Yesterday we had the pleasure of hearing a presentation by John Shin, the G10 FX Strategist at Bank of America. Mr. Shin is highly intelligent and a deft presenter, as one would expect from someone of his caliber (Harvard PhD in Econ, etc.) He also managed to make the material, essentially a rehash of Central Bank rate policy over the past several years through today, somewhat entertaining and relevant.
One of the big takeaways from the presentation was that the ECB has not been performing well in its role when compared to the FED, Bank of England, and Bank of Japan, against which it is often compared. Mr. Shin acknowledged that in many cases their hands are tied as, while they have the experience, they seem to struggle with their mandate, to maintain a stable currency, as they are vilified in a world where other Central Banks have taken stimulus to extremes once thought unimaginable.
The Euro is a very important currency. The Euro and the ECB as its managing institution are also very young relative to their counterparts. Making their job even more difficult is the fact that they are managing the currency for the Eurozone, whose internal fiscal and market dynamics at time defy analysis if not logic. Here at The Mint, we recognize that the ECB is simply making the best of what’s around as they constantly mend the currency union that holds what is at times a tense economic union together.
Mr. Shin also spoke at length about the Unemployment rate in the US and the associated workforce participation rate (roughly 64%) which has rapidly declined due to, according to Shin, a roughly 50/50 mix of demographic and economic factors. He also put the workforce participation rate in perspective, as it is still above where it was in the 1960’s, roughly 59.5%.
Generally, he was bullish on the US Economy and the US Dollar, and had pegged his expectations for FED rate increases to mid-next year. It will be interesting to see if his call plays out.
After the presentation was finished, we asked him for a nugget of advice in terms of what his one Key Indicator was to keep a pulse on economic activity. He said that, while they track many indicators, as one would expect, there is none that speaks more to the contemporaneous state of the US economy than the monthly jobs numbers. Concretely, when they top 200,000, the economy is in good shape, anything below that is a bad thing in his view. He said no other data point correlates so well with other economic growth indicators.
So there you have it, the dollar will remain strong and as long as the economy adds 200,000 jobs or more per month, all is well from the perspective of one of B of A’s best and brightest.
Mr. Shin is in charge of the “World at a Glance,” which is their flagship publication which highlights the bank’s key forecasts in FX, rates, and commodities. An extremely interesting read put together by some of the best in the business.
Will his forecasts on FED rate increases come to pass in mid-2015? If today’s market action is any indication, low rates could be with us for a long time to come.
While the management of the ongoing banking crises on this side of the Atlantic has been dishonest, the management on the other side of the pond, or in today’s case, sea, has been an unmitigated disaster. Or so it would seem.
We are talking about Cyprus. For those who have yet to hear about Cyprus, it is an island nation located in the far eastern Mediterranean Sea, just below Turkey. It is currently inhabited by a fiery mix of Greeks and Turks, who have lived in an uneasy peace with each other for some 40 years after the events that took place during the summer of 1974.
Like many island nations, Cyprus has been able to find common ground with those who have been unable to find common ground on the mainland. It has found that it can leverage its sovereignty and willingness to bend the rules to offer banking services without the nagging regulations which increasingly plague banks and their clients in the Western nations on the mainland.
Now that the government of Cyprus is bankrupt and in need of a bailout, showing that even a tax and banking paradise can be poisoned by a bad currency, they have gone hat in hand to Belgium, a strange country in the north with absolutely nothing in common with Cyprus, save the currency in question.
The Eurocratic apparatus in Belgium, either on its own or at the behest of the global banking giants in Cyprus, has decided that the terms of the bailout, or “bail in”, which is the Euro friendly way to say “Corralito,” {Editor’s Note: Corralito is the Argentinean term for when the Government decides to unilaterally make use of the funds in its country’s banks to fund the government because there is literally no one willing to lend them currency on any terms}, would be the direct confiscation of funds from depositors bank accounts in the form of a tax, in this case between 3 and 9.9% (because 10% just looks bad in print) to ultimately pay back the countries who have been generous enough to provide the funds, which, despite the technicalities involved, for most Europeans means Germany.
Predictably, the people of Cyprus, who caught wind of the confirmation of the rumors on Friday and awoke Monday to find that their government had declared what is, at this writing, an indefinite banking holiday (meaning banks and ATMs are closed) to prevent anyone who did not want to participate in the bail in from withdrawing their funds from the country’s banks, are channeling their anger at the German Embassy, quite naturally:
Henry Blodget has written a decent analysis on the details of the Cyprus bail in over at the Daily Ticker. Blodget does a good job of analyzing the events up until the point where He presumes:
“…the moment depositors think that there is risk to their savings, they rush to banks to yank their money out.
That’s called a run on the bank.
And since no bank anywhere has enough cash on hand to pay off all its depositors at once, runs on the bank cause banks to go bust.
That’s what happened to hundreds of banks in the Great Depression.
And it’s what happened to Bear Stearns, Lehman Brothers, and other huge banks during the financial crisis (though, with Bear and Lehman, the folks who yanked their money out weren’t mom and pop depositors but other big financial institutions). It’s what threatened to bring the entire U.S. financial system to its knees. And it’s why the U.S. and European governments have been frantically bailing out banks ever since.
