Sunday, July 22, 2012

Updates Syria & Spain

This last week saw some serious events take place in both Syria and Spain, and none of these events bode well for the people of these nations.

  In Syria earlier this week, a large bomb went off at a meeting of Syria's highest officials, killing a number of them. Among the deceased were the Minister of Defense, the Interior Minister and Bashar Assad's brother in law Assef Shawkat, who most people understood to be the regime's shadowy enforcer. The Syrian opposition also launched a coordinated attack in several regions, including the heart of Damascus, right before the bomb went off. In the last couple of days the regime has forced back some of the rebel offensives, including the one in Damascus. The counter offensive is being led by Bashar's ruthless, hot tempered younger brother Maher, who is head of the infamous 4th Division. Maher is so hot tempered that he was reported to have shot a family relative at supper for a percieved insult as his entire family ate supper. The rebel offensive in other areas is actually making progress and numerous reports of entire Army battalions switching sides as they advance are probably accurate. The UNHCR on Friday reported that some 40,000 Syrians fled to Lebanon once rebels took over the border crossings. Numerous crossings on the Iraqi, Turkish and Lebanese borders were reportedly overrun, though reports today suggest the regime has taken some back. The UNHCR also reports that Syrian banks are running out of money, which if true is a really bad sign for the government.

  My take is that Assad is not yet done, but this week has done a lot of harm to confidence in his regime. And its this confidence that matters most-- in a civil conflict, the one thing you don't want is to be caught standing by the losing side. The Russians and Chinese still are backing Assad diplomatically-- but that is not where Assad needs help. War is an expensive proposition-- vehicles break down, tanks get blown up, soldiers get wounded, weapons wear out and jam, ammo, gas, pay for the soldiers and thugs-- and the Syrian economy is essentially crumbling under the strain. This summer's drought in the US and the ensuing rise in grain prices will also be felt by the Syrian people. Unless Assad gets a lot of financial aid-- and he might well get it from Iran or Russia-- his regime probably won't last another six months.

  Many people are probably wondering why Syria matters. After all, they export only tiny amounts of oil. But it matters because Syria is ground zero in a bigger power struggle-- the one between Iran & Russia on one side and Saudi Arabia, Qatar and Turkey on the other. Syria borders Israel and Lebanon, where several minor wars have been fought recently. Tarsus, Syria is home to Russia's only Mediterranean sea port. Simply put, it has the potential to morph into a much bigger war as well as a sectarian bloodbath of unparalleled proportions.

  In Spain, a bailout was announced for Spain's banks-- and with it came some ugly terms from the EU as outlined in my last post. There were protests and riots in a few places, but all in all it was'nt all too serious. One thing the Spanish government did this week was to announce a bailout fund for it's states {called regions} of some $25 billion. As of today, nearly all of Spain's regions have applied for bailout funding from this fund. On Thursday, the Spanish government held an auction for 5 year bonds-- and the auction failed. By Friday afternoon, Spanish bonds were sinking like the Titanic (ie.. interest rates demanded by people loaning to Spain were shooting upward}. They have been going up and down wildly for a couple months now, and its entirely possible they'll head south again this week. But another week of this and a second, bigger bailout will have to be announced to calm the bond markets. We're seen this all before-- in Greece, Ireland and Portugal, when bonds get to a certain point there seems to be no return, and I fully believe we've reached this point for Spain. Italy's bonds also sunk and are not far behind Spain. If you're getting that Greece feeling, you're not alone. It will be most interesting if Italy will be able to participate in the next Spanish bailout-- and if not, how long France's AA+ rating will last. The best answer for Europe is for Germany and their Nordic cousins to exit the Euro; today's article by Ambrose actually outlines a way for this to happen. But will it ? Maybe-- but not until Spain bites the dust financially. Unfortunately, this very event might well collapse the entire Continental banking system before the currency conversion takes place. From Ambrose's article:

Wednesday, July 11, 2012

Spain's Punishment

  Over the last few days, the EU's finance ministers have huddled in Brussels to determine the terms of the $120 billion bailout of Spain's banking system. Many people, myself included, thought that Spain would get off lightly, especially given the support new French President Hollande seemed ready to give them. It was not to be.

  Lets remember that Spain's unemployment rate is 25% and rising. For those under 25 years old, the unemployment rate is already 52%. Yes-- half of all young people are unemployed. Probably a third of the remaining half are under employed. Spain's economy this year is contracting, and their tax revenue is in decline due to lower and lower sales tax revenues.

  About an hour ago,. the Spanish newspaper El Pais leaked the EU's terms:

* EU takeover of the Spanish banking system
* Calls for $80bln in losses for junior & hybrid debt
* A "bad bank" to wind down the banks losses
* On site raids by "inspectors"
* Rise in the VAT tax from 18% to 21%
* $80bln in additional "austerity measures"

  I have no earthly idea what the EU thinks it's going to solve by this. These measures will further slow down the Spanish economy, especially the spending cuts. These cuts will result in further unemployment and bank losses as yet more businesses go under. Nevermind that these terms are actually quite humiliating to a proud nation and its people. Worse yet, many of the "junior and hybrid debt" people, who just got shafted, are working Spaniards who will soon find out that their "safe" investments are a memory. The Spanish people, upon hearing this, have begun rioting in Madrid as I type this. Here's a chart out today documenting capital flight out of Spain, which is a huge problem that shows no sign of abating:

  At some point, a nation must decide whether it is worth it to save the bankers at the expense of the people. Rather soon in their own crisis, the government of Iceland decided to side with its own people. In a nation with unemployment already at Depression levels, I have to believe that patience is wearing very thin in Spain. When it snaps, my "Worse Case Scenario" becomes disturbingly probable:

Sunday, July 1, 2012

The Great Reset

  Well the EU Summit came and went, and the only thing accomplished was that the EU governments and the ECB renounced their senority on loans made to bailed out countries. This isn't a small deal, actually-- it will help Spain and others in the secondary bond markets now that the investors realize that if something goes wrong in these nations (like it did in Greece) that in any bankruptcy scenario their investments are now senior. That said, will this solve the problem ? No it will not. There are no EuroBonds. No Shared Banking System. No increase in the EFSF or ESM. Above all, there is no debt forgiveness. When I read the headlines, it said "Merkel blinks". But from where I'm sitting, "Frau Nein" held firm. Spain, Italy and the rest are just as insolvent as they were before the Summit. There was talk of a stimulus package, but Spain and Italy refused to do it unless Germany caved in and agreed to EuroBonds. Unbelieveable that beggars have indeed become choosers. I look for another "Emergency Summit" by mid-August. 

