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We have shown in the previous three episodes (episode 1, 2 and 3) how the US economy structurally changed after Nixon took the US off gold, letting the Federal Reserve do what it does best. Obviously, with the “hard” anchor of the US dollar cut loose, the rest followed suit. It is telling that the so-called post-Bretton Wood “gold standard” of all currencies, the Deutsche mark lost 65 per cent of its purchasing power from 1971 to 1990.

Also note that the French, with its inferior Franc lost 84 per cent of its purchasing power over the same, time hated the Germans for it. As a “victorious” nation of the Second World War, the French had a right to veto German unification, and would only agree to re-merge east and west if the Germans would give up their coveted mark and join the euro.

But we digress, in the this episode we will focus on debt levels within the context of unrestrained central banking.

Throughout history the US economy used to be leveraged, on average, 1.5 times GDP; total credit market debt fluctuated more or less within a tight range of maximum one standard deviation from its long term mean. Prior to 1971 the only time debt levels really got out of hand was during the Great Depression on back of a 45 per cent decline in nominal GDP. Total outstanding debt, in dollar terms actually fell by 12 per cent over the same time span.

So, the US economy was leveraged 1.5 times its annual output from 1840 to 1971 before fundamentally changing its trajectory. Needless to say, this low debt period was also when the US economy became the world’s largest and most sophisticated (see here) and ultimately a global hegemon.

Source: History of the United States from Colonial times to 1970, Federal Reserve, Bureau of Economic Analysis, Bawerk.net

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

Approaching a Global Deflationary Crisis?

August 16, 2015

Approaching a Global Deflationary Crisis?

Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.

So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.

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

EU Aims to Lure Greek Deposits Back to Banks With Bail-in Shield

August 15, 2015

EU Aims to Lure Greek Deposits Back to Banks With Bail-in Shield

Euro-area finance ministers shielded Greek bank depositors from any losses resulting from the restructuring of the nation’s financial system, as part of Friday’s deal on an 86 billion-euro ($96 billion) bailout.

Senior bank bondholders will be in the crosshairs if Greek lenders tap into any of the financial stability funds set aside in the new bailout. Euro-area finance ministers agreed to a deal that would next week place 10 billion euros in Greece’s bank recapitalization fund, with another 15 billion euros available if needed.

“Bail-in of depositors will be explicitly excluded” from European Union rules to make private investors share the cost of fixing troubled banks, Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem told reporters after the six-hour meeting in Brussels.

By shielding all depositors, the euro area will protect small and medium-sized enterprises who have more than 100,000 euros in their accounts and aren’t covered by government deposit insurance, Dijsselbloem said. This prevents “a blow to the Greek economy” that ministers wanted to avoid, he said. Instead, the focus will turn to bond investors.

“When so much money must be invested in banks, in the first place, banks must take part of the risks,” Dijsselbloem said.

Alpha Bank AE’s 400 million euros of 3.375 percent notes due 2017 traded at 70.5 cents on the euro Friday to yield 25.4 percent. Those securities are up from a low this year of 27.5 cents in July.

Firewall Fund

At the start of the new aid program, the bank funds will be placed in a designated account at the European Stability Mechanism, the currency bloc’s firewall fund. Bank supervisors can tap the money as required once Greece’s banks have gone through stress tests and an asset-quality review.

After Greece’s lenders are recapitalized, the subsequent bank holdings will be transferred to the nation’s planned privatization fund, which will then be able to sell off the stakes and use the proceeds to pay back bailout funds.

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

Greeks Flock to Grassroots Alternative Currencies in Affront to Euro Debt Slavery

August 14, 2015

Greeks Flock to Grassroots Alternative Currencies in Affront to Euro Debt Slavery

Necessity is the mother of invention.

Screen Shot 2015-08-14 at 11.29.09 AM

When Christos Papaioannou noticed his car needed new tires, the Greek computer engineer bought them with euros—but used an alternative currency, called TEM, to pay his mechanic for the labor.

His country has avoided a catastrophic exit from the common currency, at least for now. But a small but growing number of cash-strapped Greeks, who are still grappling with strict money-withdrawal limits, have found another route in TEM and other unconventional payment systems like it.

Before then, Ms. Sotiropoulou said she was only aware of two such programs. No official record of the number of alternative currencies and local bartering systems appears to exist in Greece. But according to an Athens-based grass roots organization called Omikron Project, there are now more than 80 such programs, double the number in 2013. They vary in size, from dozens of members to thousands.

