Blog Archives

Energy Markets Are On The Brink Of Crisis

06/19/2014
Submitted by Tyler Durden
 
by Brandon Smith of Alt-Market.com,

The multitudes of people, especially Americans, who view U.S. government activity in a negative light often make the mistake of attributing all corruption to some covert battle for global oil fields. In fact, the average leftist seems to believe that everything the establishment does somehow revolves around oil. This is a very simplistic and naïve view.

Modern wars are rarely, if ever, fought over resources, despite what the mainstream gatekeepers might tell you. If a powerful nation wants oil, for instance, it lines the right pocketbooks, intimidates the right individuals, blackmails the right officials or swindles the right politicians. It has no need to go to war when politicians and nations are so easily bought. Modern wars, rather, are fought in order to affect psychological change within a particular country or population. Wars today are fought to cover up corrupt deals and create desperation. Oil is used as an all-encompassing excuse for war, but it is never the true cause of war.

In reality, oil demand has become static and is even falling in many parts of the world, while new oil and gas-producing fields are discovered on a yearly basis. Petroleum is not a rare resource — at least, not at the present. And the propaganda surrounding the “peak oil” Armageddon scenario is pure nonsense. Oil prices, unfortunately, do not rise and fall according to supply – instead they rise and fall according to market tensions and, most importantly, the value and perceived safety of the U.S. dollar. Supply and demand have little to do with commodity values in our age of fiat manipulation and false investor perception.

That said, certain political and regional events are currently in motion that could, in fact, change investor perception to the negative, and convince the world of a false fear of reduced supply. While supply is more than ample, the expectation of continued supply can be jilted, shocking commodities markets into running for the hills or rushing into mass speculation, generally resulting in a sharp spike in prices.

A very real danger within energy markets is the undeniable threat that the U.S. dollar may soon lose its petrodollar status and, thus, Americans may lose the advantage of relatively low gas prices they have come to expect. That is to say, the coming market crisis will have far more to do with the health of the dollar than the readiness of supply.

In the span of only a few years, as the derivatives crisis took hold and the fed began its relentless bailout regime, petroleum costs have doubled. It wasn’t that long ago that someone could fill his vehicle’s tank with a $20 bill. Those days are long gone, and they are not coming back. The expectation has always been that prices would recede as the overall economy began to heal. Of course, our economy will not be healed until it is allowed to crash, as it naturally should crash. And as it crashes, because of our currency’s unique place in history, the price of oil will continue to climb.

The petrodollar has always been seen as invincible — a common denominator, a mathematical constant. This is a delusion propagated by a lack of knowledge and common sense amongst establishment economists.

As I have covered in great detail in numerous articles, the U.S. dollar’s world reserve status is nearing extinction. Multiple major economies now trade bilaterally without the use of the dollar; and with foreign conflicts on the rise, this trend is going to become the norm.

In the past week alone, Putin adviser Sergey Glazyev recommended to the Kremlin that a coalition of nations be formed to end the dollar’s reserve status and initiate a form of economic warfare to stop “U.S. aggression”.  Of course, anyone familiar with the escapades of international banking cartels knows that it is the money elite that dictate U.S. aggression, just as they dictate the policy initiatives of Russia.  I would note that there is only ONE currency exchange structure that could be used at this time to shift global forex reserves away from the dollar system, and that is the IMF’s Special Drawing Rights.

The argument has always been that the IMF is a U.S. controlled institution, however, this is a faulty assumption.  The IMF is a GLOBAL BANKER controlled institution, a front organization for the Bank of International Settlements, which is why the recent refusal by the U.S. Congress to vote on new capital allocations for the IMF has resulted in the world’s central bank threatening to remove U.S. veto power. Globalists have no loyalty to any single nation, and the reality is, the fall of the dollar actually benefits these financiers in the long term.

Russia’s historic oil and gas deal with China, just signed weeks ago, removes the dollar as the petroleum reserve currency.

Russia’s largest gas company, Gazprom, has all but excluded the dollar in all transactions with foreign nations. In fact, nine out of 10 of Gazprom’s foreign clients were more than happy to buy their products without using dollars.  This fact cripples the arguments of dollar cheerleaders who have always claimed that even if Russia broke from the dollar, no one else would go along.

Gazprom and the Russian government have followed through with their threats to cut off gas pipelines to Ukraine, and now, some analysts fear this strategy may extend to the EU, in which many countries are still 30% dependent on Russian energy.

