IMF "saves" europe, and sends it to the dark ages

A very peculiar leak ahead of the G20 summit tells an interesting story. It turns out that the markets may have correctly figured out what is going on. The seemingly unsolvable problem of governments that will soon be forced out of the bond markets (Italy and Spain) may actually be "solved", through a remarkable backdoor to quantative easing.

The ECB standing firm, or rather having some semblance of a firm standing in the face of disaster has so far prevented the money-printing necessary to bail out the entire eurozone. Despite buying both Greek, Italian and Spanish bonds, these operations have so far been "sterilized", which means that the ECB sells other assets so the money supply is not inflated. Unfortunately, this is the reason that Europe is staring into the abyss, while the US is looking a bit more perky due to the mad scientist Bernankes frivolous use of asset purchases. Well, here comes the IMF to the rescue.

In what can only be described as the most evil monetary plot ever, the IMF is planning on bailing out Italy (and possibly Spain?) by lending them money. Their own money, which they previously have contributed to the IMF. This remarkable idiocy has likely been dreamed up by the globalist financial elite as the ultimate way of deluding people into thinking that the situation will be saved, without printing more money. There is only one problem - the money from the IMF comes from the contributing countries central banks.

What will happen is this - central banks will print money, hand it to the IMF, who will lend it back to soon-to-be-serf nations of Southern Europe, while simultaneously demanding different austerity programs in return. It doesn't take a genius to figure out who will benefit from this, and how. Likely, vast swaths of public assets will be "liberalized", at the order of the IMF, and by "liberalized" I mean sold at undervalued prices to corporate friends of the financial elite. We can only imagine what ingenious financial constructions will be created to suck every last penny of value out of whatever state assets that taxpayers have previously paid for, and will now have to surrender to private friends of the financial elites. Why? To be given loans by the IMF, of their own money.

Let me note that I am not against moving assets from public mismanagement to private hands. But this should NOT be done to the benefit of globalist schemers and detriment of citizens, rather such assets (utilities, banks, infrastructure, etc.) should if they are to be privatised be handed back to the citizens that paid for them through taxes. But let's face it - the governments of the West are completely dependent on the financial fraudsters that run the global banking complex, and they really aren't interested in what would be good for any of the European economies. They are interested in creating more financial assets they can arbitrage value out of, through inflationary policies.

The downside of all this? It will be the final piece necessary to start a global inflationary bonanza of unprecedented scale. In addition to this, the Greek protests over losing their sovereignty to the "Troika" will spread through the entire Southern Europe, and the probability of uprisings against the national governments will increase significantly. It's a very nasty secret that neither the welfare statists nor the corporatist elite would like to confess - the fact that they are in a mutually dependent relationship which serves to impoverish the average citizen, and enrich both the financial elite and government bureucrats.

But none of this will last more than a few years. What will happen, I wonder, when inflation burns across Europe and the actions of the ECB will be pointless, as long as new money can be funneled to the markets through the IMF intermediary, to continue to enable government overspending? We are seeing the final moves of a failing financial era, and when it is over not much will be the same. Since 2008, it has become increasingly obvious that the global banking elite have overplayed their hand, and the only way to keep the status quo ponzi game running is to inflate at increasing speeds. It shouldn't be too long before this starts being felt in earnest in consumer prices, and at that point we ask : What now? Game over?

And again, lets blame Germany

Here's a memo to Ambrose Evans Pritchard, and all the other delusional blame-throwers out there : STOP FRIKKING BLAMING GERMANY! Look, I know its a tradition soon a century old to blame all the problems of Europe on Germany. It's getting pretty old, especially since usually, Germany either didn't do it or at least wasn't the only culprit. But for those of you who still believe your grad-school history books : Do you think that the political machinery of the Allied forces, after more or less having destroyed TWO generations of Americans, Britons and French would after the war say : "Well, we sort of had some blame too, after all we didn't handle that Versailles peace very well, and also maybe starvation blockades weren't such a good idea, nor was selling Eastern Europe to Stalin or killing millions of innocent civilians"

I'm not denying any of the atrocities done by Germany during the reign of Adolf Hitler, I'm simply posing the following question : Where was Roosevelt, Truman and Churchill at the Nurnberg trials? Or maybe you people didn't know (because you believe the standard accounts of history written by those victorious) : Churchill ordered the incineration of a quarter million of German civilians, because he thought it would benefit the war effort. Truman incinerated even more Japanese, despite there being many indicators that the Japenese were willing to surrender. And if you go check history as it was written directly after the war, it was pretty clear that FDR willingly ignored intelligence pointing towards an imminent attack by the Japanese, meaning he sacrificed a few thousand americans at Pearl Harbor.

