Morgan Stanley: Government Defaults Inevitable

In addition to "It's different this time" and "Self sufficiency is an out-moded concept" one of the deadliest assumptions is "That can never happen here."

Morgan Stanley says what we have all known for some time. There will be government defaults of various types on debts which have become unmanageable.

As we see in a UK Telegraph story today, a report claims the Tories are placing the greatest pain in managing their budget gaps on the backs of the less well to do, presumably protecting their more well to do constituency. No surprise to anyone if it is true. And yet this may not be enough unless the economy recovers and the great mass of the public can regain some reasonable level of organic economic activity.

In the States, the uber wealthy will be spending large sums to lobby against new taxes, and even removing tax cuts that were known to be untenable, and based on false economic assumptions, at the time they were passed under Bush. Instead they will point to more broadly public and regressive taxes such as VATs, and seek to curtail public programs like Medicare and Social Security, while leaving their own subsidies and welfare, such as those in the financial sector and corporate and dividend tax breaks, sacrosanct.

In the US the broad mass of consumer have been the economy's golden goose, and after decades of median wage stagnation, neo-liberal economic policies, and overseas military expansions and expeditions, that goose looks cooked.

But at the end of the day this soft class warfare, despite its vicious hypocrisy and pettiness, is all intramurals, as the real defaults and debt reconciliation will most likely be in the form of artificially low bond rates accompanied by devaluations in the Western fiat currencies. I have been trying to figure out a way that a selective default could be accomplished, but have not quite muddled through that yet.

The limit of the Fed's and Treasury's ability to monetize the debt, which is a form of default through a true monetary inflation, is the value of the dollar and the bond. People who have never lived through it will begin to finally understand this in the days to come.

Bloomberg
Morgan Stanley Says Government Defaults Inevitable
By Matthew Brown
Aug 25, 2010 11:44 AM ET

Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.

“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said.

Borrowing costs for so-called peripheral euro-region nations such as Greece and Ireland surged today, resuming their ascent on concern that governments won’t be able to narrow their budget deficits. Standard & Poor’s downgraded Ireland’s credit rating yesterday on concern about the rising costs to support nationalized banks.

Mares said debt as a percentage of gross domestic product is a false indicator of an economy’s health given it doesn’t reflect governments’ available revenue and is “backward- looking.” While the U.S. government’s debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest, the report said. Conversely, Italy has one of the highest debt- to-GDP ratios, at 116 percent, yet has a debt-to-revenue ratio of 188, Mares said.

Double Dip

“Outright sovereign default in large advanced economies remains an extremely unlikely outcome, in our view,” the report said. “But current yields and break-even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”

Mares once worked at the U.K.’s Debt Management Office and is a former senior vice-president at credit-rating company Moody’s Investors Service.

“Note that a double-dip recession would not invalidate this conclusion,” Mares’ report said. “It would cause yet further damage to the governments’ power to tax, pushing them further in negative equity and therefore increasing the risks that debt holders suffer a larger loss eventually.”

Investors’ concern that the U.S. may fall back into recession has grown in recent weeks as U.S. economic data missed economists’ estimates. A Citigroup Inc. index of U.S. economic data surprises fell to minus 59 last week, the least since January 2009...

“The conflict that opposes bondholders to other government stakeholders is more intense than ever, and their interests are no longer sufficiently well-aligned with those of influential political constituencies,” such as elderly voters and their claims on pensions and health insurance, Mares wrote.

The Problem of Unresolved Debt in the US Financial System

Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.



Chart fromA Blistering Ride Through Hell by Michael David White.

I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:

"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333."

Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

This debt must be resolved. There are two major ways to do it: repayment and default.

Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ' just mail in the keys.'

Straight up default, writing off the debt even through foreclosure, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.

Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.

So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?

The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as 'the lost decade' while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.

Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.

Someone has to end up 'holding the bag.' And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be 'the last bubble?' Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.

A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.

Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise. And bear in mind that the only real limit and effective constraint on the Fed's ability to monetize debt is the value and acceptability of the bond, and the dollar in payment of interest, by foreign debt holders, as domestic debt holders are under legal compulsion by the law of legal tender.

And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.

These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played. Obama has been disappointing, but what comes next may well be worse, much worse.