China is currently striking oil deals not only with Russia but also with Iran. New oil deals are being signed even after a $2 billion agreement fell through this spring.  And, despite common misinformation, it was actually China that was reaping the greatest rewards through the reopening of Iraqi oil fields, not the U.S., all while U.S. military assets were essentially wasted in the region.

Now, any U.S. benefits are coming into question as Iraq disintegrates into chaos yet again. With the speed of the new Islamic State of Iraq and Syria (ISIS) insurgency growing, it is unclear whether America will have ANY access to Iraqi oil in the near future.  If ISIS is successful in overrunning Iraq, it is unlikely that Iraqi oil will ever be traded for dollars again. Unrest in Iraq has already caused substantial market spikes in oil prices, and I can say with considerable confidence that this trend is going to continue through the rest of the year.

Interestingly, mainstream news sources suggest that Saudi Arabia has been a primary funding source for the ISIS movement.  It is true that the Saudis have warned for years that they would fund and arm Sunni insurgents if America ever pulled out of the country.  But, I would point out that the U.S. has also been covertly supporting such extremist groups in the Mideast for quite some time, and this is not discussed at all in the MSM storyline. The mainstream narrative is painting a picture of betrayal by the Saudis against the U.S. through subversive groups designed to break the foundations of nations opposed to its policy views.  When, in fact, the destabilization of Iraq has been nurtured by money and weapons from both America and Saudi Arabia.

It was the CIA which trained ISIS insurgents secretly in Jordan in preparation for their subversive war in Syria.  It was an agreement signed by George W. Bush and delegated under Obama’s watch that allowed ISIS leader, Abu Bakr al-Baghdadi, to be set free in 2009.  Saudi Arabia has been openly arming the Sunni’s for years with the full knowledge of the U.S. government.  So then, why is the narrative being created that America and Saudi Arabia are at odds over ISIS?

Such a development would place the U.S. squarely in conflict with the Saudi government, our only remaining toehold in the global oil market. Without Saudi Arabia’s patronage of the dollar, most OPEC nations will follow (including Kuwait), and the dollar WILL lose its petrodollar status. Period.

In the past few days, Saudi Arabia has demanded that the foreign interests refrain from any military intervention in Iraq.  While Barack Obama has repositioned an aircraft carrier, armed troops, and special forces in the area.

Now, my regular readers understand that this was going to happen eventually anyway. The Federal Reserve’s quantitative easing bonanza has destroyed true dollar value and spread unknown trillions of dollars in fiat across the planet. The dollar’s death has been assured. It has been slated for execution. This is why half the world is positioning to dump the currency altogether. My regular readers also know that the destruction of the dollar is not an accident; it is part of a carefully engineered strategy leading to the centralization of all economic power under the umbrella of a new global currency basket system controlled by the International Monetary Fund.

I believe Saudi Arabia may be a near term trigger in the next great shift in petroleum markets away from the dollar. Renewed U.S. involvement in Iraq, diplomatic tensions over ISIS, and more lucrative offers from Eastern partners have been edging Saudi Arabia away from strict petrodollar ties. This shift is also not limited to Saudi Arabia.

“Abu Dhabi, the most influential member of the United Arab Emirates,” has suddenly ended its long-standing exclusive relationship with Western oil companies and has signed a historic deal with China’s state-owned China National Petroleum Corporation (CNPC).

Russia has formed the new Eurasian Economic Union with Belarus and Kazakhstan, two countries with freshly discovered oil fields.

On the surface, it appears as though the world is huddling itself around oil resources in an environment of East versus West conflict. However, these changes are not as much about petroleum as they are about the petrodollar. The reality is the dollar’s reserve-status days are numbered and this is all part of the plan.

What does this mean for us? It means much higher gas prices in the coming months and years. Is $4 to $5 per gallon gasoline a burden on your pocketbook? Try $10 to $11 per gallon, perhaps more. Do you think the economy is straining as it is under the weight of current gas prices? Imagine the earthquake within our freight-based system when the cost of trucking shipments triples. And guess who will end up paying for the increased costs? That’s right: you, the consumer. High energy prices affect everything, including shelf prices of retail goods. This is just the beginning of what I believe will be ever expanding inflation in oil prices, leading to the end of the dollar’s petroleum reserve status, then it’s world reserve status by default, and the introduction of a basket currency system that will ultimately benefit a select few global financiers while diminishing the quality of living for millions, if not billions, of people.