  In the end, these nations cannot hope to pay their debts; most cannot even hope to balance their budgets-- us included. Worse, due to the size of these debts and the weakness of banks globally {most big banks are still very badly undercapitalized, especially given the credit default swaps they've written}, there is, given enough time, very little chance the banking and financial system that exists today will endure. One day soon enough the world's economic system will be faced with a crisis they cannot fix with bandaids, hot air or empty promises. Spain or Italy are the most likely triggers. It's then that there will have to be a very serious meeting on what to do. One answer would be to print over the problem on a global scale; a sudden and massive devaluation-- a Plaza Accord on steroids. But this presents several difficulties, primarily that of credit default swaps that did'nt exist in the time of the Plaza Accord. Credit default swaps {or CDS's) are a form of insurance; many are written on interest rates and currency exchange rates as well as bankruptcy protection. For example I can get a CDS on a bunch of Italian Bonds I bought; the CDS will pay me money if the currency in which the Italian Bonds are written goes down by 10% or more. Worse, who on earth would buy a German Bond that pays 2% over ten years if the inflation of the currency in which it's written is 8% a year ? Then we come to the part where this sudden money printing brings inflation to the common people-- what if the price of gas went from $3.59/gal to $4.99/gal overnight ? Inflation brings people's family budgets to their knees and they begin defaulting on their debts. Many will panic and begin withdrawing their money from banks and stock. Overall, I believe that a sudden, massive currency devaluation might bring on consequences the central bankers did'nt forsee. Here's a chart on Wiki on credit default swaps and how much are written; take a look at how much is in Forex {currency insurance} .

  Insolvent nations, insolvent megabanks, insolvent Central Banks, unpayable CDS's written by the trillion-- this is not how to run a financial system, folks. But is it within the Wit of Man to some up with something better ? If so, how would we get from here to there ? Being rather overcaffeinated this morning and having made promise on last week's post to present my Answer To All, here we go.

  To begin with, lets look at when there was a really good, functioning financial system and how it all went bad. We don't have to look very far. When I was growing up in the 1970s, the financial system was much, much different than the one we have today. I clearly remember my father bemoaning the fact that he needed 1/4th down to purchase a house or a car. It forced him to do something he did'nt like: he was forced to live within his means-- indeed, under his means-- in order for him to save the 25% needed to purchase his house. In the Big Picture, the money he was saving was used as "Tier 1 capital" by the bank to expand their ability to loan to more people at the 10-1 loan-capital ratio of the time. The more money in the vault = greater ability to loan. This system worked beautifully from the mid 1930s to the mid 1980s. We as a nation were the world's largest creditor nation; we had a healthy banking system.

  Then came Alan Greenspan-- and with him, out went that stable financial system. Glass Steagall and 10-1 capital ratio were jettisoned. Banks went to 30-1 or more. In 2000, Clinton {with Greenspan's strong encouragement} signed laws allowing credit default swaps. Before long, people with horrible credit scores and no money down were getting homes and big banks were writing CDS's. Whoops.

And here we are.

  My idea is to get us back to the system that existed during my father's day. Stable, simple, one that forces people to save and live within their means. In other words, I want to turn the financial system clock back to 1964-- the year your humble author entered this world. How do we get from here to there with the system we currently have ? First off, there is no painless way-- someone's going to lose, and really is the big question here. My idea is to spare the common people at the expense of bankers, government and the investor class. Simply put, if the common people are made to pay dearly for the wealth of bankers, investors and government elite, many of them will grab pitchforks and take control of their local governments {city, county level}. If done in enough places, vast areas of countries become ungovernable. So here specifically are my proposals:

1. Immediately reinstate Glass-Steagall.
2. Immediately reinstate 10-1 Capital Ratio
3. Immediate debt forgiveness for everyone: personal, government, corporations.
4. No company will be greater than 2% of GDP in size-- if so, it will be broken up
    into many smaller entities.
5. Mortgages & Cars: Banks will renounce all claim to residential homes and cars
    not currently in their possession.
6. All Tier 1 deposits {savings, checking, CDs} will be guaranteed up to $100,000.
7. The Fed will purchase $600 billion in corporate bonds and bank CDs 
8. Constitutional Amendment banning public debt at all levels of government.
9. Ban on all forms of leveraged transactions, including commodity, stock, bonds.
10. Ban on all naked CDS's.  

  These actions will give our country a working, proven, stable financial system. It will give to the people about 100 million homes and 20 million cars-- a massive transfer of wealth from bankers to the common people so as to insure social stability. Losers ? The investor class-- many will see their pensions wiped out; their retirement savings will be gone as many people invested in government bonds and stocks. Many elderly will complain bitterly, and rightly so. But it was their generation that benefited most from the old system, which was designed by their generation. Heaping debt upon your children will not be part of my solution. The Chinese and other foreign creditors also complain loudly, but nations which possess 12,000 nuclear weapons do not suffer military attack due to debt default. The Chinese will move forward. With the American people no longer indebted by mortgages or auto debt, they'll be buying Chinese products like never before. 

  As for the banks, they will wake up the next morning and discover that they have no debts, but they do still have some assets-- the Tier 1 deposits, repossessed commercial & residential buildings. By 10am, The Fed will be purchasing large amounts of their CDs. They will be able to open their doors and begin loaning money again-- but due to the 10-1 capital ratio, will begin demanding 25% or more down on most loans. The people, no longer indebted, begin spending and saving more than before. The Fed's $600 billion jump start will help get capital to corporations to begin again. There would be a Depression for sure-- but with a stable, debt free  financial system in place and societal stability, I dare say recovery will come quickly, especially with a ZIRP policy in place by The Fed. 

  If the system does collapse, will anything like this see the light of day ? Never. Those in power never give up without a very ugly fight.

Update 7/7 9am: Mish posted an interview with an Australian economics professor named Steve Keen, who suggests essentially a QE for the public. His idea is to give all individuals $100,000. This money must first be used to pay down debt. If you are a frugal, debt free sort {or a wino in the alley} you simply get a check in the mail. My comment is that this cannot be done all at once {roaring inflation}; but if it's done over a five year period, lets say you get the money on your birthday each of the five years.. this could work very, very well for most and it would'nt simply punish those who save as my plan would. Implementing such a system would be an interesting proposition, however-- would there be an "administrator" who would pay down my debts and/or decide who gets how much ? I would also suggest that for those who earned less than $8,000 last year perhaps give them only a third that which would be given to those who work full time (unless it's debt forgiveness). One thing I'd add is that to avoid such problems from arising again we should implement my 10-1 leverage ratio hand in hand with any such giveaway. Here's the link to the video:

Monday, June 25, 2012

EuroSummit v20.0

  Yes folks-- this Thursday and Friday the European leaders will meet to solve the economic crisis for the twentieth time since early 2010, which since the last meeting {v19.0} has seen Spain and, as of today Cyprus, sucked into the vortex. This morning Spain formally asked for a banking bailout, and as the day progressed, so did Cyprus.

