27 December 2009

Band-aiding the zombied and ponzied corpse of western finance with QE

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. 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.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.

And while things are hair-raising in "gross" country (not Bill...at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan - the country has plunged into its nth consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:
Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.


Best of the Season

Merry Christmas and a Happy New Year to friends, readers and contributors. Thank You.

23 December 2009

21 December 2009


by Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission
December 18, 2009

Depreciating Global Warming and Appreciating Real Assets

"Hockey sticks in the air!" well summarises the Climate summit debacle and face-saving attempts by Europe's hardcore political defenders of "imminent climate catastrophe" to breathe more hot air and illusion into the Copenhagen chill, as the COP15 conference winds down and out. The attempt by Europe's climate conscious leaderships to surf the wave of public concern on so-called runaway global warming, and generate new export markets for the continent's overlevered, high output cost renewable energy corporations and companies with recession hit domestic markets, looks unlikely to succeed. The same applies to Obama, faced by a recalcitrant Congress with low conviction that now is exactly the right moment to launch an additional big government, big spending spree with borrowed public money - much of it overseas, on projects outside the USA.

One sure winner will be real resources. That is oil, natural gas, gold, some other metals and minerals, and many of the agrocommodities. The linkage is clear and easy for oil, and for natural gas: the big spending push in renewable energy (RE) is now delayed, although already proven and economically viable RE will continue to power ahead. Fast uptake of RE in the lower income countries - which would only be possible with major aid and big soft loans from richer nations - will now take a lot more time.

Both China and India will continue their own, already large RE and Cleantech development programs, but this will have little spillover to the lower income developing countries in the near term. Along with rising but confused signs of economic recovery in the US if not in Europe or Japan, and continued strong economic growth in the big Emerging Economies, the bottom line for world oil demand is clear. Demand is likely to pick up through Q1 2010. Traders will anticipate this in a trading context marked by a return to selling pressure on the dollar (presently upstaged by a falling Euro),signaling higher oil prices from the short term. To be sure, events such as the December 22 OPEC meeting will generate their own price moves, but the new fundamental for oil is that global demand is likely to grow.

Unlike the recent past, natural gas futures will also tend to rise in synch with oil, rather than falling anytime Brent and WTI rise, and rising anytime Brent and WTI fall. Gas is the clear winner from attempts at finding cheaper, lower carbon substitutes to oil, but its price has languished this year. With restored oil price growth, natural gas will this time also gain.

The J-Curve

Exactly like the global warming Hockey Stick, but real, delayed response to converging news in the trading rooms operates a J-curve for short-term prices. While traders are out to lunch and deciding how to react, their first action will be trimming positions and paring risk before they go out to a sushi meal of near-extinct red tuna. Like the impact of dollar devaluation on the monthly US trade deficit, the first impact is a deepened deficit. For traded real resources, increased and complex news that should generate price rises firstly generates lower day closing prices.

The complex news from the Copenhagen climate summit through its long, laborious and heated sessions is that this "qualified success" will do less than nothing to rapidly trim fossil energy demand in the emerging and developing countries, and probably little in the OECD group of rich nations with one-sixth of the world's population but consuming one-half of world oil production. In the OECD group and especially Europe, however, climate change business has become Too big to fail which for energy will generate higher prices across the energy space. Returning from lunch, the signs for traders will be clear that real resources are better placed to show asset growth than most mainline Equities on many markets, of course with ample exceptions, and for as long the global economy shows credible signs of coming out of recession.

This is far from radical as a near-term read out, and is reinforced by another J-curve, the reserve/production ratios which apply to an increasing swath of the real resources, aka the hard assets.

We can state this simply: Gold, copper or any other diminishing fossil or mineral asset, including the fossil fuels is still faced with relatively price inelastic, and recovering or increasing demand. Exactly as for per capita oil and gas consumption in the OECD countries relative to China and India, and therefore CO2 emissions per capita, the same stepwise difference in consumption applies to metals and minerals. Increasing world production to enable equalization of per capita demand is, to be sure, a theoretical target for global economic development, but is not possible.

Obligation to Perform

The obligation to perform overrides the almost philosophical question of deciding if the party will continue, or rather when the party's rules will change, which they will but not at Copenhagen. Easily explaining why China and India will in no way agree to global binding commitments reduce CO2 emissions, but will act to slow their increase, this simply conforms with long term trends of economising resource utilisation, recycling and substitution rarer and higher cost resources with more abundant and cheaper resources. This is a long-term factor in human history and the world economy.

Break points are however certain in a free-for-all where each player is unsure of the resources held by the rivals, each player has an obligation to perform, and many natural resources are becoming rare. As many examples show, late arrivers are not at all necessarily the losers, witness Angola or Canada for oil, Kazakhstan for uranium, Zimbabwe for platinum, and the present and future bioresource and renewable fuels exporters of Africa and Asia. Depending on technology change and metal, mineral, or fossil energy substitution potentials, this now-or-later choice will increasingly impact day traded and near-term commodity prices as global potentials for radical output hikes increasingly shrink.

Rising real asset prices have an interesting self-limiting production impact, running alongside physical depletion and rising environmental impacts from their extraction and production. When their daily market price rises, the future value of presently unexploited reserves increases, and forecast production needed for a given revenue (of course in devaluing paper money) decreases. For gold and other PMG metals there is a measurable and predictable impact of rising prices on physical output capacity, basically due to milling capacity, with easily made comparisons in other fossil extraction industries. For gold and the PMG metals, when prices rise, and if a producer moves to lower grade ores they will for some while operate the same milling capacity. Due to this, total output will fall with rising prices, not rise.

This is a stealthwise change of physical output capacities, finally impacting the obligation to produce, and aiding the policy shift to a preference for slower exploitation of depletable resources. This shift is in fact nothing more or less than an update of the old-time wisdom of gold miners. This was a simple one-liner: Worst grade first, best grade last.

Despite the fact that other considerations also count, this one-liner is hard to beat. Ecology minded economists going as far back as Georgescu-Roegen and Daly, and in fact even further back can echo this wisdom, with multiple caveats, drawing on ecosystem behavior and functions. More than 90% of the trophic hierarchy acts this way, allowing just a few breakthrough and emergent alpha male species to act otherwise. To be sure there is one really large difference: natural ecosystems are close to 99% based on renewable energy, but the global economy is around 84% based on non renewable fossil fuels, and 100% dependent on non renewable metals and minerals including uranium, phosphates and all other one-shot, only partly recyclable resources.

Obligation to Deplete

Only one remedy applies to maximising output of non renewable resources that start depleting and fading away: energy. When or rather if there was 'unlimited energy' we could imagine all manner of science fiction, and economic fiction futures. In the real world and in all history, we have neither the time nor energy for this.

The above theoretical aside can be terminated by looking at the way major gold mining, fossil energy and minerals producer companies have cozied up to host governments, and through a long period of about 1985-2005 chose suicidal producing strategies. Accelerated depletion is surely one large, but hidden real world driver of the loud public statements that we face "climate catastrophe" if national budget deficits are not further raised, this time to finance Green Energy rather than bail out near-bankrupt finance sector players. Fighting depletion of energy and other real resources is the scarcely hidden message of OECD leaders, which failed at Copenhagen.

Brave words are advanced on the theme that accelerated depletion of fossil energy will 'jumpstart' innovation in alternate energy, and speed the 'modernization' of the economy. For the non renewable resource of gold, this innovation in fact has a long pedigree. Taking gold as a fiduciary money base, it can be substituted by silver, then bronze, then iron, and why not aluminium, paper, plastic and most recently electrons ?

Debate on whether we can sustainably extract oil from tarsands , or copper and other metals from sea water is basically a question of energy. This is due to energy needs spiraling as leaner and leaner orebodies and resources are exploited. Stepping down in orebody richness does not generate a linear increase in energy needed to extract the same amount of metal, but much much more, determined by many convergent factors we can call 'entropic'. This stepwise increase in energy demand is only partly covered by technology progress - and is a major physical determinant of rising prices for current generation resources, and a marker for the certainly rising capital costs of future energy and minerals supplies.

The 'Climate Catastrophe'

The re-valorisation of gold and other real assets is taking place at a time of surreal change in economic policies and policy making, symbolised by the strident calls for a massive and massively rapid shift away from fossil fuels, to the renewable energy sources and systems. Failure of the Copenhagen farce, however, will surely reawaken media and public opinion to the real, and very complex trends of both natural and anthropogenic climate change, along with anthropogenic ecosystem disruption, degradation, and destruction. In the same list, ongoing and rising pressure on natural resource supply capacities for constantly growing human population numbers and even faster growing urban populations will exercise a constant impact.