Source

The Country Is Over

Monty Pelerin April 5, 2013

Data are hard to deal with when your vision is on the wrong side of it. Those wanting to claim there is a recovery underway are having just this problem. These people either have no understanding of economics or they believe falsely that they can inflate “animal spirits” with their hyped reports and that will initiate a recovery.

There will not be an economic recovery given the economic policies of this country. A recovery is not unlikely, I would argue it is closer to impossible if not impossible. The reasons for this position are not complicated. In short, the nation has become an out-of-control welfare state that is rapidly destroying the incentives to work or create jobs. Government policies appear designed toward this end. One doesn’t need a high IQ or  an advanced degree in economics to understand the problems.

There are innumerable factors responsible for the decline of the US. Only three important ones will convey why the economy is dying:

1. The rule of law and property rights are under attack.

What do you really own? The depositors in Cyprus believed they owned what was in their bank accounts. They found out otherwise. Bondholders of General Motors believed they were protected by bankruptcy laws when GM was bankrupted by the government. They found out otherwise. Do you own your pension plans and IRAs. Well you always believed you did except now there is talk about confiscating a portion or all of these funds.

How much of your income do you own? For those doing well, let’s say 60%. But that portion is under attack with the “need” for higher taxes and “fair share” gobbledegook. What about Social Security? Although the government sold it as a retirement policy and told you it is yours, the government says in fine print it is not. That is their excuse for not treating it as a liability on their balance sheet.

The fact is that the rules are being changed at will by the side who has lots of guns. The number of rules and laws that have been changed or ignored in the past several years makes one wonder what laws will remain. We are  approaching the point where there are no rules which means there can be no society. Without cooperation, markets will cease to function efficiently or perhaps at all. Millions of people will starve to death under such conditions.

2. Obamacare has raised costs

The costs associated with Obamacare are still not known or calculable. The rules are still being written. Already there are thousands of pages. Even though we passed it as Speaker Pelosi suggested as a means to find out what was in it, we still don’t know as the rules are still being made up.

For sure the program is driving up the costs of medical care and driving down the quality. That is exactly the opposite of what was promised. Business firms face great uncertainty as to what this mandate will do to their costs and operating procedures. Obamacare is rising the cost of employees. When you penalize something, you get less of it. That is a prime reason why there is no employment recovery in this country.

Employers have frozen their hiring until clarity develops. The development of clarity is no assurance that they will change their behavior. If the costs are too high (and they appear to be for many smaller businesses who create the most jobs), then hiring will not return.

The effect on hiring is only one negative. Full-time workers are being made part-time in order that they be exempted from the Obamacare mandate. These steps are not something business wants to do, it is something they must do in order to survive.

3. Government policies have made the dole more lucrative than work

As we make it easier to get unemployment benefits for longer time periods, more people take advantage of the system. So too with food stamps and disability. All programs are at or near record levels in what is supposed to be four years into an economic recovery. For many, the benefits of becoming a government dependent exceed what they can earn. One study reported that a family of four, collecting all the benefits for which they were entitled, would have to earn $65,000 per annum to have the same after-tax purchasing power.

If you are a product of the government schools and are legal to work (i.e., have skills enough that you are affordable at the minimum wage or higher), at what point do you realize that there is no need to go through the hassle of actual work. You can live pretty well by staying home and taking advantage of the entitlements available to you. That is exactly what a larger and larger percentage of the population are realizing. In many cases, it is economically irrational to work.

This behavior creates a social pathology that only worsens over time. Kids learn from their parents that work is not necessary and the many ways to game the system. In this regard, look for this problem to become worse over time unless these programs are cut back.

There Can Be No Recovery

Despite all you hear coming from the government’s media megaphone, there is no economic recovery underway, nor can there be one. The policies in place ensure that one will not happen. Economics is not a top-down science as Keynesians and politicians want you to believe. You can throw as many Fed dollars into the system or devise innumerable government stimulus programs. These are all top-down. Economics is a bottom-up process that starts with individual decisions and behavior. Individuals respond to available choices and incentives. They act in their own self-interest not in the manner in which some government planner wants them to act. Top-down programs do not affect the incentives of the individual decision-makers.

We raise the costs on those who work (higher taxes) and the businessmen who provide the jobs. One of the basic laws of human nature is that when you penalize something or make it less pleasant, people will want less of it. It is not a mystery why business is not hiring and the number of workers is declining. The return to both is declining as a result of government policies.

We raise the rewards for not working. Another basic law of human behavior is that when you increase rewards for a particular kind of behavior, you will get more of it. It is not a mystery why more people are choosing the dole than ever before. Government has encouraged them to do by providing higher rewards.

