Monday, November 29, 2010

The Great Irish Robbery

Details are just out on the Irish "bailout", and they're pretty painful if you happen to work for a living in the Emerald Isle. From where I'm sitting, it looks like the "troika" (EU, ECB & IMF) have literally robbed the Irish National Pension Reserve Fund, which acts as a backstop to all Irish pension funds. It has a value of €24 billion. Of this, eight billion is already "invested" in Irish banks. Of the €16 billion left, the troika has determined that €12.5 billion is to go directly into Irish banks, with the troika providing another €22.5 billion for the banks. Another €50 billion will be lent to the Irish Gov't, which is to provide the banks with sufficient funds to avoid going belly up. All told, the troika has agreed to loan Ireland and her banks €67.5 billion (only after emptying the pension fund) at an interest rate of 5.8%, a rate that is higher than was given to the Greeks six months ago. Given that Ireland is about to enter into a Depression and that the Irish Gov't is being held responsible for the solvency of these banks, this actually isn't nearly enough, especially as Ireland's economy (and thus tax revenues) begin declining.

In the last year or so, the ECB has provided Irish banks €130 billion in loans to keep them afloat. The troika has informed Ireland that this support will be ending as well.

Oh yes.. and the troika demanded Ireland's government enact a new "austerity" budget. Amongst the things included in this budget were slashing the minimum wage, 24,000 job cuts, raises in taxes amongst all income groups and slashes in services provided to the poorest amongst the Irish.

What of the (mainly German and English) bondholders of these banks.. do they get to feel the pain ? Of course not.. 100% guarantees across the board. Restructuring is still not negotiable.

All of this.. why ? To support Irish banks which foolishly lent out waaayy too much to waaayy too many, especially in the area of real estate. But more accurately, it's to protect the German, English and other banks which are very heavily invested in Irish banks. Were the Irish government to simply walk away (ala Iceland) it might cause a catastrophe for some very large banks on the Olde Continent.

If I were in Dublin, I myself would down a few pints of stout and join the protesters. One day soon enough, the people of a nation will have enough of this robbery on behalf of the banksters and put an end to this. They in fact maybe already awakening. On last Thursday, there was an election in Donegal, an Irish county where the Fiana Fail Party of PM Cowen has always won. The result ? Fiana Fail was flailed by a two to one margin by the Sinn Fein Party.. yes the very same party that is arm in arm with the IRA. The day after the election a couple of Sinn Fein MP's met with the IMF delegation.. and told the delegation they were neither needed or wanted in Ireland. The AK47 round across the bow I dare say. Then on saturday, an estimated 75,000 Irish marched against the bailout.. whilst small for America, this in fact amounts to roughly 2% of the population. Here in the States, that would be the equivalent of having six million people march to the White House. Another Irish Rebellion at hand ? If so, it's d@mn sure for the right reasons. This article in the Irish Times says it all:

Update: Having just read an article from Paul Krugman, who gets absolutely everything dead wrong, I find myself in agreement with his post re: Ireland. The End is Nigh !!

Monday, November 22, 2010

Irish misery and viva Correa !

Well today the Irish situation was "resolved".. an IMF/EU bailout, with the UK and Sweden also kicking in some funds. Champagne bottles are popping with the good news. Equities and commodities are rising; Eurocrats everywhere are giving themselves high fives. Now was'nt that easy ?

Indeed.. except for the people expected to pay for this. The government of Ireland, like Greece, Iceland, Ukraine & Latvia before it, has agreed to give an ever larger portion of their budget to prop up rotten banks.. at the expense of social services and government employee wage slashes. In Latvia & Iceland, this has led to a deflationary depression where their economies shrink by at least 25% and possibly more. Greece is heading in this same direction. Worse, when their economies shrink, these governments will be forced into yet more slashes of services and wages as their revenues don't keep up with projections. It's like taking more and more plasma from a man who's losing weight.

