What is truth?

Posts tagged ‘Great Recession’

Shock: Krugman Turns on ‘Elites’

Wednesday, May 11, 2011 –
by Staff Report

Well, what I’ve been hearing with growing frequency from members of the policy elite – self-appointed wise men, officials, and pundits in good standing – is the claim that it’s mostly the public’s fault. The idea is that we got into this mess because voters wanted something for nothing, and weak-minded politicians catered to the electorate’s foolishness. So this seems like a good time to point out that this blame-the-public view isn’t just self-serving, it’s dead wrong. The fact is that what we’re experiencing right now is a top-down disaster. The policies that got us into this mess weren’t responses to public demand. They were, with few exceptions, policies championed by small groups of influential people – in many cases, the same people now lecturing the rest of us on the need to get serious. And by trying to shift the blame to the general populace, elites are ducking some much-needed reflection on their own catastrophic mistakes. –

New York Times/Paul Krugman

 Dominant Social Theme: We have to level blame where it belongs, just not too much.

Free-Market Analysis: This is a fairly remarkable article that uber-liberal New York Times media star Paul Krugman (left) has written. Imagine even a few years ago that an article by one of the Times’ most prestigious analysts would frankly castigate America’s ruling class and one begins to get a sense of the growing panic that must be circulating at the top of the proverbial heap. Krugman, who evidently and obviously rubs shoulders with these people, tells us that fingers are starting to be pointed – not at others in the US ruling class but at the larger civilian population. He wants to make clear he disapproves.

Krugman is not merely trotting out the normal dominant social theme of the elites that one would expect at such a time. As we have suggested in the past, the normal elite playbook blames the private sector and “bankers” for what has gone wrong when the business cycle inevitably turns away from fiat money. The idea is always to blame industrial “greed and corruption” for the problems and thus accrue more power for the state, which is actually to blame through a variety of price-fixing mechanisms and central banking stimulation that eventually add up to a ruinous burden.

But in this editorial, Krugman comes perilously close to blaming government and the military industrial complex, which is a startling perspective. Either Krugman wrote the article clumsily or blame is to be cast beyond the normal boundaries. As analyzers of dominant social themes, we think an article like this is significant. The strategy seems to be changing. Instead of the usual Blame Capitalism rhetoric, we are apparently witnessing a new strategy, the Limited Hangout.

A limited hangout is where powers-that-be release some information but not too much in the hopes of defusing a crisis or media-fanned uproar. The idea is that a pliable press will treat the limited information as definitive, write articles using that information and then move on. In this case, Krugman’s limited hangout is being applied to what we call the Anglo-American power elite. He doesn’t mention them of course, which is why this article of his qualifies as a limited hangout. He is directing people’s frustrations toward establishment functionaries, those who carry out elite policies, including economists, politicians, corporate moguls and even Presidents (Barack Obama in this case).

But this is news nonetheless, in our view. And at Krugman’s level we would suggest that nothing happens by accident. Krugman doesn’t simply sit down and dash these editorials off by himself. He may not even write them at all, even though his name goes on them. Thus, such an editorial – appearing in the US “paper of record – may begin to a signal that unrolling sociopolitical disasters afflicting the US and the West have reached a more critical stage. Apparently, the powers-that-be – and this is an important point – may have decided that what has gone wrong in the West is not about to be easily rectified after all.

The blame game is an especially difficult affliction for those who cluster about the power elite. It is when they learn the difference between power that is held and power that rubs off. There are hundreds of functionaries that cluster close to the power elite in the City of London. There are thousands in the next concentric ring, and so on. All benefit from the radiance of those intergenerational banking families at the center of the system, but when times are tough and scapegoats are needed the blame is apportioned outward, much as it is in the military. Those at the center remain unscathed while those in the outer rings are exposed to injury.

Krugman, a functionary himself, has begun a new process of blame. Perhaps by doing so he hopes to avoid guilt-by-association, though no one has been a more faithful proponent of the current disastrous system than Krugman. But with the Anglo-American elite’s wars stalled abroad and Western economies stagnating or worse at home, Krugman must be feeling the pressure too.

