Editorial
Lost in the Greek of It... The Mire of Political Gibberish, and the Nonsense of Bureaucracy that Comes with It
"A bank is a place that will lend you money if you can prove that you don´t need it." ~ Bob Hope
As I write this commentary, the yields on 10Y Italian government bonds have rapidly risen above 7%. This shook the stock markets considerably. Now, it looks like the ECB will interact and buy Italian government bonds in order to counter this development. Thus, the ECB, with its newly appointed (Italian!) chairman Mario Draghi, can be expected to (possibly permanently) leave its former path of restraint. US-style debt monetization is only a matter of time.
Lost in the Greek/Italian/French of it
The analysis of our problems today is quite simple: The West has indulged in the temptations of prosperity for too long. The complacency and the 'cheap' government-controlled money that have accompanied the process have led to a huge pile of garbage. The levels of debt, the abundance of bureaucratic and political nonsense, the lack of self-reliance, an ideology that government should care for us from 'cradle to the grave' (even more so in Europe than in the US) and the growing power of centralistic policy-making are all irresistibly taking us down the road of bankruptcy.
Common sense and a basic knowledge of history will recognize the folly of curing a debt crisis with more debt. To clean up the mess, a default on the debt and the elimination of government´s complete power over money is required. The concept of sound money is where the solution lies.
Unfortunately, we won´t get there easily or voluntarily. It will take a severe recession / depression first. Politicians are not prepared to accept the fallacies of the welfare state and the current fiat currency system. It certainly would not secure them a re-election.
Instead, they are all tangled up in the political and bureaucratic gibberish, in the complexities of the treaties, the rules and the mechanics of a flawed system they have created over the past decades. The media is all too happy to go along for the ride. Most of what is being broadcast and then regurgitated many times over has, therefore, become overly convoluted and confusing.
Today, we have literally gotten lost "in the Greek of it." The focus of mainstream media is on Papandreou and his political contortions. It's on the social unrest in Athens and Berlusconi's personal escapades. We are hammered with abbreviations such as IMF, EFSF, CDS and the like. We try to keep up with Merkel's comments on fiscal sanity and Sarkozy's rhetoric of saving Europe (as if that were a French possibility). And, if you stay entangled in the system and principles of 'their world,' you will be lost in the mire as well. It's impossible to keep up, easy to give up...
Let me give you just one example that is currently the latest hot topic amongst bankers and asset managers: The "CDS Credit Event Process" (yeah, I know...).
CDS Credit Event Process - Say What?!
Credit default swaps (CDS) are a kind of insurance that buyers of government bonds can acquire in order to protect themselves from the default of such bonds. Therefore, CDS spreads (i.e., the 'cost' of buying that kind of insurance) are generally perceived as a good indicator of a country's creditworthiness...or its default risk.
In a column I wrote October 13th, I mentioned that CDS spreads were back to levels that we saw at the end of 2008 and the beginning of 2009. I also referred you to the Deutsche Bank Research website that offers CDS data and charts for FREE. Have a look if you haven´t done so already.
Anyway, the assumption has generally been that credit default swaps would provide a shield against default. We now learn, as with pretty much everything we currently read about, that things are not quite that simple. In a recent press release issued by the International Swaps and Derivatives Association, Inc. (yes, such an animal does exist) we have now been informed that the "ISDA Determination Committee" decides whether a "credit event" has taken place or not. Here are a few excerpts from the press release:
"The determination of whether a credit event occurs under CDS documentation is made by the relevant ISDA Determinations Committee (DC), which consists of 10 sell-side and five buy-side firms. ISDA serves as secretary to, but does not sit on, the DC. A supermajority of votes (12 of 15 DC members) is required to find that a credit event has occurred without the decision being subject to external legal review. A weaker majority decision would be subject to external legal review that might overturn such a determination."
"When the DC does review a situation to determine whether a credit event has occurred, it does so using publicly available information and according to the terms of the ISDA Credit Derivatives Definitions. The Definitions specify that for a credit event to occur, a restructuring must be binding on all holders of a particular bond or loan."
