White collar crime is the dirtiest as it works on the people labouring to build assets and then uses constrictive measure to remove those assets for a fraction of the cost, where the greater unwashed then fights in frustration not against the instigators – the bankers – but the marginalised, be they black, immigrants or even bikie gangs.

It is easy for them as they hire armies, mercenaries and police to take the brunt of the rage and turn the populace against each other.

Professor Carroll Quigley, an insider groomed by the international bankers, revealed this plan in 1966, writing in Tragedy and Hope: ‘The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences’.

This article titled ‘Deficit terrorists’ is from http://www.opednews.com/articles/DEFICIT-TERRORISTS-STRIKE-by-Ellen-Brown-100618-289.html.

Last week, England’s new government said it would abandon the previous government’s stimulus program and introduce the austerity measures required to pay down its estimated $1 trillion in debts. That means cutting public spending, laying off workers, reducing consumption, and increasing unemployment and bankruptcies. It also means shrinking the money supply, since virtually all “money” today originates as loans or debt. Reducing the outstanding debt will reduce the amount of money available to pay workers and buy goods, precipitating depression and further economic pain.

The financial sector has sometimes been accused of shrinking the money supply intentionally, in order to increase the demand for its own products. Bankers are in the debt business, and if governments are allowed to create enough money to keep themselves and their constituents out of debt, lenders will be out of business. The central banks charged with maintaining the banking business therefore insist on a “stable currency” at all costs, even if it means slashing services, laying off workers, and soaring debt and interest burdens. For the financial business to continue to boom, governments must not be allowed to create money themselves, either by printing it outright or by borrowing it into existence from their own government-owned banks.

Today this financial goal has largely been achieved. In most countries, 95% or more of the money supply is created by banks as loans (or “credit”). The small portion issued by the government is usually created just to replace lost or worn out bills or coins, not to fund new government programs. Early in the twentieth century, about 30% of the British currency was issued by the government as pounds sterling or coins, versus only about 3% today. In the U.S., only coins are now issued by the government. Dollar bills (Federal Reserve Notes) are issued by the Federal Reserve, which is privately owned by a consortium of banks.

Banks advance the principal but not the interest necessary to pay off their loans; and since bank loans are now virtually the only source of new money in the economy, the interest can only come from additional debt. For the banks, that means business continues to boom; while for the rest of the economy, it means cutbacks, belt-tightening and austerity. Since more must always be paid back than was advanced as credit, however, the system is inherently unstable. When the debt bubble becomes too large to be sustained, a recession or depression is precipitated, wiping out a major portion of the debt and allowing the whole process to begin again. This is called the “business cycle,” and it causes markets to vacillate wildly, allowing the monied interests that triggered the cycle to pick up real estate and other assets very cheaply on the down-swing.

The financial sector, which controls the money supply and can easily capture the media, cajoles the populace into compliance by selling its agenda as a “balanced budget,” “fiscal responsibility,” and saving future generations from a massive debt burden by suffering austerity measures now. Bill Mitchell, Professor of Economics at the University of New Castle in Australia, calls this “deficit terrorism.” Bank-created debt becomes more important than schools, medical care or infrastructure. Rather than “providing for the general welfare,” the purpose of government becomes to maintain the value of the investments of the government’s creditors.

England Dons the Hair Shirt

England’s new coalition government has just bought into this agenda, imposing on itself the sort of fiscal austerity that the International Monetary Fund (IMF) has long imposed on Third World countries, and has more recently imposed on European countries, including Latvia, Iceland, Ireland and Greece.

Deficit hawks point ominously to Greece, which has been virtually squeezed out of the private bond market because nobody wants its bonds. Greece has been forced to borrow from the IMF and the European Monetary Union (EMU), which have imposed draconian austerity measures as conditions for the loans. Like a Third World country owing money in a foreign currency, Greece cannot print Euros or borrow them from its own central bank, since those alternatives are forbidden under EMU rules.

Greece is stuck in the debt trap, but the UK is not a member of the EMU. Although it belongs to the European Union, it still trades in its own national currency, which it has the power to issue directly or to borrow from its own central bank. Like all central banks, the Bank of England is a “lender of last resort,” which means it can create money on its books without borrowing first.

The “deficit terrorists,” however, will have none of this obvious solution, ostensibly because of the fear of “hyperinflation.” A June 9 guest post by “Cameroni” on Rick Ackerman’s financial website takes this position. Titled “Britain Becomes the First to Choose Deflation.”

Hyperinflation or Deflation?

The dreaded threat of hyperinflation is invariably trotted out to defeat proposals to solve the budget crises of governments by simply issuing the necessary funds, whether as debt (bonds) or as currency. What the deficit terrorists generally fail to mention is that before an economy can be threatened with hyperinflation, it has to pass through simple inflation; and governments everywhere have failed to get to that stage today, although trying mightily. Cameroni observes:

“[G]overnments all over the globe have already tried stimulating their way out of the recent credit crisis and recession to little avail. They have attempted fruitlessly to generate even mild inflation despite huge stimulus efforts and pointless spending.”

In fact, the money supply has been shrinking at an alarming rate. In a May 26 article in The Financial Times titled “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard writes:

“The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.

“‘It’s frightening,’ said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,’ he said.”

Too much money can hardly have been pumped into an economy in which the money supply is shrinking. But Cameroni concludes that since the stimulus efforts have failed to put needed money back into the money supply, the stimulus program should be abandoned in favor of its diametrical opposite — belt-tightening austerity. He admits that the result will be devastating:

“[I]t will mean a long, slow and deliberate winding down until solvency is within reach. It will mean cities, states and counties will go bankrupt and not be rescued. And it will be painful. Public spending will be cut. Consumption could decline precipitously. Unemployment numbers may skyrocket and bankruptcies will stun readers of daily blogs like this one. It will put the brakes on growth around the world. . . . The Dow will crash and there will be ripple effects across the European union and eventually the globe. . . . Aid programs to the Third world will be gutted, and I cannot yet imagine the consequences that will bring to the poorest people on earth.”

Hyperinflation, however, is a bogus threat, and before we reject the stimulus idea, we might ask why these programs have failed. Perhaps because they have been stimulating the wrong sector of the economy, the non-producing financial middlemen who precipitated the crisis in the first place. Governments have tried to “reflate” their flagging economies by throwing budget-crippling sums at the banks, but the banks have not deigned to pass those funds on to businesses and consumers as loans. Instead, they have used the cheap funds to speculate, buy up smaller banks, or buy safe government bonds, collecting a tidy interest from the very taxpayers who provided them with this cheap bailout money.

Seeking Solutions

The alternative to throwing massive amounts of money at the banks is not to further starve and punish businesses and individuals but to feed some stimulus to them directly, with public projects that provide needed services while creating jobs. There are many successful precedents for this approach, including the public works programs of England, Canada, Australia and New Zealand in the 1930s, 1940s and 1950s, which were funded with government-issued money either borrowed from their central banks or printed directly.

The Chinese have done better, expanding their economy at over 9% throughout the crisis by creating extra money that was mainly invested in public infrastructure.
The EMU countries are trapped in a deadly pyramid scheme, because they have abandoned their sovereign currencies for a Euro controlled by the ECB. Their deficits can only be funded with more debt, which is interest-bearing, so more must always be paid back than was borrowed.

