The Daily Reckoning U.S. EditionHome . Archives . Unsubscribe 
The Daily Reckoning | Tuesday, November 15, 2011
-------------------------------------------------------
Special Daily Reckoning Holiday Gift Set: One Ounce of Gold, Ten Ounces of Silver
As a special thanks for being a long-suffering Dear Reader, the DR team wants to give you a special Holiday Gift set.
It contains an ounce of 99.99% pure gold and ten ounces of pure silver.
Go here to see what the catch is as soon as you can...
Clinging to a Bankrupt Monetary System Why Central Bankers Work Feverishly to Save the World’s Financial “F-Students”
Reporting from Laguna Beach, California...
Eric Fry
“Europe is in one of its toughest — perhaps the toughest — hours since World War II,” German Chancellor, Angela Merkel declared yesterday.
Who would argue with her?
The Second World War crippled the European economy. The victors suffered almost as much as the vanquished. Nearly ten years after the war ended, the British were still rationing sugar and meat.
Notwithstanding these hardships, however, the history of the post- WWII European economy is mostly a story of economic renaissance. From the rubble of war, the European Continent produced decades of economic growth.
Attempting to perpetuate and enhance that growth trajectory, the leading economies of Europe thought it best to pool their resources. So they formed the “European Union” and abandoned their national currencies in favor of the euro.
Nice idea. But the execution may have been flawed.
Just like a “group project” in junior high school, there’s usually an A-student in the mix...as well as an F-student. So what happens? The A-student does all the work to make sure he gets his habitual A. The F-student does nothing, but still receives the “A” he never could have earned on his own.
That’s the European Union.
Unfortunately, the F-student is on his own most of the time. He still has to get passing grades in his other courses...like “Tax- Collecting I” and “Remedial Budget-Balancing.” When the F-student fails to get a passing grade, there’s very little anyone can do to change the transcript...other than writing over the F’s to make them look like “B’s.”
That’s the European Union’s rescue plan. Every kid gets a passing grade, no matter how awful his homework may be.
But out in the school of hard knocks, an “F” is an “F.” Greece has failed already...and several of the other “students” are close to failing as well. The leaders of the euro zone are trying to change the transcripts. But that gambit will likely fail. A curriculum without absolute standards is a curriculum of no value.
The moment the EU began bailing out the Greeks, it abandoned the absolute standards that rendered the euro viable. If the EU had applied absolute standards and booted Greece out of the euro block, the euro’s credibility would have been validated. Without those standards, the euro’s value becomes as dubious as an online degree.
That’s why the Greek crisis has become a euro crisis. In fact, the entire system of currencies-backed-by-nothing may be lurching toward a crisis.
“If ideas could file for bankruptcy,” James Grant muses in the latest edition of Grant’s Interest Rate Observer, “the modern model of money and banking would have beaten MF Global Holdings to the courthouse. The concept of leveraged finance in a world of paper money and socialized risk deserves rehabilitation under an intellectual Chapter 11.”
The world’s monetary model is bankrupt — both intellectually and in fact. But if ever there were an institution that was too-big-to- fail, it is the institution of paper currencies. It is too-enormous- to-fail, which is why the world’s central bankers will stop at nothing to rescue it.
In general, the central banks are borrowing and/or printing money to buy “distressed assets.” By removing these distressed assets from the marketplace, the central banks hope to clear away some of the rot in order to “stabilize” the financial system and, by extension, the value of the currencies they print.
But since central banks are functionally outlawing bankruptcy for every large institution and government in the Western world — along with a few of those in the Eastern world, the rot remains...and it’s spreading. The rot is not only undermining economic activity, it is also undermining the entire global monetary system.
Throwing good money after bad — even newly printed, pretty good money — does not really clear away the rot; it merely smears it around...like a dry windshield-wiper smears bird-droppings.
Bankruptcy clears the rot away. Nothing else will do.
But since bankruptcy has become the ultimate non-option, the world’s largest central banks are all printing currency in the name of alleviating economic stresses. And they are swapping this currency for troubled assets.
For example, here in the States during the 2008-9 crisis, the Federal Reserve purchased hundreds of billions of dollars’ worth of mortgage-backed securities. It still owns them. Today, the European Central Bank is busy buying up the dodgy debts of Greece and Portugal.
Even the Chinese are in on the game. China’s sovereign wealth fund recently announced that it was “investing” in four of the largest state-owned banks in order to stabilize their share prices and support their operations.