Extreme flights of fancy of the world's deciders, hinged on global warming, are likely to be put on the back burner, for example attempts to save the US dollar, through proposals to replace it as the world reserve money, with a "CO2 Bancor". This new plaything for FX traders and central bankers could be cobbled together from a shifting pile of carbon finance instruments, CO2 offset bonds for 'soft energy' loans to developing countries, carbon tax revenues and their derivatives, and other creative paper promises of future value built on the shaky struggle to fight climate catastrophe. This will signal a return to normal business, in a context where both Equities and Commodities are now completely interdependent and interchangeable trading chips - for traders and financial market operators.

This changes nothing on the ground, or rather underground. Long-term trends to more sustainable resource development - meaning long term production strategies - will be accelerated in a context of higher energy prices. For gold mining this is already clear: companies who want to remain in business for more than a few decades have already started to shift back to mining at the marginal grade. This raises production costs, and caps output, moving the threshold up for future price corrections on exuberant and always exaggerated trading floors.

Higher commodity prices effectively cause the marginal grade of every gold mine to drop. In the energy space this shift will be intense, as the world shifts to lower intensity, harder to use and higher capital cost renewable energy which can only increase slowly, after big capital expenditure. The net result is simple to forecast: as for gold output which has shown little or no responses to a tripling of the dollar price since 2002, world energy supply is set in a relatively slow growth, or no growth outlook, we can summarise as net energy and natural resource output falling as prices rise and because prices rise.

© 2009 Andrew McKillop


Climate deal 'good but not perfect', says Flannery

Copenhagen Climate Council chairman Tim Flannery says a draft climate accord reached by world leaders is ‘‘good but not perfect’’, and has described Prime Minister Kevin Rudd’s role at the summit as ‘‘outstanding’’.

Speaking in an online briefing from Copenhagen shortly after 11pm local time (9am AEDT), while final details of the draft accord were still to be announced, Professor Flannery said the science community believed the draft text was a few hundred gigatonnes short of ideal, but that he was ‘‘not entirely dissatisfied with the agreement’’.

Wealthy and key developing nations have agreed to limit global warming to two degrees Celsius, according to a US official, with each country required to list the actions they would take to cut global warming pollution by specific amounts.

‘‘We need a more aggressive reduction target by the US ... (we need) China to tighten up its emissions standards,’’ Professor Flannery said.

This, combined with a concrete agreement among European countries, he said, would ‘‘put us in a better position ... where we need to be’’.

But he said the talks in the Danish capital were ‘‘not the end of the story’’.

‘‘We’ve seen a huge advance at this meeting ... This is a step on a long road and I’m not entirely dissatisfied with the agreement.’’

The draft text was ‘‘good but not perfect’’, he said.

Professor Flannery said he was impressed by the direct and honest role played by Mr Rudd at the summit.

‘‘Our prime minister has played an outstanding role. I was at a briefing he gave on Thursday. He was frank and honest ...
He said he was doing his best but there was absolutely no guarantee of success.

‘‘He’s been working very hard the last few months,’’ he added.


20 December 2009

The Four stages of a bear market ~ expect dashed hopes

Our starting point for developed-market equities is that we are not in a new secular bull market. Extended bull markets typically happen when: 1) the starting point valuation is very attractive; 2) growth is strong and sustained, and 3) credit is readily available, allowing greater use of leverage. None of these factors seems likely in this cycle. Once the current rally ends, we expect an extended period of choppy markets. Exhibit 1 shows a stylized picture of how this could play out (taken from Teun Draaisma's report entitled The Aftermath of Secular Bear Markets, 10 August).

What is likely to end the rally? We think the biggest risk is growth and earnings disappointment. As is typical, an expanding PE ratio led the rally. The PE expands from a market low due to improving risk appetite and investors factoring in better earnings to come. Next year equities will have to become more earnings-led, again as is typical.

GEAB N°40 is available! Spring 2010 – A new tipping point of the global systemic crisis: When the slip knot around public deficits....

LEAP/E2020 believes that the global systemic crisis will experience a new tipping point from Spring 2010. Indeed, at that time, the public finances of the major Western countries are going to become unmanageable, as it will simultaneously become clear that new support measures for the economy are needed because of the failure of the various stimuli in 2009 (1), and that the size of budget deficits preclude any significant new expenditures.

If this public deficit « slip knot » which governments gladly placed around their necks in 2009, refusing to make the financial system pay for mistakes (2) is going to weigh heavily on all public expenditure, it is going to particularly affect the social security systems of the rich countries in always impoverishing the middle classes and the retired, and setting the poorest adrift (3).

At the same time, the general context of the bankruptcy of an increasing number of states and other authorities (regions, provinces, federal states) will entail a double paradoxical event of increasing interest rates and the flight out of currencies towards gold. In the absence of an organised alternative to a weakening US Dollar and in order to find an alternative to the loss in value of treasury bonds (in particular US ones) all central banks will have, in part, to « reconvert to gold », the old enemy of the US Federal Reserve, without being able to state the fact officially. The bet on recovery having been, at this point, totally lost by governments and central banks (4), this Spring 2010 tipping point is thus going to represent the beginning of the huge transfer of 20,000 billion USD of « ghost assets » (5) in the direction of the social security systems of the countries which have accumulated them.

In GEAB N°40, the LEAP/E2020 team develops its anticipations on these various subjects, whilst also giving a detailed appraisal of its 2009 anticipations which achieved an overall success rate of 72% (6). Finally our researchers unveil their recommendations regarding this month in particular: commercial real estate, currencies and expatriates’ revenues.

The ten most vulnerable countries on a debt/GDP ratio (in blue; public debt; in orange: private debt) – Source: Crédit Suisse, 03/2009
Reality quickly fuelled GEAB N°39’s anticipation which indicated that 2010 would be a year noted for three trends, one of which would be state bankruptcy (7): from Dubai to Greece, via more and more worrying reports from the rating agencies on US and British debt, or the draconian Irish budget and the Eurozone suggestions for grappling with public deficits, states’ increasing incapacity to manage their debts is making press headlines. However at the centre of this press ferment, all the information isn’t of the same value: certain are no more than laborious works on the « finger » of the Chinese proverb (8), whilst others really stretch to the moon.

On the subject of laborious works on the « finger », this public announcement of the GEAB N°40 presents the case for its anticipations on Greece.

Greek debt crisis: A small problem for Frankfurt and a strong warning for Washington and London
Coming now to Greece, we find a theme similar to what our team showed up in the GEAB N°33 in March 2009, when the press gave widespread publicity to the idea that Eastern Europe was going to lead the European banking system and the Euro into a major crisis. We have explained that this « news » was not based on anything credible and that it was only « a deliberate attempt on the part of Wall Street and the City to create the belief of a crack in the EU and instill the idea of « deadly » risk weighing on the Eurozone, in continually publishing false stories on the « banking risk from Eastern Europe » and trying to stigmatise a Eurozone cowardness compared to American or British « willful » measures. One of the objectives is also to try and turn international attention away from the increasing financial problems in New York and London, all with the purpose of weakening the European position on the eve of the G20 summit ».

The Greek case is rather the same. Not that there isn’t a crisis in Greek public finances (that is the reality), but the supposed consequences for the Eurozone are overestimated, whereas this crisis indicates increasing tensions surrounding sovereign debt, the Achilles heel of the United States and Great Britain (9).

New sovereign debt issuance in 2009 (USD billions) – Source: PhoenixProject, 07/2009
First of all, one must remember that Greece remains the country above all others, which badly managed its EU accession. Since 1982, different Greek governments have done nothing but use the EU as an inexhaustible source of subsidies, without ever taking steps to modernise the financial and social framework of the country. With nearly 3% of GDP coming directly from Brussels in 2008 (10), Greece is indeed a country which has been on a European drip-feed for almost thirty years. The actual deterioration in the country’s public finances is, then, only another step in this drawn-out development. The Eurozone leaders have known for a long time that the Greek problem would materialise one day.

But with a country producing 2.5% of the Eurozone’s GDP (and 1.9% of the EU’s) we are far from a dangerous situation weighing on the single European currency and the Eurozone. By way of example, the California’s default (12% of US GDP) entails far more risks of destablisation of the Dollar and the American economy. Moreover, since the same analysts usually like to make lists of all the Eurozone countries facing up to a serious crisis in their public finances (Spain, Ireland, Portugal, to which we can add France and Germany), for the sake of completeness it should be pointed out that in the United States, besides the fact that the Federal State would be technically bankrupt (11) if the Fed weren’t printing Dollars in unlimited quantities for the purpose of buying, directly or indirectly, Treasury Bonds for an equal value, and besides California (the richest state in the Union teetering on the edge of the abyss for months), there are altogether 48 States out of 50 with growing budget deficits now (12). As summed up by the title of the December 14th edition of Stateline, an American website specialising in the US States and municipalities, said « Nightmare scenarios haunt the States », all the states of the United States are afraid of defaulting on their debt in 2010/2011.