In other words, the DC will not honor a default as a "credit event" unless it is binding on all holders and unless it is forced upon all the holders of such bonds. Obviously, the question now becomes this: What if some holders voluntarily accept a 'haircut'? Will they be covered by this 'insurance' or not? What about those investors that do not voluntarily accept a loss on their investment?
And, if there is such a DC committee, with a two-thirds majority of CDS sellers (those offering the insurance to bond investors), how reliable are CDS vehicles at all? And, have we been assuming a false sense of security? Has the risk exposure to sovereign debt been underestimated, falsely valued on the books of the banks with such exposure?
You get the idea: Lost "in the Greek of it"... I´m reminded of the famous Bob Hope quote: "A bank is a place that will lend you money if you can prove that you don´t need it."
Currently, a lot of questions exist in regard to credit default swaps, their spreads and the valuation assumptions made on the basis of these derivative instruments. Nothing is quite what it seems. The devil is in the detail and bureaucrats are EXTREMELY talented at creating A LOT of detail!
So, can Europe 'fix it'?
The answer to that question is a clear and simple, 'No.' What I expect now is that Europe will do what America has done for some time now. In the latter part of 2008 and early 2009, the American and British governments, faced with their biggest debt crises and no longer able to service their debt with and ordinary measures, started 'buying' the bonds they issued in their right hand with the 'legal tender' they created with their left hand. It's ludicrous, I know. But that is the concept of 'debt monetization.' It is something governments in desperation will do and I believe it is what Europe will start doing as well. And, I consider Italian socialist Draghi to be precisely the man to 'get the job done.' His first act in office, notably, has been to cut interest rates.
Most European politicians clamor for the same things as their US and UK counterparts. They are pushing for their 4-5-6 times leveraged bailout fund. They are pressing the ECB to stop goofing around and FINALLY become the Federal Reserve of Europe, the 'lender of last resort.' They want the ECB to become a Fed, a BoE. They want a Eurobond that will allow for continent-wide, coordinated inflation. They want to be able to create money with ease, with popular support, without any particular nation being singled out for any monetary and fiscal excesses.
In short, they want to kill this feisty debt crisis with more debt. They want to be like Ben and Tim. They are determined to not let the disaster unfold any further, at least not under their watch. They want to be re-elected!
The problems did not originate with banks, and they did not originate in Europe!
With all this said, and with the worldwide focus on Greece, Europe and the euro, I'd like to remind you of the fact that Europe is not where this all originated. The 'easy money' death spiral – i.e,. increasingly loose monetary and fiscal policies, low interest rates, policies that push cheap mortgage financing (a la Fannie Mae and Freddie Mac), continued currency devaluation and war mongering – originated in the United States. America is the greatest exporter of one good only: global monetary inflation!
The rest of the world is, willingly or not, being sucked into that same rut. Do we have a banking and credit crisis in Europe? Of course. However, don't forget America. I find it curious how the problems in the US appear to be blotched out of the media. Yes, there is still some lip service given to sub-prime and Lehman, but it appears as though THAT crisis has been 'fixed.'
I came across one 'expert commentator' who criticized Europe for its indecision. He went so far as to pride himself in the following: "During our meltdown we had one person who took the reins and solved the issue – Hank Paulson [US Treasury Secretary in late 2008] ... Europe doesn´t have a Hank."
Well, I am sorry to disappoint but the 'issue' has not been solved. The US debt crisis is still a very potent one. And, the banking crisis in America is very much alive, if not even more acute than in Europe. Over the past 24 months, 275 banks (!!) have failed in America. Take a look at the "Failed Banks" list published at the FDIC website. This is mind-boggling. And yet it is not mentioned, not to be seen in mainstream media.
Do not be fooled. If you look at Europe's endeavors since the financial crisis in 2007 and 2008, you will see a Euro zone that has repeatedly attempted to take steps on the road toward austerity and financial redemption. You will also recognize that this process has been sabotaged by the Anglo-Saxon axis at every step of the way.
