recession we had to have

The Greece [and European] Crisis thread

2924 posts in this topic

Britain next to be 'attacked'?

http://blogs.telegra...n-and-the-pigs/

As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone.

The yields on 10-year British Gilts have risen to 4.06pc, compared to 4.05pc and 4.01pc for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds. Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray.

While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP.

I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.

Of course, bond yields do not tell the whole story. Credit Default Swaps (CDS) measuring bankruptcy risk are much lower for the UK than for Greece or Spain.

Bond yields capture the risk of devaluation and inflation, where CDS measure pure default risk (or do in theory — though they are also speculative tools). Britain may engage in stealth default by monetizing debt and inflating, but that does not count for CDS contracts. Countries in a fixed exchange system with loans in somebody else’s currency — the Gold Standard in the 1930s, EMU today — can indeed default.

Britain’s current account deficit is down to 1.4pc of GDP, much better than Club Med.

Still, It would be unwise to count too much on this distinction. Devaluation has acted as a shock absorber for Britain in this crisis, but it is no cure. It is a necessary condition for recovery, but it is not sufficient and it creates its own dangers. A disorderly fall in sterling at this stage (ie collapse) could prove as traumatic as default.

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Bond yeilds mean very little when governments buy their own bonds thus keeping prices down. Trouble is that everyone is playing by the old rules and analysis when they should be using Zimbabwe rules.

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This is cool. You want to play with the big paper?

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7252288/Greece-loses-EU-voting-power-in-blow-to-sovereignty.html

The council of EU finance ministers said Athens must comply with austerity demands by March 16 or lose control over its own tax and spend policies altogether. It if fails to do so, the EU will itself impose cuts under the draconian Article 126.9 of the Lisbon Treaty in what would amount to economic suzerainty.

While the symbolic move to suspend Greece of its voting rights at one meeting makes no practical difference, it marks a constitutional watershed and represents a crushing loss of sovereignty

We certainly won't let them off the hook," said Austria's finance minister, Josef Proll, echoing views shared by colleagues in Northern Europe. Some German officials have called for Greece to be denied a vote in all EU matter until it emerges from "receivership".

I challenge Obama to do the same to Cailfornia. Never.

The Euro is OK.

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I think all this talking from EU is to try to get people in greece to buy the budget cuts and rise in taxes, get them to buy there is no alternative. They are very hard to persuade, specially union and gov. workers.

Pretty much I think they are doing a good job in avoid a revolution in Greece.

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a new update on europe chrisis on bloomberg (with a touch of antieuro views typical of british press)

Feb. 19 (Bloomberg) -- The crisis stalking the euro economy began with a footnote.

When the European Union predicted in 1997 that Italy’s budget deficit would exceed the threshold to qualify for the single currency, it buried in the fine print the observation that with “additional measures” the Italians could pass.

They did, thanks to a one-time tax and a yen-denominated swap. It was an early example of the balance-sheet fiddling deployed since then by countries eager to share the benefits of a $13-trillion market and lower borrowing costs, yet unwilling to cede control over their budgets, wages and welfare systems.

Now Greece, by setting a standard for fiscal creativity, has exposed the flaws in Europe’s hybrid of monetary union and fiscal indiscipline. The crisis risks extending the euro’s 6 percent slide against the dollar this year, its expansion into eastern Europe and its prospects to challenge the dollar as an international reserve currency.

Greece’s fiscal tragedy “reveals a lot of things that people didn’t want to look at, such as the lack of economic governance of the euro zone,” said Pervenche Beres, a French member of the European Parliament who is sponsoring a resolution calling for tougher financial regulation. “If Greece falls apart, everything would fall apart. Nobody should allow this.”

Harvard University’s Martin Feldstein was among economists who have cautioned since the currency debuted in 1999 that divergent economies couldn’t fit under a single roof. The union was led by a Germany that consented to give up its deutsche mark as long as the rest of Europe embraced the German aversion to debt that took hold after two world wars.

