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Chinese Troops ‘Invade’ 25Km Into India, “This Is Chinese Territory, Go Back”

Update: who says media disinformation only takes place in Ukraine; apparently the same takes placed between India and China. Bloomberg cites an Indian army spokesman S.D. Goswami who denies Chinese entered territory in Ladakh, a mountainous area in northern India. “No incursion or encroachment of Indian territory by China has taken place along the India-China border,” Goswami says in statement. “There are areas along the border where India and China have differing perception” of line of actual control. “Due to both sides undertaking patrolling up to their respective.

Almost as if someone in the media world is eager to launch a war…

* * *

Fifteen months ago we reported China’s stealth invasion of India’s Ladakh region, and now, as PTI reports, Chinese troops are reported to have entered deep into Indian territory in Burtse area in Ladakh where they had pitched their tents last year. Indian troops spotted Chinese personnel 25 to 30 km from the perceived Line of Actual Control (LAC). PLA personnel carried flags reading “this is Chinese territory, go back” in their hands and they refused to move after being confronted by India’s quick response team.

full article here

Notice

 
29.01.2011
 
 The Internet services for most of Wicklow and the south east of the country is down since last Thursday evening approx 21.00 hrs
I have no access to the website and I have been waiting for Eircon to get back to me a customer to tell me when the service will be back up and running .I have up until to-day received no information as to when this will be I called Eircon broadband services only to be told by a gentleman speaking from India  that Eircon can withhold services for up to 5 days without been obliged to compensate any of its domestic customers .
This is just one of the reasons I am standing for election as the service industry herein Ireland is just crap and we the public seem to be shafted and expected to put up with ever higher prices and ever diminishing services .Just look at the private health insurance market continuing price hikes and ever decreasing services ,local business rates again less local services but higher taxes we must brake the political mold and bring back cost effective local services, accountability, and competence along with the proper cost base for such services
wake up the the real challenges that face this country and for God sake stop putting up with crap coming from the politicians.
I am now off to see if I can buy a new phone that can accesss the net and take decent video clips so I can post them on the website and keep up to date! 
 
Thomas Clarke

US Treasury debt

 

Interest-Rates / US Debt Dec 15, 2010 – 01:22 PM

By: Jim_Willie_CB

The Chinese really must think the American strategy and behavior to be braindead and self-destructive. The US helped them assemble a manufacturing industry, replaced US income with debt, and finally faces the Grim Reaper in a national episode of systemic failure. The US leadership is as stupid and mindless as the population is driven by compulsive consumption over the cliff, as the nation faces ruin. The Jackass warning has been for five years that the Chinese experiment would end in tragedy, and that when a preponderance of USTreasury debt is owned by foreigners, especially a single foreign nation, the Untied States will lose its sovereignty.

It is worse. It lost its vitality entirely. With its financial engineering backfire, the nation is broken from a sequence of repeated asset bubbles & busts. With its wartime economy, the nation seeks new enemies and prefers exports of weapons to productive goods. The nation is like a Sherman Tank sinking in a sea of quicksand with credit cards as banners flown, all overdrawn and canceled. The globe has come full circle from a century ago. The export of opium by Britain to China back then, the US monopoly on narcotics nowadays. Uncle Sam prefers selling contraband to legitimate industry.

A spectacular sequence of events has taken place with respect to China and the United States in the past decade. The disastrous outcome was extremely visible long ago to the competent economists. This article cannot fully discuss and analyze the entire sequence, which in my view took the USEconomy from imbalanced, debilitated, and on the verge of ruin in ten years to chronic insolvency, accelerated breakdown, and systemic failure today. The official policy toward China by the USGovt on bilateral trade highlights the incredibly stupid and irresponsible nature of American leadership, especially in economic and financial matters. Let this piece serve as an outline of ruinous self-destructive policy, resulting in a climax failure in the Untied States. At the doorstep to a much darker poorer place, with countless traits associated with the Third World, the US as a nation with its USGovt and Wall Street compromised leadership refuse to admit grotesque errors. They do what they usually do, create more money to toss at half-baked solutions, and create a new enemy to lay blame on foreigners. This time though, the Chinese object of criticism, rebuke, hostility, and retaliation is the largest USTreasury creditor. The counter-attack from Beijing after an amateurish display of ignorance and tantrums seems directed at purchases of Gold & Silver, along with developing a stranglehold on the commodity supply chain. The financial managers in China have found inventive ways to discharge vast amounts of USTreasury Bonds. Their challenge includes finding secure worthwhile investment locations for the over $20 billion in bilateral trade surplus they build each month with the US, a formidable challenge indeed.

