News That Matters

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Thetrader.se 

“PIIGS” we are informed in the current Wikipedia entry “is a pejorative acronym used to refer to the economies of Portugal, Italy, Greece and Spain. Since 2008, the term has included Ireland, either in place of Italy or with an additional I.” With apologies, I am joining the ranks of contributors to such august publications as the New York Times,Wall Street Journal, Financial Times and The Economist who have used this handy label as a linguistic convenience and, I believe, with no aspersions intended. My topic is the relative size of these five countries in a basic economic sense — to one another and to the world as a whole. To make comparisons, I’m using GDP based onpurchasing power parity (PPP). My source for the data is the IMF (International Monetary Fund), specifically the IMF’sWorld Economic Outlook Databases. http://www.thetrader.se/2012/05/31/beware-of-the-piigs/Ft.com

An important gauge of China’s manufacturing sector has weakened sharply, adding to the pressure on the government to take more decisive action to support the flagging economy. The official purchasing managers’ index for manufacturing fell to 50.4 in May, its lowest in five months, from 53.3 in April. Although it was the Chinese PMI’s sixth straight month above the 50 level, which signals an expansion of activity, the fall in the index highlighted a clear softening of growth momentum. High quality global journalism requires investment. As the first item of official economic data for May, the PMI offers a timely glimpse into how the Chinese economy performed over the past month. Many analysts and officials had believed that China was on track for a “soft landing” until a raft of poor data in April led to a flurry of growth forecast downgrades. http://www.ft.com/intl/cms/s/0/d2f17014-ab87-11e1-b675-00144feabdc0.html#axzz1wQ4tZnA1

The dramatic drop in Indian economic growth isn’t bothering the likes of Mahendra Saraf. A farmer, he works in a sector that has seen growth shrink to 1.7 per cent in the first three months of 2012 against 7.5 per cent in the same period last year. But Mr Saraf, 26, is confident the blow to his profits will be cushioned by government agricultural subsidies. “Global and domestic demand was not been very strong,” he says, “but the government buys excess grain at a fixed price, so we will get that money anyway.” High quality global journalism requires investment. Such safety blankets – the size of which vary from state to state and industry to industry – are among the targets of those who say the government of Manmohan Singh needs to take radical measures to restore growth in the Indian economy. With growth in the first quarter of 2012 rising at 5.3 per cent, the slowest rate in nine years, policy makers are panicking about how to turn things around. “It’s an absolute disaster,” says Omkar Goswami, head of the Corporate and Economic Research Group in New Delhi. “We went from nearly growing at 10 per cent to 5 per cent in less than two years . . . it’s very, very concerning.”http://www.ft.com/intl/cms/s/0/d9928116-ab13-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1

Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs. http://www.ft.com/intl/cms/s/0/25c39204-ab01-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1

Poland’s economy remained resilient in the face of the eurozone crisis, with data on Thursday showing the country’s gross domestic product grew 3.5 per cent year on year in the first quarter, largely on the strength of domestic demand.  However, the underlying data suggest that the Polish economy may not be able to continue defying gravity for much longer. The GDP increase was in line with analysts’ expectations, and showed a slight slowdown from the last quarter of 2011, when the economy was growing at a pace of 4.3 per cent year on year. http://www.ft.com/intl/cms/s/0/c4e09e84-ab35-11e1-a2ed-00144feabdc0.html#axzz1wQ4tZnA1

Brazil has raised taxes on motorcycles, air conditioners and microwave ovens in its latest move to cut imports and stem a prolonged contraction in the country’s manufacturing sector. The industrial production tax on motorcycles made outside the Amazonian tax-free zone of Manaus, the centre of most of the country’s two-wheeler production, was raised to 35 per cent from 20 per cent. The measure, which applies to domestic and foreign producers alike, follows a series of similar steps to protect industry and sparked a heated response from importers.   “There is a strong lobby urging the Brazilian government to control imports and raise taxes,” said Ivan Ramalho, president of Abece, an industry group representing international trading companies. “The government should resist this lobby.”http://www.ft.com/intl/cms/s/0/b190be2a-ab6e-11e1-a2ed-00144feabdc0.html#axzz1wQ4tZnA1

Wsj.com
European Central Bank President Mario Draghi urged Europe's political leaders to quickly come up with a longer-term vision for the euro zone including a "banking union" to protect depositors and prevent failed banks from threatening the financial system. In testimony to the European Parliament, Mr. Draghi criticized the efforts by national regulators to get a handle on the state of their countries' banks, saying some have made it far more expensive to recapitalize struggling financial institutions. http://online.wsj.com/article/SB10001424052702303640104577437912053045368.html?mod=WSJEurope_hpp_LEFTTopStories 

Spain's government says it has until at least October to raise the funds it needs for the €19 billion ($23.5 billion) rescue of lender Bankia SA, BKIA.MC +0.19%a move government officials hope will let Madrid pick the right moment to raise funds from financial markets and explore other funding options as it aims to avoid an international bailout. Investors have recently shed Spanish bonds over fears about Spain's banking system, boosting the government's borrowing costs and raising concerns that Madrid won't be able to fund its planned rescue. Spain's bank-bailout fund has around €12 billion of funds on hand following a recent capital increase and other adjustments, and officials say they have a few months to raise the remaining funds needed for Bankia. The plan is to give the ailing bank €7 billion in July and then €12 billion in October. "We don't have to raise the money right away, and when we do, it doesn't have to be all at once," a government spokeswoman said.http://online.wsj.com/article/SB10001424052702304821304577438602216733294.html?mod=WSJEurope_hpp_LEFTTopStories

Signs of slower Asian economic growth are raising questions about demand there for European luxury goods. The sector's prospects in recent years have become inextricably linked with the fortunes of China and other so-called Asian tigers. While makers of high-end products look likely to defy a downturn, analysts say, they will have to adjust to mere single-digit growth rather than the sparkling sales figures of the past few years. http://online.wsj.com/article/SB10001424052702303640104577437843852347960.html?mod=WSJEurope_hpp_LEFTTopStories

Expectations of a cut in Australian interest rates are on the rise, with two of the country's big four banks forecasting such a move by the Reserve Bank of Australia when the central bank meets on Tuesday. Both Westpac and National Australia Bank said growing fears of a slowdown in China and a widening European debt crisis should see the RBA cut the official cash rate again at its policy meeting. http://online.wsj.com/article/SB10001424052702304821304577438780437232726.html?mod=WSJEUROPE_hpp_LEFTTopWhatNews

