Former Assistant Treasury secretary: Treasury Works For Goldman Sachs

Continuing the series of sunny summer day bloggin' lite please enjoy the video below.
For those busy with saving the world from its banks irresponsibilities, read the quotes and find yourself in a financial world bare of any Chinese walls.
It's all run and done' by Goldman Sachs, with the help of the Treasury:

Craig Roberts(Assistant Secretary of the Treasury in the Reagan Administration): ... Bank bailout was a fraud and it won't succeed. Don't know what sort of stupidity the Treasury Secretary and the Federal Reserve will resort to next.
Max Keiser: Quick question. What should the Treasury Secretary be doing?
Craig Roberts: He should be trying to save the dollar as the world's reserve currency which means stopping the wars, reducing the bailout money, and trying to reduce the trade and budget deficits in order to save the dollar. That's what he should be doing.
Max Keiser: Does the treasury secretary work for the people or does he work for the banking system on Wall Street?
Craig Roberts: He works for Goldman Sachs.

Hat tip goes to Michael Shedlock

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European Credit Rankings Show No Uptrend Nowhere

Catch this graph of brand new credit rankings by European credit insurer Coface: Stable at lower levels at best, no positive outlook anywhere. This chart found in Austrian daily "Der Standard":

GRAPH: European map by credit rankings. The eventual bottoming out of the global margin call is probably as distant as the year 2011. Important translation: "sehr hohes Risiko" means "very high risk." Chart courtesy APA/Coface. Click for larger image.

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Moody's Offers Training Courses on CDO/S - After Getting 99% of Ratings Wrong

In a world drowning in some 64.000 AAA rated CDO and CDS (credit debt obligations/swaps) Moody's has - 3 to 4 years late - but correctly recognised the public's demand for information on all these papers, posing a TRILLION risk for the entire financial globe.
They must be eager to get out word on the dangers of rated derivatives. Moody's tries to get you back to class room with a DISCOUNT OFFER included in its spam. It was not revealed whether these courses were AAA-rated.

SCREENSHOT: Found in my spam folder: Moody's invitation to take classes on credit derivatives 3 to 4 years after these "weapons of financial mass destruction" (Warren Buffett) have brought us on the brink of financial apocalypse. Click for larger image.

This borders on irony as my first ever blog post was born from my fury on the triple-A writers serving everybody who paid them.

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TBTF-Theory Not Reflected in History Books

Observing nowadays' financial news I notice to have been reading and hearing a lot about the "too big to fail" (TBTF) theory since the onset of the credit crisis. There is only one fundamental problem: Not one former TBTF-candidate has remained alive much longer once this discussion had been started.
Since the South Sea Co. Ltd. was first TBTF, only to come down and take the better part of England in the South Sea Bubble with it, there is not a single grain of proof that would hold me back from officially burying the TBTF-theory as what it really is: an urban myth.
Uncountable financial corpses like Continental Illinois in the early 1980s, Long Term Capital Management in the late 1990s and not too long ago, Lehman Brothers, litter the road of economic disaster. Find a timeline of most recent TBTF events here.
This series may be continued with Goldman Sachs. At least there is no historical precedent saying otherwise and the TBTF discussion has just been given a new breather by Zerohedge's refreshing spate of documents, with an interesting answer by Kid Dynamite. As Reuters blogs/commentaries have started the timeline also eagerly documented by Karl Denninger, who served blogosphere more Goldman chutney on Monday, I may add that they may be onto something, this guess based on the historically non-proven TBTF theory.

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German Magazine: Silver as Legal Way to Repatriate 6-Digit Funds from Austria Back Home

It has become rare under ever tightening money transfer laws - allegedly because this helps fight "terrorism" - to be able to issue an alert that may help those cautious Germans who survived the markets Tsunami of 2008 to repatriate money from tax friendly Austria back home.
Legions of German savers with money deposits at Austrian banks appear to have turned into silver bulls.
Top quality German weekly "Spiegel" on Saturday revealed a legal loophole in German and EU laws that allows Germans to repatriate 6-digit funds in a most discreet, but still legal way from Austria to their home country.
This makes me understand the delighting record profits at the Austrian Mint in 2008 with a high degree of chance that 2009 will end with a still bigger income figure as sales have already exceeded last year's numbers.
I let Spiegel tell in its own words (emphasis mine) before adding a few interesting details on Austria's long term silver obligations:

The object of desire is 37 millimetres in diameter and made of .999 fine silver. On one side, the coin shows an organ, its country of origin ("The Republic of Austria") and its face value: €1.50 ($2.12). On the flipside: "Vienna Philharmonic Silver" and a few musical instruments from the world famous orchestra.
The coin, known to numismatics as the "Silver Philharmonic," could well drive Germany's already harassed Finance Minister Peer Steinbrück over the edge. Because the ounce of silver is a hot tip among German investors -- and a means of discretely transferring untaxed funds back home.
Austria issued the new coin in early 2008, wisely anticipating the consequences of the bank collapse, the stock crash and the rising value of precious metals. The coin was explicitly intended for purposes of investment, not collection. Bernhard Urban, marketing spokesman of the Austrian Mint, modestly calls it "unique" in Europe. The story of its success has to do with a funny little contradiction: As a means of payment with a value of €1.50, the coin can be used to buy a beer. But nobody in his right mind will take it to the pub in the first place because the exclusive silver piece is worth -- depending on the price of silver --somewhere between €11 ($16) and €14 ($20), and costs that much at the teller's window.

Austrian Mint 1st Euro member to Issue a Legal Tender Silver Coin
It's this difference between the face and market values of the coin that makes it so attractive in the context of international money transfers. The coin manages -- astonishingly -- to circumvent currency import regulations. A person travelling from Austria to Germany is allowed to bring €10,000 ($14,000) into the country without having to declare it at customs. So that person can bring more than 6,000 Philharmonic coins over the border and in doing so, bring home, with each trip, more than €110,000 ($156,000) of his hidden Austrian treasure.
It's common knowledge that many Germans make use of the discrete accounts in Austrian banks. But it's equally clear that the days of strict banking confidentiality are numbered. Bavarian customs officers claim not to have noticed anything yet. But in Austria, the Philharmonics are already "an absolute hit," as coin expert Urban proudly proclaims, especially among the Germans.

6,000 Philharmonics Equal €110k Paper Money
Like the entrepreneur from Munich who picked up the nifty little tip from his friends at the yacht club. Since then, the coin trick has been doing the rounds among wealthy Bavarians who stash their money next door. Because the coin collectors are exchanging tax evasion tips galore in chatrooms, the Bundesbank (Germany's central bank) is not anxious to draw attention to the matter. But senior bankers are abundantly aware of the problem.
The German Finance Ministry has responded by warning inventive investors not to get too comfortable. Customs officers suspicious about coins can forward these concerns. But they can only confiscate the silver pieces if they exceed the face value of €10,000 ($14,000).

"We want to fill a vacuum"
Meanwhile, the Austrian Mint can hardly keep up. It's a four-week wait for the coin at the Oberbank in Salzburg. There's no question that the Philharmonics are reaching well beyond traditional coin collector circles. In February 2008, the mint was anticipating sales of three or at most, five million coins; by the end of the year, almost eight million were in circulation. And already in 2009, nearly five million pieces have been bought or ordered
Of course, Urban denies that the Philharmonic is making life easier for tax evaders. That certainly wasn't the coin's purpose, he says. It was obvious that investors would go for precious metals in these uncertain times. "We wanted to fill a vacuum that the banks have left behind." Which means: for the growing number of customers who don't trust the investment advisor at their local bank, the Philharmonic offers a perfect alternative.

Germans Don't Sell Their "Real Money" 5-Deutschmark Coins
It's impossible to know how many Germans are using the coin for investment purposes and how many for cross-border transfers. What's clear is that the Bundesbank is not benefiting from the silver boom. German citizens are holding back on domestic coins at the moment; German coins are good only for collecting, not smuggling. Silver mintages have become shelf warmers. Now it's too late for the Bundesbank. The Austrians were first to grasp that in bad times, it makes more sense to mint investment opportunities rather than collector's items.

As there is not much else to say, Spiegel being reknown for decades of faultless reporting I want to add a few interesting details that may support the never ending allegations about a huge suppression scheme in silver prices.
Searching the Oesterreichische Nationalbank's annual report (PDF) the term "silver" in its physical meaning brings up only 4 references concerning silver in the annual report, all included in this one paragraph on page 109 (slight redaction for readability):

This balance sheet item exclusively subsumes the claim on the Austrian Federal Treasury from silver commemorative coins issued before 1989, based on the 1988 Coinage Act as promulgated in Federal Law Gazette No. 425/1996.
In theory, the maximum federal liability is the sum of all total silver commemorative coins before 1989, minus any coins returned to and paid for by the central government, minus any coins directly withdrawn by the Austrian Mint and minus repayments, which are effected by annual installments of €5.814 million. The proceeds from silver recovery, including the interest on the investment of these proceeds by the Austrian Mint, are designated for repayment by the contractual deadline (every year on Dec 15.)
Any amount outstanding on December 31, 2040, will have to be repaid...from 2041 to 2045 in 5 equal installments. The federal liability came to € €1.183 billion on December 31, 2008.

In short this means the Austrian central bank is at least €1.183 billion short silver (indeed and not with COMEX-contracts) as it is highly unlikely that coin owners will sell them at former Schilling face values of 5; 10; 25; 50; 200; 500 Austrian Schillings (divide all figures by 13.7603 to arrive at the € face value) when the pure market silver value means gains pf up to 3-digit percentage ranges, depending on face value and silver fineness of these coins. Find more details on the resale value here.
Although all these figures are minuscule in comparison of Eurozone banks borrowing €442 billion for 12 months from the ECB it may be another grain of salt, that central banks might be keen no to see silver rising further. In my personal opinion I see 3-digit €/$ prices for an ounce of silver.
So it may not be a bad idea to keep all the silver you have and maybe buy a little more at current prices.
There are many costly traps for physical silver buyers in Europe: Austria still applies a horrific 20% VAT on the monetary metal, absolutely defying any other logic than impeding investors from buying silver.
Germans have to give less of the purchase price to the taxman. In Germany, silver coins with a face value and being legal tender, are only levied with 7% whereas VAT on bullion bars is a hefty 19%, defying any logic than maybe "protective measures" to a yet officially unknown winner in the tax game.
Austrians can unofficially evade the 20% VAT up mark, a clear discrimination to the other monetary metal gold which is VAT free (making the whole affair look like a political and not logical decision), by buying their coins in Germany or from German sellers on ebay.

Tax-Disadvantaged Austrians Can Buy Silver Cheaper in Germany
This means that Austrians can get Philharmonics cheaper in Germany, or on ebay Germany, than at home. They too, can import a 6,000 silver Philharmonics from Germany, saving 13% VAT percentage points and stay within the bound of Austrian and EU laws.
It might be interesting to find out whether these rules also apply in other countries. The USA requires travellers to declare monies above $10,000 face value. It is up to one of my readers to find out - best with the advice of a lawyer - whether one could also import Austrian silver Philharmonics up to an exchange rate adjusted face value. This would result into a handy transfer of 4,761 ounces without alerting the IRS or immigration.
Non-EU citizens can hit another bargain: As they are VAT exempted, they can get an immediate cash refund of the 20% VAT asked by the Austrian commercial seller at the VAT refund offices at Vienna's airport by simply presenting their purchase records.
For those without knowledge of Europe's laws it may be helpful to know that Austrian banking secrecy laws will protect foreign depositors as Austria does not pass on information to foreign tax authorities that would reveal their holdings outside their domestic tax legislative. But the EU Moloch in Brussels will probably pressure Austria to reveal such intimate details in the medium term. So better buy your legal tender Austrian silver Philharmonics tomorrow than the day after.

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Is the World Split into Alpha Math Masters, Other Economists and Those Outside the Ivory Tower?

This blogger is proud to have become part of a webring of select and motivated economists initiated by blogger pal Edward Hugh. Ed applies Facebook's advantages so one can read all realtime arguments or comments on macroeconomic issues on one page instead of having to open n emails (yesterday 400+.)
Although I am a bit wary of social networks due to concerns Cryptohippie has perfectly summarized in this brilliant article on privacy in cyber age (PDF), I like the limit of 50 words as this forces one to be concise to the max.
We have blogs to dive deeper into issues, always knowing that billions of eye pairs will correct any mistake at lightning speed in comments.
Suffering from a blind spot for mathematics that cannot be done on my iPhone (i.e. electronic tag) and - god beware - contain other Greek letters than alpha, beta and delta, Deepak Jois from India has started a clever discussion on the issue of math proficiency in the macroeconomist world and its mostly incomprehensive results for those outside the ivory tower, like in markets or commerce.
I replicate first Deepak's wise words which combine thoughts on math and the Austrian school of economics and are seriously alpha:

What frustrates me as somebody who has a strong interest in Economics and has at times thought about taking it up seriously. Some of the core textbooks and papers I have read (are) such stylized models that I learn practically nothing from them because they have no real world applicability. This coming from somebody who actually has a background in computer science/math.
That is one of the reasons I am attracted to the Austrian School which emphasizes the importance of studying history and philosophy as well. My ideal economics curriculum would be something that would combine the principles of the Austrian school along with the things that Taleb talks about in the Black Swan regarding the 'science' of rare events and the cognitive biases that we as homo sapiens exhibit.

Here comes my beta-reply:
I am happy to see others share the problem that formulas with Greek letters may be of interest and useful only when one can make sense of it.
Honestly, everything exceeding merchant's mathematics, yield calculations and moving averages will forever be my blind spot and I will have to be reborn to mentally understand the deeper meaning/use of algorithms (if they are not done automatically in the few Excel sheets I use) but then again all my math skills come from financial analysis, whereas macroeconomics were rushed through in my diploma course. Especially the part on fractional reserve banking was given not much more than 2 minutes in a grad programme with lecturers from commercial banks.
I can follow the arguments of Benoit Mandelbrot with his fractal geometry model to better assess market risk than with the Gaussian bell curve, also thanks to reading Nassim Taleb.