But now, thanks to the eurozone’s bizarre decision in Cyprus, the illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.”
What Blodget presumes is that a bank run is bad for the bank. Here at The Mint, we postulate that this tax on depositors is taken precisely for the benefit of the Cypriot banks. Further, it has been taken not only for the benefit of the banks in Cypriot, but to serve as the catalyst for the Euro zone to return to growth, or the activities which pass as economic growth circa 2013.
How can this be? To understand this will take a basic understanding of the banking revenue model.
Ever since 2008, the Federal Reserve and the ECB have been underwriting the banking sector by providing cheap cash to banks and, indirectly, the governments and people’s of their respective countries. This is where Blodget’s parallel of today’s bank runs and those that occurred during the Great Depression falls apart. For all of the mistakes that Ben Bernanke has made, the unconditional guarantee of liquidity in the banking system is the one that he will never relinquish, despite appeals to reason, for he mysteriously sees it as his life’s calling.
However, in an effort to stem the fall in asset prices, which is largely a product of the insane “jack the rate 25 basis points every month or so” policy that the Greenspan and Bernanke Fed followed from June 2004 until June 2006, the policy that caused markets to seize up like a car engine losing oil as they accelerated to record speeds, the Feds and the ECB have largely ignited an increase not in economic growth, but in bank deposits.
Bank deposits, far from being a boon to the receiving bank, are a huge problem when market conditions force them to reinvest (read lend out) those funds for rates that are unconscionably low (3.75% to consumers for 30 years, in a fiat currency system, are you out of your mind?). Making matters worse, the consumers have been slow to take the bait, resulting in a big time squeeze on the traditional banking revenue model.
Enter Cyprus, an island that holds a disproportionate amount of bank deposits. As a thinking Eurocrat, of which we suspect there are few, save Nile Farage, who is hunting for a way to both ensure that the banking revenue model continues to function, the government of Cyprus retains legitimacy, and that economic activity in the Euro zone will increase, the pile of Euros in Cypriot banks looks like a great target not to loot, as most analysis of the situation will paint this move as, but to force billions of Euros out of the digital vaults of the banking system to wash from the shores of Cyprus outwards into the other Euro zone countries in search of real goods, not simply another cash warehouse.
One sees the Eurocratic genius in the move at the moment one (again, that is you and I, fellow taxpayer) understands that the mere threat of a unilateral tax on deposits as a condition for a Euro zone bailout is causing lines to form at ATMs from Andalu to Cataluña, across the border into Torino and down to the lonely parts of Sicily.
Will the Cyprus Misadventure by the catalyst for elusive economic growth in the Euro zone?
Within a matter of days, billions of Euros which were locked up in the accounts of villainous savers and otherwise useless to the European economy will be running around the Spanish and Italian streets in a desperate attempt to purchase anything real in which to hold said savings.
With what appears to have been a typically boneheaded Eurocratic move, the Eurocrats may have managed to do what Ben Bernanke and all of the helicopters in the world could not have done to the club Med economies: Shower them with foolishly spent cash while at the same time bailing out both the banks and the governments as a grotesque side effect.
To be sure, it is a short term fix and will leave the Euro zone further down the scorched earth economy path in a matter of years. Even so, you have to give the Eurocrats some credit for pulling out all the stops, even if they did stumble upon their ultimate stimulus, which relies upon their own stupidity to function, completely by accident.
Meanwhile in Cyprus, the latest is that the government wants to “think over” the terms of the bailout. The formal vote has been postponed until Friday, and we presume that the banking holiday will remain in effect until after the vote is taken and any taxes are skimmed.
It is a hard assignment, and we do not envy them nor blame them for thinking it over. The decision before Cyprus’ government officials is simple. Should they accept the bailout, they face being blamed by their countrymen for sacrificing their parched island on the Eurocratic altar as well as spending the rest of their lives dodging the hit men of any oligarch’s who did not have sufficient forewarning of the move.
Should they reject the bailout, their government may even find a few contributions from said oligarchs to keep operating, and the only cost will be a few less German tourists on their shores, which, given the alternative, seems a small price to pay.
In the end, if our hunch is correct, the mere threat of corallito should be enough to stimulate the Euro zone.
Were we in their shoes, and we are glad we are not, we would reject the bailout. Either way, it is a strong argument for exiting the formal banking system or becoming a large net creditor. It is much easier for “crats” of any stripe to confiscate assets with a few keystrokes than for them to lift a finger to grab something in the real world.
The 2012 US Presidential election is over, and the only thing that remains to be seen is whether or not the No vote will maintain its absolute majority. At last count it was 50.2% and will go down to the wire.
For our part, we finally got around to burning our mail-in ballot last night. For those who will lament that we did not perform our civic duty, we report that we did give it a cursory check to make sure there were not City or County measures which required our input.
If you are joining us late in the game, we presented our personal reasons for not voting a few weeks ago. To be fair, we have never been much for voting, mostly attributable to our inner laziness. However, this time was different. We made a conscious decision not to participate. We decided not to to meddle in the affairs of others. We took the position that the largest sphere of influence which we could, in good conscious, cast our vote over others was at the County level.
