economic modeling - credit - cannot be considered a secondary effect. His analysis points to considerably slower GDP growth and lower inflation expectations as he compares the current 'recovery' to post-WWII recoveries across 14 advanced economies - a sad picture is painted as he notes "Today employment is about 10% and investment 30% below where they were on average at similar points after other postwar recessions."

All you need to read and some more.

In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years. Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.

This chart tells millions of stories. That’s right: since 1984 (surely an appropriate year) while the elderly have grown their wealth in nominal terms, the young are much worse off both in inflation-adjusted terms, as well as nominal terms (pretty hard to believe given that the money supply has expanded eightfold in the intervening years). So why are the elderly doing over fifty times better than the young when they were only doing ten times better before? There is enough money to keep the economy flowing so long as there are opportunities for people to make themselves useful in a way that pays. With the crushing burden of overregulation and the problem of barriers to entry, these opportunities are often restricted to large corporations. These issues of youth unemployment and growing inequality between the generations are critically important. Unemployed and poor swathes of youth have a habit of creating volatility in response to restricted economic opportunity.

In keeping with the tradition of waking up to reality with a several month delay on downgrades (if being the first to upgrade insolvent Eurozone members), here comes Fitch, to boldly go where Moody's went long ago.

• UNITED KINGDOM L-T IDR OUTLOOK TO NEGATIVE FROM STABLE BY FITCH
• FITCH AFFS UNITED KINGDOM AT 'AAA'; REVISES OUTLOOK TO NEGATIVE

As a reminder, UK consolidated debt/GDP is... oh... ~1000%

The Greg Smith drama refuses to go away (probably for a reason). Earlier, we presented a spoof response from a spoof Goldman CEO. Now, courtesy of the WSJ, here is the real memo sent out from Lloyd and Gary to employees in which we learn that "89% of Goldman employees self reported they provide exceptional services to their clients." But what about the remaining 11%? Because out of 10 employees, just one is required to rob a client, whatever that means these days anyway, blind. Oddly enough, didn't CFA Magazine just find that 10% of all Wall Streeters are psychopaths? That more or less explains it all.

While everyone was busy ruminating on how little impact a Greek default would have on the global economy, the IIF - the syndicate of banks dedicated to the perpetuation of the status quo - was busy doing precisely the opposite. In a Confidential Staff Note that was making the rounds in the past 2 weeks titled "Implications of a Disorderly Greek Default and Euro Exit" the IIF was doing its best Hank Paulson imitation in an attempt to scare the Bejeezus out of potential hold outs everywhere, by "quantifying" the impact form a Greek failure. The end result: "It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion."  In other words, hold out at your own peril. Of course, what the IIF does not understand, is that for hedge funds it is precisely this kind of systemic nuisance value that makes holding out that much more valuable, as they understand all too well that they have all the cards on the table. And while a Greek default could be delayed even if full PSI was not attained by Thursday, it would simply make paying off the holdouts the cheapest cost strategy for the IIF, for Europe and for the world's banks. Unless of course, the IIF is bluffing, in which case the memorandum is not worth its weight in 2020 US Treasurys.

European equity indices are exhibiting signs of risk averse behaviour, with financials and basic materials performing particularly poorly. This follows weekend reports from ECB sources that the central bank does not believe voluntary participation in the Greek debt swap deal will be sufficient, and the CACs will have to be invoked. Markets are also reacting to the weekend press from Germany, claiming the Troika believe Greece will require a third bailout of around EUR 50bln by 2020, however these reports were denied by a German spokesman earlier in the session. European Services PMI data released earlier in the session fell below expectations, compounding the already cautious market behaviour. European Banks have parked a fresh record EUR 820bln with the ECB overnight, showing further evidence that the LTRO has loosened liquidity constrictions in the continent. Commodities are making losses ahead of the North American open following overnight news that China have made a downward revision to their GDP target for 2012. Spot gold is trading down around 0.9% and WTI and Brent crude futures have been making a loss for most of the session so far, however oil has made positive movements in recent trade. These negative movements in commodities are also weighing down upon the commodity-linked currencies, with AUD particularly making losses on the session.

Banking privacy is dead. Completely, totally dead. Murdered, really. The US government is the assailant, and FATCA is the murder weapon. We’ve talked about this a few times before– FATCA is the heinously insidiously piece of legislation that the Honorable Barrack Hussein Obama passed into law in 2010 as part of the “Hiring Incentives to Restore Employment Act”. There were no hiring incentives, and there was no restoration of employment. But any vestiges of banking privacy were destroyed. In brief, FATCA has two key concepts. First, it requires an additional (and completely unnecessary) layer of reporting from all US taxpayers who have ‘foreign financial accounts’ at ‘foreign financial institutions.’ Though as we have discussed before, both of these critical terms are ridiculously and flagrantly ambiguous, putting the onus entirely on the taxpayer. The second key issue is that FATCA puts a burden on ALL foreign financial institutions worldwide to enter into an information-sharing agreement with the IRS; this essentially obliges every bank on the planet to submit reports and customers’ private data to the IRS.  Such provisions are absolutely, 100% impossible. And it’s becoming clear that FATCA was passed with no intention of being enforceable. It’s inconceivable that every institution on the planet could enter into an agreement. And it’s inconceivable that every institution on the planet could possibly know whether every other institution has entered into the agreement. The only thing FATCA has accomplished is scaring the living daylights out of non-US banks. So much so that foreign banks have approached their governments to ask for help.