Thursday, July 14, 2011

July 14 2011: The Emergence of Europe as a Union

National Photo Co. Bathing beach parade July 26, 1919
"Swimsuit pageant at Tidal Basin, Washington, D.C."

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Ashvin Pandurangi: The European Monetary Union is the world's first example of an aggregation of "sovereign" nation-states into a single entity of economic exchange. Although there are many similarities between the EMU and the political aggregation known as the "United States", the latter only consists of one truly "sovereign" political authority. The U.S. Constitution provides that it, along with federal law, is the "supreme law of the land" in practically every sphere, while the EU Constitution only allows EU law to trump the laws of member states when the latter have explicitly agreed for the EU to legislate in those spheres.

The EU, therefore, illustrates the world's first "emergent property" of nation-states acting as an economic (currency) collective, without a very significant fiscal/political centralization of authority. Dr. Steve Keen, a renowned "Post-Keynesian" economist, recently published a presentation discussing the fact that prominent research in Neo-Classical economics has actually undercut the entire edifice of Neo-Classical theory currently taught in schools. [Video of Lecture].

Essentially, the research shows beyond a doubt that market demand curves cannot be modeled by aggregating individual demand curves which are subject to the "Law of Demand" ("all else being equal", demand for a commodity falls when its price rises and vice versa). While this law may hold for an isolated individual to some extent, it becomes little more than a coincidence at the macro-economic scale. Instead, complexity theory teaches us that when economic agents are aggregated to the macro-scale, the new collective is governed by novel, non-linear rules and exhibits "emergent properties".

That's why speculative financial bubbles are even capable of endogenously occurring within a capitalist "free-market" economy. When the prices of U.S. and European real estate continued to escalate dramatically throughout the late 1990s and 2000s, demand did not fall off, but instead continued to climb as more irrational investors joined the ranks of an emergent herd. As mentioned above, the European nation-state herd is not quite like any other we have witnessed before, and "emergent behavior" is not necessarily a good thing for economic sustainability or productive growth.

The EU as a collective monetary union is the largest economy by nominal GDP in the world, exceeding the US by more than 10%. [1]. It has been clear for some time that all of the EU's member states, while retaining political "sovereignty" and diverse economic sectors, have become committed to preserving the value of any and all public bonds denominated in Euros. On the surface, there are various stirs about Germany or France not supporting further bailouts, or about Greece refusing the conditions of such bailouts, but it is the IMF, ECB and major bondholders who actually guide the herd.

The new rules governing this herd can be summed up in two words - austerity and privatization (a.k.a. wealth extraction). While the response of U.S., China, Japan and others to the global financial crisis has been marked by increasing levels of government support/intervention in private economies, the EU as a collective has rapidly evolved to the stage of large cuts to expenditures that benefit large swaths of people and the wholesale privatization of public assets.

From Reuters:

Greek Reforms Must Move Faster, PSI In The Works: IMF
"The IMF said on Wednesday private sector involvement (PSI) was fundamental to a Greek bailout and urged Athens to move faster on fiscal and structural reforms to avoid a debt default."

Ashvin Pandurangi: Greece has now graduated from public "stabilization funds" managed by the IMF and ECB, to a plan for "PSI" that requires fast-acting "fiscal and structural reforms" (i.e. continued gutting of the public sector), which will no doubt be micro-managed by the IMF despite its name.
"...Fitch said it saw contraction at 4 percent in 2011, followed by a weak recovery next year. It said asset sales in 2011 appear feasible but the privatization plan will be increasingly challenging.

The Fund praised the recent creation of a privatization agency to help rake in a targeted 50 billion euros in proceeds until 2015, and said the target was ambitious but achievable."

Ashvin Pandurangi: Despite (because of) the ongoing "bailouts" and austerity in Greece, Fitch tells us that its economy is contracting, and while the PSI plan is a good one, the Greek people will have to try extra hard to sell their assets and meet "the target" (on their backs).
..."The conservative opposition has opposed the bailout plan, saying it stifles the economy, but supports some state selloffs. A public resentful with austerity has staged almost daily protests against the measures."

Ashvin Pandurangi: The Greek population becomes more disenchanted with their economic situation and proposed "solutions" with each passing day, but the so-called "conservative opposition" gradually comes to support the PSI plan, which is fundamentally very much the same as austerity. Now, Greece was the first to reveal the emergent behavior of the EMU collective, but it will by no means be the last. As we get closer to the collective's center, the need to privatize national assets and keep major bondholders afloat becomes even stronger.

When discussing the massive exposure of French banks to the sovereign debt of Spain and Italy, which has recently come under market pressure, Ilargi at The Automatic Earth writes the following:

Ashvin Pandurangi: The first step is to make sure that, if the inevitable does somehow occur and one of the PIIGS technically defaults on their obligations, the major European bondholders (banks and institutional funds) will at least maintain some value on their books through fraudulent accounting. At the same time, however, the banks will need to "raise capital". That can be done directly through fiscal bailouts by their home countries, but those would also be very counter-productive to the underlying issue in the EMU - excessive public debts and deficits.

The more likely behavior is what we have already seen for Greece, Ireland and Portugal - an IMF/ECB sponsored public bond purchasing commitment. Another reason for executing this now standard European tactic is to protect against the trigger of CDS contracts that were taken out as default insurance. This issue is something Ilargi has written about extensively (see The Derivatives Pressure Cooker and Credit Downgrade Swaps), and it can only grow in importance considering Italy's 120% Debt to GDP ratio and the fact its 10-year bond is about 3% rich to Germany's. [2].

The plans for austerity, of course, have been in the works for some time, and the Italian Prime Minister will now present the "package" for passage this Friday, instead of its originally scheduled date in August. From AP:
Italy To Bolster Austerity Plan, Pass It By Friday
"Italy's finance minister says the government's package of austerity measures will be strengthened and passed in both houses by Friday.

Giulio Tremonti sought to reassure markets during a speech to a banker's association meeting in Rome that Italy would speed reforms and austerity measures that seek to balance the budget by 2014.

But he also said that the pressure on markets in recent days was not a problem "of a single country, but of the structure of Europe".

Ashvin Pandurangi: So, does anyone now think that Rome will not be submerged in extensive "privatization plans" in the near future? Perhaps a big fat "FOR SALE" sign will be stuck in the center of the Coliseum? It is, as Tremonti says, a function of "the structure of Europe". Personally, I would say that Europe has fully emerged as a monetary union, and it is now behaving as any collective of nation-states would. There is no "turning back", and there is no "sustainable" plan to keep the collective together.

There are only games, tricks, cons and "private sector involvement".

And, then, there's riots and revolutions.

Moody's puts U.S. ratings on review for downgrade
by Walter Brandimarte and Daniel Bases - Reuters

The United States may lose its top-notch credit rating in the next few weeks if lawmakers fail to increase the country's legal borrowing limit and the government misses debt payments, Moody's Investors Service warned on Wednesday.

Moody's is the first of the big-three credit rating agencies to place the United States' Aaa rating on review for a possible downgrade, meaning the agency is close to cutting the country's rating. Standard & Poor's placed the U.S. rating on negative outlook on April 18 which meant a downgrade is likely in 12-18 months. "They are worried they are having these ideological arguments while Rome burns," said Carl Kaufman, portfolio manager at Oster weis Capital Management in San Francisco.

A lower credit rating would cause havoc in financial markets around the world and increase borrowing costs for the government and businesses, further harming public finances and weighing on the economic recovery. In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."

Risks of a default on Treasuries, traditionally seen as the world's safest investment, have increased since the government reached its legal borrowing limit of $14.294 trillion on May 16. Congress has refused to raise the statutory borrowing limit until agreement is reached on cutting the fiscal deficit which was $1.29 trillion in the last fiscal year. The Treasury Department has said if the debt ceiling is not raised by August 2 it will have to start prioritizing payments.

Default Risk No Longer "De Minimis"
Moody's said the probability there will be a default on interest payments is low, but it is "no longer to be de minimis." "If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed," Moody's said. "However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction," the firm said.

There is precedent for Moody's decision. In 1996 the firm put some issues of U.S. Treasury debt on watch for a downgrade when the White House and Congress failed to extend the government's debt ceiling. Moody's decision came after U.S. markets had closed on Wednesday but before Asian markets ramped up their activity. In the 24-hour currency markets the U.S. dollar index, which measures the greenback against a basket of trading partner currencies, had fallen earlier in the session and ended down 1.1 percent, marking the steepest one-day decline since early December.

"In the short-term, the dollar definitely has its problems. This ratings news sent the dollar tumbling. This is really not good," said Brian Dolan, chief strategist at of Bedminster, New Jersey. "Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic.... Between this and (Ben) Bernanke talking about QE3, the dollar could be entering a new downward phase," he said.

The U.S. dollar fell on Wednesday after Federal Reserve Chairman Ben Bernanke said the central bank could inject more monetary stimulus into the U.S. economy. The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS. In after-hours trade, U.S. stock futures dropped 4.8 points to 1307.20 following Moody's decision.

Collateral Impact
In addition, the credit ratings for institutions directly linked to the U.S. government were also put on review for a possible downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan banks and the Federal Farm Credit banks. The ramifications of a U.S. downgrade could also be felt in places such as Israel and Egypt.

Moody's says the specific bonds issued by these two governments which carry a U.S. government guarantee "were also placed on review for possible downgrade." Israel and Egypt issue bonds without Washington's guarantee, and presumably they would not be subject to the current situation. The Congress has routinely raised the nation's debt limit in the past. This time, however, negotiations seem to have stalled over the degree to which the fiscal deficit should be cut by raising taxes or cutting spending.

So far, Treasury Secretary Timothy Geithner has been able to resort to extraordinary measures to delay a debt default by at least August 2. Unlike Fitch, which promised to cut the U.S. ratings to "restricted default" after a few missed debt payments, Moody's has said it would downgrade the United States to the "Aa" range, still considered investment grade.

S&P official warns of pre-default US downgrade
by Charles Riley - CNNMoney


John Chambers, a managing director at credit rating agency Standard & Poor's, briefed Sen. Harry Reid and other lawmakers, as well as officials from the Financial Services Forum and U.S. Chamber of Commerce. As many as 20 Democratic senators attended the private meeting last week, one of the sources said. The warning counters the argument that the United States could keep its AAA rating so long as it made interest payments on the debt by prioritizing them above other bills.

Some members of Congress, primarily conservative Republicans, have made the case that eclipsing the Aug. 2 debt ceiling deadline would be merely disruptive, and not the economic calamity predicted by credible experts. A downgrade has the potential to roil markets, increase interest rates and drive up the government's cost of borrowing.





US Rating Close to 'Junk': Independent Strategist


"The Weiss ratings is very close to downgrading the sovereign debt of the United States one more notch to a 'C-', which will put it just one notch above junk," Martin Weiss, President of Weiss Ratings told CNBC on Thursday.

In April, Weiss Ratings gave the U.S. sovereign debt rating a 'C'.


Weiss believes a downgrade by the ratings agencies is long overdue, noting that the top-notch standard assigned to the U.S. is unfair to investors and savers as they are not compensated for the level of risks they were taking.

"(The United States) has a huge debt load compared to most other countries," he said."(It) has a very unstable economy over the last 10 years compared to most other countries." The U.S. debt-to-GDP (gross domestic product) ratio currently stands at over 90 percent.

"The only thing that's really holding up the US debt rating is a widespread international acceptance for US Treasury securities and nice strong liquid market. But even that might be coming into question," he added.

But he is hopeful for a last minute deal, pointing to how the failure to pass a bailout package three years ago sent markets into a tailspin, and forced Congress to eventually sign off on it.

"We might see a similar scenario here in the debt ceiling debate, a failure at first and then a desperate deal in the thirteenth hour to rescue the situation at the last minute," he said.

Americans' pessimism deepens as economic concerns rise: Reuters/Ipsos poll
by John Whitesides - Reuters

Americans are deeply pessimistic about the future as economic concerns rise and White House talks on raising the U.S. debt limit sputter, according to a Reuters/Ipsos poll released on Wednesday.


But voters do not appear to be holding President Barack Obama responsible for the problems so far. Obama's approval rating held relatively steady at 49 percent, down 1 percentage point from June. His approval rating among independents -- a group Obama needs to win re-election -- fell to 39 percent from 44 percent.

Obama's standing could deteriorate quickly if the economy does not begin to generate jobs and if Washington cannot show it is capable of solving problems, Ipsos pollster Julie Clark said. "If those things don't happen, Obama will be in for a real challenge in getting re-elected next year," Clark said.

Obama and Republicans have hit an impasse in negotiations to raise America's borrowing limit before the government runs out of money to pay all of its bills on August 2. That could force the government to try to prioritize its payments. Asked what bills the government should stop paying if the debt limit is not raised, 36 percent listed international creditors like banks and 12 percent listed government departments like agriculture and education.

The sputtering economy and high unemployment are certain to dominate the race for the White House in 2012, and the Republican candidates for the nomination to challenge Obama repeatedly have criticized his economic leadership.

In a head-to-head matchup of the two top declared Republican challengers, Mitt Romney easily leads Michele Bachmann, 40 percent to 23 percent, the poll found. Romney, a former governor of Massachusetts, leads most national polls of the Republican race but Bachmann, a U.S. representative from Minnesota, has made inroads with an appeal to Tea Party activists and social conservatives. Among independent voters only, Romney's lead is just 10 percent.

The poll found more than half of Americans believe the economy is the country's most pressing problem, the first time a public majority has put it at the top of the list since shortly after Obama took office in February 2009. The survey was taken after a weak jobs report last week showed the U.S. economy is recovering slower than expected. Unemployment rose slightly to 9.2 percent. "People aren't seeing the jobs that they want to see," Clark said. "One in five people say unemployment is the biggest problem, and there has been no improvement in that."

Talks between Obama and congressional leaders on raising the $14.3 trillion U.S. debt ceiling before an August 2 deadline also have made little progress. Officials have warned failure to raise the limit could derail the economic recovery and endanger the global financial system. "People are watching these talks and getting a real sense of gridlock and a sense of pessimism about anything getting accomplished in Washington," Clark said.

The number of people listing government spending and the deficit as the most important problem rose to 14 percent in July from 8 percent in October of last year. Republicans have insisted on spending cuts as part of any deal on raising the debt limit. Democrats want tax increases as part of the deal. The poll of 1,173 adults, including 989 registered voters, was taken on Friday through Monday and had a margin of error of 3 percentage points. Interviews were conducted on both land lines and cell phones, in either English or Spanish.

by Bob Eisenbeis, Cumberland Advisors

A recent column by Allan Sloan and Doris Burke in The Washington Post claims that the distasteful financial bailout not only worked but also generated a profit for the government of at least $40 billion and perhaps as much as $100 billion. 

Their conclusion is based on their working of the numbers, and the source of the so-called “profit” is the interest that the Fed has earned on the assets acquired through QE 1 and QE 2 and returned to the Treasury. 

They estimate that a net $102 billion has been returned to the Treasury by the Fed in 2010 and indicate that as much as $85 billion more may be returned this year.

Unfortunately, the authors have played fast and loose with the numbers. They have ignored important unreported costs of the bailout and, most importantly, they have misrepresented the true nature of Federal Reserve transfers of earnings to the Treasury.  Because of these problems, their analysis risks becoming part of revisionist history that obscures the true costs of the bailout to the taxpayer.

Their work is already being cited in the hearings on FOMC monetary policy of July 13, 2011.  Let us try to put forth a more objective take on the numbers and the kinds of analysis that must be done to get a clearer picture of the true costs of the bailout.

Consider first the authors’ treatment of the costs associated with Freddie and Fannie, which they state is the source of the biggest costs of the bailout.  They pull numbers from a CBO June 2, 2011 report  stating that the government has injected $130 billion on net into those institutions.  But this ignores other important costs also contained in that same CBO report. 

Specifically, the CBO states that fair-market adjustments to the assets and liabilities of Freddie and Fannie expose another $187 billion in unrecognized losses that must be added to the expected costs of their failure.  Additionally, the CBO also estimates that the value of projected government subsidies to Freddie and Fannie between 2012-2021 will add another $42 billion to the estimated costs, bringing the likely total to $359 billion.  This is far in excess of the $130 billion put forward by the authors and is sufficient to generate a significant “loss” on the bailout.  But there is more.

I don’t quibble with some of the other estimates except to note that the low-interest-rate environment that the Federal Reserve has engineered has been a clear subsidy to financial institutions.  The value of that subsidy should be considered a cost, but doesn’t appear in anybody’s calculations.  Then there is the value of the subsidized support provided through the discount window and other Fed emergency programs.  

Nor do people consider the fact that institutions have been able to borrow in the Federal Funds market at a rate substantially below the 25-basis-point risk-free rate that can be earned by depositing those funds at the Federal Reserve.  Banks are also receiving 25 basis points, risk free, on excess reserves held in deposit accounts at the Federal Reserve.

The real problem with the Sloan-Burke analysis, however, is in their treatment of the Federal Reserve’s excess revenues over costs that are transferred to the Treasury.  They suggest that the assets purchased as part of QE 1 and QE 2 have generated additional “profits” of about $102 billion for 2010 and another estimated $55 billion for 2011.

As we have noted in previous commentaries, the peculiarities of government accounting conventions treat these transfers as revenue to the Treasury.  Thus, the funds can also be counted towards reducing the deficit.  Treating an interest expense as revenue when returned by the Fed to the Treasury is really an accounting shell game.  Consider what the Fed has done.  It has printed money by issuing one form of government debt, to purchase to purchase other forms of government debt, Treasuries and MBS from government-backed Freddie and Fannie.


If the Fed purchased those securities directly from the Treasury, which it is legally prohibited from doing, the Fed would be directly monetizing the debt.  It is now indirectly monetizing the debt.  The revenues from this activity are not profits, nor should they be considered a return on investment from the bailout.  Rather they are simply an intergovernmental transfer that results from printing money.

