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The Global Debt Crisis., Is anyone even concerned?
Dave_vic_ozz
post Posted: Jan 2 2012, 10:03 PM
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In Reply To: denpal's post @ Jan 1 2012, 01:58 PM

I have been mucking around with Google News. You can see the German (and many other countries) news and copy paste into English via the translator tool.

I was reading a piece on the Euro. Basically Germany needed the Euro as -

The mark was so heavily backed as a "safe place", manufacturing suffered, exports dropped on high mark.

Soon, with the Euro, interest rates dropped.

Now interest rates have climbed and this is causing a few issues.

BUT, They need to keep the Euro healthy and the Fatherland firmly in the Euro mix.


I note, other countries (Estonia) see the Euro as "buying the last ticket on the Titanic". Exporters doing better but times still tough. Cost of living locally has increased quite a lot in the last 6 months.



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My comments reflect the moment in which they were posted.
Everything can change, and usually does, without notice.
 
denpal
post Posted: Jan 1 2012, 01:58 PM
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http://www.financialsense.com/node/7228

<h1 class="title">Martin Armstrong: The Entire Global Monetary System Needs to be Revised (Transcript)</h1> <h3></h3>Jim: Joining me on the program is Martin Armstrong. Armstrong became a very successful business forecaster with Armstrong Economics or Princeton Economics with head offices in Paris, London, Tokyo, Hong Kong, and Sydney, employing more than 240 people around the world. In 1983, the Wall-Street Journal cited Armstrong as its highest-paid advisor. He became one of the top currency analysts, and his work was requested by the Presidential Task Force; The Brady Commission investigating the 1987 crash. Martin, I want to begin our discussion on economics, and one of the problems with a lot of economic consulting firms today is they are so far off the mark. A good example is, this year economists were predicting 3% economic growth. When that did not happen in the first half of the year, they were talking about a second half recovery which is looking rather weak. What distinguished your work at Princeton Economics and what gave you the ability to make the accurate forecasts that you did when you were at Princeton and are still doing today?

Martin: Well, I think largely the difference was that our clientele was international. And that really forced me to look at everything through everybody else’s eyes. And what you begin to see is that unfortunately in the United States, the predominant economic community tends to look at just the United States as if we are the only thing that really matters. And I think largely that is where they always end up failing. For example, the ’87 crash, the reason we were really the only firm that was able to forecast that was simply because it is a fairly common sense thing. I mean, if you have sold all these assets – I mean the Japanese bought Rockefeller Center, all the bonds in the United States et cetera they were buying – and then you stand up, you form G-5, which is now G-20. But in 1985, and then you say, well to ease the trade problems and create employment in the United States, we are going to force the dollar down by 40%. So they do not understand because they only look at it from an American perspective. But if you bought a lot of assets in Mexico, and Mexico stands up and says, by the way, we are going to devalue the Mexican peso by 50% next week. Don’t you think you would sell and get out of there?

That is the problem in America is that we do not understand or respect so much the impact that we have globally. And the ’87 crash took place because of foreigners selling everything. And if you look at the economic statistics, nothing happened. Interest rates didn’t rise. There were no bad economic numbers, absolutely nothing. And that is what made it such a shock to everybody domestically, and that is when we got called in and the Brady Commission at the end said – well they did not want to admit that the G-5 cost them. At the end they said, well we think it had something to do with currency. And when you are getting into these currency swings of 30 – 40% in a two or three year period, you are dramatically changing the way capital moves globally. And probably any of your listeners that are invested in emerging markets or in Europe, whatever you have made on a particular stock in Europe, you have lost by the decline in the Euro. So, it does not much matter if I say, gee look I can make you a billion dollars real quick in Zimbabwe and they are going through hyperinflation. And it doesn’t mean anything. So, you have to really look at things on a global perspective, and that has been largely the problem in the United States that it is too domestic in all its forecasting and everything else.

Jim: Your model predicted once again the top in the financial markets in February 2007, and then you also predicted the bottom. So once again, was it looking at the global macro-picture that gave you that confidence because our guys over here completely missed it?