MOST FAVORED NATION TICKET

The rationale for the Clinton Admin to grant a Most Favored Nation status to China in its closing months in 1999 was a mystery to me. To be sure, the gesture went a long way toward developing detente with the slumbering giant. But it awakened the Middle Kingdom after two centuries of quiet, marred by a half century of harsh communism. Without question, some big promises were made in bilateral agreements. My suspicion is that the USGovt sought a lock on a new large scale creditor to purchase USTreasury debt securities, regardless of the consequences. Perhaps the USGovt sought a bagholder both either USTBonds or USAgency Mortgage Bonds, or both. With Japan and South Korea as neighbors, China would surely not resort to purchasing US weaponry. Given the coincident timing with the handover of Hong Kong from the British at the end of its 99-year lease, one must suspect that China might have promised not to transform HK into an economic prison camp shrouded in communist rules that would render it a wasteland, if the US and UK would only promise to assist the Asian giant with technology transfer, industrial support, and massive business investment. China probably promised some big bait of cheap imports to the USEconomy, the grand US achilles heel. The US was well along its pattern of consuming itself to death. Witness the retail emphasis within its economy, its crippling reliance upon debt, its junk food preferences, and its obesity. The China might have laid a great trap, and the US took it. Maybe the entire deal was well planned, a leftover of Mao Tse Tung days when he was a member of the Skull & Bones group.

The Most Favored Nation status was the ticket that opened the door, a New Open Door policy, for investment, lower cost in production, and the general awakening of the sleeping giant. What followed was a natural course of events to unseat the Untied States, converting it into a hopeless debtor with neither the prospect nor the means to repay its debt. Enter the new age of China, all perhaps the plan, the ever patient giant. The parallel to the destruction was a course taken by former USFed Chairman Greenspan. He guided the nation through the avenue to financial engineering and consequent implosion brilliantly, offering ideological justification, legislative obfuscation, and near the end, a nearly total abdication. He was a tremendous mesmerizing high priest. Greenspan’s second paycheck from his Swiss masters is consistent with working an agenda toward the demise of the American Empire.

INVESTMENT PARTNER

The first active stage between the United States and China was as investment partners. Rough figures of Western corporation (US, Canada, Europe) investment were $23 billion for the years 2001, 2002, and 2003. It was probably more. The Chinese industrial base expanded to the point that 60% of all Chinese trade surplus originated from Western corporations new to the scene. Yet the US leaders complained about the big surplus gathered, being part of its process. Worse, the Chinese factories often were equipped with the next generation Japanese machinery, like in machine tools, automation, and fabrication. A few years later, the German machinery entered the factory floors to some extent. US corporations saw an opportunity to tap the cheaper Chinese labor, and did so. The consensus opinion was that China could not be ignored for another century, so include them, partner with them, bring them into the fold. China quickly became the centerpiece to the globalization movement. One must wonder if the Western economist corps was so clueless as to be ignorant of the downside effects. China would draw countless jobs from the US and Europe. China would accumulate reserves rapidly. China would own foreign debt securities well beyond a critical mass. When the Hat Trick Letter started in 2004, my warning was constant and consistent, that China would eventually became a rival then a trade war opponent. The differential in labor costs would lead to a gigantic arbitrage that ended up at a breaking point, with extreme conflict at the end chapter. We are there. It will be a miracle to avoid a hot war.

THE LOW COST SOLUTION

The people of the United States no longer hear about the famed Low Cost Solution bandied about in 2002 and 2003 endlessly. It was supposedly a good thing, to reduce the cost of home electronics and housewares. For a idiot consumer society, that is a good thing supposedly. For a wise nation, it is a prescription for disaster. That was how the Jackass saw it. The solution of a lower production cost had a flip side, with staggering consequences that would put the US as a nation on a collision course with the Third World abyss. Simply stated, China’s gain would be America’s loss. The new jobs created in China to enable the lower cost in producing exports to the US consumer, hellbent on consuming his entire house in home equity, hellbent on consuming his entire future in order to live for today. The result would be assuredly lost jobs in America. It was obvious to all except the clueless cast of hack US economists. They proclaimed that the lower costs of production would enable cheaper imports into the USEconomy, a new wave of spawned growth with ripple effects in benefit, wider distribution from this vast Asian pool, more retail jobs, and a new American growth spurt. What utter nonsense! But they continue to ply their trade.

