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Listen
to the empty words of the last bailout for Greece. Credibility with the
Jackass was lost back on the third bailout, well over a year ago, out of the
six bailouts in total. Perhaps it is seven comprehensive final bailouts. The
pattern is clear. The politicians, without popular support, forge agreements
on debt coverage with the Greek officials. The deals fall through, hit the
ground, and expose the lack of support even from the European bankers, led by
the Germans. The pattern has been vividly clear for over a year, enough for
my dismissal of new accords right away on the basis that the German bankers
will not conform and agree to the deals struck. The political leaders in
France (Sarkozy) and Germany (Merkel) are due to lose their offices, yet they
continue to march around at useless summits attempting to cut last ditch
agreements that mean nothing. The people are not willing in Germany to hand
over any more than the $3 trillion to date, from the start of the common Euro
currency experiment. The bankers, like at the Bundesbank,
should attend the summits, but that would be too obvious on where the majority
of power is held. What is unfolding is
a comprehensive Greek Govt debt default from the
inability to contain the situation, the impracticality of the austerity
budgets put in place, the wreckage that has come to the Greek Economy, and
the intractable solution.
My view is the entire charade for
two years has been a grand delay to enable the big banks to sell out of their
bonds and dump them on the Euro Central Bank. Almost every bailout has been
of bank assets in some sort of redemption, not budget assistance. The biggest
question posed and not answered is: HOW ANGRY ARE THE OWNERS OF THE FEDERAL
RESERVE AND EURO CENTRAL BANK TO ACCUMULATE AND OWN SUCH A MOUNTAIN OF TOXIC
PAPER?? My German banker source says the Germans will make what seem like
agreements or permit the politicians to make them, but the bankers will
consistently obstruct them. He steadily stresses how Germany has wasted $300
billion in savings each year, is exhausted, and no longer is willing or able
to provide national welfare for Southern Europe. They will write no more
checks except what will successfully grab collateral prize properties. It has
become obvious the Greeks will not hand over much of any property without
lighting the city on fire. It is the end of the bailout road. A few months
ago my firm position, stated in the newsletter, that the bailouts would end
when the riots amplify. They have amplified. Conclusion: GAME OVER.
Next comes a planned or unplanned
default. Let's see how inequitable they will make it. Obviously it will be
inequitable, since all accords have greatly favored the bankers. The TARP
Fund was the most egregious, but it only disguised the bigger multi-$trillion
grants with zero cost to the many banks, both central bank and private bank.
The upshot of the Financial Regulatory Bill is that the USFed must open its
books, but only after such loans take place, not to be reversed. Back to
Greece. For a few months, some clarity and realism has entered the
discussions and analysis concerning the burning nation of antiquity. The
new theme has been that Greece will default, must default, and cannot avoid a
default. Exactly. So the challenge is to avoid the horrendous collateral
damage that will come. The central bankers, regional commissars, and
technocrats have been working overtime, but Davos was a missed opportunity
for forging potential solutions or at least elements.
A great comment came out of the
World Economic Forum in Davos. The comment came from one of the few Economics
Nobel Winners who makes any sense at all. The recent parade of prize winners
seems either clownish in support of the status quo in disaster mode, or
abstruce to the point of irrelevance. Joseph Stiglitz uttered perhaps the
only wisdom or story worth reporting from the forum, a country club gathering
of bankers and their investment fund cohorts whose mission is to defend the
failing system. Stiglitz said, "European
leaders repeat the same kind of platitudes, [like] we need to get growth
going, [like] austerity will not be enough, but no country has policies that
will achieve growth. I have not heard a single thing here in Davos that has
convinced me that the European leaders have any sense of what they need to do
and will do. Nobody knows who owes what to whom, where the risks of a Greek
default are." It reminds me of a premise that the first step in a
reconstruction, remedy, and solution is to liquidate the big insolvent banks.
But that is precisely where the power lies in controlling the USGovt. If not
the banks, the agencies that have evolved into a private sprawling enterprise
control much hidden power.