  I have complete confidence a solution will be found. After all, they were the last ninteen times. The markets will celebrate; stock markets will rise; fear will ease. Dom Perignon and congratulations will be passed around like dust in a Sahara sandstorm. People will turn the channel and catch up on Jersey Shore.

  It will look something like this: Spain's banks will get a bailout loan. Cyprus, too. There will be a "stimulus package" of about $150 billion {details coming "later"} and promises of stern response to any further crisis. In short, this will be nothing more than another bandaid and hot air on a system that has just lost it's foot to a landmine.

  Today a few noted columnists sounded the alarm-- many of whom have been doing so for years. George Soros warned that if the Summit was an utter failure, it could prove to be fatal to the Euro. Paul Krugman's article today was particularly dire, comparing today to not just 1937, but the far uglier year 1931, when a very similar situation which began with an Austrian bank called Kreditanstalt of Vienna went under and got the Depression really rolling. Here's the link to Herr Krugman's latest rant:

  This bandaid will buy time-- about a month or so. By mid August v21.0 will need to be crafted when they realize the amount allocated to save Spain is probably a fifth of what they really need and Italy begins showing signs of going under. Spain's economy will show further signs of economic decline, as will Italy. Portugal's economy will be literally imploding like Greece before it. Until such time as the powers that be realize that a Grand Reset is needed, this will continue. In the meantime, watch the price of gas. As it goes down, take it as a sign that the entire system is sicker and sicker as deflation sets in and demand recedes. I'm still sticking by my prediction that gas will go under $3.00/gal this year.

  One day soon enough {2013 is my guess} this farce will end very badly and very suddenly and we will all pay a dreadful price for the greed of bankers who were allowed to shred the laws enacted after the Depression to prevent just such an occurance via our under informed and over bribed politicians.

  Solutions you ask ? Unfortunately, nothing short of an entire systemic reset is needed here. The financial system is so complex, so overindebted in so many different forms that anything central banks and governments do will only delay the inevitable collapse of this bloated, diseased beast. My next post will be on what a sound financial system should look like instead of the one we currently have. Here's an article from Simon Johnson, former head of the IMF, on the complexity of it all:

Monday, June 18, 2012

Euro Faultlines

  This last weekend there were elections in a number of countries, with Greece and France amongst them. The Greek elections went as hoped, with the pro-bailout New Democracy Party winning. It's likely they're going to be able to form a government with PASOK and other pro-bailout parties. Champagne corks were heard near and far that Greece had saved itself from a terrible and sudden fate. My take is that Greece's timeline may not be sudden, but the terrible fate part is still unavoidable. Greece is going to literally run out of money in a few weeks; it'll be unable to pay Gov't wages. Unless there is a new bailout or a savior, Greece's date with The Keynesian End will come much sooner than they realize. I'm still standing by my prediction Greece will not see 2013 and be in the Euro currency. Today, the German newspaper Die Zeit reports that Chancellor Merkel today has nixed any further aid other than what has been agreed upon and refused to talk about another bailout package. When I was a kid, grandpa and his shotgun took a long walk with an old, sick horse and Valiant did'nt make it back from the walk. The kindest thing Germany could do is what my grandpa did.

  In France, President Hollande got a very nice Fathers Day present from his people in the form of a solid Socialist Party victory in Parliamentary elections. This election could very well have more implications than the Greek elections. It will make Hollande much less agreeable to Chancellor Merkel's approach; it will strengthen the Club Med nations' push to use the ECB as the primary tool to deal with the crisis. It appears that France has decided to align itself with it's Latin cousins and against their German neighbors. Unfortunately for France, this election will result in policies which are certain to hamstring France's economy. Amongst them are measures to punish companies that fire workers, reducing the retirement age, hiring 60,000 teachers and punishing companies that sell factories. These will certainly result in fewer companies starting up in France and a rush of firings before the new law comes into effect. Oh well.. once again Socialists must learn that simply passing laws does not mean that the finances needed for their laws will automatically materialize or that companies will keep their doors open.

  Thanks to the elections in Greece, the markets were expected to have a good day, and indeed started this way. But the Pain in Spain reared it's ugly head in the form of roaring interest rates on their ten year bond-- a sign from the market that the recent bailout is not nearly enough, and they're right. Spain's ten year bond reached 7.28%, though it did finish the day at 7.15%. Most market commentators know that when a nation reaches 7%, the end has come financially. To be sure, Spain reached this plateau months ago and wrestled it down-- and might be able to do so again. My make here is that at some point if this continues, certainly before it reaches 8%, the ECB will have to step in and begin purchases in order to buy time for a reformed bailout. I give it three weeks maximum before the ECB is forced to act. Here's Ambrose's take:

Update Tues 6/19 5am: Spain just held a bond auction, and the results were brutal. A month ago, investors charged Spain 2.98% for 18 month loan. Today it went up to 5.074% for the same loan. That's really bad folks. Thursday Spain is going to sell longer termed debt and I suspect the result will be the same. It appears Spain has hit the wall and is essentially unable to borrow in private markets. A bigger bailout is needed. 

Wednesday, June 13, 2012

A Glimmer of Hope

  It appears that in Germany, there is increasing talk of passing something called the "European Redemption Pact", a fund that would be used to pay down excess debt in Eurozone countries. The specifics are that all debts in excess of the Maastrict Treaty limits, which is 60% of GDP and now totals a staggering € 2.3 trillion would be paid by issuing 20 year bonds (guaranteed by all EU nations and vast amounts of gold) and the money raised would be used to pay down these excess debts. The bonds would be paid down by a special EU wide tax.

  Several smaller German parties are on board with this; there is whispers in Berlin that Chancellor Merkel will drop her opposition to this so long as certain conditions are met. Some of this has to do with the other EU Treaty awaiting passage, called the Fiscal Compact, which mandates that EU states balance their budgets and actually has mechanisms in it to enforce this. Several German parties will not pass the Fiscal Compact without including the Redemption Pact. I can see a scenario whereby these two agreements are introduced hand in hand and could pass the various nations' Parliaments. Officials at Germany's Constitutional Court say that these two measures are both constitutional and would likely not be challenged. Passage of these two measures in the Club Med nations would be overwhelming as they would be the beneficiaries. 