Our County generally fulfills its commitments and is solvent. As such, it meets our criteria for an operating Socialist system. The State and Federal level do not. We did not reach this conclusion through logical contemplation, rather, we had a minor breaking point with regards to the political systems at the higher levels as we read to our son about the Trail of Tears, which moved us to tears and, as a consequence, this form of peaceful resistance.
The rest, including what you, fellow taxpayer, are reading, is a slow digestion and reflection upon our weeping over the Trail of Tears.
For the record, we do not buy into conspiracy theories (although trading on them can be very profitable) nor are we cynical enough to say, along with Emma Goldman, “If voting changed anything, it would be illegal.” What we do know is that we can no longer endorse the killing and robbing of people with whom we have no quarrel and who pose us no existential threat.
In a sense, we are peacefully surrendering our “right” to participate. Were the government to suddenly stop taxing our wages, income, gasoline purchases, telecommunications, and capital gains, we may go as far as to relinquish the “right” to Social security, roads, and such. On this point, however, we will not hold our breath. Nor will we actively avoid taxes or reject monetary benefits which come to us. This is a broader question which we will not delve deeper into today.
Speaking of taxes, the election seems to have ignited what may be the blow off phase in the precious metals markets. Please read on…
The new Gold Rush, The triple Fiscal Cliff, and logical consequences
The market selloff continues today, as the logical consequence of the expectation of higher taxes manifests itself. While we believed that higher taxes were coming, no matter who was elected, it is nonetheless fascinating to watch what is unfolding in the equity markets.
For a bit of background, the Federal Reserve, ECB, Bank of Japan, England, and all entities in the Central Banking industry are putting the throttle down and printing money at a breathtaking pace. This has been enough to keep equity prices “afloat” with relatively minor nominal price drops.
However, the drop in value, commonly known as purchasing power, has truly been staggering over the past several years. If you track such things, look at your grocery or utility bills for proof. You are probably either paying more, getting less, or some combination of these double whammies.
The election results appear to have triggered a decoupling of the commodity and equity markets for the foreseeable future. Meanwhile, while bonds are rallying as those who hold large unrecognized gains in equity positions choose to recognize them before December 31, when the clock strikes midnight and any gains left on the table will be taxed out of existence {Editor’s note: this is figurative language and speculation, of course}.
This is the logical consequence of the fiscal cliff. When the election was called for Obama and control of the Senate and House looked to remain the same, equity holders saw the writing on the wall. The stalemate at the Federal level will remain in place and the probability of the US plummeting off of the dreaded Fiscal Cliff (which, we remind you, is purely a government construction) greatly increased.
While some window dressing will no doubt be presented as the solution, those holding large equity positions will be seen as “new meat for the grinder” and likely will be the next lamb sacrificed on the alter of fiscal irresponsibility.
But it is not just the US looking over a fiscal cliff. The anticipation of the US Presidential outcome distracted attention from the dire situation in Greece, where in 8 short days, the government will be out of funds and the once vaunted “Troika” now stands by, unwilling to throw more money at them.
Then there are the Spaniards. Having lived three years in Barcelona, we have a special affinity for the Spanish in general and specifically for the Catalans. While the Greeks may be coerced into having more conditions shoved down their throat, the Spanish situation is a bit more complex.
The Spaniards are smart, and the Catalans are even smarter. Catalunya knows that they are indispensible to Spain. They have also spent the past 30+ years building systems to ensure that they can operate perfectly well without the Spanish Feds in Madrid.
Those in Madrid know this, and are holding the threat of Catalan secession as their Ace in the hole which, at this point, has allowed them to extract concessions from the ECB, all the while avoiding surrendering what is left of their Sovereignty to Brussels as the Greeks, Irish, Portuguese, and Italians have.
Will the can which has been kicked down the road in Europe finally get kicked off the Euro Cliff? Even if it doesn’t, the Spanish firecracker inside of the can will go off at some point and blow up the proverbial can, at which point all bets are off.
With the two largest, debt based financial currencies in the world facing unprecedented uncertainty and the prospect of higher taxes on the horizon, one has to question the wisdom of holding anything but physical gold and silver in place of financial assets.
This, along with the ongoing tension in the Middle East and that crazy Mayan prophecy, is why we believe that the final blow off in the gold and silver markets is at hand. There is still time to get in and these quasi currencies have plenty of room to run. While the physical production fundamentals are less compelling than they were 10 years ago (a 440% rise in price will tend to encourage production), the financial backdrop has never been more favourable, and its about to get even better.
Just remember, buy and hold the physical metals, as ETFs and futures will likely not catch all of the upside of this monumental move.
Margaret Thatcher is truly one of a kind. This brief clip, besides depicting a session of British Parliament at its best, shows Thatcher rebutting the Socialist leanings for her ideological adversaries with classic lines such as, “by lowering the income gap you mean to say that you wish the poor to be poorer, if only the rich would be poorer as well,” and, “I condemn your Socialist policies along with the millions in Eastern Europe who have suffered under them.”