Bernie Madoff was lying and cheating and taking money until the day he closed his doors.

Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.

Moody's Cuts Greece to 'Junk'

It certainly is nice to own the world's major ratings agencies.

Oh no, not the US government -- the Anglo-American hedge funds and a few multinational banks.

Bloomberg
Greece Cut to Junk by Moody’s on ‘Substantial’ Economic Risks
By Ben Martin and Maria Petrakis

June 15 (Bloomberg) -- Greece’s credit rating was cut to non-investment grade, or junk, by Moody’s Investors Service, threatening to further undermine demand for the debt-strapped nation’s assets as it struggles to rein in its budget deficit.

In making the four-step downgrade to Ba1 from A3, Moody’s cited “substantial” risks to economic growth from the austerity measures tied to a 110 billion-euro ($134.5 billion) aid package from the European Union and the International Monetary Fund. The lower rating “incorporates a greater, albeit, low risk of default,” Moody’s said in a statement yesterday in London. The outlook is stable, it said.

Greece has cut spending, raised taxes and trimmed wages to tackle the deficit, which swelled to 13.6 percent of gross domestic product last year, more than four times the EU limit. To secure the EU-IMF aid, the government pledged to trim the shortfall to 8.1 percent of GDP this year and bring it back under the 3 percent EU ceiling in 2014. The crisis has prompted investors to sell the bonds of Greece and other high-deficit nations and pushed the euro down 15 percent this year.

“We’ve got a lot of uncertainty around the growth outlook for Greece,” Sarah Carlson, vice president-senior analyst in Moody’s sovereign-risk group, said in a telephone interview yesterday. “It’s rare for a country to implement so much structural reform in a very short time...”

ECB to Buy Bonds In Secondary Market to 'Address Severe Tensions In Certain Market Segments'

The limit to the ability of a central bank to create money is the acceptability of the underlying bonds and currency.

When a central bank turns to buying the bonds in order to support their price, or more properly the interest rate paid, this is the beginning of the end, the point at which the national currency becomes little more than a Ponzi scheme, creating more money to pay the interest on the old money.

Now both the US Federal Reserve the Bank of England, and the ECB have fallen into this. We are seeing the controlled demolition of the fiat currencies of the developed world. This will resolve itself no later than 2018, and probably before that. For that is the outer bound of when the US will be unable to service its debt without at least a selective default, a draconian diktat, or resort to hyperinflation.

Bloomberg
ECB to Intervene in Bond Market to Fight Euro Crisis
By Gabi Thesing, Jana Randow and Simon Kennedy

May 10 (Bloomberg) -- The European Central Bank said it will buy government and private bonds as part of an historic bid to stave off a sovereign-debt crisis that threatens to destroy the euro.

The ECB wants “to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” the central bank said in a statement today, minutes after European finance ministers announced a loan package worth almost $1 trillion to staunch the market turmoil.

The central bank said it will intervene in “those market segments which are dysfunctional,” signaling it views the recent surge in some of the region’s bond yields as unjustified. Policy makers are seeking to restore confidence in markets and protect the economy from a double-dip recession. The bank said the moves won’t affect monetary policy and the resulting liquidity will be reabsorbed.

“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch...”

...While the ECB cannot buy bonds directly from governments, the euro’s founding treaty doesn’t ban it from doing so in the secondary market, providing the bank with some room to execute today’s plan. The bank’s council will decide the scope of the intervention.

Bundesbank President Axel Weber said May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term...”

Europe Offers $957 Billion in Hope of Appeasing the Banks

The US SP futures are soaring almost 30 points, along with world equity markets, as the Europeans join the Americans in agreeing to monetize their debts by expanding their currencies. Make no mistake, no matter how they wrap this package and call it debt, it is the expansion of the money supply to prevent insolvency.

This does not cure the problems which remain, but rather provides time and latitude for the politicians to act. Discussion should begin at the IMF meeting on May 11, although this is unlikely to render any practical discussion of financial reforms, other than further debauching of the savings of the nations and their peoples.

These are dark days indeed that bring a false dawn that will quickly prove to be simply insubstantial.

The bribe has been given. Now there is the real work of reform and justice yet to be done. But will it be deferred and diluted in Europe as has been done in America.