The EMU model is mathematically unsustainable and doomed to fail unless it is modified in some way, either by returning economic sovereignty to its member countries, or by consolidating them into one country with one government.

A fourth possibility would be for member countries to set up publicly-owned “development banks” on the Chinese model. These banks could issue credit in Euros for public projects, creating jobs and expanding the money supply in the same way that private banks do every day when they make loans. Private banks today are limited in their loan-generating potential by the capital requirement, toxic assets cluttering their books, a lack of creditworthy borrowers, and a business model that puts shareholder profit over the public interest.

Unlike the EMU countries, the governments of England, the United States, and other sovereign nations can still borrow from their own central banks, funding much-needed programs essentially interest-free. They can but they probably won’t, because they have been deceived into relinquishing that sovereign power to an overreaching financial sector bent on controlling the money systems of the world privately and autocratically.

One thing is for sure, eventually all will have gone off; and so too does the world’s countries, as each is systematically set up, money is pumped in to promote an air of new era of financial well-being and then the money runs out and debt-markers are called in to be paid

It happens on a micro as well as macro basis, which brings to mind Wide Bay Bricks, a successful brick manufacturer that was offered additional funds by the bank to grow the business.

New kilns were built extra land bought and a massive build up of stock; however, little did Wide Bay Bricks know that the bank would eventually ‘decide’ that they wanted the debt to asset ratio improved, and called on Wide Bay Bricks to reduce the debt.

Coincidentally, at that time a national brick manufacturer – that had been suffering a loss of market share over the preceding years – decided to have a sale of bricks; sales rep’s for the national brick manufacturer signed up builders of future contracts (for an unknown period) at massively reduced prices. Obviously other plants of this national brick manufacturer around the country would take the slack, otherwise they would have gone out of business real quick.

Wide Bay Bricks had largely dealt built up its market share by competitively pricing its bricks, it had acres and acres of bricks, but nobody to sell the number they needed to sell, to sell to. They couldn’t enter the next nearest markets because they didn’t have a name presence there and the bank sent the receivers in. Now you probably know how this ends, the bank who had shut their client down then facilitated the funds for their other client – the national brick manufacturer – to buy the newly refurbished brick plant and any losses suffered in selling the bricks at a loss were soon made up when the controlled the market.

The following article replicates what is happening on a sequential order known of volatility of any given country dependant on political sell-out, manipulation and resource potential, either in material or labour resource.

“And taxes on labor now are about to be jacked up to pay off the public debts resulting from the asset-price inflation and financial wreckage that property tax cuts have helped cause. This is the cause of national debts. Governments have run into debt as a result of un-taxing the wealthy in general, not just real estate.”

Excellent article about how the banksters are coming home to pillage entire nations in Europe now…

http://michael-hudson.com/2010/05/euro-bankers-to-greecethe-wealthy-won%E2%80%99t-pay-their-taxes-so-labor-must-do-so/

The wealthy won’t pay their taxes, so labor must do so.

Riddle: How are the Greek rioters like America’s Tea Party movement?
Answer: Both reject government being taken over by the financial oligarchy to shift the tax burden onto labor.

The difference is that the Tea Partiers have lost faith in government. This is just what the financial oligarchy wants, of course. Giving up hope of gaining electoral control to pursue a fair fiscal agenda, the Tea Partiers have abandoned the centuries-long fight for reform to make governments better by giving them the power to check predatory finance and wealth. Sliding to the right wing of the political spectrum and acting mainly out of frustration, they have succumbed to a utopian desire simply to shrink a government that they see acting adversely to their interests.

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor’s financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status.

Bank lobbyists know that the financial game is over. They are playing for the short run. The financial sector’s aim is to take as much bailout money as it can and run, with large enough annual bonuses to lord it over the rest of society after the Clean Slate finally arrives. Less public spending on social programs will leave more bailout money to pay the banks for their exponentially rising bad debts that cannot possibly be paid in the end. It is inevitable that loans and bonds will default in the usual convulsion of bankruptcy.

Greek labor is not yet so pessimistic as to give up the fight. What it recognizes that its American counterparts do not is that somebody will control the government. If labor – the demos – loses its spirit, power will be relinquished to foreign creditors to dictate public policy by default. And the more the bankers’ interest is served, the worse and more debt-burdened the economy will become. Their gain is bought at the price of domestic austerity. Scheduled payouts by Greek pension funds and government social spending programs must be to replenish German and other European bank capital.

This worldview already has been delivered to Europe’s northernmost periphery, where it has elicited a fiscal masochism that banks hope to see in Greece. Having fallen on their swords, Baltic governments would be jealous and even resentful to see Greece rescue its economy where they themselves failed to repudiate arrogant creditor demands. “Seen from the eastern rim of the European Union, the looming austerity drive in crisis-afflicted Greece reads like old news,” writes Nina Kolyako.

“For almost two years, the Baltic states of Lithuania, Latvia and Estonia have brought in repeated draconian measures, slashing public spending and hiking taxes to try to dig themselves out of a hole. ‘We learned the lessons very painfully, heavily and effectively, that you need to look after the fiscal situation very carefully,’ Lithuanian Prime Minister Andrius Kubilius told AFP in a recent interview.

‘We understood very clearly that fiscal consolidation was the only way for us to survive.’”

Capitulating in a classic Stockholm syndrome (literally to Swedish banks in this case), Lithuania’s government dutifully tightened the screws so much that GDP plunged by over 17 percent. A similar plunge occurred in Latvia. The Baltics have slashed public-sector employment and wages, imposing poverty rather than the Western European levels of prosperity (and progressive taxation to foster a middle class) that was promised after the Baltics achieved their independence from Russia in 1991.

After Latvia’s parliament imposed austerity in December 2008, popular protest in January brought down the government (as a similar protest did in Iceland). But the result was merely another neoliberal “occupation regime” run on behalf of foreign banking interests. So what is unfolding is a Social War on a global scale – not the class war envisioned in the 19th century, but a war of finance against entire economies, against industry, real estate and governments as well as against labor. It is happening in the usual slow motion in which great historical transitions occur. But as in military conflicts, each battle seems frenetic and spurs wild zigzagging on the world’s stock and bond exchanges and currency markets.

All this is great news for computer program traders. The average commitment of funds lasts only a few seconds these days as financial markets are buffeted up and down by vast credit waves blown by the storms sweeping today’s financially overheating planet.

The coming economic dystopia

The Greek crisis shows how far the “European idea” has shifted from 1957 when the six-member European Economic Community (EEC) was formed. At U.S. prodding, Britain and Scandinavia created the rival seven-member European Free Trade Association (EFTA). Even so, the promise of Euroland – at least before Maastricht and Lisbon – was to elevate labor to middle-class prosperity, not to impose IMF-type austerity programs of the sort that devastated Third World countries.

The message to indebted economies is stark: “Drop dead.” And they are obediently committing economic suicide (emulating Japan in the 1985 Plaza Accords) to endorse the Washington Consensus – the class war of finance against labor and industry.

Political, social, fiscal and economic power is being transferred to the EU bureaucracy, its financial controllers in the European Central Bank (ECB) and the IMF, whose austerity plans and related anti-labor programs direct governments to sell off the public domain, land and subsoil wealth, public enterprises, and to commit future tax revenues to pay creditor nations. This policy already has been imposed on “New Europe” (the post-Soviet economies and Iceland) since autumn 2008. It is now to be imposed on the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

No wonder there are riots!

