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“All is Quiet on the Eastern Front?” – Andy Sutton

Published on: 01/13/2012

Categories: Current Events, Economics, Financial Markets, My Two Cents

Tags: andy sutton, debt, debt to gdp ratio, Economics, eurozone debt crisis, what is debt to gdp?, who caused the debt crisis, why did the great depression happen?

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2011 had been touted as the year that everything would change. Massive paradigm shifts would rock our world and many a prophecy was made regarding financial crises, currency crises, wars, rumors of wars, and there was even one fellow who said the world itself would end, although he later retracted his predictions, but not before his followers had spent their life savings putting up billboards. Such hysteria is certainly the hallmark of times such as these, but we have to keep in mind that just because some of the predicted events didn’t happen yet, we’re a long, long way from being out of the woods. There is an old saying that if you do what you’ve always done; you’re going to get what you’ve always gotten. If we continue to sow the seeds of false fixes and faulty economics, we’re going to continue to reap financial and economic crisis. It really is that simple.

One needs to look no further than Europe and its ongoing (no it isn’t over) debt crisis. The factoids have been around for a while now. Italy’s need to borrow roughly 300 billion Euros just to service its debt in 2012. The absolute failure of Greece’s austerity programs. And to top it off, the installation of shady leaders in both of these countries whose intentions should be questioned from the outset of their tenure simply because they are clearly establishment technocrats. Many of you have soundly criticized me for being ‘extremist’ because I suggested several times last year that what we’re actually seeing are economic coup d’ etats. What else can it be called when an organization enables a country to get into trouble with debt, then offers its own solution (more debt), then installs one of its operators as the country’s leader to make sure the solution is carried out? How would you feel if you had credit card debt that exceeded your yearly income and your friendly bank rep called you and said they’d bail you out by giving you even more credit, then sent a rep to live with you and control your budget when you balked or didn’t make enough spending cuts? Sometimes complicated things make sense when put in simple terms and that is exactly what is going on here.

Austerity is a cruel joke, and the national riots, strikes, and other discord that have resulted from attempts at austerity must be given our attention because it is all coming here. There is no point defined in time when a debt crisis will blossom. Many will argue that America is immune from a Euro-style debt crisis because we have a federal reserve that is willing to buy every single bond if it needs to. They will tell you we are immune because our currency is the ‘gold’ standard (sarcasm mine) of all the world currencies, and it is backed by the full faith and credit of the USGovt. If you’re still able to read this with a straight face, then you know what all this means. It is a paper promise based on an even shakier perception of ‘trust’ in an institution that deserves none. While it is true that we may not get the social anxiety and discord because of austerity, we will certainly get it because of the total loss of confidence in a currency that really died more than 40 years ago. In the worst case, we’ll get both.

As we move into 2012, the European mess has been tabled for the past month so as not to interfere with the traditions of overconsumption and debt accumulation that normally accompany Thanksgiving through the New Year. I find it sadly ironic that the same Bible that speaks of the birth of Christ also speaks of the consequences of debt and the accumulation thereof. Yet each Christmas we spend well beyond our means not to shower gifts upon Christ as was done in the Bible, but on ourselves and then spend the better part of several months trying to pay it all off. Some never do. This might seem irrelevant, but when you think about it, this is precisely what we’ve been doing on a national scale for decades now. Borrow and spend to fund the current ‘party’, and then push payments well into the future. As Europe is just beginning to find out, the ‘buy now, pay later’ paradigm has become a dog that won’t hunt anymore.

A German Solution

The biggest story so far of 2012 is the negative yields on German debt. Monday’s 3.9 billion Euro auction sported an average yield of -0.0122% .We had a similar situation here in the US in the fall of 2010 when negative yields were achieved on 3-month treasury bills for a short period of time. Obviously, these are not novice investors that are making the decision to pay a government for the privilege of lending it money. These are financial institutions: banks, brokerages, and hedge funds that are conducting these types of transactions. They’re willing to take zero interest, and in fact, pay a small premium for the ability to park their money somewhere they feel is ‘safe’. What is interesting is the fact that anyone considers Germany to be safe. Germany is essentially the Daddy Warbucks of Europe, spreading around the hard work and savings of the German people to the rest of Europe, which can easily be described as the biggest welfare state in the history of mankind. Any sane person would at this point be questioning the continued willingness (forget for a second the ability) of Germany to continue in its role as the piggy bank that never runs dry

So scared are professional investors that they’re willing to pay someone else for the privilege of lending money to them. I’ve heard several analysts comment that these negative yield auctions are merely a social engineering tool that is being used to condition the rest of us to accept near-zero interest rates ad infinitum. This may well be accurate, but just in case it isn’t, we need to consider the naiveté of even pro investors in terms of selecting ‘riskless’ assets. While it is true that in absolute terms there is no such thing – as we’re now learning the hard way, there are certainly better means of lowering your beta than just piling money into a country that is filling its role on borrowed time. Yet the same people who dove into subzero rate auctions in Europe are the same ones who dove into our subzero auctions just over a year ago. Such folly underscores the need for the re-emergence of hard currencies; meaning those backed by gold and/or silver. Resource-backed currencies such as that of Canada aren’t bad, but their value is still at the whim of policymakers, not nailed down to underlying wealth and the ability to consistently balance payments in the long run.