Making and Exporting

Instead, each country went its own way: Germany, paced by such manufacturers as Volkswagen AG and Siemens AG, parlayed caps on labor costs and the elimination of exchange-rate risks into economic ascendance. Wolfsburg-based Volkswagen’s European sales rose 16 percent from 2006 to 2008 while domestic sales shrank 3 percent. Siemens, based in Munich, boosted the European share of its revenue to 41 percent in 2009 from 32 percent five years earlier.

German unit labor costs fell from 2004 through 2006 and rose only 2.2 percent in 2008, the year of the latest Eurostat figures. Labor costs jumped 4.3 percent that year in Spain, 3.9 percent in Greece and 3.4 percent in Portugal.

The outcome was a skewed European economic map, with imbalances such as Spain’s current-account deficit of 9.6 percent in 2008 set against Luxembourg’s surplus of 5.5 percent. The intra-European mismatch resembles the divergences that sent the Italian lira plunging 40 percent against the mark between 1992 and 1995.

Lehman Bust

Greece, Spain and Portugal, buoyed by European Central Bank interest rates that never rose above 4.75 percent, rode a debt- fueled housing boom that went bust after Lehman Brothers Holdings Inc.’s collapse unleashed a global financial crisis.

The shelter the euro provided Greece began to weaken. The government in Athens paid as little as 8 basis points, or 0.08 percentage point, more than Germany to borrow on Feb. 18, 2005. The gap reached 396 basis points last month and currently stands at 334.

While the euro’s newness puts it at a heightened risk for shifting investor sentiment, doomsday scenarios of breakup are unfounded, said Simon Ballard, a credit strategist at Royal Bank of Canada in London.

“Joining the euro is like frying an egg: once it’s fried you can’t put it back in the shell,” Ballard said.

Nine-Month Low

Investors pushed the euro down to a nine-month low of $1.35 on Feb. 12 as the Greek crisis unfolded. The currency remains above its inaugural level of $1.17 and is still overvalued by 16 percent against the dollar, according to a Bloomberg index of purchasing power parities.

The $1.35 low was breached today as the dollar rose to $1.3466 per euro after the Federal Reserve yesterday raised the discount rate charged to banks for direct loans for the first time in more than three years.

Signs that Greece was an uneasy fit in the monetary union first emerged in 2004 when the government of Costas Karamanlis disclosed that its socialist predecessor had cheated on its euro-entry exam in 2000. It published phony data claiming the deficit was less than 1 percent of gross domestic product.

EU reaction to news that Greece’s budget had never gotten below the 3 percent ceiling showed how much power remains in national capitals. Greece went unpunished except for being told by the EU to tighten up its bookkeeping. At the same time, proposals to strengthen Eurostat, the bloc’s statistics watchdog, foundered on national opposition.

Stability Pact

Germany and France helped ease the rules when they forced through the relaxation of the anti-debt “stability pact” in 2005 after three years of deficits above the threshold.

Now, the question of who’s in charge looms larger than ever. After a decade of haggling, the EU appointed Herman Van Rompuy of Belgium as its first full-time president last year and enacted a new decision-making framework.

Van Rompuy’s powers are of persuasion only. He has a staff of 12, no sway over the EU’s 123 billion-euro ($165-billion) budget, and no vote on policy decisions, not even in case of a tie. Tensions over who calls the shots -- all 27 leaders, or just the 16 using the euro currency? -- further blur his role.

National governments continue to hold the purse strings. When Chancellor Angela Merkel went to Brussels last week to negotiate over a possible bailout for Greece, she was hemmed in by German high-court rulings that bar a further transfer of power to the EU and by a domestic political uproar over helping a country that won’t help itself.

No Taxpayer Money

“Not a single euro” of German taxpayer money should go to Greece, Horst Seehofer, head of the Bavarian affiliate of Merkel’s Christian Democrats, told a political rally in the southern city of Passau on Feb. 17.