NY Times
E.U. Details $957 Billion Rescue Package
By James Kanter and Landon Thomas Jr.
May 9, 2010

BRUSSELS - European leaders, pressured by sliding markets and doubts over their ability to act in unison, agreed on Sunday to provide a huge rescue package of nearly one trillion dollars in a sweeping effort to regain lost credibility with investors.

After more than 10 hours of talks, finance ministers from the European Union agreed on a deal that would provide $560 billion in new loans and $76 billion under an existing lending program. Elena Salgado, the Spanish finance minister, who announced the deal, also said the International Monetary Fund was prepared to give up to $321 billion separately.

Officials are hoping the size of the program - a total of $957 billion - will signal a "shock and awe" commitment that will be viewed in the same vein as the $700 billion package the United States government provided to help its own ailing financial institutions in 2008.

Early reaction from world markets was positive, with Japan's Nikkei index rising more than 1 percentage point after being battered last week.

In reaching the deal, European leaders were making yet another attempt to stem a debt crisis that has engulfed Europe and global markets. Underscoring the urgency, President Obama spoke to the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, on Sunday about the need for decisive action to restore investor confidence.

The SP 500 Sell Signal Was Confirmed Yesterday

In case you were wondering the SP 'sell signal' was clearly confirmed by yesterday's chart.

I would look for this decline to continue down to the 1130, maybe 1120 support level, basis SP 500 June futures. Perhaps not a bottom but at least a relief rally or bounce as you prefer. I won't be getting in front of it, again, given the bias of the sell signal.

The Non-farm Payrolls report might modulate the trend, but not necessarily change it. Sovereign default risk fears is the driver. But the US economy pretty much sucks as well despite what the statistics say. It looks to be headed for a double dip. But for now there seems to be absolutely no discussion of this, or the risk of default of individual states, some of which are larger than most countries. The US Debt- GDP ratio is north of Portugal's and climbing fast.



Short financials and long gold but less short now.

When You Lie Down With Them Dept: Morgan Stanley Has 69% Tier 1 Capital Exposure to the PIIGS

That statistic about Morgan Stanley was an eye opener in terms of percent of capital exposure. No wonder Angie Merkel is playing hard to get, holding out for more than another back rub. Morgan Stanley looks like it done slipped in the pig wallow, don'cha know.

Gentlemen, start your presses.

Bloomberg
JPMorgan Has Biggest Exposure to Debt Risks in Europe
By Gavin Finch

April 29 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy, Ireland, Greece and Spain, according to Wells Fargo & Co.

JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote.

“Regulatory data suggests JPMorgan’s exposure is largest in aggregate, but Morgan Stanley held the largest aggregate exposure to the PIIGS relative to Tier 1 capital,” the analysts wrote. Overall U.S. bank “exposure to Greece is lower than exposure to
Ireland, Italy and Spain.”

Bonds and stocks plunged across Europe in the past week on concern the Greek debt crisis is spreading across the euro area. Standard & Poor’s this week cut Greece, Portugal and Spain’s credit ratings as concern the nations may fail to meet their debt commitments increased.

U.S. banks held a total of $236.8 billion of exposure to the five nations, including $18.1 billion to Greece, Wells Fargo said. European banks have claims totaling $193.1 billion on Greece, according to the Bank for International Settlements, with another $832.2 billion of claims on Spain.

Currency Wars: Markets Shudder on Downgrade of Spain

There was unusually heavy put buying yesterday in NY markets on the Spanish stock index ETF.

Lzst month a group of US hedge funds were investigated for collusion in planning short selling assaults on the euro. Having exhausted the developing world, which has largely tossed them out, have the economic hitmen finally turned on the developing world as we forecast in 2005 that they would?

This is not to say that Greece, Portugal, or Spain are without problems or fault. There is a general crisis in many of the developed country fiat currencies, including the United States. The rising price of gold and silver, despite the heavy handed manipulation by a few of the banking centers, is a sure sign of a flight from paper controlled by central banks.

The US financial interests have been shown to exercise a disconcerting amount of control over the three US-based Ratings Agencies. I wonder how long it will be before any of the US states will have their credit ratings downgraded, and how those attacks might be structured. I am sure the government would then act to curtail their naked shorting and market manipulation activity.