  So far, Mrs Merkel's party, the Christian Democrats, are stubbornly against this, and not without reason. But the winds are beginning to change here; there is finally a sense of just how bad things in Europe really are and what a banking collapse would mean for all of Europe's people. Today's Italian Bond auction was absolutely brutal, nevermind it being inherently unfair that Italy has to borrow money at 6.2% and loan it to Spain at 3%. The matter is coming to a head very rapidly.

  The Eurozone Crisis has been festering for three years now with no real solution in sight. The two Pacts-- the Redemption Pact and the Fiscal Compact, enacted in unison, would likely be enough to solve the crisis-- as long as these nations honor their commitments in the Fiscal Compact and balance their budgets. We'll see. But for the first time in a couple of  years, I see a very real solution making progress. Hope springs eternal, no ?

Here is Ambrose's article on this:

Friday, June 8, 2012

Spain's Decaffeinated Bailout & Deflation

  This bailout was much different than the iron fist that they gave Greece and Portugal. In short, all Germany has agreed to do is to let the EFSF {Europe's underfunded rescue fund} to loan to Spain's bank restructuring fund, called the FROB. The FROB is backed by the Spanish Gov't. The EFSF loans are going to be superior to all other loans Spain has, meaning that if something bad happens, these loans get paid back first. It is at a pretty low interest rate, and so it does help Spain in the short term, sort of. It also does not force an austerity regimen or anything else onto Spain, a key demand of PM Rajoy.

  I see two problems here with this little operation. First is the amounts-- the initial pricetag is 40 billion, but almost nobody believes this. The likely total will be something like €200 billion, and in time maybe more. But the main problem here is that everybody who holds Spanish Gov't debt just went down a peg in the paying order-- it's called subordination. Spain also got downgraded by three notches yesterday by Moodys, after the bailout was announced. For investors holding Spanish debt, their investments just took a big torpedo. Some investors will have to sell their Spanish bonds because it is no longer above the A rating. Others will have to (or willingly) sell because of the subordination. Some traders will have to bail on trading Spanish Bonds because the downgrade means a higher margin requirement. Others will bail because Spain has essentially come out and said it needs help, a huge red flag. Yesterday China's Sovereign Wealth Fund, with a couple trillion Euro in their wallets, came out and said they're not going to be buying in Europe until radical steps are taken to change things. Another problem here is what is to stop the Spanish from borrowing to their heart's delight ? They can have their FROB borrow from the EFSF, and then have those banks helped by the FROB purchase Spanish debt. Yes-- a backdoor bailout. They will have to soak up a lot of Spanish bonds right away because of the wave of selling from the issues outlined above.

  Will this "unlimited line of credit" from the EFSF to the FROB work ? For a time, yes I think it will. But since only Germany, France and Italy are contributing to the EFSF now {and Italy's economy is also on the ropes lately} there will come a time when Spain will bleed the EFSF dry. 

  Yesterday Big Ben went to Congress and testified about the state of the US economy and gave hints on what he might do in the future. He said that at this time no action is warranted, but that he will be keeping an eye on matters. A few people have mentioned another Operation Twist, which I believe will do very little. Interest rates are already at historic lows; coming up with clever ways to lower them isn't going to do much good here. As the economy stalls and people's unemployment benefits end, there are just not many people who can borrow and spend. Because fewer are borrowing and spending, deflation is beginning to set in; the money supply is contracting. My guess is that Bernanke will do another Twist when the Fed meets later this month, and it will help for a few months. The markets will celebrate; the Dow and Gold will rally. For a little while anyways. The one thing Bernanke cannot do is to simply give money to the people, something he would dearly love to do. He can only manipulate the interest rates at which they get loans. Deflation's iron headlock is only beginning to show it's true power. 

Sunday, June 3, 2012

Beware the VIX

  There are several very big problems converging together right now-- Brazil's economy has now stalled. India as well, and they are having serious problems controlling runaway inflation. China's manufacturing index has gone negative. Here in the US, job creation has stopped cold in it's tracks. And in Europe, Spain's economic situation is deteriorating very quickly, so much so that a bailout is now being openly discussed this weekend. The cost of rescuing Spain's banks is now between $75-120 billion, and Spain itself cannot possibly borrow this amount on the open market without immediately causing a bond crisis. The problem is, nobody has enough money to bailout Spain. These will send Spain's Bonds plummeting-- unless the ECB quietly steps in, which it appeared to have done late last week. Bank runs in Spain are accelerating; the yield of the German, US and UK ten year bonds are at record lows as people and investors bail on Spain and stash their money into what they consider safe havens. Worst of all, the VIX-- a measurement of volatility and sometimes called the Fear Index, is creeping back up again, nearing 30. When the VIX rises above 40, something is going badly wrong. During the Lehman crisis it went above 80. Ambrose's article today warns that global lending has contracted at a rate since the Lehman Crisis. Unless something is done on a grand scale, I look for the VIX to top 40 again by week's end. For anybody looking to measure the danger level in real time, here's a link to the VIX measurement:

 Late last week I was convinced Bernanke would pursue another round of QE, but after a closer look, I'm not convinced reducing the interest rate on the US Ten Year from a record low of 1.45% to something under 1.2% would so much good. There is talk of the IMF stepping in to help Spain, and Bernanke himself could do so as well-- but doing either of these will be relentlessly attacked by the Republican opposition as a bailout of Spain instead of California. Look out for deflation and the continued sinking of commodities. For all who read this, if you see gas sink below $3.00/gal you should be afraid-- very afraid. Bernanke and the Fed meet again in a couple weeks; if the deflation train continues, I guarantee he'll so something. The problem is, we are now nearing what some call the Keynesian End Point and I fear that he has few options that will accomplish anything meaningful. 

Saturday, May 26, 2012

Spain's Problems Mount

  This week was a bad one for the EU and Spain in particular. First off, the cost of the bailout of Bankia just keeps going up. It began as a $4 billion bailout, then $8 billion-- and by late Friday had morphed into $24 billion. While not enormous, lets remember that the Fed's backdoor bailout of Bear Stearns cost $35 billion. For Spain however, this is a pretty big bailout-- especially coming on the heels of the really bad economic reports coming out of Madrid showing the economy actually declining. We're not sure where this will end either.

