Rising Star Writings

Not enough lipstick to make this pig look pretty anymore

Governments On Both Sides of the Atlantic Try to Put Lipstick on a Pig

piggy waiting for lipstick

We noted yesterday that the big banks have criminally conspired since 2005 to rig $800 trillion dollar Libor-based market.

Barclay’s chairman says that the Bank of England gave explicit approval for the manipulation.

A former Barclay’s executive – who was close to the Libor-setting manipulation – told the Daily Mail that Barclay’s manipulated Libor to make the bank look healthier than it really was, and , and the cover-up led to a slow policy response which prolonged the financial crisis.

This appears to be very similar to what happened in America.   As I noted last year:

The Tarp Inspector General has said that [then-Secretary of the Treasury Hank] Paulson misrepresented the big banks’ health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions.

(Paulson also threatened martial law if Tarp was not passed.)

As we reported last year:

[All of the big banks were] insolvent in the 1980s, but the government made a concerted decision to cover that up.

Financial writers such as Mish and Reggie Middleton pointed out in late 2007 and early 2008 that B of A was again insolvent.

Nouriel Roubini noted in January 2009 that the entire U.S. banking system is “bankrupt” and “effectively insolvent”:

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.”

***

“The problems of Citi, Bank of America and others suggest the system is bankrupt,” Roubini said. “In Europe, it’s the same thing.”

Indeed, the American government’s zero interest rate policy is very much like the British Libor manipulation scandal … it’s nothing but an attempt to breathe life back into the insolvent banks, at the expense of the taxpayer.  And see this.

And the “financial reform” laws passed in the wake of the crisis have, in some ways, actually weakened regulations of the financial markets, allowed the big banks to get a lot bigger, and have intentionally allowed fraudulent accounting (and see this).

Likewise, the “stress tests” in both Europe and America have been a total scam … a naked attempt to put lipstick on a pig to cover up the fact that the big banks are insolvent.

By choosing the big banks over the little guy – and failing to rein in the fraud which caused the crisis in the first place – the governments on both sides of that Atlantic are dooming both the financial system and the people to failure.

Euro troubles persist

During the U.S. Civil War, the future of the Union was challenged by the secession of the South. The decisions were made on the battlefields where men were willing to die either for the Union or to break away from it. Who will die for the European Union? And what will hold it together when its decisions are unpopular? The concept of extended integration can work, but not without the passion that moves a Greek or a German to protect his and his country’s interest. Without that, the glue that holds nations together is missing in the European Union. The greater the integration, the more this will reveal itself.

Money for Nothing

The German government is now getting buyers (in large numbers) for their ZERO PERCENT (0%) return bonds. 

Essentially they are offering to keep your currency from vanishing … like any of the fiat currencies have any hope of NOT doing a disappearing trick in the next decade.

Indeed the story has elements that say the coming bond issue will include NEGATIVE real returns, just imagine, we promise to loose less than you will anywhere else!

More on Zero Hedge

Wall Street Journal

Irish Times

Alternative Economics

The Guardian

Bloomberg

Tired of these sort of return tales?

Contact us: info@rsreal.com; there are alternatives to watching your money (currency) vanish ….

Greek exit from EU now openly debated …

According to Guardian:

The fate of Greece is, on Tuesday night, in the hands of the leader of a far-left party who launched the quest to form a government by declaring the country could no longer commit itself to the terms of an international loan agreement keeping its economy afloat.

After accepting a mandate to create a multi-party administration following inconclusive elections, Alexis Tsipras sent shockwaves through financial markets by announcing the pledges Athens had made to secure rescue funds from the EU and IMF were null and void.

“The popular verdict clearly renders the bailout deal null,” said the politician, whose stridently anti-austerity coalition of the radical left, known as Syriza, sprung the surprise of the weekend’s poll, coming in second with 16.8% of the vote. “This is an historic moment for the left and the popular movement and a great responsibility for me.”

Austerity … will it lead to more pain?

Certainly there is no way that the austerity measures, increasingly called for in Europe will resolve anything, as it is impossible to cut or eliminate your way to prosperity.