For observers who missed Iceland and Latvia last year, Greece is the newest and so far the largest battlefield. At least Iceland and the Baltics have the option of re-denominating loans in their own currency, writing down their foreign debts at will and taxing property to recapture for the government the revenue that has been pledged to foreign bankers.

But Greece is locked into a European currency union, run by unelected financial officials who have inverted the historical meaning of democracy. Instead of the economy’s most important sector – finance – being subject to electoral politics, central banks (the designated lobbyists for commercial and investment bankers) have been made independent of political checks and balances.

In truly Orwellian fashion, right-wingers in Europe and the United States (such as Fed Chairman Ben Bernanke) call this the “hallmark of democracy.” It actually is the stamp of oligarchy, stripping away control over the economy’s credit allocation – and hence, forward planning – while giving high finance a stranglehold over public spending programs.

Iceland, Latvia and now Greece are the opening shots in the resulting global campaign to roll back the great democratic reform program of the 19th century and the Progressive Era: taxation of land and the “unearned increment” of price gains for real estate, stocks and bonds, and subordination of the financial sector to the needs of economic growth under democratic direction.

This doctrine was still being followed by the post-1945 era of progressive taxation that saw the 20th century’s greatest rise in living standards and economic growth. But most countries have reversed the fiscal trend since 1980. Tax collectors have “freed” income from public obligation only to see it pledged to banks for higher loans to bid up property prices.

Houses, office buildings and entire companies are worth whatever banks will lend. So populations (and corporate raiders) have responded to the pro-financial tax shift by borrowing to buy houses (and companies) before prices recede even further out of reach.

And taxes on labor now are about to be jacked up to pay off the public debts resulting from the asset-price inflation and financial wreckage that property tax cuts have helped cause. This is the cause of national debts. Governments have run into debt as a result of un-taxing the wealthy in general, not just real estate.

Following Western governments in shifting the fiscal burden off property and finance onto labor over the past few decades, Greece’s government is politically unable or unwilling to tax the wealthy, or even well-to-do professionals.

But neoliberals blame it and other debtor governments for not selling off enough public land and enterprises to make up the gap. Tax-deductible interest charges make privatizations on credit tax-exempt, so governments will lose the user fees they formerly received – while populations pay higher “tollbooth” charges for hitherto public services.

Just as the U.S. Government has done, it has issued bonds to finance the deficit resulting from these tax cuts. The buyers of these bonds (mainly German banks) are demanding that Greek labor (and now German taxpayers as well) should bear the burden of tax shortfalls. German and other European banks and bondholders are to be repaid at the social cost of drastic cutbacks in pensions and social spending – and if possible, by more privatization sell-offs at distress prices.

The riots in Greece have erupted because labor understands what most journalistic reporting shies away from confronting. Growth in real wages has slowed (and has stopped cold in the United States since about 1979). Home ownership has been achieved at the cost of new buyers taking on a lifetime of mortgage debt. And the post-Soviet economies won their political freedom from Russia, only to find themselves insolvent today, dependent on IMF and EU direction of their economies to obtain the loans to pay their foreign bankers that loaded down their housing, public enterprises, industry and families with debt.

Bondholders and financial speculators have ganged up to demand EU, IMF and US support for them to take their gains before the financial game crashes.

The grab can be done most quickly by shrinking economies under IMF-style austerity plans.

Unemployment is to rise while driving economies even further into debt – not only public debt as shrinking markets lead to falling tax revenue, but also foreign debt as import dependency increases.

Creditors are to be paid by letting them appropriate the economic surplus, in the form of debt service at the expense of new capital investment, infrastructure spending, public social spending and rising living standards. Economically, the Greek uprising is a revolt against the policy of sacrificing prosperity to pay foreign creditors in this way.

At the political level, the fight is to save Greece from being turned into an anti-state. The classical definition of a “state” or government is the ability to levy taxes and issue money.

But Greece has relinquished its fiscal authority to the EU and IMF, which are telling it to violate what political theorists list as the Prime Directive of any government: to act in the long-term national interest. The Greek government is being directed to act on behalf of bank capital, and indeed, that of foreign countries to engage in asset stripping, not to promote long-term growth.

At issue is whether nations will be run by creditors or by popular aims to reap the benefits of economic growth. An oligarchic push for IMF-EU loans to bail out foreign banks and bond speculators at the expense of Greek labor (the intended taxpayers of the future) aims at making labor rather than finance capital take the loss of government arrears resulting from un-taxing wealth. The aim is to enable foreign banks to avoid having to pay the price for acting as enablers in draining the domestic market. Government policy is to be taken out of the hands of voters and subordinated to the IMF and EU acting as instruments of international finance.

This creates a state of affairs in which neither Greece nor the EC are “states” or “governments” in the traditional political sense. The EU and IMF bureaucracy is not elected. And at the point where their foreign-dictated financial plan succeeds, the economy’s capital will be stripped and social democracy will collapse.

Bailout costs Merkel
On Sunday, May 9, German voters expressed their anger at the government’s role in bailing out German bankers (euphemized as bailing out “Greece”) at the expense of German taxpayers. The European Central Bank [ECB] is not creating free euro-money but is billing national governments.

The Social Democrats overtook Chancellor Angela Merkel’s Christian Democratic Union party in North Rhine-Westphalia.

Winning only just over a third of the vote – a bit less than the Social Democrats (and down over 10 percentage points from the last election, of which 4 points were lost just in the last week when the bailout package was promoted by Ms. Merkel) – the CDU lost its majority in Germany’s upper house.

Many German voters may have wondered whether taxing the poor to pay the rich to engage in usury was really as “Christian” as the party claimed to represent. Or maybe they were concerned that Germany’s tax collector is to pay nearly $30 billion as its share in the bailout of bankers – not all of whom are beloved in Germany, even when they are German. And some no doubt saw the game as a financial deception by the banking sector’s compliant politicians.

The deception
Europe’s financial lobbyists used the crisis as an opportunity to promote a broad series of bailouts. For Swedish and Austrian banks, the EU approved a €60bn extension of the balance-of-payments facility already put in place to help Hungary, Romania and Latvia keep current on their debts to Austrian and Swedish banks respectively. To circumvent the Eurozone’s no-bailout principle, this special bailout law is based on Article 122.2 of the EU treaty permitting loans to governments in “exceptional circumstances.”

If we give Ms. Merkel credit for understanding the economics at work, then we must accuse her of lying through her teeth. The Baltic debt problem is chronic and structural, not “exceptional.” Ms. Merkel also must know that she is being deceptive in pretending to help Latvia by extending loans that the EU limits explicitly to support the lat’s exchange rate, not for domestic development. The foreign exchange is to cover the cost of Latvians paying mortgages in euros to Swedish banks, and of Latvian consumers buying food and manufactures that EU governments subsidize while leaving the Baltics in a state of economic and financial dependency.

Latvia thus is being victimized, not helped. The aim is to give Swedish banks a little more time to keep collecting payments on loans that are going to go bad in due course. Foreign exchange spent in facilitating private debt service to foreign banks becomes a national debt, to be paid by Latvian taxpayers.