– From the Wall Street Journal article: Alternative Currencies Flourish in Greece as Euros Are Harder to Come by

Hundreds of millions of people throughout the Western world are being forced to admit an obvious, yet uncomfortable reality.Democracy is dead. Your vote and your voice doesn’t matter. Not at all.

No group of people understand this as intimately as the Greeks. They voted for one thing, got something else, and in the process were unceremoniously reminded of their political irrelevance. The Greeks are now in a position to show the rest of us how it’s done. Communities need to take matters into their own hands and tackle challenges at the grassroots level. Nowhere is this more impactful and necessary than in the monetary realm, and some Greeks are already leading the charge.

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

Greeks Ditch Euro For Alternative Currencies As Parliament Votes On Bailout

August 13, 2015

Greeks Ditch Euro For Alternative Currencies As Parliament Votes On Bailout

Greece released a bit of amusing econ data on Thursday, as the country’s statistical authority claimed GDP grew by 0.8% in Q2, well ahead of estimates of a 0.5% contraction. While we suppose it’s feasible that things weren’t as bad in Q2 as they have been since (capital controls weren’t in place during the quarter), we think you’d be hard pressed to find anyone in Greece who thought things were looking up for the economy heading into the referendum. In any event it doesn’t matter, because as WSJ notes, the fiscal retrenchment enshrined in the country’s third bailout program combined with the generally poor outlook means Greece faces a two-year recession – at least:

Greece faces two years of recession amid sharp budget cuts and overhauls mandated by its €86 billion ($95 billion) bailout agreement, European Union officials said, as Greek Prime MinisterAlexis Tsipras expressed confidence that the deal would be completed.

The country’s economy is expected to shrink 2.3% this year because of the recent months of turmoil and the cuts required by the bailout, the officials said, citing the latest estimates from the institutions that have been negotiating Greece’s new aid program. Next year, it is projected to contract 1.3%.

Miraculously, the Greek economy is expected to rebound sharply in 2017, when it will supposedly grow at 2.7%. Clearly that’s optimistic to the point of being largely meaningless, but that’s the story Athens and creditors are sticking to for now and on Thursday, Greek lawmakers will be herded into parliament where they’ll be pressured to pass some 40 new laws which will serve to plunge the country even further into depression than it already plunged during the first two months of Q3.

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

We are all Greece

July 31, 2015

We are all Greece

The cast of heroes and villains in Greece’s ongoing battle to save its economy varies depending on who’s telling the story. One simplified narrative depicts the German people as rich and callous overlords inflicting hardship on the downtrodden Greeks. The austerity measures they insist upon are essentially meant to punish the Greeks for spending too much on social programs for the sick and elderly.

In an opposing storyline, the Greeks have only themselves to blame: they lived beyond their means, evaded taxation, were generally corrupt, and irresponsibly piled up debts they simply could not repay. In this scenario the Germans are like parental figures administering discipline on the immature Greeks.

Neither of these narratives is accurate or helpful; rather than providing real insight, they merely serve to heighten nationalistic and xenophobic impulses in both countries. In order to make sense of what’s going on, we need to go behind the scenes to look more broadly at the underpinnings of the crisis.

It is widely assumed that the European Union was formed in order to prevent conflict. This notion can be traced to the aftermath of the Second World War, when well-intentioned statesmen promoted the notion that economic integration was a path to peace and harmony. And until this day many idealists support the EU for this reason. However, for many in my network – particularly in Scandinavia – it was clear from the beginning that the EU was primarily about big business.

Before countries were linked together into an economic union, Europe’s many regions were home to a great variety of cultures, languages and customs. But the Union erodes this rich diversity, which was born of human adaptation to different climates and ecological realities. The many borders, currencies, and differing regulations made trade difficult for big business, while the diversity of languages and cultural traditions put limits on mass marketing.

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

The Rise Of The Yuan Continues: LME To Accept Renminbi As Collateral

July 28, 2015

The Rise Of The Yuan Continues: LME To Accept Renminbi As Collateral

As far-fetched as the notion may be to those who are wedded – by choice, by misguided beliefs, or by virtue of being completely beholden to the perpetuation of the status quo – to idea that the dollar will forever retain its status as the world’s reserve currency, the yuan is set to play a critical role in global finance, investment, and trade going forward.

We’ve long argued that the BRICS bank, the AIIB, and to an even greater extent, the Silk Road Fund, will help to usher in a new era of yuan hegemony in international investment and trade. A number of recent developments support this, including Beijing’s push for the renminbi to play an outsized role in loans doled out through the AIIB, the denomination of loans from the BRICS bank in yuan, and China’s aggressive investment in Pakistan and Brazil via the Silk Road initiative (here and here).

