Friday, April 30, 2010

Thank God, we have the Internet...

... where false statements can be exposed within minutes. Check this in Krugman's blog by
Denver, CO
April 30th, 2010
4:11 pm
-- "You wrote "Europeans are reluctant to move even within their countries, let alone across the many language barriers." The truth is that 750,000 Poles and other East Europeans moved to the UK for work since Poland joined the EU. The Independent UK (
) reported on the large numbers of Poles returning to Poland because of the effects of Depression 2.0.
Okay, so that settles the issue of inter-country. As for intra-country, East Germany has lost many people, especially women, mainly to West Germany. There are cities in the former GDR like Leipzig where apartments are empty because so many people have left (
); Leipzig has around 40,000 empty apartments. Obviously not everyone has left because the unemployment rate in the east is double that of the west, but that's because almost all of the jobs evaporated in the GDR because its industries could not compete. The movie "Goodbye Lenin!" featured a Berlin apartment where the residents left shortly after the fall of the Berlin Wall and never returned; this was a common occurrence (see,1518,603515,00.html/
 for an actual apartment).
As for the USA being able to handle "asymmetric shocks" by transferring workers from depressed areas to prosperous ones, why don't you explain how your theory fits cities like Detroit with a 50% unemployment rate?" ---
Read more in Krugman's blog and enjoy some of the magnificent comments from readers, which re-lift the spirit of believing in rational thinking after being brought down by Krugmanian nonsense.

More of unbearable nonsense

Suddenly we have hundreds of experts on Greek debt. Roubini et al.
Yet where were their warnings before the downfall happened? Did I miss something? Why didn't they say a thing when banks plunged in to buy Greek debt at a level of interest as low as for the Bunds? As almost always, the worst of the self-proclaimed reverse prophets is Paul Krugman. For him, and not for the first time, the demise of the euro is a fact. 
Being wrong more than ten years in a row isn't enough to change his mind. And he is not alone.
And then, there are the rating agencies.
Rating agencies, famous for having missed the real estate crisis in the US or the Asian crisis of 1997, are now eager to downgrade Greece, Portugal and Spain. How silly can one get to follow their lead? Their data base is as poor as mine or yours, their analytics are flawed and the theoretical basis of their judgment is about at the level of 101 economics or below.
The tragic part of all that is that ignorance in and by itself is a force. Just like expectations create facts in the financial markets, the unhampered confidence of  our famed blockheads makes the headlines.

Thursday, April 29, 2010

Why it is wrong to bet on the euro's demise

From The Business Insider: ".. When it comes to the PIIGS, Dr. Doom (Nouriel Roubini) is in full-on doom mode. Nouriel, of course, takes that kind of thinking to its logical conclusion, and kicked off the panel by announcing that it was just in time: “in a few days,” he said, “there might not be a eurozone for us to discuss.” There's no way that Greece can implement the 10% spending cut it needs to do in order to stop its debt spiralling out of control at current interest rates — and even if it did, the economic effects would be disastrous. Nouriel's base case, then, is Argentina 2001: after all, Greece has a much higher debt-to-GDP ratio, much higher deficit-to-GDP ratio, and much higher current-account deficit than Argentina had back then. And if that's the base case, there's no way that Greek debt should be trading anywhere near its current levels.
And guess what: Spain is worse than Greece, says Roubini. Ugh..."
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Comment: I don't know why Roubini says such silly things. If he really believes in what he is saying, better call him "Mr. silly Doom" instead of "Dr. Doom".
Sometimes I get the impression that in order to become a popular economist in the US, like Krugman or Roubini or Stiglitz, for example, one has to maintain a rate of 80 to 90 per cent of silly things to say and keep the sound part of one's uttering down at a rate from 10 to 20 per cent. In order to become prominent in the US as an economist follow the rule: the more clattering, the better.
As to the European Monetary Union, almost all prominent US commentators, beginning with Friedman and Feldstein, have been wrong and the same will hold for the current euro doom sayers. The euro is a political project. It is a means, not the end. The aim of creating a unified Europe still stands and there are few governments in the region that doubt it. Therefore, there will be a bailout of Greece. For me this has been certain from the beginning of the crisis. Uncertainty and hesitation have irritated the financial markets, but a swift compromise would have reduced the chances of Greece (and much of the rest of the PIIGS) to seriously address their fiscal problems. The hesitation in Berlin was also necessary because otherwise the popular resistance against austerity measures in countries like Greece and Portugal would have remained too high for the governments to carry out their plans. As of now the Greek drama hasn't cost the German or French taxpayer a cent, and although the rates have risen for Greek debt, the Greek government hasn't yet needed to pay the risk premium. As of now, the cost of the Greek drama has fully fallen back on the financial market itself, i.e. on the holders of Greek titles. If these holders did not sell, they may expect a full recovery of the price of their bonds until maturity.

Wednesday, April 28, 2010

Why it is wrong to bet on a Greek default

As has been written here many times before, the major euro area countries won't let down Greece and there will be a bailout. There won't be a Greek default. There will be a combined action including direct loans at low interest rates from state-sponsored banks, like Germany's Kreditanstalt, along with IMF loans combined with the traditional set of conditions and, probably, some indirect bailout of Greece through the European Central Bank as the ECB will more or less "secretly" buy circulating Greek debt in order to keep down its interest rates and facilitate additional financing of Greek debt at international private markets.
A few months from now the Greek drama will be forgotten or only be remembered as one more strange episode in the long history of strange episodes of international finance. Or, to put it in another way, the so-called Greek "tragedy" or the Greek "drama" will be remembered more as a "Greek comedy". After all, European countries, and Greece quite prominently, have so many things to fall back on when times get tough that it is only a matter of (short) time for them to make a recovery -- Greece included.