As the NY based stock tout crowed on Bloomberg this morning, "The US can inflate its way out of this crisis much more easily than can any other country." Well, it is an advantage to own the printing press, and to control key elements of the global financial system.

And it makes one wonder how long the economic predators will be given free rein by the co-opted regulatory agencies and government in the US, which cannot even pass a motion to debate financial reform to the floor of its Senate. I would suggest that the debate, even when it moves forward, will not produce anything sufficient to promote a sustainable recovery. That is why this debate must move now to the floors of Parliaments and legislative bodies in the rest of the world. And there has to be much more openness compelled from their central banks with regard to private dealings with the US Federal Reserve. It is now a matter of national priority.

Wall Street Journal
Euro Drops To New One-Year Low On Spain Downgrade
By Bradley Davis
April 28, 2010

NEW YORK (Dow Jones)--The euro dropped to a new one-year low Wednesday as a ratings agency downgrade of Spain sent a rush of fear through markets that a sovereign debt crisis was spreading across the euro-zone periphery.

The euro dropped to $1.3129, its lowest level since April 2009, on Standard & Poor's downgrade of Spain's long-term debt, which was accompanied by a negative outlook. The downgrade follows S&P's slicing of the ratings of Greece and Portugal Tuesday, which sent the euro plummeting.

"The deep-seated nature [of the euro-zone sovereign debt crisis] is only now being realized by the markets," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, N.J, "and we're looking at a potential funding crisis" of government and corporate debt in the euro-zone periphery "in the not too distant future."

Other ratings agencies are likely to follow with additional downgrades, analysts said, which will send the euro even lower...

Are Traders Demanding US Credit Default Swaps Payable in Gold?

If another author had said this I might not pay it so much attention. Lately some have been given over to a tabloid approach to overstatement and sensational headlines to attract attention. This is a strong temptation as the blogosphere expands, similar to the development and evolution of newspapers as a popular medium in Victorian London for example.

But as you know, I have a great deal of respect and admiration for Janet Tavakoli and her knowledge in this area. If she is seeing a new demand for Credit Default Swaps on the US payable in gold I would credit it since this is her area of expertise and industry connections, but would ask for some particulars, which I have done. This would match up with some things I have heard from other sources, and desire to continue to put the puzzle pieces together without traveling false trails. For now it remains all opaque, speculation, and rumour.

It does make sense, of course, to price a US default in something other than dollars. The question that comes to mind though, is not the suggested method of payment, but the nature and quality of the counter-party who could stand reliably behind such a claim without it being a fraudulent contract by its very nature.

If the US should default, what major financial institutions will be in a position to have written and then uphold the terms of these CDS, payable in anything at all? Surely only a sovereign bank like the US Fed, the Treasury, or the IMF, or some other central bank could be so capable. But what possible motivation could a non-profit-seeking official institution have in writing CDS on a US sovereign default? Perhaps more likely a private bank or GSE, with the buyers thinking it has some sovereign guarantees that would be upheld in extremis.

Truly, remember AIG? It was insolvent when payment was demanded, and acted improperly in paying collateral to Goldman ahead of its inevitable insolvency, and then receiving the support of the Treasury to pay obligations in full, above all others. It ought to have been placed in a receivership and its assets allocated with the previously disposed collateral clawed back. This kind of private arrangement between parties involving the sovereign wealth of nations may be indicative of things to come. The recent example of Iceland comes to mind.

I agree with her that credit default swaps should be curtailed. Indeed, I would tend to severely limit the trading of most if not all naked derivatives and stock sales by requiring capital requirements near 100 percent and secured by good collateral.

But I think the gold aspect of this may be overdone. The US has more gold than any other individual country, and still values it cheaply at a sub-fifty dollar historical price on its books. If a counterparty fails, it will fail, and a settlement will be arranged. The issue of course, is if some encumbrance of the gold in the US has already been accomplished through unfortunate leases to bullion banks who will not be able to return it.

Indeed this horse may already be 'out of the barn' as some evidence indicates that a few banks like JPM are already short more gold and silver than they can possibly deliver under the conditions of the contract without selective default to paper if demanded by their counter-parties.

