04 October 2011

Currency Wars: European Debt Crisis and the Next Phase of Global Finance

"The wealthy, not only by private fraud but also by common laws, do every day pluck and snatch away from the people some part of their daily living. Therefore, when I consider and weigh in my mind these commonwealths which nowadays do flourish, I perceive nothing but a certain conspiracy of rich men in procuring their own commodities under the name and authority of the commonwealth.

They invent and devise all means and crafts, first how to keep safely without fear of losing that which they have unjustly gathered together, and next how to hire and abuse the work and labor of the people for as little money and effort as possible."

Thomas More, Utopia

No chart updates tonight as I have out of pocket on personal business most of the day.

Here is a simple description of what is driving the markets. It is basically a counter party risk situation involving the biggest banks in the Western financial system.

If you keep this in mind most of the things that are happening will be more clear, even though the mind of the status quo rebels against it. People will believe what is in their best interests, long perhaps after it is beyond repair.

I think the endgame is well underway, and the outcome is not saving the public, but managing the transition to a new system, while hopefully keeping the same ruling class. That will not be disclosed while 'the players' jockey for advantage and position, 'turf' and the privilege of rents, if you will, well ahead of the crowd.

The European Central Bank and the Federal Reserve will bail out the banks again, and seek an 'orderly resolution' to the Greek situation. This will involve either an overt or de facto devaluation of the Euro and the Dollar. Make no mistake, the Dollar will not be allowed to appreciate dramatically for the same reasons that all the other currencies wish to avoid such an outcome.

The Dollar and the Euro are the relativistic value expressions of the financial system. They have no substance otherwise, no permanence except for the will of keepers of the system. The DXY is only an expression of the Euro and Yen and a few other fiat currencies. They are created at will.

And so in advance of the coming devaluation, gold is hit hard in order to maintain the confidence in the fiat system, with the clumsy propaganda pieces in the compliant mainstream media, and so that when bullion rises in reaction to the currency devaluations it will be easier to control, as Paul Volcker had suggested.

"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004

And this is why some European countries are already taking action to throttle demand, and to prevent a 'run on the central bank.'

Asia sees what is happening and is already trying to prepare for the next phase in the currency wars. The western nations leave the ordinary person relatively defenseless, almost as if by design.

This would all have been simpler and less destructive if the Western nations had conceived the will to nationalize the big banks when the system began to deteriorate as a result of their recklessness, and to administer their restructuring or dissolution, and reform the system, as they had done in the S&L crisis. But that would have required genuine investigation, prosecution, and disclosure.

So now the developed nations are caught in a credibility trap, and the real economy is being drained to fill the gaping hole in the wealth amassed in the credit bubble, largely held by the monied interests, which Citi had referred to in 2005 as the 'plutonomy.'

Follow the Money: Behind Europe’s Debt Crisis Lurks Another Giant Bailout of Wall Street
By Robert Reich
Tuesday, October 4, 2011

...The Street has lent only about $7 billion to Greece, as of the end of last year, according to the Bank for International Settlements. That’s no big deal.

But a default by Greece or any other of Europe’s debt-burdened nations could easily pummel German and French banks, which have lent Greece (and the other wobbly European countries) far more.

That’s where Wall Street comes in. Big Wall Street banks have lent German and French banks a bundle.

The Street’s total exposure to the euro zone totals about $2.7 trillion. Its exposure to to France and Germany accounts for nearly half the total.

And it’s not just Wall Street’s loans to German and French banks that are worrisome. Wall Street has also insured or bet on all sorts of derivatives emanating from Europe – on energy, currency, interest rates, and foreign exchange swaps. If a German or French bank goes down, the ripple effects are incalculable.

Get it? Follow the money: If Greece goes down, investors start fleeing Ireland, Spain, Italy, and Portugal as well. All of this sends big French and German banks reeling. If one of these banks collapses, or show signs of major strain, Wall Street is in big trouble. Possibly even bigger trouble than it was in after Lehman Brothers went down.

That’s why shares of the biggest U.S. banks have been falling for the past month. Morgan Stanley closed Monday at its lowest since December 2008 – and the cost of insuring Morgan’s debt has jumped to levels not seen since November 2008.

It’s rumored that Morgan could lose as much as $30 billion if some French and German banks fail. (That’s from Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks.)

$30 billion is roughly $2 billion more than the assets Morgan owns (in terms of current market capitalization.)

But Morgan says its exposure to French banks is zero. Why the discrepancy? Morgan has probably taken out insurance against its loans to European banks, as well as collateral from them. So Morgan feels as if it’s not exposed.

But does anyone remember something spelled AIG? That was the giant insurance firm that went bust when Wall Street began going under. Wall Street thought it had insured its bets with AIG. Turned out, AIG couldn’t pay up.

Haven’t we been here before?

Republicans and Wall Street executives who continue to yell about Dodd-Frank overkill are dead wrong. The fact no one seems to know Morgan’s exposure to European banks or derivatives – or that of most other giant Wall Street banks – shows Dodd-Frank didn’t go nearly far enough.

Regulators still don’t know what’s happening on the Street. They have no clear picture of the derivatives exposure of giant U.S. financial institutions.

Which is why Washington officials are terrified – and why Treasury Secretary Tim Geithner keeps begging European officials to bail out Greece and the other deeply-indebted European nations.

Several months ago, when the European debt crisis first became apparent, Wall Street banks said not to worry. They had little or no exposure to Europe’s problems. The Federal Reserve said the same. In July, Ben Bernanke reassured Congress the exposure of U.S. banks to European nations in trouble was “quite small.”

Now we’re hearing a different tune.

Make no mistake. The United States wants Europe to bail out its deeply indebted nations so they can repay what they owe big European banks. Otherwise, those banks could implode ­ taking Wall Street with them. (And this is why the Fed is helping to finance the arrangement with eurodollars which are no longer tracked as part of M3 - Jesse)

One of the many ironies here is some badly-indebted European nations (Ireland is the best example) went deeply into debt in the first place bailing out their banks from the crisis that began on Wall Street.

Full circle.

In other words, Greece isn’t the real problem. Nor is Ireland, Italy, Portugal, or Spain. The real problem is the financial system ­ centered on Wall Street. And we still haven’t solved it.

And that problem will not be solved in the way that you might think of it, because the people 'solving it' are the same ones who created it. Their every effort will be directed toward increasing their power and preserving their situations and advantages, to the exclusion of most other concerns.