The Eurozone, which has the largest gold reserves in the world (13), also includes countries which accumulated budget surpluses until last year, a foreign trade surplus and a central bank which hasn’t turned its balance sheet into a pool of « rotten or ghost » assets (contrary to the Fed in the last 18 months). So, if the crisis in Greek public finances clearly indicates something, it is not so much Greece’s situation or a specific Eurozone problem, but a wider problem which is going to become much worse in 2010: the fact that Government bonds are now a bubble on the verge of exploding (more than 49,500 billion USD worldwide, a 45% increase in two years (14)).

The deteriorating ratings published by US rating agencies since the Dubai crisis shows, as always, that these agencies don’t know how to (or can’t) anticipate these developments. Let’s remember that they didn’t see the sub-prime crisis coming nor the collapse of Lehman Brothers and AIG, nor the Dubai crisis. Because they are dependent on the US government (15), they are unable, of course, to directly blame the two at the heart of present financial system (Washington and London). However, they show from which direction the next big shock is going to come, State bonds… and in this field, the two countries with the most exposure are the United States and Great Britain.

Besides, it is very instructive to see the subtle change in the tenor of the articles published by these agencies. In a few weeks we have gone from the same old explanation stating that the intrinsic quality of these two countries’ (16) economies and their management removes all risk of default on the part of their respective governments to a warning that, from 2010, it will be necessary to demonstrate these qualities and management skills in order to keep the coveted Triple A rating which allows borrowing at the lowest cost (17). If even the rating agencies start to ask for proof, it’s because things are going really badly.

To finish on Greece’s case, our team feels that the current situation is a triple positive for the Eurozone:

. it requires it to seriously consider the solidarity measures to put in place in this type of situation. The watchers are thus going to have to make a clear choice: either they treat Greece as an isolated example, or they treat it as a component of the Eurozone. But they can’t do both at once, adding the weakness of an isolated Greece to a weakened Eurozone caused by Greece.

. it requires, at last, the Greek authorities to carry out an operation of « Truth » on the financial state of their country and allows the EU to push forward the necessary reforms, notably to substantially reduce endemic corruption and cronyism (18).

. it should serve as an example to European governments (and others) who fudge economic and social statistics more and more, demonstrating that such fudging only results in plunging a country into crisis even more. Sadly, we are more doubtful on the idea that other leaders will follow the Greek Prime Minister’s example… certainly not before a change of government in Great Britain, the United States, France, or Germany.


(1) Consumption still remains lack-lustre in the United States and Europe as well (in spite of year-end celebrations). So-called Chinese growth (watch this eye-opening video by Al Jazeera on the reality behind the Chinese numbers) doesn’t even begin to stimulate its Japanese neighbour one little bit (which would have been a clear signal that there really has been a restart of the Chinese economy), requiring it to be the first major country to adopt a second economic stimulation package in less than two years (source: Asahi Shimbun, 09/12/2009). On the other hand the faking of statistics is beating all records: a « radical » fall in unemployment in the United States fed by temporary jobs related to the Christmas shopping period and a method of calculation as « theoretical » as before (source: Global Economic Trend Analysis, 04/12/2009), « Black Friday:// » which in fact saw the value of sales dropping compared to the year before (source: Reuters, 29/11/2009), unemployment which continues to rise, and business real-estate in free-fall in Europe (source: Les Echos, 10/12/2009, and an interesting visual stroll amongst empty office blocks in Amsterdam made by Tako Dankers, « reassuring » Chinese industrial production numbers in November 2009 since they were compared to the big fall in November 2008. Such fantastic results for the hundreds of billions of 2009 stimulus plans!

(2)And in believing the banks who told them that saving them would save the economy.

(3) Source: USAToday, 12/14/2009

(4) Source: CNBC, 08/12/2009; Yahoo/Reuters, 27/11/2009

(5) Two-thirds of the global amount estimated by LEAP/E2020 a year ago, out of which two-thirds haven’t yet gone up in smoke in the various financial and real estate markets of the world.

(6) This score is lower than the 80% of 2008 but still high, particularly for an exceptional year with regard to the unprecedented extent and number of interventions by the authorities, multiplying the factors at play.

(7) On the subject of « fiscal pressure », London and Dublin have just started the ball rolling. Sources: Times, 06/12/2009; Irish Times, 11/12/2009

(8) « When the wise man points at the moon, the fool looks at the finger »

(9) And of Japan to a lesser extent.

(10) Source: La Croix, 10/05/2009

(11) Source: New York Times, 11/22/2009

(12) Source: CBPP, 12/19/2009

(13) For instance, between national central banks and the ECB, the Eurozone possesses 10,900 tons of gold and the United States only 8,133 tons (source: FMI/Wikipedia, 11/2009). Or, more precisely: the US Treasury declares that the United States holds that amount of gold, knowing that there has been no independent audit of US gold reserves for over forty years. We will return to the subject of the true amount of US gold reserves in more detail in the next edition of GEAB (N°41). Indeed our team believes that in 2010, in a context of explosion of the Government bond bubble, gold is going to become an absolute necessity for central banks.

(14) Sources: DailyMarkets, 11/24/2009; Telegraph, 11/30/2009; Forbes, 11/24/2009

(15) Legally and even financially speaking, see previous editions.

(16) Sometimes we see the wildest surrealism in reading the views of these agencies.

(17) Source: Wall Street Journal, 12/08/2009

(18) Source: Financial Times, 12/11/2009

17 December 2009

The Archdruid makes sense on climate change and much else

With the world's attention on Copenhagen, we illuminate our own views by attending to those that resonate.

Whether or not the current round of climate instability is entirely the product of anthropogenic CO2 emissions is actually not that important, because it’s even more stupid to dump greenhouse gases into a naturally unstable climate system than it would be to dump them into a stable one. Over the long run, the only level of carbon pollution that is actually sustainable is zero net emissions, and getting there any time soon would require something not far from the dismantling of industrial society and its replacement with something much less affluent. Now of course we would have to do this anyway, since the world’s fossil fuel supplies are depleting fast enough that production limits will begin to bite hard in the years and decades ahead, but this simply sharpens the point at issue.

Even if it turns out to be possible to power something like an industrial society on renewable resources, the huge energy, labor, and materials costs needed to develop renewable energy and replace most of the infrastructure of today’s society with new systems geared to new energy sources will have to be paid out of existing supplies; thus everything else would have to be cut to the bone, or beyond. Exactly how big the price tag would be is anybody’s guess just now, but it’s probably not far from the mark to suggest that the population of the industrial world would have to accept a Third World standard of living, and the population of the Third World would have to give up aspirations for a better life for the foreseeable future, for such a gargantuan project to have any chance of working.

I encourage those who think this latter is a politically viable option to try to convince their spouses and friends to take such steps voluntarily. Any politician rash enough to propose such a project would be well advised to kiss his or her next election goodbye. Any president who even took a step in that direction – well, I doubt many people have forgotten what happened to Jimmy Carter. For that matter, I’m sure there must be climate change zealots who have given up their McMansions, sold their cars, and now live in one-room apartments in rat-infested tenements with six other activists so all their spare money can go to building a renewable economy, but I don’t happen to know any who have done so, while I long ago lost track of the number of global warming bumper stickers I’ve seen on the rear ends of SUVs.

Nobody, but nobody, is willing to deal with the harsh reality of what a carbon-neutral society would have to be like. This is what makes the blame game so popular, and it also provides the impetus behind meaningless gestures of the sort that are on the table at Copenhagen. It’s a common piece of rhetoric these days to say that “failure is not an option,” but this sort of feckless thoughtstopper misses the point as totally as any human utterance possibly could. Failure is always an option; when trying to prevent it will lead to highly unpleasant personal consequences, without actually having the least chance of preventing it, a strong case can be made that the most viable option for anyone in a leadership position is to enjoy the party while it lasts, and hope you can duck the blame when it all comes crashing down.

Those who have their doubts about anthropogenic climate change can apply the identical logic to the industrial world’s sustained nonresponse to the peaking of world oil production, or to any of half a dozen other global crises that result from the collision between an economy geared to infinite growth and the relentless limits of a finite planet. In each case, the immediate costs of doing something about the issue are so high, and so unendurable, that very few people in positions of influence are willing to stick their necks out, and those who do so can count on being shortened by a head by others who are more than willing to cash in on their folly.

There’s another way to understand the paradox that makes failure the only viable option, but it will involve a glance backwards over the history of the sustainability movement and the theoretical structure – systems theory – that once undergirded it. That glance, and its implications, will occupy the second part of this series.


16 December 2009

There is no question as far as this blogger is concerned that Gold and Silver remain the investment opportunity of a lifetime and the case for a stake only gets more compelling. News Kontent are gold and silver bulls and offering evidence for that case is the rationale for this blog.

