Hmmm November 13 2011

8/3/2019 Hmmm November 13 2011

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THINGS THAT MAKE YOU GO

HmmmA walk around the fringes of nance

13November2011 1

No amount o synthesized growth can evaporateglobal debt. rying to sell creditors, debtors andtaxpayers on the idea that it can be done is autile and dangerous proposition. ime is nota variable. Tere is debt that is owed and onlymoney or assets-in-kind can satisy it. PAUL BRO DSKY/LEE QUANITANCE

Common responsibility or the European currency will also engendera common decision-making instance or the European economy. Itis unthinkable to have a European central bank but not a common

leadership or the European economy. I there is no counterweightto the ECB in European economy policy, then we will be let withthe incomplete construction which we have today However even ithe building is not fnished it is still true that monetary union is parto a supranational constitution It is our task or the uture to workwith the appropriate means or the transer o traditional elementso national sovereignty to the European level.

Italian President Carlo Ciampi, Frankurter Allgemeine Zeitung, Febuary 8, 2000

The euro is Europes key to the 21st century. The eraof solo naonal scal and economic policy is over German Chancellor Gerhard Schrder, December 31, 1998

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2.THINGS THAT MAKE YOU GO Hmmm...

13November2011 2

Big Fitz sounds like the name of a Heavyweight Champ - orthe aeconate nickname given to the regular in a neigh-

bourhood bar whom everybody knows. Big Fitz doesnt ordinarilysound like the name of a boat.

In the mid-1970s though, the only Big Fitz anybody spoke about in

Duluth, Minnesota was the Great Lakes freighter that carried taco-

nite from Duluth to the iron works in the then-thriving Detroit, Michi-

gan and Toledo, Ohio.

When she was launched in 1958, the SS Edmund Fitzgerald was the larg-

est boat on the Great Lakes. 729 feet long with a 75 beam and a 25 foot

dra, she could carry 26,000 DWT in her 33 4 deep hold. Powered by a Coal

red Wesnghouse Electric Corporaon steam turbine 2 cylinder, she had a

top speed of 14 knots and carried a crew of 29.

For 17 years, the oang workhorse ploughed back and forth across Lake Supe-

rior, seng seasonal haul records six mes and became a rm favourite with boat-

watchers (yes, they do exist) due to her size and her record-breaking exploits. Besides

her aeconate soubriquet, the SS Edmund Fitzgerald was also known as The Titanic Of

The Great Lakes

On November 9, 1975, Big Fitz was loaded with 26,116 tons of taconite iron ore pellets in Superior,

Wisconsin and embarked on what would tragically turn out to be her nal voyage - a roune crossing

of Lake Superior, bound for a steel mill in Detroit, Michigan.

The next day, November 10th, Big Fitz found herself caught in the midst of a massive winter storm,

with 35 waves and hurricane force winds. Captain Ernest McSorely, a 44-year veteran, made contactwith the Avafor, a nearby ship, and reported that he had encountered one of the worst seas he had

ever been in.

A couple of hours later, with Big Fitz roughly 17 miles from the relave safety of Whitesh Bay at the

northeastern p of Michigans Upper Peninsula, another ship made contact and was told that the

Titanic of The Great Lakes was holding her own.

Then something strange happened.

(History Channel): ...minutes aerward, the Fitzgerald disappeared from radar screens. A subse-

quent invesgaon showed that the sinking of the Fitzgerald occurred very suddenly; no distress

signal was sent and the condion of the lifeboats suggested that lile or no aempt was made to

abandon the ship.

Subsequently, many theories on what caused the SS Edmund Fitzgerald to capsize and sink 530 feet

to the lake bed almost instantly were put forward

(History Channel): One possible reason for the wreck is that the Fitzgerald was carrying too much

cargo. This made the ship sit low in the water and made it more vulnerable to being overwhelmed

by a sudden large wave. The ocial report also cited the possibility that the hatches to the cargo

area may have been faulty, leading to a sudden shi of the cargo that capsized the boat.

Either way, it didnt maer. Big Fitz sank - quickly. So quickly in fact that nobody was saved and all

29 crew members perished in the icy waters of Lake Superior. Big Fitz had been baling the odds for

several hours and things had looked bleak but she was managing to stay above water unl, suddenly,

without warning, she didnt.


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13November2011 3

This weeks anniversary of the tragic sinking of Big Fitz got me thinking about the Euro - an-other behemoth currently navigang some extremely choppy waters but managing to keep

herself above water. Holding her own, if you will.

The odds have been stacked heavily against the common currency for some me now and yet, despite

a clearly unsustainable level of debt, several countries who should never have been allowed through

the doors of the Eurozone, rapidly slowing growth and a group of basket-case policians who have re-

dened the meaning of ineptude, if you had shorted the Euro on January 7th of this year, you would

now be staring at a loss of roughly 6% on your investment (chart, below).

To have sat and read the headlines these past 10 months and yet

to be losing money on a short Euro posion would have doubt-

less sent even the most stoic of investors in search of a s drink

or some heavy counselling - but thats the way these things go

somemes. Things stay aoat against all the odds - unl, suddenly,they dont.

One cant help but think, however, that this week may well have

brought us to the wall at the end of the road down which Europe

has been kicking the can for quite some me now.

Withthe long-expected demise last week of the Papan-

dreou government and now the swi fall of Silvio Ber-

lusconis administraon in Italy, events in Europe picked up speed

as they move rapidly towards the kind of denive end that we

have needed for some me now, but that the prevaricang of the

various bureaucrats in Brussels and beyond have denied us.

The smoke has prey much cleared now and those in charge of

the SS Europe are le with a stark choice - print money or allow

the break-up of the Eurozone and the end of the common cur-

rency known as the Euro. At this point it really IS that simple.

SOURCE: BLOOMBERG

echnocracy: A orm o governmentwhere technical experts are in control o

decision making in their respective elds.Engineers, scientists, health proession-

als, and those who have knowledge, ex-

pertise or skills would compose the gov-

erning body. In a technocracy, decision

makers would be selected based upon

how knowledgeable and skillul they are

in their eld.

echnical and leadership skills would be

selected through bureaucratic processeson the basis o specialized knowledge

and perormance, rather than democratic

election by those without such knowl-

edge or skill deemed necessary. Some

orms o technocracy are envisioned as a

orm o meritocracy, a system where the

most qualied and those who decide

the validity o qualications are the same

people. Other orms have been describedas not being an oligarchic human group

o controllers, but rather an administra-

tion by science without the inuence o

special interest groups.

Te term technocracy derives rom the

Greek words tekhne meaning skill and

kratos meaning power, as in government,

or rule.

Euro: ytd


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13November2011 4

The impediment to a EuroTARP

or QEU program remains Ger-

many. Thats prey much it.Sure, the Dutch and the Finns

and even the Austrians all pay

lip service to a hard line on

monetary easing, but, as one-

by-one the formerly strong

countries get dragged into the

maelstrom of the peripher-

als leaving a new country ex-

posed on the outer fringes of

the core, it becomes more

and more obvious that some-

how, some way, Germany has

to nd a way of jusfying an

acon that is anathema to the

cizens of Europes power-

house economy. The blowout

in the spread between Austrian and German 10yr bonds this week highlights that perfectly (chart,

le).

Weimar hyperinaon is sll a very vivid memory for many Germans and, as Adam Fergus-son explained in his seminal work When Money Dies, the reasons why Germany is so setagainst the idea of money-prinng are clear:

Over most of Germany the lead was beginning to disappear overnight from roofs. Petrol was sy-

phoned from the tanks of motor cars. Barter was already a usual form of exchange; but now com-

modies such as brass and fuel were becoming the currency of ordinary purchase and payment.