But don't take my word for it. Go look it up. Or, do as you all usually do, stick your heads in the sand and chant "It's all Germanys fault!". If this madness doesn't stop, we may get another European armed conflict the coming decade, and it won't be pretty. Let's just hope that Germany and all other nations currently paying for the eurozone (which is rumoured to be what Germany had to "pay" to NATO to be "allowed" to re-unite with Eastern Germany) just shut their borders, tell the rest of Europe to go stick their nonsense where the sun doesn't shine, and we can all be done with this despicable mess.

At least, Ambrose Evans Pritchard recognizes to some part what is actually going on :

This document is not final, of course. Mr Sarkozy knows how go full-throttle histrionic, throw a fit, play the war guilt card, scream, shout, and even threaten to walk out of Emu (as he did in the May 2010 summit). He is so mercurial and impetuous that he might actually do something shocking if Germany refuses to meet him half way.

Go ahead, Mr. Sarkozy, and do the world the favour of playing your bluff one last time. Hopefully, Germany will take you up on that offer, and re-introduce the Deutsche Mark. Then you can have your beloved socialist union, and your own taxpayers can pay for the nationalization of your insolvent banking system.

Pentagon, psychic warfare and Glenn Beck

As a foreign observer, who is deeply interested in the machinations of the US warfare machine, I cannot help but think that maybe there is something going on. November 30th, if I remember correctly, is the end-date for the "Super-committee" to come up with budget cuts or budgets of all departments will be slashed. There has already been one congressman out trying to propose that the Pentagon should be excluded.

And now, we have two very interesting "threats". First, there is the strange incident of Iranian plotting against a Saudi ambassador. Aside from the obvious fact that the Saudis will use this as an excuse to turn up the rhetoric agains Iran, the whole thing reeks of crime provocation or outright fraud.

In addition to this, since the US has executed (without trial) a man that may at least have looked faintly like Usama Bin Ladin, and thereafter dumped him at sea to hide all evidence, the Afghani threat is no longer viable. NATO is likely to give up within a year or two, and Afghanistan will return to being the words premier drug-smuggling route. But fear not, after pushing the Pakistani into the grateful hands of the Chinese, the war machinery is now very busy creating a new enemy, complete with terrorist movement and demonic leader.

If one wasn't a believe in coincidences, it would almost look like the Pentagon is trying to make themselves indespensible to avoid budget cuts. And then there is the sad story of Glenn Beck.

Glenn Beck was always a strange character, swinging between admiration for the neo-cons, and shouting libertarian anti-state propaganda (but like Ron Paul, always with a solid admiration for the founding fathers). It is my firm belief that he unfortunately peeked a bit too far behind the curtain, and it was decided that he should be taken off the air. After all, he did quite a lot to show the deep corruption in the US political system, warning about disastrous inflation, pointing fingers towards the US Federal Reserve, and attempted to teach americans a thing or two about what was the foundation for the formerly marvellous US economy.

And since I watched almost every episode from this side of the pond, I couldn't help but notice something that happened as the Glenn Beck program moved towards its final season. Clearly, someone made poor Glenn Beck believe that the "moslem threat" against the Western world was the one important focal point. He probably didn't need much convincing. From what I've seen lately, he's been on a religious quest to promote the state of Israel, and while I can still admire the fact that he seems to be a deeply compassionate man, he clearly would have done much more use by continuing to bash the endless spendthrift US government instead of running the errands of the neo-con war machinery. The thing that probably did him in was when he admitted on air "I'm starting to feel like Ron Paul when it comes to foreign policy". Never look too far behind the curtain, unless you are prepared for the consequences.

Is America tired enough of war, or will the military-industrial complex score yet another victory by sending US troops on some wild quest to blow up windmills?

Are the Germans about to leave the Euro?

The rumour-engine is running on all cylinders. I pitched a few thoughts to Robert which he laid out here, and here. Basically, Philippa Malmgren (who RW thinks is a real insider) blogged the opinion that the Germans were about to bail on the Euro. This did not show up in any of the regular international news-outlets. I've tried to find any reference to it on Reuters, Bloomberg and so on. Zip. Nothing. I found it because a Swedish business paper put it out in their online version.

And then there are the "currency talks" coming which includes the finance ministers of Germany and France, and leaders of the IMF, World Bank and OECD organizations. They are to take place on Thursday, the 6th of October. If one wanted to re-introduce the German Mark, the ideal time to do it would be an announcement on Friday, after the markets close. That gives you a weekend to do the logistics. Let's not think about what happens when markets open on Monday.

So, while I was pondering this, I came up with two more interesting things to take into account.

1. Axel Weber did not run for ECB chairman
2. Jürgen Stark announced that he is leaving the board of the European Central Bank

If there was to be a move back towards the German Mark, then it would have to be lead by the Bundesbank. I find all this very interesting, to say the least. And there are more things a-buzz on the web. Karl Denninger reports of persistent rumours that the Germans have been preparing to print new Marks.