As for financial markets, China recently confirmed the impending launch of a yuan denominated gold fix which conveniently dovetailed with the LBMA’s acceptance of the first Chinese banks to participate in the twice-daily auction that determines London gold prices.

Now, in the latest sign of yuan proliferation and penetration, the renminbi will be accepted as collateral by the LME along with the dollar, the euro, the pound, and the yen.

Here’s WSJ with more:

China’s domestic stock market may be in turmoil but the country’s currency, known as the yuan or renminbi, is making a seemingly relentless push deeper into the global financial system.

The latest step: the London Metal Exchange, the world’s largest venue for trading metals where $15 trillion of metals was traded last year, is set to accept yuan as collateral for banks and brokers that trade on its platform.

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

Deflation Is Winning – Beware!

July 25, 2015

Deflation Is Winning – Beware!

Expect the ride to get even rougher

Deflation is back on the front burner and it’s going to destroy all of the careful central planning and related market manipulation of the past 6 years.

Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. Tanking commodity prices are confirming that idea.

Whole groups of enterprises involved in mining and energy are about to be destroyed. And the commodity-heavy nations of Canada, Australia and Brazil are in for a very rough ride.

Whether the central banks can keep all of their carefully-propped equity and bond markets elevated throughout the next part of the cycle remains to be seen. We know they will try very hard. They certainly are increasingly willing to use any all tools at their disposal to keep the status quo going for as long as possible.

Whether it’s the People’s Bank of China stepping in to the market to buy 10% stakes in major Chinese corporations in a matter of weeks, the Bank Of Japan becoming the majority owner of key ETFs in the Japanese markets, or the Swiss National Bank purchasing $100 billion of various global equities, we see the same desperation. Equity prices are being propped, jammed and extended higher and higher without regard to risk or repurcussions.

It makes us wonder: Why haven’t humans ever thought to print their way to prosperity before?

Well, that’s the problem. They have.

And it has always ended up disastrously. History shows that the closest thing that economics has to an inviolable law is: There’s no such thing as a free lunch.

Sadly, all of our decision-makers are trying their hardest to ignore that truth.

First, The Fall….

So how will all of this progress from here?

We’ve always liked the Ka-Poom! theory by Erik Janzen which we explained previously like this:

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

Greece crisis: Banks reopen as government eyes return to normalcy

July 20, 2015

Greece crisis: Banks reopen as government eyes return to normalcy

Stock market remains closed

Greek banks opened their doors Monday for the first time in over three weeks, a move that the government hopes will help the economy get back to normal following a period dominated by fears over the country’s future in the euro.

Still, strict controls on the amounts individuals can withdraw remain and new austerity taxes demanded by the country’s European creditors mean that most everyday items are more expensive — from coffee to taxis to cooking oil.

In downtown Athens, people queued up in an orderly fashion as the banks unlocked their doors at 8 a.m., but restrictions on most transactions remained.

Though the daily cash withdrawal limit stayed at 60 euros, the government has given individuals a new weekly limit of 420 euros from this coming Sunday so they don’t need to trudge to the ATM every day.

Ready cash is something Greeks will need as new taxes also came into effect on a wide array of goods and services Monday.

Sales taxes have risen from 13 per cent to 23 per cent on many basic goods — including some meats, cooking oils, coffee, tea, cocoa, vinegar, salt, flowers, firewood, fertilizer, insecticides, sanitary towels and condoms.

Popular services were also hit by the new taxes: restaurants and cafes, funeral homes, taxis, ferries, cram schools and language schools.

The new taxes are part of a package of confidence-building measures that the Greek government had to introduce in order for negotiations on a third bailout to begin.

Since the Greek parliament passed the measures, creditors have sought to relieve the pressure on Greece. The European Central Bank has raised the amount of liquidity assistance on offer to Greek banks while Greece’s partners in the 19-country eurozone agreed to give Athens a short-term loan so it wouldn’t default on a 4.2 billion-euro debt due to the ECB on Monday.

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

Greece Is Now A Full-Blown Humanitarian Crisis – In 9 Charts

July 18, 2015

Greece Is Now A Full-Blown Humanitarian Crisis – In 9 Charts

The people of Greece are facing further years of economic hardship following a Eurozone agreement over the terms of a third bailout. The deal included more tax rises and spending cuts, despite the Syriza government coming to power promising to end what it described as the “humiliation and pain” of austerity. With the country having already endured years of economic contraction since the global downturn, The BBC asks, just how does Greece’s ordeal compare with other recessions and how have the lives of the country’s people been affected?

