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Debate Over Target2 Continues: Twilight of the Euro

The Target2 debate continues. Eurointelligence Promotes Still More Silliness.

Eurointelligence blasts Faz for inaccuracies while spreading a pile of its own through the mouth of Mark Schieritz who says (translated) Do not be afraid of the trillions bomb.

Schieritz says: “The claims and the liabilities are fictional quantities. They exist virtually, in the balance sheets of central banks, not in the real world.”

One can stop there knowing full knowledge that Schieritz’s article is complete nonsense.

In the real world, Target2 imbalances are a measure of capital flight and loans that cannot be paid back. Even if there once was adequate capital for loans made by Italian banks, that capital vanished long ago.

Now, Italian depositors are very fearful of bail-ins and have pulled there money out of Italian banks.

That is the “real world”. Real people have real fears, and they should. Anyone holding money in Italian banks is a fool. I gave the same warning about Greece well ahead of capital controls. I make the same case again now, regarding Italy.

New Eurointelligence Nonsense

Here are a couple of new clips from Eurointelligence to discuss.

Against Target2 Hysteria

Martin Hellwig joins the debate on Frankfurter Allgemeine’s Sunday edition with a rejoinder to earlier columns by Hans Werner Sinn (which we covered) and Thomas Mayer (which we didn’t) on the danger to the Bundesbank from its near-trillion-euro claims on the eurosystem, and on the danger to the eurosystem from its near-half-trillion claims on the Bank of Italy. Hellwig argues that Sinn confuses deliberately with the smoke and mirrors of double-entry book-keeping, and is whipping up an unjustified panic over Target2.

…click on the above link to read the rest of the article…

The Biggest Monetary Experiments In History: Part 2

The Biggest Monetary Experiments In History: Part 2

In part one we discussed the troubling issues in Europe (in case you missed it, you can read it here).

Today… Japan

The story of Japan is really a story that begins with globalisation.

According to the Oxford Dictionary, globalisation is described as:

“The process by which businesses or other organizations develop international influence or start operating on an international scale.”

It is, in a nutshell, international trade, and one of the things it’s done is add huge swathes of the global workforce to the world’s economy.

I bring up globalisation because of what it’s done to the global labour supply.

Realise this labour supply wasn’t Joe-middle-class-Sixpack with a Beemer, a two story house in the suburbs, and a white picket fence.

When most people think of  this workforce, they picture small brown people in shabby clothes toiling in sweatshops in China, India, Bangladesh, Vietnam, Cambodia, etc.

And by and large that’s it.

We’re not talking about Joe Sixpack. No, this was Amit in Bangladesh with 45 kids, working 29 hours a day, and paid the equivalent of a Happy Meal at Mackers.

And when we got such a massive disparity in costs, market forces went to work and did what market forces do.

The supply of goods produced exploded, and the cost of labour on a relative global basis fell.

I guess we could call this a labour supply shock, and what this did was it helped keep wages suppressed in developed markets while those in developing markets rose. This is how Amit raised his living standard so he can afford his 5th wife.

Now, the flip side of suppressed wages in the developed world was, of course, ever cheaper imported goods as the cost of those has plummeted. Declining real wages in the developed world have been cushioned by deflation in consumer goods.

…click on the above link to read the rest of the article…

Could Germany Fracture?

Could Germany Fracture?

All sorts of centralized organizations that appear rock-solid may well melt into air as the disintegrative dynamics gather momentum.

Rising political and social discord that is generally being attributed to “populism” may actually be the re-emergence of ancient geographic and cultural fault lines. An often-overlooked manifestation of this might be the nation-state of Germany, a possibility fleshed out by longtime correspondent Mark G.

It’s both convenient and expedient for politicos to blame “populism” for the fracturing of the status quo. Given the unsavory undertones of ethnic/religious bias of “populism,” this allows the media-savvy politico (and aren’t they all media-savvy?) to paint his/her opponents as racist via the code-word “populist.”

Labeling dissenters “populists” doesn’t explain or predict anything. In terms of economic classes, it’s more insightful to distinguish between the Protected Class (insiders and favored elites) who benefits enormously from the status quo and the Unprotected Class (outsiders, marginalized workers, those without privilege or access to cheap capital).

But this doesn’t exhaust the sources of profound social discord. As historian Peter Turchin explained in his recent book Ages of Discord, historical eras are either integrative periods in which people find reasons to cooperate and join forces, or disintegrative periods in which reasons to split apart become dominant.