I remember last year, when Merkel was very much against the bailout of Greece. And then, there was a delegation from the IMF that went to Berlin in late April, and all of a sudden Merkel announced the bailout fund. It makes you sort of wonder, was this an IMF economic "hit job"? Did someone find a way to apply pressure on Merkel to agree to bailing out Greece? If Lew Rockwell is correct, and she was handpicked by the globalists, then they probably made sure to have all the leverage they need. Probably a lot of stuff you can dig up on an old communist youth-leader.

If there is nuclear news out of Germany, the weekend after this is the one to watch.

Monetary forensics

Since RW has been pretty vocal about the price inflation that is about to hit, I decided to do some simple monetary forensics, and found a few interesting things you might want to see. We all know that there are a bunch of different monetary aggregates, that measure different pseudo-real amounts of money in the system. First out we have the required reserves, which is the base upon which banks do their lending. After that, we have M1, that is the sum of all cash and demand deposits. Below graph shows percentage change in required reserves, and the M1 money supply.



Now cash is a bit tricky, because much of it may be hoarded in other places than the US, or may exist as vault cash, which means that the correlation between paper money and prices may be somewhat distorted. Demand deposits, on the other hand are pretty simple. It is money held at your local bank, available for immediate usage. Below shows percentage change in demand deposits and required reserves :

Finally, we have the M2 money supply, which includes things like small time deposits, savings accounts and money market funds. This wouldn't really be that interesting, if it weren't for the fact that you can draw checks and make payments directly from some of these accounts as well these days, and thus they could be considered part of the money supply. Here is M2 and required reserves :

So, what to make out of all of this? Well, clearly something is creating a lot of new money, and at increasing rates. M1 is increasing at a 15% annual rate, demand deposits at nearly 40% (!!!) annual, and the M2 money supply at about 8%. Remember however, that these are comparisons year-over-year, and most of the change is probably in the last few months, meaning the increase and acceleration is EVEN BIGGER.

Most people would say this is all a result of the monetary policy of the Federal Reserve. I would agree on that, but there is one more mechanism that isn't mentioned that often - the shutting down of failing banks by the FDIC. Basically, the FDIC goes in and takes over a failed bank and saves the depositors. However, since the financial crisis started the losses by the FDIC made on these transactions have been in the range of 10-35%, meaning that the banks (due to the change in FASB in early 2009) have been lying about the value of their assets, and as the FDIC goes in and saves them it effectively refills the hole in the banks balance sheet. Where does the FDIC get its money? Well, from the member banks, but in the end everyone knows that the Treasury is backing the whole thing. The important thing to notice is that these broken banks know they are bust, but until they are picked apart and the assets sold off, the capital locked into those banks are not used for additional lending, meaning they do not contribute to increases in the money supply.

I don't know how big an effect this has, but I do know that the more of the bad assets and toxic waste is cleaned out from the banks balance sheets, the higher the risk of massive money creation on a scale most people probably cannot imagine. Or, to put it simply, if the Federal Reserve succeeds in what they have attempted, namely to get "credit flowing" again, there will be an inflationary firestorm of enormous proportions.

Just imagine what those money supply figures would show right now if the US economy was "doing good". *Brrrrr*

HOT : Merkel just crossed the Rubicon

I think we just got an important signal that the euro is toast. Merkel just went out and said the euro is more stable then the d-mark was. To the best of my knowledge, this is the first time a German official has mentioned the d-mark during the euro-crisis. This like means that everyone is talking about it behind closed doors. It also means that german officials now admit the population wants the d-mark back.

With Finland openly defying the eurocrats, this may be the beginning of the end of the euro. Be prepared for possible explosions come September.

The case for a global inflation shock

Switzerland is panicking, because their currency is the only thing people trust. Switzerland, or more specifically - their central bank, are stupid. That didn't prevent them from trying to push down the value of their currency, despite getting a very nasty loss last time they tried. Here's what happened : It lasted about 7 hours.

The fact that the two benchmark currencies of the world, the euro and the dollar, are now in a mutual death spiral puts all other central banks in a very nasty position. Should the euro-crisis resolve itself, or at least calm down, the euro will likely detach from the dollar and send it off a cliff. Switzerland is just one in a long line of countries that have problems with the global debasement of the dollar. Brazil is trying to prevent capital inflows. China is slowly releasing its dollar peg (not fast enough though!) to try and get domestic prices under control. Numerous countries in the less developed world that have pegged to the dollar have seen massive food price inflation. In short, the US dollar system is becoming more and more hated worldwide, because either you get inflationary shocks (if you're pegged) or deflationary such (if you have a more solid currency that is free-floating).