BLUEPRINT FOR DAMAGE CONTROL
One must be serious and grounded
in reality. No solution exists for Greece without liquidation of their debt,
its restructure with huge writedowns if not total wipeout loss, a return to
the Drachma currency, recapitalization of their banks, and a hands off to
carpetbaggers. Almost none of these measures will be done, except blockage of
the foreigners intending to exploit. Talk is clear about a 70% bond
haircut, which does not seem enough even though it is brutal. The biggest
practical impediments to the Greek Economy are the austerity plan and the
absent ability to devalue the currency. Every single austerity plan to date
has been a failure, in every nation attempted. They result in worse economic
slowdowns, greater job loss, broad cancelation of projects, reduced pension
security, and much wider deficits. Yet they continue in a grand procession of
ruin. One must wonder if ruin is the goal, so that another technocrat can be
put in power, unelected and with allegiance only to the syndicate. Who
selected Papademous and Monti?
The absent path to a currency
devaluation hits as the central flaw of the common Euro region. The weakest
cannot compete against the strongest. In time the strong nations refuse to
provide the higher standard of living at their own domestic expense. The
German standard of living has fallen badly, angering many of its citizens.
The normal evolutionary path calls for a troubled nation to do debt restructure,
to enact broad reforms, to devalue the currency, and to stimulate the
economy. The path taken for two years has been to dance around the debt
table. No action at all on devaluation, since removal from the Euro
currency umbilical would mean enormous debt writeoffs for the major European
banks. This is the same obstructive dynamic at work in the United States.
Greece needs to go back to the Drachma, devalue it by 30% or more, and enjoy
some stimulus. Their list of export items is not in great volume. The
austerity budgets are the exact opposite of stimulus. Lunacy has taken root,
like with an entire class of public contract workers must work for no pay.
The power center of the big banks prevents solutions. So the next phase will
be full of risk and intrigue, if not treachery.
LAYERS OF RISK
Big Bank losses: The big banks in Europe face staggering losses. The attempts to make a
mere 35% bond loss haircut in past deals was so unworkable as to be
laughable. They fooled nobody. Reality has entered the room, as a 70%
writedown figure has been proposed on current bailout deals. The big banks
are already reeling from credit portfolios damaged by property like home
mortgage and commercial mortgage. They are hurt by sovereign debt generally,
not just from Greece. The Italian and Spanish Govt debt losses will be higher
in volume, lower in percentage loss. The big bank exposure extends also to
private debt within the Greek Economy, like with mortgages and commercial
loans. They are all at heavy risk. The Basel II rules have forced
de-leveraging as a warmup process that weakened many banks. The big European
banks should enter failure from an imposed Greek Govt debt default and
restructure. The Greek losses will strain the system to the hilt.
Contagion to Banks outside Europe: The interwoven nature of Western banking does not add to its strength,
like in integrated plywood sinews, but rather exposes its weakness. The
London banks own a huge amount of Southern Europe sovereign debt. The New
York banks own a sizeable portion also. A recent conversation with a sturdy
German banker revealed that Citigroup owns an enormous amount of debt in
Greece, Italy, and Eastern Europe in the mortgage sector. Most will be
written off with big losses. The amount of PIGS sovereign debt owned by banks
in France is enormous, well detailed, but under-reported. The cross
pollenation will come to the fore as the ripples are felt. The German banks
own too much sovereign debt. The big banks outside Europe are at great risk,
just like those throughout the Continent. Many non-European banks should
enter failure from an imposed Greek Govt debt default and restructure. The
Greek losses will strain the system to the hilt.
Euro Central Bank: Like the US Federal Reserve, these two central banks have served as
the buyer of last resort for toxic bonds that both nobody wants and have
nearly worthless value. Their owner lords (think castles in London and
Switzerland) must be pushing back hard. The new EuroCB head Mario Draghi at
first stated a firm position of not wishing to buy Southern European
sovereign bonds, since badly impaired. When the Italian and Spanish Govt Bond
yields rose toward or past the 7% magic mark, he relented. The stability returned
in the bond market, but at the high cost of further wrecking the EuroCB
balance sheet. It is hard to know which is more ruined, loaded with toxic
paper, the EuroCB or the USFed. Both in my view are wrecked entities and
control towers. Neither can serve adequately as a central bank when acting
like a proxy for the entire banking system. They must remove the bank
reserves held as hostage from private banks. The major central banks should
face severe insolvency from an imposed Greek Govt debt default and restructure.
The Greek losses will strain the system to the hilt.