Martin: Yeah, you cannot look at things just purely domestic at all anymore. We have a global economy. And if you look at the contagion that has taken place, that began off of mortgages in the Unites States. I mean it wiped out Iceland, it has created a world recession to the point that on October 15th, you have demonstrations around the world on this occupy Wall Street stuff. So, we really have to understand it, but everybody is connected globally. And there is nothing that we can do that doesn’t affect somebody else, and this is part of what you hear in criticism coming from Russia and China about the US dollar being reserve currency, because if we increase our money supply to affect domestic rates, that is exported then, and they are suffering from inflationary pressures that are coming to their land as well.

So everything is very much connected, and the politicians do not appreciate, I think, really how globally the economy has evolved. I testified before congress in 1997 and they were asking, well gee, well how come no American companies got any of the contracts in China to build the Yellow River Damn. And I said, well look, the United States and Japan are the only two countries in the world that tax worldwide income. I said, so a German company bidding on the same project to build over there is already 35% cheaper. Then the German citizen who decides they would like to go over there and work for a year does so tax free from Germany. Only the US and Japan tax worldwide income, and if you find a dime in a parking lot in London, they want their share.

But that is the problem. We’re not competitive. And in the United States you can see it like there is three states that do not charge income tax. Delaware doesn’t charge sales tax, so a lot of people move from Pennsylvania to Delaware just to have their mail order business. People do move around because of these issues; and you have a lot of people that – a lot of companies – that have left cities because of taxation. We really have to pay attention and be competitive on everything that we do.

Jim: This recently caused the head of Coca-Cola to say that United States has become one of the most inhospitable places to do business. So this gets back to your point in your testimony because if we have more regulations, if we have more taxation, if we are taxing the money wherever it goes, it makes us less competitive. And now we are not just competing against Europeans, we are competing against the Chinese, we are competing against the Brazilians, so it is really a global world and you would think, Martin, that members of congress would begin to recognize that.

Martin: Well unfortunately they’re not economists. Most of them are not even business people. Most of them tend to be probably the dominant profession of lawyers. And they have this attitude that they can pass a law and everybody has to comply. But that is not the case. You can pass a law and say 65 miles an hour and nobody can go above that. I mean, we are always looking at more and more regulation, and the problem is that we had this economic decline and then the natural response from someone is to say it wasn’t regulated enough. We had more than ten agencies regulating the CDSs that collapsed. Not a single one did anything to prevent a central crisis in this country. We keep adding layers and layers and layers of regulation, but they simply do not work. I mean the SEC has not prevented one economic recession, one economic decline. We have too many agencies and that is the problem of why they created Homeland Security because they admitted that a lot of these agencies had information on 9/11. Even the people who were from the first attack on the world trade center had drew the world trade center on the walls of their jail cells with planes going into it a year before. They took pictures all kinds of stuff, but nobody does anything. You have too many agencies and so they create Homeland Security supposedly to sit on top of all these agencies to get the information, and we are just so over regulated. I mean, just have one agency to do this. Why do we need so many different ones and they all contradict each other and then they compete and won’t share information. So we seem to defeat everything we do, but the answer is always to not improve what we have, but always add another agency until the point we have so many people running around, it is crazy.

Jim: Yeah, we just added, in the Financial Regulations Bill, a consumer protection agency. What are they going to do that is any different than the other agencies that are out there regulating the financial markets?

Martin: Absolutely nothing. And if you really look carefully, the issues that created the problem which was the derivative CDSs, they still didn’t regulate. So they regulate everything else around it, but they just don’t do whatever is right at that point in time. And they made it worse because these instruments are now – they changed the accounting system where you’ve adopted Japan, so we are not even mark to market anymore. Now it is basically they do not have to even report a loss, until they take it. So, you are seeing the result of that in Europe where all of the sudden some banks are going down, and people are then saying, oh my God, look at the portfolio that they had on these CDSs, but they do not legally even have to report them. So it got worse, not better.