And Krugman surely is in the blame mode. The past three years have been a disaster for most Western economies, he writes. “The United States has mass long-term unemployment for the first time since the 1930s. Meanwhile, Europe’s single currency is coming apart at the seams. How did it all go so wrong?”

Krugman focuses (predictably) on the Bush Administration, which he claims was responsible for creating a good deal of America’s disastrous budget crisis. The Bush tax cuts were part of the initial problem, he writes. And the deficit was deepened further by wars in Iraq and Afghanistan. Finally there was what he calls the Great Recession. (Why not call it a depression and be done with it?)

Krugman’s main point – an unusual one to find a high profile in an elite platform such as the Times – is that all three of these decisions were engineered by a small coterie of American “elites.” The tax cuts benefited only a few of the very wealthy; the decision to go to war was endorsed by a small military-industrialist circle clustered around Bush and the Great Recession was a product of Wall Street’s recklessness. We don’t agree with all of this but it is beyond argument that in each case Krugman is blaming a small cluster of elites. Here’s some more from the article:

So it was the bad judgment of the elite, not the greediness of the common man, that caused America’s deficit. And much the same is true of the European crisis. Needless to say, that’s not what you hear from European policy makers. The official story in Europe these days is that governments of troubled nations catered too much to the masses, promising too much to voters while collecting too little in taxes. And that is, to be fair, a reasonably accurate story for Greece. But it’s not at all what happened in Ireland and Spain, both of which had low debt and budget surpluses on the eve of the crisis.

The real story of Europe’s crisis is that leaders created a single currency, the euro, without creating the institutions that were needed to cope with booms and busts within the euro zone. And the drive for a single European currency was the ultimate top-down project, an elite vision imposed on highly reluctant voters. Does any of this matter? Why should we be concerned about the effort to shift the blame for bad policies onto the general public?

One answer is simple accountability. People who advocated budget-busting policies during the Bush years shouldn’t be allowed to pass themselves off as deficit hawks; people who praised Ireland as a role model shouldn’t be giving lectures on responsible government. But the larger answer, I’d argue, is that by making up stories about our current predicament that absolve the people who put us here there, we cut off any chance to learn from the crisis. We need to place the blame where it belongs, to chasten our policy elites. Otherwise, they’ll do even more damage in the years ahead.

We would argue Krugman’s argument is qualitatively different than the normal one that blames capitalist greed. He writes of “policy elites” and goes out of his way to castigate the Eurocrats as well – and “European policy makers.” Definitively, then, Krugman is blaming government not just the private sector. He wants to blame the policy elites otherwise “they’ll do even more damage.” For such language to appear in the New York Times from a primary exponent of top-down federalism is remarkable.

Is Krugman’s article a sign that the true powers-that-be – the intergenerational banking families and their religious and corporate facilitators – are starting to panic? It is of course hard to read the proverbial tea-leaves, but this is what elite meme-watching is all about. One has to be sensitive to changes in language and strategy, especially at major elite mouthpieces such as the New York Times.

Conclusion: If what we are suggesting is actually taking place, then we would have to assume that the elites are becoming seriously troubled by the failure of their dominant social themes and are prepared to sacrifice intimates to ensure the blame does not reach to the very top where it belongs. We would submit that this is qualitative strategic difference and has numerous ramifications in terms of the world’s larger crises and the elite’s ability to control them. Blame the Internet?

source: http://www.thedailybell.com/2271/Shock-Krugman-Turns-on-Elites.html


Here in Ireland we have the exact same system as the elite have in fact been more successful in attaching the blame for our current financial meltdown on to the shoulders of the ordinary citizens.

Our new government have done a 360 degree turnabout and we are now saddled with the failed policies of the last corrupt government who have by the way have secured enormous pay offs and pensions. To date none of the corrupt directors of our toxic banks have been to the courts and indeed they still enjoy living in their trophy homes while thousands of ordinary people are struggling to keep the bailiffs from the front door .To top all this, we have 1200 people been cut off, by the power company every week and the government have just announced a baked attempt to create jobs but they are proposing to pay for this by raiding the private pensions of its citizens. This is of course the government’s first attack on the private property of its citizens .It won’t be long before we see them rob citizen’s bank accounts.