The long recession

It is now generally agreed that Greece has experienced an economic crisis on the scale of the US Great Depression of the 1930s.

According to the Greek government’s own figures, the economy first contracted in the final quarter of 2008 and – apart from some weak growth in 2014 – has been shrinking ever since. The recession has cut the size of the Greek economy by around a quarter, the largest contraction of an advanced economy since the 1950s.

Although the Greek recession has not been quite as deep as the Great Depression from peak to trough, it has gone on longer and many observers now believe Greek GDP will drop further in 2015.

Dwindling jobs

Jobs are increasingly difficult to come by in Greece – especially for the young. While a quarter of the population are out of work, youth unemployment is running much higher.

Half of those under 25 are out of work. In some regions of western Greece, the youth unemployment rate is well above 60%.

An ‘Austrian’ Economist’s Advice For Greece and the EU

July 18, 2015

An ‘Austrian’ Economist’s Advice For Greece and the EU

For months, now, the mass media and the financial markets have anxiously watched and waited to see the outcome of a war of words, accusations, and threats that have been fought between Greece and its Eurozone and European Union partners.

Over several decades Greek governments accumulated a fiscally unmanageable debt and have been unwilling to introduce any meaningful, long-term economic and budgetary reforms to get the country’s political-economic house in order.

Greece’s Euro and EU partners have warned that Greece may be formally or informally expelled from the common currency and, perhaps, from the economic union if the terms for a new series of loans based on domestic Greek reforms and some debt restructuring cannot be agreed upon.

However, in the whirlwind of often sensational and uncertain daily new events, it is sometimes useful and even necessary to step back and try to take a look at the wider context of things in which those current events are occurring.

Greek and European Union Crisis is the Result of Collectivism

The fiscal and other economic policy problems that are plaguing Greece are simply the highly magnified and intensified problems that are affecting many of the other European nations

Many of them have accumulated large national debts that press upon the fiscal capacities of their taxpayers. They all have highly regulated markets and restricted labor markets. They all have aging populations expecting generous government-funded pensions as the years go by. They all have costly welfare state “entitlement” programs that must be financed through taxes and deficit financing.

They also share a generally anti-capitalistic mentality. Intellectuals, politicians, many in the electorates, and most certainly the national and EU bureaucrats neither understand nor advocate the classical liberal ideal of truly free markets or the wider political philosophy of individualism and individual rights to life, liberty, and honestly acquired property.

– See more at: http://www.cobdencentre.org/2015/07/an-austrian-economists-advice-for-greece-and-the-eu/#sthash.Eg4lkJYV.dpuf

Agency to Enslave Greeks Is Established

July 18, 2015

Agency to Enslave Greeks Is Established

Late on Thursday, July 16th, German Economic News headlined “Greece: Debt Restructuring Through the Back Door,” and reported that, “The majority of Greece’s national debt is to be moved in the next three years gradually to the euro bailout fund ESM [European Stability Mechanism], so that the IMF will continue to remain as a lender. The euro zone countries will thereby provide Athens a longer grace period [a temporary postponement of payments, while the 18% annual interest-rate soars Greece’s debt even higher], and longer repayment periods.”

The super-secretive European Stability Mechanism was set up in 2012, in order to handle Greece’s anticipated virtual receivership, which it now will do.

As I reported on July 16th, the treaty that in 2012 established the ESM, as being the ultimate lending-fund, for what the EU now officially considers to be a permanent economic crisis in Europe — of Greece and other member-nations that are experiencing “severe financing problems” — establishes the ESM as being so secretive, that a precondition of employment there is “Professional secrecy,” which will apply “even after their duties have ceased” (i.e., they’ve retired). In other words: the goal is that the public will never be able to know anything that goes on there, except what the top management issue in their speeches and press releases (if any). Furthermore, the ESM is above and beyond any democratic process, and is immune to any nation’s laws. Everyone in its employ “shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents.” (That’s necessary in order to ensure that no information can ever be released by the employees — only the ESM’s public statements will be.) There will be no democratic accountability, whatsoever.

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

Greece Surrendered: But to Whom Exactly?

July 18, 2015

Greece Surrendered: But to Whom Exactly?

On July 12, Greece surrendered abjectly and totally. Prime Minister Alexis Tsipras, who had promised to combat the austerity measure that are driving the Greek people to ruin, poverty and suicide, betrayed all his promises, denied the will of the people expressed in the July 5 referendum, and led the Greek parliament to accept an agreement with the nation’s creditors even worse than all those that had already caused the economy to shrink and which further abandoned the last scraps of national sovereignty.