A cinema seat cost a lump of coal. With a bole of paran one might buy a shirt; with that shirt,

the potatoes needed by ones family. Herr von der Osten kept a girl friend in the provincial Capital,

for whose room in 1922 he had paid half a pound of buer a month: by the summer of 1923 it was

cosng him a whole pound. The Middle Ages came back, Erna von Pustau said.

Communies printed their own money, based on goods, on a certain amount of potatoes, or rye,

for instance. Shoe factories paid their workers in bonds for shoes which they could exchange at the

bakery for bread or the meat market for meat.

Those with foreign currency, becoming easily the most acceptable paper medium, had the great-

est scope for nding bargains. The power of the dollar, in parcular, far exceeded its nominal rate

of exchange. Finding himself with a single dollar bill early in 1923, von der Osten got hold of six

friends and went to Berlin one evening determined to blow the lot; but early the next morning,

long aer dinner, and many nightclubs later, they sll had change in their pockets. There were sto-

ries of Americans in the greatest dicules in Berlin because no-one had enough marks to change

a ve-dollar bill: of others who ran up accounts (to be paid o later in depreciated currency) on the

strength of even bigger foreign notes which, aer meals or services had been obtained, could not

be changed; and of foreign students who bought up whole rows of houses out of their allowances.

There were stories of shoppers who found that thieves had stolen the baskets and suitcases in

Austria: 10-yr

Spread To Bunds

SOURCE: BLOOMBERG
http://www.goldonomic.com/When%20Money%20Dies.pdfhttp://www.goldonomic.com/When%20Money%20Dies.pdf


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13November2011 5

which they carried their money, leaving the money itself behind on the ground; and of life sup -

ported by selling every day or so a single ny link from a long gold crucix chain. There were stories

(many of them, as the summer wore on and as exchange rates altered several mes a day) of res-taurant meals which cost more when the bills came than when they were ordered. A 5,000-mark

cup of coee would cost 8,000 marks by the me it was drunk.

Stories like these sll live and breathe in Germany so it is no surprise that the language ofMrs. Merkel and Messrs. Schauble, Wiedmann et al have been deant whenever the subject ofmoney-prinng has arisen. But this week, as the Eurozone threatened to spiral out of control, it be-

came abundantly clear that the Euro has

reached the point of no-return.

The ECB now has to either become the

lender of last resort that Europe so des-

perately needs (and trample over Ger-

manys sensivies in the process), or the

Euro must fall. There is no other choice.

On Thursday, Italys 10-year bond yield

spiked to 7.5%. Presumably the only thing

that stopped it shoong higher sll was

aggressive buying on the part of the SMP

(we shall hopefully nd out on Monday

when the weekly totals are updated on the

ECB website), but whatever the reason for

the sudden and sharp retracement to 6.5%on Friday (surely it wasnt due to the news

that Massimo Mon had been touted as

Prime Minister in Berlusconis stead?

Surely?), you can be certain the bond

market has not nished with Italy just yet.

BUT..... Italy is running a primary surplus.

The only thing sending her over the edge

is the simple fact that the Italian govern-

ment cannot borrow at low-enough rates.

At 4% (where rates were a year ago), they

can gradually begin to adjust their debtraos and sll nance their borrowing -

it will not be easy, but they, unlike their

spendthri cousins in the Aegean, have

one of the highest savings rates in the

OECD (although, as you can see from the

chart, le, that savings rate has been eat-

en into rapidly over the past ve years).

But what of that other Big Fitz, the Euro?

Italy: 10-yr

Bond Yield

Italy: Savings As

% of GDP

SOURCE: BLOOMBERG


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13November2011 6

Any aempt to make a signicant change to either the treaes that surround the commoncurrency or the constuent members of the union would require a hellacious amount of ma-

neuvering in order to pull them o and, like the noon of Greece (or any weakened EU member) everbeing allowed to leave the Euro, the idea of either a scal union, the ECB becoming the lender of last

resort or, God forbid, Germany exing, stage le, was strictly verboten - at least unl this week:

(UK Daily Telegraph): German and French ocials have discussed plans for a radical overhaul of

the European Union that would involve seng up a more integrated and potenally smaller euro-

zone, EU sources say.

France and Germany have had intense consultaons on this issue over the last months, at all

levels, a senior EU ocial in Brussels told Reuters, speaking on condion of anonymity because of

the sensivity of the discussions.

We need to move very cauously, but the truth is that we need to establish exactly the list of

those who dont want to be part of the club and those who simply cannot be part, the ocial said.

French President Nicolas Sarkozy gave some avour of his thinking during an address to students

in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe - the eu -

rozone moving ahead more rapidly than all 27 countries in the EU - was the only model for the

future.

Prey conclusive.

Naturally, any such plan was immediately denied by a spokesman:

A French nance ministry spokesman denied there was any project in the works to reduce the cur-

rency blocs membership.

There have been no conversaons between French and German authories at any level on de -

creasing the size of the eurozone, the spokesman said.

But this me it really WAS dierent as the Germans, too, were talking about the possibility of exits

from the Eurozone:

One senior German government ocial said it was a case of pruning the eurozone to make it

stronger.

Youll sll call it the euro, but it will be fewer countries, he said, without idenfying those that

would have to drop out.

We wont be able to speak with one voice and make the tough decisions in the eurozone as it is

today. You cant have one country, one vote, he said, referring to rules that have made decision-

making complex and slow, exacerbang the crisis.

Ifyou listen very carefully, you can hear the subtle changes that make it prey clear that Germanocials are now trying to nd a way to make temporary money-prinng palatable to the Ger-man electorate. The tabling of possible exits from the Eurozone was the rst are sent up, next was

the discussion of a breakaway union featuring the strong countries, but immediately, Frau Merkel

dropped the hammer with this stark warning to her constuents (delivered at just the right degree of

arms length, of course):


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13November2011 7

(Businessweek): Germany will resist any aempt to reduce the euro region to its strongest mem-

bers to increase its stability, the parliamentary nance spokesman for Chancellor Angela Merkels

Chrisan Democrac Union said.

Such a shrinking process would be deadly for

Germany because we would end up in a mini-eu-

ro zone with all the eects you can see in Switzer-

land, Michael Meister, who is also a CDU deputy

oor leader, said today in a phone interview in

Berlin. It would be a deadly development for an

export country like Germany. It cant be in our

interest at all and if its not in our interest, we

should do everything to keep it from happening.

Once more, with feeling:

It would be a deadly development for an export

country like Germany. It cant be in our interest

at all and if its not in our interest, we should do

everything to keep it from happening.

There it is.

That is the rst step in a move to persuade the

German people that a EuroTARP or some form

of QEU will be manageable and will not cause

the runaway inaon of which Germans are ter-

ried. It will probably be proposed as a programdesigned to alleviate the pressure facing the likes

of Italy, Spain and Portugal and its architects will

point to the (relavely) benign US CPI numbers in

the wake of repeated Quantave Easing as tes-

tament to the fact that money prinng doesnt

necessarily lead to hyperinaon - although, very

quietly, US CPI has almost quadrupled since the

beginning of QE2 and its trajectory remains sol-

idly boom-le to top-right.

They WONT menon the US adjusted monetary

base (chart middle, le), nor will they bring upUK CPI (chart, boom) which is moving ever

faster away from its target rate of 2% - currently

standing at a breathtaking 5.2% - and will as-

sure the cizens of Germany that there will be

a cap on inaon past which the ECB WILL NOT

go - either that or it will be a program that will be

wound back aer, say, two years by which me

everything will be on the mend again.

