Saving the Western Economies

Averting Financial Armageddon

After the near-collapse of the financial system in 2008, a growing number of people have come to realize that our monetary disease is terminal.  

by Keith Weiner
It seems self-evident.  The government can debase the currency and thereby be able to pay off its astronomical debt in cheaper dollars.  But as I will explain below, things don’t work that way.  In order to use the debasement of paper currencies to repay the debt more easily, governments will need to issue and use the gold bond. (Wherever I refer to gold, I also mean silver. For the sake of brevity and readability I will only say gold in most cases.

The paper currencies will not survive too much longer.  Most governments now owe as much or more than the annual GDPs of their nations (typically far more, under GAAP accounting).  But the total liabilities in the system are much larger.

The shining city upon a hill

Who Gave Us the Right to Remake the World?

By Patrick J. Buchanan 

U.S. Ambassador Michael McFaul, Obama’s man in Moscow, who just took up his post, has received a rude reception. And understandably so.

In 1992, McFaul was the representative in Russia of the National Democratic Institute, a U.S. government-funded agency whose mission is to promote democracy abroad.

The NDI has been tied to color-coded or Orange revolutions such as those that dethroned regimes in Serbia, Ukraine, Kyrgyzstan, Georgia and Lebanon. The project miscarried in Belarus.

The NDI is one of several agencies, dating to the 1980s, that were set up to subvert communist regimes. With the end of the Cold War, however, these agencies were not decommissioned, but recommissioned to serve as something of an American Comintern.

Where the old Comintern of Lenin sought to instigate communist revolutions across the West and its empires, post-Cold War America decided to promote democratic revolutions to remake the world in the image of late 20th century America.

In 2002, McFaul wrote a book: Russia’s Unfinished Revolution.

Vladimir Putin’s men are not unreasonably asking if he was sent to Moscow to finish that revolution. Putin has already accused Hillary

Sayonara net creditor country

Japan's first trade deficit since 1980 raises debt doubts

By Kaori Kaneko and Tetsushi Kajimoto

Japan's first annual trade deficit in more than 30 years calls into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to fickle foreign investors.

The aftermath of the March earthquake raised fuel import costs while slowing global growth and the yen's strength hit exports, data released on Wednesday showed, swinging the 2011 trade balance into deficit.

Few analysts expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge portfolio of investments abroad. A steady inflow of profits and capital gains from overseas still outweighs the trade deficit.

But the trade figures underscore a broader trend of Japan's declining global competitive edge and a rapidly ageing population, compounding the immediate problem of increased reliance on fuel imports due to the loss of nuclear power.

Only four of the country's 54 nuclear power reactors are running due to public safety fears following the March disaster.

Being practical isn't what revolutions are about

Egypt’s Revolutionary Narrative Breaks Down

With Hosni Mubarak long gone, a heavily Islamist parliament in place, and the military in uneasy command of the country, who speaks for the revolution?

BY LAUREN E. BOHN

On the first anniversary of Egypt's revolution, the Semiramis InterContinental, a five-star luxury hotel overlooking Cairo's central Tahrir Square, offered an espresso-stained postcard of the deep political and social divides that have emerged since Hosni Mubarak's downfall.

As hundreds of thousands Egyptians converged on the square on Jan. 25, the hotel's café became the locus for discordant symposiums among Egyptians of diverse political and social backgrounds. Protesters, clad with stickers and signs that urged Egyptians to press forward with the revolution, shuffled in for a coffee (and, for some, an alcohol) break. In another part of the café, Egyptian businessmen discussed the construction of new resort hotels on Egypt's glimmering Red Sea with their colleagues from the Gulf. Still, others sought refuge from what one 38-year-old Egyptian restaurant owner described as "the never-ending noise of the revolution."

The long and painful road to deleveraging

Working out of debt

The efforts of developed countries to work out from under a massive overhang of debt shows how uneven progress has been. US households have made the greatest gains so far.

By Karen Croxson, Susan Lund, and Charles Roxburgh, McKinsey Global Institute

The problem

The deleveraging process that began in 2008 is proving to be long and painful, with many countries struggling to reduce debt during a sluggish economic recovery.