Marketwatch.com
Activity in Australia's manufacturing sector fell to its lowest level in nine months in May, which may stoke concerns that the non-mining sector of the economy is in trouble and further interest rate cuts are needed. The seasonally adjusted Performance of Manufacturing Index fell 1.5 points to 42.4 in May, well below 50 which indicates a contraction in activity. http://www.marketwatch.com/story/australia-manufacturing-gauge-hits-nine-month-low-2012-05-31

Expectations of a cut in Australian interest rates are on the rise, with two of the country's big four banks forecasting such a move by the Reserve Bank of Australia when the central bank meets on Tuesday. Both Westpac and National Australia Bank said growing fears of a slowdown in China and a widening European debt crisis should see the RBA cut the official cash rate again at its policy meeting. "Elevated European uncertainties and signs of slower activity in China and India--as well as weaker commodity prices--lead us to think that... the RBA may be inclined next week to try to boost domestic confidence further by cutting rates by 25 points," NAB chief economist Alan Oster said Thursday. http://www.marketwatch.com/story/australia-banks-warm-to-idea-of-rate-cut-next-week-2012-05-31

Reuters.com
Brazil's ex-president Luiz Inácio Lula da Silva said on Thursday he may run for president again in 2014 if he is needed to prevent the victory of the party that governed before his two-term 2003-2011 presidency. "The only situation under which I'd be a candidate again is if she (current President Dilma Rousseff) doesn't want the job," Lula said on the O Ratinho, or "the Rat" TV show on the country's SBT network. "I will not permit a member of the PSDB to become president of Brasil again." Lula, a former metalworker and union leader, was elected president in 2002 and took over the presidency from Fernando Henrique Cardoso on January 1, 2003. Cardoso is a member of the center-left Brazilian Social Democracy Party, or PSDB. http://www.reuters.com/article/2012/06/01/us-brazil-lula-future-idUSBRE85005820120601

Bloomberg.com
China, India and Singapore posted the biggest increases in millionaires last year as the Asia-Pacific region countered a decline in wealth in western Europe and the U.S., according to Boston Consulting Group. Millionaire households in China rose 16 percent to 1.43 million while those in Singapore climbed 14 percent to 188,000 and India saw a 21 percent increase to 162,000, the Boston-based firm said in a report released today. Millionaire households in the U.S. fell by 129,000 to 5.13 million. http://www.bloomberg.com/news/2012-05-31/asian-millionaires-counter-lost-riches-in-europe-north-america.html

China will be able to “cope” if Greece leaves the euro region and no large-scale stimulus is needed for the economy, a researcher for the nation’s top economic planning body said. “Assuming a Greek exit would lead to a financial and economic crisis as damaging as the collapse of Lehman Brothers, China would be able to cope,” the official Xinhua News Agency reported yesterday, citing Zhang Yansheng, secretary-general of the Academic Committee of the National Development and Reform Commission http://www.bloomberg.com/news/2012-05-31/china-can-cope-if-greece-exits-euro-ndrc-researcher-says.html

Acer Inc., Toshiba Corp. (6502) and Asustek Computer Inc. (2357) will unveil tablets running Microsoft Corp.’s Windows 8 operating system next week, people with knowledge of the matter said, challenging the dominance of Apple Inc. (AAPL)’s iPad. Acer will display a tablet based on Microsoft’s new software at the Computex show in Taipei, while Toshiba will show a tablet and a notebook-type device, said the people, who asked not to be identified because the plans haven’t been made public. Asustek will present tablets with detachable keyboards similar to its current Transformer model, the people said. http://www.bloomberg.com/news/2012-05-31/acer-toshiba-to-take-on-ipads-with-windows-8-tablets.html

Canadian growth probably stagnated at the start of the year as consumers restrained their spending, giving Bank of Canada Governor Mark Carney more reason to further delay raising interest rates. Statistics Canada will report the economy grew at a 1.9 percent annual pace in the January-March period, little changed from 1.8 percent in the prior quarter and less than Carney’s forecast of 2.5 percent growth, according to the median forecast in a Bloomberg News survey of 25 economists. Domestic demand probably increased at a 1.2 percent rate, the slowest since the recession that ended in 2009, according to Bank of Montreal. “Tentative consumers and cautious businesses are keeping growth restrained,” said Benjamin Reitzes, an economist at the Toronto-based lender. With government spendingalso expected to be weak, the central bank will probably “take a bit more of a cautious tone” in its June 5 interest-rate announcement. http://www.bloomberg.com/news/2012-06-01/canada-growth-probably-stalled-allowing-carney-to-pause.html

Nytimes.com
China’s currency dropped further in May against the dollar than in any other month since the Chinese government began allowing the renminbi to appreciate gradually in the summer of 2005. The shift could help Chinese exports but worsen trade friction with Europe and particularly the United States. By setting weaker and weaker daily “fixings” for the renminbi against the dollar at the start of each day’s trading, China’s central bank has pushed down the renminbi 0.9 percent against the dollar over the last month. The decline in the daily fixings coincides with signs that the Chinese domestic economy is slowing sharply this spring and may need help from stronger exports.  http://www.nytimes.com/2012/06/01/business/global/china-lets-its-currency-slip-raising-trade-tension.html?_r=1&ref=business

Foxbusiness.com
The debt crisis and central bank policy responses have degraded the quality and value of debt markets and signal a "potential breaking point" in the global economy, PIMCO's Bill Gross, manager of the world's largest bond fund, said in his monthly letter to investors. In his June outlook entitled "Wall Street Food Chain," Gross said stimulus policies by the Federal Reserve and the European Central Bank have led to riskier government bonds with lower value and paved the way for higher inflation.
 http://www.foxbusiness.com/economy/2012/05/31/pimpco-gross-warns-economic-breaking-point/#ixzz1wVzImZaV
USAtoday.com
Some 15 million to 60 million jobs could be created worldwide over the next two decades if nations took better care of the planet, according to a U.N. study released Thursday ahead of an international summit on sustainable development. The study acknowledges that some jobs would inevitably be lost by switching to a "greener" economy as older technologies give way to the new. But the heads of the U.N.'s International Labor Organization and the U.N. Environment Program emphasized that net gains of 0.5% to 2% in total global employment are possible, mainly through more renewable and efficient energy use. http://www.usatoday.com/money/economy/story/2012-05-31/un-predicts-millions-more-jobs-under-greener-policies/55305482/1

BBC.co.uk
Spain's economy minister has dismissed talk of it seeking a bailout from the International Monetary Fund (IMF) as "senseless". And the IMF denied that Spain had asked to discuss rescue loans. The IMF has contributed to bailouts of all the other eurozone nations, such as Greece, that needed help. Meanwhile, the European Central Bank (ECB) president Mario Draghi described the current set-up of the eurozone as "unsustainable". http://www.bbc.co.uk/news/business-18276691