In one respect, Ireland did actually win.. the Eurocrats were hell bent to make Ireland raise it's corporate tax from it's (EU low) rate of 12.5%, thus keeping Ireland competetive and able to attract more businesses to it's shores. This remained intact. Indeed Ireland has a host of new pharmaceutical industries about to ramp up and looks to be a good candidate to keep it's boat afloat. But it was a small victory. In the end Ireland parted with part of their hard won sovereignty and condemned their people to a decade of indentured servitide in order to bail out banks.

At some point, the people of these nations will have enough of this and will either elect or install somebody who will essentially flip off the bankers. Has this ever happened recently ? Why yes it did. Tiny Ecuador elected a Belgian educated economist and leftist Rafael Correa, in late 2006. His announced priorities were to increase social spending at the cost of debt repayments. In 2007, Correa immediately began threatening to default on Ecuador's debt. He declared these debts illegitimate due to them being induced by corrupt regimes, threatened to sue them in international courts and other actions. His intent was to get them to accept restructuring, and it worked.. Ecuadoran debts were substancially reduced. I'm still looking for the exact figures, but my understanding was that debt was reduced to something like 1/10th of face value.This was an important point. In the 1980s, Alan Garcia of Peru simply stopped paying.. and for a while it worked. But after a couple of years, Peru had to come back to the markets hat in hand, long after Garcia was gone.. with those debts intact. Correa's successors will not have debt hanging over them irregardless of whatever else he accomplishes.

At the end of the day, what Correa did has to happen elsewhere, be it by forcing them as Correa did, or by simply halting payments as did Peru. I'm aghast at what I've just written.. I sound like a revolutionary.. and in America I would be considered a "righty". But sadly mathematics don't lie.. these nations are entirely unable to pay. It's only a matter of when and how for a long list of nations, mainly in Europe.

Sunday, November 21, 2010

If I were King...

C'mon everyone.. we've all thought about it.. just admit it. Tomorrow morning, at 8am sharp, Obama and the entire US Congress, along with Ben Bernanke, arrive at you royal chamber and upon bent knee acknowledge you as their sovereign, ready to serve. But.. what would you do ? Here's your chance to write three Amendments to the US Constitution. Here's mine:

Currency Amendment: The nation's currency shall henceforth be the responsibility of the Currency Board. Every four years each state shall elect one member of the board by an election of the people. The Currency Board shall determine the amount of growth in the nation's GDP each quarter from a variety of sources. They will then monetize 1/10 of this amount, to be divided equally among all adult citizens and sent in the form of a check to said citizens. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment.

Leveraged Transaction Ban: Henceforth, all transactions involving banks, stocks, bonds or any other financial instruments shall not use leverage. All financial transactions shall be fully funded. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment in every instance.

Government Debt Ban: Henceforth, all levels of government.. state, federal & local.. will be banned from incurring debt, be it actual or implied. A vote of 4/5ths of the people shall be required to overturn any provision of this amendment in every instance.

C'mon folks.. give it a try.. I'm curious to see what others have in mind to do as King..

Tuesday, November 16, 2010


Well the escalating crisis in Ireland has gone unsolved; fellow EU member states are pushing the Irish Gov't to accept a bailout. The Irish, who indeed have the cash to endure until next summer, are resisting becoming wards of the IMF and thus condemn it's citizenry to indentured servitude. But make no mistake.. the situation is unbelieveably bad. Irish banks are wildly overleveraged and hemorraging badly, with the Irish state guaranteeing the debts. To put this in perspective: Here in the US, our Gov't borrows one dollar for every three it spends. Ireland's Gov't has revenues of roughly €36 billion.. with projected expenditures of €87 billion, so in effect they have to borrow five out of every eight dollars they spend. Worse, the interest rate is hitting all time highs.. today {again} the Irish Ten Year Bond settled above 8%.. which essentially means Ireland is unable to borrow on the open bond markets. The reason the EU is putting pressure on the Irish to accept a bailout is out of fear that the Irish will simply default.. and this would be insanely bad for European banks, beginning with the ECB itself, which has been lending huge sums to Irish banks, which then turn around and purchase Irish Govt bonds, which are then repo'd back to the ECB. For perspective on just how much the Irish Govt (and their banks) owe foreigners, the figure put out by the CIA just last year lists Ireland's External Debt at $2.287 Trillion {this compares to Greece's $552 billion}. And yes.. Ireland is a small country and this equates to.. get this.. $515,000 per Irish citizen:

