The Most Important Economic Chart Of The Year

 A Picture Is Worth A Thousand Words, Analysis & Commentary, Back to the basics, Bond Market, Creditors Caveat, Deflation-Inflation-Stagflation, Devaluation, Economic Analysis Isn't Science, European Union?  No Responses »
Dec 262011
 

courtesy of Spiegel Online:

This chart illustrates the end of euro complacency. Investors once acted as though the euro eliminated not just currency risk but sovereign credit risk. All nations–from Greece to Germany–could borrow at the same low rates. No longer. As the financial crisis enters its fifth year, markets are again distinguishing between strong nations and weak.

I subsequently discovered that I am not alone in choosing this chart. The BBC has a version of this as the first entry in its survey of top graphs of the year (with commentary by Vicky Pryce of FTI Consulting), and Desmond Lachman of the American Enterprise Institute included it in Derek Thompson’s survey of top graphs over at the Atlantic.

P.S. For the United States, I think Brad DeLong is right: behold the shortfall in nominal U.S. GDP.

 

The Most Important Economic Chart Of The Year by Donald Marron

Posted by Brian Schuettler at 10:16 am  

Prepare For Europe Collapse Before New Year

 A Changing Europe, A Moral Question - Not A Political One, Back to the basics, Bond Market, CDOs, Collateral Damage, Coming Social Unrest, Consumption Ran the Old Economy, Decapitalization, Deflation-Inflation-Stagflation, Deleveraging, Devaluation, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, European Union?, Fiat Currency, Financing Terrorism, Having Fun With Derivatives, History of Finance, IMF Issues - Discussion, Insolvency, Integrity and Responsibility, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, It's the Tribes, It's Your Turn to Cry FOR ME, Let's Call What It Is - DEPRESSION, No Bank Is Indispensable, PANDEMIC, Patience is a virtue...Delusion is a vice, Pig-Headed Economic Policy May Still Lead to Disaster, PIIGS Default?, Political Chaos, Read and Weep Entries, Smaller Can Be Better, Strategizing Suppy Chain Links, Subsidiarity, The Big Fat Greek Question, The Consequences of Greed, The Currency Wars Officially Begin, The Financial Elite, The Global Economy, The Importance of Strategic Planning, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The Suffering Poor, The Ticking Euro Bomb, This self-serving arbitrariness, Time For A New Third Party, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, Wage Deflation, Watch The China Market, We Are All Cooked, We Need Open Derivative Models  No Responses »
Nov 122011
 

It’s official: The European Financial Stability Facility (EFSF) plan announced at the EU summit on October 27th is essentially dead prior to arrival.

As a consequence, Angela Merkel and Nicolas Sarkozy appear to be betraying signs of throwing in the towel on the Euro project as it exists today. They appear to be actively contemplating ways to engineer an orderly breakup of the Euro.

As financial market participants gets wind of their intentions – albeit tentative – expect financial markets to accelerate the unfolding of events. The entire Euro edifice could collapse before the New Year.

EFSF Chief: The Insurance Plan Is Dead Prior To Arrival

When the Chief of the EFSF is pessimistic about the capacity of the EFSF to be leveraged to an extent that is adequate to the task at hand, then you might as well kiss the whole thing goodbye.

In a little noted article in Thursday’s FT, Klaus Regling, head of the EFSF essentially admitted that the plan agreed upon at the EU summit on October summit to use the EFSF as collateral for a first-loss insurance scheme is essentially dead.

As I predicted would occur in an article of mine several weeks ago entitled “Europe’s Inane Idea: Fake Brady Bonds,” the EFSF chief has acknowledged that there is no interest on the part of investors to purchase PIIGS bonds with a first-loss guarantee of only 20%.

Regling believes that a first-loss guarantee of 30% may be required to garner any interest.

Personally, I have serious doubts that there would be sufficient interest. Any issuance that actually requires a 30% loss guarantee in order to be viable simply has an implicit default risk profile that will be unable to garner sponsorship of sufficient size.

Since there are only about 250 billion euros available for the EFSF first-loss insurance scheme, that means that, even assuming 30% were sufficient, the mechanism would only be adequate to cover about 800 billion euros worth of debt issuance by Italy and Spain — and any other euro area country that needed funding.

It has been estimated that roughly two trillion euros of funding are needed to simply merely meet projected roll-over and fresh financing needs through mid 2013. Therefore, the 800 billion projection is totally insufficient to the task at hand.

If $800 billion in guarantees are all that Europe can come up with, Europe would probably better off wasting precious resources on this scheme at all.

That is why the EFSF first-loss guarantee proposal seems to be dead on arrival. The plan is totally insufficient, and therefore is unlikely to be implemented at all.

I believe that this realization is thoroughly discouraging the Eurocrats that are charged with structuring the EFSF insurance facility and selling it to investors. These Eurocrats are relaying their pessimism back to Merkel and Sarkozy in real time. This in turn, is prompting Merkel and Sarkozy to begin to contemplate “exit strategies.”

Imminent Fiasco

Because Merkel and Sarkozy are unwilling or are unable to support the only viable option available to them that is to fund bond purchases via the ECB, they appear to be engaging in preliminary speculations regarding a possible exit plan. The problem is that there is no viable exit plan that would not entail a total economic and financial disaster.