The British Chambers of Commerce (BCC) has slashed its forecast for economic growth this year, from 0.6% to 0.1%. But the group, which represents more than 100,000 businesses, raised its forecast for 2013 from 1.8% to 1.9%. The data, in the BCC's latest Quarterly Economic Forecast, follow official figures showing that the UK has returned to recession. BCC director-general John Longworth called for more "enterprise-friendly" action from the government. http://www.bbc.co.uk/news/business-18291523

Telegraph.co.uk
The number of Americans filing new jobless claims climbed 10,000 to 383,000 last week, according to the Labor Department. A separate survey from ADP Employer Services reported that 133,000 jobs were created in May compared with a forecast of 150,000. Signs that the job market is stalling is troubling because it has proved the brightest part of the US economy so far this year. The data is likely to be seized on by Mitt Romney, who this week became the official Republican candidate in November's presidential election. The news from the labour market came as official estimates for how rapidly the economy grew in the first three months of the year were cut. Gross domestic product expanded at a 1.9pc annual pace in the first quarter, the Commerce Department said, down from an earlier estimate of 2.2pc.  http://www.telegraph.co.uk/finance/economics/9303157/US-economic-growth-revised-down-as-jobs-data-disappoint.html

Smh.com.au
Home values fell the most in at least six years in May defying Reserve Bank efforts to spark a recovery in the nation's lacklustre housing market with interest rate cuts. Melbourne led declines. Residential property values slid 1.4 per cent across all capital cities in May, and are now down by more than 5 per cent from a year earlier, according to property analysts RP Data. The monthly fall was the biggest since the series began in June 2006, Bloomberg analytics show. http://www.smh.com.au/business/home-prices-extend-national-retreat-20120601-1zlm6.html#ixzz1wW17cKEa

Gold futures fell in New York, capping the longest monthly slump since 2000, as Europe's worsening debt crisis and signs of a US economic slowdown crimped demand for the precious metal. Advertisement: Story continues below  Gold futures for August delivery retreated 0.1 per cent to settle at $US1564.20 an ounce on the Comex in New York. The precious metal retreated 6 per cent this month, the biggest drop this year as the dollar rallied 5.4 per cent. Holdings in the bullion-backed exchange-traded products are set for a third monthly decline, data compiled by Bloomberg show.http://www.smh.com.au/business/markets/gold-caps-longest-monthly-slump-in-11-years-20120601-1zl5u.html#ixzz1wW1G4WvX

Oil prices have dived to fresh multi-month lows, driven by weak data in top global crude consumer the United States, and as the dollar rallied on worries of a possible Spanish bailout, dealers say. In late afternoon trade, Brent North Sea crude for July slumped to $US101.27 per barrel, which was the lowest level since October 5. New York's main contract, West Texas Intermediate crude for delivery in July, tumbled to $US85.86 a barrel, which was last seen on October 24.  http://www.smh.com.au/business/markets/oil-slumps-to-new-lows-on-demand-worries-20120601-1zl0x.html#ixzz1wW1OYUV3

Straitstimes.com
The majority of Spanish banks, 70 per cent, will pass the International Monetary Fund's (IMF) stress tests of the country's lenders, Economy Minister Luis de Guindos said Thursday. The IMF will on June 11 publish results of its tests of how Spanish lenders - struggling with bad real estate loans following the 2008 collapse of a property bubble - would fare if the economy were to decline further. 'What it will say fundamentally is that 70 per cent of Spanish banks are perfectly healthy and that problems are concentrated in the remaining 30 per cent,' Mr De Guindos told an economic conference in the resort town of Sitges.  http://www.straitstimes.com/BreakingNews/Money/Story/STIStory_805785.html

Xinhuanet.com
Indonesia annual inflation rate in May accelerates at slower phase as food and clothing prices decline, allowing the central bank to keep its benchmark interest rate unchanged on its upcoming meeting earlier this month as the pressure on rupiah rises. Head of National Statistic Bureau named only Suryamin announced on Friday that the inflation in May decreased to 4.45 percent on yearly basis after accelerating at 4.5 percent in April. He said that there were deflation on the prices of unprocessed foods and clothes, but the prices of processed foods increased in May. Analyst from CIMB Niaga bank Winu Wardana said that should the trend of decline of inflation continue and the subsidized-fuel prices had not been conducted, the central bank may cut its basic rate in coming months, but for this month, the bank could refrain from cutting rate to support weakening rupiah against the pressure from U.S. dollar. http://news.xinhuanet.com/english/business/2012-06/01/c_131625139.htm

South Korea's consumer prices rose 2. 5 percent in May from a year earlier, staying below the midpoint of Bank of Korea (BOK)'s inflation target band of 2-4 percent, a report showed Friday. Consumer prices advanced 2.5 percent in May from a year before, unchanged from a 2.5 percent on-year gain tallied in the previous month, according to Statistics Korea. From a month earlier, the prices were up 0.2 percent. The consumer price growth stayed at the 2 percent range for three straight months last month, boosting expectations that the easing inflationary pressures would weigh less on the BOK's normalization of the policy rate. The central bank kept the policy rate at 3.25 percent last month for 11 straight months. http://news.xinhuanet.com/english/business/2012-06/01/c_131624618.htm

The Russian ruble fell to a 37-month low Thursday as one U.S. dollar traded for over 33 rubles on the Moscow Interbank Currency Exchange. The last time the ruble was traded at that level occurred in April 2009. According to the MICEX website, at the start of the "tomorrow" trade session at 10 a.m. Moscow time (0600 GMT), the ruble fell below that psychologically important level briefly and slightly recovered later. The Russian Central Bank (CB) official exchange rate for Thursday was 32.45 rubles per dollar. Analysts say the ruble depreciation was linked to the Brent oil price drop to its May 2009 level and to the speculative operations of currency traders. This week, the Russian Central Bank started selling U.S. dollars on the MICEX for the first time since January, selling about 70 million dollars on Wednesday in an attempt to break the swift depreciation of the ruble. http://news.xinhuanet.com/english/business/2012-05/31/c_131623670.htm

