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.
___________

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Notes:

(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

Financial mess isn't even the end of the beginning.. Halligan

This blogger prefers Liam Halligan to Ambrose Evans-Pritchard, any day....

So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.

Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.

In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.

Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.

Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".

The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.

A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.

Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.

So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.

The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.

This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.

Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.

Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.

The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.

This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.

I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.

http://www.telegraph.co.uk/finance/comment/liamhalligan/6521350/This-financial-mess-isnt-even-the-end-of-the-beginning-for-UK-wealth.html

Those once called bonkers now point to where the madness lies

You talking to me, Liam? Its the coming QE driven hyperstagflation, isn't it.

As a result, the argument goes, we have "no choice" but to keep the Bank of England's printing presses in overdrive, pressing on with so-called "quantitative easing". And, clearly, any action to get the UK's disgraceful public finances under control would, given this deflationary threat, be "woefully premature".

The above paragraph, in essence, captures the consensus view now driving macroeconomic policy in both Britain and America – the "QE two". Yet it's completely and utterly wrong – not least as it's been formulated entirely to serve the financial vested interests that have so thoroughly captured these countries' political and policy-making elites.

I accept that UK inflation in September was low. But 1.1pc is nowhere near "deflation", which means that the CPI would remain negative for many months. The credit crunch has been in full swing for more than two years and it is only recently that the CPI has gone below the Bank's 2pc target, let alone breached zero.

Last month's CPI fall is entirely explained by the one-off impact of lower energy bills (tariffs were hiked last September) and last December's VAT reduction from 17.5pc to 15pc. Once these energy base effects wear off and the VAT cut is reversed, inflation will rise sharply. Core CPI inflation – excluding energy costs – rose to 1.7pc last month and would be 2.5pc had VAT stayed the same.

For all the talk that Britain is "slipping towards deflation", inflation averaged 1.5pc during the third quarter – above the 1.3pc forecast the Bank made just two months ago. The reality is that UK inflation has remained far higher during the credit crunch than the vast majority of economists expected.

At this point, I could rant on about how a few of us did warn that the threat of deflation was a self-serving myth, an intellectual deceit designed to justify the monetary incontinence we've seen since. Some of us were even called "bonkers" for our trouble and subjected to ad hominem attacks by government place-men within the Bank of England.

But we've been proven right. September was the low-point for the UK's CPI – and it's still a long way from zero. Given the impact of the recently falling pound on import prices, the Bank will be forced to increase its CPI projections in next month's quarterly Inflation Report.

With oil prices now rising steadily, having plunged during the fourth quarter of last year, the energy base effects will soon work in reverse, pushing the CPI up as fuel bills start to head skyward.

Even now, the Bank is forecasting 2.1pc inflation in the first three months of 2010 – further away from deflation. I'd say that's still too low. There are serious price pressures in the pipeline – over and above the "inconvenient truth" that QE means the UK will soon have tripled the size of its monetary base. When banks stop hoarding that cash, inflation will let rip.

Even before that happens, there are undeniable signs that supply-chain realities are now pushing prices up. In September, the producer price index rose for the first time in four months.

Which brings me, once again, to the "output gap" – yet another intellectual device that the City's pet economists have been using to justify our recent wildly expansionary policies (which, by coincidence have bailed out the banks that employ them, pumped up the stock market and ensured big bonuses are back in vogue).

For months, we've been told the credit crunch has created a "huge reservoir" of excess capacity and the economy's ability to supply dwarfs demand. So the government can print money and borrow like crazy without fear of stoking inflation.

This is total tosh. By starving firms of credit, this financial crisis has destroyed vast swathes of supply. I've said it many times before and now some serious people are starting to agree.

Last week James Bullard, the respected president of the St. Louis Federal Reserve, argued that America's output gap is "much smaller than is commonly believed" – not least because the credit crunch has caused firms to shut and workforces to disperse, so eradicating productive capacity. Bullard dismisses as "overplayed" the notion that output gaps will keep inflation low.