Thomas Clarke  

“Effectively placing private toxic bank gambling debts on to the shoulders of the taxpayers of Ireland”  (They socialized the bad debts whilst they kept the profits for their shareholders)  

Crisis 2011 (Part 1)

Crisis 2011 – Part I: The Other Shoe

• Peak Cheap Oil Cycle Two
• Stagflation, ho! The new NAIRU
• China credit bubble countdown
• Gold over $1300… and still no bubble

“The easiest period in a crisis situation is actually the battle itself. The most difficult is the period of indecision–whether to fight or run away. And the most dangerous period is the aftermath. It is then, with all his resources spent and his guard down that an individual must watch out for dulled reactions and faulty judgment.”
– Richard Milhous Nixon

Remember 1999, the good old days, when the darkest cloud on the horizon was Y2K? Before the tech bubble bust and recession, 911, the Iraq and Afghanistan wars and Katrina, when prophesies of post housing bubble economic catastrophe were abstract arguments between establishment economists and cranks, a curious form of doomertainment driving eyeballs to websites and cable “news” shows, and the global financial crisis and Great Recession were figments of pessimistic economists’ imaginations?

Since the first decade of the 2000 opened, it’s been one mess after another with hardly a year off between calamities.

Time for a fresh start. A new beginning. Enough of the wars and recessions. The somnambulist regulators. The crooked bankers. The short-sighted financial oligarchs.

We all deserve at least one blessed year of peace and quiet, of steady progress, growth, a booming stock market, without interruption by disasters man made and by the hand of Mother Nature, don’t we?

Yes we do, and we got one, in 2010.

2010 was the year deflation was banished, reflated economies grew, housing prices turned positive, albeit briefly, and commodity prices surged. The economy expanded all year, tamping out the dubious double dip scenario that discounted the power of the press – the printing press, that is.

The stock market bloomed, in fact did so for far longer, but no more, than I expected. A close over 11,500 on the DOW is a far cry from the 7,500 to 8,000 I forecast at the start of the year. Mea culpa.

Bond yields remained low, as I expected. Gold prices soared 25%, far above my 3% forecast. These reflation markets are tough to call.

The labor markets, while not improving dramatically, stopped getting worse.

Except for a hiccup or two in Europe, a few noisy students complaining about bailouts for bankers and austerity for everyone else, 2010 was a fine year. A breather. A respite. A year off in wine country away from the hurlyburly, addled headed riot of the big city.

The Other Shoe

2011 is back to the reality. Call it “the other shoe,” not a Manolo Blahnik but a Chinese knockoff Nike, stinky socks dangling out. The global financial crisis and recession left behind unpayable private and public debt and an unreformed political system. It will bite in 2011. Also the Greenspan Credit Bubble with Chinese Characteristics. Also the broken global monetary system. Also a finite global oil supply that strains under the demands imposed on it by politicians buying and selling it with a credit-based money supply constrained only by the collective skill of the Oligarch’s economists to invent new arguments to justify it more quickly than events demolish them.

The deconstructed fugly era starting in 2006 looks like this:

The decade we just survived since 2006

Flowcharts? Yes, flowcharts, starting with the past and cast into the future.

Why? The series of the events that are about to unfold are so complex and intertwined that it’s now necessary to break it all down into processes, into inputs and outputs, into decisions and decision criteria, just to get your heads around it, if one is to hope to distinguish the future course events from randomness.

To the ill-informed, the events of the past decade appeared to be random. Who could have known that a technology bubble can pop? That a housing bubble is a threat to the macro-economy? That a deflation spiral was impossible? The drivers of change for the next decade will be no less deterministic and non-random than they were during the asset bubble cycle that dominated the previous ten years. That we forecast here with sufficient accuracy to make a bundle of money.

You can’t tell the players without a program

This video lays out the three main processes that are driving change over the next ten years.

In addition to the complication of multiple drivers of change, the next decade will also be far more politically unpredictable than the last. Why? Because we blew it when we crashed the world economy in 2008. Uncool. The final straw. America’s trade partners want protection.