If there is any sort of government guarantee, it will be payable in dollars, unless some private arrangement is made for the benefit of the recipient. For example, if a bullion bank is caught short of gold, and requires it to avoid a default and 'systemic risk.' The rationale will be to pay the debt in full so as to avoid a collapse, even though there was no guarantee involved. If we did not have such a recent historical example of AIG I would say that such an abuse of the Treasury for the benefit of a few for placing the system at risk was not possible. And yet here we are.

There is another possibility, based only on speculation as far as I can determine, that a major purchaser of US debt is now demanding it be backstopped against ratings downgrades in gold payable CDS. Until now I have given this little credibility. How can such a thing be arranged in secrecy and maintained as such? How could a private bank, even a money center, write such a swap in good faith?

You see, to my knowledge no private corporation has the right to engage in contracts that encumber the US gold reserves, not the Fed nor the Banks, and not even the President or Treasury alone. Only the Congress, with the knowledge of the people, may allocate and distribute such a sovereign asset. If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud. And if the US is writing or guaranteeing CDS in gold, then most likely it is doing so as a means of rescuing those who have already gone hopelessly short the gold market, and need to arrange a 'back-door' bailout.

So the rule at hand would be the epigram of the famous trader, Daniel Drew:

"He who sells what isn't his'n
Must buy it back, or go to prison."

Unless they have good friends at the Fed or the Treasury, or in positions of power in the exchanges perhaps. But does anyone believe that the American people would stand again for another bailout of the very same banks that it has bailed out previously? I would hope that there would not be a Reykjavík on the Potomac in my lifetime.

In short, if the existence of CDS on the default or downgrade of US sovereign debt payable in gold bullion be true, who would be in a position to stand behind these Credit Default Swaps with any reliability, and what buyer would be in a position to make such a demand of a credible source?

The US most likely will resist the banning of credit derivatives because it is in the hands of the Banks, and such derivatives are the source of enormous profits. Further, such a ban might cause the existing bulk of derivatives to fall in value, destabilizing the financial system. Nothing could be more obvious, at least for now. So this situation will continue most likely until it falters, and the entire system is once again placed at risk. But these markets are so opaque, and the intentions of government in them even less apparent, that one can only watch and wonder.

At some point the Banks may seek to make the people yet another offer they cannot refuse. And America will choose. But first I think, the UK will reach this point.

Huffington Post
Washington Must Ban U.S. Credit Derivatives as Traders Demand Gold
By Janet Tavakoli
March 8, 2010

...Remember AIG? When prices moved against AIG on its credit default swap contracts, AIG owed cash (collateral) to its trading partners. AIG paid billions of dollars and owed billions more when U.S. taxpayers bailed it out in September 2008.

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

The market can create an unlimited number of these contracts very rapidly. The U.S. wouldn't have to ever default to trigger a major disruption in the gold market. Spreads (or prices) on the credit default swaps could simply move based on "news," and demand for gold would soar.

If this speculation drives up the price of gold, and the available gold supply becomes limited, are you willing to post your children as collateral? I am pushing the point so that we put a stop to this before it is too late."

Iceland Voters Reject Bank Bailouts in Crushing Electoral Defeat; Neo-Liberalism In Context

"Voters rejected the bill because ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers."

"Is there any reason why the American people should be taxed to guarantee the debts of banks, any more than they should be taxed to guarantee the debts of other institutions, including merchants, the industries, and the mills of the country?" Senator Carter Glass (D-Va), author of the Banking Act of 1933 and of Glass-Steagall

It is interesting that the government of Iceland had already declared the vote of the people as 'obsolete.' One has to wonder when the voters will declare their current government and their representatives as obsolete. One would give the government credit for at least allowing a vote on a referendum, but to then disregard and circumvent it through political devices is seems like a base hypocrisy.

Iceland is a victim of the neo-liberal economic deregulation of the 1990's, in which a few bankers can buy the government, and rack up enormous profits for themselves in Ponzi like leverage, and then attempt to socialize the debt back to the people when their schemes collapse.

Neo-Liberalism is a system of economic thought embracing the efficient markets hypothesis, the inherent good of deregulation and the natural impediment of government regulation, the necessity of free trade and globalization, the supremacy of the corporation over the individual person in the social economy, and supply side economics. It most likely favors a one world currency and consolidation of production into large corporate combinations or 'trusts' under the principle of laissez-faire.