If it were that easy to reduce the deficit, then the Fed could simply buy up as much debt as possible.  The Treasury could then use the return of interest payments it makes to the Fed to reduce the deficit to zero.  If a little works, then why not do a lot?  It is like writing a check to your wife, and when she gifts it back, you count it as income. The process makes Bernie Madoff’s Ponzi scheme look like chump change.

Italy money supply plunge flashes red warning signals
by Ambrose Evans-Pritchard - Telegraph

Monetary experts are increasingly disturbed by the pace of money supply contraction in Italy and most recently France, fearing that it could prove a leading edge of a sharp economic slowdown over the winter.

"Real M1 deposits in Italy have fallen at an annual rate of 7pc over the last six months, faster than during the build-up to the great recession in 2008," said Simon Ward from Henderson Global Investors.

Such a dramatic contraction of M1 cash and overnight deposits typically heralds a slump six to 12 months later. Italy's economy is already vulnerable – industrial output fell 0.6pc in May, and the forward looking PMI surveys have dropped below the recession line. "What is disturbing is that the numbers in the core eurozone have started to deteriorate sharply as well. Central banks normally back-pedal or reverse policy when M1 starts to fall, so it is amazing that the European Central Bank went ahead with a rate rise this month," Mr Ward said.

Italy is not a high-debt nation. Italian households are frugal by Spanish and UK standards. However, Italy has a toxic trifecta of problems that affect long-term debt dynamics: a public debt stock of €1.8 trillion or 120pc of GDP; rising interest rates; and economic stagnation. It is the interplay of these elements that has set off flight from Italian bonds.

Italy has to roll over or raise €1 trillion over the next five years, with a big spike as soon as August. "Any new issuance will be above the average rate. That is the real cause of the destructive market action," said Paul Schofield from Cititgroup.

The Italian and Spanish bond markets stabilised yesterday after coming back from the brink. News that US bond fund Pimco has taken advantage of the sell-off to accumulate Italian debt cheaply helped restore calm. The IMF has endorsed Italy's €40bn austerity package, though the measures are "back-loaded" with most of the pain in 2013.

However, RBS said the eurozone storm is far from over. "We expect the crisis to continue deteriorating, and threaten to undermine the entire euro area as European policy-makers still misunderstand market dynamics. They show no sign of catching up with reality," said Jacques Cailloux, the bank's Europe economist.

Mr Cailloux said the EU's bail-out machinery (EFSF) must be increased to nearly €3.5 trillion in committed funds to staunch the crisis. This would give the authorities effective firepower of €2 trillion. "It is a lot of money but the euro is a big project. This is all about political appetite. The longer they wait, the worse it gets.."

A fund of this size would amount to 27pc of eurozone GDP. The effective lending power of the EFSF at the moment is just €255bn, and half of that will be needed for Greece, Ireland, and Portugal. Greece's problems took a further turn for the worse yesterday after Fitch downgraded the country by three notches to CCC.

RBS compares the euro crisis with exchange rate turmoil in East Asia in 1998, though the EMU effect has this time switched risk from devaluation to bond default. Eurozone borrowers face the same "reversal in confidence" after years of deceptively benign conditions.

Hopes that eurozone leaders would deliver a "big bang" solution at a summit on Friday have been dashed after German officials said Chancellor Angela Merkel may not attend. Finance mininster Wolfgang Schauble warned against a "hectic" response, a way of saying Berlin will not be bounced into a decision. There is stiff resistance in Mrs Merkel's coalition to steps that drag the country into a fiscal union where sovereign debts are shared. German officials are drawing up possible plans to allow the EFSF to lend to countries such as Greece so that it can buy back its bonds in the market at a discount.

However, Bundesbank chief Jens Weidmann issued a caustic critique of the plan."It has a high cost, limited use, and dangerous secondary effects. This discussion is going in the wrong direction," he said. He added that the ECB would not accept Greek bonds as collateral if Athens defaults. "It is not our job to finance insolvent banks, let alone countries," he said.

The real M1 data show countries are vulnerable. There have been sharp contractions in Austria and Belgium. The Netherlands and Germany are negative. The ECB believes sluggish money supply figures reflect the reduction of an "overhang of liquidity" left from before the crisis and are benign. The claim has raised eyebrows among monetarists.

Tim Congdon from International Monetary Research said the ECB had drifted away from monetary orthodoxy after the departure of Otmar Issing as chief economist in 2006, tolerating "crazy lurches" in the broad M3 money supply. "The ECB did not see the collapse in money growth in 2008 and the great recession that followed, and they are getting it wrong again."

Darkening Clouds: Irish Debt Downgraded as Euro Worries Spread
by Spiegel





'Oligopoly of the Rating Agencies'



'Cork Bobbing on a Turbulent Ocean'



EU declares war on ratings agencies as Ireland's rating gets junk status
by Ian Traynor - Guardian

EU commissioner Michel Barnier takes on the big three credit ratings agencies: Standard & Poor, Moody's and Fitch

Ireland yesterday became the third eurozone country to have its credit rating downgraded to junk status as Europe slid into a war it may struggle to win with international credit ratings agencies. It followed a week in which the agencies partly forced a shift in the EU response to the Greek sovereign debt crisis.

A week after slashing Portugal's status, Moody's cut Ireland's credit rating to junk and warned that the country would be likely to require a second bailout. The Irish government, which wants to return to debt markets in 2013 when its current EU-IMF bailout runs out, said the development was completely at odds with the recent views of other ratings agencies. "We are doing all that we can to put our house in order and the progress that we are making is there for all to see," the department of finance said in a statement.

The commissioner in charge of the EU's single market, French politician Michel Barnier, alternately sneered and threatened the three big agencies who dominate 90% of the ratings industry: Standard & Poor's, Moody's and Fitch. His remarks followed a broadside on Monday from fellow commissioner Viviane Reding, who said the ratings agencies' "cartel" should be "smashed up" as they were seeking to determine the fate of Europe and its single currency.

"We were surprised that the agencies would downgrade a country without any warning," Barnier said of last week's verdict from Moody's on Portugal, branding its debt junk and predicting the country was the new Greece. "You don't rate a country the same way you rate a company or a product. That's an issue. We're examining that issue."

Barnier said he would announce "stiff measures" in November aimed at taming the power of the agencies. They would be forced to justify their decisions by revealing the details of their analyses and criteria. Whether they were properly registered in Europe would also be scrutinised. "I want to have transparency regarding their methods, especially when they are rating countries," he said.

S&P concluded last week that Greece would be found to be in a form of default on its sovereign debt if its private creditors were involved in a new EU bailout, as is planned. That verdict helped to trigger the rescue rethink announced over the past 48 hours in Brussels.

Christine Lagarde, the new IMF chief, when French finance minister, suggested that the agencies be banned from delivering ratings decisions on the eurozone countries being bailed out: Greece, Portugal and Ireland. "It's just an idea," Barnier added. He said he would ask the Poles on Monday, who are chairing the EU, to put a ban on the agenda of EU finance ministers. Jacek Rostowski, the British-born Polish finance minister and former Tory party member, will be chairing the meetings of EU finance ministers for the next six months. He looks an unlikely convert to the Barnier ban.

Fitch Downgrades Greece's Credit Rating To One Step Above Default
by AP

Greece suffered another sovereign downgrade on Wednesday, when the Fitch agency slashed its credit worthiness by three notches further into junk status and only one grade above default. The agency cut Greece's rating from B+ to CCC, bringing it in line with the other two major agencies, Moody's and Standard and Poor's, which had downgraded the country's bonds to a similar level last month.

Greece relies on loans from a euro110 billion ($155 billion) international bailout from other eurozone countries and the International Monetary Fund, and discussions are under way for a second bailout to keep the country's crisis from destabilizing other larger European economies.

However, no decisions have been made so far on how much more help Greece will get or in what way private holders of Greek bonds could contribute towards easing repayments. Credit ratings agencies have warned they could consider a voluntary rollover of Greek debt as a form of default. "Today's rating downgrade reflects the absence of a new, fully-funded and credible EU-IMF program for Greece, coupled with heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece's weakening macroeconomic outlook," Fitch said in a statement.

While the main aspects of further help were discussed at a meeting of EU finance ministers earlier in the week, "no further clarity on the volume and the terms of new money or the nature of private sector participation was forthcoming," it said. The agency also noted that Greece has been missing fiscal targets set out as conditions for receiving the first bailout, from which it began drawing funds in May last year.

"Fitch's 'CCC' rating encapsulates substantial credit risk and acknowledges that default is a real possibility," it said. "As previously stated by Fitch, private sector involvement would likely be viewed as a sign of sovereign credit impairment and could trigger a rating default event. The move came as the IMF said Greece's government must move quickly and decisively to bring its huge public debt under control.

To the outrage of labor unions across the country, the government has embarked on a punishing new round of austerity measures after missing its deficit-cutting targets so far in 2011. Spending cuts and tax hikes have already sparked frequent strikes and demonstrations, with protests often turning violent in central Athens.

Europe Readies for the Worst
by David Enrich, Sara Schaefer Muñoz and Tom Lauricella - Wall Street Journal

Some of Europe's biggest banks are taking steps to shore up their defenses should the debt crisis spiral out of control and one or more countries leave the euro zone, a sign of the financial sector's increasing worries over the continent's plight.

Some banks recently have been reining in some cross-border lending to companies in countries like Spain and Italy, bank officials say. Others are parking more money with the European Central Bank, according to ECB data. Banks also are increasing their use of credit-default swaps as protection against their holdings of sovereign debt from shaky countries.

As the crisis deepens, even European central banks are considering the possibility that one or more countries could leave the currency bloc, according to people familiar with the matter, a scenario that until a week ago seemed to many as implausible.

Overall, European banks appear to be growing increasingly wary of lending to each other, even on a short-term basis. Deposits parked at the European Central Bank's overnight deposit facility jumped Tuesday to €90.5 billion ($127 billion), up from €65.7 billion a day earlier. The last time the ECB's deposit facility was so flush was more than five months ago, on Feb. 7, when banks stashed €137 billion there.

While the amount of funds parked in the ECB facility ebbs and flows over the course of each month for technical reasons, it has historically been a good proxy for how fearful banks are about lending to each other—and about the financial crisis intensifying.

The moves reflect mounting concern that Europe's political leaders lack the will to adequately address the Continent's problems. The worries have shifted from concerns that Greece may default on its debts to a more dramatic scenario where Greece or another country departs the currency bloc.




The departure of a country from the euro zone could expose banks with big operations in such countries to the risk of rapid currency devaluations and other turmoil. One banker said his bank was increasing its hedging to protect itself. An official at another bank said the situation in Italy is being monitored "moment by moment."

The defensive moves have the potential to put further pressure on those economies by reducing the already limited supply of credit. This occurred at the outset of the U.S. financial crisis in 2008, deepening the recession. One official said the situation in Italy is being monitored "moment by moment."

Officials at some banks said they sliced their exposures to at-risk countries more than a year ago and so new steps are unnecessary. Banks are also closely monitoring their funding positions, alert to the possibility that panicky depositors will start yanking funds from lenders connected to the euro-zone crisis, industry officials say.

There are signs that some depositors, such as the U.S. money-market funds that represent a key source of funds for many European banks, are growing increasingly jittery. Officials with two relatively healthy European banks said they recently have been attracting more short-term deposits, despite the fact that they are offering ultra-low interest rates. The officials said the uptick in deposits is indicative of a flight to safety.

On Tuesday, financial markets more broadly were tossed back and forth by the latest news, but the selloff in Italian and Spanish bonds took a breather. The yield on Italian two-year debt edged back to 3.9% Tuesday from 4% Monday, according to Tradeweb. But yields are up sharply from last week, when they closed Friday at 3.4%. Spanish bond yields also fell slightly Tuesday.
In the currency market, the euro fell to $1.3847 during European trading hours from $1.4030 late Monday, bouncing back to 1.4050 by Tuesday afternoon in New York, then falling again to $1.3976 in the wake of Moody's Investor Service downgrade of Ireland's ratings

In the U.S., a main gauge of stress in the credit market shows increasing worries about counterparty risk as the euro-zone debt troubles increasingly threaten to spill over into larger economies. The two-year U.S. swap spread, which measures the gap between swap rates and Treasury yields and is considered a prime indicator of risk aversion, widened to 0.30 percentage point, 0.015 percentage point wider from late Monday.

Swap spreads often move in tandem with credit spreads and are a sign that traders think their partners in an interest-rate swap trade will fail to hold up their end of the trade. Part of the reason for the increased fears surrounding the continent's banks is that European regulators on Friday plan to announce results of their months-long "stress test" of 91 top lenders. Senior bank executives and regulators in several countries are worried the increased disclosures banks must make as part of the process could fuel market fears by casting their financial positions in a poor light, say people familiar with the matter.

Adding to the jitters, Moody's Investors Service on Tuesday cut Ireland's credit rating to high-yield, or "junk," status. Moody's said the country, which last year received a €67.5 billion international bailout, "is likely to need further rounds of official financing before it can return to the private market."

Focus turned also to Italian banks. Like the situation in Greece, Italian banks and financial institutions have been big buyers of Italy's sovereign debt. That, in part, has helped Italian bond yields remain lower than comparable nations, such as Spain, says Nikolaos Panigirtzoglou, European head of Global Asset Allocation for J.P. Morgan Securities. "They made a decision—that it's important to support a domestic-bond market. Perhaps they thought that their fortunes were so linked that they had a shared interest," Mr. Panigirtzoglou said. "Now that is becoming a bit of a weakness for Italy."

If Italian banks feel they already own too much government debt, they may begin to stop buying Italian bonds, Mr. Panigirtzoglou said. Already, there is slackening interest from Italian banks in buying Italian debt, said bond traders at large global banks in London. That could create a vicious cycle in which bond prices fall—and yields, which move in the opposite direction, climb—in turn dissuading more banks from buying and driving yields still higher. Such a spike in yields would be a tough burden for Italy, as it would make the costs of servicing its debts more expensive and exert a significant drag on the economy.

Question of 'Who's next?' in European crisis grows louder
by Gail MarksJarvis - Chicago Tribune

Downgraded debt, falling markets raise risk of fallout reaching U.S.

Typically this is the time of year when fortunate Americans spend tranquil summer vacations relaxing in carefree outdoor European cafes.

But this summer, images of Europe couldn't be more devoid of that serene picture. Rather, some investors across the U.S. are awakening at 3 or 4 in the morning to flick on computers and TVs and check European markets for early warning signs of damage to American 401(k)s and IRAs.

Monday, the Dow Jones industrial average dropped 151 points as European markets fell amid worries that Italy would be Europe's next emergency-debt case. Tuesday, the Dow was a little calmer as Italy's markets ended a six-day slide. The Dow closed down 58 points. But a downgrade of Ireland's debt to junk status emphasized once again the erosion of financial conditions on Europe's periphery and the tremendous price the European Union would bear if it had to bail out Greece, Portugal, Ireland, and maybe even Spain and Italy.

"It's becoming very scary," said Bonnie Baha, developed markets bond portfolio manager for DoubleLine Capital. "The world has become a much smaller place, and the end game is hard to see."

At issue is whether these five eurozone nations, collectively known as PIIGS, can afford to pay their debts. And if they can't, the concern is that banks could be hard-hit. Banks could be affected in multiple ways — perhaps by having extended loans to countries, companies or other banks that could not repay the money. There could be a cascading effect, with one bank not getting repaid and then failing to pay another.

For example, French banks have a significant exposure to Greece, and if Greece defaults on its debt, a French bank then might have trouble repaying money it owes a U.S. bank.

If many loans go bad, there could be a credit crunch in Europe in which banks would be forced to hold onto capital rather than make loans. This conjures up memories of the days following Lehman Brothers' failure, when lending came to a halt.

Without being able to borrow money, businesses and consumers would have to curtail spending, and economies could dip into recessions, said George Feiger, chief executive of Contango Capital Advisors in San Francisco. He is so concerned about large European banks he no longer has clients put money into U.S. money market funds that invest in short-term commercial paper from banks.

If European banking problems cause a credit crunch and slow the economies, companies in the U.S. and around the world could have trouble selling products in European markets.

At this point, the risk is conjecture because the exposure in the banking system is not clear. "The sovereign debt crisis will remain a key focus of the markets this week as European finance ministers meet to discuss how to resolve the crisis, and bank stress tests out later in the week will highlight how exposed the European banking system would be to a default," said Moody's economist Melanie Bowler.

Analysts have been trying to estimate the risks in the banking system. For example, Anil Lalchand of DoubleLine Capital says that if Greece defaults, the most exposed banking systems are those of France ($65 billion) and Germany (about $40 billion). European banks in general have roughly $162.4 billion of exposure, he said.

Greece is the most troubled European country to date, and according to the Bank of International Settlements, the U.S. has $41.5 billion in claims to Greece. U.S. banks don't have to disclose their foreign-country exposure unless it is greater than 0.75 percent of total assets. Both Citigroup and Morgan Stanley have reported relatively small exposure to Italy, and Goldman Sachs has an $8.3 billion commitment with Ireland, said Lalchand.

But the risk doesn't stop there, according to Lalchand. "The top five U.S. banks have exposures to Germany and France, the largest bank lenders to Greece. The interconnectedness of the U.S. and European banking systems can hardly be lost on markets and policymakers post-bailout of American International Group (AIG)."

"The fear," said Baha, "is that this is like a man drowning in quicksand. All that try to help could be dragged in too." Companies also can be tarnished by sovereign debt problems. "Even if Fiat is a fine company with decent management, their corporate rating will be constrained if sovereign Italian debt is downgraded," said Baha.

Anxious investors Tuesday moved money into U.S. Treasury bonds, and the yield on 10-year Treasurys fell to 2.87 percent.