I'm going to bet you that Milton Friedman didn't foresee this happening when he said that free-floating currencies would automatically adjust and everything would be fine.

The problem is that the longer this goes on, the higher the pressure on other central banks to at least try to adapt somewhat to the situation. Countries like Switzerland will inevitably inflate their own currency, and countries like China will have to loosen their peg and see their currency appreciate. In both cases, its just out of the frying pan into the fire. Choose your poison.

The nastiest problem is that currency intervention is dangerous, because you can suffer massive losses as a central bank. This makes the more "reasonable" choice to just inflate the domestic money supply, since there is no risk of any losses for the central bank. And here's my point : Imagine what happens when volatility increases, and the dollar begins to slide ever faster. How many central banks will be able to resist the pressure? It's going to be an idiots race to the bottom. Or, as James Turk recently put it, to the fiat currency graveyard.

The only scenario that I foresee in which there isn't massive global inflation is if all countries (except the US) jointly stand up and say : Screw the greenback. We will try to keep our currencies decently stable against all currencies EXCEPT the dollar. And I just don't see that happening.

Why europeans must start paying attention to China

ZeroHedge muses on the retarded policy of Chinese officials as they are investing deeply in crappy european government debt. I for one, am not laughing, because I think people have missed something.

How do you know that the Chinese don't want these bonds to default?

As China is becoming a larger and larger owner of European government debt, they are getting more and more leverage over european politicians. China has not said to the US that "do as we say or we dump your bonds". Why? Because the US has the worlds largest military capacity, and while the US economy is looking increasingly shaky, there is still an enormous amount of military power that can be wielded to prevent foreign economic attacks.

What does Europe have? What does Hungary have? What does Greece have? Answer : Europe as a whole, and european countries in particular has no leverage what-so-ever over China. Ergo - the situation is going to tilt heavily towards Chinese making the calls. Just like the Chinese are buying up property and business in the resource sector worldwide (especially in Africa), they are buying up European debt not only to diversify out of US debt, but to gain leverage over Europe.

What could this leverage be used for? Let's say Greece or some other country defaults at some point in the future, and China owns a significant part of this debt. It doesn't take a genius to see that the Chinese could offer to accept certain losses on such debt holdings in return for preferential trade arrangements. The population of said country would of course suffer by restricting trade against Chinese competitors, but the government of said country will likely do what national governments always do : Try to protect their own asse(t)s.

It is remarkable that no one discusses this. Everyone just assumes that "The Chinaman is stupid", and while I am confident that there are an equal amount of idiots in charge of policy in China as in other countries, there will also be an equal amount of scheming power-hungry politicians that want world domination just as much as Western globalists. In the modern financial economy that is largely going to be all about who can keep the pyramiding of debt and empoverishment of the masses going the longest, China is purchasing cheap economic weapons for a potential financial war.

In the end though, China is likely to see the same problems from financialization of the economy as the rest of the world, with the difference that they have an enormous pool of savings to rebuild once the rot has been removed from the system. What does Europe have, beyond the endless piles of debt?

Bernankes QE3 Box

Bernanke is now completely boxed in, with no escape route available. The entire financial community seems to have wised up to the comments of people like Mark Faber, Peter Schiff and Jim Rogers. Everyone is expecting QE3. Thanks to ZeroHedge, we also have a pretty good approximation of what it will consist of : Interest rate caps somewhere in the 2-10yr spectrum.

With this priced in, control of interest rates have now been lost by the Federal Reserve and are now completely in the hand of speculators, with new-born bond vigilante Bill Gross leading the pack. Why do I say this? Well, imagine for a second what happens if Ben Bernanke does NOT comply with the consensus view of QE3....

The interesting part is that an end to quantative easing would likely send everyone scurrying into treasuries for safety, as the now freely levitating stock market cannot keep floating without new stimulus. If there is no QE3, I expect money supplies to start contracting rapidly as credit freezes up and lending starts declining. In some magic world turned upside down, this would likely lead to interest rates going lower ..... just like Bernanke wants! The problem is, he doesn't want the deflationary effect of credit contraction to go along with it.

This is the Box that Bernanke Built. In order to "stimulate the recovery", he has to go about the counterintuitive act of raising inflation expectations by monetizing government debt, and simultaneously keep interest rates low despite this. My conclusion? The amount of paper that Bernanke will have to buy is going to be enormous, if he decides on an interest rate cap program. If he doesn't, the market will give a shriek of disappointment, send the dollar soaring and erase the entire "wealth effect" that QE2 created, while simultaneously kicking an already horrible sentiment for the economic future a few steps further down, upon which everyone will scream ...... oh, no - DEFLATION.