Scholes Does Not Want to Discuss His Option Formula Anymore
Myron Scholes fled me at recent panel discussion in Vienna when I wanted to interview him on whether the Black-Scholes options formula is still valid in the time of frequent occurrences of black swan events.
And, interestingly, has anybody heard anything about Harry Markowitz' model of risk free portfolio diversification recently?
I hope not to offend any economist when stating that the financial sector is only interested in all calculations where there is a currency sign in front of numbers. No bond salesman understands convexity but only knows that it's a good sales pitch (this wisdom taken from Michael Lewis' "Liars Poker".)
As I am most interested in everything that helps me sharpen my forecasting potential and especially keeping it in a style so the interested layman/investor does not fall asleep while reading it I'd like to point out that there were no complex formulas needed to see the USA's change from biggest creditor to biggest debtor in the world.
It is trends I am keen to recognize as early as possible and so far I have a fairly good track record from what I can read from yield curves in connection with industrial production figures, current accounts, unemployment and other key macro indicators. I cannot see how a formula could have helped me better to see changes in banks' lending than a few calls to bankers (the Fed calls this anecdotal information), but then again I am maybe ignorant due to my failure to understand anything that has 2 Greek letters in it.

Read Schumpeter: No Formulas Or Fancy Charts Make It Actually Entertaining
Coming to the Austrian school, where I got erased from the mailing list of Austrias Friedrich von Hayek foundation after I enraged bankers with my libertarian view that we should shut down the rating agencies and send bankers back to do their homework, i.e. assessing risk. Bankers alphabet only included AAA to C and now they are in the costly process of learning that the alphabet continues to D(efault).

Irving Fisher: The Economist Gone Broke Weeks After His Infamous Remarks on Wall Street
Irving Fisher's infamous statement from Sep 1929 that stocks will remain forever on an elevated plateau is as much a joke as was Abby Cohen's 2000 "new paradigm" that internet stocks were to dominate stock exchange listings and would outperform in the long run. Fisher lost all his money in the crash and spent the rest of his lonely life in a condo paid for by others.
In this context I also have my problems with Josef Schumpeter and his euphemism of "creative destruction" i.e. recession, a process where over capacity in some sectors gets wiped out again.
In Austrian history Schumpeter's name will forever be associated with the fact that he was the first finance minister of the young Austrian republic who acquainted us with an acceleration of inflation into the triple-digit area.
Schumpeter resigned from this post after only a few months and later founded his own bank which went belly up in the early 1920's. After retreating into the academic world later on Schumpeter also started to rethink whether his libertarian approach does actually work in a real-life economy.
While Greenspan favored abstaining from any protectionist measures (and is best forgotten by now after publishing his coffee table memoirs), Schumpeter had gone the other way at the beginning of the 1930's.
Although an advocate of a free market economy, Schumpeter turned to protective ideas.
Had he first noted on the US depression 1839-1843 that the economic devastation caused by recessionary periods is essentially a process of "creative destruction" and such periods are essential to the advance of capitalism, his views changed with his personal fate, a situation remarkably similar to the change of attitude towards free trade of US policymakers nowadays.

Schumpeter: From Libertarian to Protectionist in 2 Decades
To quote Schumpeter (from a lecture held in Tokyo in 1931):

"I need only quote the wide spread belief, that every export means a gain and every import means a loss to the nation; or that it is always an advantage to produce at home, instead of importing, a commodity which a nation is able to produce, and that we ought to rejoice in every national industry created by a protective duty; or that tariffs remedy unemployment; or safeguard the national currency; or that they are necessary to keep up a high standard of wages; or that it is their function to equalize cost of production at home and abroad and to enable the home industry to compete with foreign products on what has been called ‘fair’ terms.
All this is wrong.
The last argument for instance, which is so popular in the United States runs directly against the very meaning of international trade.
What other reason can there be for importing a commodity from abroad, and why is international trade advantageous if not for the reason that a nation may, importing, get a commodity with less effort that is to say, at less cost, than if it produced it at home?
Hence, equalizing costs at home and abroad would, if carried out to its logical consequences, put a stop to importation and exportation and amount to prohibition of international trade.
And if we want this, it is much more logical and much simpler to say so and to prohibit imports entirely, instead of creating in the public mind a vague impression that equalizing costs of production at home and abroad only eliminates some 'unfairness' from international trade but is not really meant to prevent imports.
Yet, although protectionist arguments can often be proved to be nothing else but errors, it does not follow that protection itself is always wrong.
Indeed, few modern economists will hold the free-trade argument so absolutely as the classics did.
They will hold rather that every case has to be dealt with individually and that it is impossible to recommend free trade on general grounds, and for all times and places."

Not from Schumpeter, but nevertheless valid is my view that the US depressions of 1839-1843 and that of 1929-1934 acted as a catalyst for economic and political reform in the US. Still valid is also the view that there is no stronger catalyst for a political changes than a declining economy. Take your own clues (and be long gold.)
I nevertheless consider his late (last?) book "Capitalism, Socialism and Democracy" one of the best pieces of economic literature I have read so far.
I also see a tendency to equate Austrians with unfettererd free market liberal policies.
This is simply not true.
Schumpeter and his liberal predecessors David Ricardo (no formulas, no tables, no charts) and Adam Smith (no formulas either) nowhere said that the process has to go so far to as being to the disadvantage of workers.
They all considered social peace by a more balanced distribution of profits as a necessity to avoid social unrest, which may be the last event in the current death of capitalism, initiated by US president Barack Obushama who should better lend both his ears to his economic adviser Paul Volcker instead of sending more troops to Afghanistan in the name of petro-theism.
As a last note I need to react to one economist chiding me yesterday in one of those 400+ emails for my view that much of the macro outlook can be done on the back of an envelope. Check out the baffling simplicity of big government (Treasury) documents found at such fine blogs like Zerohedge and remember that people look to quick solutions when in panic mode, instead of doing due diligence before they go on air.

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The 4 Kinds of Money

I love this quote more and more with every day:

1. Gold is the Money of Kings
2. Silver is the Money of Merchants
3. Barter is the Money of Peasants
4. Debt is the Money of Slaves

Hat tip to Duncan Robertson

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Biggest Banknote of the World - Not Worth a Penny

Big money does not equate with being rich.
I would say fiat money systems have not improved in the last 100 years. Hyperinflation always has the same face.

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ECB's Trichet Quite Complacement for the Moment - Rates on Hold

It's summertime and the livin' is... (fill with adjective best describing your situation.) The European Central Bank (ECB) has gone into a wait and see mode, leaving main interest rates unchanged and forecasting a return to mild inflation after Eurostat had issued a 0.1% deflation figure for June. According to the introductory statement delivered by ECB president Jean-Claude Trichet after the monthly rate setting council meeting on Thursday markets have somehow stabilized, but he intoned in the Q&A session I followed via webcast that all his estimates are only valid for the moment, meaning any exogenous or systemic shock could change the picture anyday. As always he repeated his mantra that the ECB stands on 24-hour guard to react quickly in case of the next black swan event.

M3 Growth for First Time Below 4.5% Reference Rate
Being complacent with the fast slowdown in money supply M3 growth to a mere 3.7%, the first time in the history of the Euro that annual M3 growth has descended below the 4.5% reference rate, Trichet concluded that:

A cross-check of the outcome of the economic analysis with that of the monetary analysis corroborates the assessment of low inflationary pressure, as money and credit indicators continue to be weak. Against this background, we expect the current episode of extremely low or negative inflation rates to be short-lived and price stability to be maintained over the medium term, thereby continuing to support the purchasing power of euro area households.

I'll leave it here. For the time being the ECB can collect a good performance grade for keeping official inflation at bay.
But my fears that this will be the last summer doldrums for a while cannot disappear after I just had an interesting chat with a source in Slovakia, since this year the 16th EU nation to transact in Euros, who said the industry there is not declining but simply falling apart.
Latvia and Estonia may be only the prelude of an economic apocalypse potentially engulfing all of Europe.

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OECD Gives Austria Good Marks But Warns of Deterioration

--UPDATED WITH SPREAD CHART--
One can literally feel a breather of relief that blew some fresh air in the Vienna city, 3 square kilometres densely packed with the executive offices for Austria's financial and economic upper crust.
The Angst about more criticism on Austria's economic position after a broadside from the IMF 2 days ago gave way to new found optimism as the Organization for Economic Cooperation and Development (OECD) gave Austria fairly good marks in general, but issued 3 warnings in its latest report on Austria that probably apply to all other 190 countries in the world too and had also been an issue in the most recent BIS annual report.
These warnings concern

1. Fiscal Sustainability
2. Financial Strength of the banking sector
3. Urgent improvement of the education sector (after hefty budget cuts in the recent past to buy fighter planes where a lot of "consultants" drove the final bill to yet unknown ridiculous levels - this is my interpretation and I hope this will finally land these consultants in court/jail)

To keep Austria's perspectives in the right dimensions as this peaceful country can hide under a pinned needle on the global map I summarize the main points and the OECD recommendation bullet pointed in their own words.

General Executive Summary

So far, Austria has weathered the global financial crisis better than other OECD countries. Even so, it is entering its worst recession in half a century. Moreover, its strong economic links with Central and Eastern Europe involve risks to GDP growth and financial stability. In the face of the crisis, the stance of monetary policy has been loosened in the euro area and measures have been taken in Austria to strengthen the liquidity and capital basis of the financial system, whilst automatic stabilisers coupled with discretionary fiscal measures also serve as a cushion.

This introduction is immediately followed by a bold recommendation to bring the financial sector back to its former conservative business attitude (sales of Ferraris have anyway not risen much in this decade.)
But the OECD recognizes that it may be in the very own interest of Austria (once the sixth-richest country on earth) to let the debt-to-GDP ratio of currently 62.6% grow a little further if this helps stabilizing declining employment figures. People I asked say Austria would also survive a debt ratio of up to 90% without major problems.

GRAPH: After a sharp upshoot of the spread between Austrian and (benchmark) German government bonds to a scary 135 basis points the Alpenrepublik has seen a rally and outlook is positive according to my sources. Chart courtesy of Oesterreichische Bundesfinanzierungsagentur. Click for larger image.

As the Eurozone convergence criteria are anyway not sustainable in many other Euro members the EU should rather look into adapting these criteria drawn up in the sunny 1990s when modest but steady GDP growth appeared quite realistic and add a social chapter to the proposed text of the Lisbon Treaty I absolutely oppose. I may add that German Bundesbank officials were then fuming about these sunny sunday projections of Maastricht criteria off the record.

While measures in Austria and abroad have been introduced to stabilise financial markets, further financial-sector support might be needed to deal quickly with downside risks should they materialise.
Income maintenance should continue to be administered with a view to protect workers rather than jobs and in conjunction with schemes improving their longer-term employability. Nevertheless helping maintain existing jobs for a limited duration can be helpful in the current state of the crisis.

The OECD is certainly correct to ask for gains in productivity, remembering yesterday's stroll through the city where so many familiar captains of all power levels crowd the shadowed terraces of restaurants, watching that the local white wine does not get too warm while officially holding 2-hour meetings (meet and greet they do indeed.)

Beyond the ongoing crisis, the economy will need to be put on a stronger growth path, and to regain the ground lost over the past decade vis-à-vis better-performing economies. There is room and need for policies to enhance both labour productivity and labour utilisation.

Concerning the all important financial sector the OECD is not really up to date when I remember this master piece of Bloomberg writer Meera Louis that said Austria's banks will need €165 billion and not the €100 billion that are still the official figure for Austria's dire needs in the financial sector, a shocking additional €19,400 the finance minister will have to collect not only from tax payers but also their kids.

In addition to the monetary stimulus imparted by the Eurosystem, the Austrian authorities have introduced a €100billion (36% of GDP) package, including a top-up of the deposit guarantee scheme by €10billion, €15billion for capital injections in financial institutions, and €75billion for supporting interbank lending (via a new clearing bank) and for government guarantees of bank bond issuance.

Covering the OECD's bleak outlook on the fiscal situation one has to complete the picture with Austria's disastrous demographic outlook that will force this micro-nation to roll out the red carpet for migrant workers in order to keep the rocketing share of retirees well fed and bathed in geriatric residences.

The deterioration in Austria’s fiscal position, though less dramatic than in a number of other OECD countries, is substantial and unavoidable...
First, the recent introduction of rolling four-year spending ceilings (which allow for cyclical spending on unemployment insurance and social protection) should help contain spending. Secondly, Austria has made progress with respect to containing ageing-related expenditure, especially on pensions.
Nevertheless, efforts on this front should be maintained as risks and uncertainties remain high. Pension schemes for all civil servants should be fully harmonised, incentives for early retirement should be curtailed, disability pension schemes should be redesigned, a new sustainability mechanism for the pension system should be envisaged and health reforms should be implemented more resolutely.

It is indeed difficult to understand that social democrat chancellor Werner Faymann defended the ridiculously low taxation of Austria's capitalists at the recent annual trade unions congress while the working middle class exceedingly turns into a working poor class because slightly rising nominal wages push them into higher tax brackets.
Small and big entrepreneurs have their problems too as the tax office demands advance tax payments based on the absolutely wrong hypothesis that every business owner will see 10% annual growth in the next years.
A more realistic approach would not only help small businesses - still the mainstay of economic activity - but could also lead to cost-saving reforms in Austria's bloated apparatus of public employees. I can see no economic sense when the tax authority first throttles business investments only to waste millions of man-hours to calculate the refunds that have to be returned because all companies look forward to the certainty of 5% less revenues this year.
I may speak against my own interests but tax free capital gains after a holding period of 1 year and a 25% deduction on interest income and speculative derivative investments could certainly be improved to keep social peace. An extension to 3 years before one can collect tax free gains on his investments and both interest and speculative income equally taxed as salaries would not only curb speculation but also create a level playing field for workers and capitalists.
Excuse me for not covering the certainly pressing issue of education but I can sit at only one table with my a.. - ahem, bottom.
Find below 4 charts and 1 table with Austria's key figures (click both for larger image) courtesy of OECD

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BIS Finds Out that the Old Dogmas Don't Apply Anymore in its Annual Report

Wishing that the Bank for International Settlements (BIS) had issued its annual report 2009 a day earlier - when Vienna drowned in torrential rain - I nevertheless attempt to provide readers with an executive summary that the central bank of central banks has omitted in its version.
This leads me to the first conclusion that world finance must have become really complicated when not even several dozen BIS economists with months of preparation time can sum up 250 pages of data and events. Please recline your chair and hang around as this annual report from what should be the highest-ranking group in the know unwittingly delivers ironies rat-tat-tat like an AK-47 in the loose hands of a kid soldier in one of these African countries we only know about because their soil holds rare elements needed to make your iPhone.
Starting with a stark notice that even the BIS profit declined from SDR 544.7 million to SDR 446.1 million (FRN660 million) YOY we are told that in a world once dominated by the Markowitz' model of portfolio diversification not even the BIS with a portfolio supposedly filled with assets (or just papers?) from all over the world was able to outperform markets.
If you read some sarcasm into this, you are right. After all there are enough bloggers who had warned about the current global crisis as many as 5 years early. Check my blogroll in the sidebar.
Sarcasm is the mildest form I can call my lines following below. Or was it just plain ignorance of warning voices that lead the authors of this annual report to start off with a question?