Quickly the jobs vanished from the USEconomic scene. Home appliances took much of the news headlines. The drain of jobs spread to Japan, as its robust economy began to feel the impact. In time the majority of consumer items like cell phones and home stereos were built in China for export to Japan. The labor arbitrage in globalization spares no advanced economy, which must operate under a higher cost structure. Follow washing machines, dryers, dishwashers, stoves, and more, came housewares and hardware items. The crowning blow was the announcement that Wal-Mart had 160 Chinese manufacturing sites in place. Sam Walton would not approve, as his motto was Made In America. The die was cast. Then came the problems of quality and reliability. Food imports from China had gradually earned a tarnished reputation of recycling chicken from reject sources and even roadkill for fresh caramel color and quick export to the US grocery shelves. The home building industry saw problems with drywall quality, even carpet chemicals. The SARS epidemic eclipsed the news headlines though, usurping attention. The same type of software reliability problems seen in the 1990 decade from India were experienced from Chinese exports. The greatest impact in the early stages of the Chinese industrial experiment were

  • the loss of US jobs in favor of growth in China
  • the loss of income from value added tangible industry in the USEconomy
  • the rise of home equity debt from US households
  • the US dependence upon asset bubbles for economic growth
  • the growth of income in China
  • the growth of the bilateral trade deficit with China
  • the growth of the mammoth FOREX reserves in Chinese Sovereign Wealth Funds
  • the increasing share of Chinese ownership of USTreasury Bonds
  • the increasing share of Chinese ownership of USAgency Mortgage Bonds
  • reduced quality and reliability of imported products to the USEconomy
  • strain for the macro economic impact to the USDollar and Chinese Yuan
  • strain for the macro economic impact to the USGovt debt and USTreasury Bond
  • resentment in the US for jobs stolen by China
  • blocked large firm acquisitions (see Unocal, BHP Billiton, 3Com)
  • new areas of friction (e.g. bank rules, security rules like Google)
  • a fast rise in tariffs and protectionism

ALARMING FOREX RESERVES

For US-based economists not to foresee a simple direct consequence of fast rising, alarming levels of FX reserves being accumulated by China, the American economists showed their true stripes as short-sighted and incompetent. The Jackass siren call was that eventually the Chinese holdings of USTreasury Bond debt would grow so great that US sovereignty would be challenged, compromised, then lost. The concept never entered the corrupted thought chambers of US economists and the cranium cavities. The challenge became so great within China for managing such huge sums of money, each and every month, that they created several Sovereign Wealth Funds. The Arab nations developed the concept, as did South Korea and Singapore, but the Chinese saw such funds flourish. When they collectively tipped the $1 trillion mark a few years ago, the news captured global attention.

Nowadays, the Chinese total reserves from diverse accounts totals $2.65 trillion, a center of great power. Heck, that is almost as much money as has been stolen by past US presidents, and stolen by US defense contractors, which happens to be about $1.5 trillion from Fannie Mae and $2.2 trillion from the Pentagon misappropriations. One must love the verbiage, as misappropriation sounds better than stolen. And that does not even address the $2.3 trillion in counterfeit USTBonds sold (over and above issuance) into the market by JPMorgan Chase, whose evidence was in the Building #7 at the World Trade Center, turned into a heap with pervasive thermite residue.

In recent months, the US-China bilateral trade deficit has remained over $20 billion per month in stubborn fashion. The labor arbitrage is a dynamic that will not go away. Chinese labor, as the Jackass wrote in 2005, could rise by 50% and still be far below the US wage scale. In order to cement their grip on trade, and assure a reliable supply line, which keeps firm their surplus revenue stream and economic vitality, the Chinese embarked on a fortification strategy. They bought the Long Beach California port facility. They bought much of the Vancouver port facilities. They bought much of the Mexican port facilities. In the last year, they expanded to building the primary Brazilian port facility. Call it a stranglehold of deep water ports. The major challenge for China with gargantuan reserves and fast growing new entries into reserves is the management of them.

