Archives of July 2011
The Sovereign Debt Crisis Learning Curve
During the second-half of his reign, Alan Greenspan became fond of trumpeting the U.S. economy’s newfound resiliency. This was a theme peppered throughout his “Age of Turbulence” memoir, published in the pre-crisis year 2007. Greenspan cited computer and telecommunications technologies; monumental productivity advancements; a flexible workforce; the financial system’s superior capacity to effectively invest limited savings; and, of course, enlightened policymaking.
Back when I wrote more colorfully, I was fond of saying, “Financial crisis is like Christmas.” In hindsight, it would have been more accurate to write “private-sector financial crisis is…” Whether it was banking system debt problems from the early-90s; the series of “emerging” market Credit collapses; the unwinding of LTCM leverage; the bursting of the tech Bubble; the 2002 corporate debt crisis; or the spectacular collapse of the mortgage/Wall Street finance Bubble – the Fed would reliably respond to each and every crisis with the “gift” of reflationary policymaking.
And, no doubt about it, “inflationism” was the market gift that kept on giving. Crisis, in the Age of Activist Central Banking, created momentous opportunities to harvest speculative returns. Those that best understood and exploited these dynamics (our era’s “titans of industry”) accumulated incredible fortunes – and vast AUM (assets under management). Read more»
Return of the Gold Standard as World Order Unravels
As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability. The spot price surged to an all-time high of $1,594 an ounce in London, lifting silver to $39 in its train.
We, The Public
“Let me distinguish between professional politicians and the public at large,” opined the president during a press conference earlier this week. “The public is not paying close attention to the ins and outs of how a Treasury auction goes,” he supposed before adding, we guess for reassurance, “We’re paid to worry about it.”
Never mind professional politicians are the reason we have a debt problem in the first place.
And so you have a choice, dear reader: Follow the president’s advice and don’t worry about the backdoor debt ceiling deal they’re cooking up inside the Beltway… or read on and prepare yourself for the consequences of what the “professional politicians” have wrought.
“I’d love to see the size of the US bubble,” a reader wrote to us recently, “and where it would fit on the debt-to-GDP chart.” Read more»
Inflation Is Beyond the Tipping Point
Forecasters face a dilemma: is the outlook inflation, or deflation? And given the recent signs of disappointing economic growth, are we worrying too much about inflation? Certainly, for the Keynesians, who are constantly on the look-out for signs of deflation, and who believe that governments must at all costs keep prices gently rising, the alarm bells are ringing.
At the heart of their economic philosophy is the tired old economic fallacy of under-consumption as the reason for recession, and government deficit spending and stimulation of consumption as the way to recovery. In their desire to promote consumption at all costs, they have destroyed savings, and encouraged consumers into unsustainable debt. And despite the stimulation of 10%+ budget deficits, the vapour trail of recovery is fast disappearing. The Keynesian solution has left us in a worse position than we were in at the time of the credit-crunch and the collapse of Bear Stearns and Lehman Brothers. Read more»
On the Road to Government Default
A great default is behind us. The public is unaware of this. If you read this report, you will no longer be unaware of it.
The ease with which this default took place should serve as a warning: there will be additional, much larger defaults. Again, the public does not understand this. The main one will be Social Security. The program is now in the red: more money going out than coming in. But most people still cannot believe that the program really will go belly-up. That’s why I produced a video on this.
What? Would the government really break its retirement promises? Of course. It has already been done. Bear with me. You need to know how the game is played in Washington. Read more»
Europe Declares War on Rating Agencies
A chorus of policy-makers from Europe and across the world have denounced Moody’s drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the “Anglo-Saxon” rating agencies of driving states into bankruptcy and destabilising the global system.
Wolfgang Schauble, German finance minister, said there was no justification for the four-notch downgrade or for warnings that Portugal might need a second bail-out. “We must break the oligopoly of the rating agencies,” he said.
Heiner Flassbeck, director of the UN Office for World Trade and Development, said the agencies should be “dissolved” before they can do any more damage, or at least banned from rating countries.
Moody’s downgrade late on Tuesday set off immediate contagion to Ireland, with dangerous ripple effects across southern Europe. Yields on Irish two-year bonds surged above 15pc for the first time. Italian borrowing costs reached levels not seen since the aftermath of the Lehman crisis in late 2008. Yields on Spain’s 10-year bonds jumped 12 basis points to 5.59pc. Read more»