An Unbelievable Opportunity in Gold

December 15th, 2009

Yes, there is no typo in the headline of this article. Today there is still an unbelievable opportunity to invest in gold that will disappear over the next several years as this monetary crisis deepens. Despite the general widespread sentiment of Western financial advisers that they have missed the run-up in gold and now it is too late to buy, this is not true at all. In fact, to illustrate how little people understand about the reasons to buy gold, of all my friends that I urged to buy physical gold more than six years ago when gold was less than half of its current price, I only know of one that has bought any gold, and it still took five years of my prodding, four times a year, for this single person to purchase gold. This is how incredibly misunderstood an asset gold remains today despite its enormous run higher in the past 8 years. This brief anecdote aptly illustrates the bias against gold and the foolish belief that gold is a bubble that persists today due to the massive propaganda and disinformation campaigns waged by bankers against gold. It is ironic today that public mistrust of bankers can be at such a high level at the same time that the public is still enormously willing to follow all of the bankers’ propaganda about gold. This great twist of irony illustrates just how powerful the bankers’ century long misinformation campaign about money and gold has been. Few people even understand how money is created let alone why gold is a protector of people’s rights.

Even if gold continues to correct this week, and the bullion banks, the US Treasury, the US Federal Reserve and the Bank of England are able to engineer a further decline in gold prices in the futures markets, this event will not be the bursting of the gold bubble as it will be, and always has been, described by many Western media sources. Even if gold loses another $120+ an ounce from its current price, this event would not mark the bursting of the gold bubble. The incorrect description of corrections in the gold markets, or downright meddling of Central Banks into the suppression of gold prices, as the bursting of a bubble is just as erroneous as the recent descriptions of rising stock markets as signs of economic recoveries. And this is the legacy bankers have created – confusing the masses to believe the exact opposite of what is true.

Though I’m not going to tell you the price point at which I believe gold will start rising again, it is not impossible to time markets as investment charlatans will lead you to believe as well. In fact, at the very beginning of this month, we told all subscribers of my Crisis Investment Opportunities investment newsletter to sell out of their precious metal stocks right before this steep correction in gold and silver occurred to lock in their profits and we’ll tell them to re-enter (or have told them to re-enter) when we feel that a low-risk, high-reward time to reposition our assets has materialized once again. By understanding the rigging game in gold and silver markets and in stock markets, we’ve more than tripled the returns of the S&P 500 this year. In all honesty, however, bankers have filled most investors’ heads over the years with so many lies about gold that for the majority of investors, it would be a futile effort to try to time the market anyway. Most would be better off just understanding the fundamentals behind why they need to own gold and to buy and hold on through the dips and rises until it reaches the mania stage.

Being able to predict the recent steep correction in gold and silver in advance of its occurrence merely requires understanding the manipulation and rigging game in these markets. Understand the rigging game behind gold and it is quite possible to repeatedly time the gold markets with a fair amount of accuracy. Subscribers to my services will vouch that I have called near perfect tops and bottoms in the gold and silver markets more than several times over the past several years. Even if you refuse to acknowledge the indisputable signs that the gold market is, and has been rigged for decades, you only need realize one thing – that despite the best efforts of the US Federal Reserve, the US Treasury and the Bank of England to suppress the price of gold, gold’s long term trend since 2001 when it bottomed at about $250 an ounce, has been up. And if you are astute enough to realize that the gold markets have been, and still are rigged, then observing gold’s rise from $250 an ounce eight years ago to more than $1200 an ounce just a week ago should give you the utmost confidence, that despite the best efforts of bankers to wreck gold’s price, its long-term trend will remain higher for quite some years to come.

Still, no matter what side of the “gold is rigged” debate you stand on (and there is lots of evidence to believe the “gold is rigged” side of the debate thanks to the tireless work of GATA.org), the public’s stated reasons for not owning gold are not only absent of logic but they are downright foolish. Two of the most frequently given reasons I’ve heard from Westerners as to why they will not buy gold are parroted banking propaganda that make absolute no sense. The first reason people often give as to why they are reluctant to buy gold is that gold pays no interest. People would realize how foolish this stated reason was if they only realized that all paper money is issued as debt. If there were no debts in the system, there could be no money, yet people gladly accept an instrument that is issued as a debt and believe that it is a pure asset. Secondly, they state, you can’t buy anything with gold. You can’t pay for many items with Euros in many American stores or buy items with US dollars in many European stores either, but that doesn’t mean the Euro is worthless to own if you live in America or that the dollar is worthless to own if you live in Europe. Both will still have some value in buying goods and services. Thus, to not own gold because “you can’t buy anything in stores with a gold coin or gold bar” is an answer devoid of any logic whatsoever.

Throughout history, gold has always been accepted as a form of money. In fact a gold coin in ancient Roman times would buy you about the same things today as it would have back then. With US dollars, you now need twice as many dollars to buy the same things today as you would have needed just 8 or 9 years ago. If a wealthy eccentric man walked into a Maybach auto dealership and insisted on paying for four custom made Maybachs with $2.4 million worth of gold bars, I guarantee you that the dealer would find a way to accept the gold bars and make the $2.4 million sale, knowing that he could choose to hold on to the gold or to convert it into Euros, Yen, Pounds or Dollars at a later point and time. Thus, there is no reason to believe that gold can not be used to purchase items. Gold may be an inconvenient form of money, but it will be much more inconvenient to watch your fiat money crash and burn and for much of your wealth to be wiped out when the second phase of this monetary crisis commences sometime in 2010 or 2011.

Secondly, psychology plays a huge role in the foolish bias of Westerners against gold. Were Westerners to live in China for just one year, where almost everyone knows multiple people that own physical gold, I guarantee you that their perception of gold, upon returning to America, would be drastically changed. They would be inclined to buy more gold just because of the sheep herd mentality that would make them much more comfortable purchasing physical gold after watching many of their friends and associates engaging in the behavior of buying gold for an entire year. Though in China, this herd behavior happens to be correct, just because everyone is doing the same thing, does not by default, make it the correct behavior. In fact, in investing, just the opposite is normally true. When everyone is doing (or not doing) the same thing, they almost always are wrong. Think of US hedge fund manager John Paulson and his enormous coup of earning $4 billion of profit for himself in 2007. Paulson stood on the opposite side of the subprime mortgage bet from the rest of all of Wall Street. Regarding a recent book based entirely upon Paulson’s enormously successful bet to short the US housing market, one reader stated: “The most amazing thing is that no one seemed to believe [Paulson] until the market crashed and by then it was too late.” Though Paulson was a lone wolf among very few lone wolves that existed at the time regarding his beliefs that the subprime mortgage market would crash and burn, he ended up being right and all of Wall Street ended up being wrong. With buying physical gold, it will also pay to think like a lone wolf if you are a Westerner.

However, here’s the lesson most investors still refuse to learn about Paulson’s enormously successful investment play. The majority of investors never take the next crucial step of investigating the reasons why no one believed Paulson’s comments about the US housing market. If the did, they would discover that the reason nobody believed in Paulson’s enormous bet back then was due to the propaganda of bankers like Ben Bernanke and politicians that assured the American people that the housing market would be fine. Many times the masses immediately accept a person’s statement as truth with no critical analysis of that statement just because that person is a public authority figure. But how naïve would you have to be to believe President Obama’s recent statement on the American TV show 60 Minutes that “[he] did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” Goldman Sachs’s Political Action Committee was the second largest contributor to President Obama’s election campaign, so were it not for the money of “fat cat bankers”, Obama may very well not even have been elected as President in 2008. Knowing this, do you really believe that Obama has zero obligations to the second largest contributor to his political campaign?

Furthermore, were you to merely analyze President Obama’s financial decisions since he has taken office, the disingenuous nature of his above comment would be readily exposed. Almost every single financial policy decision of his administration has benefited “fat cat bankers” to the detriment of everyday US citizens. Again, those blinded by political or racial loyalties at the expense of logic will be sure to foolishly digest my statement as a politically-biased statement though there is no evidence to support that conclusion. Any reader can easily check my past history of public statements and discover that my criticisms of the foolish monetary and fiscal policies of the Clinton and Bush Administrations are just as numerous as my criticisms levied against the Obama Administration. If you are serious about never wanting to be fooled or bamboozled by a politician again, then never look to a politician’s words, but only to his or her actions, to unearth a politician’s true character and nature. Only a fool would ever accept a politician’s words as an accurate representation of a politician’s intent.