How could this happen? No one thought that the financial system could collapse.

Maybe they had better looked at the irresponsible monetary policy of the Federal Reserve in this millennium that did not create a society of house owners but a universe of debtors who have sunk below the water line called negative equity.
And how about reading other stuff than the Bubble Street Journal (WSJ) or other lamestream media? Simple "Go ogle" searches on various topics and reading their very own statistics could have alerted them to such fundamental changes like the USA morphing from the biggest creditor (until Nixon closed the gold window) to the biggest debtor in 3 decades that managed to stuff its unbacked FRNs down the throat of more or less all other nations under the disguise that these unbacked greenbacks were a "reserve currency."
As I am already so enraged I refer you to pages 2 to 10 of Alice in Wonderland, sorry, I meant the BIS annual report.
I have only one explanation for their explanations: One does not bite the hand that feeds one. I bow my head in honour of former World Bank chief economist Joseph Stiglitz who overcame this rule in order to set the record straight with his books. The same applies to former economic hitman John Perkins who tells in 2 books how he was contracted to draw unrealistic growth scenarios for developing countries, to be used by US banks and companies as a reason to indebt such nations while reimporting the loans by handing out contracts to US firms, greasing the local elite's hands on the way.
You don't really have to read these 9 pages if you have been following this blog on a post-by-post basis since April 2005.
You can also skip page 11, containing such wisdom like:

Commentators cautioned about the deterioration of credit standards, especially in the issuance of mortgages. And they warned about the risks that come with rapid financial innovation.

Do they allude to the blogosphere or did I just drink too much vin du pays this sunny afternoon?
Page 12 shines a light on the true problem for the first time:

Monetary policymakers’ only available instrument was the short-term interest rate, and there was a broad consensus that this tool would be ineffective against the alleged threat.

How many SDRs does one get paid for such enlightenment - after the world's investors were pared of half their savings in 2008, according to Blackstone?
As the BIS writers begin mind games whether more regulation - currently a hot issue in the EU especially stressed by German chancellor Angela Merkel - could have helped avoid the mess we currently live in, I humbly remind everybody that in a truly free market it is every investors own occupation to do his due diligence on prospected investments. There has never been a free lunch.
Before you get tired; the BIS is good at drawing tables of events that truly simplify recollecting what lead to the biggest financial/economic crisis in mankind's written history.

TABLE: Most important events leading to the current crisis. Source: BIS Annual Report. (Click all graphs for a larger image)

If you did not replicate Robinson Crusoe's life on an isolated island you can also skip pages 16 and 17. But the following timeline of key events from 2007 to mid 2009 is a useful guide for future historians.
2007

• 9 August Problems in mortgage and credit markets spill over into interbank money markets when issuers of asset-backed commercial paper encounter problems rolling over outstanding volumes, and large investment funds freeze redemptions, citing an inability to value their holdings.
• 12 December Central banks from five major currency areas announce coordinated measures designed to address pressures in short-term funding markets, including the establishment of US dollar swap lines.

2008

• 16 March JPMorgan Chase agrees to purchase Bear Stearns in a transaction facilitated by the US authorities.
• 4 June Moody’s and Standard & Poor’s take negative rating actions on monoline insurers MBIA and Ambac, reigniting fears about valuation losses on securities insured by these companies.
• 13 July The US authorities announce plans for backstop measures supporting two US mortgage finance agencies (Fannie Mae and Freddie Mac), including purchases of agency stock.
• 15 July The US Securities and Exchange Commission (SEC) issues an order restricting “naked short selling”.
• 7 September Fannie Mae and Freddie Mac are taken into government conservatorship.
• 15 September Lehman Brothers Holdings Inc files for Chapter 11 bankruptcy protection.
• 16 September Reserve Primary, a large US money market fund, “breaks the buck”, triggering large volumes of fund redemptions; the US government steps in to support insurance company AIG (and is forced to repeatedly increase and restructure that rescue package over the following months).
• 18 September Coordinated central bank measures address the squeeze in US dollar funding with $160 billion in new or expanded swap lines; the UK authorities prohibit short selling of financial shares.
• 19 September The US Treasury announces a temporary guarantee of money market funds; the SEC announces a ban on short sales in financial shares; early details emerge of a $700 billion US Treasury proposal to remove troubled assets from bank balance sheets (the Troubled Asset Relief Program, TARP).
• 25 September The authorities take control of Washington Mutual, the largest US thrift institution, with some $300 billion in assets.
• 29 September UK mortgage lender Bradford & Bingley is nationalised; banking and insurance company Fortis receives a capital injection from three European governments; German commercial property lender Hypo Real Estate secures a government-facilitated credit line; troubled US bank Wachovia is taken over; the proposed TARP is rejected by the US House of Representatives.
• 30 September Financial group Dexia receives a government capital injection; the Irish government announces a guarantee safeguarding all deposits, covered bonds and senior and subordinated debt of six Irish banks; other governments take similar initiatives over the following weeks.
• 3 October The US Congress approves the revised TARP plan.
• 8 October Major central banks undertake a coordinated round of policy rate cuts; the UK authorities announce a comprehensive support package, including capital injections for UK-incorporated banks.
• 13 October Major central banks jointly announce the provision of unlimited amounts of US dollar funds to ease tensions in money markets; euro area governments pledge system-wide bank recapitalisations; reports say that the US Treasury plans to invest $125 billion to buy stakes in nine major banks.
• 28 October Hungary secures a $25 billion support package from the IMF and other multilateral institutions aimed at stemming growing capital outflows and easing related currency pressures.
• 29 October To counter the protracted global squeeze in US dollar funding, the US Federal Reserve agrees swap lines with the monetary authorities in Brazil, Korea, Mexico and Singapore.
• 15 November The G20 countries pledge joint efforts to enhance cooperation, restore global growth and reform the world’s financial systems.
• 25 November The US Federal Reserve creates a $200 billion facility to extend loans against securitisations backed by consumer and small business loans; in addition, it allots up to $500 billion for purchases of bonds and mortgage-backed securities issued by US housing agencies.

2009

• 16 January The Irish authorities seize control of Anglo Irish Bank; replicating an approach taken in the case of Citigroup in November, the US authorities agree to support Bank of America through a preferred equity stake and guarantees for a pool of troubled assets.
• 19 January As part of a broad-based financial rescue package, the UK authorities increase their existing stake in Royal Bank of Scotland. Similar measures by other national authorities follow over the next few days.
• 10 February The US authorities present plans for new comprehensive measures in support of the financial sector, including a Public-Private Investment Program (PPIP) of up to $1 trillion to purchase troubled assets.
• 10 February G7 Finance Ministers and central bank Governors reaffirm their commitment to use the full range of policy tools to support growth and employment and strengthen the financial sector.
• 5 March The Bank of England launches a programme, worth about $100 billion, aimed at outright purchases of private sector assets and government bonds over a three-month period.
• 18 March The US Federal Reserve announces plans for purchases of up to $300 billion of longer-term Treasury securities over a period of six months and increases the maximum amounts for planned purchases of US agency-related securities.
• 23 March The US Treasury provides details on the PPIP proposed in February.
• 2 April The communiqué issued at the G20 summit pledges joint efforts by governments to restore confidence and growth, including measures to strengthen the financial system.
• 6 April The US Federal Open Market Committee authorises new temporary reciprocal foreign currency liquidity swap lines with the Bank of England, ECB, Bank of Japan and Swiss National Bank.
• 24 April The US Federal Reserve releases details on the stress tests conducted to assess the financial soundness of the 19 largest US financial institutions, declaring that most banks currently have capital levels well in excess of the amount required for them to remain well capitalised.
• 7 May The ECB’s Governing Council decides in principle that the Eurosystem will purchase euro-denominated covered bonds; the US authorities publish the results of their stress tests and identify 10 banks with an overall capital shortfall of $75 billion, to be covered chiefly through additions to common equity.

Sources: Bank of England; Federal Reserve Board; Bloomberg; Financial Times; The Wall Street Journal.
If you need more detail, read a longer version of these key events thru page 36, multi-colored graphics included.
Page 37 headlines "The financial sector under stress" but I presume readers of alternative media have grappled already long ago that the world's central banks were not digitizing all these fresh trillions just for fun. Correctly stating that we saw a level of unprecedented policy intervention (by central banks, I assume) since the onset of

a full-fledged crisis that reached historic proportions.

Looking into the future the BIS arrives at the aha-conclusion that further developments will depend on the dynamics of both financial institutions and the macro economy:

Over the medium term, the health of financial firms will depend on the interplay between their response to losses and the dynamics of the macroeconomy. The feedbacks between the two become particularly strong when the capital cushions of financial firms are depleted. In the first stage of the crisis, capital raised from private investors met the cost of writedowns on securities portfolios. In subsequent stages, private capital had to be supplemented on a large scale by public sector resources to address mounting losses on institutions’ loan books driven by rapidly deteriorating macroeconomic conditions. The pace and shape of recovery will be critically linked to the ability of financial firms to manage their leverage and capital positions in a challenging environment without unduly restricting the flow of credit to the economy.
From a longer-term perspective, the crisis carries important messages for the structure and stability of the financial system. The events of the past two years highlighted how strong the interdependencies between financial system components can become. Market participants and also, arguably, prudential authorities underestimated the complementarities in the roles of different actors along the securitisation chain, the close interlinkages among financial markets and institutions, and the interplay between asset market and funding liquidity.

Things get more interesting on page 40 again.

TABLE: So far bank losses seem to have peaked in the 2nd half of 2008. But all unofficial talk that reaches my ears focuses on the BIG whoppers still ahead of us. Especially corporate inter-linkages between banks and insurers may prove to be the major problems as accounting at insurers allows to hide losses much longer than on balance sheets of banks. And don't forget the yet unsolved $700 TRILLION problem of over-the-counter (OTC) derivatives. Search that figure yourself in the BIS report. Last time I checked it was "only" $600 TRILLION.

Here Some Color Before You Doze Away
Realizing that this blog post is in imminent danger to resemble the boring (but very readable) layout of the BIS original, here comes some color concerning the investment banking sector, whose limitless greed for ever larger bonuses for its employees is IMHO the root of all the problems we face today.

GRAPH: These charts are self-explaining and are in line with bankers bonuses over the past years. I notice that a decline in private risk securitization is now being substituted with more government debt business. As all other underwriting sectors have gone from boom to bust in the hands of pinstriped investment bankers I think this may forebode soon-to-happen disasters with public debt, i.e. the default of sovereigns. Check out this post about the pending risk of defaulting nations/fiat currencies.

Hedge Funds Going To Where They Came From: Nothing Left
Sorry for having water boarded you with too much black ink for the past couple of screens. You don't need to read page 48 and onwards to find out that 2008 was the year where the guys in front of an array of Bloomberg screens literally jumped out of the window together with most markets they had been betting on in the years before.

GRAPH: No need to say much here. Hedge funds were only riding the wave of markets and disappeared at the same velocity with which the markets of their choice went down. To be fair: Policy interventions limiting trading the short side did not leave them much room for survival in what turned out to be one of the worst years for all kinds of markets.

The last decade was not only marked by leveraging equity to the max (most institutions went down or were bailed out once leverage exceeded a level of 30, meaning banks, funds and all other players with access to easy money (thank you Alan Greenspan, thank you Jean-Claude Trichet, thank you Ben Bernanke) were playing with 30 times as much money as they actually had in the till.
A World Full of Debt Slaves
As if turning the better part into debt slaves by pushing mortgages on more or less everybody who could make it to a bank's office unaided was not enough banks were looking for still more business (and bonuses!) Saturated home markets left them only one choice: Expanding into new territories, kind of a financial recolonization of formerly dependent territories.

GRAPH: Having grazed off domestic markets, engulfing them in the highest debt levels of history, banks set the sail and started lending all over the world. Of course it is always easy to have the winnining lottery numbers on a Monday; but how the hell is it possible that a generation of whiz kids excelling in constructing sophisticated Excel sheets completely missed out on the unbending fact that growth has its limitations and every excess ends in a mutual cannibalization of market share?

Becoming a little tired to reprint the BIS explanations about the obvious mega-problems in the financial sector one is happy that after 55 pages the BIS begins to focus on what matters most: Financial crashes have always been the precursor of extended economic downturns.
Think South Sea Bubble, think France before the revolution in 1789, think Vienna stock exchange in the 70s of the 19th century (then the biggest stock market in the world) and then again in the late 1980s after Jim Rogers kissed it awake from a century long slumber.
When the easy money begins to dry up, so does the real economy (that is where all other people except bankers make their money!)

GRAPH: The real economy followed the downturn in the financial sector with a delay of about one year, proving again an old market rule that stock markets discount the future at a range between 12 and 18 months.

I absolutely disagree with this charts low showings of inflation. Inflation indexes are governments tools to keep the wages of public employees and the pensions of retirees as low as possible. This is not a science but simply a sophisticated way of lying in the face of the public.
Finally, Some Sort of Summary
Oh, on page 72 I find out I criticized the BIS for not coming up with some sort of executive briefing. Well, the black ink proves me wrong. Here we go:

The global financial crisis has led to an unprecedented recession accentuated by rapid declines in trade volumes, large employment cuts and a massive loss of confidence. How deep and prolonged the downturn will be is uncertain. In the industrial countries, there are some signs that the rapid pace of decline in spending witnessed since the fourth quarter of 2008 has started to ease. But a strong, sustained recovery in those countries could be difficult given attempts by households and financial firms to repair their balance sheets.
Nevertheless, substantial fiscal stimulus and exceptional monetary easing in many countries should help bring the recent contraction to an end. The policymakers’ task in the near term will be to ensure a sustained recovery. In the medium term, however, it will be to ensure that policies are adjusted sufficiently to maintain the stability of long-term inflation expectations.