When the head of the World Bank starts talking about gold as part of a new global reserve currency, the era of the Treasury dollar standard is nearing an end. When the high priests say aloud what heretics like us said only in whispers in 2001, that the US is no longer the center of the universe, that the sun does not revolve around the earth, and that no quantity of creative math will make it so.

Nietzsche explained, “There is no truth, only power.” When power shifts, new power speaks a new truth, but don’t expect that truth to have much to do with yours or mine in daily life.

We all needed a solid year off from crisis, and 2010 was it. but sum the positive and negative inputs and the net directs the realist the conclusion that the next ten years will be even more crisis-ridden than the last, starting in 2011.

Crisis 2011

Housing prices are sinking again, even after billions in government subsidies were spent to prop it up. Fifteen months after the official end of the recession, the median duration of unemployment, a measure of how long the majority of the jobless have been out of work, remains at nearly twice the level it was at 15 months after the 1983 recession.

GDP growth under a 3% annual rate, while better than zero, is simply too slow to close the output gap created by the Housing Bust Recession before a new recession arrives to widen it yet again.

The US has suffered a credit cycle recession every ten years on average since WWII. The beginning of the Peak Cheap Oil Cycle around 2005 will make recessions more frequent, and I believe we’re due for another before the end of 2012.

We need more growth but no one seems to know how the economy can grow any faster, without a new bubble to boost growth the way the housing bubble and war spending rescued the economy in the early 2000s. With interest rates at zero the economy lacks a tail wind of falling interest rates as it had in the early 1980s.

A replay of the 1960s tax cut boom is out of the question, given the nation’s finances, as are more New Deal style programs, or an good export and housing boom like the one that pulled the economy out of a tailspin after WWII.

In fact, every trick that generated the 4% plus annual GDP growth that the US needs to reach output gap escape velocity is out of the question, save the unmentionable: an inflationary boom ala 1975 to 1980 that generated an average 5.6% annual real growth — much to my surprise when I researched it — while wiping out a generation’s debt.

Stagflation, ho! The new NAIRU

The most worrisome, but least unexpected, development is fast rising cost-push inflation. No surprise to iTulip readers, inflation that began as fast rising oil prices in late 2009 worked its way into commodity prices in early 2010 and started to make headlines as out-of-control food costs in China and India by the end of the year. As we’ll see, inflation in excess of 5% is already showing up in the official US producer price indexes.

In 2007 I guaranteed that a deflation spiral is impossible under the structure of our monetary system, that the Fed will put a floor on price deflation with a raft of orthodox and unorthodox policy measures, including bank bailouts and quantitative easing officially and dollar depreciation unofficially. The perverse result I expected was a combination of weak demand and rising costs, forcing producers to cut the quality and quantity of goods while maintaining prices. Several members started threads to rack the trend (See Inflation Snapshots).

That phase is ending. As the labor market in select industries improves, producers and wage earners regain pricing power. One class of society will be able to afford the higher prices and those left behind in dead or dying industries put under by the recession will continue to their now 30 year long ride down the living standards curve.

If interest rates rise, albeit more slowly than inflation, figure higher money costs into prices as well, and wage inflation, too, as competition for trained labor within growing industries, especially energy and technology related businesses, drives up wage rates.

Non-Accelerating Inflation Rate of Unemployment (NAIRU) is a monetarist concept that continues to guide Fed policy. My theory is that when the time comes, once the bogus deflation risk dust settled, after the rate cuts and QE and dollar depreciation – inflationary policy, by any other name – that persistently high energy prices will shift NAIRU such that inflation will rise off a 9% unemployment rate in 2011 as it did off 4.5% unemployment in 2007.

The costs of the Fed’s pro-inflation policies are largely born by the middle class. High food and gasoline prices, often dismissed by statisticians as too volatile to include in the CPI, are included in the producer price indexes, and the trend is clearly up.

Crude, intermediate, and finished food price change rate: 21.2%, 7.5%, and 4.1% respectively.

Food may only represent 16% of personal consumption expenditures (PCE) for US consumers as a whole, but 4.1% food price inflation, with 7.5% intermediate food price inflation in the pipeline, is a big deal for a family making $50,000 a year. That’s down 4% from $52,000 ten years ago.