The willingness and even zeal of investors to accept negative rates is a ringing endorsement of the need for a new gold standard. I am quite sure that it would end up being perverted over time as all prior ‘standards’ have, but in a time of extreme crisis such as where are currently situated, having a bit of financial bedrock certainly wouldn’t be a bad thing. It certainly beats the quicksand we find ourselves trying to navigate today.

The Second Biggest Story of 2012

Buried under the headlines of Presidential politics and ‘who said what about whom today’ is the fact that the current administration has formally requested that Congress increase the debt ceiling by another $1.2 Trillion. I say the following only to point out the acceleration of the debt cycle in the past several years, not to pin the blame on any politician; they’re all responsible. In early 2009, the national debt was roughly $10.6 trillion. The most recent request to take the limit to over $16 Trillion will last the government less than another year if Congressional Budget Office projections prove to be accurate. Our actual debt just passed 100% of GDP. Exhausting this new increase will push it well past the breaking point of the Eurozone. Does anyone really think there will be no consequences for this flagrantly irresponsible fiscal behavior?

While there is no way to pin a date on when the current Keynesian debt paradigm will end, what we can be 100% sure of is that it will end. Will it be at 100.3% debt/GDP or will it be 200.3%? We don’t know for sure, but at some point, the weight of the mistakes of the past will be too much for the future to bear and it will all come crashing down. The system is too big to fail, yet at the same time it is already too big to save. The actions of policymakers to date give little reason for optimism as much of the emphasis is on kicking the can down the road and pushing the inevitable far enough into the future so that it will be someone else’s problem. What is particularly disturbing is that most of the election year rhetoric focuses on attacks rather than on solutions; so much that you can almost hear the fiddles playing as Rome burns.

Silent Run on Greek Banks

by TwoCentsEditor

Published on: 08/03/2011

Categories: Current Events, Economics, Financial Markets

Tags: bob chapman, debt ceiling, derivatives, eurozone debt crisis, gold, government bankruptcy, jim sinclair, money, moody's, webster tarpley

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In one of the biggest banks in the centre of Athens a clerk is explaining how his savers have been thronging to pull out their cash.

Wary of giving his name, he glances around the marble-floored, wood-panelled foyer before pulling out a slim A4-sized folder. It is about the size of a small safety-deposit box – and those, ever since the financial crisis hit Greece 18 months ago, have become the most sought-after financial products in the country. Worried about whether the banks will stay in business, Greeks have been taking their life savings out of accounts and sticking them in metal slits in basement vaults.

The boxes are so popular that the bank has doubled the rent on them in the past year – and still every day between five and 10 customers request one. This bank ran out of spares months ago. The clerk leans over: “I’ve been working in a bank for 31 years, and I’ve never seen a panic like this.”

Official figures back him up. In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a “silent bank run”. This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can. Some of that money will have been used to pay debts or supplement incomes, of course, but bankers put the sheer volume of withdrawals down to a general fear about the outlook for Greece, one that runs all the way from the humble rainy-day saver to the really big money.

‘Clueless’ government

“Every time the markets move, I get phone calls,” says an Athens-based fund manager. “They’re from investors asking: ‘How can I get my money out of the country?’ ”

One senior investment banker is more blunt: “People are scared that the government doesn’t know what the fuck it’s doing.” He tells a story about an acquaintance who took out €30,000, wrapped it in a bag and stashed it in his garage. “The bag had previously had some food inside,” he says. “So it attracted rats, who ate the notes.”

Bags of money in garages, frightened savers fleeing banks and even the country: these aren’t the sort of stories you associate with a comparatively-prosperous European country, but with a developing one facing a life-or-death economic crash. The fact that they are now emerging from Greece not only indicates the scale of financial distress, it suggests something else: Greece today looks like parts of Latin America in the worst moments of its financial crisis.

In an echo of the days of Jim Callaghan, the International Monetary Fund is back inEurope, doing what it is more accustomed to doing in Buenos Aires or Brasilia: making emergency loans and telling the government how to run its economy. What is more, the scale of the changes an overborrowed Athens is now making are so vast and so rapid that they will leave Greece looking like a different country.