Unlike his Fed colleagues in Washington, Bullard is no White House lickspittle. He is a serious economist, well capable of independent thought. We need more policymakers like him – who cannot be dismissed as "bonkers", but who dare to highlight the madness of the current policy consensus.

http://www.telegraph.co.uk/finance/comment/liamhalligan/6359847/Those-once-called-bonkers-now-point-to-where-the-madness-lies.html

News Snippets ~ UK , predictions, silver, Mitch's desert planet boomtown.. Ag/Au on the up..

Britain better put the IMF on speed dial.....

As the UK's public borrowings reach record levels, Britain's credit outlook has been lowered from stable to negative by the ratings agency Standard & Poor's. The agency cited government debt and political uncertainty with an election looming for its decision. It is the first time that Britain has been on negative outlook since S & P introduced outlooks in the 1980s. The move could eventually lead to a cut in the UK's Triple A rating and leave the Government in a position where it would have to pay more to borrow on financial markets. Official data released overnight also shows British public borrowing hit a record high for the month of April. The pound tumbled sharply and shares also fell in response to the Standard & Poor's decision..
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On the qualification of predictions...

The late JK Galbraith, one of the twentieth century's most prominent economists, observed wryly that the purpose of economic forecasting is to make astrology look respectable. The American baseball star Yogi Berra, famous for his malapropisms, said: "It's tough to make predictions, especially about the future."

Recent history bears that out. Just about every official forecaster around the world underestimated the impacts of the global financial crisis. Over the past year the International Monetary Fund has revised down its forecasts for the global economy month after month. Just ten months ago, it was predicting that the global economy would expand by more than 4 per cent over the year to the end of 2009. Now it sees global growth going backwards by 1.3 per cent.

The Reserve Bank and the Treasury, too, have been consistently wrong during the course of the crisis - or, to put it more kindly, their forecasts have been overtaken by events. Within weeks of being issued in February, the updated economic and financial outlook from Treasury predicting that Australia would avoid recession looked heroic, bordering on ludicrous. Of course, it's almost certain that these forecasts were based on assumptions chosen to accentuate the positive. The last thing the central bankers or the econocrats want to do is undermine public confidence by predicting a recession until it would be utterly implausible not to.

Silver breaks out...



Mitch Hooke is a boso spruiker not to be taken seriously... the hyperbolic dimple will say anything,imo
The mining industry has released modelling saying 23,500 jobs will be lost by 2020 under the Federal Government's emissions trading scheme.
Around half the job losses are forecast to be in Queensland's coal industry, and Minerals Council head Mitch Hooke says those figures will multiply in the future, with job losses doubling by 2030."New South Wales would be the second highest level of job losses - a bit over 4,000 direct jobs [lost]," he said."Put a multiplier on that and you can see these figures really start to become quite significant."

He says one of the fundamental failures of Australia's emissions trading scheme is that its targets are far ahead of other countries. (Liar, liar, pants on fire Mitch...)

Hey Mitch, how many job losses in agriculture and tourism under this senario.....

Now, the MIT study has been published in a peer-reviewed journal -- The American Meteorological Society's Journal of Climate (subs. req'd) -- which obviously it makes it much more credible and high-profile. Reuters has a good story on it, "Global warming could be twice as bad as forecast." The study concludes:
The MIT Integrated Global System Model is used to make probabilistic projections of climate change from 1861 to 2100. Since the model's first projections were published in 2003 substantial improvements have been made to the model and improved estimates of the probability distributions of uncertain input parameters have become available. The new projections are considerably warmer than the 2003 projections, e.g., the median surface warming in 2091 to 2100 is 5.2°C compared to 2.4°C in the earlier study. Many changes contribute to the stronger warming; among the more important ones are taking into account the cooling in the second half of the 20th century due to volcanic eruptions for input parameter estimation and a more sophisticated method for projecting GDP growth which eliminated many low emission scenarios.

[Note: That rise is compared to 1981-2000 temperature levels. So you can add at least 0.5 °C and 1.0 °F for comparison with pre-industrial temperatures, which I did in the headline -- see "A (Hopefully) Clarifying Note on Temperature."]

The MIT press release calls for "rapid and massive" action to avoid this. Study co-author Ronald Prinn, the co-director of the Joint Program and director of MIT's Center for Global Change Science, says, it is important "to base our opinions and policies on the peer-reviewed science... There's no way the world can or should take these risks." Duh!