It will be impossible for Merkel, Sarkozy and other European leaders to prepare an exit strategy without their intentions being leaked to the press. Financial markets will therefore unravel any and all plans that they contemplate before they can even commit them to paper.

As soon as markets realize that the original EFSF scheme is being abandoned and that the entire Euro project will be restructured, the Euro will be crushed, the European banking system will become insolvent and global financial markets will freeze up.

Merkozy Musings

Sarkozy is already openly musing about a “two-speed” Europe. He envisions a group of countries that will quickly move towards tight fiscal and economic integration and another group of countries that will remain fiscally and monetarily independent.

Sarkozy has stated that he believes that a tight federation is impossible for a large group of economically, politically and culturally disparate countries. The implication is that the group of 16 nations that currently comprise the Euro is probably too large to be manageable.

At the same time, Merkel is already dreaming about a “New Europe.” Exactly what Germany’s Chancellor means by this is ambiguous. However, it is clear that Merkel has in mind much tighter fiscal and economic integration. In this regard Merkel must know that several current Euro members may be unable or unwilling to join in such a tight federation.

The problem with Sarkozy’s and Merkel’s musings is that they are completely irrelevant and even counterproductive to the current task at hand. The issues that they are touching on were issues that needed to have been resolved at the inception of the Euro. At this point, the question is how the damage can best be undone, not to debate what should have been.

Conclusion

Merkel and Sarkozy will soon learn that an orderly break-up of the Euro is not possible. Even the slightest hint that a breakup is being contemplated will cause a global financial disturbance that is so great that any perceived benefits of a break-up will be completely overwhelmed by the costs that will be imposed by the market.

Prepare For Europe Collapse Before New Year by James A. Kostohryz


Posted by Brian Schuettler at 10:58 am  

Most of you understand this.

 A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A State of Distress, “the Greenspan doctrine”, Back to the basics, Bilderbergers 1 Germany 0, Bilderbergers 1 USA 0, Coming Social Unrest, Consumption Ran the Old Economy, Coup d'etat in America, Death of the Dollar, Decapitalization, Devaluation, Dismal Science-Ignorant Scientists?, FDR, Fiat Currency, Figures don't lie but Liars can figure, Former Economist, FREEDOM, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, HEY AMERICA-STICK 'EM UP!, It Is Nice To Be Part of the Elite!, It Is Supposed to be a Republic!, IT'S ALL ABOUT POWER AND MONEY, Let's Call What It Is - DEPRESSION, Obama Bingo, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Pig-Headed Economic Policy May Still Lead to Disaster, TARP fruit loops, The American Financial Oligarchy, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Great American Heist, The Growing American Fascist State, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, Unindicted Co-Conspiritors, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Nov 052011
 

One of the things that I suspect has brought many of you to Naked Capitalism is the hard lesson that conventional wisdom in finance and economics has been very costly to ordinary citizens around the world. If you had believed the prevailing world view of early 2007, that markets were efficient and bad actors would of course be found out and shunned, that were were in the midst of a Great Moderation and could expect to enjoy continued prosperity, punctuated by shallow recessions, and that financial innovation was a boon and therefore to be encouraged, you had an ugly awakening. The global financial crisis imposed tremendous costs on investors and society at large, via unemployment, a housing bust, plunging tax revenues, cuts in government services and increasing political discord.

Yet no one in power before the crisis has been punished or even suffered much. In fact, 2009 and 2010 Wall Street bonuses exceeded the record levels of 2007. As former IMF chief economist Simon Johnson described in a May 2009 Atlantic article, the US instead suffered a quiet coup, with the top end of the financial services industry becoming more concentrated, more powerful, even more concentrated and more firmly in charge of the political apparatus.

Most of you understand this. It’s awfully hard not to notice that we have a two-tier system of justice, in which the major financial firms get to flout the law and violate their own contracts, yet are able to get their agreements enforced against seemingly everyone, from credit card, mortgage, and student debt borrowers to municipalities who entered into risk-laden swaps they didn’t understand to nations like Greece, where a clearly insolvent borrower cannot get a deep enough restructuring out of fear of triggering payouts on credit default swaps. But complexity, leverage, and opacity have been the big banks’ best friends in executing this program of looting. You’ve come here to get educated so you won’t be so easily taken next time.

So the lies that the elite financiers have peddled appeared to be free, when in fact, many of them were sold via clever messaging and lobbying.
Read the Rest…

At Naked Capitalism

Posted by Brian Schuettler at 9:24 am  

A Standard for All Nations

 A Gold Standard, Back to the basics, Deflation-Inflation-Stagflation, Devaluation, Dismal Science-Ignorant Scientists?, Dollar Musings  4 Responses »
Aug 212011
 

DeGaulle On the Fiat Reserve Currency

 

Advantages

  • Long-term price stability has been described as the great virtue of the gold standard.[16] Under the gold standard, high levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the gold supply increases.[17] Economy-wide price increases caused by ever-increasing amounts of currency chasing a constant supply of goods are rare,[17] as gold supply for monetary use is limited by the available gold that can be minted into coin.[17] High levels of inflation under a gold standard are usually seen only when warfare destroys a large part of the economy, reducing the production of goods, or when a major new source of gold becomes available.[17] In the U.S. one of those periods of warfare was the Civil War, which destroyed the economy of the South,[18] while the California Gold Rush made large amounts of gold available for minting.[19]
  • The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency.[17] It provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade.[17] Historically, imbalances between price levels in different countries would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the “price specie flow mechanism.”[17]
  • The gold standard makes chronic deficit spending by governments more difficult, as it prevents governments from inflating away the real value of their debts.[20] A central bank cannot be an unlimited buyer of last resort of government debt. A central bank could not create unlimited quantities of money at will, as there is a limited supply of gold.[17]