Tuesday, April 27, 2010

Financial meltdown of Greece

"...For its part, Greece has already admitted it can't pay debts coming due shortly and reached for a bailout. But the reluctance of the largest country using the euro — Germany — to fund the largest share of the euro45 billion rescue by European government and the International Monetary Fund is sending shudders through markets.
Investors fear the money may not reach Greece to enable it to avoid default by May 19, when euro8.5 billion in bond payments come due..."
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Comment: In an awkward interplay of factors, the reluctance of Greece to provide a reliable plan caused some euro countries, Germany in particular, to hesitate to subscribe to the bailout plan. While it has been clear that there will be a bailout, the question has remained at which conditions the bailout will be granted. That is the essence of the "Greek drama", better called "farce".

Public deficits in the euro zone

Source: Sueddeutsche Zeitung

Greek drama moves towards climax

April 27 (Bloomberg) -- Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time that’s happened to a euro member since the currency started, as contagion from the nation’s debt crisis spread through the bloc.
Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The Greek move came minutes after the rating company reduced Portugal by two steps to A- from A+.
...  “The markets are demanding their pound of flesh and want everything to be signed, sealed and delivered as of yesterday,” said David Owen, chief European financial economist at Jefferies International Ltd. in London...--
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Comment: The reaction of the financial market is way overblown. Nevertheless, expectations can become facts.

A plan for Greece

Discussion about the Greek bailout go on but it seems that a plan will be adopted to link fresh money from the major euro area countries and the IMF to a debt rescheduling and respective concessions by
the banks that hold Greek titles.
The main obstacles to the realization of this plan is Greece itself which hasn't been unable so far to come up with a convincing austerity plan.
Portugal is at risk because likewise the government lacks popular support for its plans.
The country with the least risk of getting hit by the contagion is Ireland. Ireland not only has a solid plan in place, it also seems that the government enjoys popular support to carry out the plan.
Whatever the outcome, it would not be the first time that financial market got it totally wrong when it comes to continental Europe. The simple reason for that is that there is a lack of insider information for the top shots of the financial market operators (GS, Soros, etc.) when it comes to continental European countries in contrast to the UK and the US.

Contagion on the run

April 27 (Bloomberg) -- Portugal risks becoming the new Greece.
With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala...--
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Comment: Part of the reason why contagion is spreading is the ongoing uncertainty about a bailout of Greece. For the financial markets, it would have been better if from early on a clear signal were given of either a bailout or a non-bailout. Financial markets hate uncertainty more than bad news. Although there was signaling that in the end a bailout would happen, the signal was too weak and sent with too little conviction so that the financial markets did not get the message. On the other hand a weak signaling was necessary in order to prepare the debtor countries for the coming of hard austerity measures.

Monday, April 26, 2010

Greece gets bailout

News are out that Germany has given up its resistance against a bailout of Greece and will come up with tens of billions of euros in order "to rescue" Greece and "safeguard" the euro.
Great for the Greek. This way the party can go in Athens' party quarter Monastiraki (picture left).
Next in line:
Portugal, Spain, Ireland?
How long will take until the virus reaches France, Germany, The Netherlands?

Vigilants at sleep

April 26 (Bloomberg) -- The bond vigilantes who punished governments for profligate spending in past years have gone into hiding.
Sovereign bonds yield an average 2.385 percent, about the same as a year ago and below the average of 3.08 percent in 2008 when the credit market seizure led investors to seek the safety of government debt, according to Bank of America Merrill Lynch index data. The cost to borrow is steady even though the amount of bonds in the index that includes nations from the U.S. to Germany and Japan has grown to $17.4 trillion from $13.4 trillion two years ago.
While the debt helped the global economy recover from its first recession since World War II, yields show bond investors aren’t troubled that the growth will spur inflation. Consumer prices excluding food and energy costs rose 1.5 percent in February from a year earlier in the 30 countries that form the Organization for Economic Cooperation and Development, the smallest gain on record...--
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Comment: The best time for thief to come is when the burghers' sleep is the deepest. In order to become the great tragic that we expect from the coming hyperinflation, it is necessary that a maximum of investors accept the belief that "inflation is dead".

Saturday, April 24, 2010

The need for the great rebalancing

For nations living the good life, the party's over, IMF says
Washington Post Staff Writer
Saturday, April 24, 2010
"Rebalancing" is an idea that most everyone endorses -- including the technicians at the fund and President Obama and the leaders of the G-20 group of economically powerful nations. In broad strokes, it means curbing what has been a massive transfer of capital from nations that consume more than they produce, such as the United States, to nations that produce more than they consume, such as China.
The imbalance has been key to China's modernization: The country buys U.S. government bonds by the tens of billions to keep the dollar stronger than it would be and to keep its domestic currency -- and its exports -- cheaper. Looked at one way, the flow of U.S. debt to the People's Bank of China has acted like a giant, collective credit card, underwriting consumers across the United States and driving the business models of major retailers such as Wal-Mart." --
Full text
Comment: Easier said than done. What mainstream economists neglect is the fact that rebalancing implies a fundamental change in the capital structures of the countries involved. Rebalancing is not simply done by a "depreciation" of the currency of the debtor country and the respective "appreciation" of the currency of the export surplus country. In the case of the US and China what lies ahead is much more dramatic. A fundamental shift of the capital structure of the United States from imports and service economy to manufacturing and exports and in China it is the other way around. Which is easier, which is harder? You guessed it right.