Add in the regime uncertainty associated with unstable or unpredictable laws and regulations and you have the perfect storm. There is no incentive to hire. Business hunkers down not knowing what is coming their way next. They understand they are targets of this Administration. It is unlikely that there will be any improvement on this fron while Obama remains in office. This behavior has nothing to do with politics. Even businesses headed by Democrats are behaving in this fashion. It is self-interest as in the desire to survive that motivates this behavior.

Why The Economy is Dying

As government grows the private sector shrinks. As the private sector shrinks there are fewer goods and services produced (government produces no goods and few services). I believe it was Dick Armey who described this situation with the wagon analogy: there are more people riding in the wagon and fewer pulling the wagon. As the wagon becomes heavier, the remaining pullers must work harder to move it.

The pullers must support the riders. Government does not support the riders or anyone else for that matter. Whatever government has it has taken from the pullers. Whatever it doles out it must get from taxes, borrowing or printing new money. Regardless of which means it uses, it is all coming from the pullers. They pay the borrowing back. They have less as a result of higher taxes. They are made poorer by the rising prices from the printing of money.

As the burdens increase on the pullers and the benefits increase for the riders, more pullers decide to ride. The truly creative and talented can always make enough money to continue to work rather than ride. However, when their efforts can be expended in other countries that penalize them less, at some point they no longer pull the wagon. They leave the country to climes where they are treated better.

Each increase in government spending means requires more money from the private sector. That means greater distortions in the incentive-disincentive calculus that produces fewer people pulling the wagon. Now fewer people must support more non-producers. Every time someone gets in the wagon, the burden on the productive sector increases. More must be extracted from a smaller group to serve the increasing riders.

That is what is happening in this country. If it is not reversed, the economy will stagnate and eventually implode. This conclusion is dependent upon nothing more than simple arithmetic. How bad is the imbalance today? Tyler Durden provides some information (my emboldening in red added):

The punchline: 110 million privately employed workers; 88 million welfare recipients and government workers and rising rapidly.

And since nothing has changed in the past two years, and in fact the situation has gotten progressively (pardon the pun) worse, here is our conclusion on this topic from two years ago:

We have been writing for over a year, how the very top of America’s social order steals from the middle class each and every day. Now we finally know that the very bottom of the entitlement food chain also makes out like a bandit compared to that idiot American who actually works and pays their taxes. One can only also hope that in addition to seeing their disposable income be eaten away by a kleptocratic entitlement state, that the disappearing middle class is also selling off its weaponry. Because if it isn’t, and if it finally decides it has had enough, the outcome will not be surprising at all: it will be the same old that has occurred in virtually every revolution in the history of the world to date.

But for now, just stick head in sand, and pretend all is good. Self-deception is now the only thing left for the entire insolvent entitlement-addicted world.

Is The Decline Inevitable?

Of course not. As Lawrence of Arabia stated: “Nothing is written.”

The Economic Solution

The solution to solving the problem is quite simple for an economist. Merely reverse the process. Make it attractive for people to jump out of the wagon and begin pulling. For businesses, make it attractive for them to hire. Make it unattractive to be on the dole. Reverse the growth of government and you increase the size of the private sector. More capital is made available for productive activities rather than being squandered by government. Talent stops leaving the country when they are treated more favorably here, whether this be via lower taxes or less onerous regulatory burdens. Then, get government out of the way and let markets solve the problem.

The Political Barrier

For the political class, the solution borders on the impossible. Politicians have bribed the citizenry with goodies for votes. They have sold the notion that government is responsible for all good things. The economic solution runs counter to everything that politicians have peddled. Further it reduces their power and ability to retain office, at least in a manner in which they are accustomed. It shrinks their perquisites. It shrinks their vote-buying ability. In short, it is virtually impossible for them to go along with such a solution.

What politicians thrive on is what created the current problems. Reversing this behavior is alien to them. They would not know how to behave under such conditions. Yet the economic solution is the only solution!

Do I expect politicians to change and save the country? No! Is it possible they could? Probably not, but “nothing is written.”

Source

Federal Reserve’s Attack on Gold & Silver A Warning Sign All Patriots Should Heed

April 24, 2013

By Paul Craig Roberts

For Americans, financial and economic Armageddon might be close at hand. The evidence for this conclusion is the concerted effort by the Federal Reserve and its dependent financial institutions to scare people away from gold and silver by driving down their prices.