Added to German outrage was the disclosure that New York- based Goldman Sachs Group Inc., Wall Street’s most-profitable securities firm, helped Greece raise $1 billion of off-balance- sheet funding in 2002 through a currency swap that may have masked the deficit’s size.

What resulted, at last week’s Greece-dominated summit in Brussels, was an EU pledge for “determined and coordinated action if needed” to prevent a sovereign debt disaster from destabilizing the economy, coupled with silence on what it would do.

As striking workers protested budget cuts in Athens, the EU declaration failed to shore up confidence in Prime Minister George Papandreou’s plan to shave the deficit by 4 percentage points in 2010 from an estimated 12.7 percent last year.

Aid to Greece?

Still, it would be a mistake to underestimate the EU’s resolve to aid Greece and prevent the fiscal rot from spreading, said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest mutual fund from Newport Beach, California.

“The very strong words that came out of the European community last week are not words that I would bet against,” Bosomworth said in a Feb. 15 Bloomberg Television interview. “I don’t think the European Union is going to risk a repeat of Lehman within the monetary union.” He declined to say how Pimco was investing.

The Brussels communiqué, negotiated by a group led by Merkel and Van Rompuy, also sharpened the dividing line between the euro bloc and the rest of the EU. The leader of the largest EU country using its own currency, U.K. Prime Minister Gordon Brown, wasn’t in the room.

Ins and Outs

“The biggest single cleavage in the EU will increasingly be between those that belong to the euro and those that don’t,” said Peter Ludlow, a historian and author of “The Making of the New Europe.

That leaves the euro’s further expansion to eastern Europe -- after the EU took in ex-communist countries in 2004 -- a potential casualty of the Greek fallout. Already in 2006, Lithuania felt the collateral damage: it was barred from the euro because of 3.5 percent inflation, the first euro aspirant to be vetoed.

The next test comes with Estonia in April or May. Once a showcase economy with growth peaking at 10 percent in 2006, the EU’s second-highest rate that year, the Baltic nation’s GDP plunged an estimated 13.7 percent in 2009. Its bid to join the euro next year hinges on persuading the EU that the deficit won’t head back up after dipping to an estimated 2.6 percent last year.

“It will be more difficult for the potential new members to join,” said Esther Law, emerging-markets strategist at Societe Generale SA in London. “I expect them to be more strict with all the criteria and also to be more strict with the statistics.”

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

Last Updated: February 19, 2010 02:50 EST

a touch of antieuro views from simon Ballard typical of britain...

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Strikes.

http://www.marketwatch.com/story/labor-unrest-spreads-across-europe-2010-02-22

LONDON (MarketWatch) -- Labor unrest spread across Europe on Monday as pilots for German airline Deutsche Lufthansa AG started a four-day strike, a union representing British Airways cabin crew prepared to announce the outcome of a strike ballot and Greece prepared for a massive private-sector strike on Wednesday.

The strike at Lufthansa /quotes/comstock/11e!flha (DE:LHA 10.10, -0.14, -1.26%) , Europe's third-largest transatlantic airline, will heavily disrupt travel. About 800 out of the 1,800 scheduled flights through Thursday have been cancelled and partner airlines such as Air Canada and Singapore Airlines are expected to be affected as well.

The pilots walked out after negotiations over their work contracts collapsed. The union is seeking a 6.9% pay increase and reassurance that the airline wouldn't start pilots from recently-acquired airlines like BMI and Austrian Airlines on union-flown routes.

The airline industry suffered record losses in 2009 and airlines around the world have cut jobs, renegotiated contracts and reduced capacity to cope with the lower demand for air travel amid the economic downturn.

Lufthansa said at a press conference last week that the strike would cost it around $33 million a day.

Lufthansa shares fell 1.6% on the Xetra exchange in Frankfurt.

News of the strike at the German airline came as Unite, the union representing British Airways /quotes/comstock/23s!a:bay (UK:BAY 208.40, -2.20, -1.05%) cabin crew, prepared to unveil the results of its latest strike ballot.