Thursday, April 22, 2010

What to do with Greece?

April 22 (Bloomberg) -- The European Union said Greece’s budget deficit last year was worse than previously forecast and may top 14 percent of gross domestic product, fueling investor concern about a default and sending its bond yields soaring.
The EU’s statistics office said Greece’s deficit was 13.6 percent of GDP last year, topping the government’s two-week-old forecast of 12.9 percent and the EU’s November prediction of 12.7 percent. “Uncertainties” about the quality of the Greek data may lead to a further revision of as much of 0.5 percentage point, Luxembourg-based Eurostat said.
Greece’s benchmark 10-year bond yield rose to 8.49 percent, the highest since 1998 and more than twice the comparable German rate. The cost of insuring government debt against default climbed to a record today.
Greece’s widening deficit and questions about the accuracy of its economic data have undermined the credibility and enforcement of the EU’s budget rules and contributed to the 6.9 percent slide in the euro this year. The EU and the International Monetary Fund offered Greece as much as 45 billion euros ($60 billion) in emergency loans to assure investors the country can make its debt payments and shore up the euro...--
Full text
Comment:  In order to understand the fix Europeans are in, one must remember that the euro was created not as a consequence of a political union, but as a means of promoting it. The European Monetary Union is a means towards the end of a European Political Union. That is why it is so hard for the euro club to simply through out Greece. Keeping Greece in therefore has a high priority but this aim collides with the promise of making the euro a hard currency which in turn requires the maintenance of the "no bailout clause". 

Tuesday, April 20, 2010

Crony capitalism Mussolini type

Gerald P. O'Driscoll puts it the right way:
"... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.
We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.
Nobel laureate Friedrich Hayek described the price system as an information-transmission mechanism. The interplay of producers and consumers establishes prices that reflect relative valuations of goods and services. Subsidies distort prices and lead to misallocation of resources (judged by the preferences of consumers and the opportunity costs of producers). Prices no longer convey true values but distorted ones.
Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct.
In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time...
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery..."
Read full text
Comment: Well put, Gerald, great piece! More of this is needed.


Wall Street Journal MARCUS WALKER in Berlin and DAVID ENRICH in London
Goldman Sachs Group Inc. in danger of losing business with a key group of clients as a result of the fraud allegations it faces: governments in Europe and the U.S.
Politicians in the U.K. and Germany are starting to call on their governments to cut ties with Goldman, which has long been one of the top financial advisers to European policy makers.
U.K. Liberal Democrat leader Nick Clegg, riding high in opinion polls less than three weeks before national elections, said on Tuesday that Goldman "should now be suspended in its role as one of the advisers to the government until these allegations are properly looked into." His comments follow Prime Minister Gordon Brown's recent characterization of Goldman's alleged behavior as "morally bankrupt." --
Read more

SEC smells big prey

April 20 (Bloomberg) -- Robert Khuzami, shortly after becoming the Securities and Exchange Commission’s enforcement chief last year, told Congress the agency must be willing to fight big cases to show it poses a “credible threat.”
Targeting Goldman Sachs Group Inc., the most profitable company in Wall Street history, in the SEC’s first contested lawsuit against a major investment bank in more than a decade reflects the enforcement unit’s new combative approach.
The stakes for the SEC are high. While winning high-profile cases may help the agency restore its image after being battered by the financial crisis and its failure to detect frauds including Bernard Madoff’s Ponzi scheme, losing may tarnish the SEC’s reputation. Goldman Sachs said it will “vigorously” fight the case, which hinges on whether information withheld by the firm should’ve been disclosed to investors.
The lawsuit says: “We’re willing to file big cases, we’re willing to file against the biggest firms, and we’re willing to file about the most complicated stuff,” said Mark Radke, a former SEC official now at Dewey & LeBoeuf LLP in Washington.
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Comment: Too many entrepreneurs, unfortunately and hard to understand, and too many high executives, understandably but unfortunately as well, seek intimacy with the state, with governments and their functionaries. Some companies, such as Goldman Sachs, even think that they can get special protection through personal connection. This, however, will only pay-off when the connection allows the company, in this case GS, to make particularly profitable bets based on implicit guarantees of bailouts. All that has happened in the past. Yet politicians, in times of crisis, turn populist, and turn against those who have fed them in order to gain popular support. The intimate connection between politics and business is of great evil. In the end, it makes all of us lose. It may have some advantages in good times smoothing the running of the car, but it turn very negative once we're hit by a crisis. Instead of alleviating the effects of economic and financial crises, the connection between big business and state, modern (democratic) fascism, makes matters worse. Monopolisitc state capitalism is not a viable economic system. 