Yet, Moody's economist John Lonski was surprised that the euro stayed above $1.40. That may be because investors are also worried about how the U.S. will cope with its debt, he said. But he also wonders if investors are looking at "ongoing financial market turbulence" as a lever that will finally prompt policymakers in the U.S. and abroad to resolve debt issues.

"Kicking the can down the road may no longer suffice," he said.

Draghi Says EU Debt Crisis Is in New Phase
by Lorenzo Totaro and Jeffrey Donovan - Bloomberg

Europe’s debt crisis has entered a new phase and policy makers must come up with a "clear" response to stop the contagion that threatens the region’s single currency, said the European Central Bank’s incoming President Mario Draghi.

"It’s now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available," Draghi said today in a speech in Rome. "It’s a necessary step to ensure the stability of the euro area and its currency."

European governments can no longer count on their financing costs remaining similar to those of Germany, the region’s strongest economy, simply because of their participation in the
single currency, he said. "The solvency of the sovereign states is no longer something acquired he said, but something earned with high and sustainable growth, which is only possible if budgets are in order," Draghi, who also heads the Bank of Italy said. "Today’s cost of credit reflects that new reality."

Draghi’s comments at the annual meeting of Italy’s banking association came after Italian bonds and stocks plunged in recent days on concern the country would struggle to reduce the euro-region’s second-biggest debt. The yield on Italy’s 10-year bond reached the highest since 1997 and financing costs at a sale of treasury bills surged on investor concern that Italy would be the next victim of the region’s debt crisis.

Bonds Gain
Italian bonds gained today on pledges by the government for swift passage of a 40 billion-euro ($64 billion) deficit- reduction plan that seeks to balance the budget in 2014. The premium investors demand to hold Italy’s 10-year bond over German bunds fell 17 basis points to 269.3, down from a euro-era record of 348 reached during trading yesterday.

Italian Finance Minister Giulio Tremonti, speaking at the same conference, said the plan would be passed by both houses of parliament by July 15. Opposition parties have agreed to ease passage of the measure in the legislature. "Italian politicians decided to respond firmly to market concerns over the credibility and implementation of the 40 billion-euro fiscal package," Fabio Fois, European economist at Barclays Capital in London said in a note to investors. "These are clearly positive developments. The fiscal plan was originally supposed to be voted on at the beginning of August."

Asset Sales
The deficit plan is "an important step in strengthening the public accounts" that will help reduce the debt, Draghi said. He also called on the government to explain details of additional measures for 2014 that will be needed to achieve the balanced budget. Tremonti did say the government was considering a plan to sell off more state-owned assets "once the crisis passes."

Austerity measures won’t be enough for Italy and other euro-region countries to reduce debt if not accompanied by policies to boost economic growth, Draghi said. The Bank of Italy expects Italian growth to continue to lag behind the euro area average for the next two years, he said. Second-quarter growth did expand at a similar pace as that of the euro region, Draghi said, reversing the trend in the first three month when Italy grew 0.1 percent, a fraction of the 0.8 percent rate for the euro area.

In contrast to many European economies, Italy has the advantage of a solid banking system and a declining jobless rate, Draghi said. Italian lenders will pass stress tests this week with a "significant" margin of capital above the core Tier 1 minimum, he said. He estimated the lenders still need to boost capital by 20 billion euros to meet Basel 3 standards for 2019, he said.

Italy’s borrowing costs soar
by Guy Dinmore and Joshua Chaffin - Financial Times

Italy’s borrowing costs soared to their highest level in over a decade amid highly volatile trading as market contagion from Greece forced Silvio Berlusconi to appeal for national unity and "sacrifices" to cut the nation’s debt mountain. "We are in the front line of this battle," Mr Berlusconi said, describing a crisis that threatened all of Europe and the future of its common currency.

The Italian prime minister’s appeal – the most sombre in his three years in charge of his centre-right government – was intended to rebut widespread criticism in the Italian media and the markets that his coalition was rudderless and divided by disputes between him and Giulio Tremonti, finance minister. "We have to eliminate any doubts over the efficacy and credibility of our budget," Mr Berlusconi said, insisting that the €40bn package would eliminate Italy’s budget deficit by 2014.

Opposition party leaders in Rome pledged their co-operation in parliament to pass the government’s three-year austerity programme by Friday in time for a possible emergency summit of EU leaders in Brussels that day. "This would be a record in Italian history," Enrico Letta of the opposition Democrats told the Financial Times. "Never before has a budget been passed in five days."

Italian banking sector shares plummeted further at the opening of trading on Tuesday and its benchmark 10-year bond yields hit a euro-era high of 6.09 per cent before markets recovered substantially on news that Mr Tremonti was returning early to Rome from Brussels for emergency talks with the opposition.

Under media fire for spending too much time on dealing with his media empire’s own financial woes, Mr Berlusconi also rushed back to Rome after cancelling a trip to watch his AC Milan football club in training. A relatively successful sale by the Italian Treasury of €6.75bn of 12-month bills – albeit at the highest yield for three years – calmed markets. Some traders said they believed China had stepped in.

France is also being affected by the market volatility as the premium it pays for debt over Germany hit a new euro-era high on Tuesday. French 10-year yields were 0.7 percentage points higher than equivalent German ones. And Irish debt was downgraded to junk by Moody’s, which loweerd its rating on the embattled country one notch to Ba1, saying it was likely to need a second bail-out. Mark Schofield, head of interest rate strategy at Citi, said: "France is now trading like Spain and Italy did [before this week]."

In Brussels, finance ministers agreed late Monday night to enhance the flexibility of eurozone’s €440bn temporary bail-out fund – a move that was widely interpreted as a signal that the fund would be allowed to begin buying distressed government bonds in secondary markets.

That approach – long rejected by Germany – would allow Greece to erase part of its sizable debt burden. In hopes of bringing further relief, finance ministers also pledged to lower interest rates and extend debt maturities.

Hopes were raised that a new and more comprehensive bailout package for Greece was at hand after Herman Van Rompuy, European council president, sounded out member states about holding an emergency summit on Friday. But in spite of the progress, diplomats said that it was not clear if a detailed package could be readied in time.

Berlusconi's Last Stand
by Michael Braun - Spiegel

Italy is used to crises -- the government is rudderless, the economy is stagnant and Prime Minister Silvio Berlusconi is mired in scandals. Now the country may become embroiled in the euro crisis, and its fate lies in the hands of its finance minister. Berlusconi, for his part, faces the ruins of his political career.

After a black Friday and a black Monday the nation initially seemed to be facing a black Tuesday. The market indices in Milan on Tuesday morning looked disastrous. The stock market fell by up to 5 percent in the first few hours of trading, after having sustained losses of 3.5 percent on Friday and 4 percent on Monday. The yield spread between Italian and German debt kept widening as well. Just a few weeks ago, the rate on Italian 10-year bonds was just two percentage points higher than comparable German paper. On Monday, the difference grew to three percent and on Tuesday it reached 3.5 percent.

This turmoil coincided with the auction on Tuesday of almost €7 billion worth of 12-month bills. If the sale had failed, or if it had even been undersubscribed, the markets may have panicked. But the whole issue found buyers, albeit at significantly higher interest rates. The gross yield on the bills rose to 3.67 percent from 2.15 percent at the previous auction in June.
The Milan bourse breathed a sigh of relief and was in positive territory for several hours -- but it is likely to remain a rollercoaster in the coming weeks. The country, its economy, banks, government and citizens have suddenly been subjected to a stress test that came completely out of the blue.

'Aren't That Bad'
Economists interviewed on television on Tuesday kept on repeating the mantra that "Italy isn't Greece or Portugal," and "Italy's economic fundamentals aren't that bad."

And it's true: no real estate bubble has collapsed in the country, banks aren't battling enormous sums of toxic investments and new state debt is well below that of France, for example. Italy's unemployment rate is at 9 percent, miles away from Spain's 20 percent. The country -- the third-largest economy in the EU -- has a solid industry structure, mainly thanks to tens of thousands of small and mid-size businesses, which still earn billions each year through exports.

Nevertheless, Italian commentators, whether in left-wing journals or the conservative and financial press, have shown surprisingly little inclination toward passing the buck onto "the speculators." The staunchly left-wing daily Il Manifesto is dryly balanced. "Italy is paying for a double weakness, the political and the structural," it wrote. The conservative Corriere della Sera stands strong: "It doesn't help to get excited about international speculators. If we conduct ourselves seriously then we have nothing to fear. Unfortunately we have not been serious up until now. For that, the markets are paying."

Berlusconi's Fear
The accusation about insufficient seriousness is, of course, directed mainly at Prime Minister Silvio Berlusconi, who is preoccupied with his scandals and legal battles. Just last Saturday, one of the companies he owns was sentenced to pay damages of some €560 million to a competing media company.

When he is forced to address political problems facing Italy, he is often not more destructive than constructive. When it came to a massive, €47 billion austerity package, Berlusconi attacked his finance minister, Guilio Tremonti, saying he was not a "team player." He then referred to "Tremonti's plan" as though he had had nothing to do with it.

Behind this lies Berlusconi's fear that further cuts would be unpopular. At the same time he knows full well that Tremonti is Italy's only guarantee for solidity, which says everything about the state of the government. "This worries me greatly, because the credibility of a country can't hang on a single man," economist Paolo Guerrieri said.

It is probably no coincidence that the speculative attack began on Friday in Italy. This week the Italian parliament begins debating the austerity package, which the ruling parties are expected to dilute considerably. The exercise will now probably be even easier, because Tremonti just took a hit -- he and one of his closest allies, parliamentarian Marco Milanese are under investigation for corruption. Milanese allegedly provided Tremonti with an apartment worth €8,000 per month for free.

A political leadership that lacks direction, a country that has fundamental growth problems: Italy has been stagnating for years. Since the global economic and financial crisis, the country has only been able to manage growth of a single percentage point annually. Just how it plans to pay off its debts, which are the equivalent of 120 percent of its gross domestic product, remains a mystery.

Opposition Signals Quick Passage of Austerity Package
On Tuesday, though, the country's politicians managed to send a signal of determination -- led by the opposition. Italian President Giorgio Napolitano, himself from the leftist camp, had appealed to the opposition for "national resolve." And he quickly got what he wanted. All three opposition parties in parliament pledged not to stand in the way of the passage of a package of austerity measures within the next week. They won't vote in favor, but they vowed not to slow down the bill with a slew of amendment requests. Furthermore, even the final passage of a budget this Sunday is now seen as a possibility.

It is partly for this reason that the situation on the Milan stock exchange relaxed on Tuesday. Furthermore, the risk premium on Italian bonds dropped again and is now back to just three percentage points higher than the German benchmark. But the opposition also made it clear that they see this as Berlusconi's last battle. Massimo D'Alema, head of the leftist Democratic Party, said that once the austerity package is passed, Berlusconi should "go immediately" and make room for a new government aimed at improving the country's financial health.

And Berlusconi himself? Little had been heard from him for the last four days -- until Tuesday afternoon. His coalition, he said, is "unified and determined." He said he welcomed the conciliatory gestures from the opposition -- and said nothing at all about a possible resignation. But in the end, his future lies more in the hands of the financial markets than it does with the Italian parliament. Any additional signs of investor distrust could signal the end of the road for Berlusconi.

Eurozone policymakers must grasp the nettle
by John Plender - FT

The limits of eurozone policymakers’ efforts to address the sovereign debt crisis were cruelly exposed by Monday’s rise in Italian government bond yields. This contagion all the way from lowly Greece to one of Europe’s big four economies opens up a new phase in the drama. For while the markets cheered up a little on Tuesday in response to a successful auction of short term Italian paper, I doubt that the contagion has gone away.

There is no way round the fact that the markets believe there is a solvency gap in southern Europe that can only be met by debt relief. They fear that fiscal retrenchment is strangling chronically weak economies that are seriously uncompetitive and unable to devalue their way out of the problem. Policy is thus increasing the risk of sovereign default while promising years of deflation for the embattled countries of the region.

Investors are also conscious of a vicious circle at the heart of the eurozone. Undercapitalised banks are supporting over-indebted governments by holding their IOUs; over-indebted governments are supporting troubled banks; and there is insufficient equity in the European banking system to absorb the losses implicit in the solvency gap. The outcome is that the European Central Bank ends up providing liquidity on an open-ended basis to the peripheral countries to keep their banking systems afloat at the cost of an ever weaker balance sheet. The one surprise in all this is that more of the retail deposit base of southern Europe has not disappeared in capital flight.

An optimist would say that Italy has long been a rich economy shackled to an unworkable state, so the markets’ worries about the political dogfight over a tougher fiscal strategy are overdone. A further ground for hope is that eurozone ministers’ meeting on Monday produced a proposal to enhance the flexibility and scope of the European Financial Stability Facility, to lengthen the maturities of loans and lower the interest rates. That suggests the beginnings of a shift in attitude towards debt relief. It could also pave the way for the EFSF to buy government bonds in the secondary market, which would help address the contagious rise in government bond yields.

But shock and awe it was not. And the more striking thing about eurozone crisis management remains the extent to which it represents displacement activity. Last week’s decision by Moody’s to downgrade Portugal to junk status prompted angry protests from finance ministers and central bankers. But how could a rating agency in good conscience accord investment grade status to a country that has had to go to the European Union and the International Monetary Fund for a bail-out? The more relevant question is why the downgrade did not happen earlier.

These criticisms are tinged with xenophobic hostility to American ownership of the agencies, notwithstanding the fact that Fitch, the number three rater, is French owned. Hence a suggestion that the EU should encourage the development of European rating agencies, presumably to deliver more politically correct ratings which no one would trust. This is on a par with European politicians’ urge to make the hedge funds the scapegoat for a financial crisis for which they had no responsibility at all. As for the finance ministers’ suggestion that Europe should consider suspending credit ratings for countries in official bail-out programmes, that would reliably provoke an offshore shadow rating system.

Equally worrying has been the calls by German regulators and Spanish banks for weaker bank stress tests. What merit the current approach to the crisis has, boils down to buying time so that, among other things, weak banks can recapitalise themselves. Fudging stress tests is not the way to inspire confidence among investors who will have to put up the fresh capital. Since the credibility of the new European Banking Authority hinges on the robustness of the tests, which are due this Friday, I hope and believe that it will not have given any quarter to its critics.

Underlying all this are a number of irreconcilables. One is that the politicians do not trust the markets, while the markets think the politicians have failed to grasp the nature of the crisis. Another is that the taxpayers of northern Europe do not want to bail out what they perceive to be profligate and lazy southern Europeans. Yet their elected politicians cannot contemplate the alternative of sovereign default because that would put the whole European banking system at risk. The upshot is a form of crisis management that the financial community dubs "extend and pretend". There will be plenty more extending and pretending before eurozone policymakers reach the point of grasping nettles.

British age of austerity to continue for decades, warns OBR
by Heather Stewart - Guardian

Office for Budget Responsibility report suggests UK will continue to pay the price for an ageing population and declining tax levels

Britain must brace itself for decades of austerity even after George Osborne's spending squeeze, to pay the price for an ageing population, the independent Office for Budget Responsibility (OBR) warned on Wednesday. The OBR, set up by the chancellor to produce independent projections of the public finances, says the rising cost of healthcare and pensions, and declining tax revenues from the North Sea, will mean future governments have to take action to prevent debt levels rising inexorably.

Without fresh tax rises or spending cuts, the OBR says, the government's debt will hit a trough of 60% in the mid 2020s, compared with less than 70% now, before rising rapidly to hit 107% of GDP by 2060-61. Although the deterioration in the public finances is more than a decade away, the OBR urges politicians to make long-term decisions now, to prevent the economy drifting into a debt crisis as the population ages.


The OBR's report coincides with the publication of new "whole of government accounts" from the Treasury, which include new – and much larger – estimates of the state's long-term commitments, based on treating the government as though it were a business, with assets and liabilities. The "net present value" of paying public sector pension promises – a way of calculating the cost if they all had to be paid today – had already hit almost 79% of GDP, or £1.1trn, by March 2010, according to the Treasury's calculations.

The price of Labour's Private Finance Initiative – Gordon Brown's favoured method for building new schools, hospitals and infrastructure without the Treasury paying the whole bill up front – is put at £40bn.

Meanwhile, the state's other "contingent liabilities", which the Treasury hopes it will never have to pay, such as guarantees to the crisis-hit banking sector, amount to more than £200bn.
Set against the government's assets, which the Treasury calculates to be worth £759bn, overall public sector liabilities now stand at £1.2trn, or 84.5% of GDP.

Despite these eye-watering estimates, however, the OBR says the main reason taxpayers must get used to decades of austerity is the growing burden of an ageing population, with its inevitable knock-on effects in terms of pensions and healthcare.

"Balance sheet measures look only at the impact of past government activity," it says. "They do not include the present value of future spending that we know future governments will wish to undertake, for example maintaining health, education and pension provision. And, just as importantly, they exclude the public sector's most valuable financial asset: its ability to levy future taxes."

They estimate that health spending will have to rise from 7.4% of national output in 2015-16 to almost 10% by 2060, while state pension costs will hit almost 8% of GDP over the same period, and social care costs increase to 2% of GDP.

Despite the hefty estimate of the net present value of public sector pensions, the annual cost of paying retired public sector staff will actually decline over time, the OBR says, because of the chancellor's decision to uprate them in line with the lower consumer price index measure of inflation, instead of the Retail Price Index.

The Next Domino? Italy Suffers from Euro-Zone Contagion Fears
by Carsten Volkery - Spiegel

Italy has slid into the speculators' crosshairs amid concerns that the euro-zone crisis could hit the country next. In many respects, Italy is much better off than its neighbors on the periphery. But unlike Greece, it is definitely too big to fail.

The symptoms are all too familiar. The risk premium on Italian government bonds reached a new high on Monday, stocks fell and the Milan stock exchange restricted short-selling as a precaution. Italy has suddenly become the focus of international investors' attention. New doubts about the stability of the Rome government and a deep skepticism about the country's finances have combined to form a dangerous mixture. The national debt is at 120 percent of gross domestic product (GDP), the second highest in the euro zone after Greece.