Feeling that many readers will never have scrolled to this piece, I relieve the busy bee readers with another BIS conclusion beginning on page 136. Get this last dose of what I would not exactly call mythic wisdom of central bankers but a statement every economic and financial observer will agree with. In short: We need an instant reform but there are sooo many obstacles. Here's the longer BIS version:

We have no choice but to take up the challenge of first repairing and then reforming the international financial system, all the while cushioning the impact of the crisis on individuals’ ability to live productive lives. Efforts so far have fully engaged fiscal, monetary and prudential and regulatory authorities for nearly two years. The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5% of world GDP – more than anyone would have imagined even a year ago.
Recovery will come at some point, but there are major risks. First and foremost, policies must aid adjustment, not hinder it. That means moving away from leverage-led growth in industrial economies and export-led growth in emerging market economies. It means repairing the financial system quickly, persevering until the job of restructuring is complete. It means putting policy on a sustainable path by reducing spending and raising taxes as soon as stable growth returns. And it means the exit of central banks from the intermediation business as soon as financial institutions settle on their new business models and financial markets resume normal operations.
In the long term, addressing the broad failures revealed by the crisis and building a more resilient financial system require that we identify and mitigate systemic risk in all its guises. That, in turn, means organising financial instruments, markets and institutions into a robust system that will be closer to fail-safe than the one we have now: for instruments, a system that rates their safety, limits their availability and provides warnings about their suitability and risks; for markets, encouraging trading through central counterparties (CCPs) and exchanges, making clear the dangers of transacting elsewhere; and for
institutions, the comprehensive application of enhanced prudential standards combined with a system-wide perspective, beginning with the application of something like a systemic capital charge (SCC) and a countercyclical capital
charge (CCC).
Successfully promoting financial stability requires that everyone contribute. Monetary policymakers must take better account of asset price and credit booms. Fiscal policymakers must ensure that their own actions are consistent with medium-term fiscal discipline and long-term sustainability. And regulators and supervisors must adopt a macroprudential perspective, worrying at least as much about the stability of the system as a whole as they do about the viability of an individual institution. An encompassing policy framework with observable objectives and implementable tools is at an unfortunately
early stage of development. But the suggestions made here and elsewhere are a start. The work will have to be coordinated internationally. In particular, institutions with expertise in the field – including the Basel-based standard-setting committees and the Financial Stability Board – will need to play a leading role in making such a framework operational. This is going to be a long and complex task, but we have no choice. It has to be done.

As in most of my past 600+ posts I disagree with this official attitude that has landedus where we are. It would be maybe of help if all insiders REALLY read David Ricardo and Adam Smith and then follow these centuries old guide lines for free markets. My two cents can be found here and will be extended in the future.

Continue here!

First Blood Spills in Austrian Banking Apocalypse: Raiffeisen Withdraws "Capital Note" Offer

Having had very serious thoughts about the gargantuan problems of tiny Austria's banking sector stemming from overly euphoric attempts to financially recolonize Austria's long gone emporium since the end of 2007 bits and pieces of information begin to confirm this blogger's suspicions that Austria will be really hard hit.
Resisting attempts to blog more on the matter because of possible libel suits I now can come up with more details thanks to Zerohedge blogs detailed publications of documents issued by Raiffeisen Zentralbank group. Here we go with a story that could not only happen in Austria but in every country with a small banking industry where everybody knows everybody and compliance regulations are only valid during sparse official business hours from 8 AM to 3 PM.
Zerohedge, a shooting star in the global blogosphere with millions of hits, first raised my attention last week when it published the prospectus for an exchange offer where RZB group offered to exchange its "€500 million non-cumulative subordinated perpetual callable step-up fixed to floating rate capital notes" - in short hand unsecured crap - against some other unsecured crap called "non-cumulative subordinated perpetual callable fixed to floating rate capital notes" at 55 cents on the Euro.
This 45% haircut was sexed up with a 15% coupon (coupon of old notes was 5,69%), but when one reads the fine print it more sounded like a weak promise as the fine print says RZB group only has to pay that high coupon if it has enough resources to do so.
OMG, why don't we go to the horse races right away?
The new notes were to be issued by RZB Finance (Jersey) IV limited, which is a 100% indirectly owned subsidiary of Raiffeisen Zentralbank AG (RZB) via Raiffeisen Malta Bank, also not exactly a plush bank with €2,000 paid-up capital.
A perpetual note is an investment vehicle that has never to be redeemed by the issuer and therefore can only be resold in secondary markets - if there are bids for it.
RZB Jersey IV Ltd. has a paid up share capital of €2,000 and is 100% owned by Raiffeisen Malta bank, which also negatively stars with a paid-up share capital of €2,000. RZB Jersey's sole business is to raise hybrid capital for its parent RZB. Read all the details in the prospectus over at Zerohedge.
Both companies losses in a total default of the new issue "worth" €275 million would be limited to these €4,000 as much as I understand the complex web of finances without money.
So much about the recent past of this issue which had been made public on June 18.
Find all the details of the proposed exchange offer over at Tyler Durden's (pseudonym) Zerohedge blog.
From here the story gets really hairy.
RZB issued a release on Monday 29, saying that it withdrew the offer for the exchange of the old into new "capital" (haha) notes. Having stored this release on my computer I first want to offer Zerohedge's suspicions why the issue was withdrawn.

Complete lack of investor interest

Concerns about what would happen once the lack of interest is made public

Trouble with accountants

rating agency getting back to the bank that this would be treated as a distressed exchange (as Zero Hedge speculated), putting the company into an Event of Default.

But Tyler would not be Tyler had he not also some other possibilities for the withdrawal on his mind:

Then again, the real reason is probably much more innocuous, and has to do with the bank discovering a buried gold treasure in its back yard which will be used to satisfy the several hundred billion in toxic assets as a result of chicken coups built in Transylvania at a 180% LTV (in a probably JV with GE Capital)

There is nothing to add. Austria's banking sector is up to its ears in you know what, despite officials saying otherwise (they also begin to worry about their pensions.)
For more information about Austria's big role in the demise of Central Eastern Europe financed with the money of depositors at Austrian banks click the label "Austria" below to find more information and background about the possibility that Austria, not long ago considered the 6th richest country in the world, is in a good position to be the first Eurozone member that has to default. For more background, why every Austrian from baby to octogenarian, may be liable for up to €19,600 per capita thanks to bankers who saw only bonuses and nothing else - like maybe responsibility - read this post.
NOTE: This blogger will treat all material documents sent to the email address to be found at my profile page with absolute discretion.

Continue here!

One Eurozone But Many Sets of Growth and Price/Inflation Data

Preparing this rant about the widening milkyway between Eurozone economic growth and Euro production in the ECB and its printing presses spread evenly amongst Euro members proves one more time that the absoluteness of financial math and official figures are 2 pairs of shoes. Calculating GDP growth in the so called single market begins with problems of the data source.

GRAPH: According to data from the EU commission - the non-elected quick intervention troup towering above the European Parliament - I arrive at a total real GDP growth of 19,64% for the period from 2000 to 2008. Chart courtesy of tradingeconomics.com

Harmonization at even the most important levels like data integrity is a goal still to be attained, comparing the EU Commissions data with those of Eurostat, the EU's official statistical office.

GRAPH: GDP growth figures for the Eurozone's 15 members (Slovakia only joined this year) come in a tad smaller according to Eurostat. According to Eurostat's figures total GDP growth from 2000 to 2008 was 18,98% in real terms. Chart courtesy of Eurostat

I would have loved to provide readers with the absolute difference between these two official figures in nominal Euro figures (certainly many many billions,) but such are not available. Browsing Eurostat's and the EU commission's websites does not yield this information.
I would prefer nominal GDP figures as I have been having a problem with the dichotomy between the EU's/ECB's "official" inflation figures that diverge widely from the real devaluation of the Euro since its inception in 2001 for consumers (corporate and government accounts were converted a year earlier.)
Based on continuously changing consumer baskets in all Euro member countries I am reminded of Winston Churchill's quote that he only believed statistics he had falsified himself. Read more on the issue of juggling inflation figures in this earlier post. Although it deals mostly with US inflation figures you should get an idea of the manifold tricks invented to hide true inflation.
My anecdotal evidence stemming from criss-crossing the old world concludes that prices have effectively doubled in the last 10 years. This is a crass disparity to Eurostat's official figures.

GRAPH: Annual Eurozone Inflation according to Eurostat from 2000 to 2008. Chart courtesy of Eurostat.

Be it Germany where I paid €3,40 for a coffee in Berlin, about double of what it was in the hailed times of the ultra-hard Deutschmark, the Netherlands, where a single fare ticket for the Metro in Rotterdam is a whopping €3,50, or Venice/Italy where a single fare with the public vaporetti - boats - has exploded from 80 Euro cents to €6,50 since the introduction of the common currency let me conclude that the real ascent of prices is closer to 7% annually since the formation of the Eurozone.
In my home country Austria gastronomy prices have been going through the roof. A simple lunch menu on Vienna's Naschmarkt where office clerks share tables with guys with ties has shot from an average of €4,35 in 2000 to €8,80 nowadays further elevates my skepticism about the true reflection of consumer prices in Eurostats HICP (Harmonised Index of Consumer Prices) figures.
Not that inflation would be a phenomenon limited to Euro members. An average lunch in the city centre of Bratislava/Slovakia, the youngest Euro member, has doubled from €5 to €10 in the last 10 years.

Recent Decline of Inflation Will Be Temporary
Seeing the upper echelons of the ECB jumping with joy about recent declines in HICP figures will be a short-lived spectacle. Italian ECB governing council member Lorenzo Bini-Smaghi told a conference on June 24 that there is a lively European debate whether we have to fear deflation or inflation more.

The debate between those who consider that inflation represents the main risk for advanced economies over the next few years and those who instead believe that deflation is the most immediate threat, has polarised, especially in the United States. It has also had an interesting echo here in Europe.
Both concerns are legitimate. To some extent, the fact that informed observers can maintain both views simultaneously can be seen as a sign that monetary policy is managing to walk the fine line between the two risks. The debate neatly encapsulates the trade-off currently facing policy-makers. They have to choose between short-term adjustments to strong recessionary forces and long-term macroeconomic stability. A key challenge is how to calibrate the policy response in the face of these forces: too timid a reaction may be costly in the near term, but an overreaction may sow the seeds of the next crisis. I will argue that a policy action that aims to ensure macroeconomic stability in the medium term requires a thorough examination of the risks, in much the same way as a disease calls for a sound diagnosis if it is to be properly treated.

They better hurry up with their diagnosis, as this crisis is far from over although my gut feeling tells me we will see a short-lived bounce this fall in economic activity before the whole mess caves in due to unsustainable debt levels on both public and private accounts.

GRAPH: A chart accompanying Bini-Smaghi's speech shows that future inflation expectations have significantly moved north since last November.(Click for larger image)

Enjoying blogger's freedom of speech I firstly expect significantly more true inflation based on the daily price shocks I experience when shopping or paying for public services which should be covered by taxes already. Double-charging has become the new norm in the leading debtor nations of the world, 9 of the first 10 of them being Eurozone countries.
Secondly I allow myself to remind the money printers in the ECB that no saver would ever fear deflation. Or would you mind if your weekly grocery bill would be lower?
The ECB's self-pride is based on clay feet though. A slowdown of M3 growth while the economy contracts still means there is more fiat money produced compared to the declining purchases of goods and services with these funny colorful papers that are only backed by the belief they will buy the same amount of goods and services in the future as they did in the past.

GRAPH: Absolute growth of money supply M3 clearly shows that even in a contracting economy (Q1: minus 4,8%) the ECB showers the Eurozone - or more exactly its banks with ever more money. The weekly financial statement to be released next Tuesday will show another upshot due to the record €442 billion 371-day "liquidity providing" tender

Not only nominal but also the relative change of M3 - hovering above the ECB's reference rate (whatever that means) shows that we are still experiencing monetary inflation at its best.

GRAPH: Don't get confused: Month-on-Month change of M3 is still way to high in order to return to the ECB's meaningless reference rate of 4.5% annual M3 growth, a growth rate it has never reached since the inception of the Euro. Chart courtesy ECB. Click for larger image.

Another way to see that the ECB will have to face runaway inflation is the comparison of weak GDP growth since 2000 and the balance sheet of the ECB. Repeating above mentioned meekly economic growth of 18,98% or 19,64% (depending on the data source) lags far behind the 162% growth of the ECB's balance sheet between January 2000 and end of 2008. In absolute figures the balance sheet grew from €792 billion to €2,072 billion. This is a lot more money sloshing around in comparison to GDP growth.
While these additional €1.3 trillion (on Tuesday it will be €1.75 trillion) are now kept within the ailing banking sector who ran agog creating derivatives, thereby exploding leverage to dimensions never seen before in history, this money has to trickle through into the contracting economy, pushing up nominal and real prices at one point. After all, for every loser there is a winner who will try to maximize his gains again.

Gold Again Proves Its Role As Inflation Shield
Although the next chart from Gary Dorsch is a bit outdated, stemming from February 2008, it again proves the point that gold is a most reliable canary in the coal mine of monetary inflation.

GRAPH: Observing since a while that gold only gyrates against Federal Reserve Notes but remains more or less steady priced in Euros this year is another indication that the dollar's days will come to an end soon. Chart courtesy Gary Dorsch via MarketOracle.

I sign off with John Pierpoint Morgan's historical quote when asked by congress in 1907 what money actually is.

"Gold is money. Everything else is credit."

And finally I like to promote this phrase, brought to my attention by learntotradefutures.com publisher Duncan Robertson.

Gold is the money of kings.
Silver is the Money of merchants.
Barter is the money of peasants.
Debt is the money of slaves.

Continue here!

Better Listen What China Has to Say

Shocked by the fact that lamestream media and Twitter are all about Michael Jackson's death from what appears to be a drug overdose, I enjoy being the spoiler for a world that seemingly does not know how to set its priorities anymore. While 33 of the 42 commercial media I regularly read headline with Jacko, it is Chinese media that published the truly important news of the day.
Here's the executive version of Chinese economic news picked from the English language People's Daily Online.

1. China takes public ownership as the main body and the other (issue) is to adhere to the common growth of economy belonging to diverse forms of ownership.
2. The People's Bank of China (PBoC) will stick to an appropriately easy monetary policy but will ensure reasonable growth in money and credit, the central bank said yesterday.
3. New credit in the first half of 2009 will definitely surpass 6 trillion yuan, and some experts even predict the figure to be up to 6.5 trillion yuan. This means that total credit in the first half of this year will be more than the total amount invested in any year since China was founded.
4. China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said.