Disadvantages

Gold prices (US$ per ounce) from 1968 to 2010, in nominal US$ and inflation adjusted US$.
  • The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.[21] This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2).[22] Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.[23]
  • Deflation rewards savers[24][25] and punishes debtors.[26][27] Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all.[28] The overall amount of expenditure is therefore likely to fall.[28]
  • Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.[29] Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.[30] Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn’t expand credit enough to offset the deflationary forces at work in the market.[31]
  • Monetary policy would essentially be determined by the rate of gold production.[32] Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.[32][33] Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation.[23][34]
  • Although the gold standard gives long-term price stability, it does in the short term bring high price volatility.[33] In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88.[33] It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.[35]
  • James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government’s financial position appears weak, although others contend that this very threat discourages governments’ engaging in risky policy (see Moral Hazard).[34] For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s.[34]
  • If a country wanted to devalue its currency, a gold standard would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.[36]
  • Mainstream economists believe that a low, steady rate of inflation is ideal for an economy because it incentivizes people to purchase consumable goods now rather than later. This low, steady rate of inflation is most easily achieved with a fiat currency system in which the monetary authority is free to regulate money supply. [37]
  • It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.[38]
Posted by Brian Schuettler at 10:14 am  

The Rise of the Wrecking-Ball Right

 A Moral Question - Not A Political One, A State of Distress, BANK RESERVES FOR TBTF, Bilderbergers 1 USA 0, Constitutional Questions, Coup d'etat in America, Deleveraging, Devaluation, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Federal Reserve-Discussion, Figures don't lie but Liars can figure, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, HEY AMERICA-STICK 'EM UP!, History of Finance, Insolvency, Integrity and Responsibility, Is The Market Rally Real?, IT'S ALL ABOUT POWER AND MONEY, Jacksonian Democracy, Moral Hazard, Obama's Hypocrisy, Objectivism, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Regulatory Failures, Robert Reich, Small Business-Bedrock of America, Smaller Can Be Better, Subsidiarity, TARP fruit loops, The American Financial Oligarchy, The Big Fat Greek Question, The Consequences of Greed, The Democrats Blew It Again, The Dollar's Demise, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Growing American Fascist State, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who owns Congress-Still!  1 Response »
Jul 162011
 

One would have thought the last few years of mine disasters, exploding oil rigs, nuclear meltdowns, malfeasance on Wall Street, wildly-escalating costs of health insurance, rip-roaring CEO pay, and mass layoffs would have offered a singular opportunity to explain why the nation’s collective well-being requires a strong and effective government representing the interests of average people.

The Rise of the Wrecking-Ball Right

Posted by Brian Schuettler at 10:53 am  

The End of QE2 Is Going to Be a Disaster

 A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A State of Distress, A Time To Repent, AIG and all that....., “the Greenspan doctrine”, Bilderbergers 1 USA 0, Coup d'etat in America, Credit Card Debt, Death of the Dollar, Deficit Death Spiral, Deflation-Inflation-Stagflation, Deleveraging, Devaluation, Dismal Science-Ignorant Scientists?, HEY AMERICA-STICK 'EM UP!, Is Goldman Sachs Evil?, Is The Market Rally Real?, It Is Supposed to be a Republic!, IT'S ALL ABOUT POWER AND MONEY, Jacksonian Democracy, Joseph Stiglitz, Labor Issues, Let's Call What It Is - DEPRESSION, Obama Bingo, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Robert Reich, Ron Paul Stands Tall, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The Dollar's Demise, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Great American Heist, The Growing American Fascist State, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Time For A New Third Party, USA Is the New Japan, Wage Deflation, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  1 Response »
May 152011
 

The end of the second round of quantitative easing (QE2) is going to be a complete disaster for the paper markets — specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE3, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the “Muni Asset Trust Term Liquidity Facility” or the “American Prime Purchase Program,” but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.

A Premature Victory Lap

Ben Bernanke recently stood at a lectern and announced to the assembled audience that the Fed’s recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low.

It was his own version of a “mission accomplished” speech, just like the one G. W. Bush gave. Similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.

Here’s one recent version of how the Fed’s actions are being interpreted, courtesy of Bloomberg:

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What’s not to like?

The main problem is that this is all an illusion.
The End of QE2 Is Going to Be a Disaster – Chris Martenson, Minyanville

Posted by Brian Schuettler at 10:17 am  

Is Cowen’s Great Stagnation For Real?

 Deflation-Inflation-Stagflation, Deleveraging, Devaluation  No Responses »
May 152011
 

How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better
By Tyler Cowen
(Dutton/Penguin, Kindle Edition, $3.99)

With The Great Stagnation, Tyler Cowen has given us a provocative and highly controversial assessment of the U.S. economy. Cowen, a professor of economics at George Mason University, the co-proprietor of the popular blog Marginal Revolution, and the author of a monthly business column for the New York Times, argues that the U.S. economy has been stagnating for more than a generation due to a slowdown in technological invention and progress. The slowdown in invention is behind several current adverse trends, among them rising inequality, stagnating wages and income for the middle class, rising government debt, protests against government spending, and, even, the recent financial crisis. His case is worth pondering even if in the end the reader may not be convinced that he is right.