US ratings agencies who have gleefully AAA-rated US banks and their toxic sludge for years have been falling all over themselves to downgrade European nations...one by one. US politicians, who have created unprecedented levels of debt for generations to chew on, have been criticizing Europe to finally join the process of 'decisive monetary policy.' Any move, no matter how modest, to fight the debt spiral and work on a process of genuine fiscal recovery has been denigrated and blocked.
Europe, when they launched the euro a decade ago, was set to challenge the US dollar as the global reserve currency. That has, as of late, created a currency war that, as things look today, may be lost by Europe. However, be alerted to the fact that both currencies are in dire shape. The euro is no more a viable 'reserve currency' than is the US dollar. Just like the dollar, it is now backed by the mere promises of a largely bankrupt system.
There is a difference between the US dollar and the euro, however. Contrary to the Fed, the ECB (at least so far) recognizes gold as an official reserve asset while the Fed does not. Therefore, I would be careful to bet on either currency, either way.
Which currency will survive? Which will be the world´s number one reserve currency down the road? Will either? I don't know. I do know, however, that we are headed for more monetary inflation and continued volatility in currency markets. I know that I continue to favor gold as the number one true currency to trust, with the Swiss franc following as the number one fiat currency, for many reasons.
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Posted by Bischoff on 11/12/11 06:26 PM
Yes... ..and I bet Grendel's mom is no one to be trifled with.
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Posted by Bischoff on 11/12/11 06:20 PM
"Of course, they will "politely request" that we sell them our Gold BEFORE they announce it!"
Yes, of course. In the meantime, they will also manipulate the "gold price" to encourage us to sell.
They and their mouth pieces in academia will call the "barbaric metal" an absolute dinosaur, right up until the very day they officially announce the return of the "gold standard".
You are right, they act just "as usual".
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Posted by fabien_hug on 11/12/11 04:13 PM
This article albeit depressing is excellent and I also think that gold still has bright days ahead. The CDS problem is worth mentioning and it may very well occupy the headlines in the months to come. It is widely accepted that most of these CDS are bought by speculators, people who don't own the underlying security. Hence, it should be no big deal if an actual default is really one for the issuer of the CDS; an ugly speculator takes a bath, no big deal and all for the better if said speculator is an hedge fund. I think it's wrong and that trick over CDS will only get investors to fly away at the smallest hint of a problem. Without a transparent and liquid market in derivatives, you can't mitigate or neutralize your risk if you have to. The consequence? Even higher interest rates for the numerous issuers in trouble.
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Posted by AlephNull on 11/12/11 04:08 PM
Well said.
As to : ... "when the official return to the gold standard comes"...
Of course, they will "politely request" that we sell them our Gold BEFORE they announce it !
... as usual.
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Posted by Bischoff on 11/12/11 01:29 PM
"Gold is Banker's Money .. never sell it".
This statement mirrors that of J. P. Morgan a hundred years ago.
J. P. Morgan before the 1911 congressional Pujo Committee, when asked, "What is money?", answered "Gold is Money and nothing else."
There is only one solution to the present world monetary crisis caused by irredeemable central bank currencies. It is the return to the gold standard and banking under the Real Bills Doctrine. The FED and the ECB will have to come to this conclusion sooner or later.
Of course, when the official return to the gold standard comes, it will show up the academics who advocated Keynes and Friedman as having been nothing but mouth pieces for central bank policy makers.
These academics will then stand there "naked", having had their mantel of Keynes and Friedman pulled away from them by the very people for whom they were chilling.
Then, lets see how quickly they can change their convictions to keep employment to gain income to pay the mortgage.
Isn't all just fascinating... .???
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Posted by Don on 11/12/11 12:46 PM
@Bischoff
Addendum: The happiness of others pains Grendel, who also never touches King Hroðgar ("The Crown"). After a long fight Beowulf eventually vanquishes Grendel, but must then face the wrath of Grendel's mom.
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Posted by Bischoff on 11/12/11 12:32 PM
Sort of ironic that the Moshees are very well and "voluntarily" financed, whereas the Christian Church has to rely on a "state mandate".