Thehindu.com
If there is one thorny issue that policymakers need to squarely address to spur growth, it is the falling investment rate or Gross Fixed Capital Formation (GFCF).  The revised estimates of national income for 2011-12 released by the Central Statistics Office (CSO) on Thursday revealed that GFCF has fallen to 29.5 per cent of GDP at current prices for that year.  This is the first time that GFCF has gone below 30 per cent since 2004-05, compounding problems for the Government, which is already buffeted by such challenges as reform inertia and criticism over retroactive changes to income-tax law.  The economy registered a lower-than-anticipated growth of 5.3 per cent in the fourth quarter of 2011-12, confirming that slowdown in Asia's third largest economy is deepening. In the same quarter last year, the economy had clocked 9.2 per cent growth.  http://www.thehindubusinessline.com/industry-and-economy/economy/article3475946.ece?homepage=true

Economictimes.com
The government, which has often appeared to be in denial, blaming troubles in Europe for the economy's predicament, appeared to hit the panic button on Thursday evening, asking all ministries to cut non-plan expenditure by 10% and banning creation of new posts. Gross domestic product, or GDP, rose 5.3% in the three months to March from a year ago, down sharply from 6.1% in the previous quarter, the Central Statistical Office said in a statement on Thursday.  Senior policymakers appeared to be pinning their hopes on the RBI cutting rates. "It is critical to appreciate that there is no scope for any further fiscal stimulus, but if inflation moderates, then RBI has a greater room to exercise its power," C Rangarajan, chairman of Prime Minister's Economic Advisory Council told ET. http://economictimes.indiatimes.com/news/economy/indicators/rupee-decline-wobbly-markets-and-lowest-gdp-growth-highlight-inept-handling-of-economy-by-upa-ii-government/articleshow/13694064.cms

It was not only the meager 5.3% GDP growth in the fourth quarter of 2011-12 that disappointed economists on Thursday. Analysts continued to be baffled by the shoddy quality of expenditure estimates in the latest national accounts compiled by the Central Statistical Organisation in the Ministry of Statistics and Programme Implementation.  The recent data release shows that India had a $10-billion trade surplus in the fourth quarter of 2011-12. Based on this surplus, India's GDP grew by 5.3%.  However, analysts argue that such a trade surplus is invalidated by the huge current account deficit that India had during the period.  "The trade surplus number is not compatible with the current account deficit. So, if one considers the Q4 (2011-12) growth net of foreign trade, growth has actually slipped to 1.5%," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi share and stockbrokers.  http://economictimes.indiatimes.com/news/economy/foreign-trade/10bn-trade-surplus-in-fourth-quarter-of-2011-12-baffles-all/articleshow/13695306.cms

India's key infrastructure industries grew 2.2% in April from a year ago, marking a sluggish start to the new financial year after the economy expanded at is slowest pace in nine years in 2011-12. Output at eight core industries-coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity- had risen 4.2% in April 2011 and 2.2% in March this year, data released on Monday showed. These industries have a 38% weight in the index of industrial production or IIP, suggesting a poor industrial growth for yet another month, after a 3.5% contraction in March.http://economictimes.indiatimes.com/news/economy/finance/april-core-growth-nearly-halves-to-2-2/articleshow/13695375.cms

Yonhapnews.co.kr
The government will move to increase the country's reserves for farm and fishery products in an effort to help stabilize consumer prices, the finance ministry said Friday. At a meeting of economic policymakers, the government said it plans to actively buy up farm products in advance and hold them in reserve to deal with a supped spike in prices. It added emergency imports of products that are in short supply can also be utilized to help increase the stockpile and alleviate inflationary pressure. "Seoul will increase its stockpile of such products as cabbages to 20,000 tons this year from 8,400 tons in 2011, with numbers for chili peppers and fisheries also being increased," the ministry said in a press release.http://english.yonhapnews.co.kr/business/2012/06/01/99/0501000000AEN20120601002300320F.HTML
Fin24.com
South Africa’s trade deficit widened to R9.9bn in April from a R5.5bn shortfall in March, the South African Revenue Service said on Thursday.  Exports fell by 14.9% and imports were down by 7.2% on a month-on-month basis in April of this year, the data showed. Economists had expected a R4.5bn trade gap, although the data is volatile and hard to forecast.  The trade deficit was R2.4bn in April 2011.http://www.fin24.com/Economy/SAs-trade-deficit-swells-20120531

Khaleejtimes.com
India and Bahrain announced the signing of a Tax Information Exchange Agreement to promote economic and joint investment between the two countries. According to the International Monetary Fund, total trade between the two countries currently amounts to $1.7bn a year, with this agreement aimed at boosting that number.  The agreement was one of a number signed during a two-day state visit by a senior Bahrain delegation led by Salman bin Hamad Al Khalifa, the Crown Prince of Bahrain and chairman of the Bahrain Economic Development Board, or EDB, including representatives from the EDB, Bahrain Chamber of Commerce & Industry, or BCCI and members of the private sector. The delegation was visiting Mumbai and Delhi to strengthen bilateral relationships between the business communities and to highlight investment opportunities in the Kingdom. In addition to the Tax Information Exchange Agreement, a number of commercial and economic cooperation agreements were also signed. http://khaleejtimes.com/biz/inside.asp?xfile=/data/internationbusiness/2012/June/internationbusiness_June1.xml&section=internationbusiness


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Liberty in Aquarius?

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Many New Age leaders embrace the state and advocate world government.
Filed Under: News

The Monetary Approach to the Balance of Payments

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Mises grounds his balance-of-payments analysis on the insight that it is a monetary concept.
Filed Under: News

ZH Evening Wrap Up 5/31/12

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Some Headlines From Today

- Morgan Stanley's Gorman defends handling of Facebook IPO

- Spain says it has at least until October to raise enough funds to rescue Bankia

- Newly issued Mortgage Backed Securities see record low yields

- Weekly Jobless claims come in at 383,000

- New York City Will now tell you what to drink

- Goldman Sachs says it can't cut salaries any further...

 

On a long enough timeline 

- China's Manufacturing PMI Plunges

- Your daily Biderman rant

- What does high yield credit know that stocks don't?

- Student Debt Bubble Delinquencies Surge

- I want to work at the Goldman Sachs

Filed Under: News Tagged With:

Guest Post: Myths and Realities of Returning to a Gold Standard

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Submitted by Terry Coxon of Casey Research

Myths And Realities Of Returning To A Gold Standard

The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public's consciousness.

I'm happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.

Despite my enjoyment of the revival, I've noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let's take a closer look at what it really means. It's not that complicated.

What Isn't at Stake

The abolition of the gold standard has been the source of considerable mischief, but it hasn't been the source of all mischief.

I've heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn't.

The legal-tender laws are usually part of the story, but the story doesn't hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don't like it, you can avoid it by declining to accept anyone's IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.

The legal-tender laws amount to no more than the government's claim that it owns "dollar" as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark "Chevy" and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.

Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn't alter that situation or expand the range of your choices.