When gold prices hit $1,917.50 an ounce on August 23, 2011, a gain of more than $500 an ounce in less than eight months, capping a rise over a decade from $272 at the end of December 2000, the Federal Reserve panicked. With the United States dollar losing value so rapidly compared to the world standard for money, the Federal Reserve’s policy of printing $1T annually in order to support the impaired balance sheets of banks and to finance the federal deficit was placed in danger. Who could believe the dollar’s exchange rate in relation to other currencies when the dollar was collapsing in value in relation to gold and silver?

The Federal Reserve realized that its massive purchase of bonds in order to keep their prices high (and thus interest rates low) was threatened by the dollar’s rapid loss of value in terms of gold and silver. The Fed was concerned that large holders of U.S. dollars, such as the central banks of China and Japan and the OPEC sovereign investment funds, might join the flight of individual investors away from the dollar, thus ending in the fall of the dollar’s foreign exchange value and thus decline in U.S. bond and stock prices.

Intelligent people could see that the U.S. government could not afford the long and numerous wars that the neoconservatives were engineering or the loss of tax base and consumer income from off-shoring millions of U.S. middle-class jobs for the sake of executive bonuses and shareholder capital gains. They could see what was in the cards, and began exiting the dollar for gold and silver.

Central banks are slower to act. Saudi Arabia and the oil emirates are dependent on U.S. protection and do not want to anger their protector. Japan is a puppet state that is careful in its relationship with its master. China wanted to hold on to the American consumer market for as long as that market existed. It was individuals who began the exit from the U.S. dollar.

When gold topped $1,900, Washington put out the story that gold was a bubble. The presstitute media fell in line with Washington’s propaganda. “Gold looking a bit bubbly” declared CNN Money on August 23, 2011.

The Federal Reserve used its dependent “banks too big to fail” to short the precious metals markets. By selling naked shorts in the paper bullion market against the rising demand for physical possession, the Fed was able to drive the price of gold down to $1,750 and keep it more or less capped there until recently, when a concerted effort on April 2-3 drove gold down to $1,557 and silver, which had approached $50 per ounce in 2011, down to $27.

The Federal Reserve began its April Fool’s assault on gold by sending the word to brokerage houses, which quickly went out to clients, that hedge funds and other large investors were going to unload their gold positions and that clients should get out of the precious metal market prior to these sales. As this inside information was the government’s own strategy, individuals cannot be prosecuted for acting on it. By this operation, the Federal Reserve, a totally corrupt entity, was able to combine individual flight with institutional flight. Bullion prices took a big hit, and bullishness departed from the gold and silver markets. The flow of dollars into bullion, which threatened to become a torrent, was stopped.

For now it seems that the Fed has succeeded in creating wariness among Americans about the virtues of gold and silver, and thus it has extended the time that it can print money to keep the house of cards standing. This time could be short or it could last a couple of years.

For the Russians and Chinese, whose central banks have more dollars than they want, and for the 1.3B Indians in India, the low dollar price for gold that the Federal Reserve has engineered is an opportunity. They see the opportunity that the Fed has given them to purchase gold at $350-$400 an ounce less than two years ago as a gift.

The Fed’s attack on bullion is an act of desperation that, when widely recognized, will doom its policy.

The Fed is creating 1T new dollars per year, but the world is moving away from the use of the dollar for international payments and, thus, as reserve currency. The result is an increase in supply and a decrease in demand. This means a falling exchange value of the dollar, domestic inflation from rising import prices and a rising interest rate and collapsing bond, stock and real estate markets.

The Federal Reserve’s orchestration against bullion cannot ultimately succeed. It is designed to gain time for it to be able to continue financing the federal budget deficit by printing money and also to keep interest rates low and debt prices high in order to support the banks’ balance sheets.

When the Fed can no longer print due to dollar decline which printing would make worse, U.S. bank deposits and pensions could be grabbed in order to finance the federal budget deficit for a couple of more years. Anything to stave off the final catastrophe.

By its obvious and concerted attack on gold and silver, the U.S. government could not give any clearer warning that trouble is approaching. The values of the dollar and of financial assets denominated in dollars are in doubt.

How the Fed Tanked Gold & Silver

By Paul Craig Roberts

I was the first to point out that the Federal Reserve was rigging all markets, not merely bond prices and interest rates, and that the Fed is rigging the bullion market in order to protect the U.S. dollar’s exchange value, which is threatened by the Fed’s quantitative easing. With the Fed adding to the supply of dollars faster than the demand for dollars is increasing, the price or exchange value of the dollar is set up to fall.