You can now go back to watch CNN's US propaganda broadcast and remain in the "don't worry, be happy" camp which still has a solid majority in the Western world. Or would you prefer to gather a little more intel on the next #1 power in the world? Then read on.
Bullet point #1 appears to point to a struggle of ideologies in the Chinese communist party. Chinese entrepreneurs certainly favor a more liberal business climate but one must not forget that there is still a gap as wide as the Amazon river between the Ferrari driving riches in towns and a rural hinterland where oxcarts and bicycles remain to be seen as signs of prosperity. In order to prevent social upheaval China needs to bridge this gap or it risks falling apart. The anonymous commenter in the People's Daily reminds the world that China still favors a hands-on approach:

Taking public ownership as the mainstay is a fundamental principle of socialism. In a socialist country like China, where people have become masters of their own destiny, it is imperative to keep public ownership of means of production as a basis of the socialist economic system. So, adherence to public ownership as the main body is of vital importance in giving play to the superiority of the nation's socialist system, increasing the nation's economic strength and promoting social harmony in the country.

Pointing out, that 26 of the 500 largest companies in the world as of 2008 are state-controlled Chinese corporations, the most populous nation on earth insists that it is not so much about ownership-ideology but about keeping up a harmonious people.

In a nutshell, it is imperative and essential to consolidate and develop the public ownership economy, to encourage, support and guide the growth of the non-public sector economy, and to maintain the right to equal access of property resources, so that a brand-new situation will emerge, in which all economic sectors will "vie with each other" on an equal footing so as to spur their economic activity for mutual advancement.

Confronted with a global economic downturn China's central bank made it clear this week that it will emphasize an easy monetary policy to keep its economy humming despite declining exports. In a stark contrast to the indebted western world China sits on roughly $2 trillion in assets, enabling it to conduct stimulus policies no country in the Western hemisphere could afford. Read their opinion on bullet point #2 in their own words as it also signals a concern about the environment:

In a summary of the conclusions drawn at its second-quarter monetary policy committee meeting, the central bank said yesterday that it would ensure reasonable growth in money and credit but would strictly control lending to polluting, energy-intensive industries...
"The top priority at the moment is to stop the explosive growth in lending at the end of the month and quarter," China Banking Regulatory Commission said in a recent notice to lenders, pointing to the phenomena of banks racing to offer loans before June to meet their half-year lending targets.

The Eastern dragon so far performs much better than any recession-stricken nation in the West, where money supply has rocketed to potentially fatal (hyper inflationary) levels. Covering bullet point #3 in their own words, China plays its monetary muscle.

People's Bank of China Monetary Policy Committee recently held a regular meeting on the second quarter of 2009. The conference studies the orientation of monetary policy and measures for the coming future, concluding that we need to implement moderately easy monetary policy and maintain the continuity and stability of policies to guide a reasonable growth in monetary credit.
It is learned that in the first five months, RMB loans increased by 5.84 trillion yuan. June figures have not yet been released, but according to past experience, new credit in the first half of 2009 will definitely surpass 6 trillion yuan, and some experts even predict the figure to be up to 6.5 trillion yuan. This means that total credit in the first half of this year will be more than the total amount invested in any year since China was founded.

2 Ways Through a Recession: China Can Afford It Because of Savings
Show me a Western country that could shell out a trillion Euros/dollars from its full pockets! There is no such thing. All stimulus packages Western politicians promise are only backed by the hope of future tax payments. China can dive through a recession on its savings whereas the so called first world has nothing else to show than debts that are enough of a burden for the two next generations.
Wouldn't we all love to have the same economic discussion as the Chinese where economists argue whether the economy has bottomed out at a growth rate of 6.1% in Q1 2008 or whether one should be skeptical about a possible GDP growth rate of 9%?
Diving into recent history (i.e. this blog's archive) China can actually see the global downturn as a benefit that helps keeping the economy from overheating. BTW, why are we actually concerned with "overheating" economies? Don't we all want to become rich by tomorrow? But I won't digress, this is an entirely different discussion best to be had over a bottle of good plum wine.
Let's better proceed to bullet point #4: China's growing role in forex markets.
Reuters staffers Zhou Xin and Alan Wheatley direct my attention to the fact that China sees a much bigger role of gold in global currency policy after surprising the world with the fact that it had domestically purchased gold and now sits on a hoard of 1,054 tonnes after publishing a figure of 660 tonnes since 2003.
Buy Gold Before China Buys It All
The communist party's chief economist told Reuters the following strategic goals (found on GATA's website):

China should buy more gold because the dollar is poised for a fall and the metal is needed to support the greater international role envisaged for the yuan, a senior researcher with the ruling Communist Party said on Thursday.
Li Lianzhong, who heads the economic department of the party's policy research office, said China should use more of its $1.95 trillion in foreign exchange reserves to buy energy and natural resource assets.
Speaking at a foreign exchange and gold forum, Li also said that buying land in the United States was a better option for China than buying U.S. Treasury securities.
"Should we buy gold or U.S. Treasuries?" Li asked. "The U.S. is printing dollars on a massive scale, and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So gold should be a better choice."

Following the nuances of Chinese official-speak it is clear that China sees itself superior in monetary policy but is left with a problem it shares with all creditors in the world: Its forex reserve stash consists mainly of unbacked Federal Reserve Notes (FRNs), a fiat currency backed by nothing else than the belief it will buy you the same amount of goods and services in the future as it did in the past.
China takes appropriate steps at its own rhythm to secure a bigger role for the Yuan in the future. Looking at the Yuan's slow revaluation so far China has made good on its promises to the bankrupt USA.
The Reuters story sums it up correctly:

Li cited the high share of gold in the foreign exchange reserves of the United States, Italy, Germany, and France to argue that China's gold holdings, which account for about 1.6 percent of its reserves, are too small.
China does not disclose the composition of its currency reserves, but bankers assume around 70 percent is held in dollar assets.
China is the largest single holder of U.S. Treasuries, with $763.5 billion at the end of April, according to U.S. Treasury data.
Analysts say this data set understates the true number as it does not capture paper bought through dealers in London or elsewhere.
Li said a second reason for buying more gold would be in anticipation of the yuan one day becoming a reserve currency.
The yuan is not convertible on the capital account, meaning it cannot be freely traded for other currencies for financial transactions that are not related to trade. This rules out the yuan's use as an international reserve currency, for central banks would not be able to convert it quickly if necessary.
But in a very preliminary step toward that goal, China is paving the way for greater use of the yuan beyond its borders.
The People's Bank of China has arranged currency swap deals with six countries since December totalling 650 billion yuan ($95 billion) so that trade and investment with China can be conducted in yuan, not dollars.
And China will soon allow selected firms in the southern province of Guangdong that trade with Hong Kong to settle their transactions in yuan, or renminbi.
"If the yuan should go international or become a reserve currency, China needs more gold to back that," Li said.

One must not forget that China's political state supports long term strategies for which Western leaders who want to get reelected every 4 years have no leeway.
Reuters fills in here very well too:

When the yuan does become an international currency, which Li acknowledged was a long way off, he said the composition of the SDR should be reformed to include the Chinese currency.
Ideally, in the long term, the SDR would be made up of the dollar, euro, sterling, yen, and yuan, each with a weighting of 20 percent, Li said.
The SDR is currently made up of the dollar (with a weighting of 44 percent), the euro (34 percent), the yen (11 percent), and sterling (11 percent)
The four currencies in the SDR, which must be convertible, are those issued by fund members with the largest share of global trade. The weights assigned by the IMF are based on the value of exports and the amount of reserves denominated in those currencies.
The composition of the basket is reviewed every five years. the next review is due in 2010.

Rest assured that the dragon will blow some hot air down the Western world's spine in the run-up to this review.

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Newsletter: US Embassies Are Advised to Buy Enough Local Currency for 1 Year

This rumour could become TNT for the USA. Newsletter publisher Harry Schultz who correctly forecast the 2008 stock tsunami and outperformed the market more or less as long as he invests, comes up with truly hot stuff.
In its current issue the Harry Schultz Letter (HSL) (via Marketwatch, HT John Trudgian) reports rumors that

"Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

His apocalyptic projections don't end there:

"Another FDR-style 'bank holiday' of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it)."

This is one more rumor adding to my suspicions something big is going to happen. An imperium in decline will play all dirty tricks in order to stay afloat. There are no green shoots to be seen for several years, as explained in my 600+ earlier posts. We are in for a K-winter (Kondratieff).
Was the swine flu just a test run for a deadlier pandemic?
Or will the US default by waging WW3?
Section 25C of the Federal Reserve Act (adapted in 1994) explicitly says that the USA does not have to repay debts to a country if the two countries are engaged in a war.
Read more on the US external debt in this earlier post "The US debt balloon - a simple explanation for non-economists."

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ECB Shells Out €1,437 Per Eurozone Citizen to Banks

If your small-time loan you need for your kid's bracelets is denied by your bank's customer representative, you have every right to go berserk.
The European Central Bank (ECB) came up with one of their ominous "innovations" on Wednesday that essentially is nothing else than a new form to print still more money. With a record tender of €442,000,000,000 (that is €442 billion) the ECB has showered Eurozone banks with €1,437 for every Eurozone citizen in its first tender with a 371 day maturity, accepting all bids at the fixed official rate of 1%.
BTW how much does your bank charge you for an overdraft? I presume it is closer to 10%, leaving the banks with a hefty profit that makes me understand why even the bible discusses usury.
These figures show that ECB president Jean-Claude Trichet and all the governors on the ECB's council have been publicly denying what cannot be overseen anymore: The Eurozone system is broken beyond repair. Check these posts where the (expletive) central bank(rupt)ers have told us since the onset of the crisis in August 2007 that all is well and contained. My god, I yearn for the good old times of the subprime crisis when I could enrage myself about lousy €50 billion quick tenders. Check my archives since August 2007 for more chronology of the subprime crisis mutating into a full blown global banking crisis.
These Numbers Promise More Hyperinflation
With the latest "innovations" in the process of digitizing new fiat money the ECB basically does the same what it has done since the onset of the crisis: Creating more new money, only with longer maturities and less regard for the quality of collateral, whose rules it softened last year.
Only yesterday Austria's central bank governor Ewald Nowotny had told a champagne drinking crowd at the annual self-celebration of Austrian bankers that the worst is yet to come; an abrupt U-turn after he developed a 100% wrong track record since he took office last year.
The inofficial sounds that reach my ears fully agree with this bleak outlook. The Eurozone's cross border banks had gone completely mad in Eastern Europe. Or what would you call €800,000 condos in Sofia/Bulgaria where the average net monthly income is €300?
Bulgarian tax authorities are now checking all Bentley owners - and there are lots of them - from where their cash stems. Small hint: from foreign banks hallucinating when they pushed loans onto people, charging them 16% interest and more.
Lets not forget that this will blow up the ECB's balance sheet next week, propelling it again over the €2 TRILLION mark.
All this happens at a time when all consumers in the old world have gone into standby mode, deferring everything but the most important items like food when they go out shopping.
I notice more and more shops selling luxury items (like balsamico vinegar and Dijon mustard ((the original producer company went bankrupt last year)) that now glue ads into their windows, offering discounts between 10% and 50%.
Being used to bazar methods from my many years in Asia I can now immediately claim the status of a "regular" customer, getting huge discounts the first time I frequent a store.
A story in the Bubble Street Journal (WSJ) has more details on Europe's way into hyperinflation. From the WSJ:

Euro-zone banks borrowed the one-year funds, the largest amount the central bank has ever dispersed at a single shot, at the ECB's current key rate of 1%. Much of the total likely substituted for amounts banks had been borrowing from the ECB for shorter time periods, so the net stimulus to the economy is less than it appears at first sight.
The novelty lies more in the length of time over which the ECB is prepared to offer unlimited funding, reflecting a desire to bring longer-term money-market interest rates down to where it thinks they should be...
Analysts said the high demand for the funds reflected the problems some banks are still having in funding their businesses.
At the same time, it also reflected expectations that the euro zone's economy will start to recover later in the year and that ECB interest rates are unlikely to fall further. ECB policy makers have signaled they are not inclined to cut their key rate -- now at the lowest level in the central bank's 11-year history -- again unless the euro-zone economic outlook darkens substantially. Analysts expect the key rate to hold steady at 1% through year end.
"We are nowhere near the beginning of a tightening cycle, but we are getting closer to the end of the easing one," said Lauren Mutton, a strategist with Margin Stanley in London....
The Paris-based Organization for Economic Cooperation and Development said Wednesday in its latest forecasts that the ECB still had scope to cut its key rate further.
At the peak of the crisis, banks were using over €1 trillion in short-term funding from the ECB. As fears of a complete meltdown of the financial system have eased, that has fallen to around €618 billion.
During the worst of the crisis, banks were forced to live from week to week, always anxious about access to liquidity. In response, the ECB offered money first for three, then six and now 12 months to give banks greater clarity in their operations, hoping the certainty of longer-term funding from the ECB would encourage them to lend again to the real economy.
"This should reassure the banks that they have adequate liquidity for the next 12 months," ECB governing council member Lorenzo Bini Smaghi said in a speech to a university in Rome Wednesday.
By promising a full allocation of all bids on Wednesday, the ECB has effectively passed responsibility for any easing of policy to the banks themselves, giving complete license to any institution that thinks it can lend the money out profitably into the real economy.
"They must pass it along," Mr. Bini Smaghi said.

This is exactly the problem that has not been solved in the last 22 months and will also not be solved by creating pan-European watchdogs for the financial industry: Banks are not willing to lend unless you present them with 200% collateral. As always, credit is only around for those who don't really need it. Anybody wagering a bet that Europe will recover within the next 12 months. I'd love to take the other side.