The Great Stagnation is an e-book available only on the Internet at a modest price, with a condensed argument set forth in a mere 15,000 words. While the author is a skilled economist, he presents his case with a minimum of academic jargon and technical proofs. The intelligent layman can proceed through the book in a few hours of attentive reading and come away from the experience with a new way of looking at old problems. The presentation of the argument in this form is ironic in that the author proceeds to argue that the revolution in computers has done little to change our ways of living.

Is Cowen’s Great Stagnation For Real? – James Piereson, American Spectator

Posted by Brian Schuettler at 10:06 am  

One nation, under fraud

 A State of Distress, Banks - Crisis Discussion, Business Legal Issues, Devaluation, Figures don't lie but Liars can figure, Foreclosure Law, Insolvency, Integrity and Responsibility, Is The Market Rally Real?, Lending Crisis, Mortgages  No Responses »
Oct 172010
 

Tomorrow, a bank—not your bank, but any bank—could evict you from your home. Even if you didn’t know the bank was foreclosing. Even if your mortgage is paid off. Even if you never had a mortgage to begin with. Even if the bank doesn’t hold a single piece of paper that you signed. And major banks not only know this fact, but have spent millions of dollars to defend it in court. Why? The answer starts with a Jacksonville homeowner named Patrick Jeffs.

In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons.

The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air.


One nation, under fraud Joseph Tauke, The Daily Caller

Posted by Brian Schuettler at 10:00 am  

The Committee to Defraud the World

 A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A Time To Repent, AIG and all that....., Analysis & Commentary, Bilderbergers 1 USA 0, Collateral Damage, Coming Social Unrest, Consumption Ran the Old Economy, Coup d'etat in America, Death of the Dollar, Deflation-Inflation-Stagflation, Devaluation, Did they ever hear of GAAP?, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Even the Terminator Can't Help California, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, Insolvency, It Is Supposed to be a Republic!, Jacksonian Democracy, Let's Call What It Is - DEPRESSION, Moral Hazard, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Small Business-Bedrock of America, Smaller Can Be Better, Social Security Time bomb, Socialism, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Those Quarky Accounting Rules, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
Aug 012010
 

To say now that ‘No one knew’ or ‘I was mistaken’ or ‘I was just doing as I was told’ is another in a series of lies and deceptions that have supported one of the greatest frauds in the history of the world.

But this is not history. This episode of fraud is still playing itself out now. And to fail to understand the depth and breadth of this madness is to place oneself in peril, and in the power of those who are twisting the Western economic and political system even now to satisfy their lust for wealth and power. You are only successful if you can keep what you kill.

Glass-Steagall fell after a decade long campaign involving hundreds of millions in lobbyist money spread lavishly around the Congress, led by Sanford Weil of Citibank, supported by key banking and political figures in the Congress and at the Fed. It involved Senator Phil Gramm, who helped to put a stake in the heart of the financial regulatory process under the Reagan free markets banner, and who recently said the problem is that the middle class were a bunch of whiners. As did his wife Wendy, who as the chairperson of the CFTC had exempted Enron from regulatory oversight, and then left to take a position there on its board of directors.

Like the Mortgage Backed Securities scandal it involved surprisingly few principal players, like Alan Greenspan and Robert Rubin, who used their power and influence to silence and ostracize critics, and promote a climate of reckless disregard for the public trust under the meme of ‘efficient markets’ and deregulation. This might have been an innocent policy error if it did not involve premeditated theft on a massive scale, followed by cover ups, denials, and a control fraud that exists even today.

But it also involved literally thousands of collaborators and enablers, from mainstream media people, economists, analysts, and other thought leaders to politicians and regulators who saw that it was to their advantage to at least passively support this scheme which they knew very well was a fairy tale, a fraud, class warfare by a new name, but were able to hide their own guilty consciences behind self-serving rationalization and the shield of plausible deniability.

History, and hopefully the justice system, will sort this all out. It is difficult, even now, to get one’s mind around the enormity of it. This is its most powerful weapon. Who could be such monsters, so amoral, so destructively sociopathic? Future generations will regard it as an episode of madness, driven by a few people in a tight circle of self-reinforcing thought, people with remarkably similar cultural and educational backgrounds, driven by a consuming lust for power, that were able to dupe and delude an entire nation made vulnerable by propaganda, a co-opted press, and apathy.

In the meanwhile all the great mass of people can do is to watch, and wait, and seek to protect themselves from these ravening wolves grown increasingly desperate, as their arrogance comes to a tragic fall. They can vote out incumbents, but the parties choose the candidates, and too often they resemble competing crime families of special interests more than pillars of a representative government, saying one thing to get elected and doing another thing once in office.

This is the approach of trouble when hubris is at its height, and the few feel they have everything to gain and nothing to lose, if only they can gain more power, and necessarily become more ruthless. They are trapped in a cycle of fear and greed. The fear provokes the lies and the cover ups, but the greed promotes the extension of the fraud and the theft, requiring even more lies and cover ups. The operative word is ‘over reach,’ in a classic late stage Ponzi scheme. This will undoubtedly add to the confusion as the truth is assaulted by the big lie.