Speaking of our good friends the Greeks, a new report out by Eurostat (they do the accounting in the EU as well as national governments) states that Greece's statistics were.. shock.. wrong for a fifth (or sixth ?) time and that the situation is.. you guessed it.. much worse than what the Greeks are saying it is. Eurostat said that the Greek Gov't deficit is 9.6% of GDP (right about what ours is). They also revised the 2009 figure to 15.4%. These figures are well above the EU bailout guidelines. Saving Greece looks increasingly like an open ended commitment instead of the three year plan they all greed upon. But.. will the Greek people put up with more austerity in order to pay off bankers ? That's a big if in my opinion.

Then we come to Portugal, who is waiting on the sidelines for their turn at the bailout trough. Portugal's Finance Minister Dos Santos said yesterday: "The risk is high because we not facing just a national problem. It is the problems of Greece, Ireland and Portugal together.. this has to do with the stability of the Eurozone, and that is why contagion in this framework is more likely.. markets look at this together because we are all in the Eurozone". Mr. Dos Santos hit the nail squarely on the head; look for Portugal to follow Ireland at the EU bailout trough. Portugal's budget deficit last year was 9.7% of their GDP, roughly what our is this year. This year they were to slim this down to 7.3%, but this is looking very unlikely. The markets are thusly punishing Portugal, though not nearly as badly as Greece and Ireland.

But will the other Eurozone members be there to support their brethren ? Today Austria came out and said that since Greece did not meet their budget targets, Austria will not be participating in another Greek bailout package. Within the hour, Finland was rumored to have nixed any aid to Ireland. This was very badly timed to say the least on both of their parts, and a very ill omen. At the hour of greatest need for unity, it appears a few links in the chain are weakening.

The EU's President, Herman Von Rompuy, had this to say yesterday: "We're in a survival crisis. We all have to work together in order survive with the Eurozone, because if we dont survive, the European Union will not survive. But I''m confident we will overcome this". Unfortunately, the Austrians and Finns missed this speech.

Any solution will require large amounts of cash to be made available. In the past, the call was made across the Atlantic to Ben Bernanke, who then opened up what are known as "swap lines", which essentially amount to us printing money to help the EU. In addition, the US is on the hook for what amounts to 20% of any IMF bailouts. Were the EU to make the call again, they might not find us nearly as accomodating; it would put enormous pressure on Bernanke and Obama, though in the end I see them riding to the rescue, but not with the support of the Republican House of Reps, where opposition to this would be intense.

We are slowly approaching a critical moment in the EU. In the end, I see Ireland and Portugal getting bailed out, the US opening the swap lines again and the financial system as a whole surviving this mini crisis. But if Spain and her 9.3% of GDP budget deficit were to falter, the odds of success drop below 50% in my very humble opinion. Given enough time and the fact that none of these nations can solve a problem of debt with more of it in combination with austerity, the chances of the Euro surviving are grim indeed.

In addition to the misery on the Olde Continent, something wierd is happening here; the Muni Bond markets, perhaps spooked by the impending bankruptcy of Harrisburg PA, are seriously tanking.. over 10% in two days:

Sunday, November 14, 2010

Ireland bites the dust

This last week, Ireland's benchmark ten year bond rose to over 8.8%, which means essentially that nobody is willing to buy Irish debt on the open market. There were rumors Ireland was in talks with EU officials for a bailout package. As we speak, only the ECB is loaning money to Irish, Greek and Portugese banks, which then purchase their own government bonds courtesy of this ECB funding. The ECB will not purchase these nations' debts outright, something that is happening with abandon here in the States. But the ECB risks inflation if done to extreme, which the Germans hate.