Why it matters

National economic prospects depend on how deleveraging plays out. Historical experience suggests that excessive debt is a drag on growth and that GDP rebounds in the later years of deleveraging.

What to do about it

Companies active in countries that are experiencing deleveraging should closely monitor progress toward targets that historically have coincided with economic improvment. These include banking-system stabilization, structural reforms, growing exports and private investments, and housing-market stabilization.

The deleveraging process that began in 2008 is proving to be long and painful. Historical experience, particularly post–World War II debt reduction episodes, which the McKinsey Global Institute reviewed in a report two years ago, suggested this would be the case. And the eurozone’s debt crisis is just the latest demonstration of how toxic the consequences can be when countries have too much debt and too little growth. (The full report, Debt and deleveraging: The global credit bubble and its economic consequences (January 2010), is available online at mckinsey.com/mgi.)

44 caliber persuasion

Which Countries Will Be Forced To Bail Out The Developed World

by Keith Weiner

Update: literally seconds after this article was posted, we receive news that the IMF will seek Saudi contribution to the European bailout fund. There you have it - you enjoy that implicit US protection Saudi emirs? It is about to cost you.

While it is best to pray that NASA will find some very rich and not so intelligent life on Mars so it can bail out the world as it sinks deeper and deeper into a untenable debt hole (which somehow can be "filled" only by issuing more debt at least according to tenured economists at ivy league institutions), a strategy of planning for a realistic outcome may not be a bad idea. The question then is who in the world has some/any spare leverage capacity to incur even more debt and use the proceeds to fund a Eurozone-American-Chinese collapse. Enter the Economist's "wiggle-room index." The publication, best known for recently introducing the "shoe thrower index" (remember the Arab Spring and how Fed induced runaway inflation generated a "democratic" revolution across MENA?) has

Go to Jail, do not pass through Go, do not collect your Votes

Goldman swap shows Greece was Europe’s sub-prime nation

By Nick Dunbar

All the talk about Greece trying to persuade its creditors to swap some once-valuable bonds for new ones worth much less reminds me of another Greek swap that I wrote about in 2003. That deal with Goldman Sachs, designed to conceal part of the country’s ballooning debt-to-GDP ratio in order to conform to the rules for Europe’s single currency, was analysed by EU statistics agency Eurostat in a report published last year.

An innocent victim of the blind Justice

The Greek/Goldman 2001 deal, overlooked aspects, and open questions

Former prime minister Costas Simitis lost in 2001 a timely opportunity to tackle the Greek Debt Crisis in its infancy, using Goldman Sachs cheap tricks, allowing the Debt Crisis to explode during the reign of New Democracy prime minister and expert PS3 player Costas Karamanlis  

By The ECB Watch

In 2001 the Greece ministry of finance hired Goldman Sachs to enhance its books using derivatives. This became known in 2003. Two noticeable events occurred in  2010. 

First, the EU mandates audits into Greece’s national accounts, uncovering huge irregularities, including those related to the 2001 deal. This received financial media coverage (Wall Street Journal…). It was suspected, then, that, in addition, Goldman Sachs shorted Greek debt which, on the face of it, is a market abuse. The final audit, however, came at a time when the media coverage had dissipated: we will see that it's unfortunate. 

Second, Goldman Sachs’ wrongdoing in the subprime crisis was made official by the SEC and congressional investigations. The EU authorities and the UK (Gordon Brown) declared that they would carry out due diligence checks on this issue, in cooperation with the US.

What were the consequences?

One right thing at exactly the right time

Eventually, Will Come a Time When ....

by Mike "Mish" Shedlock

Inquiring minds note that French presidential candidate Le Pen calls for France to quit euro

Marine Le Pen, the leader of France’s far-right National Front, has made abandoning the euro one of the pillars of her presidential election campaign, launching a powerful attack on the ailing single currency as she seeks to bolster her already strong showing in the opinion polls.