The last vestiges of polite society are often shed as the downfall reaches it final conclusion, at the end, when all is revealed, at last. And so there will be great danger.

Jesse’ s Cafe http://jessescrossroadscafe.blogspot.com/2010/07/committee-to-defraud-world.html

Posted by Brian Schuettler at 4:25 pm  

Deflation Danger

 Deflation-Inflation-Stagflation, Devaluation, Dismal Science-Ignorant Scientists?  No Responses »
Jul 172010
 

Imagine a world where prices of all sorts of goods and services just keep moving down.

Your weekly grocery bill shrinks. Your hairstylist gladly accepts 15% less, just to get the business. At long last, movie theaters even stop gouging you on popcorn.

Good times? Sure — until your employer cuts your salary or fires you to cope with the need to reduce prices. Suddenly, the economy is in the grip of a vicious spiral, as falling consumption forces prices lower, driving unemployment up, which in turn drives consumption and prices down further.

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That’s the deflation scenario that has, yet again, become one of the hottest topics on Wall Street.

Fear of a broad-based, sustained decline in prices — the textbook definition of deflation — was rampant at the height of the credit crisis in late 2008.

That concern faded last year as the economy and financial markets recovered. By early this year many big investors were warning of the opposite risk: They saw the continued ballooning of government budget deficits, and central banks’ easy-money policies, as setting the scene for an eventual surge in inflation.

Now, we’ve come full circle: With the U.S. economy clearly slowing, deflation worries have revived.

“The U.S. economy is at the doorstep of deflation,” Nomura Securities economist Zach Pandl warned clients in a lengthy report this month.

A number of Federal Reserve officials have echoed that concern in recent weeks, although in the usual Fed manner — i.e., without using an alarmist tone.

For the moment, however, the story still is one of disinflation rather than deflation. Prices overall are rising, but the year-over-year rate of increase has fallen sharply since August 2008.

The government’s consumer price index for June, reported Friday, showed that core inflation — prices for everything except food and energy — was up 0.9% from a year earlier, the slowest pace in 44 years.

Still, the core CPI rose 0.2% in June from May, the biggest monthly increase since October. Prices of used cars, clothing and medical care rose at a faster rate last month than the previous month.

No wonder the average consumer will wonder what this deflation chatter is about. People aren’t seeing it in most of what they buy.

But with the year-over-year core CPI skating closer to zero, the risk is that a slowing economy could tip the scales to deflation.

Optimism about the recovery suffered another blow Friday, when the Reuters/University of Michigan national consumer confidence index for July fell more than expected, to the lowest level since August.

It matters more what people actually do with their money than what they say about their confidence or lack of it. But plummeting confidence preceded the financial crisis and economic crash of late 2008. And the government’s report this week of disappointing June retail sales added to concerns that consumers’ willingness or ability to spend is waning.

Revitalizing consumption has been the great challenge all along in the wake of the devastating recession, of course. A large chunk of the global economy’s capacity to produce goods and services has been idled since 2007. That means many businesses’ pricing power already is severely limited. If demand falls again, serious price-cutting may be the only option companies would have to try to maintain sales.

“A renewed downturn in the economy at the current low level of resource utilization opens up the possibility that disinflation will turn into outright deflation,” said Steven Ricchiuto, an economist at Mizuho Securities USA in New York.

So what? If you have a job, plenty of cash and relatively little debt, deflation would be paradise. Many of your favorite things would cost less. What could be better?

If you’re heavily in debt, however, deflation would make that load even more onerous.

What’s more, the deflation scenario terrifies companies, governments and central bankers because it raises the possibility of a downward economic spiral that can’t easily be reversed.

If consumers adopt a deflationary mind-set, and figure that prices will only get cheaper if they wait to buy, they’ll probably be right. But the end result could be a recession even worse than the one we just climbed out of, if demand sinks and companies react in part by slashing their payrolls again.

That is why deflation and depression often are mentioned in the same breath in economic discussions. From July 1929 to March 1933, as the Great Depression deepened, U.S. consumer prices plummeted 27%.

If we look to financial markets today for guidance on deflation risks, the messages aren’t encouraging. U.S. stock prices have tumbled since April, when worries about the economy began to intensify. Rally attempts have just given way to more selling, as on Friday, when the Dow industrials slumped 261 points, or 2.5%, to 10,097.

Gold, considered the classic inflation hedge, has fallen 5.5% since reaching an all-time high in mid-June.

And the one asset likely to be coveted in a deflationary period — Treasury bonds, with their guaranteed interest — has seen ravenous demand for the last three months. The 10-year T-note yield has fallen below 3% in recent weeks for the first time since April 2009.