Jim: Let’s talk about maybe one of the reasons why QE2 failed. I mean, the Fed announced last year, QE2, it was supposed to stimulate the economy, bring down the unemployment rate, but what it did is it exported that money overseas. It forced a lot of those governments, especially in Asia that are pegged to the dollar to print more money. Now they are dealing with higher inflation rates. And Martin, we’re stuck today with a market that is exactly where it was when the Fed announced QE2. In your view, will they announce another QE3 or a QE4 as some on Wall Street anticipate if the economy weakens?

Martin: Well unfortunately they feel they have to do something. But in all honestly as I think they do realize, at least the people at the Fed, that no matter what they do, they can’t stop it because we are in a global economy. I mean, you take the QE2 idea, then okay, fine you are going to buy 30-year bonds and you are going to take them in, and therefore, in theory people will want long-term … there’ll be a shortage of long-term debt, so therefore they’ll lend more back to the mortgage market. Again, that shows the problem of this myopic view of the world. China said, well gee thank you very much. And they shortened their maturity by selling those 30-year bonds and moving down to two year notes or less.

So, the problem we have is that there is no way to stimulate the economy because if they pump in the cash, there is no guarantee it just stays here. They export it overnight. We do not know who owns what. The only think we do know is that 40% of the interest that is on our national debt goes out to foreigners. So, the old economic theories where fixed exchange rates system and all these things after World War II, it just does not exist anymore. And we really have to sit down and revise the entire world monetary system because nobody knows what they are doing.

Jim: I want to go to the Euro for a moment and I want to have you comment on – I think it surprised a lot of people the movement in the Euro markets with their problem. People do not understand how capital is mobile today and it can move. So as European problems accelerated, money moved out of the Euro, capital flowed into the United States strengthening the dollar (because we had a lot of dollar bears at the beginning of year) and in that process, not only did it strengthen the dollar, but it brought down interest rates … now a lot of people would credit that most of this came as a result of Fed policy. But is not it more a movement of global capital, Martin?

Martin: Yeah, exactly the same precise thing happened in 1931. Most people do not realize … well it is another one of the things they tend to leave out of the history books. But virtually all of Europe defaulted on its national debts in 1931. Britain went into a moratorium. They eventually came back and honored it. South America defaulted. China defaulted. You can go to an antique dealer and you will find a lot of these bonds. They are very pretty, and some of them are very nicely framed up for people. But as that happened, the capital came here and that is what pushed the dollar up to all time record highs going into depression. Now, politicians did not understand what they were doing then either. And that is when they came out with Smoot-Hawley and said, “Oh this is protectionism”, and they were trying to force the dollar down back then as well. Eventually FDR devalued the dollar, and in 1934—and that kind of got things going up a little bit after that—but what we are seeing in Europe and what the Europeans did not do properly, they thought they were creating a single currency. What they didn’t do was they didn’t create a single debt. So, they left the national debts in each of the members. And what they did at that point in time is really they left … by doing that you are creating a derivative that okay, fine the Deutsch Mark does not exist anymore, or the Greek Drachma. But if I short the Greek bond, it is effectively the same thing as if it were the currency. I can isolate just Greece and sell that.

Now what happens is that pressure has been pulling Europe apart. And they are not prepared to consolidate the debt to stop it, and they keep putting band-aids on to try and prevent it. But it’s not going to happen. I mean Europe is collapsing under this monetary idea that they had, and the way I can explain it in American terms, I mean, if you can imagine what chaos we would have if all 50 states were allowed to issue federal government debt. I mean, it would be an absolute free for all. And unfortunately in Europe, there is no single European bond. Every country issues its own, and then the banks use those independent states, they take their debt and they use that for their reserves to say that the banking system is secure. Now, when you start taking Greece down and people start attacking the bonds of Spain and Italy and so on, what happens is, now you are attacking the actual reserves of the bank. So, now we have a banking crisis develop. So, I mean, Europe is just … the politicians won’t do the right thing, and therefore it is just turning into a real basket case.