Mach dir keine Sorgen. Wir haben alles unter

Kontrolle.

SOURCE: ST LOUIS FED

SOURCE: BLOOMBERG

SOURCE: BLOOMBERG


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13November2011 8

Dont worry. Weve got it all under control.

Of course, this assumes that the vagaries of a vastly expanded money supply can be controlled once

released into the wild and, as Weimar Germany, the Zimbabwe of Gideon Gono, Eduardo Duhaldes

Argenna and, to a lesser extent, even the America of Paul Volcker in the 1980s bear witness, once

this parcular beast is unleashed it can take some prey drasc tranquilizers to get it back in the cage

again.

No maer for now though, as Europes problems are both immediate and pressing. The Eurocrats will

eschew the potenal pialls of runaway inaon in favour of the short-term x of money-prinng.

Lots and lots of money-prinng.

In addion to Frau Merkels Michael Meisters dire warning, other headlines this week have been very

carefully laying the groundwork for a speech I dare say well be seeing soon about how, much as it is

against the original concept of the Euro, a temporary bout of Quantave Easing is necessary to save

Europe and the Euro from destrucon. We will be in desperate mes, will require bold acon andcan have condence in the ability of Europes leaders to ensure there is no inaonary impact from

any monezaon. The gang is denitely all here...:

(NY Times): Europes economic outlook received a fresh dose of gloom Thursday, when the Eu-

ropean Commission warned that the Connents economies were stalled and faced the risk of a

double-dip recession.

The recovery in the European Union has now come to a standsll, and there is a risk of a new

recession, Olli Rehn, the European commissioner for economic and monetary aairs, told report-

ers in Brussels.

This forecast is in fact the last wake-up call, he added.

(UK Daily Telegraph): Barack Obama, the US President, tonight urged Europe to provide strong

assurances that countries like Italy will be able to nance their debt.

We are not going to see massive growth out of Europe unl the problem is resolved and that will

have a dampening eect on the overall global economy.

Speaking at the Asia Pacic Economic Cooperaon (APEC) summit, Mr Obama said: Its not going

to be addressed over night. So it is important that Europe as a whole stands behind its Eurozone

members.

(UK Daily Telegraph): Europe must move quickly to control its spreading debt crisis, because the

volality it is causing is the central challenge to global growth, US Treasury Secretary Timothy

Geithner said.

We are all directly aected by the crisis in Europe, but the economies gathered here are in a beer

posion than most to take steps to strengthen growth in the face of these pressures from Europe.

Mr Geithner added that the basic framework for the European recovery was good.

But we need to see it put in place with the speed that markets require and with the force that

restores condence, he said. Theyre moving ahead. We just need to see them move a lile more

quickly and with a lile more force behind it.

(Todayonline) ; The global economy could suer a lost decade unless naons act together to

counter threats to growth, Internaonal Monetary Fund managing director Chrisne Lagarde


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13November2011 9

warned yesterday.

Speaking at a nancial forum, Ms Lagarde said: There are clearly clouds on the horizon ... parcu-

larly in the advanced economies and parcularly so in the European Union and the United States.

Said Ms Lagarde: If we do not act, and act together, we could enter a downward spiral of uncer-

tainty, nancial instability and a collapse in global demand. Ulmately, we could face a lost decade

of low growth and high unemployment.

Lets see.... is that everybody pulling in the same direcon? US President? Check. US Treasury Sec-

retary? Check. EU commissioner for monetary & economic aairs? Check. Head of the IMF? Check.

German and French heads of state? Check. Anybody else?

(Reuters): I refuse to even speculate about so-called two-speed Europe, Czech Finance Minister

Miroslav Kalousek said in response to Reuters quesons on the maer.

That would go against the Czech Republics interests.

Czechs? Check. Hell, theyre not even IN the Eurozone yet.

I guess that just leaves the big dog; China:

(Brecorder): Chinese President Hu Jintao warned on Saturday that the global economy recovery

was under threat and called for eorts to boost growth and liberalize trade.

The global economic recovery is fraught with greater instability and uncertainty, Hu said during

a speech in Honolulu ahead of a summit of Asia-Pacic leaders.

Referring to Europes sovereign debt crisis, he said the world must remain commied to ensuring

strong growth in order to add momentum to the economic development of the Asia-Pacic and

beyond.

So there we have it. A carefully craed scenario which will give Germany the ability to stand astride

the world stage by giving up its objecons to money-prinng (temporarily, you understand) in the

interests of the global good; the all-new Commiee To Save The World.

Judging by the Daily Telegraph story on page 20 of this weeks Things That Make You Go Hmmm.....

this cunning plan comes not a moment too soon (can you say Ponzi?):

(UK Daily Telegraph): Europes 1 trillion (854bn) rescue fund has been forced to buy its own debt

as outside investors become increasingly concerned about the worsening eurozone sovereign debt

crisis.

The European Financial Stability Facility (EFSF) last week announced it had successfully sold a 3bn10-year bond in support of Ireland.

However, The Sunday Telegraph can reveal that target was only met aer the EFSF resorted to

buying up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than 100m buying up its own bonds to help it achieve its

funding target aer the banks leading the deal were only able to nd about 2.7bn of outside

demand for the debt.

Speechless.


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13November2011 10

But before we nish for today,we return to our own Big Fitz

of the currency markets - the Euro -as it struggles to stay aoat against

all the odds. So far, it has been

managing quite nicely, although

the technical picture has been de-

teriorang rather dramacally (see

chart, le). Once the now-inevitable

European money-prinng begins,

its hard to make a case for a strong

Euro - parcularly in light of weaken-

ing economic data across the core of

the region - from the French tradebalance (which showed a 6.303 bil-

lion decit in September - the sev-

enth largest single-month decit in

French history and a staggering 46% m-o-m decline), to a plunge in French exports that matched the

lows seen in 2008-9, to Germanys Industrial output (which fell almost 3% in September) and Indus-

trial Orders (which fell 3.6% m-o-m) and on to the rise in unemployment in Germany - the rst such

increase for 28 months.

Mario Draghis rate cut is just the beginning. Interest rates in the EU are heading below 1% in a hurry

if the recent data are anything to go by and, once QEU or the EuroTARP commence, Europes Big Fitz ,

which has stayed aoat for so long against all the odds, will likely sink - suddenly and without warning.

You have been.... oh, wait...

Todays missive is laden with about 26,000 tons of Europe Im afraid - including the thoughtsof such luminaries as Jeremy Warner, Michael Pes, the Economist and the IFR to name buta few and between them they take a prey good stab at guring out what the hells going on. Ted

Butler takes a swing at the CME over MF Global, we nd out how Iran is trying to strengthen its hand

by cozying up to Greece, Ma Taibbi tells of his love for OWS and my friends Paul Brodsky and Lee

Quaintence are back once again to teach people like me how to write as they take on the nipping and

tucking that the nancial system has undergone in the last forty years.

We have charts on S&P earnings season, Italys debt and Unicreditos comparison between the US and

Italy, theres a double bill of Nigel Farage, the two Jims - Rickards and Grant sit down for a crackinginterview with Bloomberg TV and the wonderful Turd Ferguson talks to Chris Martenson about pre-

cious metals.... looks like I nished just in me...

As a result of my role at Vulpes Investment Management, it falls upon me to disclose that, from me-to-me,

the views I express and/or the commentary I write in the pages of Things That Make You Go Hmmm..... may

reect the posioning of one or all of the Vulpes funds - though I will not be making any specic recommenda-

ons in this publicaon.

Grant

www.vulpesinvest.com

SOURCE: BLOOMBERG
http://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdfhttp://users/Grant/Library/Caches/Adobe%20InDesign/Version%207.0/en_GB/InDesign%20ClipboardScrap1.pdf


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13November2011 11

Contents 13 November 2011

The Euro Is Being Held Together Only By Fear

France Will Be The Next To Crumble, Warns Gordon Brown

Staring Into The Abyss

Greece Turns To Iranian Oil As Default Fears Deter Trade

EU Mulls New Sancons Against Deant Iran

Slovenian Bond Yield Breaks 7%, First Time Since Euro Entry

How I Stopped Worrying And Learned To Love The OWS Protests

Banks To Dump More Italian Debt

An Unmigated Disaster

Germany Must Do It, Not China

Berlin Prepares for Possible Greek Exit from Euro Zone

Eurozone Bail-Out Fund Has To Resort To Buying Its Own Debt

Plascs

Charts That Make You Go Hmmm.....

Words That Make You Go Hmmm.....

And Finally

The Gonnie, Gonnie Banks

# Bank Assets ($m) Deposits ($m) Cost ($m)

88 Community Bank of Rockmart, Rockmart, GA 62.4 55.9 14.5

Total Cost to FDIC Deposit Insurance Fund 14.5


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13November2011 12

There has been a lot of thinking the unthinkable over the past week. If the euro is ulmatelyunsustainable, why not just face up to reality and let this grand exercise in polical hubris go?

Would the consequences really be quite as bad as convenonal analysis makes out? These quesons

need deconstrucng.

The announcement of a referendum last week by Greek (then) prime minister George Papandreou

prompted German Chancellor Angela Merkel and French premier Nicolas Sarkozy to ask in exaspera-

on whether Greece wanted the euro or not.

Their intenon was to frighten the Greeks into submission, and it worked. Papandreou is gone, and a

government of naonal unity is being formed under the fully signed up

eurocrat Lucas Papademos. Berlin and Paris have got their way.

But in threatening eecve expulsion, they also broke an unspoken

taboo; they admied that countries can opt out if they want to. In sodoing, they invited speculaon on just such an outcome.

Since then, the waters have been further muddied by the suggeson

that German and French ocials are already working on plans for

a two-speed Europe, involving closer union for a smaller euro core.

Those unable or unwilling to meet the requirements would be thrown out.

In any case, the principle has now been openly acknowledged. Divorce is possible. The diculty oc-

curs because for the me being none of these countries actually wants to leave. Even the Greeks

seem to have decided, for now, that geng out is not a soluon. The same is broadly true of Ireland,

Portugal, Spain and Italy. In none of these countries is there a credible polical force that advocates

exit.This in itself may be symptomac of a dangerous divorce between polical elites and growing popular

senment, but thats a story for another day. Right now, they all seem to be falling over themselves

to take their medicine.

Its not just the markets that demand Italy suspends the Byzanne inghng of its polical system and

form an unelected government of technocrats to enact the pain. There seems to be much appete

for it among Italians, too.

Unfortunately, its most unlikely to result in a sustainable euro. The internal devaluaon demanded

of these countries is going to take years to deliver results. Thats years of austerity, and years of nil or

negave growth for no certain gain in compeveness. Europe seems to be condemning itself to a

Japanese-style lost decade, and very likely something worse.O O O JEREMY WARNER / LINK

France risks becoming the next vicm of the sovereign-debt crisis in the coming weeks, Gor-don Brown, the former prime minister, has warned.Mr Browns predicon came as the dierence between French borrowing costs and those of Germany

hit record levels.

EU leaders urged France to draw up further austerity measures to meet its decit reducon targets,

amid fears the eurozones second biggest economy could crumble if Italys debt crisis spirals out of

control. Mr Brown, speaking in Moscow, said: France is in danger of being picked o by the markets

in the coming weeks and months.

... Divorce is possible. Te dicul-ty occurs because or the time be-

ing none o these countries actual-ly wants to leave. Even the Greeksseem to have decided, or now, thatgetting out is not a solution.
http://www.telegraph.co.uk/finance/comment/jeremy-warner/8882217/The-euro-is-being-held-together-only-by-fear.html


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13November2011 13

He urged Nicolas Sarkozy, the French president and current G20 chairman, to draw up a global growth

agreement with major powers such as China.

Such a deal could help to support the EU, whose bail-out mechanisms are not big enough to prop up

a major naon.

Mr Browns speech echoed Olli Rehn, the EU economics commissioner.

Mr Rehn urged France to take further steps to cut its public decit to a limit of 3 per cent of gross

domesc product in 2013 from an esmated 5.7 per cent this year. He said it was set to miss those tar-

gets by a wide margin. We believe that it is best that France announces,

as early as possible, the measures that are needed to keep its decit in

line with the ocial targets for 2012 and 2013, he said. The spread or

dierence between German and French 10-year government bond rates

the cost of state borrowing which reects investor condence hit a high

of 170 basis points yesterday before falling back. At the close, the interestrate or yield on a 10-year French bond was 3.46 per cent, while its German equivalent was 1.78 per

cent.

On Monday France announced a 65 billion austerity package over ve years its second in three

months to retain the triple-A credit rang, which allows it to borrow at the lowest rates.

The credit agency Moodys put France under observaon last month and could revise its rang in

January. Mr Sarkozy announced a 12 billion package in August consisng mostly of small tax rises and

the abolion of tax breaks. That was to respond to it revising down its growth forecast for next year

from an opmisc 1.75 per cent to 1 per cent.

The European Commission yesterday scaled down its forecast for French growth to just 0.6 per cent

next year as it warned that the debt crisis risked dragging the enre bloc into recession.

With presidenal elecons in France just six months away, the unpopular Mr Sarkozy is staking his

credibility on decit reducon, as he tries to convince voters he is a safer pair of hands than his So-

cialist rival, Franois Hollande. This in part explains why his government dismissed the suggeson it

needed more austerity measures yesterday. But a chasm appeared to be opening between Europes

two big economies.

O O O UK DAILY TELEGRAPH / LINK

When Britain abandoned the gold standard in 1931, it was not only forsaking a system formanaging the currency but also acknowledging that it could no longer bear the mantle of

empire. When America broke the dollars peg with gold in 1971, it ushered in a decline that connuedunl Paul Volcker re-established condence in the currency in the early 1980s. As Joseph Schumpeter,

the great Austrian economist, once wrote: The monetary system of a people reects everything that

the naon wants, does, suers, is.

In the same way, the crisis that has engulfed the European Union (EU) is about much more than the

euro. As government bonds, share prices and banks swoon and global recession knocks on the door,

the rst fear is of nancial and economic collapse. But to understand what is happening to the cur-

rency you also need to look at what is happening to Europe.

The euro will not be safe unl Europe answers some fundamental quesons that it has run away

from for many years. At their root is how its naons should respond to a world that is rapidly chang-

... France is in danger o beingpicked of by the markets in thecoming weeks and months
http://www.telegraph.co.uk/finance/financialcrisis/8882828/France-will-be-the-next-to-crumble-warns-Gordon-Brown.html


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13November2011 14

ing around them. What will it do as globalisaon strips

the West of the monopoly over the technologies that

have made it rich, and an ageing Europe starts to lookincreasingly like the western peninsula of a resurgent

Asia?

Some Europeans would like to put up carefully designed

fences around the EUs sll vast and wealthy market.

Others, including a growing number of populist poli-

cians, want to turn their naons inward and shut out

not just the world but also the elites project of Euro-

pean integraon. And a fewfrom among those same

elites, mostlyargue that the only means of paying for

Europes disncve way of life is not to evade globalisa-

on but to embrace it wholeheartedly.

This is not some abstract philosophical choice. It is a

erce struggle for Europes future, being waged in Ath-

ens as George Papandreou loses power to a temporary

government of naonal unity, in derelict factories in

France and Belgium and in the wasted lives of millions

of unemployed young Spaniards. This struggle will set

the limits on Europes welfare state. It will determine

how the unbalanced partnership between Germany and France, and an increasingly detached Britain,

will shape the EU. It will dene the high polics of Brussels and the low polics of European populism.

And it will decide the fate of the device that Schumpeter would see as the embodiment of all this: the

euro.O O O THE ECONOMIST / LINK

Greece is relying on Iran for most of its oil as traders pull the plug on supplies and banks refuseto provide nancing for fear that Athens will default on its debt.Traders said Greece has turned to Iran as the supplier of last resort despite rising pressure from Wash-

ington and Brussels to se trade as part of a campaign against Tehrans nuclear program.

The near paralysis of oil dealings with Greece, which has four reneries, shows how trade in Europe

could stall due to a breakdown in trust caused by the euro zone debt crisis, which is threatening to

spread to further countries.Companies like us cannot deal with them. There is too much risk. Maybe independent traders are

more geared up for that, said a trader with a major internaonal oil company.

Our nance department just refuses to deal with them. Not that they didnt pay. It is just a precau-

on, said a trader with a major trading house.

We couldnt nd any bank willing to nance us. No bank wants to nance a deal for them. We missed

some good opportunies there, said a third trader.

More than two dozen European traders contacted by Reuters at oil majors and trading houses said

the lack of bank nancing has forced Greece to stop purchasing crude from Russia, Azerbaijan and

Kazakhstan in recent months.
http://www.economist.com/node/21536872


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13November2011 15

Greece, with no domesc producon, relies on oil imports and in 2010 imported 46 percent of its

crude from Russia and 16 percent from Iran. Saudi Arabia and Kazakhstan provided 10 percent each,

Libya 9 percent and Iraq 7 percent, according to data from the European Union.

They are really making no secret when you speak to them and say they are surviving on Iranian stu

because others will simply not sell to them in the current environment, one trader in the Mediter-

ranean said.

O O O REUTERS / LINK

The European Union may approve fresh sancons against Iran within weeks, aer a U.N. agen-cy said Tehran had worked to design nuclear bombs, EU diplomats said Thursday.Iran denies trying to build atom bombs and its Supreme Leader Ayatollah Ali Khamenei said any U.S.

or Israeli aack on its nuclear sites would be met with iron sts.

The United States and Israel have refused to rule out any opon to prevent Iran from acquiring a

nuclear arsenal.

Diplomats in Brussels said preliminary discussions among EU capitals on

new measures had begun and plans may be ready for EU foreign ministers

in Brussels to approve on December 1.

Experts are discussing a number of opons on the table but it is dicult to

foresee the outcome of the debate, one EU diplomat said. Another said he

expected a formal decision to be reached on December 1.

Iran already faces a wide range of U.N. sancons, as well as some imposed unilaterally by the United

States and the EU.

New EU sancons would be a signicant part of Western eorts to ratchet up pressure on Tehran aer

the U.N. nuclear watchdogs report this week that laid bare a trove of intelligence suggesng Iran is

seeking nuclear weapons.

The White House said Thursday the report by the Internaonal Atomic Energy Agency (IAEA) was

very alarming and it would connue to push Tehran to change its behavior.

Western governments would prefer further Security Council measures against Tehran. But Russia and

China, both permanent Security Council members with veto power, are opposed and on Thursday said

new sancons would not work.

Tehran, which says its nuclear program is for producing electricity and other peaceful purposes, saidWednesday it remains ready for negoaons with world powers on the issue.

Western diplomats say only sancons against Irans energy sector could exert serious pressure on

Tehran, but such steps would also hurt a global economy hit by Europes debt crisis.

O O O REUTERS / LINK

Slovenias 10-year government bonds slid for a fourth day, with the yield topping 7 percentfor the rst me since the naon adopted the euro in 2007, as the debt crisis in Europe roilsmarkets.

... Te United States and Israelhave reused to rule out anyoption to prevent Iran romacquiring a nuclear arsenal.
http://www.reuters.com/article/2011/11/10/us-nuclear-iran-idUSTRE7A94OY20111110http://www.reuters.com/article/2011/11/11/us-greece-iran-oil-idUSTRE7AA3IJ20111111


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13November2011 16

The yield rose to 7.14 percent at 1:05 p.m. in Ljubljana, according to Bloomberg data. The spread, or

the dierence investors demand to hold the securies instead of similar- maturity German debt, also

advanced to a euro-era record of 545 basis points. A basis point is a hundredth of a percentage point.

Slovenia, which holds early elecons next month, was cut by Standard & Poors, Moodys Investors

Service and Fitch Rangs on the governments collapse, the poor economic outlook and a weak bank-

ing industry. The former Yugoslav republic is also a vicm of its proximity to Italy, which is struggling

to fend o an investor crisis of condence.

The worry is that turmoil in Italy will last for some me, pushing Slovenian bond yields even higher,

Michal Dybula, an economist at BNP Paribas in Warsaw, Poland, said in a phone interview yesterday.

However, even if they breach the 7 percent mark that would not be the same evil as in Italy.

Slovenias ve-year credit-default swaps rose 47 basis points to a record 395 basis points...

O O O BUSINESSWEEK / LINK

Ihave a confession to make. At rst, I misunderstood Occupy Wall Street.The rst few mes I went down to Zucco Park, I came away with mixed feelings. I loved the

energy and was amazed by the obvious organic appeal of the movement, the way it was growing on

its own. But my inial impression was that it would not be taken very seriously by the Cibanks and

Goldman Sachs of the world. You could put 50,000 angry protesters on Wall Street, 100,000 even, and

Lloyd Blankfein is probably not going to break a sweat. He knows hes not going to wake up tomorrow

and see Cornel West or Richard Trumka running the Federal Reserve. He knows modern nance is a

giant mechanical parasite that only an expert surgeon can remove. Yell and scream all you want, but

he and his fellow nancial Frankensteins are the only ones who know how to turn the machine o.

Thats what I was thinking during the rst few weeks of the

protests. But Im beginning to see another angle. Occupy Wall

Street was always about something much bigger than a move-

ment against big banks and modern nance. Its about pro-

viding a forum for people to show how red they are not just

of Wall Street, but everything. This is a visceral, impassioned,

deep-seated rejecon of the enre direcon of our society, a

refusal to take even one more step forward into the shallow

commercial abyss of phoniness, short-term calculaon, with-

ered idealism and intellectual bankruptcy that American mass society has become. If there is such

a thing as going on strike from ones own culture, this is it. And by being so broad in scope and so

elemental in its movaon, its own over the heads of many on both the right and the le.

The right-wing media wasted no me in cannon-blasng the movement with its usual idioc clichs,

casng Occupy Wall Street as a bunch of dirty hippies who should get a job and stop chewing up Mike

Bloombergs police overme budget with their urban sleepovers. Just like they did a half-century ago,

when the debate over the Vietnam War somehow stopped being about why we were brutally murder-

ing millions of innocent Indochinese civilians and instead became a referendum on bralessness and

long hair and ower-child rhetoric, the depraved acks of the right-wing media have breezily blown

o a generaon of fraud and corrupon and market-perverng bailouts, making the whole debate

about the protesters themselves their hygiene, their envy of the rich, their hypocrisy.

The protesters, chirped Supreme Reichskank Ann Coulter, needed three things: showers, jobs and a

point. Her colleague Charles Krauthammer went so far as to label the protesters hypocrites for having

... Occupy Wall Street was always aboutsomething much bigger than a movementagainst big banks and modern nance.Its about providing a orum or people toshow how tired they are not just o WallStreet, but everything
http://www.businessweek.com/news/2011-11-11/slovenian-bond-yield-breaks-7-first-time-since-euro-entry.html


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13November2011 17

iPhones. OWS, he said, is Starbucks-sipping, Levis-clad, iPhone-clutching protesters [denouncing]

corporate America even as they weep for Steve Jobs, corporate tan, billionaire eight mes over. Ap-

parently, because Goldman and Cibank are corporaons, no protester can ever consume a corporateproduct not jeans, not cellphones and denitely not coee if he also wants to complain about tax

money going to pay o some billionaire bankers bets against his own crappy mortgages.

O O O MATT TAIBBI / LINK

European banks are planning to dump more of the 300bn they own in Italian governmentdebt, as they seek to pre-empt a worsening of the regions debt crisis and avoid crippling write-downs a move that could scupper the European Central Banks eorts to bring down soaring yields.

Sll reeling from heavy losses on money they lent to Greece, lenders are keen not to make the same

mistake twice.Then, under the pressure of governments and a hope that credit default swaps would

protect them against heavy losses, they held on unl it was too late to sell.

With the ECB providing a bid for Italian bonds that might not otherwise exist, board members at some

of Europes largest bank say now is the me to accelerate disposals. Many are also reversing long-

standing policies of buying into new Italian bond issues, denying Rome an important base of support.

Our tradional buying days are no longer, said one board member at a European bank, one of Italys

10 biggest creditors, who added that the bank has also sold o previous bond purchases. Unless

there is more certainty on Italians changing direcon, it will be very

tough for them to nd buyers.

Its beer to take the losses now when everyone is expecng it rath-

er than wait around for a default

Banks are important creditors to Rome, having bought about 40% of

the 22bn Italy issued in euro-denominated syndicated bonds since 2009. According to the European

Banking Authority, the regions biggest 90 banks held 326bn of Italian debt at the end of last year.

Many banks have since reduced their holdings, although the EBA numbers released in July are the

most up-to-date cross-industry gures on nominal holdings. Italys debt load totals around 1.7trn,

with more than 300bn due to mature next year alone.

Youre beer o doing it now rather than waing, said one investment banker who is currently

working on plans for bank clients to further sell down their Italian bond holdings. Its beer to take

the losses now when everyone is expecng it rather than wait around for a default.

O O O IFR / LINK

Oftentimes, the signicance of truly historic events is not fully appreciated at the methey occur. I think we are at one of those mes with the bankruptcy of MF Global. Theres noqueson that the news and overall circumstances of the demise of the large commodies brokerage is

widely known, but the signicance of the event is not yet fully understood. While I would classify the

event as an unmigated disaster on many levels, I have hope that it might result in some long-overdue

and necessary changes in the commodies regulatory structure.

The disaster is that for the rst me in modern nancial history, the main guarantee of the clearing-

house system has completely failed its most important constuent the customer base. The underly-

... Its better to take the losses nowwhen everyone is expecting it ratherthan wait around or a deault
http://www.ifre.com/banks-to-dump-more-italian-debt/1615206.articlehttp://www.rollingstone.com/politics/news/how-i-stopped-worrying-and-learned-to-love-the-ows-protests-20111110#ixzz1dNdkxIPb


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13November2011 18

ing promise to every parcipant in the futures market is that your money and open posions are safe

from the and default. This is the very glue that holds the future market together, namely, that all

market parcipants can depend upon strict regulaon and oversight to safeguard against fraud andthe. Thats what has made the US organized futures exchange system the envy of the world. Unl

now. For more than a week, almost all of the 50,000 commodity customers of MF Global are in limbo

as to the access and status of their funds on deposit and open posions. This is unprecedented and

beyond bad. For these 50,000 customers, its the equivalent of discovering your bank just went out of

business and there is no assurance all your funds will be returned. (In the interest of full disclosure,

my background is in futures, having started as a commodity

broker at Merrill Lynch some 40 years ago. But I have not

traded futures for years and am no way personally involved

in the MF Global mess; Im strictly an outside observer and

independent analyst).

Let me cut to the chase here and pinpoint the real problem the CME Group. I know I have connu-ously cricized the CME, even calling it a criminal enterprise on many occasions, but in truth I may

have understated the case. Yes, I would agree that the immediate cause of the MF Global bankruptcy

was MF Global itself; but what turned it into a disaster of unprecedented proporons was the CME

Group. The CME Group was the front line regulator for MFG, responsible for auding and insuring the

safety of customer funds and for guaranteeing those funds in a worst case scenario. The CME failed at

every turn. Not only did its auding fail miserably, the CME failed to step up to the plate to safeguard

customer funds aer it was discovered that $600 million was missing. This is like a case of paying pre-

miums for years on an insurance policy only to be denied coverage when presenng a claim for the

rst me. I know that the federal commodity regulator, the CFTC, has been negligent in the case of MF

Global as well, but that does not migate the CMEs failures.

O O O TED BUTLER / LINK

As polical horizons get shorter (in a crisis, governments tend to be unstable), leaders chooseshort-term xes at the expense of medium-term soluons. Since they are unlikely to be in of-ce to benet from the medium-term improvement, they discount its eect at much higher rates than

they discount short-term policies. The result is that the crisis gets worse, not beer.

This seems to be what is happening in Europe. In order to postpone the crisis, perhaps because of

upcoming elecons in a number of important countries, European leaders are choosing quick xes at

the expense of long-term European growth, and of course this will simply increase the probability and

cost of a crisis.

Europe is capital-rich and in fact is a net exporter of capital. The reason peripheral European govern-ments cannot get nancing is not because there is a lack of capital or liquidity but simply because

their solvency is quesoned by investors, and correctly so in my opinion. They dont need Chinese

capital. They need someone foolish enough to lend money to countries that probably wont repay.

If European leaders hope that China will lend large amounts of money directly to those borrowers,

I say good luck to them but they shouldnt expect too much. Why should China lend to someone

who wont repay? But if Europe is asking China to lend into a fund that is eecvely guaranteed by

Germany, then there shouldnt be much Chinese reluctance. In that case however I would have to

wonder why Europe needs help from foreigners. Germany has lile diculty in borrowing on its own.

But the main issue is the sheer silliness of Europes asking for foreign money. Any net increase in

... Let me cut to the chase here and pinpointthe real problem the CME Group
http://news.silverseek.com/SilverSeek/1321022610.php


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13November2011 19

foreign capital inows to Europe must be matched by a deterioraon in Europes trade balance. This

will probably occur through a strengthening of the euro against the dollar. And given weak domesc

European demand, this means that either Europeans will buy from foreign manufacturers what theywould have bought from European manufacturers, or it means Europe will export less. Europe, in

other words, is trading medium-term growth and employment for short-term nancing for borrowers

that should not be increasing their debt levels.

This is absurd. Europe needs growth, not capital, and imporng capital means exporng demand,

which is now the worlds most valuable resource. Increasing unemployment cannot possibly be the

soluon for Europe especially when Spain just announced yesterday that unemployment was up to

21.5%. But I guess postponing the crisis is more important than medium-term growth if you are look-

ing to get reelected in the next year or so.

O O O MICHAEL PETTIS / LINK

The German government has been simulang a range of scenarios to prepare for a possibleexit of Greece from the euro zone. Under a worst-worst-case scenario, the country could de-scend into a vicious circle of misery that could last decades.

The German government is preparing for Greeces possible exit from the euro zone in the event that

the countrys new government decides not to connue with the previously agreed austerity pro-

grams. Experts at the German Finance Ministry have been simulang a variety of scenarios based on

dierent assumpons, SPIEGEL has learned.

A so-called baseline scenario is based on the expecta-

on that the situaon does not get too bad. Under this

scenario, Greeces exit from the monetary union couldeven contribute to the strengthening of the euro zone in

the long term, following an inial period of turbulence.

The thinking goes that the currency union could be more

stable without its weakest member.

Admiedly, peripheral euro-zone members like Spain

and Italy would sll face challenges, but the assumpon

is that they would be beer able to tackle their problems without the addional burden of the Greek

crisis. According to the assessment of German government experts, these countries may currently be

struggling to get access to money, but unlike Greece they are not close to insolvency.

Under the Finance Ministry experts worst-case scenario, developments in the euro zone would be

less favorable. In this case, Italy and Spain would nd themselves in the crosshairs of the global nan-cial markets, and their borrowing costs would rise. In this simulaon, the European backstop fund,

the European Financial Stability Facility (EFSF) would be forced to supply those countries with fresh

money. For this to succeed, the experts argue, the EFSF should be expanded as quickly as possible so

that it has an eecve lending capacity of 1 trillion ($1.4 trillion).

In addion, the government experts also looked at a so-called worst-worst-case scenario. In this mod-

el, Greeces new currency would dramacally devalue against the euro. That would have the posive

eect of making the countrys exports cheaper, but the negave eects would outweigh the benets.

The countrys naonal debt would rise despite a haircut, because Greeces debts would sll be de-

nominated in euros. The countrys credit rang would be immediately downgraded again, and Greek

companies would struggle to get access to money because the countrys banks would also be cut o

...In addition, the government experts alsolooked at a so-called worst-worst-case scenario.

In this model, Greeces new currency woulddramatically devalue against the euro. Tat

would have the positive efect o making thecountrys exports cheaper, but the negative e-ects would outweigh the benets.
http://mpettis.com/2011/11/germany-must-do-it-not-china/


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13November2011 20

from internaonal capital markets.

Many rms would go bankrupt because their debts would also be denominated in euros, with the

result that many more workers would lose their jobs. Domesc consumpon would collapse, aggra-

vang the downturn. The country could take decades to free itself from this vicious circle, and other

naons might also be drawn into the vortex. The German government experts do not, however, con-

sider this scenario to be the most likely one.

O O O DER SPIEGEL / LINK

Europes 1 trillion (854bn) rescue fund has been forced to buy its own debt as outsideinvestors become increasingly concerned about the worsening eurozone sovereign debt crisis.The European Financial Stability Facility (EFSF) last week announced it had successfully sold a 3bn

10-year bond in support of Ireland.

However, The Sunday Telegraph can reveal that target was only met aer the EFSF resorted to buying

up several hundred million euros worth of the bonds.

Sources said the EFSF had spent more than 100m buying up its

own bonds to help it achieve its funding target aer the banks

leading the deal were only able to nd about 2.7bn of outside

demand for the debt.

The revelaon will be seen as a major failure and a worrying

sign of future buyers strike aer EFSF ocials and their bank-

ers had spent recent weeks travelling the world aempng to

persuade key investors, including Chinas naonal wealth fundand Japanese government funds, to buy its bonds.

Chinese and Japanese money was crucial to last years rst bond sales by the EFSF, but they have since

been dismayed by the eurozones failure to resolve the worsening debt crisis and alarmed at how fund

has morphed from being a rescue facility for European banks into a potenally 1 trillion leveraged

rst-loss insurer for eurozone governments.

Other European Union funds are also understood to have supported the EFSFs bond sale. The failure

of the EFSF will increase pressure on the European Central Bank to eecvely become the lender of

last resort for the eurozone, a move it has strongly resisted.

At a private breakfast organised by PI Capital last week, Mark Hoban, the Treasury minister, said:

What it doesnt do is provide the next stage of the soluon, which is how do you stop this from hap-pening again? he said.

The move, by the European Investment Bank, will cause more disquiet among non-eurozone EU

members who have become concerned about their growing exposure to the cost of rescuing the cur-

rency bloc.

O O O UK DAILY TELEGRAPH / LINK

The current global system of money and credit is indeed a at system, as hard money ad-vocates derisively claim, yet not as well known is that: 1) governments have let their bankingsystems enjoy control over their currencies and, 2) at control over currencies gives at control over

... Sources said the EFSF had spent morethan 100m buying up its own bonds tohelp it achieve its unding target ater thebanks leading the deal were only able tond about 2.7bn o outside demand orthe debt.
http://www.telegraph.co.uk/finance/financialcrisis/8886380/Eurozone-bail-out-fund-has-to-resort-to-buying-its-own-debt.htmlhttp://www.spiegel.de/international/europe/0,1518,797399,00.html


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13November2011 21

commerce. Therefore, all public and private commercial enes must bear the risks assumed by their

banking systems, which is parcularly odd because both private banks and central banks are for-prot

enes in the private sector. There is no such thing as a private commercial exchange that our bank-ing systems do not inuence.

Consider that credit created by banking systems ows through to capital-building enterprises, wages,

earnings and thus savings. A poron of this credit nds its way into investment (as equity), and a

poron nds its way back to the banking system (M1 and M2). Thus, the balances most economists

and nanciers refer to as savings and retained earnings, entries that all of us generally think of as

wealth, are in reality unreserved bank system credit. All economic actors are borrowing their money

from the banking system, in eect, nancing their lifestyles.

We nd ourselves discussing money again when we intended to discretely idenfy the true nancial

system. This is because not only are stocks and bonds nancial assets, the very money in which they

are denominated is too. It is borrowed, as we discussed above.

We, as economic parcipants, use banking system-manufactured

electronic credits as our medium of exchange in commercial trans-

acons, to pay our taxes and, for many, to save (store our wealth).

When banking systems can no longer nd outlets (consumpon,

capital expenditures, home borrowing, nancial asset speculaon,

etc.) for the explicit credit they create, the nancial system begins

to de-leverage. This includes most of what today is perceived as

our money. How can our money de-leverage? It does so in pur-

chasing power terms (or else, via bank runs!).

What we are seeing today is economic cheerleaders trying to get M2 savers to leverage their cash

further (as a theorecal example, pung down a big chunk of the $9.6 trillion as down paymentsfor home purchases and using the rest as the basis for increasing consumer borrowing). Think of the

economic smulus this would engender. Now think of what would actually be occurring. Money that

is already mostly credit would be going to create explicit credit, half of which we would call home

equity. The aendant rise in home values and consumpon would then create more jobs and wages

and income and consumpon (and more electronic credits). Leveraging would start anew. This ex-

ponenal leveraging does not describe a preposterous theorecal future -- it precisely describes our

most recent past.

The amount of debt in an economy theorecally does not maer. Why? Because people and busi-

nesses may owe any amount to each other and if they cant nd the money then they can repay their

debts with assets. However, in modern sociees creditors are not kings and cannot take too much

property in lieu of money. You may pay back the mortgage on your home by sending your bank thekeys, but everyone on your block or town cannot. Why? Because in the absence of subsequent base

money stock growth, the banks would have no one to whom to sell the houses then, right? There

would be no money le.

Greece could pay back its debts to European banks tomorrow by selling China a few shipping ports

or tonnes of gold in exchange for Euros. Will it? Nah, it knows the Euros it owes the banks are base-

less, as do the banks, as do the Chinese. In the end, what maers is that banks are repaid in nominal

currency so that the con is perpetuated. Banking systems manufacture credit, call it money, and

control the global monetary system.

O O O BRODSKY & QUAINTANCE / LINK

... Greece could pay back its debts toEuropean banks tomorrow by sellingChina a ew shipping ports or tonneso gold in exchange or Euros. Will it?Nah, it knows the Euros it owes thebanks are baseless, as do the banks, asdo the Chinese.
mailto:pbrodsky%40qbamco.com?subject=TTMYGH%3A%20Please%20Send%20Me%20A%20Copy%20Of%20%27Plastics%27


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22.CHARTS THAT MAKE YOU GO Hmmm...

13November2011 22

Italy Or USA - Where Would You Put YourMoney? While at a glance this may seem like

a straighorward queson with a simple andobvious answer, troubled Italian bank UniCredit

has released a ponderous arcle comparing and

contrasng the two heavily indebted, polically

challenged, and growth-retarded naons. Com-

paring debt-to-GDP raos and trajectories, GDP

growth, and unemployment (as well as funding

needs), the answer actually becomes a lile less

obvious and boils down to the central bank (as

does every trading decision in the world cur-

rently).

Obviously Italian interest rates are being driven

by the systemic concerns in the Eurozone. What UCG considers - is the spread dierenal jused by

fundamentals? As the super-commiee grapples with the reality of the budget and Berlusconis new

boy faces austerity, IMF esmate for gross debt-to-GDP actually converge by 2016:

Aer discussing unemployment outlooks and growth, they nd that indeed, the fundamentals (from

an economic outlook) favor the US over Italy but their view is that the markets percepon of the dif-

ference is misplaced.

Because at the end of the day investors are not concerned about GDP growth rates themselves, but

about the implicaons of the economic performance for the health of the public nances. And while

stronger growth rates undoubtedly help, they are no guarantee for lowering the debt. That is un-

equivocally shown by the latest IMF projecons. While the fund expects the US to grow faster thanItaly, it at the same me projects much higher decits for the US. In ve years me, the US is even

likely to have a larger debt-to-GDP rao, but right now the Italian government has to pay seven mes

as much for a 5-year bond than the US Treasury. How comes?

...seemingly all boils down to the second explanaon, which is of course the behavior of the central

banks. While both the Federal Reserve and the ECB have been buying government bonds in recent

months, it is obvious that the ECB has been much more reluctant to do so. In the (currently unlikely)

event that the US Treasury will have problems to rollover maturing debt in the market at reasonable

rates, it is probable that the Federal Reserve would step in again and buy even more government

bonds. In combinaon with the direct demand

eect, that implicit insurance puts downward

pressure on Treasury yields, as investors are de-manding only a very low risk premium. The situ-

aon in Europe is very dierent, and we simply

do not know how many more government bonds

the ECB is willing to buy. The reasoning behind

the ECBs more cauous atude has repeatedly

been arculated loud and clear: While addional

bond purchases could help in the short-term, they

might come at long-term costs, such as high ina-

on rates or a less stable EUR.

O O O ZEROHEDGE / LINK
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/10/20111111_ITATSY_debt.pnghttp://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2011/10/20111111_ITATSY.pnghttp://www.zerohedge.com/news/italy-or-usa-where-would-you-put-your-money


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13November2011 23

BarryRitholtz brings us this summary of earnings season in the S&P500 courtesy of Jim Bianco

CLICK TO ENLARGE

CLICK TO ENLARGE SOURCE: BIANCO RESEARCH

SOURCE: BIANCO RESEARCH
http://www.ritholtz.com/blog/wp-content/uploads/2011/11/fdf.pnghttp://www.ritholtz.com/blog/wp-content/uploads/2011/11/charts111.png


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13November2011 24

So far, so good. 2012? Problems...

The Bertelsmann Foundaons study ofchild poverty amongst the worlds devel-oped naons makes for sobering reading.

You can read the full report h

SOURCE: BERTELSMANN

CLICK TO ENLARGE SOURCE: DER SPIEGEL
http://www.bertelsmann-stiftung.de/bst/de/media/xcms_bst_dms_34886_34887_2.pdfhttp://www.spiegel.de/international/europe/bild-796280-280260.htmlhttp://gregor.us/wp-content/uploads/2011/11/Child-Poverty-Rankings.pnghttp://www.bertelsmann-stiftung.de/bst/de/media/xcms_bst_dms_34886_34887_2.pdf


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25.

13November2011 25

WORDS THAT MAKE YOU GO Hmmm...

Turd Ferguson is a funny guy.

But theres one thing this irreverent, acerbically gooall forecaster is stone-cold serious about: the need to build personal exposure to the precious metals.

For him, it s a straighorward mathemacal certainty that the global economy must

collapse under the weight of the excessive (and exponenally compounding) credit

amassed over the past several decades. The debt is simply too large to be serviced.

As a growing number of analysts are predicng, Turd sees the replacement of the

worlds current monetary regimes as the endgame to this story. And he believes we

are watching that endgame unfold in real-me now.

In this interview with Chris [Martenson], Turd discusses his reasons why gold and

silver oer the best prospect for preserving wealth through the coming devaluaon

of world currencies, despite his strong convicon that the markets for these metalsare heavily price-manipulated.

Adouble bill of Nigel Farage today. Right:Nigel smacks down the Eurocrats inBrussels.

Le: Nigel discusses the whereabouts of Eu-

ropes gold, the global economy and the six

week D-Day facing Europe.

JimRickards & Jim Grant - two of the

smartest Jims around - discuss Feder-

al Reserve monetary policy and the pos-

sible impact on the U.S. economy, the

gold standard and Rickards new book:

Currency Wars: The Making of the Next

Global Crisis.

CLICK TO LISTEN

CLICK TO WATCH

CLICK TO WATCHCLICK TO LISTEN
http://www.youtube.com/watch?v=nNXd0qbpln0&feature=player_embeddedhttp://www.bloomberg.com/video/79944740/http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/11/9_MEP_Nigel_Farage_files/Nigel%20Farage%2011%3A9%3A2011.mp3http://www.youtube.com/watch?v=NIQVMeGnmoQ&feature=player_embedded


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and fnally

God of our fathers, known of old

Lord of our far-ung bale line

Beneath whose awful hand we hold

Dominion over palm and pine

Lord God of Hosts, be with us yet,

Lest we forgetlest we forget!

The tumult and the shoung dies

The Captains and the Kings depart

Sll stands Thine ancient sacrice,An humble and a contrite heart.



Far-called our navies melt away

On dune and headland sinks the re

Lo, all our pomp of yesterday

Is one with Nineveh and Tyre!

Judge of the Naons, spare us yet,


If, drunk with sight of power, we loose

Wild tongues that have not Thee in awe

Such boasngs as the Genles use,

Or lesser breeds without the Law



For heathen heart that puts her trust

In reeking tube and iron shardAll valiant dust that builds on dust,

And guarding calls not Thee to guard.

For franc boast and foolish word,

Thy Mercy on Thy People, Lord!

Rudyard Kipling,Recessional

and fnally

Hmmm

PHOTO: GRANT WILLIAMS

GRANT WILLIAMS 2011
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Hmmm November 13 2011

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