Skating Dangerously Close to Deflation – Tom Petruno, Los Angeles Times

Posted by Brian Schuettler at 1:39 pm  

Things could get nasty

 A State of Distress, A Time To Repent, Banks - Crisis Discussion, Coming Social Unrest, Consumption Ran the Old Economy, Creditors Caveat, Devaluation, Mortgages  No Responses »
Jun 122010
 

  • PR Push Against Strategic Defaulters Underway (Is There a Debtors’ Prison in Your Future?) – 06/12/2010 – Yves Smith

    • Posted by Brian Schuettler at 3:58 pm  

    Bank credit is contracting and getting more expensive

     Analysis & Commentary, Deflation-Inflation-Stagflation, Devaluation  No Responses »
    Apr 242010
     

    AMERICA’S GDP is growing, employment is finally expanding and the stockmarket is buoyant. Yet one thing has not changed: the Federal Reserve’s monetary pedal remains firmly pressed to the floor. For more than a year it has kept its short-term interest-rate target near zero while pledging to keep it there for an “extended period”. It has also bought $1.7 trillion of long-term bonds, primarily mortgage-backed securities (MBS), to keep long-term interest rates down.

    That is unsettling some inside the Fed, fuelling speculation it will soon signal an exit from that ultra-easy monetary policy, perhaps even by altering its “extended period” commitment when its next two-day policy meeting wraps up on April 28th.

    The most vocal dissident is Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the Fed’s longest-serving policymaker, who has twice formally objected to the Fed’s “extended period” language. That commitment plus zero rates, he explained on April 7th, lead “banks and investors to search for yield… take on additional risk [and] increase leverage”. He argued the Fed should soon raise rates to 1% to “end the borrowing subsidy”.

    The next day Narayana Kocherlakota, president of the Minneapolis Fed, voiced a different concern: that the excess bank reserves created by the Fed’s MBS purchases create the potential for high inflation. He advocated selling $15 billion-25 billion of MBS a month, which would clear the Fed’s inventory in five years instead of the 30 it would take for the bonds to mature.

    The rest of the Fed and its chairman, Ben Bernanke, have listened politely but are not ready to drop or even water down the “extended period” language, much less raise rates. Dropping the commitment would be tantamount to a tightening of monetary policy as bond yields rise in anticipation of short-term rate hikes. Mr Bernanke has already said the Fed would eventually sell some MBS, but not now. By pushing up long-term rates that too would be a tightening of monetary policy.

    Bank credit is contracting and getting more expensive. Excess bank reserves will not lead to inflation so long as the Fed can still raise interest rates, which it can. Indeed, the Fed has an embarrassment of ways to tamp down inflationary pressure when the time comes, from raising interest rates on excess reserves to selling bonds to telling banks to tighten lending standards. It has far fewer tools at its disposal for battling deflation, not a remote risk.

    Still, as long as the recovery proceeds, the debate cannot be put off forever. The Fed will spend a lot of its policy meeting talking about how to talk about its exit. The Bank of Canada has helpfully provided a tutorial. On April 20th it dropped its own commitment to keeping its short-term rate at 0.25% until the second half of this year, citing stronger growth and firmer inflation than expected. “The need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus,” it said. Bond yields and the Canadian dollar rose in response.

    The Fed also sees its “extended period” commitment as conditional. It does not mean six months, as many seem to think, but only as long as unemployment remains high and inflation (both actual and expected) stays low. If those things change, so will interest rates.

    Posted by Brian Schuettler at 11:21 am  

    Sic transit America?

     A Growing List Of One Term Presidents, A State of Distress, A Time To Repent, AIG and all that....., “the Greenspan doctrine”, Back to the basics, Collateral Damage, Coming Social Unrest, Commercial Real Estate Bust, Consumption Ran the Old Economy, Coup d'etat in America, Death of the Dollar, Deflation-Inflation-Stagflation, Devaluation, Dismal Science-Ignorant Scientists?, Even the Terminator Can't Help California, Federal Reserve-Discussion, Figures don't lie but Liars can figure, Integrity and Responsibility, Is The Market Rally Real?, It Is Nice To Be Part of the Elite!, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Monetary Policy - Discussion, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Politicians, Prostitutes and Pimps All Rhyme, Small Business-Bedrock of America, Sub-Prime anytime, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Global Economy, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Sorry State Of American Manufacturing, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, US Trade Imbalance, USA Is the New Japan, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World  No Responses »
    Jan 162010
     
    An American sailor stands on the flight deck of the aircraft carrier USS George Washington
    Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington

    If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.

    In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”

    Self-doubt tarnishes Brand America

    Posted by Brian Schuettler at 12:54 pm  

    Obama’s Big Sellout

     A Growing List Of One Term Presidents, A State of Distress, A Time To Repent, AIG and all that....., Analysis & Commentary, Bilderbergers 1 USA 0, Coming Social Unrest, Consumption Ran the Old Economy, Deflation-Inflation-Stagflation, Devaluation, Insolvency, Is Goldman Sachs Evil?, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Political Chaos, Small Business-Bedrock of America, Small Cap Stocks, Smaller Can Be Better, Socialism, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The Judeo-Christian Political Coalition, The New American Socialism, Time For A New Third Party, Unemployment Catastrophe, USA Is the New Japan, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
    Dec 132009
     

    Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

    Then he got elected.

    What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

    How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?

    Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

    How did we get here? It started just moments after the election — and almost nobody noticed.

    Previous Page

    Posted by Brian Schuettler at 8:15 pm  

    Investment Future

     401(k) Issues, Analysis & Commentary, Back to the basics, Bond Market, Devaluation, Dollar Musings, Figures don't lie but Liars can figure, Investment Portfolios  No Responses »
    Oct 102009
     

    The Future of Investing
    FT writers join major world figures in examining the implications of the credit crunch on our investment system.