  On Wednesday as the Summit in Brussels was going on, Spanish PM Rajoy strongly urged that the ECB be allowed to step in and purchase sovereign debt, saying that their economy can't take much higher rates. Part of the problem on this was the last solution-- the last two LTRO's have loaded Spanish banks with Spanish government debt. When the value of this massive pile of debt goes down, the banks take losses. Last week, the value of these bonds went down, costing not only the Spanish state more money to service its debt but it's banks as well in these losses.

  Out in the real world in which we all live, Friday afternoons are very much looked forward to. In the financial world, it is just the opposite-- Friday afternoons after market close is when companies and nations unload their really bad news, which at this point is actually expected. Unfortunately for Spain, the Governor of it's biggest state, Catalonia, could'nt wait until market close to crap all over the markets. He announced that his state would need help from the central Spanish government to meets its obligations as Catalonia was essentially now shut out of the bond markets. Catalonia will need help in finding about $16 billion or so. The Spanish 10 year Bond immediately tanked, leaving Spains banks with even more losses thanks to the aforementioned LTRO, nevermind the Catalan State Bonds, which also tanked, producing another flood of red ink at these very same Spanish banks. All of this is happening in a nation who's unemployment rate is now 24% and who's economy is actually contracting.

  When {not if} Spain goes under, the EU banking system will be in serious danger of collapsing. In the meantime, don't be surprised to see Rajoy's request that the ECB begin purchases materialize or even another LTRO, of which there were market rumors last week. Another LTRO will simply enable overleveraged Spanish banks to borrow money and use it to purchase even more unstable Catalan and Spanish Gov't debt. The noose is tightening and the stool underneath is looking less steady.

Update Mon 5/28 1pm: Ambrose Evans today in his blog mentions that Spain's newspaper El Mundo is reporting that Spain no longer has the power to bring down rates on their 10 year bond. Today it went up sharply to 6.47%. One problem with this is that the 10yr Bond is now 4.5% above Germany's Bund, and when you get to this point, a market trading group called LCH, which determines what margins should be on all commodities, raises the margin on you to trade this commodity. This amounts to a margin call on all those who are long the Spanish 10 year. This is the point where many traders simply give up-- and they sell the Spanish 10 year, this exaserbating the problem. Ambrose also mentions that Spanish PM Rajoy has accepted the inevitability of a bailout. We're entering dangerous ground here. Don't be surprised to see the ECB step in and quietly purchase Spanish debt. Here's a link to Ambrose's blog:

Sunday, May 20, 2012

The European Fiscal Tourniquet

  Last year, in the midst of the Greek meltdown and Portugal's problems, the Germans {rightly} insisted that EU states take decisive measures to balance their budgets. On January 31st of this year, the EU agreed on what was called the European Fiscal Compact. This agreement makes it so that EU nations would be forced to balance their budgets by 1/1/14.

* This would have to be ensconed into the member states' constitutions.
* The treaty demands that an automatic correction mechanism be enacted in their constitutions.
* All states would accept the jurisdiction of the Court of Justice to verify the imposition of this rule.
* It requires all states balance their budgets by January 1st, 2014.
* The EU's High Court will be able to fine any nation that does not accept a balanced budget amendment in it's constitution. 
* Any nation which does not ratify this into it's constitution will be ineligible for any aid from the ESM.
* The treaty will enter into force if by January 1st, 2013 twelve of the seventeen EU states ratify the treaty.

So far, only Greece has ratified it oddly enough. Portugal, Poland and Slovenia have all passed it in one of their legislative houses, awaiting passage in the other one. Ireland is holding a referendum on May 31st on this treaty, and as of this writing it looks like it has a good chance of passage. I actually believe it will pass in time. It will be quite interesting to see if France will pass this with the election of Hollande. If this treaty does not pass, Germany will have it's excuse to head for the exits.

  This treaty presents several problems. First and foremost it ensures that the countries in trouble will be forced to apply another deflationary tourniquet to an already constricting economy. Greece's recent example of what deflation can do should be a huge red flag for these nations. For nations like Spain, it will ultimately be forced into a brutal political choice come late 2013-- exit the Euro or apply the tourniquet {assuming they ratify this. If not, then no ESM rescue and a bond crisis hits them very quickly}Other nations like Italy, Portugal and Ireland will also face this brutal choice. Some will do neither-- their governments will fall apart. I'd wager that more than one nation will end up like Greece and Belgium-- essentially without a government that can make a decision. This is not what markets want to hear. These adrift nations's bonds will be immediately punished by the markets, presenting a crisis almost immediately should a nation {for whatever reason} be unable to balance its budget. Damned if you do, damned if you don't. 

Monday, May 7, 2012

Spanish Meltdown & European Elections

  Yesterday elections in France and Greece brought new governments to power with different ideas on how to tackle their respective economic problems. In France, Francois Hollande, the Socialist candidate, came to power with the idea of increasing taxes on the wealthy and pushing the ECB into greater purchases of sovereign debt. The idea of pushing the ECB to purchase more sovereign debt would, in theory, weaken the Euro currency as ECB purchases amount to little more than printing money and loaning it to governments. This idea is vehemently opposed by Germany, who does'nt want to see their hard earned savings devalued and their loans to other EU nations monetized away. Angela Merkel openly supported Sarkozy, something she probably will come to regret. Hollande also promised a balanced budget by 2017, lower the retirement age to 60, and to hire 60,000 new teachers as well as increase taxes on those making more than a million per year from the current 46% to an absurd 75%. Sorry Mssr Hollande, but expanding the welfare state and raising taxes isn't going to work in a world where French businesses {and investors} can simply uproot and relocate to other nations who choose not to ruthlessly punish their success. Why would anybody start a business there with this mentality ? Answer: They won't.  They'll start their business in Poland or Ireland.

  In Greece, the two pro-bailout parties {Pasok and New Democracy} together got 149 seats in their Parliament. You need 151 at least to form a government, therefore they would need to get another of the anti-bailout parties on board. This afternoon, the New Democracy leader announced that he was unable to form a government. Next up is an anti-bailout leftist party's {Syriza} turn to try and form a government. This is unlikely to happen as they would need to get an ultra right party on board-- thats rather like Stalin asking Hitler to share Poland, and we all know how that ended. The most likely outcome is another election in a month or so, and in the meantime there will simply be no government. I'm not so sure this is all too bad; at least the crickets can't make anything worse than the politicians did. Will the next election produce a clear result ? Probably not. Oh well-- Belgium has been with out a government for a few years. Yeah this will end well. 