Neo-liberalism may degenerate into crony capitalism, or even corporatism, as its theoretical idealism of perfect rationalism and virtue falters against the reality of human behaviour. In times of financial crisis, for example, neo-liberalism ironically turns to centralized economic planning by allegedly private banks which appropriate public funds and the power of the monetary license to socialize private debts, and, in a strikingly Orwellian twist, eviscerate the discipline of the markets and the individual to preserve their freedom, and the well being of the private corporations. Although now largely repudiated, neo-liberalism has strong roots in the public consciousness, and its adherents hold considerable power in Western governments and among the 'freshwater school' of American economics.

What makes neo-liberalism and neo-conservatism 'neo' or new is their attitude towards the relationship of the individual to the state. Both tend to denigrate and diminish the condition and rights of the inividual as compared to the consideration of the corporate system or the centralized command state.

In the States, the Congress and the President have just ignored the massive protests against their own bank bailouts. The US was able to cloak its own debt assumptions through accounting frauds, claiming that the bailouts were repaid by the banks. The bailouts are wrapped in AIG, Fannie and Freddie, and the Federal Reserve. This is the advantage of owning the currency, the IMF and ratings agencies. And of course your media.

Although Europeans and the markets are looking at the 'PIGS' for the next serious default as the economic hitmen are moving from Iceland to Greece, the real test of globalization in financial markets and the dominant control of the private banks will come in the UK, a sovereign people too proud and strong to go down into feudal servitude and the rule of tyrants easily. Or at least one would hope.

The Relationship of the Condition and Rights of the Individual to the Organized State




Bloomberg
Iceland Rejects Icesave Depositors Bill in Referendum
By Omar R. Valdimarsso

March 7 (Bloomberg) -- Icelanders rejected by a massive majority a bill that would saddle each citizen with $16,400 of debt in protest at U.K. and Dutch demands that they cover losses triggered by the failure of a private bank.

Ninety-three percent voted against the so-called Icesave bill, according to preliminary results on national broadcaster RUV. Final results will be published today.

The bill would have obliged the island to take on $5.3 billion, or 45 percent of last year’s economic output, in loans from the U.K. and the Netherlands to compensate the two countries for depositor losses stemming from the collapse of Landsbanki Islands hf more than a year ago. The island’s political leaders say they’ve already moved on to talks over a new accord.

“The government’s survival doesn’t rest with this Icesave vote,” Prime Minister Johanna Sigurdardottir told RUV after the preliminary count was announced. “The government coalition remains solid,” Finance Minister Steingrimur Sigfusson told RUV.

Failure to reach an agreement on the bill has left Iceland’s International Monetary Fund-led loan in limbo and prompted Fitch Ratings to cut its credit grade to junk. Moody’s Investors Service and Standard & Poor’s have signaled they may follow suit if no settlement is reached.

‘Obsolete’

Iceland’s leaders are trying to negotiate a new deal with the U.K. and the Dutch that focuses on the interest rate payable on the loan, making the bill in yesterday’s vote “obsolete,” Sigurdardottir said on March 4.

Dutch Finance Minister Jan Kees de Jager in a statement posted on the Internet last night said he is “disappointed” the agreement hasn’t yet come into effect. The U.K. was “obviously disappointed,” while “not surprised,” said a Treasury official who declined to be identified in line with departmental policy.

Iceland’s government pointed to “steady progress toward a settlement” in the past three weeks in a statement.

“The British and Dutch Governments have indicated a willingness to accept a solution that will entail a significantly lower cost for Iceland than that envisaged in the prior agreement,” the statement said.

The U.K. and Netherlands have offered an interest rate of the London Interbank Offered Rate plus 2.75 percentage points, according to the U.K. Treasury official. That’s the same as the rate for the loan from the Nordic countries that the Icelandic Government accepted in July 2009. The new offer also gave relief on the first two years of interest for the loan, amounting to 450 million euros.

‘Ordinary People’

The three governments have declared their intention to continue the talks, the Iceland statement said.

