Edge of a knife!
Eurozone: Countdown to Crisis? Yes or No?
Europe is caught in the cross hairs of the exports of deflation from Japan and China. Delighted by the support to sovereign Bomb er bond markets, dogged by the too high euro from the capital flows and cursed by the lack of government, banking, regulatory and tax reform. So the debt spirals continue and the economic collapse rolls on. Anyone familiar with the Eurozone knows the Euro is a political project first and a practical exercise second. This week’s Financial times details this in all its gory detail, detailing how Eurozone elites toppled Governments in Italy and Greece during the heat of the crisis. It is all about gathering POLITICAL power in exchange for money printed out of thin air which rarely if ever arrives.
"Let me issue and control a nation's money supply and I care not who makes its laws."
– Mayer Amschel Rothschild, Founder of Rothschild Banking Dynasty
Regulatory and labor corruption known as crony capitalism, confiscatory taxation and the myth of the welfare state where people BELIEVE the impossible dream that they can live at the expense of others guarantee its ultimate demise. It has destroyed any hope of real economic recovery and income growth. It is all paper and government myths to sooth the modern day serfs known as the public from from having a Marie Antoinette moment.
"Government is a great fiction, through which everybody endeavors to live at the expense of everybody else"
– Frederic Bastiat
OFFICIAL government statistics understate the deflation risks. Deflation as measured by Eurostat’s HICP Inflation index (which compensates for taxes) has ALREADY arrived in France -1 pc, -2pc in Holland, Belgium and Slovenia, -4pc in Spain, Italy and Portugal, -6pc in Greece, and -10pc in Cyprus. Add to the list in deflation Sweden and Switzerland. Eurozone wide inflation is .6 of 1 percent. It also shows that 23 of 28 countries in the Eurozone have had falling prices for the last 7 months. This is a death sentence for counties that must inflate their debts away or die. Look at the trajectory of Debt to GDP ratios for France and Italy if inflation remains in its current range.
A moonshot in sovereign debt accumulation in the France and Italy the 2nd and 3rd largest economys in the eurozone, Spain lies just in between. That is the picture of a slow death by exfixiation as debts spiral out of control and growth continues to go nowhere. At .5% inflation the top lines are understated.
Growth has been virtually NONEXISTENT in the Eurozone except Germany (the only capitalist economy on the continent). Broadly Inflation has been in freefall and momentum is fierce. Inflation in the BASICS such as food and energy continue to spiral higher. Internationally the debt spirals in developed economies continue across the globe unrestrained:
Sovereign leverage just spirals HIGHER and HIGHER! Let’s see: no growth for most of the last 4 years but debt compounding at 4 to 7% a year. WOW! This is a disaster and the European commission & central bank is waiting for it to explode and explode it will.
As this continues to unfold It has been and will be the source of great civil unrest, look no further than Italy which has not allowed a vote by the public since Beppo Grillo and the 5 star movement (anti EU) took large chunks of the legislature several years ago. Now regime change is done by elites with NO IMPUT from the voting public. Look for this to continue. France, Italy’s and Spain’s finances are crumbling before your eyes. But you wouldn’t know it from the Main stream media who is preaching the mantra that the recovery has finally arrived. GOOD News for the useful idiots who believe it.
This week’s elections for the Eurozone parliament looks to be a real eye opener as Eurosceptic parties are predicted to seize a MUCH larger slice of the balance of power in Brussels sending a MESSAGE to socialist elites in control that their time in power is increasingly on a shorter and shorter leash. Will they begin to serve the people or continue to serve their masters: elites, banksters, crony capitalists? Some things never change and these people won’t either. The answer is the latter. Look no further than Greece, France, Cypress, Portugal, Ireland, Spain and Italy to find the answer. It never ceases to amaze me the amount of abuse the European people will endure from their elite masters in European capitals. Civil unrest looms as there is no future for the younger generation under current GOVERNMENT policies except: stagnation, debt and despair. Eurozone Governments have spent the last 5 years EXPANDING their previous policies which caused the crash. Economic Growth and real wealth creation strategies have been abandoned by its political leaders they have substituted government dependency, the welfare state and fascism. Entrepreneurs have been regulated and taxed into extinction.
“It is not an endlessly expanding list of rights —the “right” to an education; the “right” to health care; the “right” to food and housing. That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery – hay and a barn for human cattle.”