Credit Default Swaps: The bond insurance market is even more corrupt than the mortgage
market. At least the mortgage arena contained some hint of regulatory
oversight. The derivative market has none at all. Some fine analysts like
Chris Whalen stated two and three years ago that without the derivative
trade, the US banks would have keeled over dead long ago. They took in huge
fees on contracts whose legitimacy and effectiveness are unclear. The ISDA
has issued rulings on bond debt default that seem corrupt to the core. The
next round of Greece Govt Bond writedowns apparently will feature CDSwap
insurance responses in the form of awards in exchange for bond ownership, the
inherent asset swap. Like the SEC and CFTC, the ISDA is loaded with bankers
from the everpresent Wall Street revolving door. They will serve the banks at
the expense of the system and economy. The interwoven nature of Western
banking does not add to its strength, but rather exposes its weakness. The
claimed offset on derivative ownership is nonsense, as Bank A holds
derivatives that cover Bank B, and vice versa. They do not cancel out for net
neutral. Both banks are killed, neither able to aid the other. The payouts
for Credit Default Swap contracts being enforced should cause tremendous
additional damage to the entire financial system, from an imposed Greek Govt
debt default and restructure. The Greek losses will strain the system to the
hilt.
Exposure of Profound Fraud again: The strain from any imposed default skein will expose the derivative
market. The cast of counter-parties is too diverse. The obligations are too
unclear. The nature of the contracts is too untested. The enforcement by the
ISDA rulings are too subservient. Like with the mortgage sector, liquidations
reveal the seriously putrid underbelly. With mortgages, no widespread
liquidation of mortgage bonds could be done, since the process would reveal
bond fraud to the extreme. Its mortgage contract fraud is in the open for
full view. So patchwork was done, even nationalization of Fannie Mae and AIG
under the USGovt wing. The fraud is contained supposedly, but without the
basis of a solution. Hyper monetary inflation goes down a Black Hole. So also
is the nature of the derivative market. Liquidations will reveal the
seriously corrupted core of the business. After the recent MFGlobal,
JPMorgan, and COMEX episode, one more log on the raging fraud bonfire. The
system's foundation of integrity is burning. The CDSwap contract award
process should expose profound fraud in the system from an imposed Greek Govt
debt default and restructure. The Greek losses will strain the system to the
hilt.
Recapitalize domestic banking
systems: The banking system has operated
in the Western nations amidst deep insolvency for three years or more. When
the Greek default is begun, that insolvency will be much worse. Some banks
will fail. The dominos will fall. The impact will be understood quickly. The
need to rebuild the banking system will be an obvious and very painful
realization, but the volume will result in shock. The big banks serve as the
core for the domestic credit engines, the machinery to pump credit into the
many businesses. That engine is sputtering badly. Some measures will be done
to enable new Euro Bonds to take senior position, but expect it to backfire
since bond dealers and bond funds will resist the favored treatment and
retreat. Several $trillion will be needed to recapitalize the banking
systems, not just a few banks. With the dependence upon newly printed
unbacked money, the banking systems should lose further integrity from an
imposed Greek Govt debt default and restructure. The Greek losses will strain
the system to the hilt.
Debt Rating Agencies: Since the autumn months of 2008, the agencies have acted more
responsibly. The Standard & Poors downgrade of the USGovt debt was a
wakeup call of unprecedented manner. However, the Moodys and Fitch agencies
did not follow suit. Worse, the S&P chief executive was forced out of
office, probably by a Wall Street phone call, replaced by a Citigroup
veteran. In the last several months to perhaps 18 months, the debt rating
agencies have been doing their job reponsibly, but their focus is entirely on
Europe. They have ignored the United States, even ignored the embattled
insolvent US States. They are piling on with European sovereign downgrades,
European bank downgrades, even European stability fund downgrades. Instead of
putting the debt rating agencies at greater risk from an imposed Greek Govt
debt default and restructure, the pressure will be on them as a group to
focus more attention on the USGovt and the US States. Their collective
financial condition is equally bad as Greece.
Economies suffer from Austerity: The impact of every austerity plan is to put in place what appears to
be a more rigid spending process. But the dependence of the domestic
economies is so great upon the public sector for jobs and projects and grants
and subsidies, that the damage is instant and deep. No austerity budget plan
has resulted in improved finances in the first two years of emplacement.
None! The economists seem blind to the effect. The politicians seem ignorant.
The corporate leaders are frustrated. No solution exists for remedy short of
a five year period. Many economies in the West should suffer even worse and
more painful recessions from an imposed Greek Govt debt default and
restructure. The Greek losses will strain the system to the hilt.
