With Greece predominantly in the headlines for its fiscal woes, this insightful report by Robert Kaplan explores the historical roots of Greece’s economic problems as well as its unique strategic advantage owed to its geographic location.
Is Greece European?
It can be a long road from political extremism and nepotism to a moderate political center, and this past weekend’s elections have shown that it is a road which Greece may not continue down, no matter how much prodding it gets from the increasingly desperate EU.
Greece, Inc. is now for sale. Its new management is preparing a list of demands for its current creditors, the Troika. If those demands are not met, Greece, Inc., which enjoys a prime geographical location, will prod its shareholders to accept an offer from the highest bidder, likely to be either Russia and/or China.
From Olympic sized overspending to the aftermath of the recent world wars, Kaplan does a fine job of presenting Greece’s history as a framework for understanding its current situation.
The report can be seen in its entirety via Stratfor:
When we attended graduate school in Spain, we were the first North American student in our course. It was late 2003 and the Eurozone was full of optimism. This optimism lead some of the professors to use a portion of their class time taunt the US model as failed and the European model as the obvious way forward.
As proof of European supremacy, our Finance professor often made a point of mentioning to us that the yields on the Spanish 10yr bond were almost the equivalent to the yields on the US 10yr bond.
What a difference nine years and 500 basis points make.
Circa 2012, Spain dominates the financial headlines as the latest casualty of the European debt crisis. Apparently Spain now is in need of a bailout. The bailout strategy which will be employed by Spain, Inc. is a hybrid of the prior bailouts accepted by their counterparts, Greece, Inc. and Ireland, Inc.
Greece, Inc. required a bailout because its government was broke. Ireland, Inc. was slightly more ingenious in that it made a good faith effort to backstop its banks, only to find that it was now the entity which required a backstop. Spain, Inc, theoretically learning from both experiences, forced its banks to accept the backstop directly so that the Spanish government could save face and be spared the humiliation of the Irish scenario.
Unfortunately, the markets have seen through the charade and are now putting pressure on all bonds, bank or sovereign, which hail from the Iberian Peninsula.
What a difference nine years and 500 basis points make!
Spain’s strategy has failed before it was even implemented for lack of collateral and credibility, both of which are in desperately short supply amongst the EU leadership.
How did once proud Europe end up in this situation? They decided to force a debt based currency integration by integrating only the currency part of the equation and leaving the debt and fiscal matters to chance.
As if choosing to use a debt based currency weren’t bad enough, choosing only to implement the currency is like handing the nations foolish enough to engage in such a gamble the revolver in a game of Russian roulette where the revolver is fully loaded.
Now, the revolver is being passed and it is Spain’s turn. Once Spain slumps to the floor, it is Italy’s turn, the Belgium, France, etc. until the European Currency Union, doomed from its outset, breathes its last.
At some point in the process, possibly as Spain pulls the trigger, USA, Inc. will be forced to step in with the “ultimate” backstop, the final hope of the failed, insane “debt is money” currency regime. As the US throws its sovereign credit rating in front of the runaway freight train of Europe’s soveriegns, it will quickly find itself in the very situation that it is trying to save the European Sovereigns from.
For in this debt crisis, the unwritten rule of quality holds. When one adds wine to sewage, one gets sewage. When one adds sewage to wine, one gets sewage. The sovereign vats have long since been polluted. It might make sense to check one’s portfolio and remove as much sewage as possible.
Beyond that, we will present two unsolicited yet practical bits of advice. First, US Bonds will ultimately slide as USA, Inc. wades across the pond to aid Europe. The Euro currency will rally as the run on European banks by the citizens and the wholesale dumping of any bond denominated in the currency begins. Quite simply, demand for the Euro will exceed supply in the short term.
Plan accordingly.
We submit to you that the Spain, Inc. debacle is further evidence of one of The Mint’s central themes, that Anarchy is man’s reality, it is an ultimate given, it simply is, and all understanding of the current political and social structures is greatly facilitated by one’s acceptance of this fact.
In fact, one’s ability to act and react to the unfolding changes in the current political and social structures depends upon accepting and embracing Anarchy as the basis for reality and learning to operate in the Truly Capitalistic system which organically emerges as men learn anew that mutual trust and cooperation are in their rightly understood self interests, and that he who is to lead must truly become the servant of all.