The central banks dress their brutish market manipulations and backdoor bailouts in the elegant vernacular of ivory tower economics. Thus, “counterfeiting” becomes “quantitative easing,” while “using my influence at the Treasury Department to bail out my buddies at Goldman Sachs” becomes a “Troubled Asset Relief Program.”
But at the end of the day, the central bank manipulations are as clumsy, counter-productive and/or illegal as they appear at face value. And the worst of it is that these multi-trillion-dollar interventions do not remove the rot from the financial system; they merely relocate it from the private sector to the public sector.
The European Central Bank (ECB), for example, holds sub-AAA assets equal to 14 times its equity. Large portions of those sub-AAA assets are the very sub-AAA government bonds of Greece, Portugal, Italy and Ireland. If these assets, in the aggregate, were to lose 7% of their value, the ECB’s equity would be zero. (For perspective, the government bonds of Greece, Portugal, Italy and Ireland have already lost 30% to 60% of their values).
But don’t lose any sleep over the math; that’s what printing presses are for — to paper over the asset values the financial markets take away.
Observing these phenomena, Grant concludes: “There are better ports in a monetary storm than government securities denominated in paper money.” Obama’s Burning Shame Revealed Here...
This is the unspoken, burning shame that could kill Obama’s presidency...
It could spell the end of his short political career...
It’s all revealed in this extremely urgent and controversial documentary report.The Daily Reckoning Presents Goldman to the Rescue!
More pieces are coming together. Day by day, the puzzle takes shape. Not a pretty picture.
Bill Bonner
An epic battle is taking place. Between the forces of...
..inflation and deflation
..growth and depression
..credit expansion and credit destruction
..centralization and de-centralization
..politics and markets
..managed paper money and gold
..managed capitalism and the real thing
..control and wealth
..bull and bear
..greed and fear
..zombies and real working people.
Yes, dear reader, it’s quite a fight. Better than Frazier vs. Ali. And who’s gonna win?
Europe faces its “toughest hour since WWII,” says Angela Merkel. What does she propose? More centralization. Centralization got Europe into this mess — harmonizing interest rates so that the Greeks and Italians could borrow more. And now, more centralization, she believes, will get it out.
Europe is taking no chances. This debt problem is a slugger. What to do about it?
Who knows more about debt problems than anyone else? The people who cause them, of course. So, under great pressure from the centralized European authorities, Greece got rid of its Papandreou, after the man had the gall to suggest letting democracy work. He wanted the people to vote on further austerity measures. It replaced him with Papademos...a guy who won’t make the mistake of deferring to the masses. After all, he was vice-president of the European Central Bank for years. And he taught at the Kennedy School of Government at Harvard.
Meanwhile, Italy too has been forced to get rid of its popular, but difficult to control, elected leader — Silvio Berlusconi. It has put in a company man. Yes, a company man. What company? Goldman Sachs, of course. The new fellow, Mario Monti is an ex-Goldman guy. And so is the new fellow at the European Central Bank, Mario Draghi. Monti was also an EU commissioner. Draghi ran the Bank of Italy as the nation built up one of the world’s biggest piles of debt. Then, when Italy’s cost of borrowing shot over 7%, in came Monti and Draghi.
It is almost as if they planned it that way. Who’s the biggest seller of debt on the planet? We don’t know...but Goldman Sachs has to be up in the rankings somewhere. You’ll recall it was Goldman that helped Greece structure its debt so that it could abide by the letter of its treaty engagements with Europe but totally thumb its nose at the spirit of it.
And now the debt has blown up...and the Goldman boys are on the job, managing the mess they were so instrumental in creating.
What’s their solution? Oh come on...dear reader, you should know how this works by now. They propose more centralization, more management, more paper money, more debt, more inflation, more of everything you see on the right hand of our column above.
In other words, they believe that they know better than the people...or the market. They believe that their sanitized, homogenized, pasteurized Capitalism-in-a-Can works better than the real thing. Besides, they have a reason to believe it. This claptrap is the source of their power, status and money. Who knows, maybe their wives married them because of it.
Rather than renounce the program on which their reputations, careers and fortunes depend, they try to shore it up. They open up the can and see what they can use. They promise to reform the system, not reject it.