Presenting her “presidential project”, Ms Le Pen said Europe should give up the euro, which had “asphyxiated our economies, killed our industries and choked our jobs” for years, as well as causing France to accumulate “Himalayan” debts. In any case, she added, the country should prepare a planned exit from the currency union. “We need to anticipate the collapse of the euro rather than suffer from the collapse of the euro,” she said in a television interview on Sunday.

Le Pen supports misguided policies on trade and numerous other issues. However, protectionists and isolationists will eventually win the way, on one issue and one issue alone.

Last April, in Finland, the "True Finn" party soared from obscurity based on one simple idea: stopping bailouts of euro-zone member states. The rest of the "True Finn" platform was cancerous, yet meaningless. Voters everywhere are fed up with bailouts.

My Point

Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.

Le Pen may be too early, and France may not be that country, but the time will come.

Greece, Finland, Germany, Belgium, and even France are possibilities. All it will take, is for one charismatic person, timing social mood correctly, to say precisely one right thing at exactly the right time. It will happen.

The central lesson of the financial crisis is ignored

Why the Fed Slept
By R. Samuelson 

The recent release of the 2006 transcripts of the Federal Reserve's main policy-making body stimulated a small media frenzy. "Little Alarm Shown at Fed at Dawn of Housing Bust," headlined The Wall Street Journal. The Washington Post agreed: "As financial crisis brewed, Fed appeared unconcerned." The New York Times echoed: "Inside the Fed in '06: Coming Crisis, and Banter."

Comments from members of the Federal Open Market Committee (FOMC) now seem misguided. The first 2006 meeting was the last for retiring Fed Chairman Alan Greenspan. Janet Yellen -- then president of the Federal Reserve Bank of San Francisco and now Fed vice chair -- said "the situation you're handing off to your successor is a lot like a tennis racket with a gigantic sweet spot." Treasury Secretary Timothy Geithner -- then head of the Federal Reserve Bank of New York -- called Greenspan "terrific" and suggested his already exalted reputation might grow even more. There was no sense of a gathering crisis.

All true, but it begs the central question: why? The FOMC members weren't stupid, lazy or uninformed. They could draw on a massive staff of economists for analysis. And yet, they were clueless.

It wasn't that they didn't see the housing boom or recognize that it was ending. At 2006's first meeting, a senior Fed economist noted "that we are reaching an inflection point in the housing boom. The bigger question now is whether we will experience (a) gradual cooling ... or a more pronounced downturn."

Doublespeak

Opposing Imperialism Is Not "Isolationism"

By Sheldon Richman

When pundits and rival politicians call Ron Paul an “isolationist,” they mislead the American people — and they know it.

They know it? How could they not: Ron Paul is for unilateral, unconditional free trade. He believes any American should be perfectly free to buy from or sell to any person in the world. In that sense — the laissez-faire sense — he favors globalization, which, applied consistently, would require a worldwide free market. He’s such a strong advocate of free trade that he objects to the world’s governments, led by the U.S. government, setting up international bureaucracies, such as the World Trade Organization, to manage trade. He thinks trade should be a totally private matter. That’s a solid classical-liberal, or libertarian, position.

So why is Paul repeatedly called an isolationist?

Apparently in today’s political world, being an isolationist means opposing the U.S. government’s policing the rest of the world through invasion, occupation, and war — that is, militarism. The word “isolationist” has always suggested a fear of foreigners, and no doubt those who apply the word to Paul want to cash in on that sense. So we are left with the daffy conclusion that Ron Paul is a xenophobic, head-in-the-sand isolationist precisely because he prefers peaceful trade with foreigners rather than invasion, occupation, and demolition of their countries.

If that’s what it means to be an isolationist, count me as one too.

The Monster of Jekyll Island

The Fed’s Men Behind the Curtain

by Jeffrey Tucker

The debate about the Fed is under way, and thank goodness. But as with many policy debates, there really shouldn’t be a debate at all. That’s because, if you think about it, the idea of central banking makes no sense.

We don’t have a government-created central repository that plans and manages shoe distribution. The market takes care of that. We don’t have one for cabbage, keyboards or curtains. Somehow, we get books, clothes, tree-cutting services and everything else we need and want without a central planning agency that manages the quantity available, fixes the prices of the products and bails out the firms when they overextend themselves.