A strike planned during the holiday was scrapped after the airline won a legal challenge.

The new ballot closes at 2.30 p.m. GMT. A possible strike could begin as soon as March 1.

The airline and its staff are locked in a dispute over pay and work conditions. BA wants a pay freeze in 2010 and to switch around 3,000 employees to part-time working.

British Airways shares slipped 0.6% on the London Stock Exchange.

Meanwhile as Greece struggled to cope with its ballooning debt crisis and the government committed to massively reduce spending, threats are looming of a big private-sector strike on Wednesday.

Aude Lagorce is a senior correspondent for MarketWatch in London.

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Hell, its no biggie, its a country right?

http://www.zerohedge...ay-give-or-take

Yep.

This comment caught my attention at the bottom of the article.

Sunday night: Sydney up 1.5%. Nikkei up 2.5%. Doesn't seem to be a lot worrying around the globe.

There is a big hole in the side of the ship, but the champagne is still flowing, and the music is still playing.

The multitude are oblivious to the icy water, that's about to wake them up.

Edited by Solomon

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Hi Sol,

Please forgive my rant on the homeless thing, bit boozy on some megastar (Crown Royal) Canadian Rye and narky - sorry.

Yes sir there seems to be some fairly happy tunes globally.

I'm not a bear per se, just a dude that forms an opinion on analysing stuff but I now just see the same dysfunctional situation I saw in 2007, but now the govts are in deficit.

Am I wrong or missing something?

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Hi Sol,

Please forgive my rant on the homeless thing, bit boozy on some megastar (Crown Royal) Canadian Rye and narky - sorry.

Yes sir there seems to be some fairly happy tunes globally.

I'm not a bear per se, just a dude that forms an opinion on analysing stuff but I now just see the same dysfunctional situation I saw in 2007, but now the govts are in deficit.

Am I wrong or missing something?

Hi TP.

No problems. We can all get a bit narky at times. Think nothing more of it.

On another subject.

I wish I knew more about the workings of the bond system and forex system to truly say that I understand it. But I don't.

This is the latest offering from Berninger.

Whilst I don't profess to understand it, or know whether it might be true or not, it certainly sounds credible.

Greece forces the US to raise interest rates in an emergency action

BY: BERNANKE WATCH How Sovereign debt and currency crisis determines monetary policy An interesting question was raised recently, which in part is answered by the FED latest move to raise the discount rate by 25 basis points. The question was “How could the US be threatened to default, if its central bank can print unlimited amounts of money?”

The media will argue that the FED move will be a reaction to one of those situations:

  • The economy recovered and the rate rise takes excess liquidtity away
  • The rate rise was a reaction to aggressive monetary contraction policies in Australia, China and other areas in the world.

All of the above sounds good, but none is the main reason why the FED had to tighten monetary policy. If, any of the above considerations would have played a role, then the FED would most likely have chosen this action in an ordinary meeting and not on a Thursday, out of meeting schedule.

Reality shows that the US had extreme deleveraging in financial and debt products. Inflation recently picked up again as the Berninger Report US shows.The spike in Inflation would have itself manifested very fast in Consumer prices, within the coming months, so the FED had to react to this shift from deleveraging to inflation and to mitigate the medium term risk of running into hyperinflation within a too short period of time.

The inflation was caused by the global imbalances in the currency markets, which can be attributed to the fact that the FED had engaged in using monetary policy tools to buy up large parts of the available tools at the markets, such as Mortgage securities, treasuries and other securities, eventually even stocks. The consequence was excess Dollar liquidity in the markets, looking for a way to be invested. But the real issue was that the low interest rate policy, which was required to keep treasury rates low, became a threat to the FED itself and started to crowd out investments into treasury bonds.

Investors (mainly large banks) from all over the world had a great chance to borrow at basically zero interest rates Dollars and to invest it in foreign sovereign debt, such as Greek bonds.