I've also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It's quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn't redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).

What It Wouldn't Fix

A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.

A new gold standard wouldn't be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve's ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.

And a return to a gold standard wouldn't ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we've seen, a gold standard adopted one day can be abandoned the next.

What It Would Fix

Now that we've dampened expectations, here's what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.

Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn't prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn't.

With a fiat money system, you don't need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money's purchasing power. The years-long lag between printing and the effect on prices makes deception easy.

If you print more money this year, well, it's only a temporary measure and only because of the recession you're trying to avoid. Next year, you'll slow down the printing or maybe not print at all – you'll have to wait and see what conditions are next year. And don't forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there's always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You'll think of something.

Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.

With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.

The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.

Filed Under: News

U.S. Labels ALL Young Men In Battle Zones As “Militants” … And American Soil Is Now Considered a Battle Zone

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Preface: If this is too intense for you, look at this instead.

Glenn Greenwald has two must-read posts on the reason that virtually everyone the U.S. kills is called a “militant” or “suspected militant”.

He wrote Monday:

glenn headlines 460x307 U.S. Labels ALL Young Men In Battle Zones As Militants ... And American Soil Is Now Considered a Battle Zone

 

Virtually every time the U.S. fires a missile from a drone and ends the lives of Muslims, American media outlets dutifully trumpet in headlines that the dead were ”militants” – even though those media outlets literally do not have the slightest idea of who was actually killed. They simply cite always-unnamed “officials” claiming that the dead were “militants.” It’s the most obvious and inexcusable form of rank propaganda: media outlets continuously propagating a vital claim without having the slightest idea if it’s true.

 

This practice continues even though key Obama officials have been caught lying, a term used advisedly, about how many civilians they’re killing. I’ve written and said many times before that in American media discourse, the definition of “militant” is any human being whose life is extinguished when an American missile or bomb detonates (that term was even used when Anwar Awlaki’s 16-year-old American son, Abdulrahman, was killed by a U.S. drone in Yemen two weeks after a drone killed his father, even though nobody claims the teenager was anything but completely innocent: “Another U.S. Drone Strike Kills Militants in Yemen”).

 

This morning, the New York Times has a very lengthy and detailed article about President Obama’s counter-Terrorism policies based on interviews with “three dozen of his current and former advisers.” I’m writing separately about the numerous revelations contained in that article, but want specifically to highlight this one vital passage about how the Obama administration determines who is a “militant.” The article explains that Obama’s rhetorical emphasis on avoiding civilian deaths “did not significantly change” the drone program, because Obama himself simply expanded the definition of a “militant” to ensure that it includes virtually everyone killed by his drone strikes. Just read this remarkable passage:

 

Mr. Obama embraced a disputed method for counting civilian casualties that did little to box him in. It in effect counts all military-age males in a strike zone as combatants, according to several administration officials, unless there is explicit intelligence posthumously proving them innocent.

 

Counterterrorism officials insist this approach is one of simple logic: people in an area of known terrorist activity, or found with a top Qaeda operative, are probably up to no good. “Al Qaeda is an insular, paranoid organization — innocent neighbors don’t hitchhike rides in the back of trucks headed for the border with guns and bombs,” said one official, who requested anonymity to speak about what is still a classified program.

 

This counting method may partly explain the official claims of extraordinarily low collateral deaths. In a speech last year Mr. Brennan, Mr. Obama’s trusted adviser, said that not a single noncombatant had been killed in a year of strikes. And in a recent interview, a senior administration official said that the number of civilians killed in drone strikes in Pakistan under Mr. Obama was in the “single digits” — and that independent counts of scores or hundreds of civilian deaths unwittingly draw on false propaganda claims by militants.

 

But in interviews, three former senior intelligence officials expressed disbelief that the number could be so low. The C.I.A. accounting has so troubled some administration officials outside the agency that they have brought their concerns to the White House. One called it “guilt by association” that has led to “deceptive” estimates of civilian casualties.

 

“It bothers me when they say there were seven guys, so they must all be militants,” the official said. “They count the corpses and they’re not really sure who they are.”

The next day, Greenwald noted:

In 2006, the pro-Israel activist Alan Dershowitz created a serious scandal when he argued – mostly in order to justify Israeli aggression — that “civilian causalties” are a “gray area” because many people in close proximity to Terrorists — even if not Terrorists themselves — are less than innocent (“A new phrase should be introduced into the reporting and analysis of current events in the Middle East: ‘the continuum of civilianality’ . . . . Every civilian death is a tragedy, but some are more tragic than others”).

 

Even more repellent was John Podhoretz’s argument in 2006 that “the tactical mistake” which “we made in Iraq was that we didn’t kill enough Sunnis in the early going to intimidate them and make them so afraid of us they would go along with anything,” specifically that the real error was that the U.S. permitted “the survival of Sunni men between the ages of 15 and 35.” In other words, “all military-age males” in Sunni areas should have been deemed “combatants” and thus killed. Podhoretz’s argument created all sorts of outrage in progressive circles: John Podhoretz is advocating genocide!

 

But this is precisely the premise that President Obama himself has now adopted in order to justify civilian deaths and re-classify them as “militants.” Here is the rationale of Obama officials as described by the NYT: “people in an area of known terrorist activity, or found with a top Qaeda operative, are probably up to no good.” Probably up to no good. That’s a direct replica of Dershowitz’s argument, and is closely related to Podhoretz’s. They count someone as a “militant” — worthy of death — based purely on the happenstance of where they are and the proximity they’re in to someone else they suspect is a Bad Person. If such a person is killed by a U.S. missile, then, by definition, they are “militants,” not “civilians” — even if we don’t know the first thing about them, including their name.

Will This Policy Apply to Americans On U.S. Soil?

This may sound like something far away which won’t directly affect Americans.

But the military now considers the U.S. homeland to be a battlefield.  As we noted in March:

Fox News reports:

FBI Director Robert Mueller on Wednesday said he would have to go back and check with the Department of Justice whether Attorney General Eric Holder’s “[criteria] for the targeted killing of Americans also applied to Americans inside the U.S.

 

***

 

“I have to go back. Uh, I’m not certain whether that was addressed or not,” Mueller said when asked by Rep. Tom Graves, R-Ga., about a distinction between domestic and foreign targeting

 

Graves followed up asking whether “from a historical perspective,” the federal government has “the ability to kill a U.S. citizen on United States soil or just overseas.”

 

“I’m going to defer that to others in the Department of Justice,” Mueller replied.

Indeed, Holder’s Monday speech at Northwestern University seemed to leave the door open.