A fall in the dollar’s exchange rate would push up import prices and, thereby, domestic inflation, and the Fed would lose control over interest rates. The bond market would collapse and with it the values of debt-related derivatives on the “banks too big to fail” balance sheets. The financial system would be in turmoil and panic would reign.

Rapidly rising bullion prices were an indication of loss of confidence in the dollar and were signaling a drop in the dollar’s exchange rate. The Fed used naked shorts in the paper gold market to offset the price effect of a rising demand for bullion possession. Short sales that drive down the price, trigger stop-loss orders that automatically lead to individual sales of bullion holdings once their loss limits are reached.

According to bullion trader and whistle-blower Andrew Maguire, on Friday, April 12, the Fed’s agents hit the market with 500 tons of naked shorts. Normally, a short is when an investor thinks the price of a stock or commodity is going to fall. He wants to sell the item in advance of the fall, pocket the money, and then buy the item back after it falls in price, thus making money on the short sale. If he doesn’t have the item, he borrows it from someone who does, putting up cash collateral equal to the current market price. Then he sells the item, waits for it to fall in price, buys it back at the lower price and returns it to the owner who returns his collateral. If enough shorts are sold, the result can significantly drive down the market price.

A naked short is when the short seller does not have or borrow the item that he shorts, but sells shorts regardless. In the paper gold market, the participants are betting on gold prices and are content with the monetary payment. Therefore, generally, as participants are not interested in taking delivery of the gold, naked shorts do not need to be covered with the physical metal. In other words, with naked shorts, no physical metal is actually sold.

Consider the 500 tons of paper gold sold on April 12. At the beginning gold price that day of about $1,550, that 500 tons comes to $24.8B. Who has that kind of money?

What happens when 500 tons of gold sales are dumped on the market at one time or on one day? It drives the price down. Investors who want to get out of large positions would spread sales out over time so as not to lower their sales proceeds. The sale took gold down by about $73 per ounce. That means the seller or sellers lost up to $73 dollars 16 million times, or $1.2B. [Over the next two days it dropped $200 per ounce. That equals a $3.2B fall.—Ed.]

Who can afford to lose that kind of money? Only a central bank that can print it.

Paul Craig Roberts is a former assistant undersecretary of the U.S. Treasury and former associate editor of The Wall Street Journal. He is the author of many books including The Tyranny of Good Intentions, Alienation and the Soviet Economy, How the Economy Was Lost and others.

Source

20 Signs That The U.S. Economy Is Heading For Big Trouble In The Months Ahead

Trouble In The Months AheadIs the U.S. economy about to experience a major downturn?  Unfortunately, there are a whole bunch of signs that economic activity in the United States is really slowing down right now.  Freight volumes and freight expenditures are way down, consumer confidence has declined sharply, major retail chains all over America are closing hundreds of stores, and the “sequester” threatens to give the American people their first significant opportunity to experience what “austerity” tastes like.  Gas prices are going up rapidly, corporate insiders are dumping massive amounts of stock and there are high profile corporate bankruptcies in the news almost every single day now.  In many ways, what we are going through right now feels very similar to 2008 before the crash happened.  Back then the warning signs of economic trouble were very obvious, but our politicians and the mainstream media insisted that everything was just fine, and the stock market was very much detached from reality.  When the stock market did finally catch up with reality, it happened very, very rapidly.  Sadly, most people do not appear to have learned any lessons from the crisis of 2008.  Americans continue to rack up staggering amounts of debt, and Wall Street is more reckless than ever.  As a society, we seem to have concluded that 2008 was just a temporary malfunction rather than an indication that our entire system was fundamentally flawed.  In the end, we will pay a great price for our overconfidence and our recklessness. (Read More….)

The Economic Collapse.

Euro zone fragmenting faster than EU can act

By Paul Taylor
PARIS | Mon Jul 9, 2012 2:05am EDT

(Reuters) – Signs are growing that Europe‘s economic and monetary union may be fragmenting faster than policymakers can repair it.

Euro zone leaders agreed in principle on June 29 to establish a joint banking supervisor for the 17-nation single currency area, based on the European Central Bank, although most of the crucial details remain to be worked out.

The proposal was a tentative first step towards a European banking union that could eventually feature a joint deposit guarantee and a bank resolution fund, to prevent bank runs or collapses sending shock waves around the continent.

The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro ($620 billion) European Stability Mechanism, would be able to inject capital directly into banks on strict conditions once the joint supervisor is established.

But the rush to put first elements of such a system in place by next year may come too late.

Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.

Many banks are reorganizing, or being forced to reorganize, along national lines, accentuating a deepening north-south divide within the currency bloc.

An invisible financial wall, potentially as dangerous as the Iron Curtain that once divided eastern and western Europe, is slowly going up inside the euro area.

The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence.

Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction, the best-managed Spanish or Italian banks or companies have to pay far more for loans, if they can get them, than their worst-managed German or Dutch peers.

POLITICAL BACKLASH

The longer that situation goes on, the less chance there is of a recovery in southern Europe and the bigger will grow the wealth gap between north and south.

With ever-higher unemployment and poverty levels in southern countries, a political backlash, already fierce in Greece and seething in Spain and Italy, seems inexorable.

European Central Bank President Mario Draghi acknowledged as he cut interest rates last week that the north-south disconnect was making it more difficult to run a single monetary policy.

Two huge injections of cheap three-year loans into the euro zone banking system this year, amounting to 1 trillion euros, bought only a few months’ respite.

“It is not clear that there are measures that can be effective in a highly fragmented area,” Draghi told journalists.

Conservative German economists led by Hans-Werner Sinn, head of the Ifo institute, are warning of dire consequences for Germany from ballooning claims via the ECB’s system for settling payments among national central banks, known as TARGET2.

If a southern country were to default or leave the euro, they contend, Germany would be left with an astronomical bill, far beyond its theoretical limit of 211 billion euros liability for euro zone bailout funds.

As long as European monetary union is permanent and irreversible, such cross-border claims and capital flows within the currency area should not matter any more than money moving between Texas and California does.

But even the faintest prospect of a Day of Reckoning changes that calculus radically.

In that case, money would flood into German assets considered “safe” and out of securities and deposits in countries seen as at risk of leaving the monetary union. Some pessimists reckon we are already witnessing the early signs of such a process.

OVERWHELMING?

Any event that makes a euro exit by Greece – the most heavily indebted member state, which is off track on its second bailout program and in the fifth year of a recession – look more likely seems bound to accelerate those flows, despite repeated statements by EU leaders that Greece is a unique case.

“If it does occur, a crisis will propagate itself through the TARGET payments system of the European System of Central Banks,” U.S. economist Peter Garber, now a global strategist with Deutsche Bank, wrote in a prophetic 1999 research paper.

Either member governments would always be willing to let their national central banks give unlimited credit to each other, in which case a collapse would be impossible, or they might be unwilling to provide boundless credit, “and this will set the parameters for the dynamics of collapse”, Garber warned.

“The problem is that at the time of a sovereign debt crisis, large portions of a national balance sheet may suddenly flee to the ECB’s books, possibly overwhelming the capacity of a bailout fund to absorb the entire hit,” he wrote in 2010, after the start of the Greek crisis, in a report for Deutsche Bank.

European officials tend to roll their eyes at such theories, insisting the euro is forever, so the issue does not arise.

In practice, national regulators in some EU countries are moving quietly to try to reduce their home banks’ exposure to such an eventuality. The ECB itself last week set a limit on the amount of state-backed bank bonds that banks could use as collateral in its lending operations.

In one high-profile case, Germany’s financial regulator Bafin ordered HypoVereinsbank (HVB), the German subsidiary of UniCredit (CRDI.MI), to curb transfers to its parent bank in Italy last year, people familiar with the case said.

Such restrictions are legal, since bank supervision is at national level, but they run counter to the principle of the free movement of capital in the European Union’s single market and to an integrated currency union.

Whether a single euro zone banking supervisor would be able to overrule those curbs is one of the many uncertainties left by the summit deal. In any case, common supervision without joint deposit insurance may be insufficient to reverse capital flight.

German Chancellor Angela Merkel, keen to shield her grumpy taxpayers, has so far rejected any sharing of liability for guaranteeing bank deposits or winding up failed banks.

Veteran EU watchers say political determination to make the single currency irreversible will drive euro zone leaders to give birth to a full banking union, and the decision to create a joint supervisor effectively got them pregnant.

But for now, Europe’s financial disintegration seems to be moving faster than the forces of financial integration.

(Editing by David Holmes)

Dark economic clouds gather anew over Obama campaign

By Patricia Zengerle
WASHINGTON | Tue Jul 3, 2012 7:08pm EDT

(Reuters) – After a month in which his re-election campaign picked up momentum, hard economic realities are about to hit President Barack Obama as he takes to the road on a campaign bus trip through the Rust Belt.