Clearly, the world-system of this era is entering a disintegrative phrase, and dismissing dissenters as “populists” solves nothing. For insight on how the disintegrative phase may manifest in Germany, let’s turn to Mark G.’s commentary:

Merkel faces own ‘German BREXIT’ Chancellor’s immigration crisis is ‘Threat to Europe’

The breakdown of the Bavarian CSU and German CDU center-right coalition (refounded post WWII by Konrad Adenauer) is historic. And it has definite regional implications. I think we could be watching the beginning moves not in a “German Brexit” but in the political collapse of the modern German state into multiple components. 

…click on the above link to read the rest of the article…

The European Intervention Initiative: a New Military Force Established in Europe

The European Intervention Initiative: a New Military Force Established in Europe

The European Intervention Initiative: a New Military Force Established in Europe

The predictions have come true about the emergence of a new defense group that will change the European security environment. On June 25, the defense chiefs from nine EU countries signed off on the creation of a new force called the European Intervention Initiative (EII), which is spearheaded by French President Emmanuel Macron. The new organization will have a common budget and a doctrine establishing its guidelines for acting and joint planning for contingencies in which NATO may not get involved. The group includes the UK, Germany, Denmark, the Netherlands, Belgium, Estonia, Spain, and Portugal. Italy may join soon. The initiative is not tied to the EU’s Common European Defense, which includes the PESCO agreement as well as NATO. Great Britain has always opposed the idea of creating a European defense alliance, fearing it would undermine transatlantic unity. Now it has done an about-face, as the rifts within the US grow deeper.

The new force is to be much more efficient than anything else the EU has to offer, with a streamlined decision-making process that will permit a quick reaction time. Its relatively small number of members will give it more flexibility in comparison with the EU or NATO. For instance, the EU’s four multinational military battle groups that were created as far back as 2007 have never been deployed.

Its main mission is to offer a rapid response to crises that could threaten European security. The operations are to be conducted independently from US control. The UK will remain a member of this European defense entity even after it leaves the EU next year. Denmark, which retains a special opt-out status and has not joined PESCO, is a signatory to the EII.

…click on the above link to read the rest of the article…

EU Globalists and Chinese Communists Team Up To Protect NWO

EU Globalists and Chinese Communists Team Up To Protect NWO

On Monday, European Union leaders announced that officials from the EU and China were coming together to strengthen and protect their international trade relations from Trump’s “America First” agenda.

Jyrki Katainen (shown, left), the vice-president of the EU’s ruling and unelected European Commission, said during an interview aired on CNBC Monday morning, “I feel really we are making progress…. Both China and the EU believes in multilateralism and a rules-based world order.”

Katainen’s “rules-based world order” is a soft-sounding label given by globalists to the new world order.

Katainen is no stranger to the globalist community of insiders, as he is one of them. In addition to serving as vice president of the EU Commission, Katainen previously served as the Minister of Finance and former Prime Minister of Finland. He also attended the 2007 and 2009 Bilderberg Meetings.

Katainen is also a member of Finland’s National Coalition Party, which shares the same international affiliation as the Republican Party of the United States — the International Democratic Union. A stalwart advocate of sovereignty-killing “free trade” agreements and strengthening regional and global governance regimes such as the EU and the United Nations, Katainen’s politics are akin to those of Republicans such as Henry Kissinger, John Kasich, Richard Nixon, and the Bush family.

And like many establishment and internationalist Republicans here in the United States, Finland and the EU’s Katainen also love investments from Communist China.

“I was very satisfied for the way the host Vice Premier Liu He organized the meeting. The main outcome, of putting everything in a nutshell, is that we decided in a couple weeks’ time, EU and China will exchange market access offers on investment agreement,” Katainen told CNBC, adding that it was “the first big step forward.”

…click on the above link to read the rest of the article…

Deutsche Bank’s Troubles Raise Worries About the Future of the Euro Zone

The euro banking sector is huge: In April 2018, its total balance sheet amounted to 30.9 trillion euro, accounting for 268 per cent of gross domestic product (GDP) in the euro area. Unfortunately, however, many euro banks are in lousy shape. They suffer from low profitability and carry an estimated total bad loan exposure of around 759 billion euro, which accounts for roughly 30 per cent of their equity capital.