GOLD going to move, U$D under more pressure

Iranian oil will move to India and China using gold for settlements.

Iranian Oil for Indian & Chinese GOLD

Expect this to cause GOLD to have more upwards pressures and the demand for US dollars to decrease.

Greek deal … just another kick in the can

The recently announced deal that resolves the Greek debt situation is simply the latest ‘kick’ to keep the ‘debt can’ moving down the road.

Market reaction has been mostly positive, as anticipated, to permit the market makers to get their profits off the table before the time comes that no more ‘kicks’ will work.

The Greek debt is not resolved, the deflationary spiral is not over and hyperinflation still remains a risk worldwide.

EU House of Cards

Today’s comedic relief is brought to you, once again, by Europe. We weren’t going to write about the other side of the world today. But in this type of market you need an occasional good laugh, even if it threatens your wealth at the same time.

– After realizing the plan to leverage the European Financial Stability Facility (EFSF) was idiotic, the lemmings in Europe are running over to a new ‘solution’ – bank recapitalization. Like most things bureaucrats dream up, it’s good in theory. How it plays out in practice will be entirely different.

– That’s not the funny bit though. Check this out: Apparently European finance ministers have asked the European Banking Authority (EBA), Europe’s top (we use the word loosely) banking regulator, to stress test Europe’s banks – again.

– You may remember the same incompetent organization conducted stress tests in 2010 and 2011. The latest one, completed in July this year, found European banks to have a capital deficiency of just €2.5bn. At the same time as Athens was burning, these pompous fools didn’t even model a sovereign default. Now, just a few months later we’re talking about a need for €200 billion in fresh bank equity.

– But instead of all being sacked and the organization shut down – as would happen in the private sector – these imbeciles get another go. We can only conclude the EBA is a corrupt organization in the palm of the bankers. And it’s supposed to be their regulator?

– Look, the bank recapitalization plan is on the right track. We don’t dispute that. But it’s a plan being put together by a bunch of squabbling politicians who put their own re-election prospects ahead of anything else. So the chances of it actually being done properly are remote.

– As we wrote in our Sound Money. Sound Investments email update yesterday – bank recapitalization will be beneficial as long as they are accompanied by bad debt write-downs. The main problem with the global economy today is the amount of bad debt festering on bank balance sheets. This impedes the creation of new, productive debt.

– It also affects confidence. Banking is – and has always been – a business based on confidence. Without it, banks are exposed as the highly leveraged and fragile institutions that they are.

– So to improve confidence you need to purge the bad debt out of the system. This requires bank recapitalization to absorb the coming write-downs. Before we go any further, just what do we mean by ‘bank recapitalization’?

– The process is best explained with reference to a bank’s balance sheet. In balance sheet land, a company’s assets are equal to its liabilities and equity. The ‘equity’ value of a company is traded on the stock market. It is this portion usually referred to as ‘bank capital’.

– If you’re still with us, we’ll show you French basket case Société Générale’s balance sheet.

Assets €1.158 trillion

Liabilities €1.106 trillion

Equity €52.1 billion

– Here’s how it works. A write down in the value of its assets must be matched by a write down in the value of the equity. If the value of the banks assets fell by just 5 per cent, all the equity would be wiped out and the bank would be insolvent. This just goes to show how highly leveraged European banks are.

– Actually the bank’s assets have probably already fallen by 5 per cent. Luckily, it’s not required to ‘mark its assets to market’. Banks aren’t allowed to fail remember?

– Société Générale’s current market capitalization is just €14 billion. This is what investors think the bank’s equity value is worth. It will probably prove optimistic.

– This is where a recapitalization comes in. The Euro bailout fund, the EFSF, will contribute funds to banks in need of new equity capital. This should take the form of ‘preferred equity’, which will rank above existing equity when it comes to absorbing write-downs. That way anyone punting on European bank shares will take a hit before new taxpayer funds do.