I did notice that you put the "voluntary" contributions to the Moshees in parenthesis.
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Posted by Bischoff on 11/12/11 12:25 PM
..then what... ??? Don't leave us hanging in the middle of the story... . :)
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Posted by Bischoff on 11/12/11 12:21 PM
I do agree that Melchior Palyi is hard to beat when it comes to arguing the gold standard.
I also know that Fekete gives ample credit to Palyi for his thinking about Real Bills. Fekete is a Mathematics Professor who was bitten by the monetary system bug.
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Posted by Don on 11/12/11 10:55 AM
Paraphrasing Bob Hope, "A CDS is insurance that will indemnify your money if you don't need it." On the other hand, when you actually need it to backstop a bankruptcy, a CDS won't perform.
It's my understanding that the CDS market is more incestuous than a roomful of Royals. A small community of banksters trading bets, often acting as both a CDS buyer and seller to the same counter-party.
"Take a look at the 'Failed Banks' list published at the FDIC website."
What this world needs is a good "Failed Munis" site in lieu of the recent Harrisburg and Jefferson County defaults. Speaking of websites, this week's Commitments of Traders (COT) Report is already a day late. As if the Morgue's too embarrassed to 'fess up to the quantity of new naked shorts that it dumped into the market during the week past. And so it goes.
Beowulf (gold) is now at Heorot (the global market) to fight Grendel (the Morgue). While Beowulf feigns sleep, Grendel enters the open market and attacks, devouring one of Beowulf's men (silver). Beowulf leaps up to inflict two bankruptcy wounds on Grendel: MF Global and JeffCo.
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Posted by reegje on 11/12/11 10:51 AM
You know that Google keeps a record of what you are doing, right?
How about using Startpage? They do not record your IP address.
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Posted by TimurTheLame on 11/12/11 09:13 AM
@ AlephNull
Glad you liked it. There is so much clever subtlety there as in Germany viewing England as "Enigma code breakers" etc. The most fascinating thing is the actual understanding Tsvetkov has from any given national perspective.
It kind of argues against a true European Union. Tribalism at it's funniest...
Sorry Moshees?
I remember as a young lad when my parents sent my sister and I to Mannheim for the summer to stay with our grandparents, every Sunday- the bells tolling from as far as one could hear. I didn't realize that there was a Church tax funding such.
They may have read Napoleon's book where he decided that there was an additional glue needed to complete a nation and reversed and revised the revolution's eradication of the church. Fascinating man if you read about how
he brought about the structuring of French society as First Consul.
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Posted by AlephNull on 11/12/11 07:32 AM
@TimurTheLame .. thanks ... great sketch .
I loved the "According to the Turks" for Germany : Dönerrepublik NordTürkei
.. especially the Germany = "North Turkey" part , Angela will love that.
OTOH, we have more Greeks than Turks running "Donerkebab" shops.
i.e. NORTH TURKEY would have sufficed !
BTW, the number of Moshees in Germany are on the rise, while more and more Germans are leaving the Christian Church, mainly because they prefer NOT to pay the Church Tax ( 11% of Income Tax , added on top - per 1980s at least ).
If only they knew who ensured keeping the Church Tax .. in ca. 1933 !
Sort of ironic that the Moshees are very well and "voluntarily" financed, whereas the Christian Church has to rely on a "state mandate".
Would this have something to do with the difference between "Fiat/Tax money" and the non-Usery "Gold Money/Sharia" type of systems I wonder ?
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Posted by TimurTheLame on 11/12/11 07:12 AM
@ AlephNull
Thanks for the heads up. I don't know why the 404 but the URL is correct. For those who might be interested and don't find Googling to be a back-breaking chore, Google 'alphadesigner' . In the drop-down, there will be the option 'project-mapping-stereotypes.html' , click it and voila.
I don't normally like to impose what I find humorous on others and get quite irritated at all the 'funny' e-mails I receive from acquaintances but I found this to be so witty as well as uproariously funny that I thought it might be appreciated by the caliber of the posters here as well as because of DB's subject matter.