To truly embrace this fact, we must understand the nature of mankind. Man, left to his own devices, is completely devoid of the ability to do the right thing. He doesn’t have it in him. He is lazy, self-serving, and completely evil. He needs God and his fellow man to be able to do anything productive, altruistic, or what may be considered remotely good. A full defense of this statement is a subject for another day (although the evidence is all around us), we mention it here only to underscore the necessity of a framework which presupposes this fact within which mankind can use this weakness to avoid both self and mutual destruction.
The only reliable framework which has emerged out of natural Anarchy which not only addresses the problem of human nature, but also turn man’s weaknesses into strengths is what we call True Capitalism. Ironically, by allowing market forces to work with as little hindrance as possible, mankind can insulate itself from descending into chaos and catastrophe.
In fact, to fight the workings of True Capitalism is, by default, to submit oneself to chaos and misery. Yet every nation on the planet is devoted to some degree in the fight against True capitalism. Why? Because the nation state sells itself as the most perfect expression of man’s good intentions, which we presuppose do not exist. In other words, the dream of the nation state is built on a false pretense that is usually attributed to socialism: That man is inherently good and wants to do good to others.
Given their presuppositions, is it clear that the nation state and a truly capitalistic society are, in fact, the antithesis of one another. Where a nation state regulates by edict, truly capitalistic society regulates by example. Where a nation state is rigid, where truly capitalistic society is pliable. Hence, where truly capitalistic society will bend but not break, the nation state is repeatedly smashed to pieces when faced with change.
For the more a nation state tries to force men to do good, the more mankind’s character flaws will overtake these good intentions until the nation state becomes an expression of mankind’s evil nature.
The truly capitalistic society allows each mans evil nature to be corrected by allowing him to experience the consequences of his inherently poor behavior, paradoxically and naturally improving the behavior and norms of all.
Moving to a less philosophical level, how can we be sure that Anarchy is the basis of man’s current existence? The evidence can be found in that the institutions which supposedly offer the best option to Anarchy, the nation states if the world, are beginning to succumb to the punishments they have built up in their losing fight against natural law.
Greece, Ireland, Portugal, Italy, and now Spain, Inc. are now succumbing to the inevitable. The member of club med which turns from the failure of the Euro currency to go it alone and embrace the much feared “Anarchy,” as it were, paradoxically stands to be richly rewarded by the flocks of tourists who can suddenly afford a European vacation without the Euro.
We conclude with a brief manifesto for your perusal and enjoyment. What does the future hold?
Out of Anarchy, a Truly Capitalistic System will ORGANICALLY emerge, and with it a new dawn for humanity, built on mutual interest and almost endless capital formation which will engender a spontaneous and dynamic social order, a society without borders that would enjoy freedom and prosperity that we cannot even imagine under current conditions.
Patrick Young, an investment advisor, gives a sobering account of the current state of the Greek economy and the future of the EU. In short, Greece will default within 8 weeks and it will be chaotic. We are not sure what is more shocking, Mr Young’s assessment or the footage of the riots in Athens running in the background. About 5 minutes and well worth a view:
The fruits of Central Planning, via the socialized monetary and credit system which is currently managed by the World’s Central Banks, are beginning to ripen, and the whole world is witnessing the latest social harvest of this doomed philosophy in Greece.
“Tensions between Athens and other European capitals have hit new highs this week. While the European Union is officially still warning of the far-reaching dangers of a disorderly default by Greece, some politicians have in recent weeks downplayed the effects of such an event.
… While the Parliament in Athens faced down violent protests over the weekend to approve a far-reaching new austerity package, the cabinet of ministers remained locked in talks Tuesday evening over how to save an extra euro325 million demanded last week by the eurozone.”
It seems that the Greeks are having trouble accepting the well intended budgetary advice which their credit “counselors” (read overlords) in the north are so generously imposing upon them. Now that the Greeks appear to be balking at their inevitable slide towards a vassal state, the folks in the north are getting restless as their banking syndicates have quite a bit riding on the events unfolding on the shores of the Aegean Sea.
Will the Hellenic Republic submit?
On the other side of the Atlantic, it appears that the similarly indebted US government will escape the fate of externally imposed austerity which Greece is now suffering. The Federal Reserve has made it clear that it will print money to monetize the deficits of the US Government for as long as necessary, and the Republican budget hawks have had their wings clipped with their latest capitulation on the extension of the Payroll tax holiday.