Monday, April 19, 2010

Connections & Arrogance

From the British Telegraph: "... For all its reputation, there has always been at least a hint that some of Goldman Sachs’s success had less to do with its market nous and more to do with its connections....
It would be more serious, however, if the SEC’s investigation remained an isolated incident. If this was the case it could mark the beginning of the end for Goldman Sachs, going the same way as other investment banks that sailed too close to the wind and sank. Who now, aside from those with a long memory and an interest in markets, remembers Salomon Brothers or Drexel Burnham Lambert?
As one Goldman Sachs partner, quoted in Charles Ellis’s history of the bank The Partnership, said: “Only looking back could we see the real risk – the risk of arrogance. We didn’t see it then, but it was there and it was growing.
“The firm was at the top. We had always been the best – always the top students and the best athletes and the class leaders. And now we were the best firm – in our self-appraisal. But that was the first step towards arrogance.” --
Full text
Comment: When will the press reports show up that unveil GS's dubious gold deals?

What's behind the GS fraud?

Background document:
Text of original SEC Godman Sachs Complaint 
Comment from Goldman Sachs:

Sunday, April 18, 2010

There can be no honesty in a dishonest monetary system

From the British Guardian: "...The global financial crisis, it is now clear, was caused not just by the bankers' colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday's announcement that the world's most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud..."
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Comment: This author from the British Guardian, like so many other authors, is wrong. The heart of the matter is the fraud inherent in the fractional reserve banking system and a monetary system which has been cut off from any anchor along with an economic-political system whose desecription as "fascist" or "state-monopolistic" is not too far away from truth.

Brazil turns to China

UPI: The wide range of economic collaboration agreed between Brazil and China gives Beijing a much vaunted foothold in Latin America, opening possibilities for business and export expansion, investment in joint projects and military sales.
Analysts said neither of the other two BRIC nations at the summit, India and Russia, could match Beijing in terms of access to cash and extent of business opportunities in a growing consumer market, as in China.
The BRIC summit, the second since last year, looked at alternatives to the U.S. dollar as the world's reserve currency and ways of engineering economic and political shifts to achieve its avowed goal of a multipolar world order -- a system independent of Western pre-eminence.
Agreements reached Thursday between Brazil and China include a plan to study the use of the Brazilian real and the Chinese yuan, instead of the U.S. dollar, in bilateral trade.
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Comment: A new symbiosis is in the making. Brazil is going to substitute the US. While the old symbiosis between China and the US has enriched China at the cost of the US, the new symbiosis of China with Brazil will be more balanced. Brazil has much of all those things that China urgently needs, and vice versa.

Blowback for "morally bankrupt" GS

April 18 (Bloomberg) -- Goldman Sachs Group Inc. faces a regulatory probe in Britain and scrutiny from the German government after the U.S. Securities and Exchange Commission sued the firm for fraud tied to collateralized debt obligations.
Prime Minister Gordon Brown today called for the Financial Services Authority to start an investigation, saying he was “shocked” at the “moral bankruptcy” indicated in the suit. Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.
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Comment: The hunt is on. Politicians have smelled that the prey is wounded. Thus they will go after it ever more forcefully. I'd guess that this is the end for Goldman Sachs.

Saturday, April 17, 2010

The high art of cheating

Chairman and Chief Executive Officer Lloyd Blankfein, 55, spent the last year defending the firm against criticism from politicians and pundits, who decried Goldman Sachs’s profit in the aftermath of the financial crisis and its sale of mortgage securities that went sour. Now the U.S. Securities and Exchange Commission is charging the company with fraud.
On Goldman Sachs’s list of business principles, “clients’ interests always come first” ranks highest. The SEC paints a different picture. The firm failed to tell investors when selling them a so-called collateralized debt obligation tied to mortgages that the package had been designed to fail by hedge fund Paulson & Co., which profited from the losses, the agency alleged. Goldman Sachs said it will contest the case, calling it “completely unfounded in law and fact.” Shareholders weren’t comforted: The stock plunged the most in more than a year.
Full text 
Read more about GS's artful way of shuffling asset risks
Comment: As it has been said before: there is no honesty in a monetary system whose very essence is deceit.

Shareholder lawsuit against GS a possibility

April 17 (Bloomberg) -- Goldman Sachs Group Inc., ... didn’t disclose that it was warned nine months ago that investigators wanted to bring a case, people with direct knowledge of the talks said.
Goldman Sachs responded to the so-called Wells notice from the Securities and Exchange Commission within months and met with the agency officials trying to fend off the civil lawsuit, said the people, who declined to be identified because the talks weren’t public..
“The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” said Adam Pritchard, a former SEC attorney who teaches law at the University of Michigan in Ann Arbor. “The prudent, conservative choice is to disclose more,” because omissions can lead to shareholder lawsuits, Pritchard said.
Bloomberg News
Comment: With all of these friends at high places, GS could count on insider knowledge and political protection. Now, this is over. With the collapse of trust the dirt comes to surface. Expect more to come.

Germany to consider Goldman action

April 17 (Bloomberg) -- Germany may take legal action against Goldman Sachs Group Inc., German government spokesman Ulrich Wilhelm said today by phone. Germany’s Bafin financial regulator will ask the U.S. Securities and Exchange Commission for information on the Goldman case, Wilhelm said. It’s too early to say whether any legal action will relate to Germany’s IKB bank, he said.
To contact the reporter on this story: Tony Czuczka in Berlin at
Last Updated: April 17, 2010 16:04 EDT
Bloomberg News
Comment: Friends at high places won't help anymore.