Jack and Jill going down

The extras will all be cast as cannon fodder

By Ilargi
For today’s global financial problems, there are no solutions that are favorable to either incumbent politicians or wannabe leaders (unless they’re extremists; perhaps), let alone to the people they claim to represent. All our herd of leaders can do is to postpone the inevitable outcome of inevitable processes as long as possible. 

That's why we see Obama presenting yet another housing plan that won't work, and Europe setting up the umpteenth Save Greece concoction that is doomed to fail before it's signed - if that happens at all -. Obama knows it, and so do Europe's leaders. 


The disaster they're seeking to avert, it seems, is not so much economic depression as it is their being voted out of office. And this pattern is not going to change, not as long as they can keep up appearances by seizing ever more of our children's future wealth, not as long as we let them. 

Greece is negotiating a deal with investors to achieve a 70% haircut on existing bonds, up from 21% hardly more than half a year ago, and it still won't be enough. The 49% increase since last summer should be a huge red flag for everyone. 

Why that increase? Well, first of all of course because 21% was always ridiculously low. But something else is happening too: the biggest developing problem for Europe is that a Greek default can increasingly be enormously profitable for certain parties in the market. And why should they then work to "save" Greece? 
It has been clear for a long time now that Greek bonds have no value left at all. During that time, the smarter kids in the class have been able to position themselves according to that fact. Therefore the noose around the EU and ECB necks gets pulled in tighter as we go along. And as the ridiculous notion of the 70% haircut being labeled as "voluntary" keeps being touted.

The IMF is pressuring the ECB to also take a haircut. Other central banks and sovereigns are next in line. Hello, Fed! Hey, China! The ECB wants to sell its Greek paper to one of the European emergency funds, which can then take the haircut. Musical chairs are making a come-back as a highly popular game these days. 

The smarter kids are laughing all the way to all the banks as they are paid all the money they want by all the bankrupt nations seeking to hide their insolvency from their own citizens, squandering those very citizens' scarce remaining wealth in the process.

We can only keep our societies alive and running by telling a seemingly never ending series of lies. And if everyone had the same interests, this delusion could last quite a while; we’ve been doing it for 4-5 years already, after all (and arguably for much longer). But not everybody has the same interests, not anymore. 

University 2.0

A Revolution in Higher Education is Underway

By Mark Perry

A few days ago, I reported on how MITx could revolutionize higher education by offering free online classes along with a new benefit: credentials. Beginning this spring, students will be able to take free, online courses from MIT, and if they prove they've learned the materi­al through an assessment, they can pay a fee and receive a certificate from MITx.  

In a related recent development, Felix Salmon and The Chronicle of Higher Education report this week that Stanford University professor Sebastian Thrun, who taught an online artificial intelligence course to more than 160,000 students in the fall through Stanford, has given up his tenured teaching position there to go full-time with Udacity, a new start-up firm he co-founded that offers low-cost online classes.

From The Chronicle:

"Mr. Thrun told the crowd at the Digital–Life–Design conference in Munich, Germany that his move was motivated in part by teaching practices that evolved too slowly to be effective. During the era when universities were born, “the lecture was the most effective way to convey information. We had the industrialization, we had the

Yet Another Reminder

DEMOCRACY AS AN ILLUSION

By Simon Black

With over 150 million registered users, the file sharing site MegaUpload.com is one of the most popular on the Internet. At least, it was.

The site has now been seized by the US government and its homepage converted to an FBI anti-piracy warning. Its founder, a high tech entrepreneur named Kim Dotcom (yes, he had it legally changed), was arrested in New Zealand after his homes were raided and assets seized.

These actions were all at the behest of the US government. And it’s just the latest example of Big Brother overextending its authority across the entire world.

Last week, we discussed the grassroots efforts to stop passage of the SOPA/PIPA legislation that would give the US government

Dickens is timelier than ever

Hard Times Again

By Theodore Dalrymple 

We live in hard times, and all the indications are that they may get much, even very much, harder. No one, at any rate, would take a bet that they won’t.