  Moving along to another socialist catastrophe, Spain today put out some economic numbers that were truly scary, even for a nation already used to Depression-era statistics. "The interannual variation of the Industrial Production Index for the month of March was -10.4%" and this was followed by "The Spanish service sector declined from 46.2 in March to 42.1 in April", which is a decline of nearly 10%. In a month. This is what can only be termed an implosion. All of those newly unemployed will be applying for government benefits-- from a government teetering on bankruptcy and who, thanks to the aforementioned economic decline, will have even fewer revenues to pay them with and will thus have to borrow even more. The Spanish Gov't is also going to bail out one of their big banks, Bankia, costing them from $8-11 billion. If I was the Spanish PM, I'd have turned sheet white and taken to heavy drink by noon. Not that it would matter much; there's probably little he can do now that the ship has struck the iceberg. Yeah this will end well. Short the Euro, folks. 

Tuesday, May 1, 2012

Europe, Arabs & Hunger

  Sorry for the delay in posting recently; I was helping a relative a fair distance away from my house and was unable to keep up with the world due to lack of the internet where I was staying. It's a tad disconcerting just how dependent I've actually become on the internet for information, news and entertainment. Watching the CBS evening news and the local news afterwards has given me a whole new perspective on why most of my countrymen are ignorant of what is really happening around them.

  Anywho, it seems that the deterioration in Spain and Italy has stopped as determined by the lowering of the interest rate on their respective ten year bonds. Not that anything has been solved, mind you. Both of these nations' economies are slowly grinding out negative GDP readings and their debt levels continue ever skyward. I'm not too sure why their bond yields have come down in recent weeks; nothing meaningful has been done to remedy their respective situations. I sincerely hope that the situation remedies itself, but I highly doubt it. Ultimately the basics of mathematics will consume these nations as it already has Greece.

  The upcoming election in France this weekend could have large implications. The candidate leading the pack is the Socialist Party's Francois Hollande, who has loudly declared that Germany's insistence on austerity as a cure for the EU's problems is flat out wrong, and he has declared he plans to rewrite the newly rewritten EU treaty to allow greater budget deficits. He's calling this the "Growth Bloc", and ultimately I believe his intention is to begin the monetization of debts, something Germany vehemently opposes. "It is not for Germany to decide for the rest of the Europe" declared Hollande. While I don't believe that over indebted nations should be borrowing more, the current program of austerity is clearly not working either. In the end, those who cannot repay their debts will not repay their debts. If Hollande is able to bring about the treaty changes he believes in, this will leave Germany's Angela Merkel is a most delicate position, in between her own electorate and her high court on one side and the rest of Europe pulling away in the other direction.

  This is not the only election coming up with possibly very bad consequences. In Egypt, there is an upcoming election where there are essentially two candidates backed by the military and two other Islamist candidates. The Islamist candidates have large leads in recent polls. Things in Egypt have not gone well since Mubarak's departure. There are rumors and anecdotal evidence of large scale capital flight, likely by those tied to the last regime who have any money. The Saudi's have withdrawn their ambassador. Egypt has cut Israel off from natural gas. But these things are minor in comparison to what might become a perfect storm that looks like it is approaching. It seems that the Egyptian Central Bank has been rapidly burning through their reserves in an effort to defend the value of their currency. Worse, there seems to be problems with grain production in Latin America and Asia, and this has led to a serious spike in the price of grains-- soybeans in particular. Taken as a whole, the prospect of capital flight, a weakening currency, an Islamist government and possibly a drastic increase in grain prices {exacerbated by the aforementioned weak currency} makes for a dangerous witches brew worth paying attention to.

  In Syria, the regime of Bashar Assad is slaughtering its own people to stay in power. Despite the Assad regime throwing all it has into the fight, the Free Syrian Army is still in the field fighting. It has apparently been reinforced nicely by Al Qaida, which has decided to leave Iraq and is sending the troops to fight Assad. There has been a spate of bombings in Syria lately; most seasoned observers believe these have Al Qaida's signature all over them. One must remember that the most successful American general of the Revolutionary War was one Horatio Gates, who lost each and every battle he fought against the British-- but always kept his army in the field fighting. This constant fighting is indeed wearing down the Assad regime, most especially economically. Tourism has all but dried up, as have loans from foreign bankers. Paying and equipping an army fighting in the field is an expensive thing; by all accounts, Syria's cash reserves are dwindling painfully thin. Now comes the aforementioned rise in grain prices. One report from Debka has Syrian soldiers on the Golan Heights (just opposite Israel)  going up to the Israel fence and asking for food, and Israeli soldiers throwing bread over the fence. Desertions are still happening. Syria a couple of weeks ago "invited" the Russians to purchase around $20 billion in Syrian Gov't Bonds. To my knowledge, the Russians have not taken them up on the "invitation". For this to be public knowledge is a sign of weakness. Today the Obama administration imposed new banking sanctions against both Iran and Syria. At this point, the Syrian Army and security forces have won all the battles. But so did the British. Stay tuned. 

Thursday, April 5, 2012

Mathematics and Spain

  Up until this week, the European Central Bank's LTRO operations have kept the lid on the problems facing Spain and Italy. Since December, the yield on these nations' ten year bonds dropped a couple of points and were holding steady the last couple of months. Champagne corks were heard popping everywhere as politicians and bankers stupidly celebrated their victory over the basic tenants of mathematics and cascading debt. Unfortunately for the landed gentry, the basics of mathematics have staged an ugly comeback.

  The first torpedo from Madrid came on 3/27, when the Bank of Spain reported that the Spanish economy would contract by 1.7% this year. Spain's Prime Minister Rajoy, the next day, announced  27 billion in budget cuts to Spain's federal budget to meet EU budget targets, as well as some tax hikes on electricity and corporations. The reaction in Spain was immediate and ugly-- roughly half a million workers went on strike, and in a number of places the protests turned into riots. The next day, nearly 900,000 people marched in Madrid to protest the budget measures, again with some of these turning violent.

  On Tuesday, Spain's budget minister announced that Spain's national debt will spiral much higher than anticipated. Fresh data from Spanish authorities also showed that unemployment again rising to a brutal level of nearly 23% and that tax revenues collected were less than anticipated due to "contractionary conditions". An March forecast from Spain's Labor Ministry suggested that unemployment would rise to 24.3 %. I myself see an even 25% number. The percent of people under 25 who are unemployed is above 65%-- yes, two thirds of Spain's young people are sitting at home. That or throwing molotov coctails. 