Amplified Inflation Risk: All solutions proposed involve the disposition of new money, either
from outright printing without backing or from grander fiscal deficits. The
austerity plans result in worse deficits, thus worse pressure on inflation.
Any banking system recapitalization would be the crown jewel of monetary
inflation. Imagine the effect of $1 trillion or $2 trillion in recapped
banks, only to find they require another $1 trillion several months later.
The inflation impact could be enough to push the water level over the bunker
banker walls. Those walls have prevented the staggering hyper monetary
inflation from spilling over into Main Streets across the nation. The bank
sector has enjoyed 98% of the bailout benefits. The public has been told to
tighten belts and to eat cake. Look for the bank recapitalization project, if
it occurs, to finally push the inflation process in such a way that price
inflation hits the USEconomy in force. Refer to rising wages and rising
prices, not just costs. Tremendous pressure should come on systemic price
inflation from an imposed Greek Govt debt default and restructure. The Greek
losses will strain the system to the hilt.
Interest Rate Swap Risk: If price inflation rises in unexpected fashion, the pressure put on
the USTreasury Bond market will be greater than any time in the last ten
years. So far, the abuse of the Interest Rate Swap contract has provided
outsized leverage in keeping down the USTBond yields generally, by creating
artificial bond demand. The financial press is totally oblivious to this
phenomenon. Investors do not flock to USTBond as safe haven. The Wall Street
leverage machinery has created bond demand from the basement working overtime
for over two years. The smoking gun was the 1Q2011 report on derivative
growth by the Office of the Comptroller & Currency. It revealed $8
trillion in notional derivatives put on by Morgan Stanley alone. So much for
investor bond demand and contradiction of the S&P downgrade of USGovt
debt. What a clever tactic. However, the Greek Govt debt unraveling could
place tremendous strain on the IRSwap device, even to expose it during a time
of increased foreign creditor isolation. The US sovereign bond market inner
circle hidden devices should be brought into the open from an imposed Greek
Govt debt default and restructure. The Greek losses will strain the system to
the hilt.
Unintended Consequence Risk: The last risk to cite is the risk of the unknown, the unexpected, that
which cannot be properly planned. The potential unintended outcomes and
pressures emanating from a comprehensive planned Greek Govt debt default defy
description. In my view, it is like herding 100 cats freed from bondage on a
truck in an open field. The Jackass loves cats, but never have they been
captured in a yard when attempted. They jump fences, crawl under fences, disappear
in holes under houses, even hide in car engines. They are fast and elusive,
changing directions with extreme quickness and agility. So will be the
consequences to a planned Greek demolition of their indebted edifices. The
Powerz must realize the challenge that lies ahead, and look upon each with
some trepidation.
GOLD & SILVER
The battle has been waged in the
1750 to 1800 price corridor for almost a full month. It is critically
important. A smaller battle to overcome the 1650 mark was a success, thus
making the Gold price recovery firm and recognized. As a solution is
worked out in Greece, or the absence of one with another in a series of grand
missteps, watch the Gold price cast a vote. The system's integrity lies
in the balance. The pressure points are across the entire financial and
economic systems. The solutions are elusive since the basic initial step of
big bank liquidation is refused, too much damage to be doled to the banks
that control the power. The zinger is the recapitalization of the banking
system, an urgent need and requirement, the understood impact from the
imposed Greek comprehensive solution. Expect more favored treatment to the
banks. However, as they are put back on solvent feet, a process only possible
with vast hyper monetary inflation directed specifically at the banking
pillars, the retribution from within the system will possibly be the first
serious price inflation leakover. For over three years, the monetary
inflation leakover has been contained, to the detriment of the economy.
The anticipation of that systemic
price inflation event could be seen in the Gold price. The direct response to
the imposed Greek debt solution could be some sort of capitulation, a
recognition that the Western financial and monetary system cannot be fixed. Any
perception that bank system reconstruction would assure another powerful bout
of price inflation as the heavy cost could be a major unintended consequence.
The Gold price could explode past $2000 per ounce if that were to occur. If
the planned demolition of the Greek Govt bond building does not go according
to plan, look to the Gold price for a powerful upward response. The list of
unintended consequences and collateral damage is very long indeed. The risk
is staggering acute and not easily measured. Gold should serve as the
effective pressure valve. Most every attempt to push down the Gold price in
the last few weeks with yet more naked shorting has been thwarted and opposed
by the Eastern Coalition, their new project.
Jim Willie CB, editor of the “HAT TRICK LETTER”
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