Constitutional expert Jonathan Turley writes:

One would hope that the FBI Director would have a handle on a few details guiding his responsibilities, including whether he can kill citizens without a charge or court order.

 

***

 

He appeared unclear whether he had the power under the Obama Kill Doctrine or, in the very least, was unwilling to discuss that power. For civil libertarians, the answer should be easy: “Of course, I do not have that power under the Constitution.”

 

***

 

The claim that they are following self-imposed “limits” which are meaningless — particularly in a system that is premised on the availability of judicial review. The Administration has never said that the [Law Of Armed Conflicts] does not allow the same powers to be used in the United States. It would be an easy thing to state. Holder can affirmatively state that the President’s inherent power to kill citizens exists only outside of the country. He can then explain where those limits are found in the Constitution and why they do not apply equally to a citizen in London or Berlin. Holder was not describing a constitutional process of review. They have dressed up a self-imposed review of a unilateral power as due process. Any authoritarian measure can be dressed up as carefully executed according to balancing tests, but that does not constitute any real constitutional analysis. It is at best a loose analogy to constitutional analysis.

 

When reporters asked the Justice Department about Mueller’s apparent uncertainty, they responded that the answer is “pretty straightforward.” They then offered an evasive response. They simply said (as we all know) that “[t]he legal framework (Holder) laid out applies to U.S. citizens outside of U.S.” We got that from the use of the word “abroad.” However, the question is how this inherent authority is limited as it has been articulated by Holder and others. What is the limiting principle? If the President cannot order the killing of a citizen in the United States, Holder can simply say so (and inform the FBI Director who would likely be involved in such a killing). In doing so, he can then explain the source of that limitation and why it does not apply with citizens in places like London. What we have is a purely internal review that balances the practicality of arrest and the urgency of the matter in the view of the President. Since the panel is the extension of his authority, he can presumably disregard their recommendations or order a killing without their approval. Since the Administration has emphasized that the “battlefield” in this “war on terror” is not limited to a particular country, the assumption is that the President’s authority is commensurate with that threat or limitless theater of operation. Indeed, the Justice Department has repeatedly stated that the war is being fought in the United States as well as other nations.

 

Thus, Mueller’s uncertainty is understandable . . . and dangerous. The Framers created a system of objective due process in a system of checks and balances. Obama has introduced an undefined and self-imposed system of review ….

Before you assume that Mueller’s comments are being blown out of proportion, remember that it has been clear for some time that Obama has claimed the power to assassinate U.S. citizens within the U.S. As we pointed out in December:

 

I’ve previously noted that Obama says that he can assassinate American citizens living on U.S. soil.

 

This admittedly sounds over-the-top. But one of the nation’s top constitutional and military law experts – Jonathan Turley – agrees.

 

***

 

Turley said [on C-Span]:

President Obama has just stated a policy that he can have any American citizen killed without any charge, without any review, except his own. If he’s satisfied that you are a terrorist, he says that he can kill you anywhere in the world including in the United States.

 

Two of his aides just … reaffirmed they believe that American citizens can be killed on the order of the President anywhere including the United States.

 

You’ve now got a president who says that he can kill you on his own discretion. He can jail you indefinitely on his own discretion

Remember, government officials have said that Americans can be targets in the war on terror.

And Northwestern University’s law school professor Joseph Margulies said:

Obama and Bush … both say we are in a war not confined to particular battlefield. … Both say we can target citizens without judicial oversight and that can happen anywhere in the world.

Indeed, the Army is already being deployed on U.S. soil, and the military is conducting numerous training exercises on American streets. And see this.

And the numerous drones flying over American soil – projected by the FAA to reach 30,000 drones by 2020 – are starting to carry arms.

Remember, the Department of Justice attorney who wrote the memo "justifying" torture - John Yoo - also recently said that drones could be used against Americans living on U.S. soil in time of war:


Of course, America has been in a continuous declared state of national emergency since 9/11, and we are in a literally never-ending state of perpetual war. See this, this, this and this.

And the government has basically announced that it can label any American citizen a terrorist for no reason whatsoever.

So if a military-age man is killed in a U.S. city because he happens – even unknowingly – to be near a suspected bad guy, will the report simply read “another militant killed”?

Filed Under: News

China PMI Plunges Most In 28 Months, Reverts To HSBC’s Reality

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Color us not stunned at all. China's Manufacturing PMI finally reverted to the reality that HSBC's Manufacturing PMI has been arguing for and fell for the first time in six months. The drop is the largest since February 2010. While still above 50 (though the lowest level of expansion in five months), or 50.4 technically, down from 53.4, and missing expectations of 52.0, it seems another engine of global growth just sputtered finally - as the real impact of a European depression and fiscally challenged US hit home.

And as a reminder, here is why unless "Europe is fixed" and quite soon, the situation will first get worse before it gets much worse:

Filed Under: News

Belligerent Bears Batter BNI’s ‘Buffett-Black-Swan’ Bet

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Was it just a week ago that we suggested buying Burlington Northern CDS (credit protection) as the cheapest Black-Swan bet against Buffett and Bernanke's ebullience? The answer is yes. And from the start of May the cost of protection has doubled from around 15bps to just over 30bps - quite a surge as it seems more than a few funds thought this a worthwhile trade to tuck in the back pocket at a minimal carry cost. At 32bps mid (31/34), it remains cheap still from a carry perspective and while we are approaching the initial profit target, the reason for buying this low cost, long vol trade is the huge convexity upside should things go a little more pear-shaped for the Octogenarian-of-Omaha - or more specifically for the US equities in general. We do note that if this keeps pushing past our other profit-targets then some should be covered since counterparty risk will rapidly become an issue (unless the Fed officially becomes a CCP).

 

Chart: Bloomberg

Filed Under: News

Eric Sprott: The Real Banking Crisis, Part II

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From Eric Sprott and David Baker of Sprott Asset Management

The Real Banking Crisis, Part II

Here we go again. Back in July 2011 we wrote an article entitled "The Real Banking Crisis" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.

EURO STOXX BANKS INDEX

EURO-STOXX-BANKS-chart.gif

Source: Bloomberg

On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.1 Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country's elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.2 According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 - which is equivalent to approximately 77% of the Greek banking system's €165 billion in household and business deposits held at the end of March.3 The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.4 It's now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).

The way this is unfolding probably doesn't surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.5 Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn't much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.

The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.6 On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.7 Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It's as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It's either that, or Greece is out of the Eurozone and back on the drachma - hence the renewed bank run among Greek depositors.

Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.8 The Bankia run coincided with Moody's issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks' €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.9 The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, "It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it."10 Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.11 Deny, deny some more… panic, inject capital - this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.12 The same can be said for foreign deposits in those countries. Citi's credit strategist Matt King recently reported that, "in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks."13 Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.14

As we've stated before, no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run. It terrifies all involved, because they can spiral out of control faster than governments can react to stop them, save for the most Draconian measures. They also prompt banks to liquidate whatever assets they can, revealing the truth about what their "assets" are actually worth. In this environment, no one wants to find out what the market will really pay for them. We're seeing this now in Spain, where according to Bloomberg, "Many Spanish banks are avoiding property sales so they don't have to "mark to market" valuations. Instead, they're giving developers new loans to pay debt coming due to prevent defaults."15 Sound familiar? We're now at the point where a bank run in one Eurozone country could quickly seize up the entire system - not just in Greece or Spain, but throughout the entire Eurozone and beyond. Greek and Spanish banks are just like all the others; they operate with leverage ratios averaging 25x their equity capital. They are all so overleveraged that it takes very little in deposit withdrawals to cause instantaneous liquidity issues. This is why we'll likely see another ECB-induced printing program announced (with a new abbreviation, hopefully) before a broader bank run can take root. The Eurozone authorities simply cannot risk the consequences of bank runs in countries like Spain, Portugal or Italy, which are far too big to bailout for the over-stretched ECB. It's not about Greece staying or leaving the European Union anymore, it's about the bailout ability of European banking system to survive the impact of massive money transfers.

Nothing is really being solved here, and everyone knows it. We're essentially in the same place we were when the crisis erupted back in 2010, only now there's more total debt outstanding. Bank of Canada Governor Mark Carney remarked in a December 2011 speech that "the global Minsky moment has arrived", and it's now plain for all to see.16 The "Minsky moment" refers to the work of Hyman Minsky, a deceased American economist who developed theories on how debt accumulation eventually leads to financial crises. You don't have to be an economist to understand the crux of Minsky's theories. As an economy grows it takes on increasing amounts of debt. The point eventually comes when the cost of servicing that debt can no longer be met by that economy's productive capacity - that's the Minsky Moment, and we're watching it play out all over the world today. When Greek bond yields spiked back in February 2012, bond investors looking at the country's €368 billion of debt outstanding, its population of 11 million people, and its nominal GDP of $312 billion realized that it couldn't possibly work. There was no way Greece could pay the interest on its debt load. There was no way the bond market could keep pretending everything was ok, like it currently does with the UK, US and Japan… for now.

Greece clearly needs another large-scale bailout, and we think they'll get one. Greece's exit from the Eurozone represents a Lehman-like scenario to the global banking system - why wait to see what carnage it will unleash? It's always easier to print money, and printing another couple €100 billion is nothing compared to the trillions that have been printed since last November. Where this will get tense, however, is when the market acknowledges the Minsky moment in a larger EU economy, like Spain or Italy. As we go to print, Spanish bond yields are now trading back above 6.5%, signaling the market's non-confidence in the country's ability to back-stop its own banking system. Spain has a population of 47 million, a GDP of roughly $1.3 trillion, national debt of roughly $1.1 trillion, debt owed to the ECB and various bailout funds totaling €643 billion, and now, a banking system that also appears close to collapsing.17 Their Minsky Moment has already arrived, and it's simply a matter now of how the market will react to it, and how long it takes the ECB to come to Spain's rescue.

Without a doubt, the most counterintuitive aspect of the Greece/Eurozone debacle has been its impact on the price of gold. Gold is now back below $1600 for the third time since August 2011; each time has coincided with severe banking stress within Greece and the broader Eurozone. Some pundits have suggested that various European banks are selling gold to raise liquidity, and this would make sense if the Eurozone banks had gold to sell, but we cannot find any evidence of large physical sellers out of Europe. Also, ever since the unlimited US-dollar SWAP agreement was launched in November 2011, USD liquidity has not been the key issue in Europe - rising sovereign bond yields and deposit withdrawals have. On the contrary, the selling pressure in gold once again appears to be expressed primarily through the futures markets, which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further.

The recent gold price has been particularly frustrating given the continuation of bullish demand trends out of China. China posted another record Hong Kong gold import number in March of 62.9 tonnes. Gold imports into China have now totaled 135.5 metric tonnes between January and March 2012, representing a 600% increase over the same period last year.18 We don't have to connect the dots here - China is stockpiling the precious metal while investors in the West scratch their heads wondering why the spot price is so low.

CHINA HONG KONG GOLD IMPORTS AND GOLD SPOT PRICECHINA-HK-GOLD-chart.gif
Source: UBS, Bloomberg

Non-G6 central banks have also continued to accumulate physical gold, with the latest reports revealing another 70 tonnes of gold purchases completed in March and April by the central banks of Philippines, Turkey, Mexico, Kazakhstan, Ukraine and Sri Lanka.19 We won't bore you with the exercise of annualizing those numbers and comparing them to the annual global mine supply, but suffice it to say that the fundamentals still remain firmly intact. It's now simply a matter of improving sentiment towards gold in the West, and if the current banking crisis in Europe gets any worse, or if we see another large-scale policy response, it will likely happen on its own accord.

Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe. 