Jim: Martin, does the Euro survive? In other words, let’s say they are forced through a financial crisis to create some kind of political union because right now as you pointed out, they have a monetary union without the political union to go along with it. So, you have these disparate policies of countries issuing different bonds. Can they survive, or does this whole thing fall apart?

Martin: I seriously doubt under the current conditions that they would survive. And that is going to cause a lot of economic turmoil and that kind of brings us back to where the domestic analysts here will get it wrong again, because as that capital comes fleeing from the craziness in Europe, that will only push the dollar up even higher. And right now, you have Japan is also an economic basket case. The Yen is going up to record highs because right now people are pulling money back to Japan because they need it so desperately. But once that is over, then it will flip and the capital will start coming back out again, and that will then drive also the dollar back up. And then our politicians here will get mad about you know the implications on trade, etc. Our trade deficit will get worse. Unemployment will rise. They’ll blame it on that. And then we will be back to the same old stuff where we were in the 30s. But Europe has to–there is no real domestic confidence to support a political union. And everybody’s blaming everybody else at this point, and probably the majority of the opinion is against any kind of a political union. And you are seeing the massive amount of people protesting – there are like 10,000 people out there in Spain about this occupy Wall Street.

We’re getting the youth in a lot of these countries—to bring up Southern Europe—unemployment rates are like 30% and in some cases up to 50. And then you are looking at major political disruptions here. And where we go is not – does not look too good as long as the politicians refuse to sit down and actually look at what is happening. They are all just trying to hold on to their power.

Jim: Now when we go back and translate that here as the dollar moves up, as it is doing now, meaning that it is going to make our exports more expensive. And then you have politicians here calling for currency manipulation by other countries not realizing the global economics. Yet, Martin, we have, here in the US, more calls for more regulation, more taxation, and more government intervention. It is amazing to see this transpire. It is like nobody has ever gone through and read a history of what we did in the Great Depression that turned a recession into a depression. About the only thing it seems like Mr. Bernanke learned from that was to print more money. But in a global economy, when he prints money, it comes back and boomerangs here.

Martin: Yeah, I mean we are still living under a lot of the old Marx’s agenda in many ways. And it sounds nice, I mean, you see these people saying we are the 99%. But what they really do not understand if you confiscate all the assets of top 1% what are you going to accomplish? Will it do anything? It will not even balance the budget. I mean, that is not our real problem and you can keep raising the taxes all you want, but we have deficits far beyond that. And we are not going to solve the problem that way. We really have to do a serious, serious reform. And if you take, for example, what the tea party has been saying. It sounds nice: balanced budget, okay, but we have debt that is continuing to increase. And so what will happen is, is that the cost of interest to keep carrying this debt that we never pay off is going to continue to escalate. Eventually that would reach 100% of total expenditure. So you can have a balanced budget and the debt crowds out everything else from Medicare, you know, all the way to unemployment benefits. There will not be any of that left. So, a balanced budget, we are beyond that too. We really have to do a serious monetary and economic reform here. And the government has been doing this since World War II. They borrow year after year after year. And there is just never any intention of paying anything back.

If you go to a bookstore, alright, you can go look for basically the World Almanac, little paperback type thing. And in the beginning, look there and they have tables, all the data on the national debt, and year after year they’ll list how much you paid in interest. If you add up the interest expenditure between 1986 and 2006, you’ll see that 80% of the increase in the national debt was all interest. So, we are not getting anything for this. Forty percent of that money is going out of the country. So, it’s just astonishing to me that you can cut every program you want, but the national debt is off the table. You cannot negotiate it. You cannot – I mean, we have to create a new monetary system. We just have to do so. The debt is going to take over absolutely everything to the point we won’t have any kind of expenditures for anything. I had called the doctor for my mother, and they said they are no longer taking Medicare patients because they are anticipating cuts coming through in January. So, you can have these nice programs, but they keep chopping away at them because of the rise in the national debt cost. They can say, oh we are going to tax the rich. Okay, fine go ahead. Take everything they have. It will not stop the continual growth in the national debt. I mean it is like the pink bunny that is on the Energizer commercial. It is just going to keep on going. So, unless we sit down and start really seriously saying, look we have to revise everything and let’s look at this, there is not much that we are really have to look forward to, other than shear economic chaos.