  Yesterday the Spanish government went to the bond markets to borrow money, and the results were ugly-- the interest rate demanded by creditors was much higher than forecast. As a result of this ugly bond auction,. yields on Spain's Ten Year Bonds, which were under 5% at the beginning of March, have soared to 5.81% as of this writing. This is the market's way of sending a shot across the bow. Short sellers will dogpile onto Spain's misery and unless something is done, we'll see above 6% next week. 

  Today, Spain's PM Rajoy uttered the nastiest of all words in Europe-- the word "bailout". He said that the new budget measures were better than a bailout, but the markets were again spooked that he even uttered the word. There will be no bailout for Spain-- it's too big to bail out, and everyone knows it. The current EFSF would only be able to manage to fund about half of Spain's bailout needs. The market reaction was also ugly-- in addition to the aforementioned bond debacle, stock markets near and wide are sinking and as people and institutions begin losing faith in the Euro currency itself, they are piling into the Swiss Franc at such a rapid rate that this morning the Swiss National Bank (again) had to intervene to keep it's currency from appreciating too rapidly. Others are selling the Euro because they (rightly) expect another LTRO. 

  The battle is far from over between Europe's bankers versus the basics of mathematics. It might take a while, but always bet on basic math, folks. 

Tuesday, March 20, 2012

The Price of Gas

  First of all, so sorry for the delay in posting; a few technical difficulties cascaded into a tidal wave and ended in my having to cough up for a new computer.

  This morning as I drove up to the gas station with an empty tank, I was a little perturbed to see that gas has hit $3.74 here in Minnesota, with the summer driving season still ahead of us. Unless things change, gas go above $4.00 per gallon here in the MidWest. If the situation in Iran blows up, we'll see $5.00 in short order. With an election coming up, President Obama knows that nothing makes Americans angrier than a bad economy and soaring gas prices. There has been talk of releasing some oil from the SPR {Strategic Petroleum Reserve}, a 60 day reserve of oil our nation keeps in case of an emergency. Obama's re-election is not an emergency.

  But we do need to ask ourselves why this is happening and will it continue. Simple question, complex answer. The first part is that the world's production of petroleum is plateauing and as time goes by will begin to decline. There is already some serious doubt whether Saudi Arabia can supply the additional 2 million barrels per day {bpd} they say they can and if so for how long. The oilfields in other nations like Mexico and the UK's North Sea are in a steep decline. Both Canada and the US are ramping up production via oil sands, but producing oil in this fashion is very expensive. Worse, environmentalists are upset at how this is produced and the EU is threatening sanctions against Canadian oil sand production.

  The situation in Iran and the Gulf of Hormuz is another concern-- and while a number of people are just blowing this one off, my opinion is that Israel's PM Netanyahu will not sit idly by as Iran obtains a nuclear weapon. In Israel there is a saying-- "Never Again" and it refers to the Holocaust. A war is coming folks-- bet on it. Obama knows it's coming-- and is trying to delay it until after the election. He might well do it. Looks like the Mayans might've got the date of Armageddon right after all.

  There's more to this story. In the emerging nations of Asia, oil comsumption is growing by leaps and bounds, especially in China and India. In an article recently posted by Ambrose Pritchard, he relates that China will have an additional 125 million cars on the road within 5 years. India will put another 35 million. Then we come to the other rising economies like Indonesia, Malaysia & Vietnam. It's not only cars either-- the average peasant in China and Vietnam are switching from bicycles to scooters. Water buffalo are giving way to gas powered tractors. The implications of this are mind boggling. If these numbers are even close to the truth, the globe is looking at a rise in crude consumption of nearly 20% by 2020. And the world's non oil sand production is going to begin declining next year. Rock. Hard Place. Here in the States, that Rock will be when gasoline goes above $4.50 for an extended period of time. That's when the US economy will blow another piston.

 Is it within the Wit of Man to avoid this ? Yes it is. But it'd take a global effort and coordination that simply does'nt exist today. For example we can all agree not to produce consumer goods like toys and plastic bags. If we get really ambitious, we can limit car engines to 800 cc on a global scale-- which would leave us with only having very small mini cars available, but would dramatically reduce oil consumption. Will any of these things really happen ? No. What is far, far more likely is a war for control of those resources. That and $5.00/gal gas when the shooting starts. 

Sunday, February 5, 2012

Video: The Future of Energy & Community Solutions

This morning I came across a video of Nicole Foss {aka Stoneleigh of the Automaticearth blog} in regards to how Peak Oil and economic collapse will affect us and talks about some community based solutions. It's an hour long-- get a cup of strong java-- but it's a must see.

Saturday, February 4, 2012

Community Currencies

    According to the US Constitution, only the Federal Government has the power to issue currency. States may "make silver and gold coin a tender in payment of debts" if they so choose, so long as they are from the US Mint. It also allows communities the ability to issue a form of currency. Until recently, only a few communities and no states have done so. This, however, looks to be changing.

  In March of 2011, Utah became the first state to accept US Mint silver and gold coins as payment of debts in their state. South Carolina has proposed a bill which would accept silver and gold coins minted anywhere such as the Kruggerand. Lawmakers from 13 states this year-- including my own state of Minnesota-- have explored or have actual bills in place to issue their own currency.

  On a local level, a dozen or so communities have issued some form of currency, including the Washington DC area, where the "Potomac" is accepted in exchange for goods and services. The largest and oldest of these locals is the CHE {Cascadia Hour Exchange} which is issued in the Portland,OR area. There are now over twenty communities in the US doing this.

  Why is all this happening ?: Ben Bernanke is hell bent on printing our way into either a recovery or hyperinflation. In a word, fear. Should serious inflation {or deflation} take place in the US, I look for these community currencies to become commonplace.

Friday, February 3, 2012

The BS Unemployment Report

  Today the US Bureau of Labor Statistics {BLS} released it's monthly unemployment report. This report is very likely the most anticipated report anyone releases on a monthly basis as it calculates the unemployment rate. "Employers went on a hiring spree in January, creating 243,000 net jobs, and the unemployment rate dropped to 8.3% !" screamed the CNN headlines. The Dow Jones got a nice lift from all the good news, opening up 118 points.