The US can play this merry-go-around until there is no middle class left, and the dollar is effectively toilet paper. It may take ten years, or it may only take one year. But at one point or other, it all ends. Very badly.

Hot of the presses : Dodd-Frank doesn't like gold trading

Is this a sign of a coming attempt to clamp down on people buying gold & silver, or is it just the machinations of some idiot trying to interpret the non-law that is Dodd-Frank?

Regardless, it should scare the shit out of anyone in America.

Two types of recessions : Or why the welfare state is about to collapse

A brief overview of the Austrian Business Cycle Theory

It has been said by some financial commentators that the current economic downturn is wholly different than previous recessions, all the way back to the great depression. I would actually agree with them, because there is one fundamental difference between what has happened the last decades. For those of you not fluent in ABCT (Austrian Business Cycle Theory), the basic idea is that through artificially low interest rates, capital is misallocated into more long-term projects than people are actually interested in supporting with their savings. Money becomes artificially cheap, but since this bids up prices of goods and labour, a general miscalculation occurs. The recession enters once businesses and entrepreneurs realize that not enough real resources exist to complete their projects, and those who have overinvested too much goes bankrupt.

This is a rather simple explanation what happens if you change the price over time for money (interest rates). The economy looks like it has more real savings then it in fact does, and therefore it is necessary with a period where bad investments are liquidated, and capital and labour is re-allocated to the sectors that produce the things people are actually interested in. Once the production structure has re-aligned to better support peoples desire for consumption and investment, things go back to normal. This is what has occured during most small recessions since central banking started. Unfortunately, something quite different has happened this time. It may only be a difference in degree - both the "classical" business cycle and this second event can probably be said to have occured during all downturns, but there is still a monumental difference in scale.

Lending is done to enable the purchase by business of capital goods, which make them more effective and allow them to produce more goods and services at a lower price. Thus, their profit increases and it is out of this profit that the interest on the loan is paid. This is all good and well - it is how the economy has functioned and will always function, the problem arises when you start investing in non-productive assets. The two main non-productive assets that the world is currently riddled with is government loans and consumer loans. These loans are not made to increase future production, instead the opposite - they enable immediate consumption which reduces savings available for investment, and if pushed far enough they start devouring the existing capital structure. Here is a chart of different types of loans made in the US for a few decades :

Good loans, bad loans

Now, it would be wrong to consider this the whole picture - it does for instance not show the enormous amounts of securitization of different debt that has been done, rather it shows (if I understood the St. Louis Fed database correctly) loans that are directly on bank balance sheets. But notice what happens in the early 80's. There is a clear trend change, and more and more money is funneled into consumer and real-estate loans. These loans have as only collateral the future wages of the borrowers. Now, clearly, a certain amount of consumption loans is sustainable. But when you reach a certain point, the consumer loans themselves start crippling peoples ability to repay them. Future wages are wholly dependent on capital investment, and the more money funneled into consumer loans, the less money can be lent to business so they can make capital investments. And thus, we have now reached the point of no return. There is no way that consumer and residential loans can be payed back - much of them will be defaulted upon. If government and central banks kept their meddling fingers to themselves, this would mean a collapsing deflation of both debt and money supply. This is what started occuring in 2008, but was interrupted. Since then, the powers that be has done everything they can to prevent the unpreventable. The end result will be a default of the US government, as they have been trying to fill the hole left by consumers that cannot borrow anymore. The only thing that can, and MUST occur is that a significant part of the debt is defaulted upon, and simultaneously more and more savings are lent to business to use for investment.

This is only data for the US, but I can guarantee you that in most countries in the West it looks quite similar. I know it does in Sweden, where residential loans have more or less tripled in roughly ten years. Germany may be the sole exception, because they have had the most boring housing market in the world the last decade, and thus we can probably assume that funds have not been floating into residential loans to the same extent. To sum things up : If you invest mostly into productive assets, you can expect most of this money to be paid back, with interest. The interest rate will be decided by the availability of savings and the perceived risk of the investment. Since a functioning market consists of a vast number of participants, where the good investors are rewarded and the bad investors punished, we are guaranteed to have a development that drives money into the best investments available. When you start investing mostly in unproductive assets (consumer and government loans, for instance), you are guaranteed that an increasing amount of these debts will NOT be paid back, since increasing volumes of consumption and consumer debt leads to stagnant, or falling real wages.