Global warming will hit us so quickly and dramatically going forward that idiots like Mitch will carry the shame of their denial for the rest of their lives round their necks like a dead albatros...

Standard Chartered say buy Gold Silver...

Standard Chartered is including gold and silver as one of four main recommendations to its private banking clients, according to a presentation by chief investment strategist, Lim Say Boon, in Dubai today.

The UK’s second largest bank by market capitalization has been winning clients in a flight to quality from its crashing rivals, and this global trend has also been evident in the Middle East.

Clients are being recommended to purchase gold and silver on price pull backs as the precious metals have a low correlation to traditional asset classes. The bank will recommend on different ways to invest in the metals.

UK versus US ~Prudent Bear Fund

The U.K. is in trouble. Today it was reported that the British economy contracted a much worst-than-expected 1.5% during the fourth quarter (not annualized!), the steepest economic decline since the dark days of 1980. Manufacturing activity sank a dismal 4.6%, while services contracted by 1%. Some forecasts now have the British economy this year suffering the most severe economic contraction since 1946. There’s now a strong case for using “depression” when describing this deepening financial and economic malaise.

The pound today traded at the lowest level against the dollar since 1985. This currency has depreciated 30% against the dollar over the past 12 months. Against the yen, the pound has collapsed 42% during the past a year. There is little room left for conventional monetary policy. At 1.50%, the Bank of England’s (BofE) base lending rate is today at the lowest level since 1694.

Curiously, the British pound has declined 6.5% against the dollar so far this month, while the dollar index has gained about 6%. I say “curiously,” as I would argue that in key aspects of financial and economic structuring, the U.K. provides a microcosm of our own systemic vulnerabilities. In a recent Bloomberg interview, Jim Rogers stated “The pound sterling is going to be under pressure. The U.K hasn’t got much to sell the world anymore.” His comments to the Financial Times were even harsher: “I don’t think there is a sound U.K. bank now, at least, if there is one I don’t know about it… The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west? You don’t need London.”

Following our direction, the U.K. over the past decade gutted their already shrunken manufacturing base as it shifted headlong into “services” and finance. While this finance and asset inflation-driven Bubble economy seemed to work miraculously during the boom, the post-Bubble reality is a severely impaired financial system and an economic structure incapable of sufficient real wealth creation.

I feel for British policymakers. Just five short quarters ago, overheated nominal GDP was expanding at about a 6% pace. And with inflation surging to the 5% level, the Bank of England pushed its base lending rate to 5.75% (summer of ’07). I’ll give the BofE Credit for trying to tighten financial conditions. It was, however, in vain, as Acute Global Monetary Disorder overwhelmed domestic policymaking. BofE tightening only widened interest-rate differentials, especially compared to near zero borrowing rates in Japan. Finance inundated the City of London in a finale of unwieldy speculative excess, setting the stage for a reversal of flows, de-leveraging and today’s collapse.

Yesterday, U.S. insurance company Aflac dropped 37% on concerns for its exposure to European “hybrid” securities - in particular preferred-type instruments issued by the large U.K. banks. According to research by Morgan Stanley (Nigel Dally), “When it comes to capital adequacy and investment portfolio strength, Aflac has historically been viewed as the gold standard across the industry.” Accordingly, the Street responded violently to the report highlighting the company’s potentially significant exposure to securities that have suffered huge losses in market value (Aflac rallied sharply today). According to the Morgan Stanley report, some of the hybrid securities issued by U.K. lenders Royal Bank of Scotland (RBS), HBOS, and Barclays are now trading at between 15 and 45 cents on the dollar.

Not long ago during the boom’s heyday, these types of securities were viewed as low risk instruments. They were, after all, issued by major – and at the time well-capitalized –banking institutions. In the worst-case scenario, these institutions (and their hybrid securities) were viewed as too big to fail. In reality, these banks were issuing a most dangerous class of securities - higher yielding (“money-like”) instruments appealing to even the more conservative investors. Today, the entire U.K. banking system is enveloped in a vicious downward spiral. Tens of billions of securities that only a short time ago were perceived as safe are being heavily discounted for the possibility the issuing institution will be “nationalized.”