    Posted by Brian Schuettler at 9:42 am  

    Rushing to the Exits?

     Analysis & Commentary, Cash Flow, Coming Social Unrest, Coup d'etat in America, Deflation-Inflation-Stagflation, Devaluation, Even the Terminator Can't Help California, Figures don't lie but Liars can figure, If I Only Knew It Was This Easy!, Let's Call What It Is - DEPRESSION  No Responses »
    Oct 032009
     

    Bottom Line. The Fed is moving toward the exit as they look toward the conclusion of their securities purchases programs. But it is not clear that such a move is justified by their own forecasts or the inflation/wage/employment data. There may be an internal fear they have gone too far, a fear that the hawks can exploit. To be sure, I see no reason to expect the Fed will raise rates for a long time. And the Fed maintains it policy flexibility, claiming to be ready to revive asset purchases should economic or financial conditions justify. But I now suspect the bar for renewed expansion of Fed accommodation may be much higher than I had anticipated. And that the dominant push for expansion would have to come from financial market conditions, while they would be willing to tolerate persistently high unemployment rates so long as U. Michigan inflation expectations say elevated, regardless of the actual inflation data.

    At Tim Duy’s Fed Watch

    Posted by Brian Schuettler at 9:40 am  

    Genie needed: The magic of getting liquidity back into the bottle!

     Consumption Ran the Old Economy, Death of the Dollar, Deflation-Inflation-Stagflation, Devaluation, Dollar Musings, The Democrats Blew It Again, The excellent adventures of Ben Bernanke  No Responses »
    Oct 032009
     

    Prof. Jim Hamilton at Econbrowser (thanks Mark Thoma for the link) addresses one of the Fed’s standard methods of draining liquidity from the banking system: reverse repurchase agreements. Basically, the Fed will transfer some of its assets to the banking system via short-term loans taken out with its Primary Dealers, presumably offering standard (Treasuries) and less standard (MBS or agency bonds) assets as collateral.

    Reverse repurchase agreements simply slosh around the assets (MBS, agencies, and Treasuries) between the Fed and the Primary Dealers, rather than removing the assets from the Fed’s balance sheet permanently. Eventually, though, the Fed must sell the securities outright onto the open market – we are far, far from that!

    This is all hot air for now. How can the Fed soak up the expansionary liquidity, let alone unwind $1 trillion in assets, when the banking system is still shedding pounds?

    The Fed is considering another route, too: conducting the same repurchase agreements with the money-market mutual fund industry in tandem. An excerpt from the FT:

    The Federal Reserve is looking to team up with the money-market mutual fund industry as part of its strategy to ensure that its unconventional policies to stimulate the economy do not produce a bout of post-crisis inflation.

    The central bank envisages eventually draining liquidity from the financial system by engaging in trades called “reverse repos” with the deep-pocketed money-market funds. In these, the Fed would pledge mortgage-backed securities and Treasuries acquired during the crisis as collateral for short-term loans from the funds.

    The obvious counterparties for reverse repo deals are the Wall Street primary dealers. However, the Fed thinks they would only have balance sheet capacity to refinance about $100bn of assets. By contrast, the money-market funds have $2,500bn in assets, which means they could plausibly refinance as much as $500bn in Fed assets. Officials think there would be appetite on the part of the funds, which are under pressure from regulators and investors to stick to low-risk liquid investments.

    The Fed is solely attempting to assuage inflation angst at this time; it’s still very premature to talk about an exit of expansionary policies when credit markets still crimp the stimulus that the Fed so desperately wants to get into the open market (much of the base, roughly $855 billion on September 23, 2009 and up from $2 billion in August 2008, remains on balance with the Fed in the form of “excess reserves). Just look at the crunch in the consumer credit space (chart to left).

    As Prof. Hamilton suggests, the mechanisms of the reverse repos should successfully sterilize the base before it starts to become inflationary (with either the Primary Dealers and/or the Mutual Funds industry). However, one of the programs through which the Fed utilized previously to sterilize its liquidity, and to which Prof. Hamilton refers, – the Supplementary Financing Program – is unlikely to be an avenue for removing liquidity.

    In fact, it’s quite the opposite. The Treasury already announced its imminent plan to liquidate the bulk of its $200 billion account with the Fed. There’s another $200 billion in excess reserves with which the Fed must contend (see my previous post here).

    It’s easy to get the liquidity into the financial system. But getting it out without collapsing the economy or allowing inflation pressures to build? Well, that’s a different story.

    Posted by Brian Schuettler at 9:31 am  

    The ECB and Inflation

     Deflation-Inflation-Stagflation, Devaluation, Dollar Musings  No Responses »
    Sep 132009
     

    The Importance of ECB Wording on Inflation – Euro Thoughts Sep 7-11 2009 – UniCredit Group

    Print

    Aurelio Maccario | Sep 9, 2009

    Last Thursday my boss, Marco Annunziata, did not hesitate to define President Trichet a true statesman for his wise and transparent conduct of the ECB September press conference. In the last few weeks, with his intervention in Jackson Hole, the Sep 4 presser, and the op-ed in the Financial Times the following day, Mr. Trichet has been able to reassure markets that the ECB is aware that the economic and financial cycles remain fragile, that the weapons of mass salvation employed over the last year need to remain in place (e.g., the decision not to apply a spread on the upcoming 12-month fixed rate-full allotment operation), thus steering market rates’ expectations in the desired direction. The publication of bearish staff forecasts has contributed to finish the job. The ECB stance remains quite accommodative and any decision on rates and on the unwinding of unconventional measures is postponed to next year.