They have major challenges in investing all that money. Well actually, it is not money, but rather credits acknowledged to contain value in recognized purchase power. The Chinese have been engaged in extremely brisk investment plans to secure energy supply, metal & mineral supply, and on the other side to secure markets to sell their finished goods. Instead of weapon sales, they typically promise to build community centers, schools, hospitals, marketplaces, railroads, and port facilities. Of course in the process, they ignore local dictatorships. They have made great inroads in West Africa, a region the US ignores except for Nigeria, where the common practice is to use muscle and bribery it seems. See the ex-VP Cheney case. China has made great inroads in the Persian Gulf and in Turkey, opening up Middle East markets and African markets.

SCAPEGOAT FOR US WRECKAGE

As the disaster unfolds from a mindless self-destructive pathway toward the climax in consumerism coupled with labor market abandonment, the USGovt has followed its usual pattern of blaming the trade partner. China has been labeled a currency manipulator, a thief of jobs, everything but the old heartless yellow scourge. Save that label for last. The USGovt, with its recent Wall Street masters, has been deeply involved in wrecking the integrity of most every financial market it touches. The USTreasury Bond market has a scad of naked shorts, failures to deliver, and leverage from Interest Rate Swap contracts that help to maintain the high value and low rates. The USGovt keeps the Consumer Price Index under wraps, preventing an unwanted rise from appearing. In the 2000-2007 period, the rising home price component was carefully removed from the CPI. It featured the home equivalent rent component instead, a tame moribund figure. After 2007, the stat rats decided to include the home price component again, since it is falling. Now the CPI features a home price item that consists of 25% of the index incredibly. Then the USDept Treasury assures that enough Treasury Investment Protected Securities are bought by the USFed, so that the early warning system on price inflation is cooled by a bathtub of cold water at all times. Then the USGovt uses suppression of the gold price in order to keep the USDollar elevated. The currency stabilization funds are commonly recognized mainstays of USGovt financial management. In fact such stabilization funds have about 20 to 30 hidden agencies busily defending the USDollar value, our freedom, and our way of life. During all this market manipulation, the USGovt has angered its creditors to the extreme.

So the USGovt reveals its many currency manipulator sides. A scribe would be negligent not to mention the Shadow Banking System that is the province of the US banking industry, fully supported by the USFed and the USDept Treasury. The hidden banking network has the unique feature of profiting from other nations as their financial structure heave from the great stress, and decline into a wrecking field. Keep in mind they include vast import of fraudulent bonds from the US issuers. The shadowy system used to boast $1400 trillion in credit derivatives and other nuclear sewage, now perhaps only $1000 trillion in a celebrated deleverage initiative. Try not to laugh. These instruments go a long way to manipulate the value of USTBonds, the USDollar, and the entire usury costs of the US universe of corrupted value.

The USGovt finally has complained about Chinese Yuan currency manipulation so much and for so long, not to mention with such shrill vacant thought, that the world has isolated the US on the global stage. Take the South Korean G-20 Meeting a month ago. The US was given lip service as appetizer hors d’oeuvres, and a cold shoulder at the dinner table. Nobody followed the US lead, nobody. It was the most shameful G-8 or G-20 Meeting in Untied States history. The finance ministers took their cues from the Chinese delegation. The crowning climax to duplicity has taken shape in the last year. Early in 2010, the professor occupying the USFed Chairman post repeatedly mentioned his plan for an Exit Plan from the 0% rate corner. The Jackass dismissed such nonsensical propaganda, along with equally lunatic delusional notions like Green Shoots of USEconomic recovery. If Bernanke were graded like a graduate school student for accountability on forecasts, analysis, and white papers, he would fail quickly and exit the program (a very different exit strategy). As the distress to the USEconomy and US financial system became acute in 2010, the USGovt blamed China for more currency manipulation. It became a tired old song with little or no meaning, more like a blunt stick to beat the Chinese investment partner from 2002, to pummel the creditor. How quickly we forgot our trade partner, our source of Low Cost Solutions!!