But how bad is Italy's situation really? The investors' attacks have not come as a huge surprise. Even when the single currency was introduced, the country, with its huge mountain of debt, was already viewed as a potential problem. It was inevitable that the markets would sooner or later test the vulnerability of Italy, as one of the euro zone's weak points.

The rating agencies fired initial warning shots in recent months. In May, Standard & Poor's changed the outlook for Italy to negative, on the grounds that the government was not sticking closely enough to its austerity goals. In June, Moody's followed, announcing it wanted to review Italy's AA2 rating. Justifying their skepticism, the analysts referred to the country's weak economic growth, low productivity and rigid labor market.

Different to the Others
Indeed, Italy resembles the other ailing countries on Europe's periphery in all these respects. But there are also huge differences, which make the present state of alarm on the markets seem excessive:
  • Large, diversified economy: Italy is one of the seven leading industrial nations (G-7) and is home to several global companies. It may have plenty of olive trees, but the country is also an industrial and creative powerhouse. Internationally successful car makers, industrial designers and fashion designers contribute to Italy's export successes.
  • High savings rate: The country is sometimes referred to as the Japan of Europe because of its savings rate, which is high by European standards. In addition, many Italians invest their money in their country's own sovereign bonds. Some 55 percent of the national debt is in Italian hands. The country thus has less reason to fear a capital flight by foreign investors than, say, Ireland.
  • Liquid bond market: Although Italy's debt burden is almost legendary, the country has proven in the past that it can cope well with it. The Italian bond market is the third largest in the world, after the US and Japan. A large bond market has significant advantages: There are always investors willing to buy Italian bonds, because they know that they can always get rid of them again easily. Italy has therefore never had problems refinancing its debt.

Even the biggest skeptics do not expect that Italy will get into financial difficulties any time soon. Compared to Greece, more of Italy's national debt of €1.9 trillion is financed through long-term debt. Securities worth €80 billion will come due by the end of 2011. The government will need to issue new debt to replace them. On top of that, the country will also issue around €90 billion in new short-term debt.

So far, Italy has not had problems issuing new debt, but worries are growing about the rising cost of financing existing debt: The interest rate on 10-year bonds rose to 5.5 percent on Monday. The experience of other euro-zone members shows that the critical level is around 7 percent. If yields rise above that level, then markets develop their own momentum which is hard to stop.

Debt Worries
The main problem, however, is that investors are suddenly asking how the government in Rome plans to ever pay off its debt. Economic growth is weak: In the first quarter of this year it was just 0.1 percent, well below the euro-zone average of 0.8 percent. With declining productivity and an ageing population, the prospects of a recovery are not promising.

Italian Finance Minister Giulio Tremonti has recognized the danger. He is pushing for strict austerity measures in order to balance the budget by 2014 and begin reducing the level of debt. But Tremonti has been weakened domestically, after he had to distance himself last week from a corrupt associate and Prime Minister Silvio Berlusconi publicly announced changes to the austerity package in an interview.

Investors now fear that Berlusconi may be planning to get rid of the finance minister. Tremonti himself was recently quoted as saying that if he should fall, Italy and the euro will follow. He was perhaps overestimating his own importance. But the nervousness in the markets shows what effect his departure could have.

Should Italy fall into the vicious circle of downgrades and rising bond yields, the consequences would be disastrous for the euro zone. A new banking crisis would be likely. German banks alone had €116 billion in exposure to Italian debt at the end of March. By comparison, they are only holding €17 billion in Greek debt.

Spanish Budget Gap Adds to Worries
by Jonathan House - Wall Street Journal

The new leader of Spain's Castilla La Mancha region said on Monday that it has a budget deficit more than twice as large as had previously been thought, raising new concerns over the true state of regional finances and helping to send Spain's risk premium to records.

Castilla La Mancha President María Dolores de Cospedal said her government will on Tuesday present the first results of the audit she announced after being elected on May 22. "With the debts we've found unpaid as of June 30, the deficit is much higher than we were told," she said in an interview with Onda Cero radio station. "[Tuesday] we will see the exact figure…but it will likely be much higher than 4%," added Ms. Cospedal, who is also the No. 2 national official of the opposition Popular Party.

The outgoing regional government of Socialist José Maria Barreda had said Castilla La Mancha had a budget deficit equal to 1.78% of local gross domestic product in April, well in excess of the 1.3%-of-GDP limit for 2011 set by the central government in Madrid for each of Spain's 17 regions.

Roberto Ruiz, UBS strategist in Madrid, said the news on Castilla La Mancha "fanned the flames" of worries over Spanish finances. Largely the result of increased investor unease over Europe's inability to solve Greece's financial problems, Spanish and Italian risk premiums—as measured by the spread of their 10-year government bond yields over the German benchmark—soared to records on Monday. The yield premium investors demanded to hold Spanish paper surpassed three percentage points for the first time since the creation of the euro in 1999.

The news also raises the pressure on the national government of Prime Minister José Luis Rodríguez Zapatero to rein in regional spending at a time when the Socialist leader seems increasingly sidelined.
On Monday, he announced a series of appointments to fill the positions left vacant by Alfredo Pérez Rubalcaba, who was deputy prime minister, government spokesman and interior minister. On Saturday, Mr. Rubalcaba was officially named the Socialists' candidate for prime minister in national elections that must be called by March, and he is increasingly seen as the party's dominant figure.

Spanish regions control more than a third of spending and are essential to the country's plans to slash an overall public-sector deficit of just over 9% of GDP in 2010 to 3% in 2013. But they have made little progress in budget overhauls mandated by the central government in Madrid. In addition, since a change in government in the wealthy but highly indebted region of Catalonia last year uncovered a much larger deficit than was previously acknowledged, the accuracy of regional accounts has been under suspicion.

The May 22 elections unseated Mr. Zapatero's Socialists—undermined by a deep economic crisis— from six of the seven regions they governed. Ms. Cospedal and other incoming Popular Party leaders had promised to audit the accounts of the local governments. Castilla La Mancha, which reported a 2010 budget deficit of 6.5% of GDP, the highest of all Spanish regions, was already known to have deep financial problems. And it is a relatively small region that accounts for just 3.4% of national GDP. Still, its revelation of a worse-than-expected deficit "shows a dangerous trend," Mr. Ruiz said.

Ms. Cospedal said she had sent a letter to Spanish Finance Minister Elena Salgado, asking her for an urgent meeting to discuss the "worrying state of Castilla La Mancha's finances." The central government is due to call a meeting with all regions to discuss deficit-cutting plans by the end of July.

Spanish Banks More Vulnerable Than Italy's
by Simon Nixon - Wall Street Journal

If any doubt remained over how closely Europe's sovereign and banking crises are intertwined, the latest contagion has laid the linkages bare. Shares in Italian and Spanish banks have slumped as their governments' debt costs soar; many now trade below their post-Lehman lows. But while Italy's banks are a binary bet on a euro-zone solution to its debt crisis, Spain's banking woes are more fundamental.

Italy's bank woes are directly linked to the sovereign-debt crisis. Until Italy found itself at the center of the market storm last week, Italian banks looked relatively strong. Between them, they have raised more than €8 billion ($11.22 billion) of capital this year and most banks now have an average core Tier 1 ratio above 8%. Italian banks also have relatively low reliance on wholesale funding. Until recently, the market's biggest concern was the sector's low profitability, reflecting high costs, low credit growth and low interest rates.

But the loss of market confidence in the sovereign has raised fresh worries. Italian banks own government bonds equivalent to 13% of total bank assets—among the highest exposure of any major economy banking system, according to the International Monetary Fund. In contrast, Spanish banks' exposure to their own government is just 6.8% of bank assets; for U.S. banks, it is 5% and the U.K. just 1.5%. The only banking system more exposed to its own government is Japan's at 24% of bank assets.

The good news for Italian banks is that if the euro zone does succeed in addressing its sovereign-debt crisis, share prices might quickly recover. Although the turmoil in Italy partly reflects fiscal and political concerns, the biggest problem has been Germany's insistence on private-sector involvement in any fresh Greek debt deal. This has spooked investors who fear they will be forced to take losses as a first rather than a last resort. A solution that avoided that would reassure bondholders.

But Spain's banks won't escape the spotlight so easily. The market believes the banking sector is woefully undercapitalized and the latest volatility will further hamper the initial public offerings of savings banks Bankia and Banca Civica—crucial for restoring confidence. Bankia looks particularly vulnerable as its IPO is constrained by the need to raise €4 billion without diluting its parent below 50%.

Worse, heavy issuance of covered bonds has left Spanish banks with a shortage of collateral for future funding, according to UBS. To ease the pressure on Spain, a far-reaching euro-zone bailout package is needed that will pave the way for greater recognition of losses and comprehensive bank recapitalization. That could take months to arrange. Until then, Spanish banks will continue to suffer.

Spanish protesters fight off repossessions
by Sarah Rainsford - BBC News

The crowd started gathering just after eight in the morning. Just a handful at first, then dozens - responding to a call for help sent out via Twitter and Facebook. By nine o'clock about 200 people were crammed into the street: a "flashmob" of placard-waving protesters, chanting and singing in defiance.

"We're here to stop the eviction of this family," Eloi Morte from the "Mortgage Victims" campaign group explained, shouting above the noise. Behind him, demonstrators blocked the entrance to a building with their bodies and huge banners. The family inside has been served notice to leave after defaulting on their mortgage. A bank representative and locksmith are due at any moment to take possession of the property.

Desperate attempt
"There is a crisis in Spain. People have no jobs, they can't pay!" Mr Morte insists. "So all over the country we are standing up against this kind of eviction. We won't let it happen," he says, as a chant of "They will not pass!" rises from the crowd.

During Spain's property boom that peaked in 2007, low interest rates encouraged a surge in credit-taking. But the sector's implosion has since destroyed more than two million jobs; unemployment is more than twice the EU average, at 21.3%. And now there is a new record: home repossessions are at an all-time high, with 180 families evicted every day, according to campaigners.

Maria Jose del Coto began to fall behind on her mortgage payments in 2008. The interest rate was climbing, and both she and her adult daughter were unemployed. Now the bank has repossessed the house and served them notice to leave. The protest outside is a last, desperate attempt at resistance. "Of course I'm worried, but I'm determined to fight this," Mrs del Coto says, inside her home of 30 years. "Not just for me, but for the many other people in even worse straits," she adds.

Legal challenge
Like many, she feels duped into a mortgage arrangement she could never afford. "I understand the bank wants its money back," her daughter adds. "But if things are tough for the banks at the moment, they have to understand that families are in crisis too. They need to come up with some solutions until things improve, not kick us out."

In the street outside, the protesters are angry that banks - propped up with public funds - are now turning families in difficulty onto the street. There is bemusement it is happening at all, when almost 700,000 unsold properties stand empty. The campaigners' main demand is for a legal change to allow people to clear their entire debt by handing their home to the bank if they cannot meet the mortgage. Currently, if a bank sells a repossessed home for less than the value of outstanding debt, the borrower is liable for the difference.

'Outrageous idea'
The campaigners want the change applied retrospectively. "Forgiving debt is always a possibility, but making it mandatory retroactively is crazy," argues economist Javier Diaz Jimenez from Madrid's IESE Business School. He believes the best way to help those in difficulty is for the government to provide income support, not "meddle" with contracts.

"This is the heart and the blood of a market economy, you just don't do that. You will kill loans for ever if you do that. It is an outrageous idea," he says, pointing out that most businesses here are small- and medium-sized enterprises heavily reliant on access to bank credit. The Spanish Banking Association estimates that such a move would push the number of defaults from 2.4% of all mortgages to 8% in a year, putting an extra 4bn euros (£3.5bn; $5.6bn) on already strained bank balance sheets.

'Yes, we can!'
But the protesters gathered outside Maria Jose's house are determined. Their movement sprung from the mass demonstrations in May that began in Madrid's Sol square - against corruption, mass unemployment and a political class they felt had stopped listening to the people.

Now the "indignants" have found a new focus for their protest. "I remember the first night I was in Sol I was crying," recalls Helia Relano. "It was so incredible to realise you weren't alone; that lots of people were there to fight for what's right. This protest [now] is a clear continuation of that."

The government has already proposed changes to the law - apparently in response - including protecting a higher percentage of a debtor's income against seizure by the banks. But the protesters demand more. Six hours after they first gathered in support of Maria Jose, Eloi Morte finally raises his megaphone: the bank has suspended her eviction until further notice, he tells them, to a joyful chorus of chants: "Yes, we can!" "It's the 48th success we've had so far in Spain," Mr Morte says, and vows that the campaign will continue.

For Maria Jose, he admits, it is only a temporary respite - but he says the protest has won her some breathing space. Now lawyers for the campaign group can pressure the bank to be lenient. "Obviously the bank won't accept the demands," Mr Morte shrugs. "But when we have another date for the eviction, we will be here again and again until we get a response."

China’s $1 Trillion Debt Seen Toxic as Cities Value Land at Winnetka Level
by Henry Sanderson, Michael Forsythe - Bloomberg



In Loudi, people take home $2,323 annually and there are no Olympics here on any calendar. "The debt isn’t a problem as Loudi is not a developed place," Yang Haibo, an official at the city’s financing vehicle, says as he sits with colleagues in a smoke-filled meeting room under a No Smoking sign. "It’s an emerging city."


Officials in Loudi, whose colonnaded government building is locally nicknamed the White House, value their 18 tracts of land at almost four times what a similar plot sold for in May. In the northeast city of Cangzhou, the man in charge of the assets financing a port expansion can’t locate the land his company posted as collateral for a 1 billion-yuan bond sale. And a spending spree in Yichun, a district on the Russian border covered by ice much of the year, is backed by promises of future land sales that officials acknowledge may never materialize.

‘Huge Myth’
More than 400 billion yuan of municipal bonds sold since 2008 -- part of as much as 14.2 trillion yuan in local borrowing -- show how much local officials rely on their own forecast that land prices will continue to rise. Efforts by the central government to cool the property market so far have had no impact on their bullish estimates.

Residential land sale values slumped 30 percent this year as local officials increased sales to pay back loans, according to Credit Suisse Group AG. "It’s a huge myth that land sales are going to be able to even support the interest payments let alone the principal payments," says Stephen Green, the Hong Kong-based head of Greater China research at Standard Chartered Plc. His research team assumes that at least 4-6 trillion yuan of local government loans -- and possibly much more -- will ultimately not be repaid by the projects, Green wrote in a June 29 report on China’s debt.


The similarities with special purpose vehicles in the U.S. hiding toxic repackaged mortgages from banks’ balance sheets are increasing. Subsequent losses prompted the U.S. government and central bank to lend, spend or guarantee a peak of $12.8 trillion in 2009 to rescue the financial industry, including a $45 billion direct investment to rescue Citigroup Inc., then the biggest U.S. financial services company.

‘Playing with Fire’
"It means that China is playing with fire like we played with fire when we had all those SPVs that took everything supposedly off the books," says Carl Walter, who retired this year as the chief operating officer in China for JPMorgan Chase & Co. "It didn’t take them off the books. Citibank went down."

Moody’s Investors Service puts overall local government borrowing at 3.5 trillion yuan more than the 10.7 trillion yuan stated in a national audit published June 27. China’s central bank on July 11 backed the official count, saying estimates of 14 trillion yuan were "obviously" too large.

Banks cannot restructure all the local government loans on their books, Yvonne Zhang, a Moody’s analyst in Beijing, says. Recapitalizing the banks by the central government will slow growth in the world’s second-largest economy, says Vincent Chan, head of China research at Credit Suisse in Hong Kong. The effects would reverberate around the globe in weakening the country’s appetite for U.S. Treasuries and European debt, as well as driving down prices of oil and metals, Fitch Ratings said in a June 28 report.

Touting Western Brands

Loudi City Construction Investment Group Co. plans to use 21 percent of the proceeds from its bonds issued in March for the stadium complex and the rest for a new expressway into town, water treatment facilities and a park, according to its prospectus. The city is one of scores across the country building roads, commercial centers and subways after being urged to spend their way out of the 2009 global recession.

On a sunny day in early June, Yang smiles as he talks of transforming Loudi from an economy dominated by a single state- owned steelmaker into a bustling transport hub, a popular phrase these days with officials who tout projects they say will bring prosperity to their cities.

High-Speed Railway
Set on a lush green hillside, Loudi will be a stop on a high-speed railway spanning more than 1,200 miles from Shanghai in the east to Kunming in the west, near the border with the Southeast Asian nation of Myanmar. "Every train will stop here," says Yang, in his downtown office at the company’s headquarters. A Mao statue with a red kerchief draped around its shoulders stands in the lobby.

Outside, Yang points to a vacant plot in a swathe of land already cleared and being drained to build apartment blocks. It’s one of the lots being used for collateral. The company has pledged to repay debt by selling land it received from the city, leveraging local land prices that doubled between 2007 and 2010, according to the prospectus. The 9.69 million yuan an acre it values its land for the bond compares with a tender price in May of 2.54 million yuan an acre for a city plot zoned for commercial use, according to data from the local State Land Resources Bureau.

Better Than Treasuries
Foreign ratings companies don’t assess China’s local bond market and domestic evaluations vary. Beijing-based Dagong Global Credit Rating Co. rates Loudi’s bonds at its fourth- highest investment grade, one level higher than it gives to U.S. Treasuries. That’s in spite of its own December 2010 report that said: "The city’s ability to balance the general budget is decreasing and the results of the sales of land use rights will impact the company’s ability to invest and do construction."

Dagong gives a high rating to the bonds of local government financing vehicles because the central government has said infrastructure debt will be repaid by local authorities, chairman Guan Jianzhong said July 11. Rapid growth in local fiscal revenue should enable them to pay debts, he said.