Likewise, you would be very wise to apply the above maxim to bankers as well. Investors should look towards bankers’ actions and not their words when trying to decipher their intent. Bankers are responsible for the propaganda that gold is a barbarous relic. Bankers are responsible for the propaganda that gold is a cumbersome asset to own because it pays no interest. These are their words. Yet if you look toward their actions, Central Bankers all over the world were net buyers of gold this past year. Shouldn’t that alert you to the fact that bankers are a bunch of conniving liars in everything they tell the masses about gold? When Paulson first assumed his position shorting the subprime mortgage market, it was not only bankers, but also chief executives at large commercial investment firms that derided him, stating that the subprime mortgage market would be fine. I personally heard many of the same criticisms when I started telling people to buy physical gold six or seven years ago – that I was crazy for thinking that the US dollar would get into trouble and that the US dollar would be fine, that owning gold was a stupid and foolish investment. People actually laughed at me for buying gold. A top investment strategist at Citigroup stated that gold was a bubble in 2005 when gold reached $500 an ounce. And now, even though the gold critics have been wrong now for eight years in a row now, they still use every gold correction as an opportunity to deceive Americans into believing that gold is a bubble and about to collapse. And amazingly, Americans continue to look not towards bankers’ actions but to their words only. The overwhelming majority of Americans believe the bankers’ WORDS that the US dollar will be fine, and foolishly point out every bear rally in the US dollar as proof that the dollar will be fine.

Ninety-five percent of what I’ve heard financial advisers state about gold is wrong. Ninety-five percent of what I’ve read in the public domain about gold is wrong. Ninety-five percent of what I’ve read from the Western media about the US dollar is wrong. And ninety-five percent of the arguments I’ve read against owning gold, even when filled with supposed “facts”, are wrong. Many of the arguments against gold sound convincing, even though they are deeply flawed because erroneous data are used to produce flawed conclusions. But this is the very definition of propaganda – arguments that use erroneous data presented as “facts” to draw convincing conclusions that are highly flawed, though to the undiscerning eye, they seem quite logical. The reason that bankers have always spread so much propaganda about gold is because gold is the kryptonite of bankers. Gold allows people to preserve their wealth against their fiat currency debasement schemes.

Hank Paulson, in testimony before Congress, stated that it was necessary to bail out Goldman Sachs through the bailout of AIG because the people, “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.” If Americans really wanted to expose the fraud of the entire financial system, all they would have to do is to put just a tiny part of their entire savings into physical gold. If all Americans put perhaps as little as 5% of their entire savings into physical gold, this would likely be more than adequate to expose the fraudulent basis of the financial system by which firms such as Goldman Sachs reap such ungodly profits year after year. What frightens the bankers the most is the possibility that people will fully understand the basis of the system, and this is why Western Central Bankers continually wage so many disinformation campaigns against gold.

Consider this story about HSBC and its retail gold clients that was reported last month: “The British bank, which has sizeable vaults underneath its US headquarters overlooking Manhattan’s Bryant Park, has told retail customers – many of whom are middle-men and custodian services which store gold with HSBC on behalf of hundreds of their own clients – that all their gold must be out of its facility by July 2010. The decision has seen fleets of armoured cars laden with gold ferrying the precious metal out of New York. An HSBC spokesman declined to comment, but it is understood that the increased demand for physical storage of gold by corporate clients is behind the move to end the retail service, which HSBC inherited when it took over Republic Bank a decade ago.” With banks, it’s never about doing what’s best for their clients. It’s always about what’s doing what’s most profitable for their executives. For HSBC’s individual retail clients that were intelligent enough to own gold, HSBC most likely realized that larger, much more profitable relationships could be built with corporate clients that wanted to buy gold versus their retail clients. Thus, their retail clients got the axe despite the fact that HSBC knew that such a decision would be incredibly inconvenient for them.

Just as was the case with subprime mortgages when almost all of Wall Street got it wrong, the only reason anyone believes that gold is a bubble today is because people have forgotten how to think for themselves, foolishly believe that there are not hidden ulterior motives behind the beliefs spouted by Wall Street, and for some inexplicable reason, still internalize and accept all banker propaganda against gold while at they same time, they claim to distrust them. That’s why no matter how much further gold drops before this correction ends, if you don’t make the move to buy physical gold if you don’t own any, you will look back with regret five years from now and realize that you missed an unbelievable opportunity.

Full Circle of Govt Debt Default
by Jim Willie, CB. Editor, Hat Trick Letter | December 15, 2009

The continuation of the bank dominoes took 14 months, but it occurred. The initial destructive impact craters were carved in the United States and England. To be sure, major damage was done to assets in Spain and Greece and other smaller nations in the last year, but their banks had remained insulated. The discredit and death of the central bank franchise system showed first clear evidence in September 2008 on Wall Street. The unique mysterious aspect of banking systems is how they cannot be rebuilt once they turn insolvent. They rot in place, a process accelerated by rotten ethical values, euphemistically called moral hazard. To be sure, much so-called money flows through the dead rotten parts, but nothing becomes resuscitated except balance sheets. And besides, those balance sheets only look better due to accounting rules changes that deviate from mark to market (reality). The distortions magnify and turn cancerous. See the outsized mortgage bonds with no value at all. See the foreclosed homes withheld from the market for sale in bloated bank inventory. See the big bank balance sheets with large entries of idle money sitting in the US Federal Reserve. The dirtiest American secret in the banking world is not monetization of bonds. It is that US banks are deeply insolvent and would have suffered a worse fate in the last year if not for extortion from TARP funds as well as rescue funds coming from syndicate contraband accounts. See the Raw Story article and reference to the United Nations Office on Drugs & Crime (CLICK HERE).


Focus on the bank impact craters, not the assets within those bank portfolios tied to bonds and properties. The US housing market turned down, and the mortgage finance bubble burst. The primary victims were Lehman Brothers, Fannie Mae, and AIG, which all died. Fannie and AIG remain in the Intensive Care located south of the Black Hole down yonder under the USGovt tent. To say they have not died is pure denial at best and stupidity at worst, since they continue to generate grandiose losses, as most rotting dead bodies do. The process is called advanced cadaver decomposition, accelerated by the wondrous financial engineering acid reflux. The tales of destruction in dead banks from the initial bang extended to the AngloSphere as Northern Rock, Royal Bank of Scotland, and HBOS effectively died. It remains to be seen if the venerable Lloyds is an empty shell prone and a cave-in also. Nevermind the details of the many death spirals. Focus on the dominoes and their sequential steps in magnificent wreckage. Marvel at the total lack of recognition by the official spokesmen for financial reality at the USDept Treasury, Wall Street analysts, London analysts, and European analysts. They never comment on sovereign debt insurance or default. Both are covered in the December Hat Trick Letter.

One must inquire why the blindness. The main reasons are many, but two stick out from the aerial view. The bank leaders and their supporting cast are attempting to accomplish the impossible. They strive to revive a dead entity, drained of structural integrity, lacking in motivation to function in capital formation, devoid of vibrant liquidity flow, and directly attached to the syndicate strongholds where the drain continues. They live and operate within their Dome of Fiat Perception, whose major layer is the Dome of American Perception. Unfortunately, those working within the American fence posts suffer the greatest blindness, the tragic effect of engrained arrogance after years of incredibly broad bully tactics and criminal abuse. For those sleepy brain-dead in denial of criminal abuse, a challenge. Just identify where the prosecutions are for multi-trillion dollar bond fraud in global export of toxic mortgage bonds and their derivative brethren, perpetrated by protected Wall Street firms! If one cannot identify, please sit down and be quiet, since clearly integrity was perhaps checked in at the corporate gate in exchange for a paycheck. Wall Street prefers to call the fraud mere errors of judgment. And a murder spree at a shopping mall is an firearms accident! A closer examination can detect continuity in the Treasury Secy post, and in the Securities & Exchange Commission, both still showing Wall Street pedigree. They strive to keep the lid on Wall Street legal matters, and do a great job.


Finally, the harsh reality from the weight of gravity and the passage of time resulted in a second bang. One can always question the motivation of the Dubai World default, and the fact that it occurred when the USDollar was badly oversold. One can question the wisdom to attempt to force Abu Dhabi to cover the bad debts or assumptions that it would cover the bad debts. One can point to a hidden motive to ruin Iranian assets and trade routes, since they own 30% of Dubai properties and benefit from restricted product shipment through Dubai corporations. Regardless, the aerial view is most important. The biggest victims are the London and European banks heavily exposed to Dubai debt. The Powerz prefer to call it a rally on the USDollar from seeking the safety and security. But to the rotten ramparts of the US financial core? HARDLY!! Instead what happened was that the British Pound and Euro currency fell during an expected retreat after a realization of upcoming declared losses. The US has fortified a false front from accounting marked to fantasy that produced a stock rally and recent culmination in the most fraudulent Non-Farm Payroll report in modern history.