The great charade

So, what has really happened here? First, there has been an enormous mispricing of assets and the risk associated with them. Consumer loans should have been made far more expensive, since they carry much greater risk. This would have worked to limit the amount of such loans. Second, the amount of consumer loans have expanded to their natural limit, namely where there is no further capacity of debt-servicing. This means that a huge swath of the economy is producing the wrong things - namely things that borrowing consumers can no longer afford. This production has to be re-aligned to produce whatever the holders of these loans want to spend their money on. Again - this should naturally lead to a deflationary collapse like in the 30's, which would have pushed even more borrowers into default. This is the natural way of a credit-expansion system of removing the rot, by collapsing both debt and money supply. But a deflationary collapse has many benefits as well. It lowers consumer prices, rewarding prudent savers. It lowers prices of capital goods even more, which means a shift of the means of production from the less talented and less responsible to the more talented and more responsible. This, by the way, hasn't happened either in the US, quite the opposite. The US financial sector is gobbling up more and more assets, leading the US economy further and further down the swamp.

Lets talk about the welfare state. The late 70's and early 80's was not a good time for the welfare state. In Sweden, we had a huge property bubble that burst in the early 90's, and the welfare state ended up on the brink of collapse. But for most countries, something shifted after the troublesome 70's. What had been a highly inflationary environment turned into a period of lower inflation and lower interest rates. Part of this can probably be contributed to the IT revolution, which has enabled massive effectivisation across all sectors of the economy. But unfortunately, that isn't nearly enough to explain what shifted. What really occured was that economies that were suffering from high taxation and high inflation started instead borrowing from the future. By a self-perpetuating scheme of loans for consumption, the economy started looking better, and asset prices went up, which meant people found themselves more wealthy, which enabled further loans, and slowly the entire economic culture shifted from one of savings and frugality to one of borrowing and spending.

This charade has been relying on one thing, and one thing only - that no one ever tries to cash in their "wealth" as represented by their paper assets, and that there is always an increasing number of people willing to indebt themselves further so that more financial assets can be created from these loans. Unfortunately, the entire western world has hit the brick wall. There are no more people that can borrow more money, and simultaneously more and more people are growing older and want to cash out their retirement money. This has started leading, and will increasingly lead to a situation where asset prices continue to fall due to more sellers than buyers, and a massive, neverending (almost) wave of defaults. The response so far has been to print money to replace the non-performing assets. Yet even if we somehow magically managed to replace all bad debts without hyperinflating currencies - this wouldn't help! Due to demographic trends and the fact that we are no longer starting with a high savings rate and frugal behaviour, it is IMPOSSIBLE to repeat what has happened the last 30 years.

No one gets to retire

What has basically happened is the largest fraud in the history of mankind. I keep coming back to this, and here is the UNDENIABLE truth : There is no retirement money, because the real wealth has already been spent and consumed! It has been invested in bonds that are increasingly worthless because the money cannot be paid back, and vastly overpriced stocks that will perform horribly until there is enough savings to produce more stuff cheaper, so people can again afford them. The western economy has gone from productive engine to ponzi scheme, and there is no way out. Real wages will fall for a very long period, real wealth levels will continue to sink, and none of this stops until there is a change in behaviour across the spectrum, and savings rates go back to what they need to be to maintain a high-level production structure. Sadly, this is likely to be stopped by the machinations of government and central banks.

By now you should be seeing quite clearly what will happen to government tax revenue. Simultaneously, entitlements and future obligations continue to grow at an exponential rate. We can see what happens when these two collide in the US right now - government spending is 140% of revenue and rising. What happens thereafter can be best seen by looking at Greece - trying to shrink the welfare state leads to a permanent state of recession, because it takes time for new private sector jobs to appear, and for production to change from things that the government used to buy, to things that the private economy wants. This must go on until the welfare state has been made small enough to be supported by an economy that has been crippled by underinvestment and overconsumption.

We all know this is not going to happen. Taxes will be increased once the ability to borrow disappears. This will further cripple the economy, leading to the need for even further cutbacks. The spiral continues until we either get a complete collapse of most of the economy, or until the State finally retreats because the public demands it. The latter hasn't happened ever. And this time, it must. Because the last 30 years looked like they proved that the welfare state "worked" as long as you had some semblance of control over government spending. The fact is, that we borrowed roughly a generation of future wealth to sustain the welfare state, and now we must both accept that what we have been promised will never be delivered, AND we must pay back that which was borrowed the last 30 years.

Game over

Will there be revolt? Yes. Will there be one or more gigantic depression-style collapses of Western economies? Yes. Will there be increasing number of poor people? Yes. Will there be raving mad inflation and possibly hyperinflation as central banks try to save a collapsing debt system? Yes. What will remain? That depends on when this all stops. Clearly, there is no way for the democratic system to solve this through regular means. The path we are on leads to Soviet, the stone-age, or Argentina. Only if people revolt against the system can things be turned around, and even then it will take a long time to re-establish sound institutions of banking, while simultaneously people who are much poorer will need to learn to save money instead of consuming. If none of this sounds like it has a snowballs chance in hell of happening, then you know where I'm coming from. To quote our minister of finance, from the worst moments of early 2009.