Voters rejected the bill because “ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers,” said President Olafur R. Grimsson, whose rejection of the bill resulted in the plebiscite, in a Bloomberg Television interview on March 5.

The Icesave deal passed through parliament with a 33 to 30 vote majority. Grimsson blocked it after receiving a petition from a quarter of the population urging him to do so. The government has said it’s determined any new deal must have broader political backing to avoid meeting a similar fate.

Icelanders used the referendum to express their outrage at being asked to take on the obligations of bankers who allowed the island’s financial system to create a debt burden more than 10 times the size of the economy.

Protests

The nation’s three biggest banks, which were placed under state control in October 2008, had enjoyed a decade of market freedoms following the government’s privatizations through the end of the 1990s and the beginning of this decade.

Protesters have gathered every week, with regular numbers swelling to about 2,000, according to police estimates. The last time the island saw demonstrations on a similar scale was before the government of former Prime Minister Geir Haarde was toppled.

Icelanders have thrown red paint over house facades and cars of key employees at the failed banks, Kaupthing Bank hf, Landsbanki and Glitnir Bank hf, to vent their anger. The government has appointed a special commission to investigate financial malpractice and has identified more than 20 cases that will result in prosecution.

Economic Impact

The island’s economy shrank an annual 9.1 percent in the fourth quarter of last year, the statistics office said on March 5, and contracted 6.5 percent in 2009 as a whole.

Household debt with major credit institutions has doubled in the past five years and reached about 1.8 trillion kronur ($14 billion) in 2009, compared with the island’s $12 billion gross domestic product, according to the central bank.

Icelanders, the world’s fifth-richest per capita as recently as 2007, ended 2009 18 percent poorer and will see their disposable incomes decline a further 10 percent this year, the central bank estimates.

Grimsson, who has described his decision to put the depositor bill to a referendum as the “pinnacle of democracy,” says he’s not concerned about the economic fallout of his decision.

“The referendum has drawn back the curtain and people see on the stage the matter in a new perspective,” he said in an interview. “That has strengthened our position and our cause.”

Ron Paul: "Prepare for Revolutionary Changes in the Not-too-distant Future.”

It certainly sounds as though Representative Paul expects some significant developments.

Change is in the wind.

“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It's surreal; it's just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.

We have broken from reality--a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.

We're now in the midst of unlimited spending of the people's money, exorbitant taxation, deficits of trillions of dollars--spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.

A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.

We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.

We assume that by keeping the already-known torture pictures from the public's eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.

The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.

We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.

Of course, it could all be a bad dream, a nightmare, and that I'm seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”

Going the Way of AIG with Dollar Holders as Patsies

The Guidotti-Greenspan rule states that a nation's reserves should equal short-term (one-year or less maturity) external (foreign) debt, implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital.

The rule is named after Pablo Guidotti – Argentine former deputy minister of finance – and Alan Greenspan –former chairman of the Federal Reserve Board of the United States. Guidotti first stated the rule in a G-33 seminar in 1999, while Greenspan widely publicized it in a speech at the World Bank (Greenspan, 1999).

Guzman Calafell and Padilla del Bosque (2002) found that the ratio of reserves to external debt is a relevant predictor of an external crisis.

This is an interesting application of the Greenspan-Guidotti Rule by Porter Stansberry below because it includes the value of the gold at market prices, as well as the oil in the Strategic Petroleum Reserve, and all the foreign reserves on the books of the US against the total foreign debt owed in using the Greenspan-Guidotti rule for its default assessment.

Those who argue for a stronger dollar because of deflation due to domestic credit destruction overlook the reality of the yawning imablance of US debt to external creditors, and the need to deal with it without writing it off like a home mortage.

Yes, the US has lots of buildings, and minerals in the ground, and forests and proprietary software, and overpriced financial assets, and tranches of dodgy mortgages to sell. We are discussing AAA liquid assets here, without significant counterparty risk. Those peddling US debt instruments to Asia these days are getting a very cold reception.

What Porter Stansberry says is valid, with the important exception that the US still owns the world's reserve currency. Otherwise it would be well on its way to a hyperinflationary climax.

This is why we do not expect the default to be like the Lehman Brothers over-weekend implosion, nor as dramatic as the crisis in Dubai, or more historically the failure of the post-Soviet Russia. The US is too big to fail.