These two events, taken together, indicate that the US intends to go for broke and fully embrace the Keynesian dream of printing its way to full employment.
The obvious solution, then, would be for the Greeks to reject the Euro in favor of not the Drachma, but the infinitely flexible US Dollar.
Unfortunately for the US, and the Greeks, should they choose to join them, the Keynesian dream is quickly becoming a nightmare as the folly of central economic planning begins to express itself in the form of runaway inflation. The policy tools used in the past have succeeded only in stripping the earth and its people of the ability to make productive economic decisions. What now awaits the world is the inevitable adjustment which is likely to lead to a lower standard of living.
At this prospect, Athns burned on Sunday night, and it appears that the last bastions of austerity in the US capital threw in the towel and, for the moment, Washington is not burning.
The tragedy unfolding in Europe is a painful reminder that the power to mint money was never meant to be given, by edict, to an elect few.
Will the rest of the world learn this valuable lesson before it is too late?
Nigel Farage, again telling it like it is. Below he calls out the members of the EU for systematically destroying Greece by forcing them to stay in the Euro. With a puppet government and ceaseless demands for austerity, Greece’s economy has contracted for 5 straight years and is currently falling off a cliff.
It is refreshing to hear Farage call out the EU, and it is painfully obvious that his pleas fall on deaf ears as his Eurocrat colleagues simply mill about. The EU Commission would be a funny joke if their idiocy didn’t cause such widespread suffering. From zerohedge.com:
Nigel Farage of Ireland, calling the loss of sovereignty in Europe for what it is. Will Spain be the next country to have a puppet government thrust upon it?
We’ve had our first taste of autumn here in the Pacific Northwest. We found ourselves strangely welcoming the overcast sky and constant humidity. It is the type of weather that is pleasant for a month or two. Unfortunately, we get about 8 months of it here which requires some sort of escape to the sun, either Hawaii or California, for it to remain tolerable.
But still, the first taste was sweet and provided a warm feeling that all was well with the world, despite constant reports to the contrary. Fortunately for us, the sun looks as though it will return this week.
On the whitewashed shores of Greece, where the sun seems to perpetually shine, there is now intense pressure from which there seems to be no escape. The Prime Minister was called back from a trip to the US after receiving an emergency call from the Finance Minister as he stopped over in London. The poor chap had to be on a conference call with creditors and the troika and didn’t want to take the lashing alone.
As if to give the world a taste of things to come, the Greek Government passed an emergency property tax which is to be collected via the citizens’ electricity bill to help ensure compliance. Apparently the folks at the electric company are not happy about adding tax collection to their duties and are pushing back on the order.
The Greeks never have been good at collecting taxes, either that or their citizens are especially adept at avoiding paying them. Either way, the combination makes for low tax revenues which makes servicing public debt, well, difficult.
We offer a suggestion to the Greeks, privatize the electric company and then enact an enormous tax on consumption. At least then the riots would be staged at the electric company and not at parliament.
Meanwhile, before departing for New York in perhaps the least understood yet most important peace-keeping mission the US will ever embark upon, President Obama gave yet another clinic on teleprompter reading during his speech on, what else, government finances. His proposal was to save $1.5 Trillion over the next 10 years by in large part by ending the wars in Iraq and Afghanistan.
Will Palestine Become a UN Member?
We do not have any statistics, but we are willing to bet that this is not the first time that ending these wars has been proposed as a deficit reduction measure. What is truly astonishing to almost every thinking person is that these two military adventures have continued for so long and have become such a drain on the public treasury that ending them now would save $1 Trillion.
Less war, more money, what a novel idea! It is as straightforward as it is unlikely to happen.
We sense that both this speech and bath time for Greek creditors will be interrupted by the Palestinian bid for statehood at the UN this week. The Middle East has not seen a moment like this since Israel vied for statehood in 1949. Let us pray that this moment passes in a peaceful manner.
What a week it has been, and we are only halfway through it! Societe Generale, BNP Paribas, and many other European banks are bracing for the impact of a pending Greek default which would likely be followed in short order by an Irish, Spanish, Portuguese, and possibly Italian default as club med prepares to give the collective finger to their German, ECB, and IMF taskmasters.