The spreads became recently even more interesting, after investors realized that the risk of Greece leaving the Euro zone was increasing and that it eventually could default. Within a week, Credit default swaps cost rose to nearly half a million Euro for insuring 10 million of “Greek bullsh*t bonds”. Now, this became a very attractive deal for especially large banks. They were provided with the opportunity to borrow risk free Dollars, invest it in Euros and get a 6 to 7 percent interest rate difference. A perverse ponzi scheme, as the banks shifted risk of Greek bonds defaulting to the European taxpayer. The banks holding the debt will be considered to be too big to fail, and so they are bailed-out yet another time.

The bail-out discussion which was triggered by playing in the currency swap markets against Greece, Spain, Portugal and Italy. Positions in the Swap markets betting against the Euro currency summed up to nearly 8 billion Euro, which is however small if you consider the daily traded amount of currency or the 500 billion Euro of Mediterranean debt outstanding. Nevertheless, European Politicians had to react or the Euro would have collapsed within weeks.

They came to rescue the banks, not Greece. So they most likely have provided guarantees to Greek bond holders, while forcing Greek politicians to implement measures, which they will fail to implement.

Greece therefore will fall victim to Bankers and its own greed and denial.

This game however was diverting too much of the US liquidity resources into foreign securities. The risk free investment into e.g. Greek debt products was much more attractive than to invest in treasuries. Therefore the FED had to react and create an increased incentive to invest into the US.

This step was required ahead of a worsening Greek and therefore worsening sovereign debt situation. It had also to be done before banks come under increased pressure.

The FED therefore reacted to the huge imbalance in global currency markets, which are representing one of the “once of the life time chances”, which are provided to investors.

I have for a long time now, believed that banks govern our countries. They seem to have their fingers in all kinds of pies.

I am prepared to accept that this event is no different, until someone gives me reason to think differently.

Edited by Solomon

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How much debt is being 'hidden' by the benevolent banks and in which countries?

http://www.zerohedge.com/article/chairman-goldman-sachs-bank-and-former-frbny-president-says-many-european-countries-used-com

"Governments go to some lengths to try to manage their budgetary deficit positions and manage their public debt positions. There is nothing terribly new about this. It is true that currency swaps entered by Goldman Sachs in Greece in the late '90s and early part of the 2000s were of the nature that they did produce a rather small, but nevertheless, not insignificant reduction in Greece's debt-to-GDP ratio at that time. However, it is very clear to me, based on the investigation that I have done over the past few days that those transactions were very much consistent with, and comparable with, the standards of behaviour and legislation used by the European Community. There was nothing inappropriate.
Goldman Sachs was by no means the only bank involved with countries in these types of transactions...
These transactions were not limited to Goldman Sachs and Greece.
"

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The question was “How could the US be threatened to default, if its central bank can print unlimited amounts of money?”

I suspect the reason is because they can't. I believe in 1988 a secret agreement was made at the BIS to limit mainstream currencies to increasing the quantity of their currency by no more than a average 7.2% per annum. This was so they'd never return to the disastrous average 15% per annum rates of the 1970's.

I've seen mainstream nations respect this limit for 2 decades. Although in the financial crisis of 2008 the mainstream currencies printed 15% more currency that year. It was followed by a vast contraction in printing in 2009. The RBA printed net nothing from Xmas 2008 to Xmas 2009.

Presently all the QE in mainstream currencies has done with treasuries which can trade as virtual currency on the brokerage market.

For years credit boomed at 15% per annum affecting assets prices, but not the prices of everyday goods, wages and commerce. Your daily supermarket goods followed the rate of currency printing rather than credit.

So now we are facing a deflationary collapse of asset price structures. Such like property which zoomed ahead of currency creation for years, is now a dollar short.

The property spruikers and other dollar shorters seem to be expecting the currency taps to be turned on to 1970's levels. They may be in for a shock!