Loudi’s investment vehicle had a negative operational cash flow of 187.1 million yuan in the first half of 2010, a period during which it borrowed 284 million yuan. Beijing-based China International Capital Corp., often referred to as CICC, gives Loudi its third-lowest rating, a speculative or non-investment grade. The yield on Loudi’s bonds reached a record high of 7.318 percent on July 7, according to data from China Foreign Exchange Trade System. Yang, the official, isn’t worried. "When we get to the end of our loan we’ll just pay it back," he says.

Defaults Forecast
Across China, cities increasingly turned to the country’s nascent bond market last year after the national government turned off the spigot for many bank loans. That’s propelled a six-fold increase in bond sales this year from three years ago, according to CICC, an investment bank run by the son of former premier Zhu Rongji. "We are forecasting a lot of local governments will have to default," says Jinsong Du, an analyst at Credit Suisse in Hong Kong. About one-quarter of China’s municipal debt is guaranteed with land sales revenue, Auditor General Liu Jiayi said June 27.

Mansions Among Smokestacks
In Cangzhou, almost 800 miles northeast of Loudi, on the shores of the Bohai Gulf, luxury apartment complexes are sprouting up in view of more than a dozen smokestacks at one of China’s biggest coal depots. A billboard for Leader Mansion promises, in English, that it will bring the buyer a "high degree of endorsement of a city life."

The city is expanding Bohai New Area, a port zone between Tianjin and the border of Shandong province, by building roads and developing unspecified "green" projects with 1 billion yuan in bonds issued in May by Hebei Bohai Investment Co. They’re guaranteed by five tracts of land the company says is valued at more than 1.54 billion yuan, or 462 yuan per square meter. That’s more than three times what it paid the local government in December 2009, according to the company’s land use permits viewed by Bloomberg News.

Ask Lu Chunjiang, a Communist Party member and head of the local investment company’s asset management department, where his assets are and he can’t say. "It’s somewhere north of town, I don’t exactly know where," Lu, 41, says in his second-floor office in Huanghua Port, built on saline marshes. "It’s like the land outside the city, you know, with the big piles of salt."

Inability to Pay
Hebei Bohai’s bonds were skewered by Xu Xiaoqing, head of fixed income research at CICC, in a May 26 report. "This issuer’s own profit and cash flow is very little, its cash shortage is extremely big, its debt load is very heavy, and it doesn’t possess the ability to pay this bond," Xu and his team wrote. The local government’s fiscal income "is very limited, there will be a lot of pressure on it to support the payment of this bond," they added.

Hebei Bohai’s long-term debt of more than 7 billion yuan at the end of 2010, before the bond was issued, was greater than the city’s annual revenue of about 5 billion yuan for that year, according to the prospectus. The debt-to-government revenue ratio was higher than that of Vallejo, the northern California city that filed for bankruptcy in 2008. Vallejo cited falling revenue from real- estate transactions as a reason for its bankruptcy.

Banks on the Hook
Banks including Industrial & Commercial Bank of China (601398) Ltd. and China Construction Bank Corp. (939), China’s two biggest by market value, may have problematic loans equivalent to 30 percent of their books, says Victor Shih, a professor at Northwestern University in Evanston, Illinois, who studies China’s local government debt.

The banks also are among the leading holders of China’s mushrooming corporate debt according to data compiled by Chinabond, China’s Beijing-based bond clearing house. This year, mutual funds have been the biggest buyers, according to CICC. They’ve snapped up half the corporate bonds issued in the first five months of this year, 70 percent of which were to finance local government projects.

Buyers are attracted to high yields and have faith that the central government will bail out any in trouble, says George Weisi Tan, head of bond investments at Fortune SGAM Fund Management Co. in Shanghai. "They think the interest is risk free," says Tan, who says some brokerages leverage themselves as much as three times their capital. "This is really a big systemic risk."

Crisis ‘Unlikely’
Such pessimism is overblown, says Nicholas Lardy, a senior fellow at Washington’s Peterson Institute for International Economics who specializes in China’s financial system. The buildup of debt is slowing and many local infrastructure projects will raise revenue and add to economic growth, he said. "A majority of the projects that are being undertaken by these companies are probably projects that have very high economic rate of return," Lardy says.

Wang Tao, a Beijing-based economist for UBS AG, wrote in a June 7 report that a crisis from bad local debt is "unlikely in the near future." Of most concern, she said, is borrowing obtained with no collateral at all.

That’s the case in Yichun, a Maryland-sized area of about 1.3 million people deep inside the birch and pine forest on China’s border with Russia. Yichun is a poor city in a poor province. Income of Yichun residents was little more than half the national average last year. That hasn’t stopped the government from going on a spending spree. The new local police headquarters has a miniature dome reminiscent of that on the Vatican’s St. Peter’s Basilica.

Shanty Towns
Yichun City Construction Investment & Development Co. sold 1.2 billion yuan in bonds in 2009 backed only by a pledge from the local government and possible future land sales. CICC gave it the lowest debt rating of any city financing vehicle. In contrast, Dagong rates the bonds one level higher than U.S. debt.

Money raised from the sale is being used for the destruction of what the prospectus calls "shanty towns." Single-floor traditional wooden homes in the vallrv ey are being demolished to make way for thousands of low-income apartments. The company has also financed a new reservoir, an airport terminal and parklands, one featuring faux Corinthian columns topped by winged warrior princesses and bronze sculptures of chariot-riding local gods.

Missing Chairman Mao
Wang Zhongbing, 77, a retired factory worker who spends the summer days chatting with friends in a park next to the Yichun River, says the economic development is passing his family by. Only one of his three adult sons has a job, he says. "I miss Chairman Mao," says Wang, sitting on a red plastic chair in front of a billboard for newly built Pinaster Town, featuring a picture of a woman in high heels stepping out of a Rolls Royce. "The common people cannot afford these houses."

The Yichun financing vehicle would have lost money every year from 2006 to 2008 except for direct government subsidies. At its offices above a local bank branch in the center of town, Sun Yunlan, 49, who according to the prospectus is deputy general manager of the company, referred questions to the city’s finance department, which, in turn, referred questions back to the company.

The prospectus promised that land from the city "will provide a more substantial cash flow." Two years on, that hasn’t come to pass, according to Wu Liangguo, the head of the Yichun City Bureau of Land and Resources and its Communist Party secretary. "The land market in Yichun isn’t that great," says Wu, 49, who jogs even in minus 30 degrees Celsius (minus 22 degrees Fahrenheit) chill of the Siberian winter. "The local government financing vehicle may get land in the future but it isn’t a certainty."


Ruben said...

Does the potential for a US downgrade affect TAE predictions for a flight to safety to the US dollar? How quickly should I cash out my USD bank account and hide it in my mattress...?

TAE Summary said...











lautturi said...

@ folks here

Latest cherry from Finnish Cabinet: they are about to change Finnish Constitution. The ultra "bright" folks are slashing "Finland is a sovereign country" out and putting "Finland is a member of EU" in. No EU rule required this but - oh boy - our sock puppets are in the heat (>_<)

I'm off for 3 weeks without any connection to civilized world. I wonder whether I recognize things on my return - or not. Everybody, take care!

scandia said...

@Lautturi, such tragic news that Finnish leadership is willing to abandon a sovereignty that the rest of the world admired, that was a personal inspiration for me. I guess the generation that fought The Winter War are passed on. Breaks my heart. Where oh where did " sisu"( spelling? ) go?
Hope your time away from the chatter restores your spirit. All the best.

Ashvin said...


I highly doubt the debt ceiling will not be raised and the US govt will shut down...

but you probably shouldn't keep too much money in your bank account anyway, due to the risk of it disappearing during a severe credit event and ensuing bank runs.

LindaBob said...

@Ash, et al... Where then does one put the cash? In the bodega buried in the ground? Maybe. What are others doing?

Ruben said...

Ash, would you mind dropping me a line at porkpie att

Stoneleigh said...

@ LindaBob:

Where to invest your post-crisis cash:

Papermate black inkpens
rubber bands
toenail clippers
Juicy Fruit Chewing gum -- Not Wrigleys
shampoo -- Vidal Sassoon -- damaged/fizzy hair
lipstick -- any color except purple
nylon stockings -- nude
Frommers guide to South Florida -- 2003
Frommers guide to Minnesota -- 2007 edition
Twist-Em Twist ties -- red
Dr. Scholls odor fighting insoles

All of these items can be buried in a dry sealed container. Check for mold and mildew build-up every 6 months

It's better than green cotton.

Unknown said...

Hi Everyone,

I've been lurking here for some time now and TAE (as well as the comment threads here) have become something of a daily staple. I enjoy the back and forth of the regulars here, and while a lot of the talk about finances is over my head, I take what I can. It's also entertaining to see how you handle trolls.

Just wanted to share that I plan to do a series of blog posts on how Sun Tzu's "The Art of War" applies to the War(s) the US is currently waging. It's amazing how clearly the principles for successfully waging war are laid out, and how we seem to be following none of them. I would love it if some of the readers here would do me the honor of checking these articles out and sharing some of their intelligent insights and knowledge on this. Suggestions on how to improve are also appreciated. There's a lot of info out there and I believe that the war plays one of the leading roles in the current state of the USA. The first post is up. This is just a little blog I'm working on, nowhere near the level of discourse as found here on TAE, but hopefully it can be of some help to people nonetheless.



Anonymous said...


re: Art of War.

They are following its principles to a "T."

This sounds completely wrong until you consider that Big Finance Capital is waging war against America!

Principles from the Art of War:

1. War is all about deception.
2. The best warriors never have to take up arms.
3. If you must fight, end the war quickly lest you bankrupt the nation.

The corollary to #3 is that if someone is selling you a never ending war on terror, ONE OF THEIR CHIEF GOALS IS TO BANKRUPT THE NATION.

People would do well to test their assumptions whenever the results seem to be at odds with reason.

Many people fail to do this in regards to Osama bin Bernanke. They think he's an ignorant egomaniac.

What they don't consider is that his job is actually to transfer the nation's wealth to Big Finance Capital and to protect their financial corporate fronts.

Given that point of view, his grade is A+.

Ashvin said...

LindaBob and Ruben,

Storing some % of your cash at home in a secure location (i.e. a safe) is never a bad idea, IMO. How much depends on you - what you're comfortable with, what kind of expenses you have, how much you need checks/CCs to conveniently pay those expenses, etc. There are a lot of details involved, so I can't answer any more specifically than I am right now.

There are also non-profit credit unions available in various communities to store your cash in, which are basically the same as banks, but may be a bit more trustworthy given their smaller scales of operation. Another option is to place a good amount of cash into a money market mutual fund (they require a starting balance of ~$5000 I believe). These funds invest in very short-duration securities (such as Treasury bills), pay slightly more interest than a commercial bank, and are relatively easy to liquidate from. They usually also allow you to write checks on your account to spend the money.

I'm sure by typing "alternatives to keeping cash in a bank" into Google, you will find more useful information.

Anonymous said...


First off, nothing is safe. Anything you do during this time frame is risky.

You get 5 years of storable food and water... you could get robbed, perhaps by the police or military.

We need to fully understand what these crooks have purposely set up with their debt money Ponzi monetary system and other crimes against society.

Some have opened Treasury Direct accounts (in American) in order to store excess cash outside the system - buy short term treasury notes, let them roll over into cash and then let it sit as cash.

It could get confiscated, though.

Or converted into some kind of long term bond.

Anonymous said...


It is my understanding there is no guarantee, however phony, on money market funds anymore.

Given that many money market funds lend to fully bankrupt institutions near the brink - I recommend people do their due diligence and choose well.

>>I'm sure by typing "alternatives to keeping cash in a bank" into Google, you will find more useful information.<<

That and your IP logged by your loving Big Brother. ;-)

unkle.smokey said...

Rosen, Regarding your point 2. They agree with the principles, but are intentionally going against them.

This is the case I think in so far as their purpose is profit and not victory. The MIC is an end in itself. "Victory" would mean financial defeat, so they don't really want to win. That explains the perpetual Enemy of the Month schtick: Gadafi, Saddam, Ahmenidajad, etc ad nausaleum.

I too am a lurker.

Biologique Earl said...

OpenID skilo said... "


I have felt from the beginning that bin Laden is (was?) a very, very clever man. I suspected that the purpose of the NY attacks could have been to trigger a massive overreaction by the US. This overreaction and its associated cost, would in time cause the already overextended, fragile US economy to collapse and thus the US empire.

If this was Bin Laden's intent, he succeeded brilliantly.

Anonymous said...


The trivium is a method developed long ago in order to differentiate between reality and false perception, often put forth by self interested parties.

You, like me in the past, had probably never heard of the trivium. Why would those who want to manipulate you teach you how to identify their manipulations?

Why do I bring this up? Because I've spent 100s of hours researching the grammar (the trivium is composed of grammar, logic and rhetoric) and I'm convinced the Big Finance Capital is waging war against America and 911 is the centerpiece of their planned Endgame move on America.

IOW, the American government hasn't been fooled into anything, they are being directed by their controllers and doing EXACTLY what Big Finance Capital desires of them.

If you haven't done the 911 grammar, I suggest you do. You may end up agreeing with the "official" version, but at least do the research to make sure you aren't being played.

Don't rely on Big Finance Capital funded media mouth pieces who know to whom they owe their millions and posh lifestyle. They will lie to you, call it news and count their cash - all perfectly legally, too...

Rely on yourself - your own intellect to guide you.

BTW, the rest of The Corporation is well worth the time spent viewing it. Big Finance Capital privatized THE RAIN WATER in Bolivia.

Renaissance 2.0 gives an overview how America actually operates, as opposed to the phony view propagated by the real societal controllers...

Suffice it to say that almost everything I deconstructed and researched about the society in which I live was exposed as some level of fraud perpetrated by some front organization of Big Finance Capital.

christiangustafson said...

Someone please take the "scare quotes" away from mediocre Ashvin before he hurts himself.

Please stop publishing this guy.

lautturi said...

Just a quick pop into the saloon...

@ Rosan

Sun Tzu, US War Machine and following none of the rules! Then again as skilo points out - it all depends on the point of view for whom the the Machine is run for. Nevertheless, it's good to have such strong outburst of laughter (holding my stomach and cleaning table from spilled tea).

@ scandia

Finnish "leaders" are indeed strange bunch of people. Maybe all the "leaders" are made from same stuff, BS and all that. Something will give in the future, no doubt about that. Still this ignorance of the great masses is quite astonishing. Bah, I guess things always look different from the top of pyramid...

Anonymous said...


re: finish leaders.

their view is the same as everyone else's - self interest.

Big Finance Capital makes sure their self interest is to align with the Big Finance Capital controlled EU and they fall in line.

It isn't conspiracy, it is economics. 101.

And when you can issue as much as debt as you want, keep the proceeds and offload the debts onto everyone else in society, who can compete?

No, I don't think it is monolithic, but I do think the self interests of the few people who own 35-50% of the wealth in the world naturally align.

Given that their stated #1 is over population, their interests may well not be your interest. Or mine.

lautturi said...

@ skilo

I agree 100%. Don't like it but the creature lurking in the mirror tells me all I need to know. Oh, the humanity (nothing to do with humane)...

p01 said...

More carz. Here come the year long traffic jams. Then the permanent gridlock. Then we jump on them and set them on fire, roll them over and smash them. Then it's over.

p01 said...

Carmageddon: First rehearsal. Makes you wonder: between Tokyo and LA what would one prefer?

Mike Tanis said...

"I miss Chairman Mao..."

The TAE motto I think.

eeyores enigma said...

Skilo - Excellent comments.

The best way to get a "high credit rating" is is to borrow a lot and pay interest not principal.

The US has not paid down principal for over 50 years.

It's Big Finance Capital that collects those interest payments, whether from individuals or Nations.

Oh…right…and the money loaned that all of that interest is being paid on…Big Finance Capital pulled it out of their A$$.

But if you don't pay then they get the underling assets.

In other words given the right to create money you will eventually end up collecting all cash flows and hard assets. Sweet gig.

You are 100% correct. It's not a conspiracy it's economics 101.

"Give me control over a nation's currency and I care not who makes its laws." -- Baron M.A. Rothschild (1744 - 1812)

p01 said...

You really think so?
Just wait until the real communists start having their with the rich. Won't be long now, since free-market libertarians make it completely unavoidable. Go read some history, report back when it has resonated between your ears.

Ashvin said...

All economic data comes in weak today, markets still positive. Do you mean to tell me it is pricing in QE3 for, what, the fifth time this year? I don't know, but apparently every tick down in CPI and consumer "inflation expectations" means are that much closer to more QE, according to ZH. Bizzaro World - where good news is good, bad news is pretty good, and imminent deflation = imminent HI.

What's the one asset that always goes up? No. it's not RE. It's gold!

SecularAnimist said...


It isn't conspiracy, it is economics. 101."

From Dimtry Orlov


After they win the game, they lose.

We are entering a much different environment than the past and old patterns of behavior will start blowing up in our collective faces

SecularAnimist said...

""Won't be long now, since free-market libertarians make it completely unavoidable.""

You got that right!

Ashvin said...




Yeah, I think any transactions that rely on institutional counter-parties making good on their "promises" are now suspect at best. However, if I were to be exposed to such a counter-party, I'd rather it be one that helps keep the big players in business, rather than one who simply borrows from "MAs and PAs" for an ever-decreasing spread.

Punxsutawney said...


My brother has to go to work Saturday, and the freeway he normally uses - yes the one that is to be closed. He needs to be at the studio to do his job, so telecommuting isn't an option.

Should be interesting to hear what happens. I suspect a lot of people will stay off the roads in fear and things may not end up that bad.

LA is so spread out and car dependent that the future isn't that bright imho.

Stoneleigh said...

Having spent several days in LA recently, I can only imagine the impact of closing the 405...

Stoneleigh said...



It doesn't affect TAE predictions at all. The USD should do very well over the next year or so. The fear at the moment is simply characteristic of a market bottom.

Stoneleigh said...