Jim: Is it going to take a crisis, Martin, as we saw take place in the 30s which unfortunately lead to World War especially with tariffs and the modern equivalent of currency wars that we are seeing take place today. Is it going to take a crisis before they act because they seem to want to continue the same policies? You are hearing, okay we will be okay if we just tax the rich. They need to pay their fair share. But as you pointed out, you could tax the rich, take away their money, you are still going to have a budget deficit and we are still sending interest overseas. In fact I read a figure that we are paying China in interest on the debt it owes; we are paying them enough interest to pay for their entire military expenditures.

Martin: Sure, I mean, it is incredible that they always want to blame corporations and say, oh they ship jobs overseas and that is why we are losing jobs. If you look at the amount of interest that we are paying that is leaving this country, it is far more than what we are losing in trade. And it is a shame because we just have a lot of rhetoric all the time rather than just looking at the simple truth. And it seems to be a lot of dogma, I think, that prevents people from even looking at things, or they just do not want to. I’m not sure. But politicians are … I mean, I’ve worked with a lot and it is very frustrating because you can tell them, listen, you know the trains coming down the street and it is going to – if you do not step out of the way, you are going to get killed. Well, I do not see anything right now.

Martin: And they just will not act until there is a crisis. Yet to them it is kind of like, you know a guys comes up to you and says, listen I just saved your life. And you look at him and you say, yeah, what’d you do? Well, you see that car at the top of the hill, somebody did not put the break on, it started rolling down, it would have hit you, so I jumped in the car, put the break on. So I saved your life. The guy does not see it, so he goes yeah, how do I know you are not just lying? And that is the way the politicians look at it that they can’t win an election by saying, vote for me because I stopped you from losing your house. And they would much rather that you are under the gun of losing your house and then say, vote for me and I will prevent it, but they won’t act in advance. So, unfortunately that is I think what is wrong with our political system. And the two words, political economy should have been divorced the first moment they met, but unfortunately that is what we have to live with. And so they will not act until the crisis happens. And then they want to have their big hearings. And then they want to investigate. And then they always want to criminally charge somebody but they have tied investigations to every stock market crash since 1907, they have never found this mythical short player that pushed everything down. But it’s great grandstanding. All of the yelling and screaming that they did over the derivatives but they still did not – they still did not regulate them. They still did not stop the CDSs from being issued. They did nothing. They regulated other things, and added more agencies and more government jobs, but they actually did not do anything to prevent what was happening. And to tell you the truth the reason they will not do so is because the banks that they were looking at are primary dealers. A Primary dealer is the one that settles the government debt for them. So, they are never going to charge criminally any of those banks because they have become kind of like the financial crack dealer. They are not going to give them up. If they really wanted to help the economy, they should have shaved 25% off of the mortgages and basically funded it that way. That would have prevented all these massive foreclosures and the problem with the foreclosure is … you know some people will say, oh that is liberal you are taking … but the problem is – all that property now comes out onto the market. By that coming onto the market, even if you have a house and you are current on your mortgage payment, now your property has declined in value because of everything else that is being sold. It is all interconnected. And so, the worst recession ever is always a real estate recession, because people will spend money as long as they feel they have equity in their home. If they feel that they no longer have that equity in their home, for retirement or whatever, they don’t spend money. So, a real estate recession is the worst of all, and that is what we have.

Jim: I want to move on to the topic of gold. We have been talking about how the global markets work. We’ve got capital flows coming into the United States that is driving the dollar up. And we probably have the best looking house in a bad neighborhood. Let’s talk about gold for a minute because there is some out there that propose the silly notion that if we had a gold standard, we would not have these problems even though when we had a gold standard, governments continued to print money. The 1920s in the US is a good example of that. How does gold fit in here?