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Moody's Next Epic Fail: "US Remains a Solid AAA Nation"

While the currently ongoing two-day meeting of the Federal Open Market Committee (FOMC) is probably not only discussing the state of the US economy but also how to maintain the global attraction status of its only product, Federal Reserve Notes (FRNs) in unlimited amounts which they prefer to call the primary global reserve currency, it is difficult not burst into full laughter about rating agency Moody's stance.
According to a Reuters report from Tuesday,

Moody's Investors Service said on Tuesday that the U.S. government's triple-A credit rating was safe but added that it could be at risk if Washington were unable to bring its public debt back to a downward trajectory.
Financial markets have repeatedly been spooked this year by concern that triple-A rated governments such as the United States and Britain could face credit ratings downgrades as they borrow heavily to spend their way out of recession.
"The U.S. government triple-A is safe," Pierre Cailleteau, team managing director of Moody's Sovereign Risk Group, said at a media briefing on sovereign credit ratings held in Tokyo.
Moody's has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.

I wonder why there are still people around who believe any of the wrong commonplaces rating agencies release to the public while cashing in megabucks from those being rated. A look back in recent financial history should make investors or those who manage the money of investors reconsider their belief into institutions that have failed at all times.
Moody's had completely missed the rapid deterioration of Latin American finance in the 1980s after overlooking the US savings & loans crisis at the same time.
They were asleep at the wheel when the collapse of the Asian tigers in the early 1990s began and slept during Russia's bankruptcy in 1996, only to awake to see the multi billion failure of Long Term Capital Management in 1998.
That must have been such a shock that Moody's was paralyzed during the popping of the Internet bubble in 2000 and Enron's fraudulent bankruptcy a little later. Oh, let's not forget such sovereign risks like Argentina that went bankrupt twice within a decade.
But maybe this was a long term strategy so that bankers, whose literacy appears to have been limited from AAA to C, had a well paid scapegoat when the subprime crisis developed into what is now seen as the worst financial crisis in mankind's history (just wait a little, mass poverty in the Western world will come soon enough.)
If the US Is AAA, Everybody Else Is Eligible for AAAA
It defies any logic that the most indebted country in the world running the biggest triple deficits of all is still considered a AAA risk. If this rating is based on any rationale, we can all go and ask for a quadruple-A. Or do you run bigger deficits, owe more money and outsourced all your earlier sources of income like the USA does?
Add in that the government big-wigs like Treasury secretary Timothy Geithner, his commander-in-chief Barack Obama plus their little helper in the Federal Reserve, Ben Bernanke are a trio of one-trick ponies. (Please click all links to save me reposting what was clear as early as 2005.)
Having to fund two wars in the name of petro-theism while being confronted with an imploding economy that would look so much worse weren't it for the limitless army spending and the growing number of public employees - who will blow up future pension liabilities into the quadrillions - does not exactly look like a strategy that may improve the state of the United States.
Having deindustrialized (save for the arms and surveillance industry) what was once the greatest power of the world I wonder what Obama has up his sleeves to turn around the epic disaster he inherited from George W. Bush.
So far all we have seen is a backtrack on most changes he promised ahead of the election. The US army will continue to bomb, maim and probably torture people who ask nothing else than to be left alone in peace. An extension of the army engagement in Iraq, more soldiers for Afghanistan and moves to topple Iranian president elect Ahmadi Nejad - nobody complained when Bush stole 2 elections at hair's width, while Nejad repeated his 62% majority - may be a boon to the military-industrial complex but won't pull the US out of its down spiral.
As we have arrived in the age where trillions are the new billions - without the financial industry noticing it - the USA looks like every empire in decline: too many armed conflicts, a profligate government overspending and a general downtrend in public education (because this sector is bankrupt too) accompanied by monetary inflation has always ended in disaster. Americans can only console themselves with the fact that all central banks print money at full speed despite the economic contraction.
At least Moody's does not see the AAA rating of the de facto bankrupt US carved in stone, said Cailleteau according to Reuters,

There were possible risks that could lead to a downgrade.
"That will happen for two reasons. Either our assumptions in terms of debt reversibility prove to be wrong. That is, in fact the U.S. government is unable to bring public debt back to a downward trajectory," he said.
The other reason would be if the United States' ability to raise a large amount of debt at a low cost were to be put at risk, Cailleteau said.
"It could be put at risk if the U.S. dollar was severely challenged as the main international reserve currency," he said.
But the possibility of the dollar being replaced as the main international reserve currency in the near future was a "pretty remote risk," he added.

What I am missing in Moody's explanation is whether gold could not have a shining comeback as reserve currency. It was former Fed chairman Alan Greenspan who bent the truth when saying,

"I think central banking has learned the dangers of fiat money."

Worldwide exploding money supply despite being stuck in a recession that may see a little bounce later this year before we begin to see the signs of a true recession tells me the opposite.
By adapting zero interest rate policy central banks have outmaneuvered themselves. The only weapons left are their digital printing presses and the belief of the people that these colourful debt papers will somehow retain their purchasing power. This cannot happen and the Weimar Republic is the example that scares Germans until today.
While the official world tries to discard M3 money supply growth as an outdated indicator I point you to this story (CNN online page gone by now) where former Deutsche Bundesbank president Hans Tietmeyer - 15 years ago the second most powerful central banker in the world - is described as a central banker who was "trained in the monetarist school that teaches rapid money supply growth is a sure predictor of inflation and requires a firm policy response."
We have not yet seen anything that would somehow resemble the iron grip of the German Bundesbank.
It has always been a miracle to me which set of figures the rating agencies apply to arrive at their always too late conclusions. Maybe they publish how they arrive at their ratings in order to be able to follow their school of thoughts and formulas.
White House Economic adviser Paul Volcker, pitying Bernanke, warned already 3 years ago in a Bloomberg TV interview,

that inflation should be taken most seriously and that an improvement in this year's budget deficit would be wiped out by permanently higher social spending on an aging population. Oh, and don't forget that "is is critical that we maintain confidence in our currency," Volcker said.

I could not agree more despite the current asset deflation that inflation will become the most hated word of 2010.

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3 Investment Bankers Flee to Remote Island, Hit the Jackpot

Do you know the story about 3 investment bankers who fled to a remote uninhabited island? The guys were so happy when they discovered an old printing press and a cartload of paper. One year year later they were all "rich."

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Application Form for Your Bailout

Click the form for a larger image, print it, fill it out and send it to Treasury Secretary Timothy Geithner. Fax a copy to president Barack Obama for quick processing if bailout exceeds $10 billion.


Courtesy of Bruce Feirstein for Vanity Fair

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New 2009 List of Silver Mining Companies

As this list of silver companies published in 2007 has become the most-read blog post this year I felt compelled to update it.
Compiling a list of silver companies is controversial as there are only very few pure silver plays.
The white metal is mostly mined in combination with gold or base metals which can dramatically change the bottom line of silver miners. In some cases the mining of base metals and gold can lead to negative cash costs for every ounce of silver produced.
Silver is primarily used in jewellery and the best metallic electric conductor. For more applications for silver check this webpage by preciousmetalinvestment.com.
Expecting silver prices to multiply in the next 5 years these companies give extra leverage - if their plans come true.
All silver stocks got hammered in 2008 in the biggest crash in the mining sector in the last 80 years. Do your own research as some companies are trading at less than the cash they have in the till.
While the IPO train on Wall Street has become a train wreck due to the hesitancy of investment banks when underwriting new issues, junior miners are not dependent on conventional measures to raise capital.
They (better) know how to attract investors with a long term horizon directly, as I was able to witness myself when living in Vancouver in 2007.
Vancouver stock exchange is the primary market for junior miners for all kinds of resources. The market had had a shady reputation in the 1980s but has cleared up his act by establishing mandatory reporting rules for junior miners. Its most important improvement was the introduction of standards for reporting new metals reserves.

GRAPH: Silver is a lot more volatile than gold while physical demand is unprecedented. The Austrian Mint produces silver Philharmonics 24/7 since introducing this bullion coin in 2008. Silver currently trades at a ratio of 1:63 to gold. In the long term this ratio has been closer to 1:15, leaving enormous upside potential for silver that could easily lead to a price around $40 next year. Chart courtesy of stockcharts.com.

I consider investments in exploration companies as very risky and build up positions very slowly. But they come with a notable exception to the golden rule that for every percentage point of possible reward there is an equal risk.
In the case of explorers/developers there is an exception to the rule: As long as one invests without leverage there is a risk of 100% but a multiple of that in possible gains when an explorer hits silver indeed. When researching risky investments like this very small sector with only a few billions in market capitalization I look mainly for the following:

• Quality of management. Check the track record of management in past mining ventures.
• Management's stake in the company. If they don't sell or even buy more it is usually a good sign.
• Delays. Are there any delays in realizing the company's ventures ?
• Cost per ounce. What are the company's cash costs per ounce produced? How much do I pay per ounce when I buy their shares?
• Institutional shareholders. Which funds own the company, which analysts cover the stock?
• Proximity to production. Potential gains are higher with explorers in the early stages, but so are the risks. I like companies in the process of finalizing the feasibility study for financing or - at a later stage - companies that are close to production.
• Political risk. Your due diligence has to include the respective stability of the country where your miner digs the money out of the ground.

In respect of the political risk I also shun US based silver miners as there exists a possibility that the government can nationalize virtually any company under the Trading With the Enemy Act, which became law in 1917 during World War I and applies during declared wars, and from 1977's International Emergency Economic Powers Act, which can be applied without declared wars. Read more on this issue on GATA's website.
Marc Courtenay has recently penned a story at SeekingAlpha that deals with the possibility of another confiscation of gold and silver and mining shares by the US government. Seeing all the current nationalizations of car makers, banks and the health sector in the USA I don't rule out anything anymore.

List of Silver Explorers, Developers and Miners
Here comes the list of more than 100 silver companies (click the name for the company's website and the ticker symbol for price information):

Abcourt Mines (ABI.V): Gold, silver and zinc in Quebec
Alexco Resource (AXR.TO): Silver in Canada
Apogee Minerals (APE.V): Silver, lead, zinc in Bolivia
Aquiline Resources (AQI.TO): Silver and gold in Argentina, Canada and Mexico
Arian Silver (AGQ.V): Silver in Mexico
Aura Silver (AUU.V): Silver in Canada, El Salvador, Mexico, USA
Aurcana (AUN.V): Silver, gold, lead, zinc in Mexico
Aurex BioMining AG (not listed): Silver in Austria
Avino Silver & Gold Mines (ASM.V): Silver, gold, zinc, copper, lead in British Columbia
Bear Creek Mining (BCM.V): Silver, gold in Peru
Canadian Zinc (CZN.TO): Silver, zinc, and lead in Canada
Canarc Resources (CCM.TO): Silver in South America
Canasil Resources (CLZ.V): Silver, gold, copper, lead, zinc in British Columbia and Mexico
Capstone Mining (CS.TO): Silver in Mexico
Chariot Resources (CHD.TO): Silver and copper in Peru
Chesapeake Gold (CKG.V): Silver, gold, zinc in Mexico and the USA
CMC Metals (CMB.V): Silver in Canada
Coeur d'Alene (CDE): Silver and gold in Argentina, Bolivia, Chile, Mexico, USA
Compania de Minas Buenaventura (BVN): Precious metals in Peru
Continuum Resources (CNU.V): Silver, gold in Mexico
Cornerstone Resources (CGP.V): Gold, silver, copper, nickel, VMS, potash, and uranium properties in Canada and Ecuador
Cream Mineral Resources (CMA.V): Silver, gold, base metals in Canada, Mexico and Sierra Leone
Dia Bras Exploration (DIB.V: Silver, copper, zinc in Mexico
Eagle Plains Resources (EPL.V): 35 gold, silver, uranium, copper, molybdenum, zinc and rare earth mineral projects in Canada
Eastfield Resources (ETF.V): Gold, copper, silver, nickel, molybdenum and Platinum Group Metals in Canada and USA
ECU Silver Mining (ECU.V): Silver, lead, zinc in Mexico:
Endeavour Silver (EDR.TO): Silver in Mexico
Esperanza Silver (EPZ.V): Silver in Mexico, Peru
Excellon Resources (EXN.TO): Silver in Mexico
First Majestic (FR.TO): Silver in Mexico
First Point Minerals (FPX.V): Silver, gold, base metals in Mexico and the Americas
Fortuna Silver Mines (FVI.V): Silver in Mexico
Fury Exploration (FUR.V): Silver in Canada
Genco Resources (GGC.TO): Silver in Mexico
Gitennes Exploration (GIT.TO): Silver, gold copper in Peru
Gold Hawk Resources (CGK.V): Gold, silver, lead, zinc and copper in Peru
Golden Goliath Resources (GNG.V): Silver, gold in Mexico
Great Panther Resources (GPR.TO): Silver in Mexico
Hecla Mining (HL): Silver, gold in Mexico and USA
Hellix Ventures (HEL.V): Silver, gold in Mexico
Herencia Resources (HER.L): Silver, lead, zinc in Chile
Hochschild Mining (HOC.L): Silver in Argentina, Chile, Mexico, Peru
Huldra Silver (HDA.V): Silver in Canada
Impact Silver (IPT.V): Silver in Mexico, Dominican Republic
International Minerals (IMZ.TO): Silver, gold in Ecuador and Peru
Intrepid Mines (IAU.TO): Silver, gold in Australia and Indonesia
Journey Resources (JNY.V): Silver, gold, lead, zinc in Mexico, Peru, USA
Kenrich-Eskay (KRE.V): Silver, gold in Canada
Kimber Resources (KBR.TO): Silver, gold in Mexico
Kings Minerals (KMN.AX): Silver, gold, copper, rhenium, molybdenum in Australia and Mexico
Klondike Silver (KS.V): Silver in Canada, Mexico
LKA International (LKAI.OB): Silver, gold in USA
Logan Resources (LGR.V): Precious metals, base metals and uranium in Canada
MacMillian Gold (MMG.V): Silver, gold in Mexico
MacMin Silver (MMN.AX): Silver in Australia
MAG Silver (MAG.TO): Silver in Mexico
Marifil (MFM.V): Silver, gold, base metals in Argentina
Mexican Silver Mines (MSM.V): Silver in Mexico
Milner Consolidated Silver Mines (MCA.V): Silver in Canada
Minefinders (MFL.TO): Silver, gold in USA
Minera Andes (MAI.TO): Silver in Argentina
Mines Management (MGT.TO): Silver, copper in the USA
Minco Silver (MSV.TO): Silver in China
Mindoro Resources (MIO.V): Silver, base metals in the Philippines
Mountain Boy Minerals (MTB.V): Silver, gold, base metals in Canada
Normabec Mining (NMB.V): Silver, gold in Canada and Mexico
Orko Silver (OK.V): Silver in Mexico
Oremex Resources (ORM.V): Silver in Mexico
Oro Silver (OSR.V): Silver in Mexico
Pacific Comox Resources (PCM.V): Silver, gold, molybdenum, base metals in Canada
Palmarejo Silver and Gold (PJO.V): Silver, gold in Mexico
Pan American Silver (PAA.TO): Silver in Bolivia, Mexico, Peru
Pershimco Resources (PRO.V): Silver, gold in Mexico
Piedmont Mining (PIED.OB): Silver, gold in USA
Portal Resources (PDO.V): Silver, gold in Mexico, USA, gas and oil in Mexico
Quaterra Resources (QTA.V): Silver in Mexico
Redcorp Ventures (RDV.TO): Silver, gold, copper, lead, zinc in Canada
Revett Minerals (RVM.TO): Silver, gold, copper in USA
Sabina Silver (SBB.V): Silver in Canada
Scorpio Mining (SPM.TO): Silver in Mexico
Silvercorp (SVM.TO): Silver in China
SilverCrest Mines (SVL.V): Silver in Chile, El Salvador, Mexico
Silver Dragon Resources (SDRG.OB): Silver in China
Silver Eagle Mines (SEG.TO): Silver in Mexico
Silver Fields Resources (SF.V): Silver in Canada, Mexico, USA
Silver Grail Resources (SVG.V): Silver in Canada
Silvermet (SYI.V): Silver in Canada, Turkey
Silvermex Resources (SMR.V): Silver in Mexico
Silver Quest Resources (SQI.V): Silver in North America
Silver Standard (SSRI): Silver in Argentina, Australia, Mexico, Chile, Peru, Canada, USA
Silverstone Resources (SST.V): Silver in Mexico
Silver Wheaton (SLW): Silver in Greece, Mexico, Peru, Sweden
SNS Silver (SNS.V): Silver in the USA
South American Silver (SAC.TO): Silver in Bolivia, Chile
Southern Silver (SSV.V): Silver in Mexico, USA
St. Eugene Mining (SEM.V): Silver, lead, zinc in Canada
Starcore (SAM.TO): Silver, gold in Mexico
Stealth Minerals (SML.V): Silver, gold, copper in Canada
Sterling Mining (SRLMQ.PK): Silver in USA
Stroud Resources (SDR.V): Silver, gold, natural gas in Mexico
Teryl Resources (TRC.V): Silver, gold, copper in Alaska
Tumi Resources (TM.V): Silver in Mexico, Sweden
UC Resources (UC.V): Silver, gold in Mexico
US Silver (USA.V): Silver in the USA
Valencia Ventures (VVI.V): Silver in Australia, Canada, Chile, USA
Yale Resources (YLL.V): Silver in Mexico