Yes, Greece surrendered unconditionally, as has been thoroughly and eloquently expressed here on CounterPunch and elsewhere. But one crucial question appears not to have been adequately answered. To whom, exactly, did Greece surrender?

A common answer to that question is: Germany. The poor Greeks surrendered to the arrogant Germans. This theme has served to revive anti-German feelings left over from World War II. Frau Merkel is portrayed as the heartless villain. One thing is sure: the animosity between Greece and Germany aroused by this debt catastrophe is proof that the “European dream” of transforming the historic nations of Western Europe into one single brotherly federation, on the model of the United States of America, is a total flop. The sense of belonging to a single nation, with all for one and one for all, simply does not exist between peoples whose languages, traditions and customs are as diverse as those between Finns and Greeks. Adopting a common currency, far from bringing them together, has driven them farther apart.

But was this disaster actually dictated by the wicked Germans?

n reality, very many Germans, from the right-wing Finance Minister Wolfgang Schaüble all the way to the former leader of the left party “Die Linke” Oskar Lafontaine would have preferred a very different solution: Greece’s exit from the Eurozone. Schaüble was thinking of German finances, while Lafontaine was thinking of what would be best for the people of Greece – and of Europe as a whole.

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

The Curse Of The Euro: Money Corrupted, Democracy Busted

July 18, 2015

The Curse Of The Euro: Money Corrupted, Democracy Busted

The preposterous Gong Show in Brussels over the weekend was the financial “Ben Tre” moment for the Euro and ECB. That is, it was the moment when the Germans—–imitating the American military on that ghastly morning in February 1968——set fire to the Eurozone in order to save it.

Some day history will judge good riddance……..but that get’s ahead of the story.

According to an American soldier’s first hand recollection of the Vietnam event, it was a Major Booris who infamously told reporter Peter Arnett, “It became necessary to destroy the town to save it”.

After the massacre of Greek democracy in the wee hours Monday morning, Angela Merkel said the same thing—even if her language was a tad less graphic:

It reflects the basic principles which we’ve followed in rescuing the euro. It now hinges on step-by-step implementation of what we agreed tonight.”

Now no one in their right mind could think that lending another $96 billion to an utterly bankrupt country makes any sense whatsoever. After all, the Greek economy has shrunk by 30% since 2008 and is wreathing under what is objectively a $400 billion public debt already in place today.

That figure follows from the fact that on top of Greece’s acknowledged $360 billion of general government debt there’s at least another $25 billion loan embedded in the ELA advances to the Greek banking system. The latter is deeply insolvent, meaning that some considerable portion of the $100 billion ELA currently outstanding is not an advance against good collateral in any plausible banking sense of the word, but merely a backdoor fiscal transfer from the ECB to keep Greece’s financial shipwreck afloat.

Likewise, as I demonstrated Friday, given the even deeper deep hole into which the Greek economy has tumbled during the last six months, the fiscal targets extracted from Greece under this weekend’s demarche are utterly ridiculous. Indeed, even if the targeted primary surpluses of 1,2,3 and 3.5% of GDP are miraculously reached through 2018, upwards of $15 billion of budget deficits after interest accruals would be incurred anyway, and a lot more than that if there are material budget shortfalls, which is a virtual certainty.

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

Farage on Europe at the Heritage Foundation

July 17, 2015

Farage on Europe at the Heritage Foundation

Nigel Farage may be the only practical politician these days because he came from the trading sector. He explains the Euro-Project and its failures. He makes it clear that the Greek people never voted to enter the euro, and explains that it was forced upon them by Goldman Sachs and their politicians. Nigel also explains that the Euro project idea that a trade and economic union would then magically produce a political union – the United States of Europe and eliminate war.

He has warned that the idea of a political union would end European wars has actually turned Europe into a rising resentment in where there is now a new Berlin Wall emerging between Northern and Southern Europe.

The Euro project was a delusional dream for it was never designed to succeed but to cut corners all in hope of creating the United States of Europe to challenge the USA and dethrone the dollar, That dream has turned into a nightmare and will never raise Europe to that lofty goal of the financial capitol of the world.

The IMF acts as a member of the Troika, yet has no elected position whatsoever. The second unelected member is Mario Draghai of the ECB. Then the head of Europe is also unelected by the people. The entire government design is totally un-Democratic and therein lies the crisis. Not a single member of the Troika ever needs to worry about polls since they do not have to worry about elections. This is authoritarian government if we have ever seen one.

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

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