The number of children in America claiming subsidized meals in school has shot up; the homeless are increasing by the hour; the formerly prosperous are laid off without so much as a thank you; the young struggle to find any work at all; beggars are making a comeback on the streets of cities as if they had been hiding all these years, waiting for the right moment to emerge from their subterranean lairs into the world above.

The February bicentenary of the birth of Charles Dickens, then, could hardly come at a more appropriate moment in economic history, for Dickens was the revealer, the scourge, the prose poet, of urban destitution—a destitution that, in our waking nightmares, we fear may yet return.

Dickens knew whereof he wrote. It was his habit to walk miles through the streets of London, and no man—except perhaps Henry Mayhew—was more observant than he. Often accused by his detractors of exaggerating reality, he claimed in the

An Indian Puzzle

The Tragic Truth About India's Caste System

Untouchables cling to it because they have few other choices.

By Shikha Dalmia 

My American friends frequently ask me why India’s caste system, a pre-feudalistic division of labor that assigns one’s line of work at birth, has persisted into the 21st century in defiance of every civilized notion of justice and equality. I thought I knew the answer: The need of the privileged upper castes for cheap labor to do their dirty work. But there is an even more tragic explanation that I discovered during a recent visit to New Delhi while talking to Maya, the dalit or untouchable—the lowest of the four castes—who has serviced my family for 35 years. Maya herself clings to her caste because it offers her the best possible life, even in modern India.

The puzzling thing about the caste system is that it has endured without any legal force backing it. Unlike slavery, under which whites actively relied on authorities to maintain their slave holdings, the caste system is an informal, self-perpetuating institution that has

A Crisis of Capitalism?

The Market Economy Under Siege

Βυ  Pater Tenebrarum

Ever since the 2008 financial crisis we have frequently remarked in these pages how ludicrous the assertions are – which keep being repeated ad nauseam in the mainstream media – that the financial and economic crisis was a result of 'laissez faire' allegedly gone too far. Not a week has passed since then without someone coming out and blaming the non-existent free market for the calamity.

First of all, it should be perfectly clear that the Western regulatory democracies do not represent free unhampered market economies. They have a socialistic, centrally planned monetary system and free enterprise and production are restricted by a mountain of licensing laws and administrative legislation that is unsurpassed in the history

More is Different

The Future of Economics

By Steve Keen

For its entire history, macroeconomics has been dominated by mathematical models that ignore the existence of money, debt and banking, and that perceive the economy’s movement through time as transitions from one state of equilibrium to another.

At any point in history, these would be heroic assumptions. Could it really be true that models without either money or instability are provably superior at predicting the economy’s future course than

If we learn nothing, then we deserve to lose

What Have We Learned in the Past 13 Years?

We have learned nothing since 1999 except the Central State and Central Bank will intervene in the market to bend price and risk to serve the Status Quo.

If we learn nothing, then we deserve to lose. This is not a popular concept in America at this point in its history, when monumental errors are denied, excused, rationalized or quickly absolved by those who committed them.

As a small-fry investor, when I veer away from my discipline and system, I predictably lose money. As I sift the ashes of the trade, I always remind myself: if I learn nothing from my studies and experience, then I deserve to lose.

What exactly has America learned since January 1, 1999, 13 years that included two stupendous financial/credit bubbles, two hot wars and an explosion in public and private debt? If we examine the policy changes and institutional changes since the 2008 global financial meltdown, then we have to conclude that we've learned a very few things:

1. We've learned that the way to "repair" the catastrophic damage of a financial bubble bursting is to inflate another financial bubble in another asset class.

2. Systemic incentives will be put in place for everyone to speculate in the new bubble, with two important caveats: the Financial and Political Elites will get to play the game with moral hazard, i.e. their

The overdue cleansing of the Augean stables

Living Off Immoral Earnings

By Tim Price

“The reality… is that banks … support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle-and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries.”

 -     Financial Times‟ Lex column, January 19th, 2012.

* * *

“Stephen [Hester, CEO of RBS] is being urged by a number of people to accept the bonus and I think he will”… This person [an unnamed senior banker] added that if [Hester] turned down his bonus, it would “demoralise” staff members and would send a signal that they now effectively “worked for an arm of the civil service or a utility, rather than for a bank.”