On Wednesday, troubled Royal Bank of Scotland promised to lend $8.7bn in exchange for various lines of government support. The market took the news as a huge leap toward nationalization and governmental control over the U.K. banking sector. Even RBS’s CEO was quoted as saying, “We’ll be one the first guinea pigs.” The markets now view that U.K. policymakers will have few available options other than borrowing hundreds of billions to recapitalize their banks and support the securities markets.

Ten-year government “gilt” yields spiked 29 basis points higher this week to 3.68%, with a 2-wk gain of 55 bps. On Tuesday, Britain reported a $20.5bn (14.9bn pounds) fiscal deficit for the month of December. Spending was up 6%, while tax receipts were down 5.5%. The European Commission is now forecasting the U.K. deficit to surpass 8% of GDP this year. After trading at about 20 bps this past June, the cost of U.K. Credit default swap protection has spiked to 147 bps (traded as high as 165bps Wednesday).

The U.K. gilt market seemed to lead global bond rates higher this week. As the scope of global financial sector capital shortfalls and forthcoming economic stimulus become clearer, bond market nervousness grows. U.S. 10-year yields ended the week 31 bps higher at 2.59%, about 110 bps below comparable gilts. There should be little doubt that our new Administration will move quickly and decisively to try to bolster the financial sector and stabilize the real economy.

I fully expect our Post-Bubble Financial and Economic Predicament to parallel that of Britain. At some point, our problems will likely be of much greater scope due to, among other things, our system’s larger size. So far, the U.K. has suffered a more acute crisis due to its inability to stabilize its troubled financial sector. For one, it is suffering through a more destabilizing outflow of speculative finance (unwind of carry trades). Also, the U.K. financial structure has traditionally been less government-influenced – leaving it today more vulnerable to a crisis of confidence. Outside of government debt instruments, confidence has faltered for large cross-sections of U.K.’s financial claims (“moneyness” has been lost).

Our system has to this point proved relatively more stable due primarily, I believe, to the instrumental role played by government and quasi-government institutions such as the FHA, Fannie, Freddie and the Federal Home Loan Banks. The market’s perception of “moneyness” is retained for multi-Trillions of U.S. claims – a dynamic that bolsters the view that the U.S. dollar retains its “reserve currency” and safe-haven status. And as long as this confidence holds, faith in the government’s capacity for system “reflation” endures. But it all has the look of a fragile confidence game, and I fully expect the invaluable attribute of “moneyness” to be tested at some point.

There is absolutely no doubt that a massive inflation of U.S. financial claims is in the offing. One would suspect it is only a matter of when market perceptions of “moneyness” adjust. This week’s jump in gilt yields could portend a troubling new phase in the U.K. financial crisis. It could also be a harbinger of a more general crisis of confidence for global currencies and debt markets. The long-bond suffered its worst week since 1987 (according to Bloomberg). Gold was up $43 today and $56 for the week.

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UK banks were just three hours from collapse

Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown's Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was 'very close' to a complete banking collapse after 'major depositors' attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals.

Only frantic behind-the-scenes efforts averted financial meltdown.

If the moves had failed, Mr Brown would have been forced to announce that the Government was nationalising the entire financial system and guaranteeing all deposits.

But 60-year-old Lord Myners was accused last night of being 'completely irresponsible' for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure.

The build-up to 'Black Friday' started on Monday, October 6, when the FTSE 100 dropped by nearly eight per cent as bad news on the economy started to multiply.

The following day, Chancellor Alistair Darling began all-night talks ahead of an announcement on the Wednesday that billions of pounds of taxpayers' money would be used to pour liquidity into the system.

But shares continued to plummet, turning into a rout on the Friday when the FTSE crashed by ten per cent within minutes of opening.

Both Royal Bank of Scotland and HBOS were nearing complete collapse - but Lord Myners, who built up his fortune during a long career in the City, said the problems ran far wider.