Useful links for research and information on silver companies:

• 24hgold.com my first stop for mining research. Will be soon the most extensive database on resource stocks, currently in beta phase.
• Canadian silver stock list with key figures
• Kitco Silver
• Miningnerds silver stock list (cool)
• Silveraxis
• Silverseek
• Resource Stock research portal

NOTE: Please email me if I have missed out on one or more silver companies in order to update this list.

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Map of the World's Resources - Nothing Under Europe's Soil

Mint.com has drawn this graph depicting the distribution of the world's most important resources (diamonds may not exactly fall into this category.)

Click on graph for a larger image.

From a European point of view it is most disturbing that the old world does not show up in a single category, highlighting the sad fact that Europe will become the world's poorhouse. Europe has already begun to record current account deficits with the rest of the world and faces a lot of economic, political and financial difficulties that will certainly not improve as the near term flip-flop of the age pyramid will turn the continent in a geriatric's residence too.

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RED ALERT to EU Citizens: Don Crash Helmet Before Systemic Collapse

My initial task for the day - updating and extending this list of silver mining companies - has suddenly become a less important priority. Bloomberg writer Meera Louis (compliments!) put a story on the true potential cost for the bailout of the EU banking sector on the wire that makes me look for my golden crash helmet.
According to Ms Louis,

European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a (confidential) European Union document.

Let me first move up the number table that says it all, before shamelessly copying the rest of this outstanding piece of investigative journalism into this blog post.
Ms. Louis compiled this hitlist of government commitments that include capital injections, guarantees granted, effective asset relief and liquidity interventions. All figures are in billions of Euros.

1. United Kingdom___781.2
2. Denmark________593.9
3. Germany________554.2
4. Ireland_________384.5
5. France__________350.1
6. Belgium_________264.5
7. Netherlands______246.1
8. Austria__________165
9. Sweden__________142
10. Spain___________130

Every Austrian May Have to Pay €19,600 to Salvage Banks
Short national intercept: The potential cost for every one of Austria's 8 million citizen - from baby to octogenarian - has just risen from €12,500 to €19,600. This news has gone completely unnoticed in Austrian MSM (mainstream media) which busy themselves with repeating the bla-bla of domestic politicians because the far right makes inroads in the constituencies of social democrats and christian conservatives (these two are like Coke and Pepsi.)
On with the truly costly issues that may doom the Europe as we know it today, potentially relegating it to a supra-nation of beggars that lack resources, energy, capital and face a flip-flop of the age pyramid while still burdened by the highest labour costs in the world.
As Bloomberg scooper Meera Louis writes,

The measures, designed to save banks and revive economic growth, surpass Germany's $3.3 trillion economy, the region’s biggest. They also helped to widen the Euro area’s budget deficit to the most in three years in 2008. The commission, the EU’s executive arm, is seeking to create the first EU-wide agencies with rule-making powers to monitor risk in the economy after the crisis led to $460 billion of losses and writedowns across the continent, according to data compiled by Bloomberg.
"The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios," according to the document, produced by the EU’s Economic and Financial Committee. The draft document, partially entitled "the effectiveness of financial support measures," will be debated at the next meeting of EU leaders on June 18-19 in Brussels.

Government Pledges
EU governments approved about 311.4 billion euros for capital injections, 2.92 trillion euros for bank liability guarantees, 33 billion euros for relief of impaired assets and 505.6 billion euros for liquidity and bank funding support, a total of 3.77 trillion euros, the document shows.
The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.
A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody’s Investors Service.
All together, the EU paper said that 18 member states have introduced bank liability guarantees, 15 have approved recapitalization measures, and 11 have given liquidity support.
The programs have “contributed to a stabilization of the extremely tense financial market conditions that were witnessed in the autumn of last year,” according to the document. Still, there remain “elevated risk premiums in many parts” of the financial markets and this is “likely to remain challenging.”

High Risk Premiums
The decline of lending in Europe “remains mainly demand- driven, but banks’ balance sheet constraints and limited access to medium- and long-term financing” and high risk premiums “may also have contributed,” according to preliminary ECB analysis, the document said.
Government’s attempts to make banks pledge to increase lending as a condition of taxpayer support may “imply that banks lose one of their credit tools to manage credit risk if no safeguards are established to ensure” that loans are made on commercial terms and with “sound risk management techniques.”
The British government this year secured promises of additional mortgage and business lending from Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Northern Rock Plc in return for aid.

Further Disclosure
The document called on European leaders to seek further disclosure on impaired assets and to restore confidence in the industry. New EU guidelines may require banks in receipt of aid to sell branches or units to win approval for restructuring plans, according to the document. These guidelines could be approved as soon as the end of the month.
Banks in Germany received the third-largest amount in aid, the document showed, for a total of 554.2 billion euros. Commerzbank AG, Germany’s second-biggest bank, was told to sell its Eurohypo commercial property unit by the Commission on May 7 to win approval for a second bailout by the German government.

No additional pundits commentary needed. This story should open the eyes of everybody who can read. I only wonder when European MSM will finally recognize that this crisis rapidly grows into an apocalypse.

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2 Charts Imply that US Recession May Become Longest in History

As I am still looking out for these mysterious "green shoots" in vain that seem to be visible only for the talking heads at CNBC, here are 2 charts that make me wonder whether the current nosedive of the US economy may become the longest recession/depression in the history of the new world.

GRAPH: The current recession has already beaten all other economic downturns in terms of length since the Great depression from 1929 to 1933. Former Fed chairman Alan Greenspan managed to keep recessions in the last 20 years below 12 months. But he had a weapon that is not available anymore to his successor Ben Bernanke: Starting at higher interest rate levels Greenspan had a lot of rate-lowering ammunition to tame the bear. With zero interest rate policy Bernanke has used up the Fed's only weapon long before the present recession will begin to show any significant changes. Chart courtesy of chartoftheday.com

Now let's have a look at the level of indebtedness:

GRAPH: As all economic crashes base on too much money in the system, while nobody has any in her/his pockets, the current GDP/debt ratio of more than 400% (this chart ends in Q2/08 and the Fed only started pumping up money supply later last year with growth rates in the 3-digit area) implies the US economy is going to remain below the waterline for some more time well into the next decade. Take note that this GDP/debt ratio does neither include future federal and state pensions liabilities nor exploding health care expenses that are the result of worsening demographics. Chart found on tickerforum.org

As always, one does not need to be a financial whiz kid or tea leaf reader to see when the economic situation will turn into something the Fed and bankers like to describe as unprecedented once it starts happening. You only have to look back in history to get a reliable picture of future developments as there are only two constants in markets: greed and panic.

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Monetary Madness in 1 Chart: Hyperinflation Is Around the Corner

Is there anybody left who still thinks deflation may pose a problem in the future after looking at this horrific chart?
Arthur B. Laffer has penned an article for the Bubble Street Journal (WSJ), arriving at the conclusion that hyperinflation is not a possibility but a must, given the panicky monetary policies the Federal Reserve has applied in this millennium. Hat tip goes to Duncan Robertson.
Here come some excerpts from Laffers article:

Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II...
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!...
It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.

There is not much to add than the warning that monetary deflation is the last thing to worry about. Click the labels below to read more on money supply and hyperinflation.

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Crisis Projections: Middle Class Will Become Marxist

It is not exactly new but nevertheless extremely important: The British daily Guardian had published the following article, by Richard Norton-Taylor in 2007. While the original headline "Revolution, flashmobs, and brain chips. A grim vision of the future" sounds alarmist, its forecasts for the world in some 30 years in a 90-page report done by the British Ministry of Defense sends a shudder down my spine. Judge yourself. (Hat tip to my Twitter friend @stangrof)
The Guardian's report in full:

Information chips implanted in the brain. Electromagnetic pulse weapons. The middle classes becoming revolutionary, taking on the role of Marx's proletariat. The population of countries in the Middle East increasing by 132%, while Europe's drops as fertility falls. "Flashmobs" - groups rapidly mobilised by criminal gangs or terrorists groups.
This is the world in 30 years' time envisaged by a Ministry of Defence team responsible for painting a picture of the "future strategic context" likely to face Britain's armed forces. It includes an "analysis of the key risks and shocks". Rear Admiral Chris Parry, head of the MoD's Development, Concepts & Doctrine Centre which drew up the report, describes the assessments as "probability-based, rather than predictive".
The 90-page report comments on widely discussed issues such as the growing economic importance of India and China, the militarisation of space, and even what it calls "declining news quality" with the rise of "internet-enabled, citizen-journalists" and pressure to release stories "at the expense of facts". It includes other, some frightening, some reassuring, potential developments that are not so often discussed.

New Weapons
An electromagnetic pulse will probably become operational by 2035 able to destroy all communications systems in a selected area or be used against a "world city" such as an international business service hub. The development of neutron weapons which destroy living organisms but not buildings "might make a weapon of choice for extreme ethnic cleansing in an increasingly populated world". The use of unmanned weapons platforms would enable the "application of lethal force without human intervention, raising consequential legal and ethical issues". The "explicit use" of chemical, biological, radiological, and nuclear weapons and devices delivered by unmanned vehicles or missiles.

Technology
By 2035, an implantable "information chip" could be wired directly to the brain. A growing pervasiveness of information communications technology will enable states, terrorists or criminals, to mobilise "flashmobs", challenging security forces to match this potential agility coupled with an ability to concentrate forces quickly in a small area.

Marxism
"The middle classes could become a revolutionary class, taking the role envisaged for the proletariat by Marx," says the report. The thesis is based on a growing gap between the middle classes and the super-rich on one hand and an urban under-class threatening social order: "The world's middle classes might unite, using access to knowledge, resources and skills to shape transnational processes in their own class interest". Marxism could also be revived, it says, because of global inequality. An increased trend towards moral relativism and pragmatic values will encourage people to seek the "sanctuary provided by more rigid belief systems, including religious orthodoxy and doctrinaire political ideologies, such as popularism and Marxism".

Pressures Leading to Social Unrest
By 2010 more than 50% of the world's population will be living in urban rather than rural environments, leading to social deprivation and "new instability risks", and the growth of shanty towns. By 2035, that figure will rise to 60%. Migration will increase. Globalisation may lead to levels of international integration that effectively bring inter-state warfare to an end. But it may lead to "inter-communal conflict" - communities with shared interests transcending national boundaries and resorting to the use of violence.

Population and Resources
The global population is likely to grow to 8.5bn in 2035, with less developed countries accounting for 98% of that. Some 87% of people under the age of 25 live in the developing world. Demographic trends, which will exacerbate economic and social tensions, have serious implications for the environment - including the provision of clean water and other resources - and for international relations. The population of sub-Saharan Africa will increase over the period by 81%, and that of Middle Eastern countries by 132%.

The Middle East
The massive population growth will mean the Middle East, and to a lesser extent north Africa, will remain highly unstable, says the report. It singles out Saudi Arabia, the most lucrative market for British arms, with unemployment levels of 20% and a "youth bulge" in a state whose population has risen from 7 million to 27 million since 1980. "The expectations of growing numbers of young people [in the whole region] many of whom will be confronted by the prospect of endemic unemployment ... are unlikely to be met," says the report.

Islamic Militancy
Resentment among young people in the face of unrepresentative regimes "will find outlets in political militancy, including radical political Islam whose concept of Umma, the global Islamic community, and resistance to capitalism may lie uneasily in an international system based on nation-states and global market forces", the report warns. The effects of such resentment will be expressed through the migration of youth populations and global communications, encouraging contacts between diaspora communities and their countries of origin.
Tension between the Islamic world and the west will remain, and may increasingly be targeted at China "whose new-found materialism, economic vibrancy, and institutionalised atheism, will be an anathema to orthodox Islam".