The climax came with admission that the USFed would embark on Quantitative Easing #2, a correct Jackass forecast cited all through the first six months of 2010. The USFed would print money, buy USTBond debt, flood the bond market with liquidity, and directly manipulate the USDollar currency in the process. The debt monetization in 2009 and 2010 was much bigger than the exposed QE1. The USDollar has been in downtrend ever since. Gold has been in powerful uptrend. The duplicity comes from the USGovt continuation of charges that the Chinese Govt manipulates its Yuan currency. The DC spin has no other message. To be sure, China keeps a loosely managed peg to the USDollar, never to permit too fast a rise. But the USGovt by comparison is the undisputed world champion of currency manipulation, debt production, market undermine, statistical distortion, and bank ruin. See the Flash Trading in the stock market.

CURRENCY WAR & TRADE WAR

The Competing Currency War has ramped up, heated up, and agitated every single major and secondary nation in the global economy. The primary detonation trigger for the currency war was QE1, the printing of $1.4 trillion of phony money by the venerable USDept Treasury, blessed and managed by the august USFed, and subsequent purchase of two gaggles of USTBonds and one gaggle of USAgency Mortgage Bonds. The world watched in horror, as the USGovt gradually lost its buyer base in Treasury Bond auctions. The totally lost USFed under the myopic stewardship of Professor Bernanke, the great student of Great Depression revisionist history, pounded the podiums about an Exit Strategy once again. Except this time after the nutty home buyer tax credit expired, the USEconomy slid further into recession. The lies told and reports published on price inflation, which rages higher at 8% according to Shadow Govt Statistics competent analysis, permit a 5% to 6% lie to be built into the GDP calculations. If price inflation is not really 2% to 3% as reported, then the GDP growth is not 3% as reported, but actually minus 2% to minus 3% instead. If simple annual GDP is compared to annual GDP from a year ago, then the GDP is running at a 7% recession. This revelation is astounding!!

So the USGovt refuses to effectively stimulate the USEconomy, since beholden to Wall Street for $trillion welfare programs. The USGovt conducts revolving door sessions on home loan modification, offering much sweeter incentives to the foreclosure mills run by the FDIC for the big banks. And the USFed admitted in August and September that the QE2 project would be unleashed. The engine for the global Competing Currency War is clearly the United States, where the asset bubbles were engrained in policy, where the multi-$trillion bond fraud originated for global export, where the criminal prosecution is nowhere, where the multi-$trillion monetary press is hard at work. The response from global trade partners is shock and horror, followed by hasty actions. The central banks around the world are busily responding to rising currencies. The December Hat Trick Letter gold report shows evidence in the TIC Report on USTBond holdings by major nations.

Some nations are reducing US$ exposure by USTBond sales. Other nations are quickly buying up USTBonds to prevent a fast rise in their native currencies. Other nations are part of the hidden US-UK network that conceals their vast USTBond purchases, all of which are denied by Bernanke before the USCongress. Why would the United Kingdom be so busy if not part of the illicit game of currency ruin in a desperate survival initiative? The United Kingdom, despite being locked in an intractable downward spiral with insolvent banks, wrecked home equity, and horrendous national deficits, has somehow seen fit to increase its USTBond holdings by more than triple, from $126.8 billion in September 2009 to $459.1 billion. And China is a currency manipulator!!

The Competing Currency War has a long way to go. Healthier nations with a brisk export trade must be careful not to suffocate under a strengthening currency, as the USDollar steers itself down into the devaluation morass. The brain trust of the Wall Street and London pedigree know full well that the game is over, the fiat USDollar is trash, and that the Paradigm Shift features a power handoff to China and the East from the insolvent West, whose flagship in the US & UK is preoccupied by war. The Competing Currency War is utterly fascinating, since it can be pre-written according to a tight script. Japan is buying USTBonds to prevent a fast rise in the Yen currency, which has already done harm to their export trade. The emerging nations are being flooded with speculative funds chasing higher bond yields, proceed funds from commodity sales, and much more. They will be harmed by rising native currencies. See Brazil for example, which has instituted new rules and taxes on incoming speculative money flow. They have a food price inflation problem, which is not from speculation, but rather from in my non-expert opinion a result of three decades of cutting and burning the Amazon Rain Forest. Their rain patterns have changed radically.