"It's going to be a long, dark, cold winter."

He might not understand it right now, but in time he will learn how right he was, and what it was he caught a glimpse of during the frightful winter of 08-09. It's coming, and you cannot prevent it. You can only prepare. Doug Casey (whom have written many insightful things) recently published a set of scenarios for the US economy. The sum of it all was to buckle up, because it is going to be a very challenging 20 years ahead of us.

It is Game Over for the welfare state, even if nearly no one has understood it yet.

In defense of Goldman Sachs

If that title doesn't catch your eye, I don't know what will. Goldman-bashing is all the rage these days, and rightfully so. They got preferential treatment during the financial crisis, they sold people things that they knew were worthless before the financial crisis, so they could themselves short them. Lloyd Blankfein thinks he is "doing gods work" as he plays crony capitalist of the month, every month. The list goes one.

But there is one thing that Goldman Sachs has been accused of which is not true. It is claimed that they have driven up prices by creating commodity trading vehicles. This is blatantly false, and anyone pushing this theory has no understanding of economics whatever. You cannot push up commodity prices just by making it more widely tradeable through modern financial inventions like ETFs, index options etc. This is a lie thrown out by old commodity traders who are pissed off because regular people have gotten the tools necessary to trade the markets, while they used to be the only ones with access to the futures pits.

To every transaction there is a buyer and a seller. The charge against Goldmans commodities products is that they create "artificial demand", by pulling in people who do not have a commercial interest (hedging) these commodities, but just want to speculate in the prices. We hear the same thing about how "speculators are starving people in poor nations through higher food prices". This is nonsense. While new vehicles to trade commodities do in fact create higher demand for commodities, they simultaneously create higher demand for the opposite transaction, namely SELLING commodities.

People talk about the "goldman roll", when all speculators shift their futures positions (since they do not want to actually take delivery of a truckload of coffee, wheat, or whatever). The claim is that this artificially pushes up the prices of next months futures by everyone piling in at the same time. And while this is true, it simultaneously means that there is an equal amount of SELLING for the month that is being rolled out of.

To put it simple : Speculators may temporarily move prices, but unless they all take delivery of their contracts, they will move prices in the other direction as they are forced to find someone who will take delivery, and is willing to buy their position. In fact - the only reason we have futures trading markets is because they fill an economic purpose - namely evening out market movements. This is the opposite of what you are told, but it is the truth, and the reason it works is simple : The more participants you have that trade in a market, the smoother the moves, since there is never a lack of either seller or buyers. Simultaneously, it creates a "safety valve"-mechanism, because there is always a large number of people either short or long. If a price of for instance an agricultural commodity shoots up because of a bad harvest, bad weather or some other worldly event, there is always a large number of participants that will take profits on their contracts once the price reaches a certain level.

To illustrate why speculators do in fact prevent catastrophic price moves, look at the financial crisis. Short selling was prevented, which meant there were no short-sellers covering their positions (at large profits) on the way down. That meant that buyers of financial stocks completely disappeared, and thus you get the manic 10+% price swings. Of course, the financial stocks would still have gone down to an equal amount, but by including large numbers of speculators, some of which will speculate that the bottom is in, and some that speculate that there is further downside you will even out the curve.

There is an old ZeroHedge joke about Waddell&Reed, because their selling of a minor amount of SP500 shorts during last years "flash crash" became the official explanation of what happened that day. This joke clearly shows the low level of understanding that exists of how markets work. True - if someone pushes a gigantic pile of bets onto the market, this will push it down. But there will always be people that will start speculating where the bottom is, and they will all choose different levels. Whether they are right or wrong decides if they get a profit or a loss, and thus you have a scenario that benefits those that can make correct bets, and punishes those that cannot. This is in essence what makes markets efficient.

So while Goldman Sachs are probably guilty of most things they are charged with, and a billion of other things they haven't been charged with, they are not guilty of pushing up agricultural prices by creating vehicles for investing in commodities (one would have to imagine a vast conspiracy of farmers to even make sense of this claim). The responsibility of higher prices lies solely at the Federal Reserve. And currently, we are experiencing the exact same thing that happened in 07-08 : People are speculating that the FED will destroy the dollar, and thus make everything enormously more expensive. If they are right, they will have prepared regular people for higher prices before it happened. If they are wrong, agricultural prices will collapse and they will take the loss.

Markets work because there are large numbers of participants with different thoughts and ideas regarding the prices of things. Claiming otherwise makes you either an imbecil, a commie or a regular media douche-bag.