This EU loan thus is an exercise in naked neo-colonialism.

Will the belated shift of German voters to back the Social Democrat red-green coalition with the Green and Left parties do much to stem matters? Probably not. Greek President Papandreou acquiesced in the cave-in despite being head of the Socialist International. So the question is whether Greece really is checkmated, destined to see its public spending, pensions, health care, schooling and living standards rolled back in the way that the Baltics have experienced. They have been an experiment in neoliberal central planning. If they are an example of what the future is to bring, the world will soon see a wave of Greek emigration, Baltic-style.

That evidently is what stock markets around the world anticipated when they soared on Monday morning at the news of Europe’s trillion-dollar bailout.

What really was bailed out is the principle that economies should be stripped so that finance capital may rule.

But the fight surely is not yet over. It will escalate for the remainder of the 2010s, because it is nothing less than an attempt to roll back the history of the 19th and 20th century’s struggle to replace the power of vested property and financial interests with principles of progressive taxation and public enterprise.

Is this where Western civilization really is supposed to be leading? Confronted by parliaments controlled by aristocracies, the 19th-century reformers sought to take them over on behalf of democracy. Classical political economy was a reform program to tax away the “free lunch” of land rents, monopoly rents and financial interest extraction. John Maynard Keynes celebrated this program in his gentle term, “euthanasia of the rentiers.”

But the vested interests have fought back. Calling social democracy and public regulation “the road to serfdom,” they are trying to set Europe’s economies on the road to debt peonage. Making an end-run around national elected governments to impose the Washington Consensus, IMF and EU institutions have gained fiscal and economic control over governments and their tax policies to cut taxes on wealth – and borrow from it to finance the resulting fiscal deficits.

America’s Tea Partiers and anti-tax rebels have given up the fight to reform governments. Squeezed by debt from which they see no escape, they demand lower taxes – and are willing to see the highest brackets become the major beneficiaries in an even more regressive tax shift. Faced with the corruption of Congress by lobbyists acting on behalf of the vested interests, they reject government itself and seek safety in local gated communities.

They see Congress and parliaments throughout the world losing autonomy to the IMF, the EU and other Washington Consensus organizations seeking to impose austerity and shift the tax burden onto labor and industry, off property and off predatory finance.

The only way to prevent a regressive tax shift and debt squeeze is to gain control of governments on behalf of the spirit of classical economic and Progressive Era reforms. At least, that is what Greek labor is rioting for. Someone must control government, and if democratic forces withdraw from the fight, the financial sector will tighten its trip.

Last week is still only the beginning of how this drama will play out. The response by the post-Soviet economies, which have retained their own currencies, is to come this summer and autumn.

Anyone who has stood on a bindi (a sharp seed from a weed) knows how something so small – maybe as fine as a needle – can have such an impact on one’s ability to walk, so is Iceland the world’s bindi?

The American public have been foisted with an easily approaching trillion $ bill passed onto them by their government from the banking industry; however, the Icelandic people (who said there is strength in numbers) of only 320,000 have refused to be shouldered with the bill created by its bankers’ greed.

The anger of the people on the recession-hit island is growing as they have come to understand how politicians are kowtowing to ‘higher masters’ who want them to become responsible for a $5 billion overseas debt. Partial referendum results from around a third of the cast votes showed 93% opposed the deal, less than 2 % supported it and the rest cast invalid votes.

While polls may show Icelandic people believe the debts should be repaid, they quite rightly resent being stuck with a bill for the mistakes of a handful of bankers under the watch of foreign governments. The debt works out to be about $16,000 each and came about after Iceland’s top banks all collapsed within days of each other in 2008.

But what is really happening is a bully-boy tactic, where about 400,000 investors in Britain and the Netherlands deposited money in the banks of ‘Icesave’ online deposit accounts. As in America, investors ‘can’t lose’ even if their poor investment goes awry, they childishly want their cake and eat it, and with their connections in corporate government, they demand someone else pays.

But its not just the people hot under the collar, volcanic action is spreading another cause and effect reminder on how fragile the chain is, with bans on flights through UK-controlled airspace which will soon cause shortages in supermarkets and rising costs.

Parcel delivery firms, passengers and business people (who are protected by airline incompetence) are also suffering because of the flight ban and an obligation for them to meet their own costs of accommodation and food etc. Food comes into the UK from all over the world from fresh pineapple from Ghana to baby sweetcorn from Thailand.

The UK imports about 90% of its fruit and 60% of its vegetables and while the majority does come by sea, air freight makes up about 25% of all British imports by value. So the Iceland people and their volcano Eyjafjallajokull will disrupt the whole spectrum of survival. As hot ash spews into the atmosphere, reduced sunlight, polluted air and potable water are also problems not immediately addressed ot though of.

But it is not just fruit and vegetables, its the likes of flowers not being sold through Europe that affects the economies of countries that rely on the income to pay for fuel and fertilizers etc. If the eruption lasts for another four or five days, there will be selective shortages; however, if it lasts months, then what the global finance crisis started, this could finish off.

A classic case of how microeconomic shocks end in macroeconomic tidal waves ..

The image of banks locking their doors to keep customers from making withdrawals during a bank run is what immediately came to mind when we heard that Citigroup was telling customers it has the right to prevent any withdrawals from checking accounts for seven days.

“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change,” Citigroup said on statements received by customers all over the country.

What’s going on?

It seems that this is something of an error. The seven day notice policy only applies to customers in Texas, Ira Stoll reports at The Future of Capitalism. It was accidentally included on customer statements nationwide.

“Whatever the explanation, it doesn’t exactly inspire confidence in Citi,” Stoll writes. “But it’s hard to believe a bank would be sending out a notice like that on its statements.”

UPDATE: According to Stoll, Citi issued a statement saying that it has been required to make this change by Federal regulations–and it no longer sounds like it’s limited to Texas:

Update: Citibank has now released the following statement by way of explanation: “When Citibank moved to unlimited FDIC coverage in 2009, we had to reclassify many checking accounts to allow for immediate withdrawals in order to ensure all customers qualified for the additional coverage. When we moved back to standard FDIC coverage with most major banks in 2010, Citibank decided to reclassify those accounts back to make them eligible again for promotional incentives. To do so, Federal Reserve Reg D requires these accounts, called NOW accounts, to reserve the right to require a 7-day notice of withdrawal. We recently communicated this technical requirement to our customers. However, we have never exercised this right and have no plans to do so in the future.”

http://www.businessinsider.com/citigroup-warns-customers-it-may-refuse-to-allow-withdrawals-2010-2

The reality is that any given country’s currency was supposed to be supported by gold reserves, when in fact there has never been enough gold to support a currency; it turned into a matter of trust and as we know now (and did in the past), the banking industry is corrupt and the saying ‘no honour amongst thieves’ has never proven to be more true.

Banks operate under a fairly simple system, they borrow money by paying little to a pittance to small depositors / investors and then go a borrow money elsewhere from near and far.

Problem is though, the amount of money they borrow has to come from savings of someone somewhere, trouble is, worldwide savings are at an all time low (mainly because the majority have borowed so far into their future savings that they don’t have any anymore), so how do banks and or governments get a hold of money when it doesn’t exist?