There were rumors that BNP could not borrow dollars yesterday and today we saw why. The large French banks, of which BNP at $2 Trillion in assets is the largest, collectively hold assets of $8 Billion, which is four times France’s annual GDP. This, in theory, makes nationalization of these banks impossible and the meager, strings attached handouts offered by China are of little comfort.
Zerohedge.com posted an excerpt of a report by Jeffries which spelled out a probable endgame scenario in Europe which involves sloppy nationalizations of the financial sector and a repudiation of the Euro by the defaulting countries in order to print the drachmas, pesetas, liras, etc. necessary to make good on the newly nationalized banks’ liabilities.
The PIGS have nothing to lose at this point and it will be EUROUGLY for those who cling to the Euro.
We are all preparing to learn a great lesson about faith in paper currencies and it looks like for the Europeans, class is in session.
Yesterday, we were attempting to explain the concept of inflation coming in disguise. We speculated that the disguise would come in the form of a “10:1 reverse split” being declared for the current USD. In other words, a new US Dollar would be introduced which would be worth 10 old US dollars. We left off with a question, “What’s the big deal? Why does this matter?”
At this point, our rational readers are thinking to themselves, ”Big deal, so we get rid of the penny and nickel production cost problem, learn to move the decimal place in our thinking, and happily move along with life, right?”
This, of course, is what most monetary and governmental representatives think as well. It makes the move almost a no-brainer.
We must beware of the money changers! They seem innocent, yet are wolves in sheep’s clothing.
Yes, fellow taxpayer, under the reverse split scenario, dollar holders will be robbed. Quietly, and, if not for the following humble explanation, completely unaware. It is as Keynes famously said:
“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”
(Editor’s note: today inflation is accepted as “sound” economic policy thanks to meddlers such as Mr. Keynes.)
How, then, will dollar holders have their wealth confiscated? A change like this initially robs those who can least afford to be robbed, the poor. And the thievery is made all the more sinister because the thieves employ unwitting merchants and tax collectors with which to fleece them.
The following is a practical example of how the theft will take place:
One would be hard pressed to find a more suitable and pleasant example if instant price inflation than that of the Spanish cup of coffee, pleasantly sipped at mid-morning with friends and colleagues.
Inflation explained in the new Euro price of Cafe con Leche
This cup of coffee, a constitutional right of Spaniards for generations, could be enjoyed for a mere 100 pesetas circa 1995, in the era before the peseta was to be pegged and converted into the then conceptual Euro currency.
This 100 peseta price held more or less firm until the Euro coins began to circulate in 2002. The Euro/Peseta conversion rate had been pegged at 166.386:1 in 1995. In 2002, the same cup of coffee was now 1 Euro, an overnight 66% increase.
The numbers may not be exact but you get the point. Currency changes offer a grand opportunity for price adjustments at the lower end. While on the surface, it appears that a cup of coffee that costs 1 monetary unit compared to one that costs 100 monetary units is an improvement. In fact, considering that many wages remained stagnant, it represented a considerable deterioration of overall purchasing power.
To this day, many Spaniards think of prices for larger items such as cars and houses in terms of pesetas. It is one thing to be duped on the value of a cup of coffee, quite another to be duped on the value of a car or house.
For a time, asset prices there did indeed rise as an indirect result of people fleeing the inflation caused by the change to the Euro. However, the devil of inflation is in the details. An overnight 66% increase in a cup of coffee can eat into a laborer’s stagnant wages quickly.
Once the transitory asset price increases have been burned through at the café, one is left with a nation that is collectively poorer and unable to make economic decisions because of these types of stealth price shifts.
Returning to the probable US Dollar reverse split, we can see that a 10:1 change from old to new dollars would likely result in a cup of coffee going for a nice round quarter (or 25 new cents). Which sounds like a trip back to the 70’s until you consider that we are talking about $2.50 of the old dollars for a plain cup of coffee which could be had for $1.50 before the switch.
One can rest assured, employers will be mindful to move the decimal point and nothing more on wage calculations. Voila! Overnight poverty, all with the stroke of a pen.
While one may hold out hope that any change in the monetary unit will be price neutral, the Spanish example shows us that lipstick on a pig does not make it any prettier, and coffee at 1 Euro is no tastier than it was at 100 pesetas, just more expensive.