How did this happen ? In a word, a property boom and bust. Anglo Irish Bank, who's debts were guaranteed by the Irish Gov't, went waaayyy too deep into overpriced mortgages, and the Irish state is now paying dearly for this. Last year, Ireland knew it was in trouble, and did what nobody, especially Greece, did.. they instituted severe budget cuts proactively to nip the crisis in the bud. For most of this year, Ireland was looked at as the poster child for budgetary discipline, a role model. The cuts were indeed severe; most public servants took an immediate 15% cut in pay, there were layoffs, pensions were slashed. It worked; rates on Irish Bonds came down nicely; Greece became the problem child and the world simply forgot about the Emerald Isle.

But of late two things have crept up to bite the Irish: First was the announcement that Anglo Irish's losses were dramatically higher than previously reported, thus making the Irish state responsible for far more than previously thought. Second was from the mouth of Angela Merkel, Germany's Chancellor, who put forth the suggestion that when sovereigns and banks go under, the bondholders should accept a part of the haircut and not simply throw it all on the public. It also seemed like a blueprint to change the EFSF (see below). This particular statement had the effect of spooking bondholders, who began demanding a higher interest rate in response to their increased risk. And the usual suspects.. Greece, Ireland and Portugal.. have been paying the price.

As a result, there are increased concerns that the EU's bailout mechanism, called the European Financial Stability Facility {aka EFSF} could be called in to save the day. This was the $440 billion rescue programme announced in May at the height of the Greek Crisis whereby the governments of the EU all agree to cough up a percentage of the cost of the rescue. The problem is, these things take time to do.. parlaiments don't act within 24-48 hours. Worse, many of these nations are themselves in serious trouble.. I have serious doubts that Spain, Greece and Portugal will willingly cough up tens of billions to save the Irish state, leaving the EFSF burden to be increased on Germany, Holland and other better off Germanic states. This will not sit well in Germany to say the least. Chancellor Merkl walks a fine line; she knows her own people do not like bailing out irresponsible and corrupt governments.. yet she herself knows the possibly cataclysmic consequences of failing to do so. Not only is it these nation's governments that are in trouble, it's also their banks and their state and local governments as well. Irish banks have borrowed over $10 billion from the ECB in just the last month alone.

Another concern is the amount of risky loans (Greek, Irish, Portugese) the ECB is taking on. After all, the ECB is a bank, and it in theory can fail like all others. These concerns have led the Euro to tank this week, going from above $1.40 to under $1.37 at one point. Portugal's bond rates are also creeping up, despite a tough new austerity budget announced just last month. In addition, this came out this morning in Portugal: "Portugal Foreign Minister Reportedly Warns On Euro Exit LISBON—Portugal may be forced out of the euro zone if it fails to tackle its economic challenges, the country's Foreign Affairs Minister, Luis Amado, was quoted as saying in an interview with local weekly Expresso. At some point, the people of these nations will, in their own way, protest the coming Depression. The danger here is that at some point, one of these nations will elect a leader who will simply say "Sorry guys.. we're not gonna pay". Iceland did this just this year in a special election, where over 90% of Icelanders said "No" to paying back some of the money to England and Holland. They then chased their PM out of the parlaiment building. As Ireland and Portugal near the Keynesian End recently reached in Iceland and their version of The Depression sets in, their leaders need to reread their history books on the storming of the Bastille.

So far, as its only Ireland and Portugal, its containable. But should this spread to Spain in a serious way.. well.. I'll let Ambrose give you a scenario:

Thursday, November 11, 2010

Veterans Day

When I was a handsome lad of 20 and in Navy Hospital Corpsman School, our CO announced that all of us would be doing three or four day stints on six different wards at San Diego's old Balboa Hospital. The first ward I went to was the burn ward. I did'nt do much, but noticed what a howling torture burns are, especially the daily removal of gauze from the burned skin. The unit had six Marines, all of whom got their wounds in Beirut when they happened to be in the barracks blown up by a jihadi car bomber. Over the next few days, I got to know the patients in the unit as people. Most of these guys were seriously maimed and would never lead productive lives, never know the warmth of a wife at night, never hear the pitter patter of rug rats. I was never in any combat, but nonetheless it struck me that these guys had sacrificed everything they had and would ever have for that mission. Whenever I hear people describe sacrifice, I remember the burn ward and know in my heart what real sacrifice is all about. To my mind, the most important of all holidays is not Christmas, Thanksgiving or Labor Day, yet these days are paid days off at my employer. Today was not. I was saddened that so many of my co-workers had no idea it was a holiday today; everything was open, including our office. Most just shrugged their shoulders and went about their day's work. Far too few of us have seen what I have seen. The only "Happy Veterans Day" I got was from another vet in the office. I fear that their sacrifice is being watered down in our nation. As for me, I remember.