Martin: Well, gold is a good historical hedge, not against inflation, that is nonsense as well. It is really a hedge against political instability. And that is what we are really into at this stage in the game. It is a sovereign debt crisis that is developing on a global scale. Gold in 1980 was eight seventy five. And even if you look at foreign cars, a Porsche was about fifty thousand dollars back then. It is now about a hundred and ten or so. So, with gold being at sixteen to nineteen hundred in that area, it is not overly priced. It is about on par with everything else that has risen. I mean a Cadillacs in 1995 was – top of the line was about forty five thousand, now they are also about a hundred thousand or so. So, we are not looking at something abnormally overpriced compared to everything else. Gold will eventually run up dramatically as the crisis in the global sovereignty debt issue more or less percolates up all the way around the world. But – and then you have the possibility of gold going up to like five thousand dollars or something like that. But the main difference with gold is that, gold standards are not … I think they are just sales pitches for people that tried to sell gold. Gold is not a hedge against inflation and it is not – a gold standard’s not going to do anything. We have been there and done that. Really I mean, we had a gold standard and politicians would not raise the price of thirty five dollars because they would have to admit that they printed more than they were supposed to. So, they kept it at thirty five dollars until 1971, and Nixon could no longer hold it. We would have lost all the gold to Europe. So, he closed the gold window. That’s the only thing he really could do at the time. So, the idea of creating any kind of a standard, it does not matter what it is with, it does not really – has never historically worked. And that maneuver has been tried even going back to the times of Babylon. There are tables there that they had produced which have survived listing all of the commodities and what are the prices to be regulated to be sold at. So, I mean this idea has been around a long time. But nothing is going to force the politicians to suddenly be magnanimous or find religion. They are always going spend more. They are always going to say vote for me, I will give you this, that and the other thing and I’ll let somebody else pay for it later on. And that is the kind of system we have. So, gold is more of an independent vote so to speak, that the main advantage of gold is that it’s at least movable. Those fleeing Germany and Russia have found that out. You can have a very nice house but you cannot take it with you. So, gold has always just literally been more of a store of wealth. It is not money and that has always been some of these you know people that keep trying to sell it for some reason or another make up these stories that are just not true. It is a store value. It will rise in value against government uncertainty. And that is really what we are looking at.

Jim: Final question if I may, Martin, as you look forward over the next twelve months, what are your models tell you about the economy in the markets?

Martin: Well, basically I think we are headed into going into the end of 2015 is where we are going to get another big, I think, economic crisis. I think that is probably where the sovereign debt crisis comes to a head. But between now and then, unfortunately it just looks like more and more of a bull market for volatility. I think that initially we can still see gold consolidate a little bit. I would not expect it to take off dramatically yet. Largely a lot of people are still confused trying to figure out what is going to happen in Europe. There are people that want to be optimistic about it. But the old story of the difference between optimist and pessimist is that the two are on the top of the Sears Tower and they get blown over. And the pessimist immediately starts praying, oh my God, I’m going to die. And the optimist as he’s passing the fourth floor says well so far so good.

Martin: So, I think that pretty much sums up our problem. There are people that just do not want to admit that there are economic problems and unfortunately refusing to address them early on is kind of like cancer. I mean, you can cure it if you deal with it, but if you do not deal with it, and you wait until the very last end, it’s too late. So I think we are in a bull market of volatility. And that is what we are looking at, particularly over the next two years.

Jim: Alright well listen, Martin, as we close, you are having a world economic conference in Philadelphia, tell our listeners about it. It is going to be held December 3rd and 4th.

Martin: Yes, we are doing a … the first day is really more for people that are more professional traders. That is kind of an analytical training session more or less. The second day is world economic conference which I always enjoy because we have people flying in from absolutely everywhere in the world. They are coming from India, South East Asia, Japan, Australia, and South Africa, all of Europe. I mean we have participants coming from everywhere, and the main thing that I think a good international audience does it allows you to see the global economy right there in the room. You can see the capital flow as opposed to just these myopic domestic type things. And that is why I enjoy them. That’s why we call them a world economic conference because basically everybody comes from all over the world. And we cover the whole world, not just the United States. And basically show the interconnectivity of what is going to happen over the next few years and why.