We pray that you will prepare yourself by saving in gold and silver coins, which will retain and perhaps increase their relative value under such a scenario. Under current conditions (and probably more so after the G-7 begin to their coordinated action) anything that cannot be created by government decree, to paraphrase Michael Pento, will be preferable as a savings vehicle to the US Dollar.
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?
We are taking the week off here at The Mint. As the world observes the pitched battle between default and inflation, we will be roaming the cornfields of Northeastern Nebraska waiting to attend a cousin’s wedding.
To default or not to default, that is the question. The financial world is on the edge of its seats waiting for the answer. What will congress do?
Regular Mint readers know that once QE started, the US essentially defaulted. Everything that is happening now is a mere attempt to avoid openly admitting it.
There has been a startling graph from Bank of International Settlements that has been circling the internet and is worth a look. You may want to ask the children to leave the room, it is downright scary.
"AAA" Government dominates the market and it is beginning to smell funny!
Do you now understand why what happens in Greece, Ireland, Portugal, Spain, Italy and the US in the coming weeks is of the utmost importance for the bond markets? In a very short period of time, sovereign debt issues have become predominant. The scary part of the chart is that any sane person can tell you that there simply ain’t that much AAA rated paper out there, no matter who issues it or who rates is.
With what is sure to be an action packed week as the financial world braces for the next of its many brushes with Armageddon. Not matter what happens, the only clear winner promises to be the volatility index (which you can conveniently trade asVIX). If there truly is the threat of a default, try TBT, the Ultrashort US Treasuries EFT.
Better yet, head down to your local coin shop, load up on physical Gold and Silver, and come roam the cornfields with us, worry free!
P.S. If you enjoy or at least tolerate The Mint, please share us using the buttons at the top of this post. If you feel that you can’t go another day and risk missing The Mint, please register by clicking here. Thank you!
*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.
Investors woke up today and wasted little time in marking down Italian sovereign debt, along with Spanish and Portuguese debt issues. Why? The story of the Italians is eerily similar to that of the Greeks, the Portuguese, and the Spanish. Their government spends more than it takes in.
At this point, all readers of The Mint know that it is impossible for any Government to produce value. Yet somehow, in our upside down, insane monetary system, it has become acceptable for the western governments to run a reasonable deficit to help pay for their role as the Robin Hood in the current welfare state model. The European Union even went so far as to attempt to define what constitutes a reasonable deficit as 3% of a nation’s GDP per year.
Now if the government takes in 25% of national income in the form of taxes, which is not an unheard of (if anything it is a low estimate) and then borrows an additional 3% (which has proved an elusive target), then 28% of the welfare state’s economy is devoted to income “redistribution.”
While the term “income redistribution” does not fly well with most voters, the Government’s “investment” decisions are cleverly disguised as Social Security, Health Care, Defense, and Education. Most will recognize that these are important investments, which leads us to the logical question:
Why leave these investment decisions up to the Government?
This question is rarely asked, and most seem content to let the Government continue in their collective role as Robin Hood. It should come as no surprise, then, that a great deal of time and what would otherwise be productive energy goes into influencing Robin Hood’s decisions as to whom the poor are at the moment. Bill Bonner at The Daily Reckoning calls this outsized effect of Government in the economy a “Zombie Takeover.”
With the Zombies creatively destroying a minimum of 28% of GDP in a modern welfare state, perhaps it is a testament to the resilience and productivity of the citizenry that any real progress can be made under such circumstances.
Fortunately (or unfortunately for those in the zombie class) the insanity is coming to an end. As the government’s destruction of wealth accelerates, even elected officials will have to admit that the bad decisions that all of this accumulated debt represents do not go away just because one denies that they exist.
In fact, attempts to solve the problem of too much debt by creating more currency are futile, as each unit of currency creates a unit of debt which must be dealt with at a later date. This is the glory of modern monetary theory. It binds the world together in slavery. It is also its Achilles heel, which is now exposed, waiting to be stricken.
How and when will this finally occur? It will be like the man with back pain who finally goes to visit the chiropractor. The gradual spinal realignment that he had hoped to achieve by doing simple stretching exercises (austerity) is not taking place, in fact, his back problems have gotten worse. Once in the exam room, he will be laid down swiftly on the chiropractor’s table.
Then chiropractor will move into place, interest rates will rise, and a series of pops will go off in the patient’s spine. Naturally, the popping sounds are the troubled EU nations defaulting on their sovereign debt in unison, which is what is about to occur.