The dollar will devalue to unexpected lows, not with a bang but a whimper.

More AIG than Lehman, with high profile big-talking executives, self-serving accounting, bonuses to the perpetrators, de facto bailout and subsidies from frightened central bankers, and all that until the rest of the world can adjust. The US will most likely wallow in stagflation until it can get itself together again, barring a global conflict.

There are structural issues for sure. The US is still the consumer of the world's export products, especially manufactured goods. The problem is that they are paying for it with paper that is increasingly worthless. And it is militarily the only remaining superpower.

Do not expect this to be a straightfoward default. The US money center banks are wielding weapons of financial mass destruction, and are not afraid of gooning it up in the markets for real products, as they still exercise significant pricing power.

It may be our currency, but it's your problem.'' John Connolly, Treasury Secretary, in response to European anger at the 1971 US gold default

So, it will take time for the exporting nations to grow their domestic markets, and to find new customers at home and abroad. It will take time for the nations to agree on a new currency regime, as the US has now pulled the rug out from under them once again with the quantitative easing of the dollar. But that adjustment effort is now well underway. With regard to change, "It is not necessary to change. Your survival is not mandatory." - W. Edwards Deming

The downside of structural change after a long decline is that once it occurs, it is difficult to obtain one's prior reputation and position.

"When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger."

Porter Stansberry, The bankruptcy of the United States is now certain

Morgan Stanley Fears UK Default in 2010

As you may recall we are bears on sterling, and view the UK as the Iceland of the G20.

The monetary policies of the Bank of England were as bad as those of the Greenspan - Bernanke Fed. The difference is that the UK does not hold the world's reserve currency as a captive source of revenues.

As an aside, we see that Bank of England advisor and economic franc-tireur Willem Buiter has decided to seek greener pastures as chief economist with Citi in the States. Timely exit. Bravo, Willem.

It is sad to see a great people brought low by irresponsible leadership and economic recklessness. Perhaps there will be a movement to bring in a reform government. Hint, ask for details first, as the Yanks are finding out to their dismay as they experience continuity they can hardly believe.

UK Telegraph
Morgan Stanley fears UK sovereign debt crisis in 2010
By Ambrose Evans-Pritchard
4:09PM GMT 30 Nov 2009

Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months, according to a client note by Morgan Stanley.

The US investment bank said there is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.

“Growing fears over a hung parliament would likely weigh on both the currency and gilt yields as it would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the UK's AAA status,” said the report, written by the bank’s European investment team of Ronan Carr, Teun Draaisma, and Graham Secker.

In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery,” they said.

Morgan Stanley said that such a chain of events could drive up yields on 10-year UK gilts by 150 basis points. This would raise borrowing costs to well over 5pc - the sort of level now confronting Greece, and far higher than costs for Italy, Mexico, or Brazil.

High-grade debt from companies such as BP, GSK, or Tesco might command a lower risk premium than UK sovereign debt, once an unthinkable state of affairs.

A spike in bond yields would greatly complicate the task of funding Britain’s budget deficit, expected to be the worst of the OECD group next year at 13.3pc of GDP.

Investors have been fretting privately for some time that the Bank might have to raise rates before it is ready -- risking a double-dip recession, and an incipient compound-debt spiral – but this the first time a major global investment house has issued such a stark warning.

No G10 country has seen its ability to provide emergency stimulus seriously constrained by outside forces since the credit crisis began. It is unclear how markets would respond if they began to question the efficacy of state power.

Morgan Stanley said sterling may fall a further 10pc in trade-weighted terms. This would complete the steepest slide in the pound since the industrial revolution, exceeding the 30pc drop from peak to trough after Britain was driven off the Gold Standard in cataclysmic circumstances in 1931.

UK equities would perform reasonably well. Some 65pc of earnings from FTSE companies come from overseas, so they would enjoy a currency windfall gain.

While the report – “Tougher Times in 2010” – is not linked to the Dubai debacle, it is a reminder that countries merely bought time during the crisis by resorting to fiscal stimulus and shunting private losses onto public books. The rescues – though necessary – have not resolved the underlying debt problem. They have storied up a second set of difficulties by degrading sovereign debt across much of the world...