It's time to get rid of them

Robert Rubin, right, an ex-Goldman co-chairman and a Treasury secretary in the Clinton administration, promoted Timothy F. Geithner at Treasury. Mr. Geithner now leads the New York Fed
Read more about 'Government Sachs'
See also:
The End of 'Government Sachs'? Fraud Charge Builds Momentum for Financial Reform, Ritholtz Says
Anyway, I expect markets to fall heavily om Monday, tomorrow.

Government Sachs

Friday, April 16, 2010

Goldman Sachs under investigation

April 16 (Bloomberg) -- U.S. stocks tumbled the most since February as Securities and Exchange Commission fraud accusations against Goldman Sachs Group Inc. spurred concern the fallout from the financial crisis isn’t over. Goldman Sachs sank as much as 16 percent, the most in 15 months, after the SEC sued the company and one of its vice presidents for misstating and omitting key facts about a collateralized debt obligation. JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley sank at least 3.3 percent as all 27 shares in a gauge of banks and brokerages retreated. Google Inc. plunged 6.5 percent after its earnings trailed some analyst estimates.
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Comment: Goldman Sachs should be also on trial for insider information deals and promoting "monopolistic state capitalism".

Rewriting monetary history

McMaken explains: "...The talking points have been written and the official spokesmen have been briefed. Now all that remains is for them to deliver the government-approved version of the history of the financial collapse that has led to the worst economic disaster since the Great Depression.
In recent comments to the Council of Institutional Investors, Deputy Treasury Secretary Neal Wolin's prepared remarks examined at length the causes of the collapse without mentioning the Federal Reserve system once. Nor did he mention Fannie Mae or Freddie Mac. He did blame AIG, Enron, and the "opaque, unregulated market we have today[.]" The suggestion that the financial markets are unregulated will be news to anyone who has worked in the financial sector, but what we are seeing again and again is a public relations machine that has been dispatched to make it clear that the Federal government and its quasi-government monopolies will be relegated to the background as but marginal players in the system, or even as victims.
We see this attitude in the often-repeated claim by Fed representatives, such as Bernanke himself, that the Fed would have regulated better if only Congress had given it the power to do so. Thus, the Federal Reserve, the engine behind the absurdly low mortgage rates and the moral hazard that drove the bubble to such destructive ends, would have prevented the collapse if only Congress had given it more power. Ignored is the fact that, had the Fed not flooded financial institutions with cheap money, millions of high-risk and soon-to-be-delinquent loans would never have been made in the first place..."
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Comment: What is said about Russia, or, for that matter, about any other country's history as well, applies also to monetary policy: an institutions without a predicable past.

Quote of the day

From Wilhelm Roepke, "Economics of a Free Society":
'Our generation, which recalls the despair caused by the inflations in the post World War I era and which was required to undergo the self-same catastrophes following World War II, needs no instruction concerning the fact that the worst disease with which a monetary system can be afflicted is that kind of inflation which is caused by a deficit of the government budget. The German inflation of the years 1920-23 will always remain as a horrible example of what happens when a government attempts to cover its budget deficits by resorting to the deceitful and irresponsible expedient of the printing press. What in Germany began as “deficit financing” ended in a series of catastrophic price rises which caused the shameless enrichment of some at the cost of the hopeless impoverishment of others, and in a serious undermining of the whole economic and social structure. But the inflationary creation of money caused by the budget deficits of government need not necessarily lead to the economic and social disorders attendant on an open inflation of the kind that followed World War I. Beginning in 1933, National Socialist Germany demonstrated that a determined government can change an open into a repressed inflation by placing the country in the economic strait jacket of a command economy. Rationing, the imposition of stringent controls on wages, consumption, capital investment, rates of interest, and similar measures aimed at restricting the free use of the increasing amount of purchasing power may succeed in containing for an indefinite period the mounting inflationary pressure on prices, wages, exchange rates, stock prices, etc. Since Hitler has shown how far and how long a government can neutralize an inflation by means of the command economy, we may well ask ourselves whether from now on there will be any government which will not follow the same road when it disposes of a functioning coercive apparatus. The greater the inflationary
pressure the stronger will be the counterpressure of the command economy needed to repress it. By the same token, the command economy must resort to ever more comprehensive and ruthless controls if it is to effectively contain the mounting forces of inflation.'
(thanks to Jonathan Escott)

Thursday, April 15, 2010

The story of a man corrupted by his love of power

buy here
Only a few days ago I had the pleasure to listen to a talk by Lew Rockwell about two men and their careers: Murray Rothbard and Alan Greenspan, both of similar background including their place of birth. One, Rothbard, dedicated to the search for truth. The other, Greenspan, dedicated to the search for power.
It is only now that the late Rothbard gets all the respects and prestige that was denied to him during his lifetime, and it is only now, yet still in his lifetime, that Greenspan gets all the scorn that he deserves.