Will the patient then get up and go on his way, sore but better off for the treatment? Or perhaps the better question is; do zombies even use chiropractors?
Meanwhile in the US, the political theater that is the debt ceiling negotiations may be the catalyst that sends the US Treasury market into a much deserved tailspin. We have speculated about this almost incessantly and still cannot believe that it may happen.
But while the EU goes to the chiropractor, the US may prefer to rely on the prescription drugs of fiscal and monetary stimulus for as long as they appear to work in a futile attempt to reassure the zombies that all is well.
The US will simply destroy the value of the currency, completely and irreversibly. Why else would they pick a fight with Iran at this point?
That makes each dollar that one holds like holding an M80 firecracker with a lit fuse.
P.S. If you enjoy or at least tolerate The Mint, please share us using the buttons at the bottom of this post. If you feel that you can’t go another day and risk missing The Mint, please register by clicking here. Thank you!
*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.
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.
Another day, another Euro. It appears that it is still all systems go for the Greek bailout. Athens will get another shot of hot money in mid July and the charade will keep going on.
In the old communist days, the joke went “we pretend to work and they pretend to pay us.” In the current socialized monetary system, the joke goes “we pretend to cut back and they pretend we will pay them back.”
As our astute fellow taxpayers are already aware, the Greeks have no intention of changing their ways. Parliamentary promises and austerity measures are of little value when 90% of the population is against them. It is doubtful that the money lenders in Germany and France will step out of their high rises to come repossess the Parthenon.
No, they will leave that to foreign militaries as they march on Palestine.
But we are getting ahead of ourselves. Our topic of the day is why the Euro/IMF and now, reluctantly, the private sector are “thrashing” (which must be somewhat harsher than mere hashing) out an aid plan for Greece tomorrow in France. From Reuters:
International banks and insurers will meet on Wednesday to thrash out a plan for the private sector to contribute to Greece’s bailout effort as fears grow that the proposal will be derailed.
The Institute of International Finance (IIF) lobby group said it will chair the meeting of private-sector creditors.
It needs to resolve how a deal can get past credit rating agencies without it being termed a default, and how accountants will deal with it.
A lot of work remains to be done and Wednesday’s meeting will not be decisive, several sources said.
“It’s a process. The new French finance minister said today it will take weeks, over the summer. It’s complex. It can’t be settled overnight,” a French private sector source involved in the talks said.
He said there was unlikely to be a single “one-size-fits-all solution” but rather several options, given the number of different bondholders and stakeholders involved.
“The issue is so complex that we need more time,” a German banking industry source added.
Of course, the issue is not complex. The Greeks have promised more than they can deliver. Anyone can do this for a time but if too much time passes, actions (overspending) speak louder than words (austerity measures).
Besides, for a socialist tax collecting entity such as the Greek government, austerity measures starve its customer base of revenue, lowering its own tax revenues, which in turn demand’s more austerity, etc.
For a generally unproductive country that has made the mistake of outsourcing its money printing operations like Greece, austerity is collective suicide. Even credit ratings agencies and accountants can no longer ignore this dubious state of affairs.
Greece, Where the Euro pays tourist prices
Yet paradoxically, the international bankers seem intent on forcing the Greeks, against their collective will, to starve themselves. Why? Even in the parallel universe of our current monetary system this course of action makes absolutely no sense.
And that is precisely why it must be done. Somehow, the banking cartel must put on the charade of solvency. Most people, accountants and ratings agencies amongst them, have a vague understanding that saving money is equal to solvency.
How right they would be, if silver and gold were still money. In the current insane “debt is money” socialist monetary system, savings remove the lifeblood of the currency regime.
But that won’t stop them from trying! As the explanations become more and more ludicrous across the Atlantic and Mediterranean, keep your eye on The Mint’s Key Indicators, which are still pointing at raging inflation with no end in sight in dollar land.
The only protection for savings is anything real that is not a dollar (or a promise to pay a dollar in the future, such as dollar denominated bonds). How is that for investing made simple? So many options!
*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.
Much has happened in the financial markets in this past week, and much will happen in the coming weeks. But perhaps what is most notable is what has not happened.
Namely, the US Congress has not raised its self imposed credit card limit. For an entity that is already $14.3 Trillion in debt ($4 Trillion of which reportedly comes due in the next 12 months) with no realistic plan to pay for it, this is suicide. What are they thinking?