    Posted by Brian Schuettler at 9:53 am  

    A look at Iceland, which has been weathering a dramatic devaluation and is recovering remarkably well

     Devaluation  No Responses »
    Aug 052009
     

    From Ambrose Evans-Pritchard at the Telegraph:

    The krona has fallen by half against the euro since the `New Viking’ trio of Landsbanki, Glitnir, and Kaupthing strayed out of their depth and brought down Iceland’s financial system.

    Nothing is cheap, but prices have come within reach. Reykjavik’s cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza…

    Out in Iceland’s Eastern fjords, Alcoa has raised aluminium production to record levels – and metal matters as much as fish for exports.

    “The smelters are running full speed,” said the new-broom finance minister, Steingrimur Sigfusson. So is Mr Sigfusson himself. Last week he launched three new banks on the ruins of the old. Normality is returning. “We are going to get through this better than feared. We’re feeling real activity in the economy, and much of this comes from a favourable exchange rate,” said Mr Sigfusson.

    Iceland’s great lurch towards casino capitalism over the last decade has a cultural logic. “We are a fishing culture: when the herring is there, we take it,” said Andri Snaer Magnason, author of `Dreamland: A Self-Help Manual for a Frightened Nation’.
    There was no easier catch on offer than the Greenspan bubble and the global “carry trade”. How could fishermen resist?
    In one sense it was a terrifying shock for the 310,000 inhabitants of this Norse-Celtic outpost of lava rock to see their currency, banks, and global image crash in a single week last autumn. Yet nothing has really changed.

    “Everything still feels normal. The services of the state are intact. The swimming pool is open. You can still have a decent heart attack in Iceland,” said Mr Magnason.

    “Friends who lost jobs in banking have already found new work, and you could say the krona has worked as a buffer for us. We all went down together, and that has led to healthier recession without mass unemployment.”

    The jobless rate has risen to 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier.

    Those who point to Iceland as a scarecrow exhibit of what happens to a small country caught in a financial storm without the shield of euro membership have the matter backwards, as will become ever clearer over the next two years.

    The OECD expects Iceland’s economy to shrink 7pc this year. This is much better than Ireland at minus 9.8pc, and recovery will come sooner. So next time you hear the Sacra Congregatio of the euro faith incant yet again that EMU saved Ireland from a terrible fate, know that they deceive only themselves.

    You take your punishment early with devaluation, as Britain did on leaving Gold in 1931, or ending the D-mark torture in 1992, or now. You look a sorry sight at first, but sweet vindication comes later.

    It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation, and deeper social damage. Youth unemployment is already 34pc in Spain, 28pc in Latvia, 25pc in Italy, 24pc in Greece, and rising.

    At Iceland’s central bank – mercifully, no longer listed beside al Qaeda as a terrorist body by UK authorities – Governor Svein Harald Oygard says currency therapy is working as it should. “If you lean back and look you can see that fall of the krona accentuated the shock at first, but it is also now working as a turbocharger for recovery.

    “We’ve seen a strong hit on wealth and asset values, but the story for real economy is very different.”

    Devaluation is always double-edged. Some 13pc of households in Iceland hold mortgages in euros, Swiss francs, or God forbid, yen. Their debt levels doubled overnight.

    Some 70pc of corporate loans are in foreign currencies. Exporters are hedged. Those that earn in krona are not, and a “large number” are now in dire straits.

    The Governor is a Norwegian who cut his teeth in the Oslo banking crisis of the early 1990s. He was brought in as a troubleshooter after the last crew was literally banged out of the Sedlabanki by the Saucepan Revolution in February.
    With justifiable pride, he showed me the latest trade figures. Iceland has defied the global shipping crash to eke out an 11pc rise in exports over the last year. Even China has seen a fall of 21pc.

    Iceland will be back in surplus by next year, from a peak deficit of 25pc of GDP. You could say the same about Latvia, which has stuck to its euro peg under orders from Brussels. But there is a big difference.

    Latvia is balancing its books by crushing demand. Exports are down 28pc, but imports are down even more. The result of this Stone Age policy is economic contraction of 18pc this year, and 4pc in 2010 (state data).

    Icelanders have taken a hit, of course. Unions have accepted ‘real’ wage cuts of 10pc. Health care and welfare is being cut 5pc, education 7pc, and the rest 10pc. This is comparable to what is happening in Ireland, but again there is a difference. Dublin faces a Sysphean task as collapsing tax revenues force ever deeper austerity: Reykjavik is over the worst.

    It baffles me why rating agencies still talk of downgrading Iceland’s debt to junk. The country should emerge with public debt of 80pc to 100pc of GDP – much like Britain. Yet Iceland also has the world’s best-funded pension system at 120pc of GDP. It is the two together that counts.

    In their angst, Icelanders look wistfully at the apparent safe port of EU membership. The Althingi has voted to start entry talks. But the storm will have blown over well before an EU referendum is held in two or three years. By then the delayed cluster bomb of Europe’s unemployment will have detonated. Try selling EU protection then.

    Posted by Brian Schuettler at 9:47 am  
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