Share price developments suggest that investors have lost quite some confidence in the viability of euro banks’ businesses: While US bank stocks are up 24 per cent since the beginning of 2006, the index for euro-area bank stocks is still down by around 70 per cent. Perhaps most notably, ’Germany’s two largest banks, Deutsche Bank and Commerzbank, have lost 85 and 94 per cent, respectively, of their market capitalization.

polleit1_0_0.png

With a balance sheet of close to 1.5 trillion euro in March 2018, Deutsche Bank accounted for around 45 per cent of German GDP. In international comparison, this an enormous, downright frightening dimension. It is mostly the result of the bank still having an extensive (though not profitable) footprint in the international investment banking business. The bank has already started reducing its balance sheet, though.

polleit2_5.png

Beware of big banks — this is what we could learn from the latest financial and economic crises 2008/2009. Big banks have the potential to take an entire economy hostage: When they get into trouble, they can drag everything down with them, especially the innocent bystanders – taxpayers and, if and when the central banks decide to bail them out, those holding fiat money and fixed income securities denominated in fiat money.

Banking Risks

For this reason, it makes sense to remind ourselves of the fundamental risks of banking – namely liquidity riskand solvency risk –, for if and when these risks materialise, monetary policy-makers can be expected to resort to inflationary actions.

…click on the above link to read the rest of the article…

Europe Warns Of An Upcoming “Trade Apocalypse”

As European officials struggle to do everything they can to save the WTO, which appears headed for an all-but-certain demise thanks to President Trump’s aggressive trade policies, EU leaders have apparently circulated an “internal memo” drafted by the European Commission that accuses the US of deliberately instigating the collapse of the global trade order, and warns of an upcoming “trade apocalypse.” In short, if this document is any guide, the trade war is about to get worse – as if Trump’s threat to impose 20% tariffs on all cars coming into the US last week wasn’t bad enough.

EU

According to Bloomberg, the EU warned that the “rules-based system of international commerce” could revert to an trade environment where “the strong impose their will upon the weak,” the memo said.

Our world will go back “to a trading environment where rules are only enforced where convenient and where strength replaces rules as the basis for trade relations,” according to the memo.

The flirtations with a return to an environment of “mercantilist deals” have intensified as President Trump has been determined to narrow the trade deficit at any cost – even if the price is the collapse of the multilateral trade order.

Specifically, the memo, which was obtained by Bloomberg, spells out three complaints raised by the EU:

  • Gaps in the rulebook of global trade “leading to distortions, many of which associated with non-market policies and practices in major trading nations, that the WTO does not seem able to address adequately”
  • Aggressive unilateral actions by the US targeting allies and foes alike with punitive tariffs
  • The US’s decision to block appointments of members to the World Trade Organization’s Appellate Body that serves as the final arbiter in trade disputes.

The EU also complained about the US’s practice of blocking appointments to the appellate body that would help render a judgment in a WTO trade dispute.

…click on the above link to read the rest of the article…

The Biggest Monetary Experiments in History: Part 1

The Biggest Monetary Experiments in History: Part 1

… and all at the same time.

Last week was a humdinger. Three things happened:

One

Firstly, our pasta-eating friends, after having experienced firsthand a blizzard of accelerating violent crime… and watching their previously gentrified neighbourhoods reconfigured into ghettos resembling the Maghreb, decided enough was enough and said “non piu”.


Italy turns away two more boats loaded with ‘human cargo’ https://sc.mp/2lbiUF7  via @SCMP_News

Italy turns away two more boats loaded with ‘human cargo’

Minister says the country no longer wants to be any part of the business of ‘clandestine immigration’.

scmp.com


And who could blame them?

A clash of cultures. One that will one day be studied by scholars sipping their coffee, scratching their heads, frowning and scorning the insanity of it all.

The below video of migrants unhappy with the accommodations provided by the Italian state is nothing unusual. It is rather a daily occurrence, not only in Italy, but across various parts of Europe, Britain, and Scandinavia.

A strange way one would say to show gratitude to the Italians who rescued them from the ocean, fed them, clothed them, and provided them shelter.

That these daily events aren’t publicised by the MSM is a topic for another day, but increasingly it’s hard to hide this sort of thing from your own people. Italy, as we all know, is predominantly Catholic, certainly Christian. And so when Luigi strolls outside for an espresso at his local cafe and finds this in the streets:

… he wonders what the hell the politicians are thinking.

When future generations look back at the reasons why the European Union and one currency system collapsed, there will be many factors to consider.