  Unfortunately, once one begins to take a deeper look at the report, a couple of things jump out at you. The first one is the BLS's Labor Force Participation, which measures what percentage of the population is actually employed. To me, this is a far, far more accurate picture of the unemployment situation, and it tells us a very different story: "The labor force participation rate has sunk to a 30 year low of 63.7%. 1.2 million people dropped out of the labor force in January" Why you ask did these people drop out of the labor force ? Simple.. the BLS does'nt count "discouraged workers" in it's official unemployment report as actually being unemployed, so in order to get a palatable unemployment rate, they added 1.2mm people onto the discouraged worker heap. I'm going to include a couple of charts to show what is really happening. What you heard today was pure propaganda, a result of a practice known in DC as "massaging the numbers". Oh yes-- and a large number of these jobs were only part time jobs.

During the Great Depression, our government calculated this very differently. This measurement was called the U6 unemployment rate, which is no longer calculated by the government. Others continue to use this measurement, and it sits at approxinately 16.5%, which is the same as it was in 1936 and 1937 during the Depression. During the Depression, this reached 32% at one point, but a rebound in the mid-1930s helped to bring this down. Nonetheless, this compares with 5.2% during the Clinton years. In short, our country continues to be mired in a mini Depression.

  I hope that one day we will have a government more interested in serving the people than their own re-election campaigns. For those who read this, please consider voting for {even if it means write in vote} for Ron Paul. The people who pay for this farce deserve truth and integrity instead of deception.

Sunday, January 22, 2012

The Rathole

  Here in America, we have a saying: "Don't throw good money after bad". It means don't put money into a situation that has no clear resolution. Apparently this phrase does'nt translate well into Italian.

  Mario Draghi, the head of the European Central Bank, and Mario Monti, Italy's Premier {together called the Super Marios} have asked that the EU's upcoming bailout fund, called the ESM {European Stability Mechanism}, be doubled in size to €1 trillion from it's current €500 billion. They say it's needed to restore confidence in Southern European {ie.. Spanish and Italian} debt. The ESM essentially will go into the secondary market and purchases Spanish and Italian bonds, which has the effect of lowering the interest rates that Italy and Spain pay when they need to borrow money. Spain's foreign minister Jose Manuel Garcia {not surprisingly} added his voice to those supporting this. 

  There are a few issues with this: first of all, for those investors who don't have confidence in Spain or Italy, they're going to sell their bonds to the ESM. In short, every time the ESM begins purchases, there is a wave of investor selling. All this really is doing is transferring risk from these investors to the European Central Bank. Hot potato, hot potato..  

  Secondly, this plan has been tried before-- the ECB's SMP Program was a big buyer of Greek debt as well as Portuguese debt. It did'nt save either nation, and now the ECB itself will be taking a big hit when Greek and Portuguese bonds go belly up. In short, this plan has helped only one group-- investors who were stupid enough to buy Greek debt years ago, but smart enough to unload it onto the ECB before it became worthless. It did'nt help Greece or Portugal or their people. 

  Thirdly, these nations-- including Italy and Spain-- have lived beyond their means for the better part of a decade. The ESM simply enables them to go on doing this; it simply delays the Day of Reckoning. These nations will, in one fashion or another, have to face the fact that their standard of living is going to be lower. It's not the end of the world for these nations-- far from it. These nations are, as nations go, fairly rich countries. Italy and Spain have per person incomes of roughly $35,000/yr. If they were to balance their budgets and live within their means, this would go down to, say, $27,500 or so. Painful yes-- but not the end of the world. For me {and China's leaders as well} it's the height of arrogance to ask China, who's citizens average $5,000/yr, to bailout much richer nations who refuse to live within their means and face reality.  Is globalization partially to blame ? Absolutely. Their powerful unions will have to bend to reality, something they absolutely have refused to do up to this point. Making painful cuts to pension plans and cutting the number of public employees is also needed. 

  It's long past time that the peoples of Southern Europe begin to face reality. They can start by balancing their budgets and enacting some labor laws which make it easier to hire people to produce goods and services. Throwing another half trillion into the abyss isn't the answer. Will they make the needed changes ? I highly doubt it. These nations, like Greece before them, are world class Ratholes on a one way train headed for a cliff, with Portugal next in line to cross the River Styx.

Update 7pm: Germany's Fin Min Wolfgang Schauble has already nixed this plan; it did'nt even make it to Monday morning. Wow. There is no plan. Iceberg dead ahead. 

Sunday, January 8, 2012

Economic War on Iran

  In the Middle East, there is a lot of things that go on that most Americans don't see or is under reported. Espionage games-- assasinations, spying, covert bombings by drones and spies.. these things have been going on for decades. It's all part of "The Game". As former CIA chief Leon Panetta said "kick 'em in the toes".

  But what's happening in the last week or so is a new, much more serious thing. On New Year's Eve, President Obama signed the defense authorization bill, which funds the military. However, in this authorization bill there was a provision which sanctions companies which use the Iranian Central Bank to purchase their oil. There was also an agreement among the EU nations to stop the purchase of Iranian oil, which is set for a vote on January 31st. The action by Obama was an attack on the Iranian currency; the EU action would seriously harm Iranian oil exports. These are serious economic sanctions. Iran itself contributed to the mess when it announced that it was cancelling all trade with the United Arab Emirates a few weeks ago.. a decision they have since rescinded.

  The effect was immediate. By Monday January 2nd, the Iranian rial was down 12% on the black market. The Mehr news agency reported that housing prices were down 20% in the last few weeks. There are reports that people are beginning to sell assets and then converting the rials for USD and other foreign currencies. On Tuesday January 3rd, the rial was trading at 17,800 per USD.. which compares with the official rate of 11,000 on the Iranian Central Bank's website. The Iranian Central Bank is holding meetings almost daily now. On Wednesday, the decline continued. I don't have any more information since then. Although this is only the last few days-- and the situation could very well reverse itself-- this has the feel of capital flight. If it goes on much further, the people themselves will lose confidence in their own currency. Prices of basic goods will soar. This is worth keeping an eye on. If it gets serious for Iran's economy, expect them to retaliate.

  This has happened before; Argentina in the 1990s to be exact:

Update 1/10 4pm: Seems like the inflation rate in Iran is continuing unabated. "TEHRAN, Jan 10 (Reuters) - Iran's currency has slid 20 percent against the dollar in the last week despite central bank intervention, and some Iranians concerned about the economy said on Tuesday that attempts to send text messages using the word "dollar" appeared to be blocked... On New Year's Eve, U.S. President Barack Obama signed into law by far the toughest financial sanctions yet against Iran, which if fully implemented could make it impossible for most countries to pay for Iranian oil. The Islamic Republic responded to the growing international pressure by warning last week that it could shut the Strait of Hormuz, the shipping lane for the Gulf's oil, if sanctions were imposed on its oil exports"