Wednesday, April 14, 2010

Greenspan: everyone is guilty except myself

"... U.S. commercial and savings banks are extensively regulated, and even though for years our largest 10 to 15 banking institutions have had permanently assigned on-site examiners to oversee daily operations, many of these banks still were able to take on toxic assets that brought them to their knees. The heavily praised U.K. Financial Services Authority was unable to anticipate, and prevent, the bank run that threatened Northern Rock. The venerated credit rating agencies bestowed ratings that implied Aaa smooth-sailing for many a highly toxic derivative product. The Basel Committee on Banking Supervision, representing regulatory authorities from the world’s major financial systems, promulgated a set of capital rules that failed to foresee the need that arose at the height of the crisis for much larger capital and liquidity buffers..."
Full text of the Greenspan paper "The Crisis"
Comment: The truth about Greenspan

Lack of imagination

“No one, including myself, ever conceived we would see real estate prices plunge 30 to 40 percent, with homeowners walking away from homes en masse for the first time ever,” Thomas Maheras, the former co-head of Citi’s investment bank who oversaw its mortgage activities, said in a prepared statement.

Comment:  Tom Maheras exposes the heart of the problem. At business schools and at economics departments around the world, a new kind of manager has been created over the past decades, a creature who lacks imagination, who lacks judgment, who lacks any sense of prudence. Since the middle of the 90s these guys came to the top. Now society is presented with the bill to pay, and the amount is huge.

Society without jobs

How a New Jobless Era Will Transform America 
by Don Peck
The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.

A fake boom followed by a fake recovery

Austrian Economics in Brazil

The Greatness of Helio Beltrão
Posted by Lew Rockwell on April 14, 2010 03:15 PM
The young Brazilian financial and ideological entrepreneur, Helio Beltrão, has done something great for the Austro-libertarian movement and the cause of liberty, for his country and the whole world: establish the Instituto Ludwig von Mises Brasil, and make it flourish. The website is already significant, and this month, MisesBrasil sponsored the first Austrian Economics conference in the country’s history. Hundreds of young people gathered in Porto Allegre to hear Joe Salerno. Mark Thornton, and Tom Woods from the US, and Antony Mueller, Rodrigo Constantino, Fabio Barbieri, and Urbiratan Iorio from Brazil. I was there too, along with David and Patri Friedman. The moderators were Helio and Globo TV journalist Maria Beltrão. There were simultaneous English-Portuguese and Portuguese-English transations, and the the whole program was webcast as well. All talks will be archived on the site, with subtitles in either English or Portuguese. MisesBrasil is also bringing back into print the excellent Portuguese translation of Human Action, as well as other books of Mises. Already in print is the translation of Economic Policy, with the far better title in Portuguese of Six Lessons.
This year, the 23rd for the allied Liberty Forum, sponsored by the Institute for Entrepreneurial Studies, and held at the Pontifical Catholic University in Porto Alegre, the theme was the life and work of Ludwig von Mises, grandly illustrated, and the 4,000 students in attendance each got a copy of Six Lessons. Helio was presented with the Forum’s prestigious award for leadership in liberty. He then gave an amazing talk, an intellectual call to arms. Tom Woods spoke as well. There is secessionist sentiment, so it was fun to hear the students, faculty, and business people sing the anthem of Rio Grande do Sul, the southernmost state whose capital is Porto Alegre, but merely stand for the national anthem. I also learned that the state of São Paulo–where the North Americans flew into the capital city, a great commercial hub–fought a war for independence against the central government and its new dictator and constitution in 1934. The wrong side won, but there is an impressive monument to the secessionists, and a tradition. And at Helio’s conference Patri Friedman talked in part about secession, the basis of his Seasteading Institute.
Brazil’s taxes–a gigantic VAT being the worst–are even higher than Obama’s. The interventionism is horrific. The tariffs are abusive too. But a warm, well-mannered, and generous people can help make up for a cold, cruel state. And I was impressed by not having to take my shoes off at the airport, nor my laptop out of its case; by free-flowing shower heads; and by restaurant menus that listed lower prices for women than for men, to mention just a few things outlawed in the Land of the Free. Thanks also to Graziella Beltrão for one of the great parties in the history of the Western hemisphere, held in Helio’s and Graziella’s spectacular home, in honor of Joe, Mark, and me (Tom not having arrived yet), complete with traditional Brazilian food and band and singer. Also impressive were Helio’s “Taliban,” the well-read young Misesian-Rothbardians who aide him with the Instituto. Many thanks to Cristiano Chiocca, Leandro Roque, and Fernando and Roberto Chiocca, for all their help. One person had complained about the appropriate inclusion of Rothbard as well as Mises on MisesBrasil’s handsome crest. Wait until he sees the crest of the new Swedish Mises Institute–founded at our conference in Salamanca in discussions with Helio–said one of the Taliban. It features Mises and Hoppe.
We have long known that Austro-libertarianism is the only truly international economic-political movement outside of Marxism. How thrilling to see a boom, not Fed inspired, but truth based. This is a worldwide struggle, and now especially, we must work together, in the tradition of Mises and Rothbard, for the good of all.

Austrian economics with a German accent

Enjoy these lecturers by Guido Hülsmann and Hans-Hermann Hoppe

Tuesday, April 13, 2010

Greek relief

"... Investors enthusiastically snapped up Greek short-term securities on Tuesday after European Union leaders pledged to stand behind the country’s debt.Greece sold 1.56 billion euros ($2.12 billion) in high-yield debt that effectively carries a European Union guarantee.Investors bid 3.9 billion euros on Tuesday for the 600 million euros of 52-week Treasury bills, the Greek Public Debt Management Agency said, meaning the offer was oversubscribed 6.54 times. An auction of 26-week bills, also seeking 600 million euros, drew bids totaling 4.6 billion euros, for an oversubscription ratio of 7.67. The demand allowed Greece to sell 780 million euros of bills in each auction..."
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Comment: There is no such thing as leaving the euro zone. The project is political, not economic. If you leave, you not only lose economically, but you're lost politically as well. The euro zone is the means, not the end. The end is a political union. Most commentators get it totally wrong. They seem to believe that in order to form a monetary union, one needs a political union. The euro project is different, actually the opposite: the monetary union was installed in order to achieve political union. In this sense, the Greek crisis has brought the project a huge step further, and not backwards, as most analysts claim it to be. The euro zone has moved closer to the formation of a true political union -- whether you like it or not.