I'll be in Sweden in October. If you think it would be helpful for me to travel from there to Finland I'd be happy to do so. It's been over 20 years since I was last in Helsinki...

Mike Tanis said...


The regulars on the board are just so damn smart. It's obvious they'd make up the Dear Leader's inner core of advisers and then all the low people could benefit from their wise counsel.

Stoneleigh said...


Communism is not a solution. Like many things, it fails to scale up. Although it can work very well in small communities, as a state ideology it leads to corrupt oligarchy. There is no ideal ideological perspective, and no ideal balance between centralization and decentralization. The best position for the circumstances is a matter of pragmatism - what works here and now and what does not. TAE espouses no ideology, although our sympathies rest with the little guy. We have explained this many times. Do you consider it some kind of sin to defend the rights of ordinary people?

Mike Tanis said...

Defending rights is admirable on its surface. Defining those rights is the problem. That's politics.

We don't agree on the boundaries or the mechanisms for those rights to be defined. While this board avoids overt politics successfully, the underlying currents are strongly authoritarian, elitist, and I think Orwellian. Remember that some animals are more equal than others?

This is evident by the constant disparagement of the political structures routinely supported by the same "ordinary" people you claim to defend. I think "sheeple" is the word I see used frequently.

Stoneleigh, you are actually the single exception to this bias I see on your blog. The rest of the blog doesn't seem to take after the leader.

Of course this is just my humble opinion offered freely without rancor.

el gallinazo said...

My phone line and DSL have been down since late Monday night. Turned out very well as it broke the rut I was in. Finished In the Realm of Hungry Ghosts. Started studying Spanish again intensively. In one ear and out the other, but some of it has to stick with all the gooey stuff between the ears.

Coincident with Stoneleigh's article regarding shale gas fracking, check out this week's This American Life. Part one is fracking usurps Penn State U. Part two is fracking comes to small town America government. After you hear it, one must second Shakespeare's, "First we hang all the lawyers." Actually that's second. We should start with the bankers.

el gallinazo said...

Metanis said...



The above is itself pure Newspeak which is almost meaningless in summary. Read it four times and couldn't make anything of it. However, apparent shill Metanis, I challenge you to find one "authoritarian" comment in this comment section or the last. The one thing everyone agrees with on this commentariat with the exception of the shills and trolls, is the **legal** right to express one's opinions. This doesn't mean that we have to invite someone into our house who wants to shit on our living room rug.




Of course this is just my humble opinion offered freely without rancor


Yes. Stoneleigh is a modest saint and we all admire her for her intelligence and her restraint. As to the term Sheeple, yes it shows a certain disrespect but this comes from the majority of Americans blindly participating in their self immolation. Reminds one of Jim Jones and his flock. Two precepts that this blog puts forward including the two editors, I&S:

1) That the actions of the TARP and the Fed (on a much larger scale) over the past four years are the biggest theft, even in relative terms, in the history of humanity.

2) The levers of power of the US Federal government have been co-opted by the Banksters in a silent coup over many years.

If you disagree with these two points, your presence here is one of being a troll, assuming you are not paid for your efforts. If you are neither troll, shill, or just deranged, then perhaps you might move on to greener pastures. We all cannot be on such a high road as Stoneleigh and occasionally must vent our frustration as we are dragged along with the flock along the chute leading to the abattoir.

Ashvin said...



It is one thing to express a different point of view... it's another to label people as being the exact opposite of what they are, and routinely advocate against. That argument holds exactly zero persuasive value, just so you know, which I'm sure you do.

Bigelow said...


Automatic Earth is actually rather tame compared to the Jim Willies or Bob Chapmans, maybe you should go check them out -oh that's right, they don't have a forum for you.

el gallinazo said...

And on a similar note,

Bob, formerly Cheryl (before the operation), Evil Banker, and BBLB,

Thank you for your blather.

It makes everyone else here feel more intelligent.

The Dept. of Defense recently announced that their new antiblog software missiles can do ten avatars at a time, so we are awaiting your new arrivals.


By order of Ilargi, please do not discuss 9/11 here, even if from the vantage point of the box cutter conspiracy theory.

LindaBob said...

Thanks Bob, Ash, Skilo,

@Bob, I can't disagree. We have saved lumber, "beans bullets and band-aids" and while our lists might not 100% agree, hard goods are good (we do have the cigars, rubber bands and toenail clippers & twist ties... lol). Water filters, farm set up, etc... sorry sans stinky feet we don't need the dr schols. BTW, we just got a Food Saver (vacuum sealer) and that looks like it could be very handy for storage.

@Ash, Yes, we have what cash we aren't willing to toss in the bodega in a local privately held "bank". For Oregon Locals, it's Clackamas County Bank. Solid, look them up. A good share in the bodega is fine. And some hard goods. We aren't worried about making interest (what 1%?) so safety is the key. (un)Safe deposit box, hahaha! As if.

@Skilo, Yep nothing is 100%. Don't we know it. Just have to hedge the bets as best you can, right?

Supergravity said...

We surely agree on the mechanism required to enumerate, delineate and bind rights unalienably.

The constitution is an excellent idea, wherein the rule of law is established and maintained as [within] the sovereign property [and vitality] of the citizenry.

Although it remains an unrealised ideal, a constitutional structure of governance under the guidance of a fully informed [and enabled] citizenry [as dictated by replicative polyarchy] is the only known method [as instrument of political force] by which coexistence between people and their [immortal] institutions becomes bearable and equitable.
Without such a system [enumerating civil securities and unalienable rights [that/how the strong should not harm the weak] and optimising personal and public liberties [attenuating constitutional modalities to socio-economic preference]], institutions and their civil societies invariably become ruinous [unrestrainedly anti-social].
Thus lawfully, only the constitutional enforcement of liberty yields security [from tyranny].

The constitution becomes just another goddamned piece of paper whenever there are not enough [conscionable] citizens [so enforcing the rule of law], who remember and safeguard its function
or who would make the protection of its integrity [and vitality] their civil duty and personal or professional responsibility [as moral actors defined within a sovereign political boundary].

Frank said...

@el G


Nope, they put out an RFP to get that software. As an ex-MIC engineer, I promise you that what DOD asks for and what can actually be done are related in only the most casual way. Think, "if only we could process oil shale into oil, we would have more oil than Saudi Arabia."

p01 said...

Metanis, what exactly is your problem? You accuse us of being lefties, green dummies, Mao's spawn. You want pure libertarian anarchy? Don't worry, you'll have it. The Pure Darwinian Libertarian Tournament (TM) has been started, and it will reach this continent soon. Everyone except the .1% get to compete.
I'm sure you'll enjoy it.

SecularAnimist said...


Well, here is the problem. Our social institutions and it's "leadership", work and guide, counter to collective betterment, often times and increasingly so, knowingly, for their own strategic perceived self-interest. Actually, I would say these institutions were deeply flawed upon conception and gave the illusion of "working", due to a complex set of non-repeatable historical phenomena. Which were always misinterpreted by the sophistry of economists and politicians to validate their own existence. But, that is another discussion.

Now, it's inertia has completely gone off the rails, due to it's inherent flaws, with a trajectory towards a global social train wreck of epochal proportion.

Those that watch this, look on in horror and disgust. Which, I think, can manifest in unhealthy ways. I do agree, though, I don't particularly like the "sheeple" remarks either, because most, after all, are just victims of a suicidal culture in it's twilight years. We all are.

Stoneleigh said...

Week after week after week after week after week after week after week....

Stocks defy the prediction of dire decline.

Bear market? That dog don't bark.

The market is firm and buoyant. Just Look at that action today. and yesterday, and the day before that , and the week before that, and the 6 months before that and the 2 years before that......

Stoneleigh said...

Would a stock market decline make you happy?

One gets the impression.

Stoneleigh said...

What has anyone got against stocks?

Why hate money? Its just power in a different form.

Why hate power?

SecularAnimist said...

"would a stock market decline make you happy?"

It would be progress

SecularAnimist said...


The constitution is a product of the capitalist world system that is coming to an end. The dominant minority's decision to dismantle the constitution are derived from their fear of the "leveling impulses" laid forth by James Madison -

“were determined that persons of birth and fortune should control the affairs of the nation and check the ‘leveling impulses’ of the propertyless multitude that composed ‘the majority faction,’

Systemic integrity takes precedence over everything else.

As we move forward into the collapse of this world system, the nation-state, originally being an emergent structure of the capitalist world system, will be no longer relevant. Which is fine by me, as it's only purpose has been to be private fiefdom's of the franchised elite. The US military is the global-state policing mechanism to make sure everybody is following the rules of the "market" - as is every individual state-force mechanism in their individual nation-states.

The global system of private property, that is backed up by state violence, will no longer be valid either. It too evolved, though systemic dispossessions, as part of the capitalist world-system structure.

Of course, it can and will, get very ugly as the elite try a prop up this dying system and possibly start fighting with other franchised elite .

Stoneleigh said...

The little guy:

70 % stocks, 30% bonds until 50 years of age.

Then gradually more bonds and less stocks until 68.

Then collect social security and buy a winter cottage in Boca Raton.

Golf on Tuesdays and Thursdays. Early bird specials on Monday's and Wednesday's. Jet skis on weekends to keep your legs firm and toned.

This is the schedule. This is the life. What's not to love.

jal said...

@ Bob

You are absolutely right about the rising stock market.
Do you know why?

Did you have anything to do with eng. that rise?


Then your are just a gamble at a crap table that has loaded dices and you don't know which way they are loaded and the house keeps changing the dices.

Maybe, you want to cash out and want a bigger sucker to buy you out.

You won't find any takers around here.


skinsb said...

Ah yes, Bob is deeply embedded in the herd. See cliff, see Bob, see Bob jump.... bye bye Bob!

Supergravity said...

Here's something misjudged.

The privacy consideration would be justly opined if there was no proof of any individualised identification data attached to the naked body images as permanently or temporarily stored in a governmental system of records. Said procedure whereby a screening agent views scanned images of unclothed bodies in semi-recognizable form when in direct view of the person being scanned is nonetheless direcly invasive to bodily privacy, personal dignity and public decency, and would otherwise amount to indecent exposure.

Moreover, a screening agent's memory, as containing both the viewed scan and an eyewitness account of the scanned passenger, so being personally identifiable by facial or bodily recognition in mental conjunction with their unclothed images, may be considered a system of [governmental] record [being admissible as evidence by eyewitness testimony].

Judge Ginsburg's opinion here is woefully inadequate in regards to acknowledging the widespread anguish and damage to civil security being caused by said searches, and the rationality of intent is fallaciously argued by centering around a pervasive appeal to fear, wherein the overstrained boundaries of 'administrative searches' are only deemed reasonably applied when misviewed under dysfunction of chronic terror-psychosis, thus vastly overestimating existant terror probabilities.
The opinion regarding fourth amendment constitutionality fails to account for the inherently unquantifiable and apparently negligible chance of such terror actually occuring, thereby removing any semblance of probable cause, as overwhelmingly established by the massive failure of the TSA to actually find anything of terror-related substance after many millions of searches.

skinsb said...
This comment has been removed by the author.
Stoneleigh said...

We are human.

We are pattern seeking organisms.

We seek to understand the disorder

Thus the appeal of TAE.

A top down orderly view of how the world truly works. It organizes the randomness. It soothes your need to organize your mind and your future.

But ....what about that itch....the one between your shoulder blades.

It's the itch of disconnect. The disconnect between prediction and reality.

Each week it gets itchier........doesn't it. I bet deep down you're beginning to wonder if you'll ever itch that damn spot.

Out out damn spot. Order. Coherence. Prediction.

Supergravity said...


"The constitution is a product of the capitalist world system that is coming to an end."

If so, then the concept of an egalitarian 'citizenry' is firstly that dying product of capitalism, if allowing for unalienable property and ownership [of prosperity] to the masses, since the constitution is only the device of the citizenry as provided within the sovereign ownership of law as public property.


The national systems of private property are backed by nation-state violence more effectively than it could enforce global interests, so national or local systems of ownership may be retained in lesser complexity after globocorporate statism fails to enforce their assumed properties transnationally upon the nation-state.

Stoneleigh said...

Why hasn't the herd pulled the plug?

The tub is filling up. Maybe it will spill over the rim.

That's one messy bathroom. To breach S&P 1400, you need put up with puddles on the floor.

And who really cares after the 4th Gin and Tonic? Its all greenbacks. Greenbacks as far as I can see.

SecularAnimist said...

"We seek to understand the disorder"

You have now found yourself trapped in the incomprehensible maze...

"It soothes your need to organize your mind and your future."

"Reflexivity" is a broader concept, about the fundamental feedback between the abilities of the brain to map the world, and the selection for the survival of that mapping. Which creates the paradoxical nature to collective social reality. The collapse, which is inevitable, is held at bay with denial of reality. Where as TAE'rs acceptance and patterns of behavior, replicated enough, would hasten it's inevitability.

For some reason, I find that fascinating.

rcg1950 said...

Bob commented




Let's see now Mr. Bob …

The climate is as weird as it's been since records have been kept, or even since reliable data can be found.

Fukushima has had a triple core meltdown.

The Euro project is visibly disintegrating on a daily basis.

Any shred of concorde in the American polity is in tatters and no one is even sure if the national government can avoid nuking the markets on August 2 much less address any ongoing problems like education, health, infra-structure, jobs, energy ...

After putting trillions of dollars into the economy there is no recovery in the USA and real unemployment is up around 16% and climbing again.

America is broke but continues to wage multiple wars, all of which are unpopular and un-winnable yet we push on.

If you took your eyes off the stock market indices for a minute and looked around I think you might have to admit we're way past making predictions here … we're trying to come to grips with the daily realities of a crumbling civilization.

Stoneleigh said...

crumbling civilization?

And when was civilization spick-and-span Mr. Clean shiny?

It's always been disorderly. It's always been a struggle. The future always hung in the balance.

Do you yearn for the good-old roaring 1920's....with rampant racism, lynchings, misogyny, female repression, social darwinism etc.

Do you yearn for the good-old 1940's .....with global War on a scale that makes today's conflicts look like ping-pong.

War in the middle east. Please. Perspective. Nobody is burning cities to the ground here. Casualties in the 100s to 1000s vs. tens of millions. Perspective.

Do you year for the good-old 1960's.....Defcon 3 and a real threat of global incineration via MAD as in the Cuban Missile Crisis

Do you yearn for the good-old 1970's......15% inflation and Defcon 3 yet again during the Yom Kippur War.

Historical perspective is key. There never were any good old days. The only shining star is belongs to tomarrow.

p01 said...

Dear Bob,

The next one will be measured in billions. The perspective widens, so to speak.

All your shining star is belong to TPTB.
Have a good night.

Anonymous said...


>>We surely agree on the mechanism required to enumerate, delineate and bind rights unalienably...<<

I finally comprehended the entirety of one of your posts! ;-)

Yes, we all want to believe that benevolent sheep that promises skittle from unicorns... and then some of us learn history.

In my case, a bit late, but that's because nobody was gonna teach me real history in context until I went looking for it myself.

What a wake up call. I never bought into "the system," but I had no idea reality's rabbit hole ran so deep.

Phlogiston Água de Beber said...

It is not unreasonable to suppose that they have devised some feedback metrics at the sock puppetorium. Though I do not do customer feedback, I will make an exception on behalf of Bob.

It takes more than a little bit of cognitive dissonance to run thru a litany of humankind's long running serial acts of infamy continuing right up to current events and assert that the future will be shiny. Short of an invasion of the Body Snatchers, I can't see anything on the horizon that would cause any sharp positive break in the trendline.

It was having lived thru and in some of the events in his litany that I embraced the general viewpoint espoused by TAE at about the time Stoneleigh was born. Nothing that happened after that time gave any cause to change my mind on that. A demented species does demented things and the natural outcome is a dystopian future for that species.

So, on the basis of his contributions to educating the people via regurgitation of lamentable historical episodes. I hereby recommend that Bob be given a raise and the standard sort of meaningless commendation. And please have him come back periodically and remind us again of why the future is so screwed.

scandia said...

I was in conversation with someone to-day who holds Bob's views. He was saying " things have never been better" he'd heard that on the radio this morning. So I asked him why then do Cdns carry more personal debt than Americans if things are so good?

Unknown said...


Thanks for the feedback, of course you're right that it's intentional. I hadn't thought of it as a war being waged against America by Big Finance, good call.

BTW, while writing today's article, I wondered why the wars are not such a big focus here on TAE- is it because this is old and ongoing news, and that the situation is not really going to change? Because it seems that the wars are really playing a big part in the sinking of the US.

(Part 2 might be more interesting to readers here, as it's more clearly relevant to what's going on)



SecularAnimist said...

""If so, then the concept of an egalitarian 'citizenry' is firstly that dying product of capitalism,""

Yeah, that is not really the original conception, regardless of what you were taught in school.



Now, explaining liberalism to people is a thankless and possibly futile task, but it is one that must be attempted for clarity's sake.

Liberalism is a theory of political economy that arose in Great Britain in the 17th and 18th centuries. Its principal inspirations were Thomas Hobbes and John Locke . It emphasizes Randian-individualism, human avarice, the "virtue" of competition and the "justice" of the marketplace. It opposed feudalism and mercantilism. It sought to replace the traditional landowners with the rising commercial and manufacturing classes.


Here's what classical liberal economist Adam Smith said:


Liberal utilitarian Jeremy Benthan added this:


This means that, in modern nation-states, the rich are pitted against the poor, gaining their wealth by appropriating the work of others; and it means that government is in "business" to protect the ruling class.

The dominant minority, aware of the coming conflagration, is taking security measures to ensure systemic integrity. Of course, it won't work. They can't stop the flow of history. Even with the likes of people like Bob.

PineappleCoward said...