Ohh I know it works on ‘trust’ that vague promissory note to pay sometime into the future, but how does a bank lend money it doesn’t have to pay for things and then charge interest on just another promissory note from the borrower ?

The following article titled ‘Breakdown of the Gold Market’ is by Jim Willie CB (Feb 5 2010 10:17AM www.GoldenJackass.com);  the link will enable you to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. But here is a lengthy but shorter version of (the cause and) what went wrong (and effect) and what will most likely happen.   Just envision a high roller profile, spending wildly at a casino, having access to someone else’s money, consistently losing to and with other high rollers who all eventually end up with no money but do have access to a printing machine that prints money … and that is the banking industry supported by government.

An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

A great disconnect exists in the gold market between the exchange futures contract price (the paper price) and the gold bullion paid price for transactions (the physical price). The differential in price is growing wider, enough to place tremendous pressure on the gold market itself. Look not to the gold premium paid for purchases, but to high volume purchases in the tens of million$. In mid-December, almost every demand for gold contract delivery was matched by a cash delivery, complete with 25% bonus premium offered. The officials even produced a new ledger item called ‘Cash For Delivery’ that was necessary to balance their badgered books. It prompted little attention. Some call it a basic bribe. Others call it a technical default. It is truly both.

The paper gold market and the physical gold bullion market have finally separated in a practical manner, meaning actual gold has almost no role anymore in London paper contract settlement. This shocking statement comes from a man who actually trades from the inside. The absence of gold in London requires extraordinary tactics to settle contracts and to obtain gold bullion. Red tape procedures delay delivery for individuals, and cash premiums accompany gold delivery demands as standard practice. The opportunity to convert fiat money into precious metal at prices considered reasonable is also vanishing. The London gold banker said,

“There is going on a lot more than meets the eye. The physical system is actually consolidating bigtime and is organizing itself with lightning speed, totally hidden from pretty much anyone, even the so-called insiders. The paper precious metal market and the physical precious metal market have defacto disconnected. The paper and physical gold markets currently operate in parallel universes. The outflow of physical metal from bank vaults is happening at a mind bending pace.” His reference to bank vaults extends beyond the LBMA inventory to basic bullion banks.

Notice the reference to consolidation and re-organization in a manner not apparent to those fixated on the existing contrived system that is permitted by loyalist regulators. The officials in the LBMA, COMEX, USDept Treasury, and elsewhere are struggling to maintain the current system, and reportedly are not in step with awareness of the newly devised structures coming into place. In the background, far from view, new systems are being fabricated from scratch. Some involve complex barter systems soon to emerge and hit the scene with a splash, with impressive vertical integration, and even a gold core in its foundation. At the same time, new currencies for usage are still undergoing planning, foundation setup, contract latticework, and more for actual implementation. They too will contain a gold core component, not a 100% coverage but a component that might serve as an effective cover clause.

The true gold price might very soon become unknown, an extremely positive development. Telltale events such as bankruptcy and legal action could actually come, all in time, since the breakdown in order has led to extraordinary reactions. If done without the benefit of adequate required collateral, then it is in violation of exchange requirements. Margin calls have hit, forcing further selling of paper contracts. Gold investor sentiment among the naive and less informed has been dragging, ever since early December.

The world is approaching a climax event. Sure, many analysts have made such a claim for months. But with Europe in flux, the USCongress in flux, the Persian Gulf in flux, the US-China trade battles escalating, and USTreasury debt finance recognized more and more as monetized printing press activity, we are truly approaching a climax event if gold base inventory is indeed exiting the London market. The trigger event is unknown. It will likely not be directly related to the above event fronts. It will probably be a typical garden variety event pertaining to the far from ordinary stresses tied to the ongoing crisis in the credit market, gold market, and currency market. The financial press is critically important precisely now, for not spilling the facts on the current gold market breakdown and divergence. Do not expect to read in mainstream news of any gold shortages at major exchanges. They concentrate on the official prices from accepted paper contracts. Reports simply are not published that billionaires are emptying their gold bullion accounts at rapidfire pace, on the heels of independent inspections, since gold leasing has illegally been standard practice for many years. Imagine selling lumber contracts without wood delivered. Imagine selling mortgages without home titles delivered. Actually, Wall Street did precisely that from 2003 to 2007.

LONDON AS TARGET

Last August 2009, a busload of former key employees from the USDept Treasury and Wall Street firms arrived in Brussels Belgium. They turned themselves in to legal authorities in an attempt to avoid eventual prosecution. They came loaded with evidence, documents, emails, testimony, boxes of CDs, and much more. They won asylum in exchange for turning state’s evidence. The Brussels Serious Fraud Squad is running with the data. All indications point to a strategic decision made by the Brussels Interpol squad. Their target for legal action and market tests appears to be London. It lies at the center of enforcement of the fiat currency system, where lately the absence of gold is most glaring. The system seems clearly vulnerable.

Another important event occurred, this in December. A clearinghouse held a Letter of Intent to supply the London metals exchange with 250 metric tonnes of gold bullion. The contract was interrupted. The method used to disrupt and derail the contract is a story unto itself. Little is known in verifiable form. The point is that London bankers were denied an important channel of gold in supply at an operational level. At the same time, demands came from private billionaires to take back possession of their gold in allocated accounts. They are often called in the gold industry the ‘sovereigns’ politely. When pressed for details, my sources tell of their Chinese background. In recent weeks, the billionaires have been joined by others from Central Europe, in particular from Switzerland. So London is being drained of gold and not being resupplied, from the front door and from the back door. A breakdown is coming, and accidents assured. Gold is the ultimate vulnerability. It underpins the USDollar, competes with the USTreasury Bond, while the USDollar remains buttressed by the Petro-Dollar defacto standard. That too has been served notice. See the Saudi announcement last May 2009, with Russia, China, Japan, and Germany at their side. Eventually, crude oil sales will not be fulfilled in US$ settlement.

PARADOX OF INELASTICITY

Gold is unique as a market, as far as its tendency to seek equilibrium from matched supply and demand. Since the year 2005, my analysis has pointed out the unique condition of gold as far as supply inelasticity is concerned. My forecast over four years ago was to expect less gold output from the mining industry, even with higher gold price. That forecast was correct. In addition to more difficult mine projects, deeper ore bodies, thinner gold veins, and more costly projects, other paradoxical factors have been at work. The industry projects surely translate greater challenge into lower output. Introduce the sloppy management of the Marxist leaders in South Africa concerning electricity production. Dirty coal at power plants and higher mining firm taxation assure much lower gold output from the industry’s former leader. Numerous are the reasons for lower gold output in the current year, even with high gold price. The industry is in decline. Ultra-rich ore bodies are long gone.

My forecast of lower gold output at higher gold price, the inelastic factor, went like this. As large mining firms suffer the consequences of their unwise (surely illicit, perhaps illegal) future gold sales within their cratered hedge books, the losses would approach catastrophic levels. Take Barrick Gold for example. In 2007, they announced the complete cover of their disastrous hedge book. Not quite true as they covered about one third, using dilutive new stock issuance and new long-term corporate debt. In summer 2009, they announced again the complete cover of their disastrous hedge book. The financial press forgot that they supposedly removed all future commitments just two years ago, hardly a surprise lapse of memory. Again not quite true, since they ran out of funds from yet another grand stock issuance that again crippled their stock from vast dilution. The Toronto and Wall Street investment community still loves this total dog of a stock, as collusion and kickbacks must be suspected to prop the stock. A quick look at its Board of Directors offers an important clue toward loyalties. In fact, it has two Boards to provide extra service to the stockholders, or to shadowy entities in control. So in conclusion, the cover of huge hedge books cost the big mining firms tens of billion$ in funds that otherwise would be devoted to mine projects and additional gold output. It did not happen, since mine industry funds went into the sewer of future gold price suppression. The most curious aspect of this factor is the lack of investor lawsuits for failed fiduciary responsibility.