The November Jobs Report was dismantled in several pages of the Hat Trick Letter Macro Economic Report just posted, a grand convenient fiction. The easy dismissal has escaped the mainstream lapdog US press. It included Birth-Death Model fictional adjustments (gigantic for past revisions), constant unstable seasonal adjustments, to begin with. Dismissal included weak TrimTabs data, flagging USGovt tax revenue data, a surprise downturn in ISM service sector data, and still prevalent Challenger Gray & Christmas large site job cuts to make a mockery of the ballyhooed report. So the USDollar rally occurred, give them credit, since they needed it to avoid major losses upon the US$ DX futures option expiration. The Powerz got their onions squeezed in a vise and short hairs clipped on the gold futures options expiration three weeks ago, but they avoided a second massacre on the DX expiration last week. Now the US$ has stalled at the downtrend line.

The second bang was not so important in providing a lift in the Dead Man Walking Dollar, as it was in signaling a resumption in the dominoes. The central bank system has its next shock in store. The downgrades to government debt for Greece, Spain, and Portugal given last week by ratings agencies signal upcoming debt related earthquakes. In the United States, the game is known innocuously as Extend & Pretend. The Europeans are gifted in the same chicanery. The entire banking system in Spain has kept housing inventory, whether from foreclosures or ruined projects, at still elevated prices, stubbornly refusing to mark them down the necessary 30% or 50%. As a result, Spain has a wide gap between bid and offer, and a huge inventory sitting idle, a stalemate that leads to sinkholes.


The second bang from Dubai is the most important destabilizing debt event in 14 months, but minimized in the United States. The US press hardly even mentions the downgrades across European on sovereign debt. The US press actually boasts that the financial markets are handling the Dubai situation very well, and might be past it already. What incredible denial, but much expected. The second bang signals the beginning of sovereign debt defaults, several of them, and the reshaping of Europe, both with the European Union and the Euro currency. The movement toward a Parliamentary European Union might soon be dead on arrival. The split of the Euro currency is soon to become a reality, a forecast made months before the Persian Gulf debt default forecast. The prudent action is to put the Lisbon Treaty on hold while member nations default on sovereign debt.

Spain's Govt default will soon default. The reality of proper accounting for property writedowns and the corresponding bank debt losses will have a calamitous effect. Over 20% unemployment and the powerful recession in progress will ensure a Spanish Govt debt default. But the immediate fireworks are seen in Greece, where the Premier Papandreou has shown defiance. He will not permit the nation to undergo the mindless reckless coerced IMF restrictions and guidelines, with the workers of Greece suffering. The past record of such IMF strictures results in permanent crippling of nations, with too many precedents to fill a single page. Something very unusual comes to Greece in response to official defiance, something unprecedented yet powerful and unpleasant. Riots will return to Athens, with much greater force and intensity, and spread across Europe. But the spillover of emotions will lead to much bigger events. The momentum of Spanish and Greek defaults will kill the European Monetary Union, and thus the EU itself. The re-emergence of the Deutsche Mark is assured, except it will be called a variant of the Euro. The codenames to date are the Core Euro or the Nordic Euro. It will become the official currency of Germany and certain stronger Central Europe nations with a trade surplus. If France manages to be included in the Core, it will be a miracle and pure gift. The Germans will need squires to carry their bags, an expedient perhaps. Effects from the currency on trade export will leave France reeling but Germany struggling.


Once the cracks in Europe are broken wide open, the minor European nations will fall like flies trapped in a hot summer window. The Baltic States are weak and will no longer be carried. But the bigger and more visible tragedies will be seen in Eastern Europe. A curious malformation was constructed in recent years. The Eastern European nations attempted a reconstruction, with new industrial development. However, they went too far on the mortgage side, emulating Europe, England, and the United States. In doing so, they mixed in a deadly potion on the mortgage finance formula. The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and will probably all default on sovereign debt. The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts. The aftershock bangs to the Baltic States and Eastern Europe will set up a powerful additional event that will be seen as a climax.


At least one major European nation will suffer the ignominy of a sovereign default. By this time, Spain and Greece will have been wrecked, along with Portugal, possibly Italy also, and maybe even Ireland. The prime victims to close the process of sovereign debt default will include France and the United Kingdom. Considered untouchable, these nations will succumb to the wretched financial foundations that befall them. France unfortunately has too many similarities to Spain, which debtors cannot overlook any longer. The United Kingdom unfortunately has too many similarities to the United States, which debtors cannot overlook since the UK cannot print money like the Americans to buy more time, or draw upon clandestine sources of funds. The UK will run out of time. With the French and British defaults, the game goes ballistic and enters the TWILIGHT ZONE.


Some might look at a dangerous run on the USDollar and a severe decline being the primary requirement for a rise in the gold price. It is true that for a long time the most heavily correlated factor for gold rising has been the US$ falling. A negative correlation has been vividly clear. More importantly though, a transition has begun in the last few months. The most important factor for gold has become, and will continue to be the falling value of the major currencies, all the major currencies, not only the USDollar. One must exclude the Japanese Yen in such an argument, since its 0% interest rate has rendered the Bank of Japan a neutered central bank. Watch the BOJ now, as it actually defends against profound damage from a rising Yen currency in the unprecedented process of an unwind to the grandest carry trade ever connected to financial engineering machinery. In fact, a handoff from the Yen Carry Trade to the Dollar Carry Trade is exactly what the USFed and USDept Treasury wish to interrupt. Never in history has a carry trade been installed to drain the vitality of the global reserve currency, to force and retain a near 0% interest rate, and to enable a continued falling value in the US$.

The most important factor for Gold, worth repeating, has become, and will continue to be the falling value of the major currencies. The entire gaggle of currencies is in deep trouble from government sponsored debasement. The entire gaggle of central banks is in deep trouble from discredit to their franchise system. Gold will rise in a powerful manner from the debasement of the major currencies, in particular the USDollar, the Euro, and the British Pound. The process of currency destruction will involve rotations. The events of the last month have shown that severe losses by London and European banks, from Dubai debt default, bring about an indirect lift in the USDollar. It occurred from a selloff of the British Pound and Euro currency, whose banks are lined up for new profound losses. The Powerz portrayed the Dubai events as a flight to security in the USDollar. If so, why is the long-term USTreasury Bond yield rising? The concept of retreating to a currency, the US$, with trillion$ federal deficits, an insolvent banking system, and an economy struggling under the weight of 25% homeowners insolvent on their home loans, IS TOTALLY LUDICROUS. Soon the counter concept of retreating from a currency into Gold will be better understood.

The next confusing events will probably bring about a decline in the Euro currency from imminent and actual default in at least two European Union member nation government debt securities. That is at least two European national sovereign debt defaults. The Euro should decline from such severe events, amidst uncertainty, at least initially. Later, when the European Monetary Union fractures with a shattering deafening blow, the new central core of the Euro currency will be revealed. When that historic event occurs, essentially the revival of the Deutsche Mark, the USDollar will resume its decline in a powerful manner. Gold will then rise in response powerfully in US$ terms. During the monetary earthquake with European government defaults, the gold price will rise powerfully in Euro terms. After the introduction of the new Core Euro currency, the gold price in Core Euro terms will stabilize, with a handoff given to the gold rally in US$ terms. Such will be the nature of the rotation phenomenon. Mainstream analysts will make errors all along the way to promote the false notion of flight to US$ safety and security, when none exists. A flight out of paper fiat currency is the key, and flight into Gold is the major mega-trend that has begun to occur and will continue to occur. Those naysayers might want to examine the gold accumulation by the major savers of the world, who happen to be the major creditors to the USGovt and thereby the major supporters to the USDollar, namely China. They plan to increase their gold holdings six-fold in the next several years. Central banks in aggregate have turned to accumulation in the last several months.


No forecast invites more private anger, insults, dismissive comments, and generally negative email than my forecast made in autumn 2008 of a USTreasury Default. The climax of the string of global sovereign defaults will be the government debt default for the USGovt, in the USTreasurys. Events in the last year support the forecast. Federal deficits are rising dangerously, over a trillion$ annually. The Greenspan-Guidotti criterion for debt default has long ago been triggered, even assuming the USGovt OWNS ANY GOLD. It does not. Rather it owns clear ledger items called 'Deep Storage Gold' that is not deep in underground vaults, but deep in mountain ore deposits, not yet mined, kept very secretive. The short-term USGovt debt is over $2 trillion, closer to $3.5 trillion if immediate debt finance is counted, as in the next 12 months. The Stimulus Bill was a travesty, more wasted funds and opportunities. The TARP Fund was an $800 billion slush fund, clouded still in secrecy. The foreign wars are a sacred big money loser, with more deficits associated. The competent economists like former USFed Chairman Volcker warn that structural reform is non-existent in the USEconomy and financial sector. Volcker further warns that derivatives have done great harm, and contain no value, only a shift of financial rents. The Global Paradigm Shift is in full force since the spring months, led by the twin concepts of diversification out of US$-based reserves, and of the movement to establish an IMF basket currency as an alternative for international commerce and transaction settlement. The end of the US$ for crude oil sales has been written on the walls. The end to the US$ credit card with unlimited balance is soon to end.