People will buy anything regardless of utility or intrinsic value if they believe that there is a greater fool to sell to. The market, collectively, has come to conclusion that the FED is the greater fool and has virtually unlimited funds. As long as this perception is commonly held asset prices will hold their value or increase.
Is the market right? Will the FED wise up or run out of money? Are you willing to gamble your retirement, or even your freedom on that? Everyone should think long and hard about these questions.

Anonymous said...


TAE is a specialized operation - they focus on educating people about the end of the current system and how ordinary people can salvage as much as possible from the upcoming collapse.

It is a valiant effort and one I greatly respect.

But TAE isn't about, nor does it want to be about, the genesis of the revolution to overthrow the criminals and crooks who are looting society.

I respect that, too. Division of labor and all that stuff.

If you want to visit the "tip of the spear" fighting the infowar against these crooks, you should check out The Alex Jones Channel on Youtube.

He's quite the character, but he understands who the criminals are and how they operate in an in depth way.

His commercials tend to be obnoxious and he occasionally misrepresents the details of some of the statistics he puts out, but he's most often correct and the issues he highlights tend to be the important issues of the day.

Stoneleigh said...

Yeah, well, I just want to know one thing:

Is it safe?

Skip Breakfast said...

Hm, Alex Jones is insane.

And yes, insane people can make a good point now and again. But it really undermines their credibility over all. I'll stick to the analysis on The Automatic Earth, thanks!

SecularAnimist said...

Alex Jones is the modern incarnation of the far-right "collectivist" conspiracies that have been around for a century and were/are prevalent amongst fundamentalist christians. I wouldn't be surprised if he is, at least, tacitly supported by the same people he rails against. Because, it's almost like a preemptive populist uprising usurper using reverse psychology. Corralling all the feeble minded "revolutionaries" into one group so they can be labeled insane "Hey, look at the crazy people that believe in conspiracies". In fact, they don't even offer anything remotely revolutionary. Just babbling about a secret cabal destroying everything for the fun of it.

"No folks, it's not the logic of the system itself, it's a new world order that is trying to impose global socialism."

There is an ugly alliance in the US. The bootstrapper-maverick, sink-or-swim, angry-white-christian coalition on the font lines and the uber-elitist, trickle-down-economics, scorched-earth-capitalist, radical-self-interest-jihadist generals that call the shots at a safe distance from the field of battle

The Randbots, Jonestowners, Teabaggers, and Dittoheads are all products of american-style bootstrapper/maverick corporate propaganda.

Future Jihadists to emergent social responses of the impending train wreck.

Ashvin said...



I'm not sure that I have a problem with Justice Ginsburg's legal reasoning in the context of the 4A and "administrative searches". My problem is more with the fact that the searches are most likely being conducted by employees of the institution most responsible for the application of "terror attacks" in the first place, and that they are then being judicially reviewed by "independent contractors" of that same institution who are, in fact, not so independent.

Mike Tanis said...

@ el g


No sir, I do not disagree with your statement of the problem. However I do disagree strongly with the solutions offered here.

Running and hiding is not the answer. Neither is riots and anarchy. I can see it now on your tombstone, "He ran and hid when times got tough" or "He threw Molotov cocktails at his fellow citizens."

The solutions are readily to hand using the best infrastructure ever devised for public debate. The tools to educate the masses have never been better. The public political process has never been more ripe for improvement, change, and yes... enlightenment.

I just don't think you and your cohorts are ever going to make any progress if you keep reverting to heavy-handed Marxist thinking.

Educate people! Then give them the respect and freedom to make their own choices.

As to evidence supporting my contentions regarding the board, scroll up and check out @SA around 8:46 today. If that isn't a load of extra smelly leftist/anarchist/Marxist/elitist horse hocky then what is?

No really, I mean read it and deconstruct the slogans and the underlying hatred. And not to pick on SA because he is not alone here.

Love it!

jal said...

The math does not lie. Get a math education from "the market ticker".

"Brace for impact folks."

Thanks for the warning.

Thanks to everyone who has contributed to softening the landing.

Without the delaying actions of all the lawmakers, banksters, and economist I would have been caught without any means of trying to take evasive actions.

The impact has been delayed and made smoother.


SecularAnimist said...


Congratulations, you are a fine product of centuries of elitist divide and conquer propaganda. Anybody with half a brain can look at the confluence of an infinite growth junky-mentality driven economic model, peak everything, global debt loads, massive physical system degradation, metastasized institutional corruption, the unscientific/sophist nature of economics and growing population and put it together and see we are in for a radical reality change.... No leftist thinking necessary, just being biased towards scientific thinking

All it takes is to take a broader view of things and to be intellectually honest with yourself.

The system and "rules" that have evolved over the past several hundred years will become irrelevant and damaging. Society at large is in an intellectual straight-jacket that will act as a spiritual prison in the future.

Now, I don't have the fatalist attitude that the board has, but with the like of you, makes it very hard.

But my advice, to be taken or left of course, is to question your deepest convictions - if you don't, your nothing more than an artifact

Not to pick you on our anything.;)

el gallinazo said...


If you chose to refer to the stream of thought here as "Marxist" I will refer to what passes for your stream of thought as "Fascist." Good, we solved that problem.

As to using SA comments to bolster your arguments as an example to my challenge, you may be correct. I spend way to much time on this site as it is, and after our little "debate" on exponential population growth, I have chosen to skip his comments as a waste of **my** time. And YOU certainly are not going to inspire me to go back and review them.

Anonymous said...


Isn't is amazing how science is being demonized by the system?

Of course, they claim to uphold science and the people that don't "do the grammar - trivium reference) have no idea the professional sophists are deceiving them.

To name two examples...

1. Water fluoridation has never had its efficacy tested in a randomized, double, blind placebo study. This is just one of many reasons cited by the US EPA scientists union cited for their current opposition to water fluoridation.

2. The flu shot has never been proven effective in a randomized, double blind placebo study. In addition, they do not collect vaccination information for those who die of the flu in order to hide evidence that those who die from the flu could have been vaccinated for the flu that killed them. Vitamin E has been tested effective using the randomized, double blind placebo protocol, but the average doctor still resists suggesting its use.

Anonymous said...

Regarding vaccines (Big Finance Capital Pharma), this interview with Dr. Wakefield exposes their devious propaganda campaign to destroy individuals who apply scientific methods to their profit center...

the science indicates Dr. Wakefield is correct (more study required to nail it down 100%), of course, hence the added viciousness of the attacks on the honest doctor who value integrity.

Dr. Tenpenny sheds light on the lack of science used to promote Big Finance Capital's Pharma arm...

Anonymous said...


>>The impact has been delayed and made smoother.<<

For you and for others that have become aware - absolutely.

For society as a hole - Nope.

Each and every delay is another day to loot society dry and impoverish society as a hole.

Even those most prepared will be dramatically affected by the hoards of people caught unprepared, though.

But it does give us time to do what we can for now. If the bad must occur, might as well do some good out of it.

Anonymous said...



Which is exactly the reasoning behind the 4th amendment that doesn't allow administrative searches to travel or anything else.


Mike Tanis said...


Let's take a bit of your post and examine it.


Why a personal attack? You know nothing about me or my education, yet you presume to accuse me of being brainwashed by propaganda? Let me ask why the same then is not true of you sir? Besides, I'm the contrarian here, wouldn't your charge actually be more true if lodged against youself?


Anybody with half a brain...

In addition to the brainwashing you attack me as mentally deficient? Nice work! That was sarcasm by the way. Although your phrase is good evidence of your attitude of superiority. Well by golly aren't you just the smartest little kid in the class! Whoopee!


infinite growth junky-mentality driven economic model

I'd call this junk science myself. Who are you accusing? Do you mean the world economy or just the Western nations or just North America? If the world economy you must be aware that there is no monolithic economic model in play. Wouldn't you agree there are numerous different systems? So how's the Chinese system working? Or the Russian?

But if you mean the primarily Western nations then what have you got against people making their own decisions? Because the Western nations do operate with a substantial amount of economic freedom.

Do you really then mean that people are too stupid to make their own choices?

And then isn't that the worst form of elitism/marxism/leninism/maoism?

And by extension then: who made you so smart that you know what's best for billions of people?


I'll readily admit that I'm not the sharpest tool in the drawer. Why would I want to impose my limited understanding on my neighbors? Let them make their own decisions. That's the best thing about Western democratic free market capitalism; people making their own decisions.

You tell me to question my deepest convictions. I can and do on a daily basis. It's called prayer. Prayer is a form of self-analysis. If you readily admit your failures to God then you are also forcing yourself to deal with them directly. While He accuses me of many of the same failings as you SA, he also expects me to use my limited mental facilities to make things better.

To me "better" means the affirmation of life, freedom, liberty, knowledge, and enlightenment.

Ashvin said...


And here I was starting to hope Metanis would actually accomplish something productive with his comments. It's disappointing, but understandable. That's what I get for chasing pipe dreams and questioning the resolve of a principled perspective, right? Which reminds me of this passage in Martin Armstrong's latest piece (which is quite a good historical account of gold and its "standards", but, obviously, I believe it derives faulty Freegold conclusions):

The Outlook for Gold

"For example, April Fool’s Day emerged because Americans were stubborn and refused to follow the revision of the calendar by Pope Gregory XIII (1572-1585) who not merely corrected the 11 minute error of the Julian calendar, he made January 1st the first day of the year instead of April 1st. Those who refused to follow the calendar based solely on religious reasons because the Puritans hated the Catholics simply became commonly known as “April Fools.” Clinging to the Pagan Roman calendar where April 1st began the New Year was somehow better than following the Pope."

But is it really so foolish to stick to spiritual principles in the face of dictated standards, despite the inconvenience of doing so? Perhaps it is unproductive, especially if your goal is uniformity and centralization of authority. And, in the case of the "Puritans", perhaps it did stem from externally-referenced hatred more than any internal principle. Still, I can't help but think there is always at least some value to upholding individual principles once they have been thought through and established by the relevant individual.

Ashvin said...


"Which is exactly the reasoning behind the 4th amendment that doesn't allow administrative searches to travel or anything else."

I must agree with SA that the Constitution was largely drafted to codify the institutional protection of propertied elite and the capitalist system of economic growth. Who ultimately determines what constitutes a "search", "seizure" or "probable cause"? After taking two semesters in Constitutional law as well as criminal law, I can tell you that the vague language of amendments and statutes allows the federal court system a very wide of discretion in the act of interpretation.

Unsurprisingly, those interpretations over the years have given the federal executive (and state execs to a lesser extent) a blank check to invade the "privacy" of its citizens, for the benefit the status quo corporate-fascist structure. Perhaps some of the "anti-federalist" founders such as Jefferson genuinely wished to protect against this development, but ultimately he did not get his way in the Conventions, and even if he did, his naive faith in the relatively stable evolution of the capitalist system would have betrayed his convictions anyway.

Biologique Earl said...

June 2011 was the globe's 7th warmest June on record, according to the National Oceanic and Atmospheric Administration (NOAA) National Climatic Data Center (NCDC).

el gallinazo said...

Regarding the equities (stock) market:

I made a pot of money shorting the market in 2008, early 2009. I made some money on the dead cat bounce going long in mid 2009. I threw some, but definitely not all of it back, going short in 2010. My big cognitive error was that, while I thought that the Fed and PD's could control individual stocks and modest groups of stocks for a long period of time and the entire S&P for maybe days at a time, it was beyond their capacity to do so for a year or more. I was wrong and I paid for it.

The proper way to look at the stock market now is as if it were some sort of gauge such as the tachometer in your car, in which the cable to the transmission has been cut and replaced with a wifi receiver tuned to Brian Sack and his merry group of troglodytes with their fancy supercomputers at the NY Fed. The S&P will register whatever they want it to, and what they want it to do is dictated by the Owners. The "free market," while it was always to some degree a fiction due to insider manipulation, has now become an absurdity. So when idiots point to the stock market and say, "See how healthy our economy is," it will only elicit from me a cynical laugh.

Zero Hedge has provided a valuable service as Tyler Durden has vast expertise in spotting and understanding the exact nuts and bolts of how the Fed with its PD's (whose senior bond holders own the Fed), are carrying out this manipulation on a day to day basis. This is not to say that the Fed stands above the laws of gravity. They are facing a situation where they will have to choose between the stock market and the bond market, and there is little doubt which they will choose. The insiders are unloading their stocks as fast as they can while trying to avoid a premature collapse. PD's are the only people, virtual or otherwise, which are "legally" allowed to naked short the market. The pitiful sheeple (term used as a sop to Metanis :-) with their pension funds and also many peripheral hedge funds have been forced into risk assets to avoid bankruptcy or the loss of their managerial jobs, and they will provide the Naked Lunch for the Owners, and their top dogs such as Dimon and Blankfein, when it is time to pull the plug. The relationship between equity holders and senior bond holders is easily seen. The huge salaries and "bonuses" that top managers, particularly but not exclusively in the financial sector, are coming directly out of the hide of the stock holders. They are contemptible prey. But when the bondholders need to take a "haircut," all hell breaks loose.

As to Metanis saying that I am a coward because I have not chosen to stay and fight, I have "officially" just entered old age. I fought many battles in my youth, probably facing a fascist Metanis on the other side, and am now a retired veteran, thank you. I chose to leave the USA for two reasons. I find the American people, on the whole, to be incredibly dumbed down and passive due to decades of psy-ops control. They also appear to me to be crueler than people I meet, in general, in Latin America. Having just completed Maté's recent book, I think this may have to do with many of the children "abandoned" by their mothers at an early age who need to seek as second, and in many cases, a first income. This abandonment results in deep seated and life long fear, and fear is the perennial spring of cruelty.

el gallinazo said...

Secondly, I can actually live on my Social Security at a modest level outside the USA (not that I expect this to last much longer). I had to undergo complicated dental surgery involving the removal of a molar and a wisdom tooth earlier in the month. There were enough problems that the best dentist in my town was afraid to perform it and he referred me to an oral surgeon in a nearby city. The surgeon was fantastic with a great demeanor, technical expertise, and concern that the anesthetics were working properly. He worked on me for over 90 minutes, and I had to come back a week later to have the sutures removed. My total cost in USD was $85.00. Enough said.

Frank - I stand corrected. I hope you are right that they get the crappiest product possible.

Also, Michael Hudson has an hour interview on this week's Guns & Butter. Haven't listened to it yet because of my recent phone line problem, but I am sure that it will be worth the hour.

deflationista said...

el g-

Would you mind sending me an email? I would like to ask you a question.


bjdephillips @ gmail dot com

rcg1950 said...

@Bob --
“crumbling civilization?



Historical perspective is key. There never were any good old days. The only shining star is belongs to tomorrow.”

I'm not aware of anyone posting at TAE who is pining away for the 'good old days' that weren't. In fact, one of the main points made and remade here is that it's the techno-topians and Boobus americanus type ignoramuses who seem to believe there is a way back to good times (read prosperous, preposterous mega-watts to waste for all).

You don't strike me as either of the above types, so I'm having a hard time figuring out just what your point is. That history is a meaningless set of random accidents? Then it's you who need some historical perspective and I recommend you look from far enough back to not see Cleopatra's nose.

There have been times in history when people believed the future would be better than the past or present. There have been eras when people believed they knew their place and role in the scheme of things. There were ages when people could tell the difference between gold and worthless shiny trinkets. There are epochs of faith and epochs of disillusion. I don't think it's terribly difficult to discern the general tenor of the age we are entering. The handwriting is on the wall.
mene mene tekel upharsin

Ashvin said...

Specifically, with regards to "administrative searches" and similar exceptions to the 4A warrant requirement, the SC has reasoned that the 4A was merely intended to protect US citizens against government "searches" that are used to gather evidence for purposes of use in a "criminal proceeding". Therefore, those that meet the almost non-existent threshold of "reasonable suspicion" and/or are a part of a regulatory or statutory regime and are undertaken for "health" or "security" reasons are not in violation of the 4A.

Similar progressions have taken place with regards to almost every other amendment, where a "balancing test" of interests replaces any unconditional protection against the executive, and the executive is given a huge amount of "deference" in these tests. The one exception may be the interpretations of the Warren court, whose existence un-coincidentally corresponded to the rise of "counter-culture" movements in the US, but those have been systematically watered down since that time.

Anonymous said...

@Skip Breakfast,

You have an interesting thought process.

Instead of criticizing people who "Cremate their care" by burning a child in effigy at the base of a giant rock owl, you call the guy who exposed these people as "insane."

More logical fallacy (ad hominem) used in order to avoid actual issues.

Research the trivium - it is your only defense against the sophists.

Wyote said...

Comment:" Society at large is in an intellectual straight-jacket that will act as a spiritual prison in the future."


Let's move on, shall we?

Anonymous said...



Therein completely nullifying the 4th amendment itself.

House searches could be justified to "improve security," too.

Searching everyone, everywhere, could be used as a justification to increase security.

BTW, what do you think the Central State does when they find something they interpret as illegal when they use the TSA to search everyone?

Is it not used as evidence against them?

What makes anyone think that Big Finance Capital hasn't infiltrated and compromised the court - especially since only two Universities are represented on the Supreme Court - both Big Finance Capital educational institutions.

BTW, selling safety and the expense of liberty is a long standing ploy of the tyrant class.

~Ben Franklin

Anonymous said...


Study up on logical fallacy. The sophists seem to have trained you so well, that you don't realize that you haven't done your grammar.

The reason to speak in vague language is precisely to avoid the details that expose the vague allegations as false and/or purposely deceptive.

Let's discuss the term "conspiracy theory." It is most often used as a sophist technique to end thought and the debate and paint the person who suggests that an area of inquiry (grammar be pursued) should be pursued.

All the great conspirators lusted after a population who would demonize the idea of a conspiracy theory backed by actual grammar (study the trivium method and its history).

If you understand history, you understand one constant theme, THE RICH AND POWERFUL CONSPIRED TO GAME SOCIETY'S STRUCTURES TO THEIR OWN BENEFIT.

This is human nature and history, my friend, not "conspiracy theory."