Alexis de Tocqueville
Broad swaths of the European populations no longer can produce more than they consume, creating a constant draining of wealth creation through debt issuance which they call revenue. Bomb er bond yields in France, Italy, Spain, Ireland and Portugal are at pre-crisis levels as the hot money off the printing presses from Asia and the US seek YIELD regardless of the true state of the economy. Here’s a small illustration from Spain and Ireland of the insanity gripping bond market investors.
This picture can be seen virtually across the continent more or less and it makes me breathless. Look at the crash in rates and spreads. Spain’s total debt load is a staggering 340% of GDP if all sectors are added together. I believe these markets are pricing in a combination of oncoming deflation, hot money flows, collapsing growth and financial repression all rolled into one. Most if not all developed world sovereign bond markets sport debt to GDP levels 50% higher than pre-crisis levels with NO GROWTH for several years. In Europe they reflect a return to ECONOMIC normalcy that has not happened…
Facilitated by the Global credit rating agencies who FAIL to give the true pictures of their fiscal and financial health! Politically correct ratings rather than practically correct which allow institutions to meet investment rules, it is insidious! However investors are still GOBBLING up the debt. Who are they is the question? Can’t they do the math? OBVIOUSLY NOT!
Look carefully as the EUROZONE banks are worse than ever. Virtually nothing has been addressed since the crisis. Balance sheets remain clogged with mispriced assets; their balance sheets are 300 to 400% the size of their domestic GDP’s, lending only occurs to sovereign governments and the best of the big crony capitalist corporate sectors. The small and medium enterprises private sectors are starved for credit and issuance (except Germany) is contracting at 2 to 3 percent per year depending on the measurement you review. This is a symptom of the zombie banks they are.
No or shrinking credit growth in the private sector equals no or shrinking income and economic growth in the private sector. This chart illustrates the woeful policies of the ECB since early 2012 when credit growth went negative for the private sector. That is when the alarms should have been loudest, instead they have been ignored and the private sector which is the source of ALL REAL GROWTH is weaker and farther from ECONOMIC recovery than ever.
The Euro is bid for a number of reasons: first from capital flows from China, Japan, 2nd a run for yields, and third ECB balance sheet contraction which is aggressively moving lower as the sovereign carry trades and the LTRO expire. Take a look at the feds balance sheet versus the ECB:
Both of the previous charts are a picture of TIGHTENING credit markets in the Eurozone while the Fed powers HIGHER but at an ever reduced rate. Can you say divergence? Additionally, the ECB has NEVER really taken the toxic sludge down as the FED has done with the MBS (mortgage backed securities). Quantitative easing in the US and UK has moved Toxic sovereign debt (in the US MBS and agency debt as well) on to the central bank balance sheets while TOXIC European sovereign debt has gone into the local banking systems as always.
Author’s Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which have the potential to thrive (up and down markets) regardless of what unfolds economically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me CLICK HERE!
The link between BAD sovereign debt and the banks is BIGGER than EVER. Look at the nosebleed PE’s of the European banking sector. Those forward projections are not going to accomplished by profit growth and the next charade of stress tests is about to commence.
The banks have done as they have always done: funding sovereign governments using a carry strategy with LTRO money, deposits and lending to crony capitalists. Out on a limb in many areas such as Russia and UKRAINE where their futures hang in the balance as a default from either will send them into Visible insolvency. I say visible because they are already deeply insolvent and allowed to operate in that manner by banking regulators. Regulators who have let them do so for years and now the problem is UNSOLVABLE in my opinion. Just like the rest of the planet Europe is choking on unpayable and inextinguishable debt with no REAL growth or wealth creation! Its call insolvency…
Europe really doesn’t have the developed bond markets which are available in the United States. Most lending has been done through the banks. Quantitative Easing will be difficult to execute as the private sector debt lies mostly on bank balance sheets rather than private bond markets as in the United States. The Germans stand in opposition to purchasing sovereign debt as todays leaders remember their parents and grandparents stories of the hyperinflation of the Weimar and the 1940s. So it’s NEIN to that.