…click on the above link to read the rest of the article…

Is “America First” Hurting Global Energy Relations?

Is “America First” Hurting Global Energy Relations?

USA

Throughout history the strong bond between the United States and Europe, arguably the world’s most important alliance, has been decisive within the international arena. Massive migration from the ‘old world’ to the ‘new’ during the past centuries has been the reason for sharing important norms and values such as democracy, liberalism, and international trade.

The election of President Donald Trump, however, has put doubt to this alliance, which was the strongest supporter of the rule-based international system of the present day. It has to be seen whether the election of this President is a temporary matter, or that the United states will continue, in some way or another, to choose a more unilateral path.

The bellicose language of President Trump and his opposition to agreements and existing matters of international affairs predating his election, have put him on a collision course with his partners in Europe. The unpredictability of the U.S. President was a reason for European leaders to give him the benefit of the doubt and start with debate instead of confrontation. However, as France’s President Macron’s short ‘bromance’ showed, Trump can hardly be influenced in matters of unambiguous election promises.

European leaders have confronted the U.S. president on several occasions on reasonable terms in order to overcome their differences in international politics. In the case of U.S. withdrawal from the Paris agreement on climate change and the unilateral departure from the JCPOA or the Iran Nuclear Deal showed Trump’s intractable belief for the ‘righteous’ path of the U.S. However, trade disputes hit the interests of European partners more directly and put the Atlantic partnership on a collision course. One country stands to benefit from current developments: Russia.

…click on the above link to read the rest of the article…

How the US, Under Obama, Created Europe’s Refugee Crisis

How the US, Under Obama, Created Europe’s Refugee Crisis

How the US, Under Obama, Created Europe’s Refugee Crisis

The current US President, Donald Trump, claimed on June 18th, that Germany’s leadership, and the leadership in other EU nations, caused the refugee-crisis that Europe is facing:

“The people of Germany are turning against their leadership as migration is rocking the already tenuous Berlin coalition. Crime in Germany is way up. Big mistake made all over Europe in allowing millions of people in who have so strongly and violently changed their culture!”

The US Government is clearly lying about this. The US Government itself caused this crisis that Europeans are struggling to deal with. Would the crisis even exist, at all, if the US had not invaded and tried to overthrow (and in some instances actually overthrown) the governments in Libya, Syria, and elsewhere — the places from which these refugees are escaping? The US Government, and a few of its allies in Europe (the ones who actually therefore really do share in some of the authentic blame for this crisis) caused this war and government-overthrow, etc., but Germany’s Government wasn’t among them, nor were many of the others in Europe. If the US Government had not led these invasions, probably not even France would have participated in any of them. The US Government, alone, is responsible for having caused these refugees. The US Government itself created this enormous burden to Europe, and yet refuses to accept these refugees that it itself had produced, by its having invaded and bombed to overthrow (among others) Libya’s Government, and then Syria’s Government, and by its aiding Al Qaeda in organizing and leading and arming, jihadists from all over the world to come to Syria to overthrow Syria’s Government and to replace it with one that would be selected by the US regime’s key Middle Eastern ally, the Saud family, who own Saudi Arabia, including its Government, and who are determined to take over Syria.

…click on the above link to read the rest of the article…

The Beast From The East, coal, gas and the UK

The Beast From The East, coal, gas and the UK

In late February 2018 high pressure over the North Atlantic and low pressure over the Mediterranean combined to generate a strong easterly airflow that brought Siberian temperatures to Western Europe, increasing heating demand to the point where there was a shortage of natural gas. The outcome was an increase in UK coal generation, partly because coal briefly became cheaper than gas as a source of electricity generation but mostly because the UK did not have enough gas in storage to fill both home heating and electricity generation needs. The UK, however, plans to shut down all its coal plants by 2025, and in this post I speculate as to what might have happened if they had all been shut down in 2018. The conclusion is that the UK would not have been able to cover peak load deficits during much of the cold period owing to inadequate gas supplies and installed gas capacity.

This post was prompted by the Drax Electric Insights Quarterly linked to by correspondent Ed T in Blowout Week 231. I had not come across this report before, but it provides a good summary of UK quarterly activity and I have plagiarized it where appropriate.