The flip side to this important price reaction factor is the demand inelasticity. When on the upslope, the phenomenon is called Gold Fever. A rising gold price prompts a rising demand for gold. Imagine a 50% increase in the price of televisions resulting in lines forming to buy more costly TVs. Never. But such is normal for gold. When on the downslope, the phenomenon works in reverse. A falling gold price, in particular for the paper gold price dictated by brutal gold futures contract pressures, often not reinforced by the presence of gold bullion, results in a gradual darkened gloomy sentiment for gold. People do not rush to buy more gold since it has been offered at a cheaper price. Rather, they are trapped in margin calls when leverage is applied. Rather, they give up and sell out, dump their gold, and lick their wounds. These are the legion of dull blades and risk junkies. These are the vast hordes who do not exercise patience and prudence, fully aware of the gold exchange distress. They will return, but when they do, they will purchase gold at a price 50% higher than when they abandoned the precious yellow metal. They will double up when the gold price has doubled. For the wise, the patient, the informed, those who look to the future, we can purchase physical gold & silver at artificially low prices, with a wink of deep appreciation, while the open door of opportunity lasts. To purchase scarce precious metal at paper contract prices is a chance of a lifetime!

DIVERGENCE TOWARD COLLAPSE

My forecast on gold made a couple months ago within the Hat Trick Letter was clear. The gold price will experience a remarkable divergence. As the collapse approaches, the paper gold price (from futures contracts) will decline while the physical gold price (from bullion purchases) will rise sharply. The differential will grow gradually at first, then burst into a grotesque price disparity. When this occurs, expect some darkness to fall upon the gold market. At this point, pure speculation follows. My expectation is for the official gold metal exchanges to possibly shut down, at least temporarily. Such would be a natural consequence if they have no gold to sell! To remain open would only aggravates their contract and legal risk. Some anticipate prosecutions of middle level officials from the exchanges, heavy police pressures put on them, and deals cut to bring down the kingpins. This is standard police procedure. Lawsuits are the wild card, hard to control, difficult to predict.

Pressures build that contribute toward the divergence. Whenever large deliveries are made in recent months from the gold exchanges, a new rigorous procedure must be followed. Delivery verification involves strict assayer information like certificates and dates and firm names and stamps. Before autumn 2009, such procedures were not endured or seen. The buyers are distrustful of the gold bullion quality, amidst prevalent stories of not just 80-year old bottom of the barrel London gold bar quality, but of bars with gold less than 100% content. Great shifts in gold bullion bank industry practices seem to be the norm, after full control of the USGovt gold treasuries took place since 1992. At that time, Robert Rubin infiltrated the scene as US Treasury Secretary from his former Goldman Sachs currency trading post. The rest is history.

My expectation is when the breakdown comes, several key locations across the world will post and publish their actual transaction prices without names. Fine outfits like Kitco might be among them. They will vary somewhat. Even today, the Hong Kong gold spot price differs from the London gold spot price by $10 to $15 per ounce. This is standard, and reflects different demand levels against different supply levels. However, in the not too distant future, several key locations will herald their actual gold prices, which will be averaged, thus enabling the first true gold prices in a few decades. That day is coming, and those who stubbornly hold their physical gold & silver, do not yield to pressures, do not react to phony paper prices, they will be rewarded. They will find encouragement in the occasional story of heavy premium paid for large volume gold purchases off the market.

People who expect that day to be accompanied by unaltered political and economic landscapes are badly misguided. Think outside the box! In fact, some ugly developments already have begun to crop up. A new USGovt rule requires that any large volume gold purchase must satisfy strict anti-money laundering guidelines. So further restrictions have come. Maybe the day will come also for declaration of any American owning a foreign bank account to be illegal. Think desperation!

THE GOLD BASE AMIDST CONFUSION

Many are the background factors to gold. The principal story comes from Europe. The default of sovereign debt is assured to all but the experts, for Greece, for Spain, for Italy, for Portugal. Germany walks a fine line, as they pretend to prevent the breakdowns. They eagerly push for defaults, along with expulsions from the European Monetary Union, that group sharing the Euro currency. The Euro experiment has been a failure to Germany, ransacked of $400 billion each year in savings for a full decade. That tally is $4 trillion to Germany, which wants the Southern European fat trimmed off completely. The Euro currency decline will continue until clarity comes to the expelled member nations and to the new structure in the aftermath. The current Euro will continue to flounder in confusion, seen as a queer benefit to the USDollar. The European core with Germany and Benelux nations at its nucleus has firm fundamentals, a fact to emerge soon. European leaders benefit from a lower Euro valuation, as export trade can be encouraged in an economic stimulus, but more importantly as US$ reserve assets rise in value for bank support. Dubai started the process of debt intolerance. The Euro has embarked on a death-birth process, the end of the Broad Euro and the beginning of the Core Euro. The new Core Euro currency will resemble the old Deutsche Mark, whose return will coincide with other nations reverting to their former domestic currency. Except the new DMark will be strong and the reversion currencies will be trashed 25% to 40% lower. Unless and until Germany emerges with a solid plan with a new Super-Trim Euro currency, the US$ will benefit at the Euro’s direct expense. The Euro usage as a secondary global reserve has caused suffering. It was not designed for that purpose. Reversal is demanded. Gold faces competing forces to both lift its price and harm its price.

The currency market is in disarray. A bizarre USDollar rally seems to be underway, a second chapter to the Dollar Death Dance from one year ago. The chaos in the Euro currency combines with threats to sidetrack the extreme USGovt wasteful spending course, to offer cause for a higher USDollar. Such confidence in restored fiscal management is grossly misplaced, as the Black Holes of Fannie Mae & AIG expose colossal costs, and as the military budget grows without check or balance. The wrecked USGovt, USBank, USHousing, and USEconomy indicate a continued decline is justified. The Q4 Gross Domestic Product figure should have elicited laughter, but at least analysts noted the powerful effect of inventory buildup. Q4 data will reveal a climax sugar high, clearly evident as the USFed and USDept Treasury attempt to step back from powerful monetary excesses. Without a lower USDollar and lower USHousing prices, no economic recovery is remotely possible. A bright populist light attempts to expose the wayward US central bank. Its chairman will defend the fortress ramparts, but the syndicate is growing desperate as vassals are crossing the moats.