'There were two or three hours when things felt very bad, nervous and fragile,' he said. 'Major depositors were trying to withdraw - and willing to pay penalties for early withdrawal - from a number of large banks.'


Lord Myners: 'There were two or three hours when things felt very bad, nervous and fragile'

The threat to the system was so severe that the Bank of England was forced to contact RBS's creditors in New York and Tokyo to persuade them not to withdraw their funds, but it is not known which other banks faced a run on their reserves.

'We faced the very real problem of how banks could stop depositors from withdrawing their money,' a Treasury source said yesterday.

'The banks themselves were selling their shareholdings, accelerating the stock-market falls, and preparing to shut up shop. Mortgages would have been sold on and savers would have been spooked, to put it mildly. It would have been chaos.'

After a weekend of crisis talks, which concluded at dawn on the Monday, it was announced that Lloyds TSB was taking over HBOS, supported by £17billion of taxpayers' money, and RBS would receive an injection of £20billion - prompting the resignation of RBS's infamous chief executive, Sir Fred 'the shred' Goodwin. Share prices at last started a small rally.

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said last night that it was 'highly irresponsible' for Lord Myners to reveal the scale of the problems because it could serve to further wreck already fragile levels of confidence.

'We are not out of the woods yet,' she said. 'I fear for Barclays, after the fall in its share price, and Lloyds has been damaged by the HBOS takeover.'

She added: 'If it was panning out in that way, then the Government would have had no choice but to step in and nationalise the entire financial system.'

Angela Knight, chief executive of the British Bankers Association, said: 'The issues related only to HBOS and RBS. To imply that all the banks would have gone under is wrong. It is complicated.'

Lord Myners also said that bank executives had been 'grossly over-rewarded' during the 'golden days' of big bonuses. 'They are people who have no sense of the broader society around them,' he said. 'There is quite a lot of annoyance and much of that is justified.'

"The banks are fucked, we're fucked, the country's fucked." UK cabinet minister

Labour stakes its reputation on second gamble
Patrick Wintour, political editor
The Guardian, Monday 19 January 2009


As the Treasury last night finalised its second sweeping banking revival package in three months, Downing Street was preparing to go on the offensive, justifying the package not as a bail-out for the banks, but an attempt to protect companies and families trying to secure a mortgage. The £200bn insurance scheme is not for the culpable banks, but for their innocent customers, ministers will say.

The tone towards the banks is becoming more aggressive. Gordon Brown and a phalanx of ministers will say they share the frustration of the public at the irresponsibility of past lending practices, the slowness with which they have revealed their debts and their stubborn refusal in the past few months to release credit.

The tactics, however, betray a nervousness in Labour circles that the public will simply not understand why there is a second tranche of help going to Britain's bankers, who have already received billions of pounds of loans, guarantees and capital. There is also a worry that Brown's inadvertent title as saviour of the world might be slipping.

Opinion polls show government popularity falling in the new year. David Cameron may be internationally isolated in his opposition to a fiscal stimulus, but it does not seem to be hurting him. A YouGov poll in the Sunday Times showed Cameron's Tories rising four points to take a 13-point lead.

Privately, something close to desperation is starting to develop inside government. After watching the slide in bank shares on Friday, one cabinet minister did not altogether joke when he said: "The banks are fucked, we're fucked, the country's fucked."

Speaking at a Fabian Society gathering at the weekend, Lord Mandelson was typically and disarmingly frank. "I'm not going to say to you I think we've now at least reached a set of measures and actions that almost for sure are going to work."

Referring to the banks, he said: "What they've got themselves into is so complex technically, so challenging that nobody responsible would say that this is all that needs to be done in order to put right what has gone wrong. "It's going to take more time, it's going to take more ingenuity."

Despite the polls and the myriad concerns over the banks, many cabinet ministers hope the current crises will ultimately expose the Tories as intellectually bankrupt.

At the Fabian conference, Ed Miliband and James Purnell likened the last six months to the winter of discontent in 1979. An ideological watershed had been reached, they argued.

"I think there is no question that 2008 will be seen as a similar historical moment," said Miliband. "This is a moment of profound crisis for the idea that, in economics, as far as possible we should leave markets to their own devices; the idea that government is the problem not the solution."