Poor manufacturing data earlier this week followed by a likely weak jobless report on Friday are reminding Obama that he has a lot of work to do to convince voters he is bringing the economy back to full health.

A Supreme Court victory for Obama on healthcare and a surprise expansion of immigration laws that put Republican opponent Mitt Romney on the defensive on the issue may soon fade from memory.

“By Friday, the Supreme Court will be in the rear-view mirror and everybody will be talking about the state of the economy,” said Greg Valliere, an analyst for institutional investors at Potomac Research Group.

“I think the debate on Friday will be whether the economy is still growing or whether we’ve hit a brick wall,” he said.

U.S. manufacturing activity contracted in June for the first time in nearly three years, data showed on Monday, stark evidence of a slowing economic recovery and that Europe’s debt crisis is weighing on the U.S. economy.

And the monthly jobless figures, the most closely watched economic indicator, are expected to be lackluster.

Economists polled by Reuters expect nonfarm payrolls to have risen by only 90,000 jobs in June and the unemployment rate will stay unchanged at 8.2 percent. Employers likely increased hiring, but not enough to dispel concerns that the economy is losing steam.

The fiscal gloom allows Romney to re-energize his charge that the White House is not creating jobs quickly enough, after his nonstop economic criticism was drowned out by last week’s Supreme Court ruling that Obama’s 2010 healthcare law is constitutional.

“From day one of his administration, the president has pursued policies that have hurt job creators, hurt the manufacturing sector, and left millions of Americans struggling to find work. It’s going to be hard for the president to argue Americans should gamble on a second term while on his bus tour,” Romney campaign spokeswoman Amanda Henneberg said.

Romney also struggled recently to explain his immigration position after Obama forced the issue on to the agenda by halting possible deportations of young illegal immigrants. The immigration debate helped Obama in polls.

RUST BELT PUSH

Obama begins a two-day campaign bus tour through Ohio and western Pennsylvania on Thursday. No matter how the unemployment report comes out, he will remind voters his bailout of the U.S. auto industry helped save jobs in the area.

In a tough economic climate, polls show that Obama still comes across as likeable although he does have a problem winning over white, middle-class male voters.

“Whoever does a better job of showing empathy will have a better chance of winning in November,” Valliere said.

Obama led Romney 48 percent to 43 percent in Gallup’s daily national tracking poll on Tuesday, the sixth consecutive day in which the survey has shown the Democratic incumbent with a statistically meaningful, if small, lead.

The five-point edge was Obama’s largest lead in Gallup daily tracking since April, and his longest such streak since then.

But economic clouds could again darken his re-election chances on November 6.

“Everybody is concerned about the prospects for the economy. There are two huge issues. One is Europe and the second is our own fiscal cliff,” said Isabelle Sawhill, a budget expert at the Brookings Institution, referring to programmed cuts in the U.S. budget and rising taxes next year, unless congress acts to avoid them.

“The concerns and the fears… have already begun to undermine confidence in the economy and cause both consumers and businesses to hold back on what they are willing to spend,” she said.

Obama’s campaign points to steady, if slow, improvement in the economy since he has taken office, and says he could have done more if Republicans in Congress had not blocked his efforts to stimulate growth.

“Clearly, the economy is not functioning as well as we know that it could be. The political question is who are people going to point the finger at in doing that,” said Heather Boushey, an economist at the liberal Center for American Progress, which has close ties to the White House.

“The biggest problem in our economy is the U.S. Congress,” she said.

ROMNEY JET-SKIING

While the poor economy hurts Obama, it also holds risks for his rival.

Unrelenting Democratic attacks calling Romney a job killer during his time as a private-equity executive have helped drag down his poll numbers.

Romney is spending the week at his $10 million lakeside New Hampshire vacation estate, which features a three-vessel boat garage and where he and his wife have been photographed skidding across the lake on their personal watercraft.

That could provide fresh fodder for the Democrats’ portrayal of Romney as out of touch with ordinary Americans.

“It’s a bad headline. It can help reinforce or enforce perceptions, whatever they may be,” said Ethan Siegel, an analyst at the Washington Exchange, which tracks political developments for investors.

However, economic worries are much more prominent in voters’ minds that Romney’s vacations.

“In the end, no one’s going into the voting room, saying ‘Romney, he was in New Hampshire for the 4th of July and I’m voting no.’ It’s buzz, it’s chatter but it don’t matter,” Siegel said.

(Additional reporting by Deborah Charles; Editing by Alistair Bell and Philip Barbara)

%d bloggers like this: