Is The US-China Rivalry More Dangerous Than The Cold War?

Submitted by Zachary Zeck via The Diplomat,

The prominent realist international relations scholar John Mearsheimer says there is a greater possibility of the U.S. and China going to war in the future than there was of a Soviet-NATO general war during the Cold War.

Mearsheimer made the comments at a lunch hosted by the Center for the National Interest in Washington, DC on Monday. The lunch was held to discuss Mearsheimer’s recent article in The National Interest on U.S. foreign policy towards the Middle East. However, much of the conversation during the Q&A session focused on U.S. policy towards Asia amid China’s rise, a topic that Mearsheimer addresses in greater length in the updated edition of his classic treatise, The Tragedy of Great Power Politics, which is due out this April.

In contrast to the Middle East, which he characterizes as posing little threat to the United States, Mearsheimer said that the U.S. will face a tremendous challenge in Asia should China continue to rise economically. The University of Chicago professor said that in such a scenario it is inevitable that the U.S. and China will engage in an intense strategic competition, much like the Soviet-American rivalry during the Cold War.

While stressing that he didn’t believe a shooting war between the U.S. and China is inevitable, Mearsheimer said that he believes a U.S.-China Cold War will be much less stable than the previous American-Soviet one. His reasoning was based on geography and its interaction with nuclear weapons.

Specifically, the center of gravity of the U.S.-Soviet competition was the central European landmass. This created a rather stable situation as, according to Mearsheimer, anyone that war gamed a NATO-Warsaw conflict over Central Europe understood that it would quickly turn nuclear. This gave both sides a powerful incentive to avoid a general conflict in Central Europe as a nuclear war would make it very likely that both the U.S. and Soviet Union would be “vaporized.”

The U.S.-China strategic rivalry lacks this singular center of gravity. Instead, Mearsheimer identified four potential hotspots over which he believes the U.S. and China might find themselves at war: the Korean Peninsula, the Taiwan Strait and the South and East China Seas. Besides featuring more hotspots than the U.S.-Soviet conflict, Mearsheimer implied that he felt that decision-makers in Beijing and Washington might be more confident that they could engage in a shooting war over one of these areas without it escalating to the nuclear threshold.

For instance, he singled out the Sino-Japanese dispute over the Senkaku/Diaoyu Islands, of which he said there was a very real possibility that Japan and China could find themselves in a shooting war sometime in the next five years. Should a shooting war break out between China and Japan in the East China Sea, Mearsheimer said he believes the U.S. will have two options: first, to act  as an umpire in trying to separate the two sides and return to the status quo ante; second, to enter the conflict on the side of Japan.

Mearsheimer said that he thinks it’s more likely the U.S. would opt for the second option because a failure to do so would weaken U.S. credibility in the eyes of its Asian allies. In particular, he believes that America trying to act as a mediator would badly undermine Japanese and South Korean policymakers’ faith in America’s extended deterrence. Since the U.S. does not want Japan or South Korea to build their own nuclear weapons, Washington would be hesitant to not come out decisively on the side of the Japanese in any war between Tokyo and Beijing.

Mearsheimer did add that the U.S. is in the early stages of dealing with a rising China, and the full threat would not materialize for at least another ten years. He also stressed that his arguments assumed that China will be able to maintain rapid economic growth. Were China’s growth rates to streamline or even turn negative, then the U.S. would remain the preponderant power in the world and actually see its relative power grow through 2050.

In characteristically blunt fashion, Mearsheimer said that he hopes that China’s economy falters or collapses, as this would eliminate a potentially immense security threat for the United States and its allies. Indeed, Mearsheimer said he was flabbergasted by Americans and people in allied states who profess wanting to see China continue to grow economically. He reminded the audience that at the peak of its power the Soviet Union possessed a much smaller GDP than the United States. Given that China has a population size over four times larger than America’s, should it reach a GDP per capita that is comparable to Taiwan or Hong Kong today, it will be a greater potential threat to the United States than anything America has previously dealt with.


    



via Zero Hedge http://ift.tt/1iNyJfB Tyler Durden

JPMorgan Warns “Avoiding China Defaults Now Will Amplify The Future Problem”

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future."

A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."

 

Via Bloomberg's Tom Orlik,

Investors Should Embrace Defaults in China’s Fragile Financial System

 

 

In the years before the 2008 financial crisis, nominal growth outstripped the lending rate. Outstanding credit relative to GDP was low, keeping a lid on the burden of repayment. Against that backdrop, most borrowers were able to cover their costs and the chances of a default were low.

 

 

The situation today is different. Nominal growth has more than halved to 9 percent in 2013 from close to 23 percent in 2007.

 

Borrowers from trusts and other parts of the shadow financial system face interest rates in excess of 20 percent. An explosion in lending has increased the burden of repayment to more than 30 percent at the end of 2013 from about 19 percent of GDP at the end of 2008.

 

Lower growth, higher borrowing costs and mounting repayment costs mean defaults by borrowers and even bankruptcy at some small lenders are likely. After initial turmoil, that could actually be beneficial.

 

And JPMorgan adds:

  • China may narrowly escaped the first default in its shadow banking industry
  • Absence of default has become a major market distortion
  • The challenge is to contain the contagion risk if a default happens

 

…local media reported that the China Credit Trust has reached a last-minute agreement with investors, with all principal and most accrued interest to be repaid. That means China will again narrowly escaped the first default in its shadow banking. However, the worries remain.

 

The absence of default has become a major distortion in China’s shadow banking, and we believe that default will happen in 2014 amid economic slowing. The concern is that, if a default occurs, whether investors will walk away and put the whole shadow banking market into a liquidity-driven credit crisis.

But contagion is possible

The concern about the contagion risk is not groundless. In the past several years, non-bank financing (or the so-called shadow banking) has grown rapidly.

 

We estimate that the gross amount (i.e. with possible overlapping among sub-components) of non-bank financing in China reached RMB 36 trillion by the end of 2012 (or nearly 70% of GDP), compared to RMB 18.3 trillion in 2010 (or 46% of GDP).

 

Non-bank financing continued to grow fast in 2013. An update of our estimate suggests that nonbank financing has further increased to RMB 46.7 trillion by September 2013 (or 84% of GDP). The increase was most dramatic for trust assets (an increase of RMB 2.66 trillion in the first nine months of 2013), wealth management products (an increase of RMB 2.82 trillion), entrust loans (an increase of RMB 1.8 trillion) and bank-security channel business (i.e. banks use security firms as a channel to extend loans, which more than doubled in the first three quarters in 2013 and reached RMB 2.79 trillion).

 

 

The rapid growth in non-bank financing activities, especially for trust loans, WMPs and banksecurity channel business, has been driven by the perception of implicit guarantee from product issuers and distributors. The absence of default confirmed such perception.

 

 

In addition, there is substantial overlap between interbank assets and other components, for instance WMPs investing on interbank assets or claims on trust assets being traded in interbank markets. Nonetheless, banks are closely connected to shadow banking activities, hence possible turbulence in shadow banking will also affect the banking system.

We believe that default will happen in 2014 as the growth momentum slows down, and it will help restore market discipline and mitigate the moral hazard problem in the long run. However, the challenge is how to contain the near-term negative impact, as there could be three possible outcomes (in the order of increasing severity) if a default occurs.

The first possibility is that it is perceived as an idiosyncratic event, i.e. no spillover at all. This is the least likely outcome.

 

The second possibility is that the contagion risk is contained within a manageable level, i.e. only to similar products or sectors. For instance, if "Credit equals Gold No 1" defaults, investors will move away from collectively trust products that are only sold to wealthy individuals (but not affecting WMPs that are sold to retails investors); investors will worry about the credit quality of similar loans (non-SOE borrowers in mining industry), but not spillover to other products (e.g. local government debt, real estate companies and SOEs); investors question about the safety of trust companies but not banks. We can call it "limited spillover".

 

The third possibility is a “systemic spillover”. In a mild scenario, it will affect the vulnerable components such as trust loans (48% of trust AUM), WMP investment on non-standard credit products (estimated to be 35-50% of total WMPs) and bank-security channel business. In a worse scenario, it will affect the whole trust industry, WMPs and channel business (with a total gross size of RMB 23 trillion). Rollover of trust products (we estimate 30-35% trust products will mature in 2014) and WMP (64% WMPs has maturity less than 3 months) becomes extremely difficult. The liquidity stress could evolve into a full-blown credit crisis.

What can the government do? In our view, avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future. Meantime, there are measures the government can take to contain the contagion risk.

First, let defaults happen but establish a transparent legal process (rather than under-table arrangements) to resolve the dispute between different parties.

 

Second, regulators should tighten supervisory and regulatory framework to contain regulatory arbitrage activities, and clarify the responsibilities in various shadow banking products. The uncertainty in regulatory and legal responsibility behind each product is an important caveat in the market, and could amplify the contagion risk.

 

Third, impose hard budget constraints on local governments and SOEs, so as to avoid crowding out of credit to other business borrowers and establish risk-based pricing practices.

 

Finally, avoid defaults that could be easily linked to systemic concerns, such as the default of banks (rather than non-bank financial institutions as the perception of government protection on banks is stronger) or local government financial vehicles or SOEs. Similarly, the default of a WMP could have a bigger impact than a trust product, as the latter does not have maturity mismatch problem and are sold to wealthy individuals rather than retail investors. In that sense, China may miss an "ideal” first default if “Credit Equals Gold No 1” gets bailed out.

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it.

And they are going to get a chance again soon as there are considerably more of these maturing in the next quarter…

 

Perhaps that is why 3mo SHIBOR has been rising 9 days in a row…


    



via Zero Hedge http://ift.tt/1icx9kB Tyler Durden

JPMorgan Warns "Avoiding China Defaults Now Will Amplify The Future Problem"

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it. The implicit guarantee that no investments will go sour is one of the key problems with China’s financial system as Orlik adds it encourages reckless lending often to borrowers whose only merit lies in backing from a deep-pocketed government. Crucially, as JPMorgan warns in a recent note, "avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future."

A default that encourages lenders to price in risk would be a positive development and the CEG#1 was an ideal product to 'fail' with its 11% yield and clear idiosyncratic company problems. However, regulators won't have to wait long for a second chance as JPM warns "There will be a default in China’s shadow banking industry this year as economic growth momentum slows."

 

Via Bloomberg's Tom Orlik,

Investors Should Embrace Defaults in China’s Fragile Financial System

 

 

In the years before the 2008 financial crisis, nominal growth outstripped the lending rate. Outstanding credit relative to GDP was low, keeping a lid on the burden of repayment. Against that backdrop, most borrowers were able to cover their costs and the chances of a default were low.

 

 

The situation today is different. Nominal growth has more than halved to 9 percent in 2013 from close to 23 percent in 2007.

 

Borrowers from trusts and other parts of the shadow financial system face interest rates in excess of 20 percent. An explosion in lending has increased the burden of repayment to more than 30 percent at the end of 2013 from about 19 percent of GDP at the end of 2008.

 

Lower growth, higher borrowing costs and mounting repayment costs mean defaults by borrowers and even bankruptcy at some small lenders are likely. After initial turmoil, that could actually be beneficial.

 

And JPMorgan adds:

  • China may narrowly escaped the first default in its shadow banking industry
  • Absence of default has become a major market distortion
  • The challenge is to contain the contagion risk if a default happens

 

…local media reported that the China Credit Trust has reached a last-minute agreement with investors, with all principal and most accrued interest to be repaid. That means China will again narrowly escaped the first default in its shadow banking. However, the worries remain.

 

The absence of default has become a major distortion in China’s shadow banking, and we believe that default will happen in 2014 amid economic slowing. The concern is that, if a default occurs, whether investors will walk away and put the whole shadow banking market into a liquidity-driven credit crisis.

But contagion is possible

The concern about the contagion risk is not groundless. In the past several years, non-bank financing (or the so-called shadow banking) has grown rapidly.

 

We estimate that the gross amount (i.e. with possible overlapping among sub-components) of non-bank financing in China reached RMB 36 trillion by the end of 2012 (or nearly 70% of GDP), compared to RMB 18.3 trillion in 2010 (or 46% of GDP).

 

Non-bank financing continued to grow fast in 2013. An update of our estimate suggests that nonbank financing has further increased to RMB 46.7 trillion by September 2013 (or 84% of GDP). The increase was most dramatic for trust assets (an increase of RMB 2.66 trillion in the first nine months of 2013), wealth management products (an increase of RMB 2.82 trillion), entrust loans (an increase of RMB 1.8 trillion) and bank-security channel business (i.e. banks use security firms as a channel to extend loans, which more than doubled in the first three quarters in 2013 and reached RMB 2.79 trillion).

 

 

The rapid growth in non-bank financing activities, especially for trust loans, WMPs and banksecurity channel business, has been driven by the perception of implicit guarantee from product issuers and distributors. The absence of default confirmed such perception.

 

 

In addition, there is substantial overlap between interbank assets and other components, for instance WMPs investing on interbank assets or claims on trust assets being traded in interbank markets. Nonetheless, banks are closely connected to shadow banking activities, hence possible turbulence in shadow banking will also affect the banking system.

We believe that default will happen in 2014 as the growth momentum slows down, and it will help restore market discipline and mitigate the moral hazard problem in the long run. However, the challenge is how to contain the near-term negative impact, as there could be three possible outcomes (in the order of increasing severity) if a default occurs.

The first possibility is that it is perceived as an idiosyncratic event, i.e. no spillover at all. This is the least likely outcome.

 

The second possibility is that the contagion risk is contained within a manageable level, i.e. only to similar products or sectors. For instance, if "Credit equals Gold No 1" defaults, investors will move away from collectively trust products that are only sold to wealthy individuals (but not affecting WMPs that are sold to retails investors); investors will worry about the credit quality of similar loans (non-SOE borrowers in mining industry), but not spillover to other products (e.g. local government debt, real estate companies and SOEs); investors question about the safety of trust companies but not banks. We can call it "limited spillover".

 

The third possibility is a “systemic spillover”. In a mild scenario, it will affect the vulnerable components such as trust loans (48% of trust AUM), WMP investment on non-standard credit products (estimated to be 35-50% of total WMPs) and bank-security channel business. In a worse scenario, it will affect the whole trust industry, WMPs and channel business (with a total gross size of RMB 23 trillion). Rollover of trust products (we estimate 30-35% trust products will mature in 2014) and WMP (64% WMPs has maturity less than 3 months) becomes extremely difficult. The liquidity stress could evolve into a full-blown credit crisis.

What can the government do? In our view, avoiding defaults is not the right answer, as it will only delay or even amplify the problem in the future. Meantime, there are measures the governme
nt can take to contain the contagion risk.

First, let defaults happen but establish a transparent legal process (rather than under-table arrangements) to resolve the dispute between different parties.

 

Second, regulators should tighten supervisory and regulatory framework to contain regulatory arbitrage activities, and clarify the responsibilities in various shadow banking products. The uncertainty in regulatory and legal responsibility behind each product is an important caveat in the market, and could amplify the contagion risk.

 

Third, impose hard budget constraints on local governments and SOEs, so as to avoid crowding out of credit to other business borrowers and establish risk-based pricing practices.

 

Finally, avoid defaults that could be easily linked to systemic concerns, such as the default of banks (rather than non-bank financial institutions as the perception of government protection on banks is stronger) or local government financial vehicles or SOEs. Similarly, the default of a WMP could have a bigger impact than a trust product, as the latter does not have maturity mismatch problem and are sold to wealthy individuals rather than retail investors. In that sense, China may miss an "ideal” first default if “Credit Equals Gold No 1” gets bailed out.

Investors in China have been running scared of a default on a high risk trust product; but, as Bloomberg's Tom Orlik notes, they should embrace it.

And they are going to get a chance again soon as there are considerably more of these maturing in the next quarter…

 

Perhaps that is why 3mo SHIBOR has been rising 9 days in a row…


    



via Zero Hedge http://ift.tt/1icx9kB Tyler Durden

A Mission to Mars Illustrates the Insanity of the Federal Reserve

“The last duty of a central banker is to tell the public the truth” – US Federal Reserve Vice Chairman Alan Blinder, 1994

 

By now, everyone knows that bankers lie…all the time. They tell one group of clients to sell an asset while secretly telling another group of clients to buy the same asset. They tell other clients to buy assets and then short that very asset behind their clients’ backs. They tell the world they don’t engage in any type of gold swaps nor do they rehypothecate gold, but yet when Germany asks for its 300 tonnes back from the US Central Bank, they respond by telling Germany that they have it all but only return 5 tonnes in the whole of 2013. Five tonnes represents 0.06% of the alleged gold the US Central Bank claims is in deep storage somewhere in the United States.

 

Yesterday the US Central Bank said that they are cutting their purchases of US Treasuries yet again from $75B a month to $65B a month. But as I stated yesterday in our weekly newsletter sent to thousands before the FOMC announcement, “I do not care if the US Central Bank’s FOMC lies later today when they announce policy and if they state they are going to taper QE more just to knock down gold and silver prices again in the short-term, because the REALITY is not only can they not maintain such a policy other than for the very short-term, but that they will eventually need to INCREASE QE just to prevent disaster and all the huge bubbles they have created all over the world from popping.”

 

In today’s world, it simply doesn’t matter what any of the bankers say because the only thing we know to be true is that their words are never to be trusted. The only thing that matters is what bankers are actually doing behind closed doors after spouting propaganda lies to the public. Below, we use a mission to Mars to clearly illustrate the insanity of Central Bank-speak.

 

 

 

Other recent SmartKnowledgeU videos for your viewing pleasure:

War is a Bankster Racket

Does Your Gang Affiliation Prevent You From Thinking Clearly?

 

 

About the author: JS Kim is the Managing Director of SmartKnowledgeU, a fiercely independent research & consulting firm that focuses on precious metals. Subscribe to our YouTube channel here and our Twitter feed here.


    



via Zero Hedge http://ift.tt/1b6T0rB smartknowledgeu

Wednesday Humor: F##k The Fed

An oldie but a goodie… On the final FOMC meeting of Ben Bernanke’s illustrious career as Fed Chair, we thought it appropriate to dust off the following musical reminder of just who the Fed are…

“… you see the Federal reserve is not a government thang; it’s a bunch of private bankers we obey…and they don’t answer to the people coz they pull the strings; and that’s precisely why we have to say… hey hey, hey hey… F##k The Fed..

 

 

 

(h/t Mike Krieger’s Liberty Blitzkrieg blog)


    



via Zero Hedge http://ift.tt/1b90uXV Tyler Durden

The Carnage Continues In Asia As China PMI Confirms Contraction Deepening

Following last week’s Flash PMI print of 49.6, the Final print for January China Manufacturing dropped further to 49.5 confirming the contraction is deepening. Japanese stocks were down the most since August in the early going as Nikkei futures extended the losses from the US day-session (and rather notably decoupled from USDJPY and breaking below 15,000). The Nikkei is heading for the worst month since May 2012 (-8.66% so far). S&P futures tracked USDJPY as 102.00 was defended aggressively. Chinese stocks are also tumbling (though not as hard as Japan and US) and the PBOC will not be adding liquidity today. Furthermore the blame is being shifted as Deputy FinMin Zhu warns that the “Chinese economy faces risks from overseas uncertainty.” EM FX is drifting lower still.

 

The Final HSBC Manufacturing PMI print dropped from 49.6 Flash to 49.5 – its biggest drop since June and lowest since July 2013…

 

The Lowlights…

“Employment levels at Chinese manufacturers had quickest reduction of payroll numbers since March 2009”

 

“New export orders declined for the second month running in January, firms mentioned weaker demand in a number of key export markets.”

 

Bad for Australia: “the rate of input price deflation was marked overall, amid reports of lower raw material costs.”

 

“Reduced cost burdens were passed on to clients and marked the second consecutive month of discounting”

 

 

Japanese bank stocks are down 9% in the last 5 days and Real Estate stocks -12.5% in the last 2 weeks. But most concerning to Abe (and the rest of the carry-trade addicted mob) is the disconnect between JPY and NKY…

 

EM FX continues its slide…

 

In other news, the Baltic Dry Index has now plunged 51% from its late December highs and has collapsed to 5-month lows...

 

Charts: Bloomberg


    



via Zero Hedge http://ift.tt/1gscZp2 Tyler Durden

“The (Other) Shoe” – IceCap Monthly Commentary

Select excerpts from this month’s client letter by IceCap Asset Management

The World is Booming

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming.

After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. In addition, business in restaurants, shops and real estate in these major cities are also off the charts. And of course, the leading financial news stations are tripping over themselves with gushes of great news.

Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. When is the traffic not flowing, when are the restaurants not chalk full, and when are the brownstones not expensive? Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation.

Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers.

From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

Now, if we said “Okay the bad debt has been spread around, let’s everyone take losses and then we’ll be on our way,” then that would have been a good thing. On with the show.

However, major governments and central banks have decided that no one will take losses, and everything will be okay over time. To prevent (actually “delay” is a better term) these losses, the following occurred:

1 – 0% interest paid on savings
2 – bailouts to big banks
3 – money printing
4 – currency manipulations
5 – long-term interest rate manipulations

Of course, these extreme policy responses have resulted in:

1 – extreme sluggish growth
2 – extreme unemployment
3 – and perhaps the most terrifying of all extremely unhappy masses

And when we say masses, we mean the average person not working on Wall, Bay or Threadneedle Streets. This is where change will occur.

And, it is the unhappy masses that will shape the world in 2014 and beyond. Although this is very clear to some people, the world is on the verge of experiencing even more draconian responses from our world leaders.

First up is the 10% wealth tax which will occur in the Eurozone countries. In our last global market outlook, we provided the details behind this IMF issued and endorsed recommendation. The thinking is that if everyone contributed 10% of their wealth to the governments then that would be enough to restore debt levels to pre-2008 levels. The key words are “tax on your wealth” not a tax on your income – two completely different animals. Europe actually believes their citizens will be quite fine with having 10% lopped off of their bank and investment accounts – we disagree.

Next, the Eurozone is likely to see negative interest rates. Apparently paying little old ladies 0% on their savings wasn’t evil enough. Now, to further improve morale amongst the savers, the ECB is increasingly becoming comfortable with banks charging people for having their savings on deposit. Europe actually believes that if there is a penalty for keeping money on deposit, people and companies will instead spend their lifelong savings which will help with the recovery.

Instead, we see the opposite happening: People and companies will simply withdraw or hoard their money instead.

Why is there such a positive outlook by European governments for Europe? Simply put, the Eurozone governments believe they will not experience any reputational damage from taxing the rich and stealing from the poor.

Now, at various times many emerging market countries experienced catastrophic money problems as well. In the end, just as every rational human being would do – foreign money fled along with local private money. The result was a complete collapse of the local currency, moon high interest rates as well as zero access to international capital markets.

Yet in Europe, the espresso-sipping and champagne-gurgling powers-that-be, actually believe the continent will have no reputation damage whatsoever. Foreign money will stay put, locals will stay put. All the wealth will stay put.

We completely disagree, and unless all 18 Eurozone countries agree to form one government, create one tax code and consolidate all debt the world will be facing the largest debt default in the history of mankind.

* * *

Read the full letter below (pdf)

 


    



via Zero Hedge http://ift.tt/1mZWrCE Tyler Durden

"The (Other) Shoe" – IceCap Monthly Commentary

Select excerpts from this month’s client letter by IceCap Asset Management

The World is Booming

If one were only to look at the stock market and the buzz within New York, London, San Francisco, Sydney or Toronto; they would conclude that the world is indeed booming.

After all, people say the stock market is a leading indicator and that is telling us that the world is bursting at the seams with accelerating growth. In addition, business in restaurants, shops and real estate in these major cities are also off the charts. And of course, the leading financial news stations are tripping over themselves with gushes of great news.

Now, we don’t mean to be the party pooper; however one must understand what is really happening to truly appreciate the still, slow moving and delicate economic pickle the world has been stuck with. For starters, these major cities are always booming. When is the traffic not flowing, when are the restaurants not chalk full, and when are the brownstones not expensive? Instead, for a better picture of economic life, feel free to visit St. Louis, Winnipeg, or Marseilles and we’re sure you’ll have no problems at all securing that dinner reservation.

Peeling away the top layer of fabulous news resulting from the stock market, we cannot help but see that the deep structural issues associated with the 2008-09 crisis remain. The mountains of bad debt have simply shifted away from specific investors, to governments and their tax payers.

From a global perspective, this transfer of bad debt from specific investors to tax payers is THE most important issue to understand. In simpler terms, and unknown to many, the bad debt has been spread around the world for everyone to share. Yes, socialism has arrived and few in our capitalistic world have noticed.

Now, if we said “Okay the bad debt has been spread around, let’s everyone take losses and then we’ll be on our way,” then that would have been a good thing. On with the show.