1 Hope, Kerin and Wigglesworth, Robin (May 16, 2012) "Greek banks see steady deposits outflow". Financial Times. Retrieved May 22, 2012 from:
http://www.ft.com/intl/cms/s/0/3d588c2e-9f3c-11e1-a455-00144feabdc0.html#axzz1v3uDr3Vw
2 Smith, Helena and Treanor, Jill (May 16, 2012) "Greeks withdraw €3bn in 10 days since election". The Guardian. Retrieved May 22, 2012 from:
http://www.guardian.co.uk/world/2012/may/16/greeks-withdraw-3bn-10-days
3 Rueters (May 28, 2012) "Greece Pours $22.6 Billion Into Four Biggest Banks". Reuters. Retrived May 29, 2012 from:
http://www.cnbc.com/id/47591006
4 Paris, Costas and Paris, Jenny (May 22, 2012) "Former Greek PM Papademos: Risk of Greece Leaving Euro is Real". Dow Jones. Retirved on May 23, 2012 from:
http://www.dowjones.com/products/djfxtrader/articles/FormerGreekPMPapademosRiskOfGreeceLeavingEuroIsReal.asp
5 Smith, Helena and Treanor, Jill (May 16, 2012) "Greeks withdraw €3bn in 10 days since election". The Guardian. Retrieved May 22, 2012 from:
http://www.guardian.co.uk/world/2012/may/16/greeks-withdraw-3bn-10-days
6 Becatoros, Elena and Steinhauser, Gabriele (March 9, 2012) "Greece secures biggest debt deal in history" Associated Press. Retrieved May 20, 2012 from:
http://news.yahoo.com/greece-secures-biggest-debt-deal-history-193537156.html
7 Reuters (March 9, 2012) "Sarkozy says Greek problem solved". Reuters. Retrieved May 20, 2012
http://www.reuters.com/article/2012/03/09/us-eurozone-greece-sarkozy-idUSBRE8280QV20120309
8 Vigna, Paul (May 17, 2012) "Whatever You Do, Don't Say 'Bank Run'". Wall Street Journal. Retrieved May 22, 2012 from:
http://blogs.wsj.com/marketbeat/2012/05/17/whatever-you-do-dont-say-bank-run/
9 Reuters (May 17, 2012) "Moody's cuts Spanish banks ratings". Reuters. Retrieved May 22, 2012 from: http://www.reuters.com/article/2012/05/17/idUSL1E8GHGOZ20120517
10 Johnson, Miles (May 17, 2012) "Spain denies bank run reports". Financial Times. Retrived May 20, 2012 from:
http://www.ft.com/intl/cms/s/0/b6705296-a01c-11e1-94ba-00144feabdc0.html#axzz1vn7yKh26
11 Giles, Ciaran and Woolls, Daniel (May 28, 2012) "Spanish PM adamant bank sector won't need European Union as Bankia shares plunge". The Associated Press. Retrieved on May 28, 2012 from: http://www.canadianbusiness.com/article/85633--bankia-bailout-plan-sends-shares-plunging-10-year-spanish-bond-yield-soaring
12 Milne, Richard (May 23, 2012) "Bond exodus on a par with eurozone bank run". Financial Times. Retrieved on May 24, 2012 from:
http://www.ft.com/intl/cms/s/0/8b954e82-a4db-11e1-9a94-00144feabdc0.html#axzz1vn7yKh26
13 Field, Richard (May 21, 2012) "Citi's Matt King on deposit flight likely to pick up speed in the EU". Trust Your Instincts Blog. Retrieved on May 24, 2012 from:
http://tyillc.blogspot.ca/2012/05/citis-matt-king-on-deposit-flight.html
14 Milne, Richard (May 23, 2012) "Bond exodus on a par with eurozone bank run". Financial Times. Retrieved on May 24, 2012 from:
http://www.ft.com/intl/cms/s/0/8b954e82-a4db-11e1-9a94-00144feabdc0.html#axzz1vn7yKh26
15 Smyth, Sharon and Callanan, Neil (May 29, 2012) "Spain Delays And Prays That Zombies Repay Debt: Mortgages". Bloomberg. Retrieved on May 29, 2012 from:
http://www.bloomberg.com/news/2012-05-28/spain-delays-and-prays-that-zombies-repay-debt-mortgages.html?ftcamp=crm/email/2012529/nbe/AlphavilleLondon/product
16 Carney, Mark (December 12, 2011) "Growth in the Age of Deleveraging". Bank of Canada. Retrieved on May 20, 2012 from:
http://www.bankofcanada.ca/2011/12/speeches/growth-in-the-age-of-deleveraging/
17 Taylor, Anthony (April 19, 2012) "Spanish Debt as at April 19th 2012 vs GDP". British American Marketing. Retirved on May 20, 2012 from:
http://www.britishamericanmarketing.com/consultancy/globaleconomicnews/spainish-debt-as-at-april-19th-2012-vs-gdp-florida-investors-macro-financ-view/
18 Bloomberg News (May 8, 2012) "China's Gold Imports Jump As Country May Become Biggest User". Bloomberg. Retrieved on May 20, 2012 from:
http://www.bloomberg.com/news/2012-05-08/china-s-gold-imports-advance-as-country-may-become-biggest-user.html
19 Williams, Lawrence (May 25, 2012) "Central Banks boost gold holdings yet again". Mineweb. Retrieved on May 26, 2012 from:
http://www.mineweb.com/mineweb/view/mineweb/en/page34?oid=152096&sn=Detail&pid=102055
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Be Afraid Europe, Be Very Afraid – Tim Geithner Is Now "Helping" You

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If there was one piece of news that could force an all out panic in a market already on the edge, it is that outgoing (as in finally departing) US Treasury Secretary, Tim Geithner, was getting involved in the European Crisis. Sadly, this is precisely what happened.

  • SPAIN DEPUTY PM: US TREASURY'S GEITHNER AGREES TO WORK WITH SPAIN TO RESOLVE BANK CRISIS - DJ
  • SAENZ DE SANTAMARIA SAYS GEITHNER URGES SPAIN BANK SOLUTION
  • SPAIN'S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS
  • GEITHNER DISCUSSED SPAIN'S PLANS TO STRENGTHEN FINANCE SECTOR
  • SPAIN'S SAENZ DE SANTAMARIA TOLD GEITHNER OF REFORM EFFORTS

 

More from Bloomberg:

U.S. Treasury Secretary Timothy F. Geithner, Spain’s deputy prime minister, Soraya Saenz de Santamaria, met to discuss Spain’s plans to bolster banking system. The Pair discussed progress Spain made on fiscal, structural reforms, Spanish govt’s plans to strengthen financial sector and support recovery and job creation, and broader challenges facing Europe, global economy, Treasury says in e-mail. The meeting was held at Treasury Dept.

Sorry, Europe, you are now doomed.

Then again, Geithner's involvement may have a silver lining. Recall that the last time Geithner appeared on the European scene in September 2011, everyone's utmost hatred of the American was channeled into a reconciliation of differences, and led Europe to set off on a path that led to the LTRO and at least fooling some of the C-grade commentariat that Europe was fixed.

From September 15:

Europe Tells Geithner To Take His Advice And Shove It

 

Just because it is not enough for Tim Geithner to be mocked, ridiculed and generally despised on one continent, the former New York Fed "Hudsucker Proxy-style" plant has just managed to become the most despised individual on at least one more continent. Bloomberg reports that European Central Bank Executive Board member Juergen Stark said countries offering advice on how Europe should solve its debt crisis should put their own fiscal situation in order first. "Finger-pointing in the direction of Europe shouldn’t prevent others from putting their budgets in order and doing their homework before handing out advice to Europeans," Stark said at an event in Vienna. This probably means it is safe to assume that the ECB, after listening to the human caricature of Beavis twice in a row on implementing totally failed stress tests, will not take up Timmy on his latest proposal of how Europe should fix itself. It is also safe to say that Europe just have a perfect example of how one should shut up a corrupt, incompetent, cheating, printer of virtually infinite one-ply US debt.

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