Tuesday, November 9, 2010

Ben's Last Bullet

Watching The Fed is at times rather like watching the Vatican; waiting for the lofty Cardinals to let loose the white smoke, signaling a decision has been made. There is much politicking within the hallowed confines of 20th and Constitution, and each Chairman operates differently. From what I've read, Greenspan was rather like a dictator, allowing no real dissent, and he had enormous power in his time and would easily overcome any real internal resistance quite easily. I've read Bernanke, who was a Princeton academic before taking the baton from Greedspan, is more like a Chairman of the Board, listening intently to dissenting voices, but in the end doing what he wants. "Fed Watching" has become something of a skill, rather like "Palace Insiders" hopping around Buckingham Palace. Inside information obviously helps, and so the first amongst equals in this new arena is the WSJ's Jon Hilsenrath. The Fed quite obviously wields enormous power, and is indeed well worth watching. Not only do the internal politics play a role, but external politics as well.. pressure from the President, the Chinese, as well as economic factors such as the serious signs of deflation that were appearing this last spring. Consider me a rank amateur, but one with a blog, and so here I go !

It's my assertion that the winds of change are approaching hurricane strength. The elections in the US will bring a Republican majority to the House and gains in the Senate. The House Subcommittee that oversees The Fed will be chaired by Bernanke's harshest critic, Rep Ron Paul (R-TX). Ron Paul's son, Rand Paul, has won a Senate seat in Kentucky and has promised to stop the spending spree in DC by filibustering any attempt to raise the debt ceiling. Come January, there will be a couple new voting governors of the FOMC, all of whom appear to be hawks: Mssr's Plosser, Fisher and Kocherlakota, who will join noted hawk Thomas Hoenig from the KC Fed. The hawks want an end to money printing. They are also becoming more vocal and more media savvy.. this morning comes a report from the Dallas Fed that their President (and new FOMC member) Dick Fisher, said in an interview something quite startling and in reality unconstitutional: "For the next eight months, the nation's central bank will be monetizing the federal debt". Along with it, he passed a warning shot: "Here is the message: The Fed is going out of it's way to be a good citizen. It's time for Congress to do the same". Fisher will get an assist from Rand Paul and the newly elected Republicans, and well they should. No nation can continue to borrow 1/3 of it's entire budget forever and fill the void with printed money.

Money printing has a few drawbacks, among them is that it devalues the worth of US Gov't Bonds as well as the value of the currency. Our largest creditor, China, is none too thrilled with watching their $2.1 trillion in US dollar assets being devalued time and again. A few high ranking Chinese officials have openly advocated selling these assets lest they become even more devalued.. and were they to do this, it would be an utter catastrophe for the US. During the 2008 Lehman Crisis, Russia did just this and was urging China to join them in sinking the US economy, which was indeed within China's ability to do, and still is. Bernanke, as well as the Obama Administration, will need to begin listening to Hu Jintao. So far this year the Chinese have not become net sellers of US Treasuries, but neither have they stepped up and bought them in large quantities.

Among the other drawbacks of money printing is that it makes the currencies of other nations go up in value, thus making them increasingly uncompetitive as their exports compete with US exports and our weaker currency. First and foremost amongst the nations hurt by this is Japan, who's currency rose to another record level versus the USD last night. Because of the economic straightjacket Japan finds itself in, they are not as able as we are to simply print money. Their exports will suffer as a result, and this comes at a time when Japan can ill afford it. The EU is also being hurt by Bernanke's printing presses as the Euro passed the $1.40 mark a couple days back, thus hurting their ability to export. Other nations have taken matters into their own hands. Brazil, Korea and Vietnam have all imposed capitol controls as a way to halt the rise in their currencies versus the Dollar, and a few have done so with verbal broadsides.. notably Brazil's Finance Minister at the G20 Meeting, and rightly so. Canada and Australian dollars have reached parity with the USD this year as well for the first time.