Gold is hostage to the European reconstruction and the USCongressional revolt. At the same time, the paper gold market and the physical gold bullion market have finally separated. Divergence and havoc come next. The paper gold price might find the 1080 level to serve as a base for the next upward leg in recovery. Be sure to know that gold has entered the Twilight Zone, along with the major currencies. The USDollar and the Euro currencies float adrift in the FOREX seas of confusion, as fiat money is more doubted in some corners. What is the value of the Euro if suddenly two, three, or four nations must end its usage, default their debt in its denomination, revert to older drachma, peseta, lira, complete with devaluation? Who knows? Gold will benefit from the chaos and confusion. The USDollar appears to benefit. The USGovt is much like a desperate gambler in Las Vegas, who is doubling down as the bust looms large. The main tool used by the USGovt to finance its debt is the hidden Printing Pre$$. So far in the last twelve months, credit must be given not by creditors, but instead credit must be given to the Inflation Engineers who have managed to keep the vast monetization of USTreasury debt off the pages of the financial press and off the air of the financial networks. For every dollar financed by actual bond bids and purchases, three to five dollars are financed by Printing Pre$$ kept as hidden as possible. The levitation of the USDollar in such an environment is a very temporary situation.

When the billionaire sovereigns demand their gold to be returned home, no longer under custodial mismanagement, this does not represent new demand. The new demand comes from legitimate funds like those run by Paulson and Sprott, which have actual gold bullion behind their funds as stipulated in the prospectuses. Little fanfare came when the decade closed in December, and the big winner among all investment classes was Gold. As the story of its performance is more fully recognized, when the facts sink in, expect investment demand to increase.

Physical gold is the best protection against gold counter-party risk in futures contracts, if gold underpin erodes and contract breach turns more common. Sovereign gold reserve levels have been updated for government holdings. These are lowball figures that exclude holdings outside central banks, like in certain sovereign wealth funds. The IMF & USGovt levels are pure fiction. The Russian central bank is ramping up its gold holdings. Private sources tell of Putin storing much more gold in non-govt Russian locations in addition, that avoids public accounting. China also has hidden gold holdings. At a mere 1.5% of stated reserves held in gold, China has much catching up to do. Most nations command 15 times as much gold as China in ratios. Demand by China will surely be steadily strong, powerful, and significant for years. Most industrial nations command a 60% to 70% gold ratio in total reserves. Debate aside on reserves reality, if China were to strive toward 65% in gold ratio of reserves, it would need to accumulate 44,619 tonnes of gold bullion. Their deficit represents 27% of the total existing gold hoard held above ground. The path toward prudent reserves management will push the gold price skyward.

In Italy they have stopped being nice and putting on appearances; Italy’s financial police are seizing 73.3 million Euros of assets from Bank of America Corp. and a unit of Dexia SA as part of a probe into an alleged derivatives fraud in the region of Apulia.

The Police are investigating losses on *derivatives linked to the sale of 870 million Euros of bonds sold by the regional government in 2003 and 2004, according to an e-mail from the prosecutor’s office in Bari. The banks misled the municipality, located in the heel of Italy, on the economic advantages of the transaction and concealed their fees, the prosecutor said.

The region, also known as Puglia, joins more than 519 Italian municipalities that face 990 million Euros in derivatives losses according to data compiled by the Bank of Italy. In Milan, prosecutors seized assets from four banks including JPMorgan Chase & Co. and UBS AG in April and requested they stand trial for alleged fraud. Hearings started this month.

Dario Loiacono (a banking lawyer in Milan not involved in the case) said ‘it’s the result of the unavoidable asymmetry of information between the banks and the municipal borrowers’. Police are sequestering a further 30 million Euros that the municipality had set to place in a fund managed by the banks on Feb. 6; the magistrate also asked that Charlotte, North Carolina-based Bank of America be stopped from doing business with Italian municipalities for two years. A hearing is slated for next month.

Merrill Lynch (bought by Bank of America in January 2009) managed the bond sales for Apulia in 2003 and 2004; the bank didn’t provide the municipality with appropriate information on the financing, said the prosecutor and officials at the municipality didn’t speak English yet the contracts weren’t translated into Italian.  Merrill Lynch also recommended that Apulia seek advice from an international law firm, without disclosing that Merrill itself had a long-standing business relationship with the law firm, the prosecutor said.

Prosecutors allege that ‘banks arranged swaps’ and created a fund that invests money the region set aside to repay the bonds in 2023, they ‘misled the region’ about the economic advantages of the transaction and ‘skewed the swaps’ to their advantage ‘to hide fees’.

* Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or weather.

As banks around the world showed, Gordon Gecko was their idol and no avenue of extracting $’s from anyone anywhere, from local governments, the retired and pension funds put there for those who – after a life-time’s work – could live a comfortable life.

Stupidly, these bankers and other corporate heavyweights and their minions aka politicians and senior bureaucrats didn’t pay attention to other regions / countries that had likewise been stripped bare; the people fought back, firstly by civil disobedience, then sabotaging, then whats good for the goose is good for the gander stealing things ‘back’ and then threats, then kidnapping and taking the law into their own hands and even murder.
We have entire social structures that ‘live in the future’; by this I mean we are encouraged to borrow from a better future to enjoy some of it now and we are encouraged to put money aside for the future which in all probability will never come. The number of places you can visit in ‘its natural state’ are few and far between; and already over-populated regions found anywhere around the world show that high-rise living is the norm.      

The more visible – plane cash compared to a bus crash is – collapse is the USA and Japan is also showing signs of falling over as is Britain, but the bus crash and ripple effect on the EU is Greece’s sovereign debt crisis, which has the ability to raise doubt about the Euro, by putting European institutional arrangements on the line.

At the January 18, 2009, the Eurozone finance ministers kept pressure on Greece to fulfill its commitment to cut its budget deficit below 3% of GDP by 2012 which is estimated at close to 13% of GDP in 2009. Because the Eurozone is a monetary union with a no-bail-out clause, rather than a political or fiscal union with the associated fiscal federalism, budget cuts to contain the explosion of Greek public debt are urgently needed. In 2010, a sustainable fiscal adjustment must be delivered to restore policy credibility, market confidence and ECB/EU member-state solidarity. The problem is, the Greek government – like every other government around the world in self-protection mode – knows that if the populace knows its living beyond its means and has to tighten its belt, the depth of the living by borrowing from the future will  will come as a massive shock; and remember that even in this modern day, piracy is alive and well in Greek waters.

Three coinciding events have brought this to a head, the shortage of funds caused by the Dubai default, a common systemic risk factor and a severe cyclical and structural deterioration in public finances. Greece faces a Hobson’s Choice: whether to accept social pain with financial and economic stability, or instability.

Whatever it chooses, Greece will face economic pain and difficult socio-political fallout and  even inciting social unrest. If the debt becomes unfinanceable in the primary market or if Greece elects to exit the euro and devalue and redenominate its liabilities (a la Argentina), this could render its banking system insolvent and tip it into economic and financial isolation and decline, also with dire socio-political consequences.

As Greece is not an isolated island, disenfranchised Greek nationals and immigrants will look further afield, placing more stress on surrounding countries in not too dissimilar positions.

This record credit binge largely fuelled by the first-home buyer’s grant means every adult, on average, owes more than $74,000.

We now owe more per person than the average American; the USA was known as credit capital of the world, but there household debt stands at just under $50,000 per person.

Mortgages account for almost 90 per cent of annual GDP, up from 17 per cent in 1990. The remainder is taken up with $45 billion on credit cards and more than $90 billion on personal debts.

The Reserve Bank figures show personal debt now equates to 100.4% of Australia’s annual GDP, one of the highest ratios in the developed world.