Mean income for five quintiles plus top 5%.

If it feels to you like you’re making less money now than 10 years ago, that’s because you probably are. Regardless of income group, the year 2000 was the high water mark for incomes in America. According to the 2010 US Census data, the income ride has been downhill ever since.

One of our members asked for an update of our now famous income inequality chart from 2006, the one that shows how income gains were distributed before and after the FIRE Economy era of the early 1980s, and we have not forgotten. The old chart used data up to 2005. Here’s the chart updated with the latest Census data.

Distribution of income gains got even more skewed in the latter half of the last decade.

For those in the lower quintiles, as incomes decline and food and energy prices rise, food and energy as a portion of personal consumption expenditures will grow. Will they reach the 44% level they are at today in China? We may already be there for the bottom 20% income group, as the growing food stamps program rolls attest. High energy prices mean rising costs and falling incomes for the majority of Americans. This will be the major campaign issue in the next Presidential election.

This bears upon the Fed’s policy stance on cost-push inflation.

Unlike any previous recovery since the 1970s, inflation is near expansion peak levels

while unemployment remains higher than recession peak levels.

The Fed will be able to ignore inflation as long as it remains a wage earner’s and not a bondholder’s issue. As long as the bond market buys the weak demand-pull inflation story and bond yields do not rise too quickly, the Fed can turn the other cheek. Besides, the US can continue to export its inflation problem to China, Brazil, and elsewhere, and what are they going to do about it? They can’t fight capital inflow bonanza induced inflation produced by raising interest rates. That just makes the problem worse. So they poke away at the margins, imposing half-hearted capital controls, and complain. Or maybe 2011 is the year they do more?

Crisis 2011 – Part II: Conundrum Economics

The 2011 economic crisis hinges on oil and the dollar, on the contradictory need for the US to continue to manage post credit bubble debt deflation with dollar depreciation on the one hand and on the other the rising price of oil globally due to US weak dollar policy, rising global oil demand, and a fast-approaching oil supply threshold.

Will the Fed raise interest rates before the labor and housing markets regain their footing?

Global economic growth is again pushing oil demand up to the supply threshold it first reached in 2005 when the first Peak Cheap Oil Cycle drove prices over $100 two years later. In 2008, hedge funds and investment banks rode oil up to $147 before the financial crisis and global recession drove it back down briefly to under $40 in 2009.

The second Peak Cheap Oil Cycle started as soon as the recession ended in 2009. The Cycle will push oil back over $100 in 2011 and produce a price spike to perhaps $120 before one of two secondary crises occurs, the China Bubble Crash or the Fed cuts rates or Congress reduces spending. For an economy in a balance sheet recession facing cost-push inflation from a weak currency and rising global demand for finite oil, the options aren’t pretty. (more… $ubscription)

Tulip Select: The Investment Thesis for the Next Cycle™


For a concise, readable summary of iTulip concepts read Eric Janszen’s 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.

To receive the iTulip Newsletter/Alerts, Join our FREE Email Mailing List

To join iTulip forum community FREE, click here for how to register.

Copyright © iTulip, Inc. 1998 – 2010 All Rights Reserved

All information provided “as is” for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer


Phase #2 of the Euro-Zone Debt Crisis

Phase #2 of the Euro-Zone Debt Crisis

by Gary Dorsch | may 26, 2010

“A trend in motion, will stay in motion, until some major outside force, knocks it off its course.” For almost fourteen uninterrupted months stock markets around the globe were climbing higher, recouping $21-trillion of wealth since hitting bottom in March 2009. The global economy was pulling out of its worst recession since the 1930’s, led by locomotives in China, India, and Brazil. On May 4th a survey taken by JP Morgan showed that global manufacturing expanded at its fastest pace in six years in April as output and new orders surged to new multi-year highs.

In the United States factory activity was firing on all cylinders, lifting the Purchasing Manager’s Index (PMI) to a six-year high at 60.4 in April, with employers becoming increasingly confident about hiring. Although manufacturing is not a huge component of the US-economy the factory industry is still where recessions tend to begin and end. For this reason the factory PMI is very closely watched, setting the tone for the upcoming month and other key economic indicators.