Friday, April 9, 2010

China bust

April 8 (Bloomberg) -- China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.
The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview...
China’s foreign currency reserves will be “one asset” that can be used to fund a cleanup of the banking system, he said. The country has accumulated a record $2.4 trillion of reserves, and $889 billion of U.S. government debt, partly a consequence of its exchange-rate policy....
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Comment: The article leaves out to ask the most important question: how will the coming China bust affect US treasuries and the US dollar exchange rate?

Averting Greek default

April 9 (Bloomberg) -- Stocks rose and Greek bonds rallied for the first time in two weeks on speculation Europe’s most indebted nation will get an international bailout to avert a default. The euro jumped 1 percent against the dollar and gold futures climbed to the highest since December.
Full story
Comment: There has been an intentional show of confusion in order to avoid complacency for the rest of the endangered gang. In the end, the Eurepean Union and more specifically the countries of the euro zone won't let a member country go bust. The bailout comes with great unease. Nevertheless, the compromise is the result of an assessment of European self-interest.

Thursday, April 8, 2010


John Williams from Shadow Government Statistics is pretty sure, hyperinflation is immintent:
"A Great Collapse. The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment. The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar. The results of those efforts are being seen in tentative selling pressures against the U.S. currency and in the rallying price of gold..."
Comment: I'm not so sure. I still tend to consider the option of deflation. Who knows? My strategy for the moment is to prepare for both: hyperinflation (hold gold) and deflation (hold cash). Gold is the easy part. The more difficult part is cash. Sounds easy, but it isn't. The great question is, in which currency to hold cash. As of now I hold most cash still in euros, and some part in Brazilian reais and Japanese yen and a small part in US dollars. I would like to increase my euro position, and right now seems to be a good time. For the moment, I consider a move completely out of dollar und yen, and putting half of the proceeds into euros, and the other half into gold.

Wednesday, April 7, 2010

Turkey on the rise

"...Turkey’s $620-billion economy could move ahead of Germany’s to become the third-biggest in Europe by 2050, behind Russia and the U.K., Goldman Sachs Group Inc. economist Ahmet Akarli wrote in a report published in 2008..."
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Comment: The European Union may be well advised to reconsider Turkey's potential membership.

Monday, April 5, 2010

New feed for the euro bears

April 6 (Bloomberg) -- The euro fell for a second day against the yen amid concern Greece and other European countries will struggle to raise funds to repay maturing debt.
The euro weakened versus 14 of 16 major counterparts after the Financial Times cited an unidentified official as saying Greece plans to sell bonds in the U.S. as the European nation struggles to fund the trading bloc’s widest fiscal gap. The yen strengthened on speculation Japanese exporters bought the currency after it fell to a seven-month low against the dollar.
“People are concerned that it’s not just Greece, there are some definite sovereign debt issues in the region,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase & Co. in Sydney. “The market is still bearish on the euro overall and still wants to sell on rallies.”
Full text
Comment: "Old Europe" is jubilating. The weekened euro pulls the heart of region out of the region. Let Greece go bankrupt, anyhow.

Massive gold price manipulation

James Turk explains: "... The big news that has now begun influencing the market is the stunning revelation by GATA at a Commodity Futures Trading Commission (CFTC) hearing last week about the London whistle-blower who had explained to the CFTC how JP Morgan Chase has been manipulating/capping precious metal prices.  In a shocking parallel to the inaction by the SEC after receiving warnings from Harry Markopolos about the Madoff ponzi, the CFTC has apparently been sitting on this information.
The whistle-blower, Andrew Maguire, is an experienced precious metal trader in London.  In this riveting interview on King World News with GATA director, Adrian Douglas, Maguire describes a “new dynamic” impacting gold.  Specifically, there is a huge short position in the market.  But there is even more.
The CFTC hearing confirmed what GATA has been saying all along, that the gold market is being manipulated. To achieve this manipulation, the gold cartel has accumulated a huge short position.  Importantly, the hearing confirmed that the gold cartel’s huge short positions are ‘naked’, meaning that these positions are not hedged.  More to the point, the CFTC hearing revealed that there is 100-times more paper-gold outstanding than physical gold...
Read more
Comment: Go to your bank, demand physical delivery. Let's start a gold run. Bring the cartel down.

Sunday, April 4, 2010

Where is my gold?