However, major governments and central banks have decided that no one will take losses, and everything will be okay over time. To prevent (actually “delay” is a better term) these losses, the following occurred:

1 – 0% interest paid on savings
2 – bailouts to big banks
3 – money printing
4 – currency manipulations
5 – long-term interest rate manipulations

Of course, these extreme policy responses have resulted in:

1 – extreme sluggish growth
2 – extreme unemployment
3 – and perhaps the most terrifying of all extremely unhappy masses

And when we say masses, we mean the average person not working on Wall, Bay or Threadneedle Streets. This is where change will occur.

And, it is the unhappy masses that will shape the world in 2014 and beyond. Although this is very clear to some people, the world is on the verge of experiencing even more draconian responses from our world leaders.

First up is the 10% wealth tax which will occur in the Eurozone countries. In our last global market outlook, we provided the details behind this IMF issued and endorsed recommendation. The thinking is that if everyone contributed 10% of their wealth to the governments then that would be enough to restore debt levels to pre-2008 levels. The key words are “tax on your wealth” not a tax on your income – two completely different animals. Europe actually believes their citizens will be quite fine with having 10% lopped off of their bank and investment accounts – we disagree.

Next, the Eurozone is likely to see negative interest rates. Apparently paying little old ladies 0% on their savings wasn’t evil enough. Now, to further improve morale amongst the savers, the ECB is increasingly becoming comfortable with banks charging people for having their savings on deposit. Europe actually believes that if there is a penalty for keeping money on deposit, people and companies will instead spend their lifelong savings which will help with the recovery.

Instead, we see the opposite happening: People and companies will simply withdraw or hoard their money instead.

Why is there such a positive outlook by European governments for Europe? Simply put, the Eurozone governments believe they will not experience any reputational damage from taxing the rich and stealing from the poor.

Now, at various times many emerging market countries experienced catastrophic money problems as well. In the end, just as every rational human being would do – foreign money fled along with local private money. The result was a complete collapse of the local currency, moon high interest rates as well as zero access to international capital markets.

Yet in Europe, the espresso-sipping and champagne-gurgling powers-that-be, actually believe the continent will have no reputation damage whatsoever. Foreign money will stay put, locals will stay put. All the wealth will stay put.

We completely disagree, and unless all 18 Eurozone countries agree to form one government, create one tax code and consolidate all debt the world will be facing the largest debt default in the history of mankind.

* * *

Read the full letter below (pdf)

 


    



via Zero Hedge http://ift.tt/1mZWrCE Tyler Durden

Tonight on The Independents: The GOP’s Welfare Conflict, Locker-Room Libertarianism, Deporting Bieber, Documenting Detroit, Duck Selfies, Bad Beards, and Even More Penn Jillette!

Tonight’s live episode of Fox Business Network’s The
Independents
(9 pm ET, 6 pm PT, repeats at midnight) will
feature a sobering reminder: Never miss the online-only
“Independents After Hours” (which streams at the website
just after 10 pm, including tonight). Why? Because you miss some
seriously free-wheeling, structureless conversations with the
various beautiful freaks who populate the show. Like
Monday’s
conversation with Penn Jillette, a solid chunk of
which has been edited down for consumption tonight.

Did you want to see a little P.J. from the actual telecast? Well
here you are:

Also on the program: Party Panelists Buck Sexton from The
Blaze
and Andrew
Kirell
from Mediaite will be on to discuss the

divergent GOP approaches to welfare politics
, President Barack
Obama’s
mixed foreign policy messages
in last night’s State of the
Union address, what Justin Bieber’s many troubles
tell us about immigration policy
, and New Jersey’s
butt-hurtedness about
not getting enough revenue from the Super Bowl
.

Intense journalist Charlie LeDuff will be on to talk about his
book
Detroit: An American Autopsy
, recently retired NFL
cornerback Chris
Carr
will discuss what it’s like to be a libertarian-leaning independent
in a professional locker room, and Independents heartthrob
Kmele Foster will tell us
the latest news about Bitcoin (you may even see a snippet from our

recent Reason.tv video
on same). Also eligible for discussion:
The farm bill, Jay Carney’s beard, Duck Dynasty’s
SOTU-selfies, Vin Diesel’s dance moves, and more. And REMEMBER:
Make sure to watch the after-show, and send your tweets out to
@IndependentsFBN.

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