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I suspect the reason is because they can't. I believe in 1988 a secret agreement was made at the BIS to limit mainstream currencies to increasing the quantity of their currency by no more than a average 7.2% per annum. This was so they'd never return to the disastrous average 15% per annum rates of the 1970's.

I've seen mainstream nations respect this limit for 2 decades. Although in the financial crisis of 2008 the mainstream currencies printed 15% more currency that year. It was followed by a vast contraction in printing in 2009. The RBA printed net nothing from Xmas 2008 to Xmas 2009.

Presently all the QE in mainstream currencies has done with treasuries which can trade as virtual currency on the brokerage market.

For years credit boomed at 15% per annum affecting assets prices, but not the prices of everyday goods, wages and commerce. Your daily supermarket goods followed the rate of currency printing rather than credit.

So now we are facing a deflationary collapse of asset price structures. Such like property which zoomed ahead of currency creation for years, is now a dollar short.

The property spruikers and other dollar shorters seem to be expecting the currency taps to be turned on to 1970's levels. They may be in for a shock!

Fair enough Wulfie, but the yanks adding $1.8 Trill to their deficit this year doesnt exactly seem like they are reining in the money supply. Also, inflating the money supply and lying about CPI seems like a pretty good way of getting out of their present predicament. I cant see why they would want to rein in money supply. All their big knobs seem to agree;doing that was the big mistake of the Not so Great Depression. Please enlighten a dolt like me as to why the would enter such an agreement.

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Fair enough Wulfie, but the yanks adding $1.8 Trill to their deficit this year doesnt exactly seem like they are reining in the money supply. Also, inflating the money supply and lying about CPI seems like a pretty good way of getting out of their present predicament. I cant see why they would want to rein in money supply. All their big knobs seem to agree;doing that was the big mistake of the Not so Great Depression. Please enlighten a dolt like me as to why the would enter such an agreement.

Because they were all sick of the high inflation of the 1970's and 80's and they professed a program to combat it.

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Because they were all sick of the high inflation of the 1970's and 80's and they professed a program to combat it.

Sorry, Not buying it. Dont mean to be disagreeable, but i dont like paying taxes; doesnt mean i just get to stop paying them. The only way i can stop paying taxes is by not earning any money, which would have major side effects and disadvantages. Same with the quantative easing. If they stop it, it will have major side effects, which is exactly why they started in the first place.

My three main objections to the idea of western global governments are returning to conservative fiscal policy are:

  • Due to the nature of governments being short term creatures in constant need of re-election i think it is far easier to print money and hope things get back on track rather than face the contraction of assets prices.
  • In for a penny, in for a pound. They have already started down this track and to stop now will only make the crash worse.

  • Baby Boomers, who hold the majority of wealth in western countries are in the process of retireing and there is no way this large demographic can cash in their assets without the assets themselves being significantly revalued. Younger generations quite simply cannot afford it (whether they want to or not). This in itself engenders the need to decide whether asset prices will be deflated or eroded in real terms by inflation. History shows that it is a much smoother ride (though, still bumpy) going the inflation route and keeping high employment, whilst stealing the populations wealth surreptitiously.

I am no economist and will be happy to admit if i'm wrong, but when i look at the major trends at play, i just do not see a stop to government spending and i fully expect a return to double digit inflation in the near future. This utimately, is what will cause the Aussie housing market crash, otherwise i would'nt be waiting. All the commodity sales in the world wont save us when it goes in the pockets of older, weathier Australians.

Edited by Darth Vader

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i would short the euro but i dont have a forex account , they all seem like scammer sites to me. by time i get account all set up well be ready for recovery.

got a good company. to link me?

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Sorry, Not buying it. Dont mean to be disagreeable,

You don't have to buy it........I've looked at the facts. You look at the facts.

Here's an easy one. Check backnotes on issue for the last 20 years. Go back 10 years....half, go back another 10 years.....half.