 -     Unnamed banker, playing the world’s smallest violin on behalf of Stephen Hester.

 * * *

Erik Schatzker (Bloomberg News): “$1.6 billion in compensation [at Goldman Sachs] is still a lot of money.”

Nassim Taleb: “Anything above zero is too much money.”

Erik Schatzker: “Why zero ?”

Nassim Taleb: “Because it is a utility. Anything you bail out, should not be earning more than a civil servant of corresponding rank. Period.”

 -     Nassim Taleb on Bloomberg News, Oct 18th, 2011.

 * * * 

Contender for leading meme of our time is the idea, fast becoming conventional wisdom, that capitalism is somehow experiencing a crisis. UK Prime Minister David Cameron (or his speechwriter) suggested last week that it is now the time to use the “crisis of capitalism to improve markets, not undermine them.” If we draw a

Nothing Really Matters?

Greek Update

By DoctoRx

Bloomberg.com is out after the close of trading with EU to Have No Deadline for End of Greek Talks.  Bloomberg was flogging the story all weekend that a deal was at hand between the Greek government and its private debtholders.  Now comes this anodyne brief piece that appears to give a Roseanne Roseannadanna spin on it:  ”Never mind”.

Does anything ever matter anymore if it’s not bullish?

Wasn’t this “PSI” initiative make-or-break?  Wasn’t the euro maybe about to go the way of the lost island of Atlantis if a deal were not struck by today?  Maybe the world economy was going to vaporize?

Now . . . fuggedaboutit?

Lawrence Peter (Yogi) Berra said that it’s never over till it’s over.

He didn’t foresee a world in which it’s seemingly never over.

At least with a bond, someday it is… well… over.  That’s a Good Thing.

That’s how doctors handle things.  Faced with a problem, you triage it and if it’s serious, you deal with it right away.  Win, lose or draw, the crisis gets a resolution.

This Greek situation is no longer a Greek tragedy or even a French farce.

It’s Theater of the Absurd.

Time to move on.  We who have followed the twists and turns of the Greek crisis (or is it “crisis”?) now look like the men and women who knew too much.  Que sera, sera.

Any way the wind blows…

Quis custodiet ipsos custodes?

Tragedy of the Commons

by Garrett Hardin

In 1974 the general public got a graphic illustration of the “tragedy of the commons” in satellite photos of the earth. Pictures of northern Africa showed an irregular dark patch 390 square miles in area. Ground-level investigation revealed a fenced area inside of which there was plenty of grass. Outside, the ground cover had been devastated.

The explanation was simple. The fenced area was private property, subdivided into five portions. Each year the owners moved their animals to a new section. Fallow periods of four years gave the pastures time to recover from the grazing. The owners did this because they had an incentive to take care of their land. But no one owned the land outside the ranch. It was open to nomads and their herds. Though knowing nothing of Karl Marx, the herdsmen followed his famous advice of 1875: “To each according to his needs.” Their needs were uncontrolled and grew with the increase in the number of animals. But supply was governed by nature and decreased

Das Kapitulation

Germany capitulates, kicks can well into 21st century…or at least into 2013

by Tyler Durden

The biggest market-moving event so far this year is undeniably the positive (so far) aftershock from Germany's capitulation on monetary expansion and as Michael Cembalest of JPMorgan goes on to note that the ECB, directly and indirectly, is giving its governments and its banks the money that the rest of the world has been taking away. Between the ECB's LTRO largesse and its 'crisis management' initiatives (for example: collateral standards, watered down Basel III, lower bank reserve requirements), it seems clear that the resignation of the German contingency (Stark and Weber) from the ECB last year was a signal of the laying-down-of-arms by the Germans relative to the Periphery (perhaps for fear of the 'powerful backlash' that Monti among other has warned about). While the JPMorgan CIO understands the market's positive reaction (as Armageddon risk is reduced/delayed) he remains a skeptic broadly given the structural reforms and any expectations of growth among most euro-