Because of all of these factors, it's my humble belief that when the effects of this money blast begin to wear off this coming spring and summer, Bernanke will not be able to do a repeat performance. Bernanke will issue pages and pages of threats and hot air.. which actually do have an effect.. but I don't see him overcoming the internal and external opposition. The chamber is empty now, and next summer the deflationistas might yet be proven right.

Monday, November 1, 2010

The Big Week

In thinking about what I was going to post this morning, the two obvious hot topics came up: the US mid term elections and Ben's upcoming QE2 on Wednesday, both of which I'll cover below. But as I looked at the morning's financial news, something so astounding and right jumped out at me. The Governor of the Bank of England, Mervyn King, has proposed changes so astounding that it quite obviously made my headline. The good Governor has proposed four reforms:

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.

2. The Volcker Rule: enforcing the breakups of banks into standard and speculative arms.

3. The Kotlikoff Rule: forcing banks to match each pool of risks with an adequate reserve of capital and preventing losses in one arm from spilling over into another one.

and the duzzy:

4. "Eliminating Fractional Reserve Banking explicitly recognizes that the pretense that risk free deposits can be supported by risky investments is alchemy. If there is a need for genuinely safe deposits the only they can be provided, while ensuring that cost and benefits are fully aligned, is to ensure that such deposits do not coexist with with risky assets"

To wit: In the current system we all have, for every dollar deposited in a bank, the bank is entitled to loan out 10 dollars. This produces what's known as a 10-1 leverage ratio. If the bank therefore loses 1/10th of their loan portfolio, the bank is toast. In Europe, this figure approaches 40 and 50-1. In bigger US banks, the ratio is about 25-1. This system is how we hopelessly indebted ourselves. King's proposal would eliminate this.. for every dollar in the bank, the bank can loan out only that dollar.

Back here in the US, Ben Bernanke has talked about going the exact opposite direction: "The Federal Reserve believes that it's possible that, ultimately, it's operating framework will allow the elimination of minimum reserve requirements, which impose cost and distortions on the banking system"

My belief is, quite obviously, that fractional reserve banking must end, as do all leveraged transactions. It's these two things that blew up Wall Street.. and the problems are still there. The current system allowed our nation to hopelessly indebt itself. King's solution, if imposed, would make it impossible to so indebt ourselves. For even suggesting these things, I believe Her Majesty should Knight Mervyn King. He probably recieved an ugly text message from Ben this morning.

Which brings us to Wednesday morning.. Ben Unleashed. The question of the day.. how much. Ben's idea is to do it BIG TIME. But according to his mouthpiece {Jon Hilsenrath of the WSJ} he seems to be running into some serious resistance from the other Fed Governors and possibly China, who owns over $2 trillion in USD denominated assets and would'nt like to see then depreciated by 10% just this week. So.. my fearless prediction: $600 billion over the next six months, with a note attached saying that more maybe necessary. Look for Japan and others to either pick up the pace of money printing to keep up or impose yet more capitol controls. At the end of the day, this money has to go somewhere.. and the stock markets are the likely recipients. But none of this will actually trickle down here to us serfs. For us, the price of gas and food will continue to creep northwards and the unemployment rate will remain stubbornly high. For us, there is no recovery. For Wall Street and Government, however, the recovery is going splendidly.. bonuses and benefits have never been better.

Now onto the last hot topic.. the US elections. It's known here in the States that the Republicans will body slam Obama and the Democrats; it's a near certainty that the US House of Reps will go over to the Republicans, with a slim chance of the Senate going over as well. I fully believe this as well.. the House will flip, but the Dems will maintain a slim majority in the Senate. This will bring about a few changes: first, there will be no more stimulus or bailouts. Second, Tim Geithner is likely going to be sacrificed, and rightly so. There is also the chance that ObamaCare will begin to be hacked down piece by piece.

Can we make Mervyn King our King ?