Those people who act as naysayers, even to offer private criticism for the USTreasury Default forecast, seem never to grasp the above arguments, all of which have absolutely zero precedent. They did not foresee many important events, each of which were important Hat Trick Letter forecasts come true. 1) They did not foresee the insolvency of the US banking system. 2) They did not foresee the broader breakdown and wreckage in the mortgage finance industry beyond subprime. 3) They did not foresee the severe whacking to the British Pound. 4) They did not foresee the nationalization and insolvency of fraud ridden Fannie Mae. 5) They did not foresee the downturn and endless US housing bear market decline. 6) They did not foresee the heralded end of the Petro-Dollar, as in exclusive US$ usage for crude oil sales. 7) They did not foresee the Persian Gulf debt shock wave. In fact, they do not foresee anything except the sound of their own voices. THEY WILL NOT RECOGNIZE THE USTREASURY DEFAULT, MOST LIKELY TO COME AS A FORCED DEBT WRITEDOWN WITH DEEP CREDITOR LOSSES. We are in historically unprecedented times. Look for a new USDollar to be used inside the United States fence posts, since the USGovt does not control contracts conducted globally. The devaluation of the US$ will come full circle, and lead to an implosion internally.


The US Federal Reserve is under fire. Many in the USCongress wish to force audits of its balance sheet. Many in the USCongress wish to determine what it does with hundreds of billion$ in USGovt funds. Many citizens in the United States wish to understand its everyday operations and where its loyalty lies, let alone how it manages to fail at both its primary functions. Its defenders cannot come to grips with how the US$ has fallen over 98% in value since its inception. Its defenders cannot come to grips with how the USEconomy is stifled by near 20% unemployment (when those without work are counted). Its defenders cannot justify, or even permit true statistics, regarding the powerful monetization of US$-based official bonds. We are witnessing the Weimar-ization of the USFed and the USTreasury Bond and the USDollar. Once again, American economists ignore history, choose to rewrite it, and ignore the path leading to increasingly damaging cycles. This cycle is systemic, not a business cycle, not a credit cycle, and it contains a cliff much bigger and deeper. The train wreck in progress will culminate in a USTreasury Default.

Put aside the growing debt of the USGovt for a moment. Put aside the growing balance sheet of the USFed for a moment. Put aside the dogmatic belief that the USFed can print money to alleviate financial problems for a moment. Put aside the shifting sands notion that the USDollar will remain the safe haven for a moment. Instead, consider two important notions, monetization and balance sheet. The USFed has been monetizing USAgency Mortgage Bonds in the US credit market, in fact a colossal amount held by foreign central banks. The USFed has been monetizing USTreasury Bonds both by the domestic primary bond dealers, taking their unsold inventory merely one week after auctions. The cash value from foreign mortgage bonds serves as a monetization tool for foreign USTreasury bidding at the same auctions.

Lastly, just look at the USFed balance sheet and its ratio makeup. The USFed is bond buyer of last resort. In expanding its balance sheet, newly acquired assets have terrible quality. The USFed might actually be insolvent here & now due to rising mortgage bond purchases. Half their balance sheet is mortgage bonds. If they are worth just 6% less in true value, the USFed is broke. My conclusion is that the USFed is $100's of billions in the red. Nobody seems to care, believing they can just print money and eliminate their insolvency. It aint that simple.

The US Federal Reserve is killing itself by massive purchases of badly impaired assets, often the toxic assets almost no banks or investors want. Sure, it is also debasing the USDollar in doing so. The most dangerous assets under heavy accumulation are the mortgage backed securities issued by Fannie Mae and Freddie Mac. Demand for them is nonexistent. In the process the USFed has ruined its balance sheet. The ruin has occurred in just the last 12 months. Instead of acting in its historical role as the 'lender of last resort', the USFed has on its own expanded its mandate to become the 'buyer of last resort.' The end result is powerful, as they are a Substandard Junk Bond Warehouse. The destruction of the USFed balance sheet is apparent from the following chart with data, prepared by BusinessInsider.com. See the light blue Fed Agency Debt in the upper right, the cancer that grew upon their balance sheet. Their true value is an order of magnitude lower than book value maintained by the august body. This central bank is walking dead.

Two major billboards must be written and read. 1) The USFed is insolvent. 2) The USFed is dangerously over-leveraged. According to its latest report, the US Federal Reserve owns over $1 trillion of mortgage backed securities, equal to 45.6% of the entire portfolio. One year ago mortgage backed securities were under 1% of its total assets. Actually the number was 0.6%, to make a 76-fold increase in toxic mortgage bond assets on the USFed balance sheet. The credit market actually believes the USFed stepped in and helped the system. But in doing so, they killed themselves. Just like other major banks such as the Wall Street firms, the USFed is very highly leveraged. The USFed carries $2157 billion of debt on $52.8 billion of capital, producing a leverage ratio of 40.8 to 1 ratio. Think over-leveraged, insolvent, and dead, but not yet declared dead. They might actually resign their commission contract with the USCongress, and thereby force a USTreasury Default!!

Here is where the insolvency risk screams out in obvious manner. Its listed mortgage bonds are 19 times greater than its capital, equal to 5.3% in inverse. So therefore, if the true value of these toxic assets is actually 6% lower than their recorded book value, the US Federal Reserve capital is depleted, effectively rendering it insolvent. It stands to reason that if Fannie Mae is insolvent, if Freddie Mac is insolvent, and if monetization supports their bonds, while the market shuns them, then the true value of the mortgage backed securities with their brand is less than 94.7% of their book value. Therefore one might safely conclude that on a strict accounting basis, the USFed is effectively insolvent. My simple guess is that the USAgency Mortgage Bonds on the official USFed balance sheet are worth perhap 30% to 50% less than cited on their books. That would leave the USFed insolvent by 15% to 25%.

One might wonder of motive for the USFed to offer big banks an interest yield on assets held on account. The reason might be to shore up its broken toxic balance sheet and fight off their own insolvency. The USFed remains liquid because banks continue to provide it with funding. Few if any questions come regarding the US Federal Reserve liabilities. The USFed is insolvent, just like the USGovt, just like the Social Security Trust Fund, just like the FDIC, just like US banks, just like US homeowners, and just like US leadership!!!


That valid haven has been gold & silver for thousands of years. It will continue to be the safe haven. The major global currencies are being horribly debased as major governments fight off insolvent banking systems. In doing so, they have set up conditions for a string of sovereign debt default incidents. They will occur like a string of dominoes arranged in a global circle. The process was begun in the US and UK with broken banking systems and extraordinary measures to deal with it, like bank aid packages, stimulus packages, and liquidity facilities out the ying yang. The naive crowd thought the process ended when the US, UK, and Europe responded with official government rescues and aid, complete with certain nationalizations of key banks and financial institutions. Dubai defaults demonstrate the process continues for credit market crises. No climax has come, but the future holds plenty.

During the rotational lifts and fades of the major currencies, the one constant has been and will continue to be gold & silver. Notice today Tuesday December 15th, the Euro currency is down 130 basis points to the 145.3 area, but gold is flat on the day and silver is flat on the day, almost no change in each. Other warning signs remain, as the crude oil is back over the $70 mark and the 10-year USTNote yield has reached 3.6% in a recent rise. The so-called USDollar rebound has occurred with a rising long-term USTreasury yield, a contradiction for any claim of a flight to safe haven. The only lift for any US$ counter-trend rally come from walking atop the broken structures of other major currencies. The grand rotation during defaults will lift the Gold & Silver prices tremendously. Watch the back door vulnerability. As central banks and sovereign debt securities undergo a powerful unprecedented siege, their defense of the Gold-Dollar balance beam will vanish. British and European weakness does not translate to USDollar strength, not with destroyed finances for the USGovt and an insolvent balance sheet for the USFed. It instead translates to strength in the Gold & Silver bastions for monetary integrity.

Copyright © 2009 Jim Willie, CB


15 December 2009

The coral reef crisis and climate change

Not our usual remit but this item summarises the view we take of the climate change issue.


Robyn Williams: Charlie Veron is one of the top scientists in the world, working on corals. He's the former Chief of the Australian Institute of Marine Science in Townsville, and his book A Reef in Time covers the issues now before the world in Copenhagen. Dr Veron.

Charlie Veron: About a year and a half ago, I recorded an item on this program called 'The Plea of the Great Barrier Reef', in which I laid out the case that Australia's greatest natural treasure is on the brink of wholesale destruction from the effects of climate change. I am happy to say that this plea was heard very widely; I am less happy that the dire predictions I made then, remain on track.