The two parties are in agreement one count, they need to save $2 Trillion dollars over 10 years. Why this sum has been identified as the cure for what ails the country’s finances is anybody’s guess. Unfortunately, but not surprisingly, there is no agreement as to how to get there.
Where will they find $2 Trillion? Tax the rich, screams Obama, repeating the eternal populist sentiment. Stop spending, say the Republicans, using the circumstances to make a push for “limited government.”
Editors Note: There is no hope for limited government with the current two party system in place, therefore the Republican’s stance is entirely a façade.
The President has taken the extraordinary step of asking Congress not to recess over the Fourth of July, as is their custom, calling their lack of agreement akin to his daughters not completing their homework. While the President makes a quaint metaphor, we believe that Obama’s daughter’s homework is probably more challenging than Congress’s task of balancing the budget.
Obama Admonishes the GOP to stay and do its "homework
Balancing a budget is simple. It just takes courage. It seems that courage is in short supply in Washington DC these days.
Without internal fortitude to press the Americans along, a little external pressure is beginning to be applied. First, the Treasury’s latest 7 year bond auction did not go as well as planned as investors demanded 2.43% to hold US paper for a sabbath cycle. Without the FED at the table, it is hard to imagine how it could have gone well. Bond Market participants are beginning to wring their hands.
Then comes word that the IMF is beginning to apply pressure, eloquently reminding the Americans of what they should do and why they should do it. It is worth noting that the IMF appears to be the last to know about such things so we will excuse their apparent surprise at the lack of inaction (they are most likely not informed MINT readers like yourself):
“…the federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets,”
Yeah, tell us something we don’t know. And then, true to their holier than thou, infallible status, they give the Americans advice on how to do it:
“We see early political agreement on a comprehensive medium-term consolidation plan based on realistic macroeconomic assumptions as a cornerstone of a credible and cyclically appropriate fiscal adjustment strategy,”
Great! Thanks for the incomprehensible and totally impractical advice. This type of drivel simply solidifies our opinion that the IMF is a worthless institution and could be categorically ignored if it were not so insistent upon meddling in financial matters on a global basis.
Meanwhile, we are getting to see first hand what happens to a country that gives up control over its currency and then listens to the IMF for advice and is forced to take a loan from them. Greece, is giving the world a glimpse at how popular austerity is with the masses.
The scene that was carried out in the Middle East in the Spring is set to take place in Europe and England over the summer months.
How long until it crosses the Atlantic?
Another event that may occur as interested parties begin to reduce exposure to US Treasury debt is a liquidity crunch that will start in early July. Apart from the debt ceiling uncertainty, the Dodd-Frank financial reform rules are set to begin to do their damage to the financial system on July 15th.
If they do not forestall these rules as many banks are begging them to do, the US and global economy will take their first tender steps into the great unknown, a world without political or real capital to act a a backstop for failures.
It will be dangerous and exciting. And, just like a fireworks show, will be best enjoyed from a safe distance. Keep your money close at hand, meaning out of banks and preferably in precious metals or anything tangible, and enjoy the show!
*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.
Rationale: With the Greeks passing austerity measures in the face of widespread protests, the Euro got a temporary boost today. These types of jumps usually pull back in the short term. The Euro just double peaked on a triple top vs. the USD and is generally in a bear trend which should be reinforced post June 30th.
Result of Call for June 24, 2011:10 year US Treasury Bond yield to fall (price to rise). Was 2.87%, Currently 3.108%. Bad Call.
Calls to Date: Good Calls: 32, Bad Calls: 28, Batting .543
Daily Default:PMI Group, Inc., third largest guarantor of US Mortgages.
*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’s Call:Spain5yr Credit Default Swap to rise. Currently 315.20.
Rationale:Spain has been out of the news for some time as Greece’s debt problems have taken center stage. However, the chance of increasing unrest along with the realization that banks will likely have to roll over existing sovereign debt in Europe will likely raise risk premiums on all sovereign debt, with Spanish debt being one of the more vulnerable.
Result of Call for June 22, 2011:Yield on 10 US Treasury to fall, price to rise. Was 2.99%, Currently 2.93%. Bad Call.
Calls to Date: Good Calls: 31, Bad Calls: 27, Batting .534
*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.
*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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