– If all the bad sovereign debt in the system is really purged (which it won’t be, but bear with us) most of the existing equity holders will be wiped out. The pie-in-the-sky plan would then be for the preferred equity to convert to ordinary equity. Once this whole debt crisis thing blows over, say by Christmas*, the taxpayers would sell out for a profit, proving the eurocrats’ plan to be pure genius.

– There’s no harm in dreaming of course, but it won’t work out that way. There will be squabbling about which banks receive capital and how much is actually needed. If estimates of €200 billion are correct, the recapitalization plan will leave the EFSF just about empty, with no more funds to buy other struggling sovereign debt.

– And don’t forget, bad sovereign debt is the cause of the crisis. Insufficient bank capital is just a symptom of the problem. A Greek default still awaits.

– The Europeans are only just beginning to realize how big their problems are. So enjoy the rally, it won’t last for long.

* Remember in World War One the conventional European wisdom was the ‘it would be over by Christmas’. Christmas 1914 that is.

Two Trillion Euro needed?

According to Stratfor (see here) the Eurozone needs to have Two Trillion Euro-Dollars to survive an ‘exit’ crash of Greece.

There do not appear to be any benefactors out there to ‘bail out’ the ECB in order that they may survive this collapse.

Once Greece goes, that may be the trigger event for gold.

Most certainly, Greece doing a fire sale exit from the Euro via a debt default will be a near-death blow to the Euro.

I do not see the Chinese investors or state funds having any interest in supporting euro-debt.

The inevitable moves one step closer to actuality.

Euro Zone Danger remains and is larger than many feel

The financial gains that “Europe” gained via the single currency was not evenly distributed to all member nations, this disparity is coming home to roost as the need to work together gets distorted by nationalism.

George Freedman covers this topic in this guest article:

By George Friedman

When I visited Europe in 2008 and before, the idea that Europe was not going to emerge as one united political entity was regarded as heresy by many leaders. The European enterprise was seen as a work in progress moving inevitably toward unification — a group of nations committed to a common fate. What was a core vision in 2008 is now gone. What was inconceivable — the primacy of the traditional nation-state — is now commonly discussed, and steps to devolve Europe in part or in whole (such as ejecting Greece from the eurozone) are being contemplated. This is not a trivial event.

Before 1492, Europe was a backwater of small nationalities struggling over a relatively small piece of cold, rainy land. But one technological change made Europe the center of the international system: deep-water navigation.

The ability to engage in long-range shipping safely allowed businesses on the Continent’s various navigable rivers to interact easily with each other, magnifying the rivers’ capital-generation capacity. Deep-water navigation also allowed many of the European nations to conquer vast extra-European empires. And the close proximity of those nations combined with ever more wealth allowed for technological innovation and advancement at a pace theretofore unheard of anywhere on the planet. As a whole, Europe became very rich, became engaged in very far-flung empire-building that redefined the human condition and became very good at making war. In short order, Europe went from being a cultural and economic backwater to being the engine of the world.

At home, Europe’s growing economic development was exceeded only by the growing ferocity of its conflicts. Abroad, Europe had achieved the ability to apply military force to achieve economic aims — and vice versa. The brutal exploitation of wealth from some places (South America in particular) and the thorough subjugation and imposed trading systems in others (East and South Asia in particular) created the foundation of the modern order. Such alternations of traditional systems increased the wealth of Europe dramatically.

But “engine” does not mean “united,” and Europe’s wealth was not spread evenly. Whichever country was benefitting had a decided advantage in that it had greater resources to devote to military power and could incentivize other countries to ally with it. The result ought to have been that the leading global empire would unite Europe under its flag. It never happened, although it was attempted repeatedly. Europe remained divided and at war with itself at the same time it was dominating and reshaping the world.

The reasons for this paradox are complex. For me, the key has always been the English Channel. Domination of Europe requires a massive land force. Domination of the world requires a navy heavily oriented toward maritime trade. No European power was optimized to cross the channel, defeat England and force it into Europe. The Spanish Armada, the French navy at Trafalgar and the Luftwaffe over Britain all failed to create the conditions for invasion and subjugation. Whatever happened in continental Europe, the English remained an independent force with a powerful navy of its own, able to manipulate the balance of power in Europe to keep European powers focused on each other and not on England (most of the time). And after the defeat of Napoleon, the Royal Navy created the most powerful empire Europe had seen, but it could not, by itself, dominate the Continent. (Other European geographic features obviously make unification of Europe difficult, but all of them have, at one point or another, been overcome. Except for the channel.)