Iran
Iran will steadily grow in economic and demographic strength and its energy reserves and geographic location will give it substantial strategic leverage. However, its government could be transformed. "From the middle of the period," says the report, "the country, especially its high proportion of younger people, will want to benefit from increased access to globalisation and diversity, and it may be that Iran progressively, but unevenly, transforms...into a vibrant democracy."

Terrorism
Casualties and the amount of damage inflicted by terrorism will stay low compared to other forms of coercion and conflict. But acts of extreme violence, supported by elements within Islamist states, with media exploitation to maximise the impact of the "theatre of violence" will persist. A "terrorist coalition", the report says, including a wide range of reactionary and revolutionary rejectionists such as ultra-nationalists, religious groupings and even extreme environmentalists, might conduct a global campaign of greater intensity".

Climate Change
There is "compelling evidence" to indicate that climate change is occurring and that the atmosphere will continue to warm at an unprecedented rate throughout the 21st century. It could lead to a reduction in north Atlantic salinity by increasing the freshwater runoff from the Arctic. This could affect the natural circulation of the north Atlantic by diminishing the warming effect of ocean currents on western Europe. "The drop in temperature might exceed that of the miniature ice age of the 17th and 18th centuries."

IMHO some of these predictions/probabilities will become real much earlier as the whole world speedwalks into global police and surveillance state, having technological repression technologies that far surpass George Orwell's nightmares.
Crowd control is high up on the agenda of rulers who don't want to give up control over the sovereign (thas is YOU!)Do you know about the "shit-gun" that sends out waves that will make you lose control of your bowels? Imagine 5,000 peaceful protesters all defecating at the same moment. Will they be eager to attend the next protest?

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What's Hot With TPI Readers These Days

In one more praise of the internet and its possibilities in terms of readers feedback here is some statistics that show the most popular search engine submissions that guide readers from all knowledge levels to The Prudent Investor (TPI) blog.


"Monetizing the debt" has just replaced "silver mining companies" as the most popular search term and its variations. In a rough guess I would estimate that the list of silver mining companies has been the most read blog post this year.
Enjoy my older but often timeless writings in my archive in the sidebar as I am off into a long weekend thanks to the many holidays Austria still celebrates.

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Inflation and Deflation - Both Is Right and Wrong at the Same Time

Observing the ongoing cyber discussion whether we currently live in an inflationary or deflationary environment I hope I can add a little more than my 2 trillion cents.

• Yes, we experience a lot of inflation these days!
• Yes, we experience a lot of deflation these days!
• No, there is no inflation these days!
• No, there is no deflation these days!

Let these four arguments sink in for a second before you continue reading or - god beware - you surf to another blog for orientation in these messy times.
All 4 opinions are both right and wrong at the same time.
Here's why:
It mostly depends on the interpretation of these 2 nine-letter words (the third bad one is "recession") that have been slowly descending from discussions among economists - 99% of whom did not correctly forecast the current economic mess - into heated talks on the tables around me in my favorite Viennese lunch joint with less and less customers every week - that raised its prices by 5.4% within a year.
True Eurozone Inflation Now at 7.4%
As a general principle I prefer to follow the Austrian school of economics that defines inflation as the expansion of money supply - which has been exploding on a global scale while the economy contracts in almost all countries that publish these figures correctly.

GRAPH: Nominal M3 growth in the Eurozone. Remembering an old rule of thumb from the German Bundesbank, undoubtedly the best inflation fighters in the second half of the 20th century, economists there subtracted GDP growth from M3 growth to arrive at the true rate of inflation. If I follow this rule with the European Central Bank's (ECB) M3 data series - find a handy overview of key Eurozone figures here - I arrive at a true inflation rate of 7.4% as of April 2009. Chart courtesy of ECB.

The Federal Reserve stopped publishing money supply M3 figures - the broadest monetary aggregate - well before M3 ran into the 2-digit area. Luckily shadowstats.com has filled the void, calculating M3 with an error margin of 0.3%.

GRAPH: Even M2 (read the comments of this post) is now running at annual rates solidly in the 2-digit percentage growth area despite a contracting US economy. Chart courtesy of Fed St. Louis

The other attempt to define inflation is to derive it from rising prices for services and goods. Taking two recent statistics from the EU's statistical office Eurostat, I discover a big discrepancy: While the flash estimate for annual inflation for May arrived at 0% (PDF) on May 29, Eurostat had released alarming figures on living conditions in the EU, headlining "One third of the EU population could not afford an unexpected expenditure in 2007" that also said that 7% of EU inhabitants were already in arrears on their utility bills.
Looking at my own energy bill I notice that natural gas for heating my (badly insulated) residence has become about 25% more expensive despite natural gas retreating from $13 to $3 on futures markets since its historical highs in 2007. Looking at the other bill of the day I see my chimney sweeper has raised his fees by some 18% in the last 6 months.
I would not exactly call this deflation. Keep in mind that consumer price indices have been changed by statistics offices in order to keep index-bound pensions and with it nations' expenses low.
But, YES, there is a lot of deflation in this world, as all owners of stocks or real estate have sadly found out in the past 2 years. Take the market index chart of your choice or compare your house/flat price with that from a year ago and there is hardly an exception to the newly rediscovered concept of asset price deflation.
Asset price deflation is a direct result of commercial banks' policies. As we have regressed from a savers society into a debtors society on a worldwide scale asset prices are heavily influenced by banks' willingness to lend money for purchases of asset papers (stocks) and real estate or other things.
In one short sentence: If banks don't lend to buyers, your theoretical net worth development will turn south.
As an additional note I want to remind you that we have not evolved very much since medieval times. As the majority of the population was then paying a part of their earnings to the count or king it nowadays has the same plight towards banks. Buying a house or whatever else on credit does not make you an owner at an instant, but only puts you in the debtor's position until you have paid off your loan to the last cent.
As a general rule for reading economic indicators do not fall for the trap of slowing relative (percentage) growth which is now widely used by bankrupt governments to paint a rosy picture. A slowdown in growth of an indicator does not mean it has reversed its development. This trick may work with overworked and underpaid financial journalists, but should not succeed with prudent investors who are willing to walk the extra mile of knowledge to protect their savings.
I finish this post with another rhetoric question: Which creditor/saver would mind price deflation? Or would you feel worse because your petrol bill recedes to levels last seen in the second millennium AD, when crude oil traded at less than $15 a barrel? It is time we proceed again and get mankind out of the credit trap that has led us into the biggest economic disaster in history! And now everybody please stop punching your discussion counterparty. You are both right and wrong at the same time ;-)

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Missing Bloomberg TV in Europe? Don't Worry, Stay Happy (If You Can Manually Tune Your Sat Receiver)

I have recently blogged a comparison between the reporting approach of CNBC and Bloomberg TV.
Repeating my stance that it was only fair to shut down the dead-boring German language version of Bloomberg that had as much appeal as various TV gospel preachers to me I was startled to get only a blank screen when tuning into Bloomberg's English language TV program this week.
As my investment style - holding shares a minimum of 366 days to forever for tax reasons - does not require realtime prices and I can get all my information needed for free on the internet I do not subscribe to Bloomberg's a bit pricey terminal service.
Unfortunately my MacBook Pro rejects my efforts to get Bloomberg TV running in a small window due to some Quicktime issues that exceed my user knowledge.


Calling a friend - the Fed would call it "anecdotal evidence" - my initial panic that Bloomberg TV had entirely gone off air in Europe was confirmed. His satellite receiver drew blank screens for Bloomberg Germany, Bloomberg UK and Bloomberg Europe as mine did too.
Studying my sat receiver manual I found out that I can also receive programs aired via Hotbird (Astra being the standard satellite in the German language regions of Europe.) But I came across another dead Bloomberg channel that offered at least some relief.


A still screen tells viewers that the new international Bloomberg TV channel can be received either at

• Astra 1L TP26 frequency 11597V, or
  
• Hotbird6, Channel 3, frequency 11597V.
  

I have yet to consult my manual how to tune into the new channels. So far I know that I can only receive Hotbird 1-5 but not 6. I guess I have to stay offline for the remainder of this night in order to program the new Astra frequency.
Service for freebie customers is not that great, I found out too meanwhile. Bloomberg's own webpage on European TV unfortunately only offers a schedule and a self-advertisement (which works even on Macs.)
An email inquiry via Bloomberg webform sent on Monday has not been answered by now. I am confident a lot of web searches on the said issue will earn me more webhits at my blog that will surpass the 700,000 mark in the next few hours.
Not bad when dealing with issues like central banking that usually make me the spoiler of every cocktail party - which have drastically reduced in number since the general public and PR managers in special have realized we are at the beginning of a major depression ;-)
I can only hope Bloomberg international TV will not be restrained by budget cuts too. Does anybody know recent Bloomberg terminal count figures to post them in comments?
Watch Bloomberg TV on YouTube
Further research with my touchpad has revealed that Bloomberg runs a channel on YouTube. I have yet to check whether I will find the recent long interview with White House Economic Adviser and former effective inflation fighter at the Fed, ex-chairman Paul Volcker, which kept me awake at 3 AM a few weeks ago.
I hope Bloomberg's style of telling the bare truth does not run afoul of YouTube parent Go Ogle!'s secret policies which had temporarily closed down Alex Jones' prisonplanet channel recently for exactly this reason: Painting an entirely different picture of the bankrupt police state USA than all US propaganda TV stations like CNN do (where does CNN get the funds for its global coverage? Certainly not from the ads far and few in between.) Oh, BTW, Prisonplanet TV has been reinstated at YouTube after an uproar of the worldwide critical internet community.

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Tim Geithner Becomes Laughing Stock of the World

My irregular series "if it weren't so serious I'd be ROTFL (rolling on the floor, laughing)" may become a daily issue as long as we have such brains like that of US Treasury secretary Timothy Geithner, trying to fix a mortally broken financial system he profited from in the first place while being lax on his tax filings.
According to a Reuters dispatch from Tuesday, citing a story on the Bubble Street Journal's (WSJ) website, Geithner wants to push European bank regulators to put banks in the old world under more rigorous stress tests.

The Obama administration wants European countries to put their banks through more rigorous public stress tests to ensure that the institutions survive if the economy deteriorates further, the Wall Street Journal reported on its website.
U.S. Treasury Secretary Timothy Geithner is likely to discuss the issue in Italy later this week during closed-door meetings with finance ministers from the Group of Eight leading nations, according to the paper.
Geithner may face resistance from some of his European counterparts, who believe that publicizing the weaknesses of individual banks increases the risk that they will fail, the paper said.

Only last week Geithner was greeted with laughter when he told Chinese students that Federal Reserve Notes (FRNs) were a strong currency and nobody need not fear that this would change. Looking at the USD index (in the sidebar of my blog) I am afraid that young Tim's knowledge about the true developments of said fiat currency appears to be very limited. Has he overlooked that the USA has turned from the biggest creditor into the biggest debtor of the world since the time Geithner collected his first grades in primary and secondary school?
While it is a global faux pas to criticize others for their shortcomings when one hasn't done his own homework first, Geithner continues a bullying policy the world had thought to be over at the time former US president George W. Bush returned home to clear the brushwood's at his farm.
It is also a faux pas to get to the microphone, reminding others of a problem the Eurozone has already recognized. If the acting Treasury secretary would not only read MSM (mainstream media) but also blogs, he would have known since November 29, 2008, that

a report published by the European Central Bank (ECB) arrives at the conclusion that the stress testing methods of Eurozone banks are inadequate and have been introduced in some cases only after the beginning of the credit crisis in August 2007.
The report on "EU Banks' Liquidity Stress Testing and Contingency Funding Plans" carried out by the ECB's Banking Supervision Committee arrives at the sour conclusion,
that there is substantial room for improvement in both areas.

In the global ping pong of blaming the other side of the Atlantic for the mess we are in, here comes my pong to Geithner: Why did the US financial system and its regulators not include Fannie Mae and Freddie Mac in their "stress tests?" And as a last note, would you be be distressed after receiving 2 TRILLION FRNs (where the Fed refuses to publish who got how much!?) As I said, if it weren't all so serious because Europe and the USA will become the global backwater at the end of this crisis, I'd be ROTFL.

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The Safest Way to Own Physically Allocated Bullion Gold

Does your favourite precious metals exchanged traded fund (ETF) or exchange traded commodity (ETC) really invest in bullion all time? Or does it rely on paper contracts where a third party poses a counter party risk to a varying degree? Not everything marketed as a way to safely invest in precious metals truly shines under the spotlight.
To my knowledge there is only one group of precious metals ETFs, managed by Swiss Zuercher Kantonalbank (ZKB) - sorry, no english language information found - that always holds the 4 fund's funds in 100% gold, silver, platinum or palladium. This limits the only risk to the size of cash holdings that are unavoidable for short periods when the ETFs adjusts bullion holdings during trading hours.
I have checked a few other liquid European and US ETFs, but this appears to be the only safe way to own allocated gold besides holding it physically. Within the European Union there appear to be no restrictions to buy/hold/sell these ETFs, others please check local regulations.

GRAPH: Read from this gold chart whatever technical indicators you prefer. The fundamentals have never been stronger for a long gold strategy. Chart courtesy of kitco.com

Read more about investing in gold here at wikinvest.
Most, if not all other precious metals ETF/ETC come with some sort of a counter party risk.
Checking the prospectus (PDF)of global heavyweight SPDR , risk factors beginning on page 10 give room to "don't blame me, blame the next one in the food chain" finger-pointing games like this quote from page 13,

If The Trust's gold bars are lost, damaged stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust's claim.

Check out the 4 pages of risk factors yourself and find more quotes hinting at a counter party risk. SPDR may also accept non-standard gold bars without checking their genuiness by its management.
Click here for a SPDR chart who reported record holdings of 1,124 tonnes or 36,460,190 ounces as of today. But it is not 100% gold according to the fine print.

A price below spot gold stems from expenses paid for after selling some gold.
Basically the same applies to Europe's popular XETRA gold ETC, traded in Frankfurt. Check out the prospectus starting at this disclaimer page. Always remember only to enter security classes when you fully understand them. Xetra gold is basically a permanent zero bond without a coupon, covered by gold and claims on gold.
As ZKB's precious metals fulfill my requirements I have not looked further. If you come across more ETF/ETCs that truly hold the gold/silver/platinum/palladium themselves down in the vault, please let me know in comments.
DISCLAIMER: I am in no way affiliated with ZKB and I cannot confirm the rumour that ZKB headquarters is sinking under the weight of its ETF holdings in its vaults. Long gold positions.

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