The RBA has been inflating the currency at the same rate for 20 years.

http://www.rba.gov.au/statistics/tables/xls/a01whist.xls

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The Sovereign Debt Disaster

By Egon von Greyerz • February 24th, 2010 • Related ArticlesFiled Under

About the Author

Egon%20von%20Greyerz.jpgEgon von Greyerz (EvG) is the Founder and Managing Partner of Matterhorn Asset Management AG. EvG started his working life in Geneva as a banker and thereafter spent 17 years as Finance Director and Vice-Chairman of Dixons Group (DSG International Plc) in London, the UK’s largest electronic and electrical retailer. Since the 1990s Egon von Greyerz has been actively involved with financial investment activities including Mergers and Acquisitions and Asset allocation consultancy for private family funds. This has led to the creation of Matterhorn Asset Management. EvG has also held a number of non-executive board memberships.

Wherever we look at the world economy today, we see a wall of risk...and potential financial catastrophe. We see a large number of virtually bankrupt major sovereign states (US, UK, Spain, Italy, Greece, Japan and many more) teetering atop a financial system that is bankrupt, but is temporarily kept alive with phony valuations and unlimited money printing. Increasingly, therefore, investors will want to exchange this funny money for gold.

Governments like the US and the UK are committed to printing increasing amounts of worthless paper money in order to finance their growing deficits. The consequence of this rescue mission will be a hyperinflationary depression in many countries, due to many currencies becoming worthless.

The list of countries at risk of bankruptcy is increasing by the day. The acronym used to be PIGS (Portugal, Ireland, Greece and Spain). It is now PIIGSJUKUS and growing. The main contenders are currently: USA, UK, Japan, Spain, Italy, Greece, Ireland, France, Portugal, Baltic States, Eastern Europe and many more. On a proper accounting basis all of these countries are already bankrupt, but since many nations can either print money, like the US and the UK, or increase their already high borrowings, like Greece and the Baltic States, they have technically avoided bankruptcy.

The problem is not just the current debt levels of these nations, because the deficits in all the countries are rising. Tax revenues are collapsing at the same time, while the governments' expenses for social charges are soaring. In the US for example the federal deficit in 2009 was $1.5 trillion (10.7% of GDP) and is forecast to stay around that level for many years. The plight of the US states is just as bad. Out of 50 states only four are expected to have a balanced budget in 2010.

It took almost 200 years for US Federal debt to reach $1 trillion, which it did in 1981. In 2009 the debt increased by $1.9 trillion in just that year to $12.4 trillion. In the next ten years the US debt is forecast to reach $25 trillion. And this doubling of the debt does not include any funds to continue propping up a bankrupt financial system. The forecast also assumes optimistic growth in GDP, which is extremely unlikely. Currently, US Federal debt is six times what it collects in tax revenue every year. With debt exploding and tax revenues collapsing, there is no chance that the debt can ever be repaid with normal money. Also, with debt out of control, interest rates will rise substantially to 10-20% per annum. Applying a 15% interest rate to a $25 trillion debt would give an annual interest bill of $3.75 trillion, which is the same size as this year's ENTIRE budget.

The chart below shows the US Federal Debt per person. In the last ten years it has gone from $ 20,000 to $ 40,000. If we were to also include the present value of the government's future unfunded liabilities like Social Security and Medicare, the debt per person would soar to more than $250,000.

debt20100224a.jpg

Therefore, the indebted governments of the world have two choices: continue to borrow and print money or reduce government spending. This is a lose-lose situation. Countries within the EU like Greece or Spain are introducing austerity programs that forecast their deficits to come down to 3% of GDP, which is the EU maximum deficit limit. These are totally unrealistic targets that are mainly based on an improvement in the economy. Ironically, not one single country within the EU is below the 3% limit, not even Germany. Furthermore, the austerity programs would lead to such a major contraction of the economies that tax revenues would collapse, further exacerbating the plight of these countries.