Figure 1 shows UK generation by source over the period between February 1 and March 31 2018, covering the Beast From the East cold periods. The generation data are five-minute Gridwatch values averaged into hourly intervals and the temperature data are daily means from the Met Office Central England temperature site:

Figure 1: UK hourly generation by source and mean daily Central England temperatures, February 1 to March 31 2018

Imports are plotted at the bottom because this is the only way I have found of displaying negative values (exports) on a stacked bar chart. Together with nuclear and biomass they provided reasonably stable baseload generation.

…click on the above link to read the rest of the article…

Europe Is Awash With Oil Stored On Ships

Europe Is Awash With Oil Stored On Ships

shell North Sea

While many analysts and agencies have already called the end of the global oil glut, oil held in floating storage in Europe is at an at least 18-month-high, also due to the booming U.S. oil exports that have displaced some of the traditional crude oil routes in the world.

Oil in ships around European shores was 12.9 million barrels on average in May, accounting for 26 percent of all global floating storage, and more than Asia-Pacific’s 9.7 million barrels of oil stored, according to estimates by oil analytics company Vortexa, as carried by Reuters.

In the two preceding months, March and April, the share of oil in floating storage in Europe accounted for 10 percent of the global storage, compared to 40 percent stored in the Asia-Pacific region. But in May, the volumes of oil held in Europe—including in the Mediterranean—exceeded the oil held off the Asia Pacific coasts for the first time since at least early 2015, according to Vortexa.

Consultant Kpler has estimated that there are some 17 million barrels of oil stored on ships in northwest Europe—the highest since at least the beginning of 2016.

Soaring U.S. exports have upended some traditional buying patterns, as China, India, and Indonesia have purchased more U.S. crude at the expense of African crude grades from OPEC members Nigeria and Angola, and of some Middle Eastern crudes.

On the other hand, U.S. crude oil exports to Europe have also been rising lately, as U.S. oil is increasing in popularity with European refiners, often at the expense of oil cargoes from OPEC nations and Russia.

…click on the above link to read the rest of the article…

The Eurozone’s Coming Debt Crisis

The Eurozone’s Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

The 19 eurozone countries have collectively saved 1.15 trillion euros in interest payments since 2008 due to ECB rate cuts and monetary policy interventions, according to Handelsblatt. A reduction in costs against the losses of pensioners and savers.

However, that illusion of savings and budget stability can rapidly disappear as most Eurozone countries face massive maturities in the 2018-2020 period and wasted precious years of quantitative easing without implementing strong structural reforms. Tax wedge rose for families and SMEs, while current spending by governments barely fell, competitiveness remained poor and a massive one trillion euro in non-performing loans raised doubts about the health of the European financial system.

 

The main eurozone economies face more than 2.1 trillion euro in maturities between 2018 and 2021. This, added to lower tax revenues due to the slowdown and rising spending from populist demands creates an enormous risk of a large debt crisis that no central bank will be able to contain. Absent of structural reforms, the eurozone faces a Japan-style stagnation or a debt crisis.

 

…click on the above link to read the rest of the article…

Italian Politics: The Calm Before the Next Storm

Europe remains a potential source of angst for financial markets in the form of another existential crisis for the Eurozone. True, stock markets have relaxed over the past week in part because of relief that another Italian election has been avoided for now and in part because US dollar upward momentum has stalled (see following chart).US DOLLAR INDEX

US Dollar Index - June 2018

Source: Bloomberg

CONFLICT IN ITALY — WHEN WILL IT COME TO A BOIL?

The coalition government’s economic policies will likely conflict with the fiscal rules set by Brussels.

On Italy this is likely just the calm before the next storm given the Five Star and League coalition government’s economic policies are almost inevitably going to be in conflict with the fiscal rules set by Brussels — though the confrontation may take longer to come to a boil because of the presence of technocrats in the new government, a compromise required by Italian president Sergio Mattarella for the government to be formed on June 1.

There will also doubtless be hopes on the part of the political establishment that the differences in ideologies between the left of centre Five Star and the right-wing League will become evident in the everyday practice of trying to run a government resulting in due course in both ‘populist’ parties being discredited in the eyes of the electorate.

ITALIAN 10-YEAR GOVERNMENT BOND YIELD AND SPREAD OVER 10Y GERMAN BUND YIELD

Italian 10Y government bond yield and spread over 10Y German Bund Yield

Source: Bloomberg

THE ECB AND THE EUROSYSTEM — ITALY’S GREATEST CREDITOR

The other point to consider with an Italian populist government now in place is how the ECB will react in terms of the signals sent given that the ECB and the Eurosystem is the single largest holder of Italian government debt.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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