It means we are living way beyond our means and eroding our children’s future.

Like America, or financial headache is going to get worse. We’ve just passed the peak spending season yet the Reserve Bank data applies to October’s debt levels only, not counting two months of First Home Owner Grant fuelled mortgage activity and the government’s stimulus.

A Fujitsu Consulting monthly survey of 10,000 families shows the typical household is paying about 39%t of its income on debt repayments and ‘stressed households’ will be paying 41% and ‘severely stressed’ households will pay about 43% of their household income.

Despite the positive commnets by ‘economists’ about grwoth, the reality is that 2010 may well see a slowdown in Australia’s economic growth and a contraction as stimuli peters out.

Stupidly, the Reserve Bank will try to fool the market by raising the cash rate; the ensuing credit crunch further dampening banks profitability and credit ratings.

Therefore, if borrowers have borrowed to the hilt, then howe can banks look to lending money if the borrower’s budget is already super tight.

Our economic problem is rather simple to describe: There is too much debt relative to income and/or wealth.

Below is a single graph that depicts the condition of our economy. It shows total debt of the U.S. as a percentage of GDP from 1870 forward.

The debt figure includes all private and public debt.

It does not include liabilities associated with unfunded government mandates like Social Security and Medicare. (Note: according to the U.S. trustees of these funds, the present value of the liabilities is about $106 trillion. Including them would boost the ratio below to nearly 1,000%.)

The amount of debt relative to GDP is staggering from a historical perspective. Several points are worth making about the graph:

• The long-term “norm” for the ratio appears to be around 150%. The red lines band the “norm” at 130% and 170%, respectively.
• Other than the two boom periods that commenced in the 1920s and the 1980s, the ratio never exceeded the upper band.
• Each cross resulted in enormous credit-driven booms. The first ended in the Great Depression. The second will produce a similar if not bigger bust (we are merely at the beginning of this event).
• The credit expansion that led to the Great Depression was not nearly as overextended as the current expansion.
• Peak credit occurred after the Depression began. Government spending and the shrinkage in GDP continued to drive the ratio up early in the Depression.
• Since this graph was published, today’s ratio has grown to near 380%, about double the level when the U.S. entered the Depression.
• While it appears as though current private borrowing may have peaked, funding enormous government deficits continues to drive the ratio up, as does GDP shrinkage.

No economic theory rationalizes a proper “norm,” yet intuitively, we know that such a number exists. Debt must not exceed some percentage of income, or else it cannot be serviced. Equivalent conceptual ratios for individuals and businesses have been used by the banking industry as lending criteria for more than a century. For various reasons, banks neglected these guidelines over the past couple of decades, contributing greatly to the credit bubble.

The government has decided that the cure for too much debt is more debt. This solution cannot work, especially when credit is already so overextended. Income and wealth cannot support present debt levels. Credit will adjust back to the mean, regardless of what the government attempts. Whether this is via orderly payment or via default, the reduction in debt is inevitable.

Ludwig von Mises addressed the limits of credit in The Theory of Money and Credit, originally published in 1912. As he expressed in later work:

There is no means of avoiding the final collapse of a boom brought about by credit [debt] expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit [debt] expansion, or later as a final and total catastrophe of the currency system involved.

In 2009, it was not possible to finance U.S. capital requirements through conventional markets. Only via the Fed’s explicit (and surreptitious) Quantitative Easing was the government able to fund its 2009 deficits. Discussing 2009, Zerohedge stated:

There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

Zerohedge estimated that demand (financing) for U.S. fixed-income securities must increase elevenfold in order to fund capital needs in 2010. Continued shrinkage in foreign participation in U.S. fixed-income markets makes that increase impossible.

There are only three possibilities with respect to meeting 2010 funding needs:

• The Fed continues its QE beyond their planned cessation in March 2010.
• The Fed raises interest rates to levels that would attract the capital necessary to fund government operations via conventional credit markets.
• No Fed action is taken. That would cause the government to default on some of its obligations.

None of these alternatives is attractive. The unpalatable choices arise from prior Fed and governmental policies. To avoid recessions over the past fifty years, the government abused and then finally exhausted all reasonable options. After years of mismanagement, the government is in a quandary of its own making from which there is no escape.

All alternatives will be very painful, and none offer the possibility of a traditional recovery. No matter what alternative is chosen, the country cannot avoid a depression. At this point, “do no further harm” should guide policy.

Of the three alternatives, what is best economically is worst politically. This natural conflict between good economics and good politics is not unusual. Economically, the country would be harmed least by implementing alternative 2. From a political standpoint, alternatives 2 and 3 are probably unacceptable. Thus, it is likely that alternative 1 will be tried (again!). It is precisely the continual overuse of this alternative that has led to the current sad state.

Alternative 1 cannot work. It will not avoid a depression. Worse, it will likely result in hyperinflation. Thus, we likely end up with the worst of all worlds. With hyperinflation, money will cease to be a medium of exchange. Markets will cease to work, except on a barter basis. The middle class will be wiped out. Their savings will become worthless along with the dollar. The end will be as Mises warned so many years ago.

The possibility of losing our form of government is a real risk under any of the alternatives. So is civil unrest and strife. All are probably more likely under alternative 1 because of the corrosive effects of high inflation combined with a depression.

Beware the turn of the calendar. Things are going to get interesting, and probably very quickly.

http://www.americanthinker.com/2010/01/2010_will_be_worse.html

The federal government’s First Home Owners Grant and state governments’ ‘free stamp’ duty helped bolster the housing market in Australia; news stories via the main stream media are warning of rent increases, but where do they get the information?

I suspect they just make it up or make some ‘economic forecaster’s newsletter’ a story of interest.

If you leave the various stimulus packages aside, Australia is still in recession.

The Federal Reserve Bank may be oblivious to unemployment and that the growth they seek to supress – by raising interest rates to help the banks – is a Claytons growth.

While the Canadians don’t have the FHOG and side step Stamp Duty, the Conservative political have played a similar game to Captain kRudd’s only they have told the CMHC (Canada Mortgage and Housing Corporation) to take on pretty much every home loan application.

What this has done is make the CMHC the largest sub-prime mortgage lender in the world. Apparently in an effort to prop up the real estate market in 2008 (when affordability nosedived), the Harper Conservative government directed the CMHC to approve as many high-risk borrowers as possible and to keep credit flowing.

The approval rate for these risky loans went from 33% in 2007 to 42% in 2008. By mid-2007, average equity as a share of home value was down to 6% — from 48% in 2003.

At the peak of the U.S. housing bubble, just before it burst, house prices were five times the average American income; in Canada today that ratio is 7.4:1, almost 50% higher and in Australia, the prices are nearly 10 times the average Australian’s income.

The Americans have had their cash for clunkers (also pushed for here in OZ) and there is talk of ‘white goods’ and Australians have the opportunity to borrow $10,000 interest free for 4 years if they buy goods that reduce energy consumption on the grid.

Did Rudd create the situation … no, but he has extended it; Tony Abbot (now pretending to be pro-Aboriginal with respect to the Wild Rivers legislation in Qld) as opposition won’t expose the looming disaster becasue of the ripple effect (and shooting the messenger) as the banks will again put the hooks into the taxpayers for billions of dollars in defaulted mortgages.