French elections may just turn interesting

Okay, so Dominique Strauss-Kahn is probably not going to be running for French president at this stage, since he now has an internationally reported sexual crime charge on his hands. That means that Sarkozy and Le Pen just lost a probable competitor. I think Le Pen is probably cheering at this stage, while Sarkozy may be a bit more muted.

What will happen to Europe if Le Pen takes over France? She is seemingly not as completely insane as her father, but there are still heavy elements of rabid nationalism and other things that have a history of turning Europe into a nasty place.

Interestingly enough, this kind of thing would not mean anything for Berlusconis re-election chances, since he is pretty well versed in sexually deviant behaviour already ...

Why the US needs a debt ceiling filibuster

Strange rumours has it that senator Jim DeMint (R) is threatening a debt ceiling vote filibuster. In my view, this is exactly what the US needs, for the following reasons :

• It will not risk US insolvency (debt can still be rolled over)
• It will force truth into the media. There is no denying what a balanced budget looks like when you are forced to run one.
• It will re-assert reality in the markets, possibly destroying the "Bernanke Put"

Let's look briefly at what is likely to happen. Basically, the bond market can react in any direction, but the outcome for all are somewhat long-term positive.

Bond markets rally:

If the bond markets act positive on this sign, simply because it means a temporarily balanced budget, this will prove a very important point - higher debts mean higher interest rates, lower or stable debt means relatively lower interest rates. Regardless of how the media spins it, that will be the only conclusion that can be drawn. Likewise, if the debt ceiling is later lifted, bond markets may actually sell off in strong disapproval.

However, I find this scenario to be somewhat unlikely.

Bond markets are indifferent:

This too, would prove an important point, namely that there won't be any death or destruction in the bond markets simply because the debt ceiling isn't raised. Obviously, a withdrawal from government stimulus of 10-15% of GDP will mean an enormous recession, but in regards to the bond markets, it will (just like if bond markets rally) prove that the whole "the US can't pay its bills unless the debt ceiling is raised"-talk is pure nonsense. However, I think this too is somewhat unlikely. Most likely is ....

Bond markets initially sell-off, and then rebalance

Markets behave irrational short-term. Due to the amount of nonsense regarding the US fiscal position and what a debt ceiling blocking would mean, I think it is in fact likely that US bonds would initially sell off after such a decision. Why? Because it is a wake-up call that clearly shows the dire fiscal position the US is in. There is little risk of a complete collapse though, simply because of the following : If US bond rates sky-rocket because of a debt ceiling - who do you think will step in to purchase enormous amounts? My guess is Bill Gross, among others. Why? Because Bill Gross has a brain and knows an opportunity when he sees it. Imagine long-term bond rates jumping 2 percentage points on pure irrationality (I don't think such a large move could occur, but lets imagine). How golden an opportunity is this if you know that the risk for a US default hasn't increased one bit, rather it has actually slightly decreased. That's free yield for a yield-starved market. And remember - the rollovers are in fact completely safe under a debt ceiling.

The interesting part, however, and this is pure speculation on my behalf, is that I think US debt would actually be priced somewhat higher after such an event. When the debt ceiling is eventually raised (through some sort of compromise, or because whoever is filibustering simply runs out of political willpower to continue), maybe people actually start getting it. Maybe increases in US debt will actually be treated like the potential future disasters that they are. Maybe people will realize that there won't always be a larger idiot who you can flip your bond to "before its too late".

Conclusion:

No matter what we think the bond markets will do if a Senate filibuster actually occurs - all the possible cases above are clearly an improvement of the long-term outlook of the US economy. Basically, a debt ceiling filibuster would be a heroic act of political suicide, that should be applauded by anyone understanding the disastrous position the US government is in.

....on second thought, there is one single risk with doing it. Ben Bernanke could panic, and announce that he will buy unlimited amounts of US Treasury debt, thinking it would calm markets. That is what they call a hyperinflationary trigger, and in that case, the US dollar may be worth no more than toilet paper before the summer is over.

I wonder if a Greek restructuring can solve this one

The US dollar, as previously stated, is staring into the abyss. Last year, it was saved by Greece announcing that they were almost bankrupt. Can they save the dollar one more time by actually announcing a restructuring of debt this time? I am not so sure. Note that when Portugal applied for emergency funding, the USD hardly moved. When the "True Finns" pushed firmly into the Finnish Parliament a few days ago, running on a "no more bailouts"-agenda, the USD hardly moved either. Maybe the markets have come to realize that PIIGS going bankrupt doesn't necessarily mean the euro should crash, rather it all comes down to how much they are willing to monetize at the ECB to prevent such a thing from happening.

Maybe a pan-european collapse of governments and banking will be good for the euro. It sure as heck would be deflationary, that is for sure. Maybe the dollar is about to meet his maker, or at least finally take some serious punishing for the actions of Ben Bernanke and his printing crew? Stay tuned.