KEYNESIAN private estimates of the bad debt of $700 billion euros, more credible main stream media sources put it at 1.4 trillion, my estimate is more than quintuple (5x) that number. If the banking sectors assets average 300 to 400% of the size of Eurozone gdp of 10 trillion euro ($13.6 trillion dollars) and 15% of the lending is unrecoverable that implies 4.5 trillion euros ($6 trillion dollars=$6 million million dollars) of bad debt. They have made provisions for $60 billion euros (60,000 million of rescue funds payable over the next several years, .001 of what’s required), and the new banking laws pave the way for the whole continent to by CYPRESSED. This will be attempted in the crisis to come. Whether they get away with it is another story.
The only responsible Central bank and regulator is the Swiss national bank which is moving reserve requirements to 20% in preparation of the coming debacle of write offs. The only other central bank in the world with a 20% reserve requirements is CHINA. See last edition of Tedbits for the china story.
No reductions of sovereign debt levels have occurred since 2008, and most have climbed approximately 50% or more. The banking reform is basically an UNFUNDED farce; it is a masquerade as new rules are created to CYPRESS many banks as the eventual fireworks unfold.
The Euro is a project to gather power to the central government in Brussels. None of the aforementioned countries have the power of Seignioriage (central bank controlled printing presses), that privilege was given to the ECB when the euro was created. Which is the only way to ATTEMPT to escape the debt spirals also known as PRINTING THE MONEY. They would have failed anyway but it brings their demise a little bit closer.
Authors note: Don’t miss the next edition of Tedbits “Edge of a Knife series” where we will be covering the USA. Subscriptions are free at the new TedBits.com blog is up as well, Exit the Matrix with Austrian commentary and articles from the main stream and alternative media all in one location. A mental body builders dream site.
Yesterday the ECB had their monthly meeting and a burst of hot air came from Mario Draghi’s lips, saluting to the deflationary winds but declining to address them once again. Implying the June is D Day. Of course he is constrained as Asset backed securities, corporate bond markets are TINY as the lending sits on bank balance sheets and they cannot securitize them as to do so would require valuing them which cannot happen unless they are really marked to their true value, which would be a banking debacle. I promise you he will disappoint in June, the ECB and European commission will always be a day late and a dollar short of the solutions required to restore the illusions of growth. These people only act during crisis, almost never prior to it. Outright monetary transactions are still only a myth and QE will be too in my opinion. “Whatever it takes” is now a joke, and markets haven’t forgotten: now its fool me once shame on you, fool me twice shame on me. We are about to see how many fools there are. All decisions taken are POLITICAL first and PRACTICAL second. It is not a recipe for FUTURE stability, but rather INSTABILITY!
French economist Frédéric Bastiat wrote about the redistribution of wealth – or “ plunder” – in 1850 in The Law: “There are only two ways of obtaining the means essential to the preservation, the adornment, and the improvement of life: production and plunder…. What keeps the social order from improving (at least to the extent to which it is capable of improving) is the constant endeavor of its members to live and to prosper at one another’s expense.”
Most of Europe has been in plunder mode since Bretton Woods II in 1971. No one in the main stream media or global capitals speak of what is necessary to revive growth because none of those measures are to be considered. In fact the requirement for the policies of growth ended at Breton woods II when easy money and borrowing from the future created illusions of growth that have grown to today…
Public economic policy became Printing money, constant devaluation of money, creating debt slaves of the public and creating demand for crony capitalists from borrowing from the future to fund them rather than from economies which create wealth and rising incomes, borrowing from the future for current government consumption and raising taxes to confiscatory levels. Returning freedom and income to the private sector to restore incentives to produce has not and will not be considered by the powers that be.
FREEDOM once taken never to be returned. So don’t expect an ECONOMIC recovery either. The reason AUSTERITY is a dirty word is it means less SOCIAL BENEFITS for those who depend on them, which is virtually half of them. So cutting back the welfare state, taxes, and reforming employment and business regulations is effectively prohibited. Civil unrest looms as the future has been destroyed by the suffocating embrace of socialism and fascism. It’s the same throughout the developed world including the United States.
The welfare states have forgotten how to create wealth except the German’s who enjoy a vibrant economy based upon the creation of wealth thru their mighty industrial complexes and Middlestadt, who have been busy becoming suppliers to emerging markets, the rest of Europe, Russia and most importantly CHINA. Germany PRODUCES more than it consumes and provides more goods and services for less money aka as capitalism to those of you who don’t know this. That is the secret of their success. Capitalism is producing wealth as it always has.