The government itself describes its plan to slash public spending and jack up taxes as one of the most ambitious deficit-reduction programmes in the world. But what often goes missing from this discussion of a fiscal crash-landing is the impact on the lives of citizens who have precious little time to adjust. When salaries of civil servants are slashed by up to 30% within a few months, as happened last year, and over 20% of public-sector workers face unemployment within the next four years – plus whole swathes of national assets are to be privatised before Christmas, with more job losses doubtless to follow – then you are talking about a wholesale transformation of a workforce.

Greece is already one of the poorest and most unequal societies in Europe, reckons Christos Papatheodorou at the Democritus University of Thrace. Among the few countries that look worse are Romania, Bulgaria and Latvia. So what will Greek society look like after the government’s austerity measures take effect? He pauses, then says: “It will probably look like a developing country.”

That message has not been lost on workers either: one of the new nouns used by trade union members and others who oppose the cuts is kinezopeisi, or China-isation. The claim is that such large drops in wages will lead to a workforce paid barely more than their counterparts in Shenzhen.

The oddest thing of all is that some of the leading lights in the government appear to see nothing wrong in a wholesale transformation of Greek society, albeit not into one that resembles an enterprise zone in eastern China. Elena Panaritis is widely tipped as one of the up and comers in Greece’s government, and it is not hard to see why: smart, formidably well-trained in economics after a career with the World Bank, funny and fluent in English, she is exactly the sort of person any prime minister would choose to give a keynote address to fretful institutional investors.

And for a Greek politician involved in pushing through some of the most abruptly painful economic measures in the country’s history, she does not seem especially Greek. When I observe how many Apple computers are in her office, she replies: “That’s because I’m not Greek, I’m American.” Her speech is American-accented and peppered with “darn” and “have a nice day”. When asked to describe how Greece needs to change its economy, her answer revolves around changing its institutions and its structures – in other words, making Greece less Greek. Castigating the bureaucracy, she says: “It’s not a kibbutz, it’s a big country!”

This is a line that you hear often enough from those who want Greece to change. By European standards, Greece has an average-sized public sector, but a very leaky tax collection system. What the public sector is, however, is under-resourced and inefficient. On my last day in the country, I wangle my way inside a public pensions office for those working in the tourism industry: there are just two Dell computers in one large room, and lever-arch files dating back 30 years. No one ever paid for the data to be computerised, I am told, and the result is that one day’s work takes three.

Private sector woes

The other big problem is in the private sector, with few industries that are able to pay their way in the world. Jason Manolopolous, who is author of a new book called Greece’s ‘Odious’ Debt, says that for years Greece was buying more from the rest of the world than it was selling. “We were buying BMWs from the Germans and selling them tomatoes.”

For now, those days are well and truly over. In Athens’ upmarket shopping district of Kolonaki, boutiques that used to have waiting lists for designer handbags have shut. One sign says the owners have relocated – to Rome. In one clothes shop, with racks of discounted Calvin Klein and DKNY, the manager, Sav, explains what’s happened: “In this crisis, the middle classes have been hollowed out.” That is just what happened in Buenos Aires during its crash last decade.

The result is that people who thought themselves used to one way of life, and in one social class, are getting used to a sharp downgrade.

In one factory, where a staff of 200 is now down to 30, the manager points to empty floors and idle machines. They’re now all on unemployment benefit, he says. “Mind you, our pay has been cut too, so we’re not that far off.”

Outside the soup kitchen of the Aghia Triada church in Piraeus, near Athens, more of Greece’s new poor are waiting for a handout. Anna and her two daughters have walked in the midday sun to get here and are now queueing up with the long-term homeless.

That is not Anna’s situation though; she lost her job three years ago but has still hung on to her house. That said, she no longer has the income or the benefits to pay bills and the electricity was cut off last month.

Inside, Pater Daniel, the head priest, says that he’s noticed a lot more “well-dressed, clean” people taking free meals from the church. He reels off stories of a 23-year-old man who left last week for Australia, and a 40-year-old woman who lost her job on Friday.

Because the Greek Orthodox church is partly on the state payroll, the clergyman’s salary has fallen by almost 10% to €15,000 a year.

Is he saying that the Orthodox church is also subject to public spending cuts? Pater Daniel laughs, then holds up five fingers: there are five priests in Piraeus, and soon there will only be one. He’s pondering taking a second job.

“There is too much pain, and people are looking for someone to listen and squeeze their hand.” He sighs. “Everyday I leave this church with a headache.”

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