The US economy added 570,000 jobs during the first four months of 2010. In sharp contrast, just a year earlier, the US economy was losing more than 700,000 jobs during the worst months of the “Great Recession,” which began in December 2007. Still there’s been a worrisome undercurrent lurking beneath the surface – the U-6 jobless rate, including those who can only find part-time work or are too discouraged to look for a job, rose to depression levels of 17.1% in April highlighting the deepening impoverishment of the American middle class.

Still, traders on Wall Street saw the glass as more than half full rather than half-empty. The key numbers were still turning up spades. The combined net income for S&P-500 companies in the first quarter were 46% higher from a year earlier, helping to fuel the S&P-500 Index’s 75% rebound from its recession low in March 2009. Analysts on Wall Street upped their forecasts for S&P 500 profits to grow 29% this year and 19% in 2011, the biggest two-year advance since 1998.

Bullish traders bought increasingly expensive stocks on all dips, comforted by a steady stream of remarks from Fed officials promising to keep the fed fund rates locked near zero percent for an “extended” period of time. So powerful was the hallucinogenic effect from $1.75 trillion of liquidity injected into the markets by the Fed that speculators bid up the Dow Industrials to the 11,200 level, just shy of the 11,450 level – where horror story of the Lehman bankruptcy began.

Yet according to a Bloomberg opinion poll dated March 19th-22nd, there was always a big “disconnect” between the bullish perceptions on Wall Street and the fear and trepidation felt by workers on Main Street. There was great disbelief in the theory that the Fed could simply inflate the US economy to prosperity. Barely one in three Americans thought the economy was on the right track, and less than 10% predicted the economy would be strong within a year. Most American investors plowed their remaining savings in bond funds and missed the “green shoots” rally.

Still, the strategy pursued by the Fed and US Treasury were rather simple – inflate the value of the stock market through any means possible, including massive money printing, pegging interest rates at ultra-low levels, clandestine intervention in the stock index future markets, and jigging the accounting rules for valuing toxic bank assets. Eventually, the “wealth effect” would kick in and consumers would increase their annual spending by 3.5 cents for every dollar of added wealth. The Fed’s QE scheme opened the monetary floodgates driving high grade and junk bond yields sharply lower, and fueling a $5.5 trillion recovery of US-stock values.

But just as US consumer confidence was rebounding to a two-year high, buoyed by the Dow Industrials’ rally above the 11,000-level and US-home prices showing a year-over-year gain of 2%, the first increase since 2005, “a major outside force, began to knock the stock markets off their upward course.” Few traders would realize how the tiny nation of Greece with just 11-million citizens could bring the world economy to the brink of another Lehman-style meltdown.

Few traders on Wall Street took notice of the obscure and thinly traded Greek credit default swap (CDS) markets. There was a sense of complacency about talk of a Greek debt default, with traders reckoning that at the end of the day politicians in Germany and France would ultimately bankroll a massive bailout and prevent panic and fear from spreading to other highly-indebted Euro-zone countries, like Portugal or Spain, and plunging the Euro into a death spiral.

However, lying beneath the surface of the euphoria on Wall Street a ticking time bomb was winding up and getting ready to explode. The villain igniting the fuse was a most unlikely source – the S&P credit rating agency – which usually lingers far behind the credit default curve. Surprisingly, S&P roiled Euro-zone politicians and shocked the markets on April 26th by downgrading Greece’s €300 billion of debt three notches to junk status, at BB+, and thus, derailing the upward trajectories in industrial commodities and global equities. 

In the eye of the storm Greek CDS rates soared towards 1,200 bps, and yields on Greece’s two-year notes jumped to 25.8 percent. Suddenly stock markets in the fastest growing emerging markets in Brazil, China, and Russia were at the gates of bear market territory after suffering steep losses of 20% or more. Crude oil plunged $23 /barrel to as low as $64 /barrel, and there was a 20% shakeout in the copper market. The Australian and Canadian dollars tumbled 12% and 7% respectively amid a flight from natural resource shares and monetary tightening in China.