There are now two further books on this subject. In September, the Great Barrier Reef Marine Park Authority released their long-awaited Outlook Report, a government profile of The Reef which spells out just how the Authority sees the Reef's future, and just out is an excellent book for students called Coral Reefs and Climate Change, prepared and published by the University of Queensland. The bottom line for all three volumes is essentially the same: they show how and why the Great Barrier Reef is, indeed, in very serious trouble.

Among the many that heard my talk last year was an English zoologist who promptly came to my home in Townsville to discuss the lead-up to Copenhagen. 'It would be effective, Charlie', he said, 'if the Royal Society were to stage a full presentation of what you have to say, and have you introduced by David Attenborough, and have it spread around the world by Google'. Surprisingly, this all happened as he planned. A drop in the ocean perhaps, but it has helped highlight the plight of coral reefs. If you, listener, can spare an hour to hear me out, the URLs for this talk are on this program's website.

How well are Australians facing up to climate change? Do other countries give so much media coverage to so-called climate change sceptics? Do other countries politicise climate change issues like we do? The answers are 'no', and 'no'. The so-called anti-climate change lobby which has now transformed itself into an anti-climate-science lobby, seems to have no equivalent in other countries except, perhaps in the bible-belt of the United States.

There are real parallels between the anti-climate-change proponents in Australia and the anti-evolution lobby in the United States. Both claim that science is on their side yet both constantly make assertions that have no scientific basis whatsoever. Both are promoted by zealots who fancy themselves as crusaders acting for the greater good of God or country. Most significantly, both have proponents who call themselves scientists, but knowingly misrepresent science to support some story or other they want to put across. We all want to believe that human-induced climate change is not happening, but unfortunately the science is showing that it is. This science is overwhelming on every imaginable front.

All this reminds me of a time when I used to argue evolution issues with creationists. A complete waste of time, but harmless. However, when it comes to climate change, nothing less than the future of our planet is at stake., Seeing what has recently happened in Canberra, I feel that Australian scientists must give much more of their time and effort to raising awareness of real science for the general public, let alone parliamentarians. This is something most scientists hate doing, but if Australia does not lift its game, we will not play our part in avoiding the climate catastrophes that lie ahead. We are now the worst polluter per capita of any developed nation, and are on track to become the world's foremost exporter of pollution. Because of the Howard years, we are already lagging far behind. Among the G20 nations, a recent study ranked Australia 15th in preparedness for a clean energy future. Any comment I have about this will immediately be out of date, but in retrospect I believe we hit rock bottom with the popular Liberal Party view that Australia is too small to make a difference, so why not leave it to the big guys. That same argument would have been equally applicable to Australia's participation in both World Wars: should we have opted out of those also?

Dozens of major international conferences have now been held in the lead-up to Copenhagen. The overwhelming focus of these is on the science of climate change, on economic impacts, and on political issues. What is missing in all this? The plight of natural ecosystems. European climate change research organisations habitually forget this, as I have repeatedly discovered when giving seminars. With corals we are not just making predictions. The impacts have been happening for decades and are well recorded. This puts them in a class of their own.

The bottom line is this. We can argue computer predictions, economics and politics all we like, but we must never forget that we are ultimately dependent on the health of our planet's ecosystems, for our own existence.

Coral reefs are the natural ecosystems at the forefront of climate change. This is not only because of the recent track record they have left, but because corals are the Earth's natural ancient historians. Being carbonate platforms, reefs are very sensitive to ocean chemistry changes. This means that they respond quickly to disturbances in the carbon cycle, the sorts of disturbances which are at the root cause of extinctions. The mechanisms involved are not complicated. The carbon cycle is the greater matter cycle that links the biosphere to the geosphere. All life forms are part of it; so are rocks. Carbon dioxide is the fast-acting currency of the carbon cycle and it is carbon dioxide that is acidifying our oceans. This process alone seems capable of plunging our planet into a mass extinction.

When it comes to climate change, corals have two separate adversaries: global warming and ocean acidification. These are largely independent.

Coral reefs have been tracking global warming via the process of mass bleaching for 30 years. Bleaching occurs when the food-providing algae in the coral's tissues start producing lethal levels of oxygen in response to elevated temperature. Mass bleaching started occurring world-wide when carbon dioxide levels reached about 320 parts per million. This was in the late 1970s. By the early 1980s, sporadic, highly destructive bleaching occurred in response to levels of about 325 parts per million. We see this only in the rear-vision mirror today. Carbon dioxide has now reached 387 parts per million. At this concentration, were it to be held constant, we can be almost certain that most reefs world-wide would slowly decline. Up till now, this decline is linked to El Nino cycles, natural weather events which take place very 4-7 years. In future, bleaching is set to decouple from these cycles and become annual events. The whole process is speeding up.

Ocean acidification, the other great adversary of corals, is caused by changes in the ocean chemistry in response to carbon dioxide, dissolving in surface water and forming carbonic acid. The chemistry is simple and has been understood for a long time. Carbonic acid is neutralised by ocean carbonate buffers. When this process is speeded up, there is a shift in the ratio of carbonate to bicarbonate ions which, in turn, reduces ocean alkalinity, or pH. The acidification process is now well established in the cold Southern Ocean where carbon dioxide is relatively soluble. It will move towards the equator over the next few decades. Just how this will affect reefs is not known in detail, but it may already be slowing the rate of coral growth. As growth slows, branching corals will develop a sort of coraline osteoporosis as skeletons become progressively weaker. They will then cease to provide the three dimensional habitat which most reef species depend upon. It's analogous to taking trees out of forests, the whole ecosystem ultimately collapses. Without its biodiversity, reefs will be overtaken by algae and bacterial slime. I have seen such instances in many parts of the world now. They are deeply depressing sights because they point to the future.

If humans do not successfully curb carbon dioxide emissions now, we will reach the level of 450 parts per million by 2030 or soon after. This is the limit most climate change brokers are going for at Copenhagen because of the general belief that a maximum of 450 will limit global warming to 2 degrees, the global temperature widely believed that humans can endure without global collapse of agriculture and completely catastrophic sea-level rise. But what about natural ecosystems? At that level, reefs will be in rapid, terminal decline world-wide. First from temperature-induced bleaching, then through ocean acidification. There will also be knock-on effects to all ecosystems associated with reefs. Reefs will cease to be large-scale nursery grounds for fish and will cease to have most of their current value to humanity.

By around mid century, our predicament will, at current rates of emissions, become much worse. Carbon dioxide will have reached 600 parts per million and climate change will be in full runaway mode. Reefs will have little in common with their counterparts today. They will be eroding geological structures. Extinctions will be very widespread, for about a quarter of our planet's entire marine biodiversity is linked to reefs.

Although mass bleaching is a reef phenomenon, the effects of ocean acidification will directly impact not only corals, but calcareous algae, most molluscs, many crustaceans, echinoderms and planktonic life. It will also directly affect other taxa that rely on carbonates for skeletal growth and for normal cellular function. This includes fish which are particularly vulnerable during early stages of their life-cycle and also krill, the lynch-pin of the Southern Ocean. Research on these issues is still in its infancy, but the enormity of the threat, nevertheless, is real. What I am describing is the start of a mass extinction the likes of which the Earth has not seen for tens of millions of years.

Are we seriously, really seriously, on the verge of plunging the Earth into a mass extinction event? We can't be sure, but the evidence pointing in that direction is frightening. What we are doing is driving our planet into uncharted waters which, at the very least, is putting the health and welfare of all life on it at extreme risk.

Efforts at emissions reductions have so far been very limited. Recent slowing in carbon dioxide emissions seems more an outcome of the global economic crisis than anything to do with emissions reductions. It is critical that this situation be reversed through rapid and dramatic cuts. Even so, the outlook is grim: cumulative carbon emissions to date have already committed atmospheric carbon dioxide to remaining above 330 parts per million for at least the next thousand years. Returning to a safe level will necessitate creating new mechanisms of extracting carbon dioxide from the atmosphere.

Now we are talking geoengineering, a name given to human attempts to artificially control our climate. Personally I believe it will come to this, no matter what the cost or the risks. The Royal Society's review of geoengineering, published a few months ago, more or less says that the only safe way to extract carbon dioxide from the air is to give the job to plants. There are a lot of options here. We need to adopt them all.

Even so, we may well have left it too late for the Great Barrier Reef. This incredible place is on Death Row and at this point I see no clear way for a reprieve. But perhaps we will not be too late for most other ecosystems. Not if we are prepared to act decisively. Now.

I believe children alive today will celebrate the foresight of today's leaders for heading off a global disaster or else curse us all for failing to face up to the greatest challenge in human history when we had the chance.

When we had the chance! Dr Charlie Veron is the former Chief Scientist of the Australian Institute for Marine Science in Townsville. His book on all this is called A Reef in Time.

Dr Charlie Veron
Former Chief Scientist,
The Australian Institute of Marine Science,

Corals on the EDGE: a message for Copenhagen