For many years, people assumed that the London Bullion Market Association (LBMA), the world's largest gold market, was a simple bullion market. Cash for gold. However, just in the past few months, more people are realizing that there is actually very little gold within the LBMA system.
Even long-time gold specialists like Maguire have been amazed to learn that there is no gold corresponding to the vast "gold deposits" at the major LBMA banks.
During the CFTC hearings, Jeffrey Christian of CPM Group apparently informed us that the LBMA banks actually have about a hundred times more gold deposits than actual gold bullion.
(GATA on CFTC hearing revelations, including video clips.
ZeroHedge on the LBMA "paper gold ponzi")
This means that there are thousands of clients -- Asian and Middle Eastern governments and sovereign wealth funds among them -- who think they own hundreds of billions and perhaps trillions of dollars of gold bullion, and are being charged storage fees on that fantasy bullion, but they really own unsecured gold loans to the banks at a negative interest rate.
Read full text
Comment: Make a test. Order to get your paper gold deposits in bullion. Spread the news about your experience. Let's start a gold run.

Saturday, April 3, 2010

Liars and cowards

April 3 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan...--
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Comment: Of course, China is manipulating its exchange rate, but so does also any other country.

America's economic suicide

Peter Schiff explains: "During the 1990s, inflationary Federal Reserve policy fueled a tech stock bubble. When that bubble burst, the Fed inflated a larger one in real estate. Now that the real estate bubble has burst, the Fed is inflating the biggest bubble of them all – a bubble in government. While the earlier booms at least provided the illusion of prosperity and some fun while they lasted, the government bubble will cripple the economy and deliver widespread misery to the vast majority of Americans...
Our economy is being transformed from a mostly capitalistic one to a mostly socialistic one. More decisions are being made by politicians and lawyers in Washington and fewer by entrepreneurs. The motivation behind this shift is the mistaken belief that the financial crisis of 2008 was caused by too much capitalism and a lack of proper government oversight. This conclusion is self-serving for those in power, and couldn't be more economically misguided. Through corruption or just plain ignorance, Congress and this Administration have embraced an ideology that has failed every time it has been tried..."Read more 
Comment: What is happening is not only a tragedy for Americans, but one for the whole world.

Friday, April 2, 2010

Stimulus deception

April 2 (Bloomberg) -- The biggest increase in employment in three years makes it “pretty clear” the deepest U.S. recession since the 1930s has ended, said the head of the group charged with making the call.
Payrolls rose by 162,000 workers last month, the third gain in the past five months and the most since March 2007, figures from the Labor Department showed today in Washington.
“I personally put lots of emphasis on employment,” Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee, said in an interview. “I would say ‘pretty clear’ is a good description” for whether the economic contraction has ended, he said.--
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April 2 (Bloomberg) -- President Barack Obama, highlighting today’s government report that showed the U.S. economy last month created the most jobs in three years, declared the “worst of the storm is over.”
“We are beginning to turn the corner,” Obama said in a speech at a battery-parts manufacturer in Charlotte, North Carolina. “Today’s job numbers, while welcome, leave us with a lot more work to do,” he added.--
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Comment: Poor victims of their own stimulus scam.

Currency diversification continuous (with a caveat)

Reserves Shifting Away from the Dollar?

From RGE Monitor: "Global central banks, which managed over US$8 trillion in reserves at the end of 2009, according to IMF, estimates have been gradually diversifying their portfolios. The dollar share has inched down since 2000. The appreciation of the U.S. dollar and central bank participation in the global flight to safety slightly boosted the dollar share in 2008 to around 65% of the institutions that report their currency composition. IMF data suggest that the dollar share of reserves of countries that report currency composition fell to almost 62% at the end of 2009, underscoring an ongoing trend of gradual diversification away from U.S. dollar assets. The pace of diversification seemed to slow as 2009 wore on, as intervention by central banks to slow the appreciation or volatility of their exchange rates implied significant purchases of dollar assets. Several countries—especially China—do not report the currency composition of their reserves, so the dollar decline may be overstated."

Thursday, April 1, 2010

Another "axis of evil"

CARACAS (AFP) – Russian Prime Minister Vladimir Putin is set to meet the presidents of Venezuela and Bolivia in Caracas Friday to sign military and energy deals that broaden Russia's footprint in Latin America...--
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Comment: Invasion through the backyard.

Stocks in the long run

Looks very much like it's time for a new trough to come.

A decade of April fools

 The WSJ reminds us:
"The past decade has been a lost one for stock investors. The Dow Jones Industrial Average finished Monday at 10552.52, up 61% from the recession low a year ago, about halfway back to its record high of 14164.53 in October 2007. The blue chips are trading at a level they first reached in April 1999."
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Comment: The performance gets worse when adjusted for inflation.

Consequences of the welfare state

Ludwig von Mises:
"By weakening or completely destroying the will to be well and able to work, social insurance creates illness and inability to work; it produces the habit of complaining... it is an institution which tends to encourage disease, not to say accidents, and to intensify considerably the physical and psychic results of accidents and illnesses. As a social institution it makes a people sick bodily and mentally or at least helps to multiply, lengthen, and intensify disease." - Socialism

Sand castles and pipe dreams

"... The two disillusioned attorneys were victims of an unfolding education hoax on the middle class that's just as insidious, and nearly as sweeping, as the housing debacle. The ingredients are strikingly similar, too: Misguided easy-money policies that are encouraging the masses to go into debt; a self-serving establishment trading in half-truths that exaggerate the value of its product; plus a Wall Street money machine dabbling in outright fraud as it foists unaffordable debt on the most vulnerable marks..."
The Great College Hoax
Comment: Easy money policies provoke malinvestment, and this also includes higher education.