Underlying Tensions

The tensions underlying Europe were bought to a head by German unification in 1871 and the need to accommodate Germany in the European system, of which Germany was both an integral and indigestible part. The result was two catastrophic general wars in Europe that began in 1914 and ended in 1945 with the occupation of Europe by the United States and the Soviet Union and the collapse of the European imperial system. Its economy shattered and its public plunged into a crisis of morale and a lack of confidence in the elites, Europe had neither the interest in nor appetite for empire.

Europe was exhausted not only by war but also by the internal psychosis of two of its major components. Hitler’s Germany and Stalin’s Soviet Union might well have externally behaved according to predictable laws of geopolitics. Internally, these two countries went mad, slaughtering both their own citizens and citizens of countries they occupied for reasons that were barely comprehensible, let alone rationally explicable. From my point of view, the pressure and slaughter inflicted by two world wars on both countries created a collective mental breakdown.

I realize this is a woefully inadequate answer. But consider Europe after World War II. First, it had gone through about 450 years of global adventure and increasingly murderous wars, in the end squandering everything it had won. Internally, Europe watched a country like Germany — in some ways the highest expression of European civilization — plunge to levels of unprecedented barbarism. Finally, Europe saw the United States move from the edges of history to assume the role of an occupying force. The United States became the envy of the Europeans: stable, wealthy, unified and able to impose its economic, political and military will on major powers on a different continent. (The Russians were part of Europe and could be explained within the European paradigm. So while the Europeans may have disdained the Russians, the Russians were still viewed as poor cousins, part of the family playing by more or less European rules.) New and unprecedented, the United States towered over Europe, which went from dominance to psychosis to military, political and cultural subjugation in a twinkling of history’s eye.

Paradoxically, it was the United States that gave the first shape to Europe’s future, beginning with Western Europe. World War II’s outcome brought the United States and Soviet Union to the center of Germany, dividing it. A new war was possible, and the reality and risks of the Cold War were obvious. The United States needed a united Western Europe to contain the Soviets. It created NATO to integrate Europe and the United States politically and militarily. This created the principle of transnational organizations integrating Europe. The United States also encouraged economic cooperation both within Europe and between North America and Europe — in stark contrast to the mercantilist imperiums of recent history — giving rise to the European Union’s precursors. Over the decades of the Cold War, the Europeans committed themselves to a transnational project to create a united Europe of some sort in a way not fully defined.

There were two reasons for this thrust for unification. The first was the Cold War and collective defense. But the deeper reason was a hope for a European resurrection from the horrors of the 20th century. It was understood that German unification in 1871 created the conflicts and that the division of Germany in 1945 re-stabilized Europe. At the same time, Europe did not want to remain occupied or caught in an ongoing near-war situation. The Europeans were searching for a way to overcome their history.

One problem was the status of Germany. The deeper problem was nationalism. Not only had Europe failed to unite under a single flag via conquest but also World War I had shattered the major empires, creating a series of smaller states that had been fighting to be free. The argument was that it was nationalism, and not just German nationalism, that had created the 20th century. Europe’s task was therefore to overcome nationalism and create a structure in which Europe united and retained unique nations as cultural phenomena and not political or economic entities. At the same time, by embedding Germany in this process, the German problem would be solved as well.

A Means of Redemption

The European Union was designed not simply to be a useful economic tool but also to be a means of European redemption. The focus on economics was essential. It did not want to be a military alliance, since such alliances were the foundation of Europe’s tragedy. By focusing on economic matters while allowing military affairs to be linked to NATO and the United States, and by not creating a meaningful joint-European force, the Europeans avoided the part of their history that terrified them while pursuing the part that enticed them: economic prosperity. The idea was that free trade regulated by a central bureaucracy would suppress nationalism and create prosperity without abolishing national identity. The common currency — the euro — is the ultimate expression of this hope. The Europeans hoped that the existence of some Pan-European structure could grant wealth without surrendering the core of what it means to be French or Dutch or Italian.