Germans are running a balanced budget and export surpluses approaching 7% of GDP. They are being attacked for living prudent lifestyles, creating wealth and stability. When you live in the Eurozone where socialism is the law of the land their activities are viewed as subversive. Germany’s banks are arguably some of the weakest and most leveraged on the continent. Deutsche bank announced today an 11 billion dollar capital increase and it is being reported that the equity were sold at a discount. Take a look at this levered behemoth courtesy of www.zerohedge.com: 
Doing the math 54 trillion euros is $73 trillion us dollars (73 million million divided by 11000 million=.001506), that is the size of the move of their derivatives which would wipe out the new equity. Makes you feel really small doesn’t it? Keep in mind the ALL of the big banks in the core (Germany, UK, France, Italy, Spain, Ireland, etc.) and periphery are operating at about 33 to one leverage (at minimum) versus their balance sheets and a small move against them in asset or derivative markets will wipe them out and DRIVE UP their government debts up DRAMATICALLY!
Germany is in control of the ECB and the Latin bloc is too timid to mount a coup. Public servants, elites and the public can’t bear the thought of which is growing by the day that the economy refuses to revive. The socialists are running out of other people’s money. Their policies are KILLING their economies. Elites and the public await a cyclical recovery that will never arrive. The banksters eagerly await the next bust, standing ready to gather assets at discounts and POLITICAL power in exchange for money printed out of thin air. Keep in mind: it is impossible for a modern day central bank to become insolvent as all their assets are purchased with money printed out of thin air.
Demographically Europe is shrinking as is Russia, and Japan. Think about how high youth unemployment would be if this age group was growing rather than shrinking as a percentage of the population. Socialism is doing its dirty work of shrinking and collapsing economies and spreading misery widely. Democracy is now the cover term for socialism/communism and the creed of the collective which is imploding as we speak.
In closing: No BOOM, just BUST and it is just around the corner. Deflation, stagnation, civil unrest and never ending economic collapse are the future for the Eurozone. Nothing can stop it except a wholesale change in leadership and public policies from socialist governments. Don’t hold your breath as you will die. Socialist empires and Fiat currency and credit financial systems die in waves of insolvency and the next one is just around the corner. Recovery in the Eurozone other than Germany is a STATISTICAL mirage, just as it is in the USA.
Embracing capitalism, wealth creation, competition within and outside the Eurozone, private property rights, regulatory and labor market reforms, rolling back confiscatory tax rates and reduction of currency debasement by bank credit creation for sovereign debt purchases are unthinkable by the powers that be.
They can’t even use the printing press as it is forbidden to do so. Conversely, the US, UK and Japan faces the same bleak future but they will attempt to reverse it with money printed out of thin air. Stealing what’s left of value/purchasing power from the people who are attempting to store wealth in paper. Both are recipes for financial disaster ultimately. Confidence is a fragile underpinning to acceleration of growth especially when there are no fundamental policy drivers to drive the recovery which there isn’t. In REAL TERMS Europe’s recovery is nothing but a charade and Potemkin invention of the powers that be to be fed to the useful idiots among them.
Minor crack up booms can be seen in equities and bonds in the US, UK and the Eurozone as money printed out of thin air seeks shelter from financial and economic repression. Jumping from the proverbial frying pan into the fire. The future sounds bleak and for many it will be, but in reality it is my opinion that this is the greatest opportunity in history for those that can really apply Austrian economics.
Author’s Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which have the potential to thrive (up and down markets) regardless of what unfolds economically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me CLICK HERE!
Tightening known as the taper in the United States is occurring as we speak and Kuroda in Japan has just announced a coming taper in BOJ money printing. Combine this with reduced rates of credit creation in China as they tackle their banking system before a Minsky moment and the clear tightening in the ECB leaves you a quadruple witching moment for debt dependent markets and economies. Once the momentum turns south it should produce some real fireworks in markets and economies.
ECB president Draghi is at a show me moment which he will fail in June, failure to launch at the next ECB meeting has the potential to become an explosive situation. Don’t miss the next edition of Tedbits “Edge of a Knife series” where we will be covering the USA. Subscriptions are free at TedBits.com.