Jim: And if our listeners want to find more about that conference or make reservations, can they just go to your website?

Martin: Yeah, they can go to armstrongeconomics.com or they can go to martinarmstrong.org, and they’ll find details about the conference there that they can look at, and if you want to send an email to armstrongeconomics@hotmail.com, and we’ll be glad to forward the details of that. And I do not know what seating is left yet but I am sure somebody will take care of it for them.

Jim: Alright. We’ve been speaking with Martin Armstrong from Armstrong Economics. You can find out more about Martin’s work, his blog, by going to his website armstrongeconomics.com. Martin, I want to thank you so much for joining us on the Financial Sense Newshour. I hope you’ll come back and talk to us once again.




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hoaky
post Posted: Sep 27 2011, 09:48 PM
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This actually made an appearance on the 730 report tonight. Worth 3min of your time if you missed it

BBC Speechless As Trader Tells Truth: "The Collapse Is Coming...And Goldman Rules The World"

http://www.zerohedge.com/news/bbc-speechle...man-rules-world


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mullokintyre
post Posted: Sep 27 2011, 06:04 PM
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Below is a most excellent summary of why we are still heading for GFC Mark 2. If the Geman parliament rejects merkel's bid for the Bundesbank to provide funds for the EFSF, it may well be the trigger. And of course, the ridiculous situation of some of the bailout recipients providing over a third of the money to bail themselves out is just icing on the cake so to speak. Be parepared rfor the banks(including OZ ones) to have anotheer freefall.
Mick
QUOTE
As far as Europe is concerned they talk in telephone numbers when it comes to securing bailout money. Where oh where would the ECB get €4 trillion? Less than 48 hours ago Olli Rehn was sprouting that as soon as the region’s governments confirm new powers for their 440-billion-euro fund (EFSF), attention would turn to how to get more impact from the existing money, he went on to say that they needed to find a mechanism that could leverage that money at least 5 times but added they had not worked that out yet.



As I said a month or so ago, the money that was proposed for the EFSF was to come from pledges made by the 17 countries that formed the EU, however approximately 37% of that money was to come from the very countries that headed the list for bailouts. This is such a mammoth balls-up you could be forgiven if you thought you were watching re-runs of the Keystone Cops, and as you rightfully point out Dave, Merkel has yet to give approval for the July resolution for the 15th , or whatever it is, original bailout and if memory serves, that is only for about €8 billion.



As we have discussed on many occasions, the problem isn’t so much with Greece, its with the banks, the top two banks in France, BNP Paribas and Societe Generale have assets and liabilities that are 3 times greater than the French GDP and that doesn’t include the off the books derivatives that have been marked to model rather than mark-to-market.



As of yesterday the one year Greek Bond was yielding 135%, that would suggest a bondholder haircut in the case of default at around 65% and I think the bond market is being conservative there. It certainly is nothing like the 21% the banks have estimated, so on know exposure to Greece the French banks alone would suffer a 40-50 billion euro loss and I suspect that is nothing in comparison to their potential derivative losses.



I want to show you the quarterly report from the Comptroller of the Currency on U.S. bank trading and derivatives for the second quarter of 2011 (see attached) what you will see is that 5 banks in the U.S. account for 96% of the U.S.$250 trillion in outstanding US Derivative exposure.



The 250 trillion is made up of 204 in interest rate swaps 26.5 in FX 15.2 in CDS and another 3 in odds and sods. What you will also see is that banks exposure is up 5.3 trillion from the first quarter – what happened to Too Big to Fail?



I know that everyone (or most) will say that you have bilateral netting which eliminates net bank exposure almost entirely .Hello, anyone hear the name AIG? For goodness sake that was only three years ago and I will guarantee that there is more than one AIG around today and this is happening in a country where oversight and regulation are supposed to have improved 10 fold since the GFC, so god only knows what the risk in Europe is.






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