On May 7th, EU monetary affairs chief Olli Rehn spoke about the need to avoid a Greek default on its debts at all costs. “Little did authorities of the United States know in September 2008 what the bankruptcy of investment bank Lehman Brothers would lead to. The consequence was that the world’s financial system was paralyzed in a way that led to the biggest global recession since the 1930’s. Consequences from Greece’s insolvency would be similar, if not worse,” he warned.

Rhen’s apocalyptic warnings were taken very seriously. Euro-zone finance ministers and central bankers huddled behind closed doors during the May 8-9th weekend working frantically to craft a bank bailout plan before the opening of the Asian stock and currency markets on May 10th. What emerged was “shock and awe” – a 750-billion euro ($1-trillion) bailout package, including standby loans and guarantees that could be tapped by Euro-zone governments that were shut out of the credit markets. Putting the squeeze on naked short sellers the Spanish IBEX Index jumped 15% in a single day and the Euro briefly jumped to a high of $1.3100.

Since May 10th however the “shock and awe” effect has worn-off. The Spanish stock market index has completely surrendered its one-day gain of 15%, and the Athens stock index has retreated to within 5% of its March 2009 lows. The Euro has failed to gain any traction and is still sliding lower along a slippery slope towards parity with the US dollar. While the $1 trillion bailout succeeded in preventing an immediate default on Greece’s sovereign debt, the cost of borrowing for Greece’s biggest banks remains prohibitively high, which could choke its economy to death.

Thus, the focus of the second phase of the European debt crisis has shifted from the specter of a sovereign bond default to a frightful situation where European banks may become unwilling to lend money to the private sector, or could demand higher interest rates or impose tougher collateral rules. In other words, the markets fear a “double-dip” liquidity crunch, which could deprive European companies with junk bond ratings of badly needed funds as banks become more risk averse.

Since May 10th credit default swaps for the Euro-zone’s top 50 junk rated bonds has surged to as high as €625,000 to insure €10 million of debt. That’s up sharply from €460,000 since the $1 trillion bank rescue plan was announced. In fact, the European corporate bond market has been effectively shut down for banks with bond issuance slumping to $2.6 billion in May, down from $82 billion in January.

Amid fears of a liquidity crunch in Europe there are expectations in the gold market that the ECB would respond by ramping up its money printing operations to full throttle, and in the process exerting further downward pressure on the Euro. As of May 21st the ECB had already bought 26.5 billion Euros worth of sovereign bonds as part of its agreement to monetize the debts of the most fiscally irresponsible Euro zone governments. The ECB might end up monetizing as much as 750 billion Euros of sovereign debt, including riskier bank bonds, to avoid a full blown crunch.

After climbing to a record 1,000-euros /oz in mid-May, Gold endured a brief pullback tumbling in tandem with sharp slides in crude oil, copper, nickel, rubber, and other industrial commodities. But gold has proven itself a very resilient metal and highly sought after as the purest form of “hard” currency, shining brightly as a hedge against paper currency devaluations and the monetization of government debt.

The European Central Bank (ECB) has crossed the Rubicon agreeing to monetize hundreds of billions of Euros held in Greek, Portuguese, and Spanish bonds. In the process the supply of Euros in world money markets is likely to increase. The ECB’s efforts at sterilizing the bond purchases are voluntary and have been feeble at best. Furthermore, at the end of the day, there is little chance that Greece’s 2.5 million working citizens can repay 300 billion Euros of debt, while at the same time absorbing 25% wage cuts in the public sector and paying 23% VAT taxes.

At some point Greece’s government would seek to untangle the noose strangling its economy and demand a restructuring the country’s debts, and in a polite way tell its lenders to take a big haircut. Argentina is holding a $20 billion debt swap this month at 45 cents on the dollar, nine years after defaulting on $95 billion of loans. The Euro would remain a very unstable and weak currency. Reports that Beijing is becoming increasingly nervous about its Euro zone bond holdings drove the Euro to as low as $1.2180 and fueled a flight for safety into gold.


Gary Dorsch
SirChartsAlot, Inc.

Tag Cloud