The real big battlegrounds are between the US & China and among nations within the European Union. The Europeans cannot continue with the fractured common Euro currency more longer, especially with defaulting sovereign bonds underneath them. Its Euro Bonds are so different, that arbitrage pulls apart the Euro at a time when the sovereign debt structure is falling like a series of dominos. The big enchalada is clearly Spain, which is near default. It will change the EU landscape radically. Today some silly nonsense propaganda deception news was promulgated that $40 billion would be needed to fix Spain and its banks. If Spain is three times larger than Greece, and the Athens banks needed $110 billion, one might use lower math to conclude that perhaps over $300 billion would be needed to come to Spain’s rescue. A rising Euro renders great harm. So again, according to script, the EU leaders and the EuroCB chieftains will do what they can to bring down the Euro currency, an exceptionally easy task. Such an easy task to order more Euros and bail out more European banks. The decision is simple, and in the process of pushing down the Euro exchange rate, the Gold & Silver prices rise substantially. The Competing Currency War swirls. The only winner is Gold and its shiny quicker brother Silver.

GRAND CREDITOR & LIQUIDATOR

China has become the world’s great creditor. So far they have not abused their role and position. They tend to cut trade deals more than weapons deals like the US has done with the entire Persian Gulf for five decades. The most clever action so far by China in the last two years was to establish a Dollar Swap Window for Greek Govt debt conversion. They obviously are using USTBonds in a dumping exercise. They are building a broader Dollar Swap Window for conversion of Portuguese and soon Spanish Govt debt. They have won a freeze on trade war decisions at the governmental level across the entire European continent in a brilliant stroke. They won access to world class German industrial products. They have an avenue to dump USTBonds and in a sense enter the EU as a member nation, its creditor partner. The maneuver essentially isolates the Untied States further. Just this week, the clownish notion of US insulation from PIIGS sovereign debt was smashed. The US banks are vulnerable, despite past denials.

China has discovered that it can dump far more USTBonds by purchasing discounted EU member nation debt securities than it ever could in buying up West African deposits or Persian Gulf energy sources or South American deals. American observers shook quake in their boots, since China has learned how to enter the world of high finance. Sovereign debt is the closest thing to currencies in existence. The bonds are the obverse side of the currency. China has begun to expand its Yuan convertibility. Moves with Brazilian Real were followed by a less significant move with the Malaysian Ringgit. In late November moves with the Russian Ruble were cemented. In two years, the Chinese Yuan might be on nearly equal footing as the USDollar as a global reserve currency. The fact that it is rising will be one of its strongest features.

GOLD CENTER OF RETALIATION

The trade war has blossomed from import & export of goods & products to the financial sector. The resentment over currency manipulation has a backfire. China is heavily motivated to purchase Gold and to convert reserves to Gold. They are using USTreasury Bonds to buy Gold. They are fast exhausting the available supply of gold bullion, the real tangible physical version with inherent value. They are encouraging the Chinese population to buy gold in any form, relaxing the rules. At the same time, they are playing the Wall Street and London corrupt rigged game. They are using USTBonds to purchase layers of indexes futures contracts in gold. So as they buy up gold bullion, they pack underneath layers of long contracts at slighly lower prices. It is like a rugged strangling of the victim about the neck while covering the mouth & nose with a brutal cupped hand. The Chinese has engaged in the active war of words. They have called the USDollar a joke for a global reserve currency, unworthy since it is linked to gargantuan deficits. They carefully avoid accusations of bond fraud. The Chinese have called the USDollar the ultimate in currency manipulation, due to its open abuse as a monetization instrument. The mere fact that the USDollar is the object of a new carry trade, on then off, is another insult. Imagine using the USDollar at 0% cost as the source to fund speculative trade. It guarantees a powerful longstanding enduring decline.

GOLD & SILVER BREAKOUTS

The breakouts in the Gold & Silver prices will continue for the next two years and beyond. Every several weeks, a fresh record high will come. The unique aspect of the precious metals breakout is its foundation in a crumbling global monetary system. Demonstrated proof is that the Gold & Silver prices are making record highs in all major currencies. The gold chart is less impressive than the silver chart. The long held favorite by the Jackass is silver. Central banks own none, and industry demands plenty, as substitutes are few. Gold & Silver have found their place as global reserve assets and currencies within FOREX accounts during the global assault on sovereign debt. The claims that Gold & Silver are in a bubble are as stupid as they are humorous. Money is never in a bubble. The big bubble is USTreasurys. The desperation of the captains of fiat fraud is showing like underwear worn on the outside in plain public view.

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.

source

Gary Dorsch
SirChartsAlot, Inc.

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