Stocks tumbled on Friday on profound worries. Arnold Swartzeneger, governor of California announced budget cuts that would leave single mothers, foster youth, children from low-income families, the disabled and seniors who rely on state services feeling a lot of pain. Also on Friday the IMF warned that advanced economies face a herculean task to restore public debt to pre-crisis levels (mission impossible), and failure to do so will drive up borrowing costs and curb economic growth. In this case even Hercules and all the kings’ men are not up to this task meaning the Walls of Jericho are going to come tumbling down and survivors will have to learn to live among the rubble, ruin and pain.
When the wildfire in the Greek bond market began to wreck havoc on the
Portuguese and Spanish markets, EU politicians hastily arranged an
emergency meeting, to devise a rescue from the brink of Armageddon.
“The sovereign-debt crisis spun out of control in the past week, and we see no easy way to resolve it,” said Madeline Schnapp, director of macro-economic research at TrimTabs Investment Research. “The problem of the western world is that we have too much debt,” said Daniel Arbess, who manages the Xerion investment strategy at Perella Weinberg Partners. “Rather than reducing our debt, we’ve been moving it from one balance sheet to another. All we’re doing is shifting chairs on the deck of the Titanic.” What is happening could rip the very fabric of Europe’s economic system and wreck economic recoveries in the U.S., China and Latin America.
The cost to insure debt to peripheral European
countries and U.S. companies rose on Friday as reports
about political discord in Europe reignited worries about
the region’s stability and drove the euro to a 17-month low.
In London, the benchmark FTSE 100 index of leading shares closed down 3.14 percent to 5,262.85 points. In Paris, the CAC 40 plunged 4.59 percent to 3,560.36 points and in Frankfurt the DAX tumbled 3.12 percent to 6,056.71 points. Madrid, Milan, Lisbon — all seen as weaker eurozone members left vulnerable in the fallout from the Greek debt crisis — were more badly hit, with Spanish stocks down more than six percent.
And what about gold? The gold market is anticipating a blow-up in the world’s monetary system for it is going up on good news and bad news and every news. It’s going up because investors are starting to pee in their pants as they see what is happening when a country runs up too much debt. Debt default visions on the horizon and destruction of currencies are piercing the illusion and the paradigm of fraudulent banking.
The world economy, badly shaken as it is, has still not collapsed but that does not mean it won’t do that sometime soon. Things are heating up (though global temperatures are still cooling) and you can tell how bad things are getting with open hunting season on bankers now coming into fashion. More than a year and a half after Iceland’s major banks failed, all but sinking the country’s economy, police have begun rounding up a number of top bankers while other former executives and owners face a two-billion-dollar lawsuit. In the United States the witch hunt is finally arriving on Wall Street where some of the biggest crooks that have ever walked our planet are assembled. And in Ireland they are storming the parliament.
Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalized fiscal union (in other words with central power to tax and spend) if it is to survive meaning the chances of its survival are nil so Europe is going down.
A bold $1 trillion rescue by the European Union halted the slide of the euro last Monday and sent markets soaring worldwide but it was admitted right away that the rescue package did not resolve the basic dysfunction at the heart of Europe’s monetary union. World stocks and the euro fell Tuesday as the massive relief rally triggered by a $1 trillion plan to contain Europe’s debt crisis fizzled out. Well it was just fantasy money anyway; just more debt and more promises that don’t do anything but dig a deeper hole to financial hell. Europe’s currency has fallen 1.8 percent this week after the region’s policy makers unveiled the plan.
Greece shows us what happens to a country at the end of a long period of living beyond its means.
Analysts warned that the emergency bailout fund would do nothing to reverse Europe’s soaring public debt — and would even worsen it. “The last thing you give a drunk is another drink,” said Jeremy Batstone-Carr of Charles Stanley stockbrokers. “The process of providing a bridging facility for Greece and possibly other indebted nations will add significantly to regional debt and deficit ratios without actually solving the underlying problem.”
So it cost the world system 1 trillion to save the day BUT the bailout announcement did nothing to stem the crisis that is starting to infect the bank funding system, driving borrowing costs higher from Asia to the U.S. and threatening to torpedo whatever global economic recovery economists were imagining was happening. The bailout is little more than a shuffling of debt risk from one place to another – nothing had been solved at all. Debt was merely shuffled from one location to another, from the banks to the public.
The dirty little secret of banking is that they have no interest in seeing the loans they make get paid back, after all its only money that’s been created out of thin air that they earn interest on. And that’s all they want – that the interest payments be made. As long as the interest payments are being made, it doesn’t really matter how large the outstanding loan balance is. That just gets rolled over. In the United States it’s these rollovers that are going to capsize the ship of state.
Meanwhile as bond sales plummet we can hear the bells of doom. Global corporate bond issuance plummeted last week, with $9.4 billion sold, the least this year, following $30.1 billion in the previous five-day period and $47.9 billion in the week ended April 23. The three-month London interbank offered rate in dollars, the rate banks pay for loans, jumped 5.5 basis points to 0.428 percent on May 7. It climbed 8.2 basis points on the week, the biggest increase since October 2008. The spread between three-month dollar Libor and the overnight indexed swap rate, a barometer of the reluctance of banks to lend, jumped to 18.1 basis points on May 7, three times the 6 basis-point spread on March 15 and the highest since August.
“At the moment, it feels worse than 2008,” said Geraud Charpin, a fund manager at BlueBay Asset Management in London. “There is no buyer of risk in the market.” ‘Liquidity Drying Up’ That means in plain English the money is running out. “There is a concern the market may be ceasing to function, with government bond liquidity drying up completely as everyone looks to sell,” said Mark Austen, managing director at the Association for Financial Markets in Europe.
The ability of a government to pay its bills ultimately comes down to the ability of its citizenry to produce income high enough to pay those bills. Meaning the game is almost up for all of the major first world countries do not and will not have enough money to pay up on its obligations, it is as simple as that. The IMF is looking aheadand does not like what it sees and neither should the rest of us because the Drums of Doom are beating louder and louder.
The Austrian economist Ludwig von Mises, for one. He never put a time horizon on his projections, but he did say that the Keynesian “spend yourself into wealth” economic policies that were being lauded and implemented all over the world would result in disaster. He was so obviously right, and the politicians and social engineers who used Keynes as an excuse to encourage entire countries to live beyond their means were so obviously wrong, who would have thought it would take decades for the whole thing to implode?