Yet even during the post-World War II era of security and prosperity, some Europeans recoiled from the idea of a transfer of sovereignty. The consensus that many in the long line of supporters of European unification believed existed simply didn’t. And today’s euro crisis is the first serious crisis that Europe has faced in the years since, with nationalism beginning to re-emerge in full force.

In the end, Germans are Germans and Greeks are Greeks. Germany and Greece are different countries in different places with different value systems and interests. The idea of sacrificing for each other is a dubious concept. The idea of sacrificing for the European Union is a meaningless concept. The European Union has no moral claim on Europe beyond promising prosperity and offering a path to avoid conflict. These are not insignificant goals, but when the prosperity stops, a large part of the justification evaporates and the aversion to conflict (at least political discord) begins to dissolve.

Germany and Greece each have explanations for why the other is responsible for what has happened. For the Germans, it was the irresponsibility of the Greek government in buying political power with money it didn’t have to the point of falsifying economic data to obtain eurozone membership. For the Greeks, the problem is the hijacking of Europe by the Germans. Germany controls the eurozone’s monetary policy and has built a regulatory system that provides unfair privileges, so the Greeks believe, for Germany’s exports, economic structure and financial system. Each nation believes the other is taking advantage of the situation.

Political leaders are seeking accommodation, but their ability to accommodate each other is increasingly limited by public opinion growing more hostile not only to the particulars of the deal but to the principle of accommodation. The most important issue is not that Germany and Greece disagree (although they do, strongly) but that their publics are increasingly viewing each other as nationals of a foreign power who are pursuing their own selfish interests. Both sides say they want “more Europe,” but only if “more Europe” means more of what they want from the other.

Managing Sacrifice

Nationalism is the belief that your fate is bound up with your nation and your fellow citizens and you have an indifference to the fate of others. What the Europeanists tried to do was create institutions that made choosing between your own and others unnecessary. But they did this not with martial spirit or European myth, which horrified them. They made the argument prudently: You will like Europe because it will be prosperous, and with all of Europe prosperous there will be no need to choose between your nation and other nations. Their greatest claim was that Europe would not require sacrifice. To a people who lived through the 20th century, the absence of sacrifice was enormously seductive.

But, of course, prosperity comes and goes, and as it goes sacrifice is needed. And sacrifice — like wealth — is always unevenly distributed. That uneven distribution is determined not only by necessity but also by those who have power and control over institutions. From a national point of view, it is Germany and France that have the power, with the British happy to be out of the main fray. The weak are the rest of Europe, those who surrendered core sovereignty to the Germans and French and now face the burdens of managing sacrifice.

In the end, Europe will remain an enormously prosperous place. The net worth of Europe — its economic base, its intellectual capital, its organizational capabilities — is stunning. Those qualities do not evaporate. But crisis reshapes how they are managed, operated and distributed. This is now in question. Obviously, the future of the euro is now widely discussed. So the future of the free-trade zone will come to the fore. Germany is a massive economy by itself, exporting more per year than the gross domestic products of most of the world’s other nation-states. Does Greece or Portugal really want to give Germany a blank check to export what it wants with it, or would they prefer managed trade under their control? Play this forward past the euro crisis and the foundations of a unified Europe become questionable.

This is the stuff that banks and politicians need to worry about. The deeper worry is nationalism. European nationalism has always had a deeper engine than simply love of one’s own. It is also rooted in resentment of others. Europe is not necessarily unique in this, but it has experienced some of the greatest catastrophes in history because of it. Historically, the Europeans have hated well. We are very early in the process of accumulating grievances and remembering how to hate, but we have entered the process. How this is played out, how the politicians, financiers and media interpret these grievances, will have great implications for Europe. Out of it may come a broader sense of national betrayal, which was just what the European Union was supposed to prevent.