But every reform — unless it merely dismantles one of their previous reforms — is a manipulation...a price fix...and a scam. For example, they are proposing tax incentives to employers who hire youths and women. Good idea? Why not just drop some of the regulations and taxes that make it so expensive to hire youths and women in the first place? Nope. Then, they’d be giving up control. They’d be letting market forces decide who gets what.
Here’s another proposed reform, as reported in The Financial Times: “Wider social safety net to help those made redundant (laid off) and encourage labor mobility.” Typical rubbish. Spread a wider safety net and you discourage people from doing the hard work of finding new careers. But here’s one that will be popular with the managers: a “crackdown on tax evasion.” Are you kidding? Tax evasion is the only thing that keeps these economies going. People prevent their government from squandering their money. They spend it themselves. But the new Goldman guys won’t like it. They’ll want to get their hands on as much of that ‘black money’ as possible.
Meanwhile, what’s going on in the USA? Alas, the US economy is the hands of the same sort of people. The people who caused the mess...who did not see it coming...and who have not had a clue what to do about it. They’re still running US economic policy. These illustrious incompetents — such as Larry Summers of Obama’s National Economic Council and Tim Geithner, his Treasury Secretary — have proven that they wouldn’t know a Great Correction if it bit them on the behind...
So, they just keep adding more debt, more spending, more management, more ‘reform’ measures, and more centralization.
Ultimately, the elite managers of Europe and America all went to the same schools (Harvard, Yale, MIT...)...all read the same newspapers and magazines (The Financial Times and The Economist)...all worship the same gods (money and power)...all speak the same language (mid- Atlantic English)...and all want to control the world.
So far, they seem to be making great progress towards their objectives. They stuff the world with debt. It blows up. Then, they push out democratically-elected leaders...gain new power and authority...and take charge of the rescue.
Regards,
Bill Bonner
for The Daily Reckoning Only 99, 68, 48...about 30 Remain!
Special Daily Reckoning Holiday Gift Set: One Ounce of Gold, Ten Ounces of Silver
As a special thanks for being a long-suffering Dear Reader, the DR team wants to give you a special Holiday Gift set.
It contains an ounce of 99.99% pure gold and ten ounces of pure silver.
There are only about 30 left, so go here to see what the catch is as soon as you can... And now back to Bill with the rest of today’s reckoning... Of course, everything isn’t smooth sailing for the manipulators. There are storms to reckon with. The Telegraph reports that there is revolution in the air. From Ambrose Evans Pritchard: Italy’s youth are turning. Watch the footage of students chanting “democracy” and brandishing their “95 Theses” of Wittenberg revolt as poet Van Rompuy tried to speak in Fiesole.
Regards,
“No to Austerity,” starts the Luther List: “Troika out of Greece”, “IMF and ECB out of Italy, Ireland, and Portugal”, it goes on.
“The EU has become ever less accountable to the people of Europe. The undemocratic structures have infiltrated the very structures of the Union,” they said.
Behold “the EU’s furious reaction to the Greek government’s effort to seek popular consent over the financial stranglehold imposed on the country. No longer are expressions of popular consent simply ignored, it is now impermissible to consult citizens.”
“The game is getting dangerous,” said Il Sole. Some suspect that the Berlusconi camp would not do too badly in snap elections, if allowed, campaigning against the “hated euro and EU bosses”. Is that why Brussels is now so afraid of Italy’s voters?
If Mr. Monti relies on the Left, how can he comply with EU orders to break the power of the trade unions and impose “Anglo-Saxon” wage- bargaining? A large bloc in parliament will die in a ditch to defend Article 18 of the labour code.
Labour minister Maurizio Sacconi warned last week that careless handling of this issue threatens to unleash another round of terrorism in Italy. It is only nine years since Marco Biagi was assassinated by the Red Brigades for threatening the sacred cows of the Sindicati.
In 2009 the European Commission praised Italy’s “spectacular job creation” and its “greater resilience to external shocks”. In 2008 in said Italy was making “good progress” on the Lisbon reform agenda. In 2007 it said Italy’s debt sustainability risk was “broadly in line” with France and Germany.
Italy’s four sets of pension reforms were held out as a shining example. Finance minister Giulio Tremonti was feted in Brussels, lauded for his iron discipline and primary budget surplus.
And now these same EU bodies tell us that Italy’s failure to grasp the nettle of reform and tackle its debts is so egregious that Europe must step in to overthrow an elected government.
Bill Bonner
for The Daily Reckoning
Tuesday, 15 November 2011
Posts