What is perhaps most striking about this discourse, which took place in 1990, is the final part of the clip where Thatcher saw clearly that the Euro currency would mean the end of democracy and Parliamentary sovereignty for the countries who adopted it, a prophecy which has begun to play out in Greece, Italy, Ireland, Portugal, Spain, and even the economic juggernaut Germany, where all branches of government are at the mercy of the whims of the ECB.
For the few who missed it, Spain handily defeated Italy yesterday, proving Moody’s wrong once again and making us 1-0 on Euro cup calls here at The Mint. The Spanish national team, which has won each Euro and World Cup since 2008, will now go down as one of the greatest national teams of all time.
Spain downs Italy as The Mint goes 1-0 on its Euro 2012 prediction
The continent will now turn its weary eyes to the Olympic games, while those who can afford it prepare for their constitutionally guaranteed summer vacation (no kidding, the EU high court has held it as such).
Unfortunately for footballers and vacationers alike, Europe is operating in a perpetual crisis mode, and it is possible that vacationers will return to a Europe that is quite different than the one they left just 30 days before. One in which their options are limited and their ATM card doesn’t work.
Yes, what started as a minor Hellenic financial problem has predictibly mushroomed into a political crisis at the highest level of the EU. Voters, fed up with the bailout/austerity approach to banker welfare, increasingly exercise what is left of their sovereign right to vote out relative conservatives and/or moderates and vote in technocrats and/or populists as their fearless leaders.
Here is another prediction, for what its worth, the populists take Germany in the fall of 2013, Europe’s version of Mega Maid will have turned all the way from suck to blow. The path of austerity that they are currently on will be but a faint memory as the ECB and policy makers move from bailing out the bankers to bailing out any and every political ally.
{Editor’s note: A populist, for our purposes, is a socialist who no longer masquerades as a conservative or moderate, they are out of the closet, as it were.}
Yet for all the drama and human suffering that is unfolding, we can’t help but think that this is all simply a high priced publicity stunt to get the doomed Euro currency some air time.
For many of the European peoples, the Euro currency has served as nothing more than an unwanted crash course in math and an agent of larceny on the grandest of scales. The average Jacque, Giorgos, Jorge, or Giovanni would have been better off in the long run had the Euro never been dreamed up.
Rising Populism in Europe to test the ECB’s commitment to elasticity
However, the continued use of the Euro is an extremely high priority to for a select few with addreses on Wall Street, in The City, and anywhere in Germany. As such, the current tack for the doomed Euroship is for it to be spoken of in the same context as climate change or terrorism, which invariably involves an increasingly illogical and alarmist rhetoric.
The question of whether or not something should be done is glossed over in favor of handing supreme power to a body who demands that something be done. The only rhetoric that is allowed beyond fear mongering is a discussion of what the supreme power should do.
And so it is with the Euro.
There will be a number of elections over the coming months in the Eurozone, and not one of them will matter. The tone in Europe is turning decidedly populist, as George Friedman eloquently describes in his recent Geopolitcal Weekly report via Stratfor:
Rumors today that Greece would default on its sovereign debt were received with relative calm by the bond markets. Now that Greece’s public debt is approaching 150% of GDP and is forecast to increase by at least 10%, even the most optimistic analysts, namely S&P, are coming to one inescapable conclusion:
Greece is in technical default.
This is news to no one in the world of finance. The numbers in Greece haven’t penciled out for at least three years and have shown absolutely no sign of improvement. Anyone with significant exposure to Greece has either sold it or obtained some sort of guarantee from the ECB and/or IMF that they will be made whole on their exposure.
Hence, the lack of panic in the markets.
For financial market participants, the guarantee of the ECB works as a hallucinogen. Traditional analysis no longer applies once an infinitely solvent guarantor signs on to back the debt of a weak partner. The weak partner is no longer seen as insolvent, but rather, devoid of credit risk.
However, 2012 is shaping up to be a tough year for the ECB itself. With every cent of spare Euro liquidity fleeing to American shores, the ECB is now the lone ranger as its lending activity increasingly dominates the Euro money markets.
Assuming that it must fund a large majority of the Eurozone’s debt rollovers in in 2012, how many Euros will the ECB need to conjure up? The rough tally is 740 billion euros worth of European sovereign debt.
Additionally, it is almost a bygone conclusion that the ECB will need to step in and buy the debt of European banks whose country’s sovereigns are under pressure. This includes:
25% of Irish banks outstanding debt
20% of Spanish banks outstanding debt
15% of Italian banks outstanding debt; and
15% of Italian banks outstanding debt
To borrow an old but relevant metaphor, 2012 will be the year that the ECB’s wine, the Euro, turns to sewage. Thanks to their unlimited swap line at the Federal Reserve, the US currency is likely to begin to smell funny as well.
Could this be why the FED funds rate has creeped up from its flatline the past few days?
No matter how you look at it, the 2012 Euro funding picture does not pencil out. The sooner that Greece and the other insolvent sovereigns and banks declare the default that the markets have long since priced in, the sooner growth and hope will return to the Eurozone.
On the other hand, the longer the sewage is allowed to backup at the ECB, the greater the risk of a Euro currency collapse. Nobody wants to see that, especially the FED.
Living on the West Coast, there are two things which we take for granted here at The Mint. First, that viewing Twitter is the quickest way to take a pulse of what is going on in the financial world. Second, that we are, by virtue of our location, jumping into the financial news of the day when it is half over in New York and finished in Europe, allowing us not only to see the news but also the effect of the news on these markets.
With these two givens, we often pen our thoughts as a sort of digestion (or indigestion, as the case may be) of the events which are currently unfolding. Such is the case today.
The Final Act
We’d barely had time to collect our scattered thoughts as news came that the final act of the tragedy that is the world’s financial system circa 2011 appears to be underway. This morning, numerous tweets announcing that coordinated action amongst western central banks, specifically the Federal Reserve and its counterparts in Canada, Japan, Switzerland, and England, had been taken. The action was taken to rush a fresh supply of cheap US Dollars to the ECB in time for the ECB to prevent a major European bank from imploding today.
Our guess is that the yet unnamed bank is BNP Paribas and by extension its many counterparties. Any large French bank would be a candidate and we are just guessing that it would be the le grand chat.
The USD got torpedoed in coordinated action
As further evidence of the final act being underway, we see that the Federal Reserve suspended its POMO (Permanent Open Market Operation) for today until December 2nd. Not coincidentally, this latest operation was to withdraw liquidity from the US dollar system on a day on which apparently the system was calling for more.
To simplify what has happened for our fellow taxpayers we offer the following executive summary: Today is the final day of a calendar month, a day when accounts must be settled. A large bank in the Euro zone did not have enough US Dollars with which to pay back its short term loans to other banks. It turned to the ECB, which did not have enough US Dollars to backstop the large bank. The ECB, then turned to the Federal Reserve, which quickly shifted gears from suck to blow and confirmed, once again, that it will print money any time there is a liquidity crunch, anywhere in the western world.
The FED will now wait until the dust settles on December 2nd to see how much liquidity it can withdraw from the system without imploding it. To them we say: good luck.
As longsuffering Mint readers are already aware, a debt based currency regime, which is erroneously referred to as a monetary system, relies on the infinite creation of debt along with its continued acceptance in place of money proper in order for the game to continue. Once either of those conditions ceases to exist, it indicates that a majority no longer have confidence in the currency regime. In other words, the currency regime has failed.
The western central banks appear to momentarily have their streams crossed, and in a pointless effort to homogenize interest (and by extension foreign exchange) rates, will increasingly take this sort of “coordinated action” until their currencies act and trade as one.
A JP Morgan note on this most recent coordinated action highlights the fact that the Federal Reserve not only will lend dollars to these Central Banks at a discount, the foreign Central Banks will in turn lend their respective currencies to the Federal Reserve at a discount on demand. This gives further credence to the fact that the system has already failed and is in retreat, with the Central Banks themselves left passing their currencies and credits amongst themselves and their member banks.
Once this is homogenization process is complete; a severe devaluation of the homogenized currency will take place which will leave any holder or the homogenized currency(s) as a savings device substantially poorer and the holders of real assets better off on a relative basis.
However, on balance, the world as a whole grows poorer every day that the centralized currency regime is allowed to continue its violently enforced monopoly on currency issuance.
Money proper was never meant to be centralized and controlled by a single entity, and the current system which engenders this centralization is exploding before our very eyes. Yet it will not go without a fight. Recent events in the Middle East and Iran indicate that yet another physical fight to expand this failed system may be at hand.
It is a further expression of the Might Makes Right ideology, and it is time to pray for the peace of Israel.
While it was a rough day for equity markets everywhere, in light of what is occurring, they (the markets) were amazingly resilient. A testimony to how fast the monetary spigots at the Central Banks are running.
There are two events that appear to be on a collision course with destiny today (No, neither of them is the NASA space junk hurtling towards the earth). It feels as if the world is reaching a sort of inflection point in modern history. Perhaps a great awakening is about to occur. Will people’s faith in Central Banking finally be broken?
The colliding events are the Palestinian bid for official recognition by the United Nations, scheduled for tomorrow, and the emerging institutional bank run on BNP Paribas.
The Palestinian situation needs no further discussion. It is clear to most that it is an explosive topic to which the bid for recognition threatens to detonate, much in the way the Israeli Declaration of Independence ignited war in Palestine in 1948.
The Institutional run on BNP Paribas is an event that is occurring as we write and it is unclear how it will play out. Reggie Middleton at the BoomBustBlog, is chronicling this event in real time. If you are interested, we highly recommend following the event there.
Then there was the report of the ECB making an emergency loan of $500 million US Dollars to an unidentified bank (read BNP) with similar loans to other institutions in the cue. It is clear that the banking crisis in France is dwarfing the ability for the French government to deal with it.
There is no use pointing out the many lessons that society will learn from this, for only one is expedient at the moment. That lesson is that digital bits on a computer screen or numbers on a bank statement are worthless if the counterparty cannot make good on their commitments.
The run on BNP will intensify the focus on Western Central Banks, which have balance sheets that make BNP, BAC, and all of the other large sinking banks look good by comparison. This is important because a good part of the world is to some extent a counterparty to the Central Banks.
Need proof? Open your wallet. If you have US Dollars or Euros, you are a counterparty to (owed money by) the Federal Reserve or the ECB, whose management is currently buying every worthless paper asset on the planet with leverage that is unimaginable for mere mortals.
Dollar and Euros are about to become extremely hot potatoes, which makes trading them for potatoes, spuds, or anything real, a real good idea.
Let us pray for the peace of Jerusalem, and that tomorrow passes uneventfully on all fronts.
The Stock market is absolutely resilient in the face of news ranging from bad to UGLY. Presumably, the slow motion debt market collapse occurring in Europe is priced in, and it may be this very collapse that is driving money into US equities. In the insane “debt is money” system, the money can only go so many places, and there is currently so much money sloshing around that it is a wonder everything isn’t going up in price.
Oh, wait, it is! The CPI came in at 0.4% for August. Nothing to write home about but at this pace the annual CPI could hit 5%, well above the FED’s 2% target.
And we haven’t seen anything yet. Tomorrow, the Federal Reserve will meet and be expected to “do something.” Lately, “do something” has meant that the FED offers to throw perfectly good Federal Reserve notes at various forms of bad paper issued by companies and governments who never intend to make good on them.
At this stage in the game, it is now a given that if perfectly willing market participants won’t buy the paper, surely the FED must do it. “So what?” say you, “Let the FED waste its own money!” If only it were that simple, fellow taxpayer.
Unfortunately, the FED’s money, by decree, is everybody’s money. Every bad decision by the FED reduces the purchasing power of every dollar holder on the planet, making nearly all of us involuntary shareholders of this worthless enterprise, and management at the FED has been making some very bad decisions with very large sums for about four years now.
As a concerned involuntary shareholder of the FED we are compelled to offer the following unsolicited advice: Why not just wait until January, when the 0% FED funds “trickle” their way down to Main Street? Then things will really be interesting. That is when the US Dollar in its present form will go the way of every other paper currency in the history of mankind.
Fellow taxpayer, prudence demands that one make immediate plans to replace anything that depends upon the value of the US Dollar with something real. By the time the FED gets around to doing it for you, by introducing a New Dollar, current inaction will have caused anyone with faith in the dollar to suffer horrendously tremendous losses in relative purchasing power.
Back in the rotting old world, to quote Nabokov, the Euro debacle just became more complicated as the Slovenian government failed a confidence vote. The President is now left trying to cobble together a government and the rest of the Eurozone will presumably have to wait at least 30 days to get Slovenia’s approval for the next round of good money to be thrown at Greece.
It is useless to point out that the Eurozone governments, like their American counterparts, are simply throwing good money after bad. As we have observed here before, throwing money at failing enterprises is their only solution. Besides, they have banking interests to protect. Soon they will be spreading propaganda that ATMs won’t spit out Euros and the world will end if the Greeks are not supported.
That may be true, but these unpleasant outcomes will eventually come to pass no matter what the Euro FEDs do.
This is how the State, which by definition can do nothing but destroy wealth, operates. Western societies, and dare we say, the entire world are now beginning to suffocate under the weight of the current form of welfare/warfare state which exists to make promises on behalf of its productive citizens to its unproductive citizens.
Then, after enslaving the productive citizens, the State then makes promises to support the banking and military interests in order to ensure that the productive citizens remain enslaved.
Is Anarchy the Answer?
At some point, each citizen decides that they are either better off becoming an unproductive citizen, working for the State taskmaster as a banker or provider of “security”, or fleeing beyond the State’s ability to enslave them. Western society is quickly approaching the tipping point where a majority of its productive citizens will be forced to make this choice.
Faced with such facts, an intelligent fellow taxpayer such as yourself is surely asking (or should be asking, if we may prompt you), “Isn’t there a better way?”
In other words, is the State really necessary? Today we read a brilliant essay on this very subject by Stefan Molyneux. We encourage you to peruse it at your leisure. You can see it by clicking on the link below:
If you are limited on time, it is enough to say that Molyneux lays out compelling, logical arguments about how the free market would more effectively take care of the tasks which are currently relegated to the State. Specifically, he examines three activities which pro-State apologists claim that the free market will not solve on its own, making the State’s existence a necessity: Dispute Resolution, Collective Services, and Pollution.
After reading Molyneux’s arguments, it seems that now more than ever that embracing Anarchy is the answer to what ails society.
Much more than simply the answer, it is clear that the true chaos in not created by the Stateless Anarchist model, rather the present chaos is a product of entrusting the State with too much power.
How else can one explain how every present effort the Government uses to ”improve” its citizen’s lives serves to collectively impoverish them?
The moment of truth is approaching for Greece. Today the headlines flashed that the markets were pricing in a 98% chance of the Greeks defaulting on their sovereign debt. A great lesson is about to be learned. Is anyone paying attention?
The great lesson is the following: Reliance on governmental and/or central bank action to stave off a default is not a sound strategy. You may get lucky once, twice, even three times. If one is particularly unfortunate, the strategy may even work many times in succession.
The government reliance strategy is like idly watching spins a roulette wheel with all your chips on red. With enough spins, the ball will eventually drop on a black. Think of it as the governmental version of a black swan.
Gambling on Government intervention
In the case of Greece, who abandoned its 2,000 year old currency to join the Euro club, there seems to be a lack of political will to ink the rubber stamp which approves the Greek’s next ration of Euros. The taskmasters of the Eurozone are starting to realize that each time the stamp is inked, the sewage of Greek finances leaks a little further into their well.
The populace is starting to get sick to their stomach, as are large banks on both sides of the Atlantic. The French banking giants are queasy because much of the Greek debt is on their books. In the New World, where about half of Greek debt is insured, the banking giants are getting nauseas. It is the nausea of a drunk man realizing he will be stuck with the bar tab after his buddies sneak out of the tavern.
Meanwhile, as the politicians and central banks continue to bungle their way through this information, the market has already priced it in.
“Priced in?” Astute, shocked, and astounded readers are surely thinking, “Then where is the crash in stocks and bonds?”
Astute readers, of course, are right. There is a crash occurring right now in stocks and bonds. However, bond yields are down and the stock market is up because the crash is occurring against the backdrop of rapidly depreciating currencies and as such, the debauched currencies are disguising the crash.
The Disguise
Astute readers now have a collective light bulb in their head illuminating as they clearly see that inflation in consumer prices is set to accelerate in the near future. Naturally, this obvious inflation would not be tolerable and as such must be masked in order for the general public to peacefully accept it.
A new dollar will be introduced with a convertibility ratio from old dollars of 10:1. In other words, each current dollar will be the equivalent of a new dime.
Voila! No inflation here. The new and improved dollar now buys more than ever!
The Debauched Dollar in disguise
Why choose a 10:1 ratio? There are two compelling reasons for the US Currency to go through a reverse 10:1 split. First and foremost, it is simple. Since a majority of the world’s commerce is conducted in dollars, the disguise must be mathematically simple. What could be simpler than moving a decimal place?
The second reason is less obvious but perhaps more compelling from the point of view of the monetary authorities. The disguise would immediately eliminate the need for pennies and nickels and increase the demand for dollar coins.
At this stage in the game, it costs the US Mint more to create pennies and nickels than they are worth. While we are not certain of the exact numbers as of today, some estimates have the value of the metals needed to create a nickel valued at $0.07 while the metals needed to create a penny are valued at $0.012. This is before considering the energy and equipment necessary to strike the coins and distribute them.
At current metal prices, which are unlikely to drop in the near future, the US Mint is producing nickels and pennies at a loss.
This embarrassing detail makes the purchase of nickels and pennies a better risk free investment than US Treasury Bonds, the world’s current safe haven of choice. The metal premium for Platinum, Gold, and Silver coins is widely known. At some point, nickels and pennies will disappear from circulation and their metal premium will take precedence over their face value.
Still, one may ask, “What difference does it make? This 10:1 switch sounds like a great idea. I’m sick of pennies!”
Oh, if only the switch were price neutral, it would make no difference at all. How, then, do the stock, bond, and almost every other market continue to rally in the face of questionable macroeconomic fundamentals?
Much ink is being spilled today in anticipation of what may or may not happen as the 10th anniversary of the events that occurred on September 11, 2001. Here at The Mint, we take the somewhat radical view of the Amish in response to tragic loss. We must forgive. An important part of forgiveness is to avoid making or observing a memorial to the offense. Memorializing an event is to keep it present before us.
As the US Empire is now conducting at least three extremely expensive military adventures which have their origins in the events that occurred that fateful day, forgiveness is probably not on many people’s minds this weekend. Meanwhile, millions of dollars are being spent to memorialize it.
We must forgive. It is our opportunity to choose the tree of life over the tree of the knowledge of good and evil. To repair the fateful error made in Eden.
Under the cover of this memorial, we sense that an extraordinary event will occur which will impact the fortunes of many in the US, England, Japan, and Europe and others outside their borders with exposure to their respective currencies.
Debauchery
The Event which we refer to is the coordinated debauchery of their currencies.
For the past four years, the FED, BoE, BoJ, and ECB have been engaged in a desperate attempt to debauch (devalue) their currencies. They have had the predictably mediocre to poor results that one would expect from efforts made by this rare hybrid of an agency which combines the laziness of the banking class with the incompetence of the governing class.
The goal seems simple enough. Print money to pay existing debts and encourage people to spend and to take on new debt. So simple, that each of these Central Banks is currently running at their own pace down this calamitous path with little regard to how the outside world is reacting.
Guess what? The outside world is not reacting as expected.
What they did not take into account, at least until now, was that there is quite a bit of money to be made from the fact that they are all running at different paces down the same path. The nature of international finance is such that one Central Bank’s unbridled effort to debauch its currency leads to an opportunity to profit by borrowing in that nation’s currency and purchasing one of the other three currencies, which undermines the debauchery of the currency that is being purchased.
Stark, as most thinking persons, cannot stomach the debauchery in his midst
This is commonly known as the carry trade, and these large Central Banks have taken all of the guess work out of it for the past four years.
We suspect that these four Central Banks see the immediate need to eliminate interest rate spreads amongst their currencies which will force those who ply the carry trade to purchase currencies outside of this group.
In effect, this ultimate coordination of interest rate policies will cause these four currencies to “peg” to each other, which should assure that the debauchery of their respective currencies will continue unchecked and likely accelerate.
Will another stealth disaster befall the US this weekend? If these Central Banks somehow coordinate their collective debauchery of the currency, the economic devastation of millions will march on.
The crisis in the Eurozone is getting too big to ignore. The gig is up, the Greek Government is in default, and Portugal and a host of private lenders, amongst them the ECB itself, are on their way there as well. So certain is this fact that Moody’seven went on record and took the small step of downgrading Portugal’s debt.
Naturally, the Europeans can’t believe it. Don’t they pay good money for these ratings?
Whatever Moody’s reasons for stating the obvious, the news is having the effect of sending money fleeing across the Atlantic to US Markets any which way it can. Commodities, Stocks, Bonds, even Real Estate are being bid up today as the European Bond Market collectively exhales capital.
For the moment, inflation on this side of the pond is only moderately accelerating as much of the cash is trapped on the Ellis Island of the US Banking system at the FED member banks.
Send me your tired, wadded up Euro capital looking for a home!
But as any banker knows, if you can’t lend the money then excess cash begins to crush your balance sheet. This is why it is probable that the US will participate in a Eurozone bailout. Even the threat of US intervention should get this newly immigrated capital looking for a new home shortly after arriving.
The trillion dollar question is now begging to be answered, will the US avoid default and keep the mushroom shaped debt sponge intact or will the current stalemate in Congress finally put the squeeze on the debt sponge and unleash the 500 year inflationary flood onto American shores from which there is but on escape (buy gold, silver, or anything real)?
*See the MINT Perceived target Rate Chart. This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy. This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.
Today the focus of the financial world is on events around the Mediterranean where the Greek and increasingly the Spanish people again find themselves at odds with their respective governments and their IMF / ECB / German debt collectors.
How did they get there? The Greeks and arguably the Spanish have been living in the social equivalent of a Club Med ever since they joined the Euro. The initial sting of higher prices was offset for most by lower borrowing costs. Life was good. The advent of the Euro along with a boom in tourism began to feed a property boom in Spain and a government spending boom in Greece.
Alas, as an economy slows, the government is usually the last to know.
Like the father whose family takes a vacation to Club Med, he is content to let the family splurge with little worry as to how he will cover the bill. “Just throw it on the credit card, we’ll take care of it later” becomes the mantra.
Unfortunately for the father (who represents the Greek, Spanish, and arguably the US governments in our parable), his bank decides to cut his credit line just before the vacation is over. The bill comes due and the man frantically negotiates with his bank (the ECB, IMF, and arguably the US FED) to extend his credit line enough to cover the bill.
Club Med – Paradise Lost!
To make matters worse, upon his return the man finds that the income from his job (the government’s tax receipts in our parable) has been cut due to “the economy*.” He now has no realistic prospect of repaying his extended credit line and instead must now consider a painful reduction in the family’s standard of living.
Naturally the family, who has developed some expensive habits while away at Club Med, rebels. The father is now in a no win situation. On the surface, he appears to have a choice between satisfying his family at the expense of his creditors or vice versa.
There is, of course, an easy way out. The man who is in this hopeless situation can declare bankruptcy. Problem solved, right? Not so fast. You see, because of “the economy*,” the bank cannot release the man from his debts and have enough money to make good on its own obligations.
At this point, the Central Banks of the world (which are represented by the bank in our parable) lack not only the credibility but also the practical tools to perform their make believe function as protectors of the value of their respective currencies.
Today we read a piece by Michael Pento of Euro Pacific Capital (run by Peter Schiff) which seems to give logical credence to what we have long suspected to be the case:
“In the end, any meaningful attempt to withdraw liquidity will not only bankrupt the institution (The FED) but also zero out their remaining credibility. That’s why they’ll never even make an honest attempt.”
The FED is helpless to remove the liquidity it has injected and will soon have to decide which of its member banks to sacrifice if the dollar is to continue as a functioning currency. Our money is on the dollar and all who rely on it as a store of value to be the sacrificial lambs.
Back to our parable. Both the man and the bank will continue to pretend to negotiate with each other, giving the illusion that what is now their mutual problem will supernaturally disappear. The family will continue to pretend to debate which expenditures to cut back on as if it will make a difference.
Unfortunately, the likelihood of the problem disappearing is equivalent to the likelihood of the family being able to go back in time to cancel their trip to Club Med prior to departure. Such is the nature of debt.
So the bank, the father, and the family find themselves clinging to a myth as they helplessly hurtle towards the unknown.
*Definition of “the economy”, circa 2011 – A term used to describe the large scale collapse of Central Banking and the Socialist / Communist economic model that it has created over the past 100 years. Generally used by politicians and others in authority to “explain” why they cannot pay their obligations. This explanation is presented to the masses as a failure of capitalism when quite the opposite is true. Thus, this simple two word phrase is used as an excuse to further the Socialist / Communist agenda and that of the police state that is forming all around the world.
*See FED Perceived Economic Effect Rate Chart at bottom of blog. This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy. This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.
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