The alternative is to print or borrow more money. Printing is not a luxury that individual EU members have. And borrowing is becoming increasingly expensive...or impossible. But the European Central Bank can print money and this is likely to be the path they will initially choose to save Greece and possibly Spain. Countries like the US and the UK can still borrow and print money. And this is what they will continue to do. With rising deficits, rising unemployment and the problems in the financial system re-emerging they have no choice. We will see trillions of pounds and dollars printed in the next few years.

We will also see trillions of pounds and dollars worth of new government securities. But the buyers of these government securities might start to become scarce. The rest of the world may dump their holdings of US and UK debt, which would result in both the dollar and the pound dropping precipitously and interest rates rising substantially. The effect of a collapsing currency will be a hyperinflationary depression. This is the inevitable outcome for the UK and US.

All the countries of the major trading currencies - the dollar, euro, pound and yen - have major economic problems that can only be resolved by massive money printing. This is why it is a futile game to try to predict which currency will be the weakest out of the above four. They will all weaken substantially but not at the same time. Therefore, we will have incredible volatility in currency markets in the next few years whilst speculators lose their shirts jumping from one currency to the next. There will be very few winners in that game.

So the last 100 years will be seen in history as an extraordinary period when governments thought that they had invented a new economic miracle based on unlimited credit and money printing. But sadly this miracle will be seen by future historians as another failed delusional economic theory dreamed up by politicians.

Therefore, as many paper currencies become virtually worthless in the next few years, gold will continue to do what it has done for 6,000 years. It will maintain its purchasing power and therefore appreciate substantially against all paper currencies. The recent correction in gold is the weak hands getting out of speculative positions in the paper gold market. There has been virtually no selling in the physical market. So far gold has gone up more than four times in the last ten years in a stealth bull market that very few investors have participated in. There is no other asset during this period that has given such an excellent return whilst at the same time providing the highest form of wealth protection (provided it is physical gold).

The chart shows gold in 2009 dollars adjusted for inflation, as calculated by Shadowstats.com. (Shadowstats.com is a superb service that analyzes government statistics on a true basis, taking out all adjustments, revisions and other manipulations). Applying the true inflation rate on the gold price shows that the gold high in 1980 of $850 in today's terms is $6,400.

debt20100224b.jpg

Governments have suppressed the gold price in the last 30 years by both overt operations (official gold sales) and covert operations (manipulations in the paper gold market and unofficial sales). Central banks have now stopped official sales and China, India, Russia and many other countries are major buyers. Production is falling steadily and investment demand is soaring. With the fundamentals so much in gold's favor, it should have no problem to reach the 1980 inflation-adjusted high of $6,400. With inflation or hyperinflation, gold will go a lot higher than that.

During the next phase up in gold, which we expect to start within the next few weeks, mainstream investors will discover what only a few investors have understood in the last ten years, namely that physical gold is one of the very few ways to protect their assets and preserve capital.

Regards,

Egon von Greyerz

for The Daily Reckoning Australia

Edited by Darth Vader

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More fun in Eurozone...

Deputy prime minister Theodoros Pangalos touching some raw nerves...

http://news.scotsman.com/world/Greece-wants--Nazi-gold.6102255.jp

GREECE has touched Germany's rawest nerve by accusing the EU powerhouse of not fully compensating it for gold stolen by the Nazis during the Second World War.

Strikes turning into riots...

http://online.wsj.com/article/SB10001424052748704240004575084853361540506.html?mod=WSJ-hpp-MIDDLENexttoWhatsNewsForth

Espana...

http://online.wsj.com/article/SB10001424052748704454304575081481536661858.html?mod=WSJ_Currencies_LEFTTopNews

MADRID—Greece set off the crisis rattling the euro zone. Spain could determine whether the 16-nation currency stands or falls.

The euro zone's No. 4 economy, Spain has an unemployment rate of 19%, a deflating housing bubble, big debts and a gaping budget deficit. Its gross domestic product contracted 3.6% in 2009 and is expected to shrink again this year, leaving Spain in its deepest and longest recession in a half-century.

P1-AT969A_SPAIN_NS_20100224210421.gif

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