Purnell, from a more New Labour position, said: "For the last 30 or so years, politics in Britain has been determined by the image of the winter of discontent. The idea of achieving a fairer society through state action was damaged. I think that unbalanced politics. I don't think we will rebalance to the other side, where markets are entirely dismissed, but I think we can have a more balanced politics as a result."

Douglas Alexander, the international development secretary, added: "I think the real opportunity for the Labour party is to say that we did not just witness the demise of individual institutions, we ultimately witnessed the demise of an ideology that says that the only role for government is always to get out of the way and that the right response to a financial crisis is to nudge, privatise and deregulate."

Yet, on the evidence so far, the public have not yet bought these somewhat abstract notions, and Cameron will not make the mistake of siding with bankers or opposing better regulation.

Last week Cameron met William Buiter, the economist who is a keen advocate of better regulation.

Buiter, according to Cameron, told him "the last time we built up this much debt was when we were fighting ... half of Europe. This time we've done it on our own. It's quite a chilling thought. This is my worry is that it's like the man in the casino has lost it all on red and you know ... what's to stop Gordon putting it all on red all over again?"

Brown, however, will do so today, and who knows if he will win.

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Gordon Brown brings Britain to the edge of bankruptcy ~Telegraph

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The political impact will be seismic; anger will rage. The haunted looks on the faces of those in supporting roles, such as the Chancellor, suggest they have worked out that a tragedy is unfolding here. Gordon Brown is engaged no longer in a standard battle for re-election; instead he is fighting to avoid going down in history disgraced completely.

This catastrophe happened on his watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections. Throughout, Brown boasted of the beauty of his regulatory structure, when those in charge of it were failing to ask the most basic questions of financial institutions. The same bankers Brown now claims to be angry with, he once wooed, travelling to the City to give speeches praising their "financial innovation".

Does the Prime Minister realise the likely implications when the country joins the dots? He has never been wild on shouldering blame, so I doubt it. But Brown is a historian. He should know that when a nation has put all its chips on red and the ball lands on black, the person who made the call is responsible. Neville Chamberlain discovered this in May 1940 with the German invasion of France.

We're some way from a similar event. But do not underestimate the gravity of the emergency and potential for disgrace.

The Government's bail-out of the banks in October with £37 billion of taxpayers' money was supposed to have "saved the world", according to the PM, but now it is clear that it has not even saved the banks. Our money kept the show on the road for only three months.

As the Liberal Democrats' Treasury spokesman Vince Cable asks: where has the £37 billion gone? The answer, as Cable knows, is that it has disappeared down the plug hole.

It is finally dawning on the Government that the liabilities of the British banks grew to be so vast in the boom years that they now eclipse the entire economy. Unfortunately, the Treasury is pledged to honour those
liabilities because it has guaranteed not to let a British bank go down. RBS has liabilities of £1.8 trillion, three times annual UK government spending, against assets of £1.9 trillion. But after the events of the past year, I wager most taxpayers will believe the true picture is worse.

Meanwhile, the assets are falling in value. This matters, because post-nationalisation these liabilities are now yours and
mine.

And they come piled on top of the rocketing national debt, charitably put at £630 billion, or 43 per cent of GDP. The true figure is much higher because the Government has used off-balance sheet accounting to hide commitments such as PFI projects.

Add to that record consumer indebtedness and Britain becomes extremely vulnerable. The markets have worked this out ahead of the politicians, as usual, and are wondering what to do next. If they decide our nation is a basket case, they will make it so.

The PM and the Chancellor , both looking a year older every day, tell us that for their next trick they will buy more bank shares, create a giant insurance scheme for bad debt, pledge to honour liabilities without limit, cross their fingers and hope it all works. The phrase "bottomless pit" springs to mind for a reason: that is what they have designed.

In this gloom, the Prime Minister has but one slender hope: that somehow, by force of personality, the new President Obama engineers a rapid American recovery restoring global confidence, energising the markets and making us all forget this bad dream.

Obama is talented but he is not a magician. Instead, Gordon Brown's nightmare, in which we are all trapped, is going to get much worse.