As for the current conspiracy, there was ABSOLUTELY a conspiracy fact to blow the world's largest credit bubble - and to do so illegally.

The Federal Reserve Mandate (designed to prevent credit bubbles) has been broken for 25 years running and the conspiracy runs so deep, you almost certainly don't even know what the Federal Reserve Mandate is - even though I've posted it on this thread with a link before.

Anonymous said...

@Ash, my paradigm is that humanity - all of us - have a fatal flaw.

People care about themselves more than they care about others.

From this flaw, which some refer to as "sin," all the evils we see around us flow.

While the people who created the Constitution were selfish, it has been the best attempt to keep a powerful Federal government from being taken over by crooks and used to rob We, The People.

Jefferson put it very succinctly...


Note that he didn't say the Constitution was created to eliminate crime, rather, to eliminate criminals from co-opting government and beating We The People to death with their Central State Club.

Is pure capitalism the answer?

Absolutely not - humanity's fatal flaw of selfishness will damage any system.

Is it better than we have now? Some might argue the point.

But when the deepest depths of the Greatest Depression are being plumbed, I think most people will wish they had tried the lesser or two evils.

But Stoneleigh is right. Societal apathy is a key ingredient to the tyranny stew (we are partially at fault, too)... and the most tasty to the tyrants.

el gallinazo said...

I present to Bob, aka Cheryl, Evil Banker etc.:
(that's a joke - for everyone else actually)

Blog: Real Clear Markets

Bernanke Employs a Modified 'Pump and Dump'

By Jeffrey Snider

Worth the read.

SecularAnimist said...

Why a personal attack?

I apologize.

"You know nothing about me or my education, yet you presume to accuse me of being brainwashed by propaganda"

Education has zero to do with cultural stupidity. Actually, it's usually the "intelligentsia" of every one of history's past failed social experiments that propagates cultural stupidity. For some reason, we think we are exempt. The one positive thing we have, which is not entirely corruptible with money - is the peer review process. Unlike the "economic review" process which we use now for measuring social health. Though, capital has been working hard, since the early 80s, at taking funding away from members of academia that are too critical.

""Let me ask why the same then is not true of you sir?""

And who or what is propagandizing me? That leftist NPR, public schooling? MSNBC? Please let me know any anti-capitalist media venue that is spreading dangerous propaganda. Yes, I admit it, I despise the institution - though it is learned and has been cultivated though my own intellectual dumpster diving. I guess you could say, that I propagandized myself.

"I'd call this junk science myself"

Of course you would. Which one? AGW, peak oil, ecological overshoot? soil erosion, acidic oceans, species extinction, decrease in availability of clean water? Or anything the says our collective behavior is unsustainable and we may have to "gasp" change how we do things? We'll prove to the world we don't have to change, eh?

"Do you mean the world economy or just the Western nations or just North America? "

Western patterns of (consumption and waste) behavior are trying to be replicated across the world - because it's seen as "successful" and sometimes forced by the point of a gun, as in South America. I look at it more like female genital mutation. Because these unhealthy patterns of behavior, that are encouraged, through mass communication, to support the economic model, are "bad". How do we know they are bad - well just look at the trajectory of ecological and social health based on decades of peer review. It's basically all dopamine hijacking, evolutionary baggage exploitation - that we wrap in a banner of "natural" and "freedom". We seem to confuse powerful cultural stressors for personal and social benefits. Among those stressors is a constant culturally-induced striving for perennially unsatisfiable desires that often conflict with basic bio-social needs

This is not to say going from subsistence level poverty to a basic level of economic security and access to the fruits of industrial civilization(healthcare, electricity, ect) is not desirable. But beyond that, economic "growth", turns into a social and ecological health eroding pathology.

Here is a lengthy overview of several dozen "junk science" studies. Not only is this "encouraged" behavior doing irreparable ecological damage, it also fosters a addiction epidemic that manifests differently through society at large in various physical and mental illnesses
Cultural factors, especially materialism or consumerism, are also implicated in adverse social trends such as growing obesity and inactivity, which, in turn, are linked to a wide range of physical health problems including heart disease, diabetes, and cancer.41""

Enlightened, we are not

Ashvin said...


Is it not used as evidence against them?"

That's exactly the point, skilo. Once the search is exempted from the 4A's warrant requirement, as largely determined by SC precedents (and federal circuit court decisions for relatively new laws, such as those implemented after 9/11), the evidence is not excluded in a criminal trial. The only catch is that the government will be forced to publicly disclose the evidence, which is not always in its interest, in which case it will simply choose not to prosecute (but even that has "conditionalized" to some extent under the Confidential Information Procedures Act).

The more general point is that the Constitution shouldn't be regarded as some holy document drafted with the best of intentions, but as an extremely generalized set of principles that are solely interpreted by federal courts with any degree of finality, which in turn are highly "deferential" (aka controlled) by the very institution that the provisions are meant to constrain. If the government really thought searching individual homes without first going through a magistrate was necessary to maintain the status quo, then the courts would find a way to let them do that (and they have to some extent, with regards to "searches incident to arrest" and thermal imaging from the outside).

No offense to Mr. Franklin, but the words spoken by some colonist hundreds of years ago provide little consolation to the billions of dead and living who have been disenfranchised by the very oppressive system he helped to enshrine.

Anonymous said...


Here is a nice example of Big Finance Capital sophistry...

“There have been so many flaws in mortgages that it's been an unmitigated disaster,” Dimon said during a conference call today. “We just really need to clean it up for the sake of everybody. And everybody is going to sue everybody else, and it's going to go on for a long time.”


Note the straw man logical fallacy. dimon mentions flaws, but he doesn't mention how those "flaws" occurred (the banking system he represents is 100% responsible for the "flaws" and the CRIMINAL FRAUD of not representing those known flaws (proper paperwork not in securities owned and sold by banks)).

But for the good of everyone, Dimon rises above his own hidden CRIMINAL ACTIVITY and suggests we fix it for THE GOOD OF EVERYONE.

Not one in 1000 will understand the sophist deception at play here because they are too uninformed/apathetic to do the required grammar (trivium method) that enables them to discern truth from deception.

Folks, the media IS DESIGNED to lie on behalf of their Big Finance Capital sponsors.

Don't believe the sophists that yell "conspiracy theory" to shut down your logic.

Would you get on national television, tell the world about your bosses dirty laundry and expect to have a job in the near term?

Why or why not?

Is it an economics 101 decision, as opposed to "conspiracy theory?"

If Monsanto/GE/JP Morgan Chase are spending $100s of millions in advertising with your network, are you going to call for criminal actions against their management team and expect to work the following week?

Ratigan tried that approach and was told to quit the lead anchor on Fast Money within two weeks.

The conspiracy is simple. Make the game all about economics and then set up a system that aggregates the vast majority of economic power to interests you control.

It is happening. Either it was a conspiracy (obvious for those who have done the grammar) or it is an accident all our wealth is being aggregated to the interests of the people who DESIGNED THE SYSTEM.

My grade school child isn't that naive.

SecularAnimist said...


Yeah, the evolution of societies has been one of paranoia driven by sociopaths proselytizing about other people wanting to take their stuff(which most likely was driven by some scarcity(crop failure) issue to begin with), which drove other societies to follow sociopaths promising to protect their stuff and go get more stuff. Being superstitious beings, this behavior was seen as successful, enshrined and ritualized then evolved into imperial conquest and taking people's stuff for the "glory" of it - leading to colonialism, slavery and it's final incarnation capitalism(taking other peoples stuff and conquering without guns and labeling it enlightened). You can track this behavior, not from going to agriculture from tribal societies, but from a distinct waring, male deity, hierarchical culture that came out of southern russia about 5-6000 bc. They commenced conquering all the female deity, egalitarian civilizations that were prevalent at the time. Archeologist Marija Gimbutas spent her life excavating and studying this post tribal, egalitarian, pre-imperial conquest time period.

Anonymous said...


No offense to you, Ash, but Jefferson didn't enshrine the current system.

If you think the Constitution is being followed as written and intended, I suggest you actually read the document itself and consider what it actually says.

Nowhere does the Constitution say that the court can nullify the words in the Constitution.

Or that Congress can nullify the Constitution.

In fact, the Constitution LIMITS Congress' authority and the court's authority - exactly opposite of what you suggest!

Sure, Big Finance Capital controlling interests have used sophism to sway our views on the Constitution, but they do so OUTSIDE of the authority of the law. They are criminals who have subverted the Constitution, the same way they have subverted the Federal Reserve Mandate.

Criminals, all of them.

PS - This doesn't mean the Constitution is perfect. Humans aren't perfect. But I know of know better system, even if it has serious flaws.

PSS - The biggest flaw is an apathetic, easily manipulated populace. If the Constitution was actually followed AND people voted with their pocketbook and bought from small, local business and supported good things, then the system could work as THE BIGS would be ostracized and couldn't get the kind of society warping power they currently posses.

But for goodness sake, don't blame the Constitution for what it explicitly tried to prevent.

Anonymous said...

>>Yeah, the evolution of societies has been one of paranoia driven by sociopaths proselytizing about other people wanting to take their stuff<<

List as many SPECIFIC nations where the rich and powerful didn't conspire to take advantage of the rest of society.

Can you list even one?

If not, stop the sophistry and go where the data leads - like any reasonable person would.

SecularAnimist said...


Well nations is a modern term. But, I did not say I did not agree. Within the confines of empires and nations. But, societies goes far beyond that. As I said this behavior developed around 5000 bc. Before that, societies were egalitarian, for the all of human history. It was a DEVELOPED trait past down from ruling class to ruling class. My personal theory is it was an acquired "taste" through incremental change that developed into a culture of deceit. The wealthy don't know how to be honest with the commoners because they were born into it.

You may want to study up on pre-capitalist societies. I am talking about the volumes of anthropological studies of past societies living outside of the mechanisms of empire. You get a much different view of social relations.

Today's wealthy are conditioned sociopaths, addicts that refuse to admit they are addicts. At this stage, they are in as much denial as the commoners because they are slitting their own throat. You might say their behaviors are not in their best interest.

Anonymous said...


BTW, Jefferson also addressed the necessity of the public to be informed in order to "remain free."

Thomas Jefferson to Charles Yancey, 1816

The main argument isn't what system is "good," rather, which system is "least bad."

You can choose between restrained government (government can't become tool of criminals) and free market capitalism with an educated populace that is prejudiced against anything big an powerful, crony capitalism and crony collectivism.

The selfish nature of humans turns big government into tyranny every time. Every time. Every time.

This time isn't different.

Next time won't be different.

No time will ever be different.

The Founding Fathers understood this and codified it into a law that the crony capitalists and collectivists have been undermining ever since.

Sure, they were flawed in many serious ways - as people.

But I think they hit it out of the park that big government always turned into crony collectivism.

Just as there are no Santa Clauses or Eater Bunnies, there is no benevolent big government that will care for the orphans and the needy, rather, they line up to murder, rape, pillage and aggregate as much insider wealth and power as they can.

Every time. Every time.

Anonymous said...

>>Well nations is a modern term. But, I did not say I did not agree.<<

So, I'm a "conspiracy theorist" for thinking the rich and powerful are gaming America's systems for their personal benefit.

You agree with me that the rich and powerful are gaming America's systems for their personal benefit (by not excluding the US and agreeing with every nation does this).

I'm dizzy from spinning in circles trying to keep up with your thought process.

Stoneleigh said...

I drive the interstate (280).

I drive CA route 101 every work morning.

I see the progress.

I see a society getting to work together and getting it done. 100s of thousands of us together -- fender to fender.

Man and woman, old and young, we travel together. Flowing and slowing, and stopping and starting. Together. Encased in steel and unified by music and talk radio.

We roll together...At 80 mph down the blacktop and concrete path.

A path of toil and progress. A path to higher technology and social interconnectivity.

We roll the great boulder up the mountain.....onward to the top.
There is no turning back.

el gallinazo said...

This discussion of the 4th Amendment reminds me of the great German 2006 film, The Lives of Others. However, unlike the film, do not expect the slightest redemption in Usakistan.

SecularAnimist said...

""So, I'm a "conspiracy theorist" for thinking the rich and powerful are gaming America's systems for their personal benefit.""

Uh, did you not read ANY of my posts. Good grief. It's not the GAMING that is question. It's the development of said gaming through the course of history. Capitalism was developed for justification of this gaming process, that the enlightenment philosophers worshipped so much. This gaming is systemic- top to bottom - an culturally worshipped. Supposedly it spawns all "progress" and "innovation"

Conspiracies are systemic tendency. I agree. The history of history is one conspiracy after another. That there is one over-arching conspiracy is true in the abstract.

my post from above


Stoneleigh said...

A general survey for our files:

Marital Status:
# of Minor Dependents:
Net Worth:
Criminal Record:
Sexual Preference:

Ilargi said...

New post up.

The Real State of US Housing


Ashvin said...



No thanks, I've done that enough times in the last few years. Let me ask you, how many court decisions have you read interpreting the provisions of the Constitution? How closely have you followed the legal reasoning of various SC justices in their opinions over the years?

"Nowhere does the Constitution say that the court can nullify the words in the Constitution.

Or that Congress can nullify the Constitution."

You are failing to understand that the Constitution's lack of very specific prohibitions, including the one you mention, serves to do the opposite of what you argue it does (protect the people from the oppressive tactics of big capital OR the central state). Less than 40 years after the Constitution was drafted, the SC unilaterally took on the role of being its final arbiter in Marbury v. Madison. Through this role of final interpretation, it has very clearly "nullified" the plain meaning of the words in the document, to the extent they had any.

I can't get in the heads of the people who drafted and voted for the wording, and I'm not arguing that SC chose to interpret the words in a way that is obviously incorrect. In fact, I am saying it was just the natural evolution of a complex socioeconomic system that led these documents and institutions to develop the way they did.


Actually, the main articles of the Constitution lay out the governing structure of the country and GRANT the executive, Congress, and the federal judiciary various powers over the states and people. The BOR, which was only added as a last minute "compromise" to get it ratified, and subsequent amendments limit the government's power, and in a very general way that makes it all but inevitable that they will be diluted over time.

"They are criminals who have subverted the Constitution, the same way they have subverted the Federal Reserve Mandate."

The Federal Reserve Act itself is a great example of how the general and alleged "principles" of the Constitution can be easily subverted and that subversion will be sanctioned by the courts if the executive so desires (and what's more important to maintaining the status quo than a central bank?)

TAE Summary said...

What about Bob:

Bob said:
* Invest in lipstick, nylon stockings and odor eaters
* Stocks will go up long term
* The market is as firm and buoyant as a pair of silicon implants in situ
* A stock market crash would please TAEers
* The love of money is the root of all virtue
* Comfortable retirement is the sine qua non of our existence
* Humans seek patterns; TAE provides patterns but does nothing for your itchy back
* My S&P cup runneth over; Surely goodness and mercy will follow me all the days of my life
* Civilization has always been messy; There are no good old days, just a shiny, golden future
* Bad things happen; Just make sure they don't happen to you
* There's nothing better than being trapped like lemmings in shiny metal boxes
* Sysiphus was engaged in God's work

The Anti-Bob said:
* Bob is Cheryl with huevos
* Bob blathers
* If Bob would post on TOD instead of TAE, the average IQ of posters on both sites would go up
* Bob is married to a croupier and his mistress is a bigger fool
* Bob is a lemming
* Bob is a DOD avatar
* Bob is a rat in a maze
* Bob doesn't factor in nuclear disaster, climate change, European dis-union or American insolvency
* Bob doesn't realize billions will die in the coming collapse
* Bob is a cog with dissonance; He deserves a raise and a fools-gold-plaited watch
* Bob is a people like Bob
* Bob is measured in the balance and found wanting
* Bob is actually Alex Jones on quaaludes

- Ronald Reagan

Anonymous said...

@Ash, while I understand the basis of your point and that it is valid to a point, I am of the view that the "Constitution is not clear" meme has been pushed well passed the breaking point or any semblance of reason.

I don't think the first amendment was written with the intent to create "free speech zones" similar to China.

I don't think the second amendment was written with the intent to enforce victim disarmament in various locals.

I don't think the 4th amendment can be reasonably interpreted as "the government can search you and your things anytime they want so long as security is invoked - and security can be invoked for anything an everything."

Nor do I believe that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people" is reasonably interpreted as the government can mandate whatever they want, regardless of whether the Constitution allows it or not.

Yes, there is room for interpretation, but the current "thought" isn't even in the same ball park as "reasonable interpretation," IMHO.

We may have to agree to disagree here.

Anonymous said...


Actually, the powers that were granted were quite limited, as I stated, and ALL OTHER POWERS were given to the people or the states.

If you disagree that these powers were limited, do list the explicit powers given to the Central State by the Constitution.

Now compare that list to what the the Central State actually claims are within its powers.

See a difference?

Make the List. Check it twice.

Of note is that Central State often doesn't even exercise the limited powers it was given - like controlling the issuance of currency and credit.

The reason I think this is important is because your right to free speech, to protect your family, to keep the government from plundering your personal effects, forcing you to pay tribute to the crony collectivists, etc. is enshrined in the Constitution.

Take that document away and you are left under authoritarian control of the Big Finance Capital class.

The same one that starves millions in Africa as a matter of economic POLICY and that actually privatized the rain water in Bolivia.

They aren't nice people. Stalin wasn't nice. Mao wasn't nice. Pol Pot wasn't nice. King George wasn't nice. You get the idea.

Take away the rights of the people enshrined in the Constitution (and that is the Big Finance Capital game plan - can you spell Patriot Act?) and citizens have nothing left to claim as your own.

that's always worked out very badly through the course of history, hasn't it?

Anonymous said...

@SA, please explain, specifically, why you invoked the term "conspiracy theory."

I thought, from context, that it was because Alex Jones believes there is a conspiracy by the rich and powerful to manipulate and control society.

If it is more nuanced than that, do explain.