But to paraphrase the rationale of new laws... " if only one person gets a laugh, it will have been worth it"-ha
Cheers-
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Posted by AlephNull on 11/12/11 06:50 AM
"should lighten the hardest heart with laughter"
404 Error , unfortunately !
I'm sure you'll like this one though :
FINALLY, FREE HEALTH CARE IN THE USA :
Click to view link
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Posted by TimurTheLame on 11/12/11 06:24 AM
With all this financial doom and gloom encompassing Europe and the USA, I wish to offer a site for visitation that should lighten the hardest heart with laughter- Click to view link
Its been a long time since I have simultaneously laughed out loud and appreciated the wit of something like this.
Disclaimer: If you don't travel, read history or follow financial issues, kindly ignore.
Cheers-
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Posted by AlephNull on 11/12/11 06:16 AM
A little rant : Yes, good article .. 5 stars.
It raised the key elements of the fraud, such as Ratings Agencies, which I stated in 2008 are the modern "Economic Hit Men" as well the "50% haircut" / ISDA trick to stop CDSs triggering.
I also predicted the sell off of Sovereign Bonds ( especially the Italian .. as of immediately), for which their "CDS insurance" has now become "doubtful" .. and a direct result of the ISDA trick.
BTW, whatever "interventions" they create , the overall direction is the same.
Just an aside : "Schäuble wants to give more powers to the EU"
Click to view link
Good that the subject of Gold was raised.
If the ECB does mirror the FED in design ( now seems more than probable ), then the Gold question could get pretty interesting. The ECB would control 10,000 tons versus USA's 8,500 tons.
Whether one should believe what Bernanke says when he downplays the role of gold ? ... I do NOT !
In the mid 80's , I had a meeting with the boss of one of the oldest German Private banks ( about my physical Gold ) ... his last worlds were "Gold is Banker's Money .. never sell it".
What was also interesting, was that using physical Gold as security, I could draw over 50% more than it's market value in credit. ( I was running a business then ). So that just shows how banks "really" value the yellow metal !
FWIW
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Posted by Justin on 11/12/11 02:16 AM
The motive of profit may be the engine here Mr Bischoff. Speculators don't care if ultimately CDS are flim-flam if they think they can turn a quick buck off of it. 30 years of steadily declining interest rates, so bond profits, is as good a reason as I can find for the continuing debacle that is the international 'monetary' system.
Few care that that Fed, or any other central bank, is in any position to pay
out, that is extinguish its debts.
For what its worth, I concur with your position on real bills. I too am a student of Fekete, though I think he draws heavily on Melchior Palyi, who I regard as number one. Keep up the good work.
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Posted by Bischoff on 11/12/11 01:57 AM
"Currently, a lot of questions exist in regard to credit default swaps, their spreads and the valuation assumptions made on the basis of these derivative instruments."
Credit default swaps are a kind of insurance against prime interest rate fluctuations. Who sets prime interest rates... ??? The central banks, i.e. committees of the FED, ECB, etc. Who are these committees... ??? PEOPLE.
You mean to tell me that one can create actuarial models which are valid to insure against human decisions... ??? Really... ???
I can understand hedging against "Acts of God", as you would in commodity markets, but "Credit Default Swaps"... ??? Tell me its a joke...
Spreads on these instruments as an indicator... ??? Here again, the people selling this flim-flam must know what CDSs are as an insurance instrument (or maybe not, judging by AGI) and that those things will never payoff (also, I guess the DC committees are to asuage some angst).
How can there be a spread that tells you anything... ??? If you know that you can't possibly pay off on those instrumenys, you sell this stuff to those dumb enough to buy it for any price. I can't believe this is happening.
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Posted by Justin on 11/12/11 01:16 AM
Maybe these quotes from Doug Noland's latest (Click to view link) might help you Mr Suess -
"Increasingly, the backdrop is reminiscent of previous financial collapses, with the not too distant fiascoes in South East Asia, Russia and Argentina coming to mind. In all cases, policymakers for months fought resolutely to thwart the forces of Credit Bubble collapse."
"Later, the atrophied status of central bank balance sheets proved critical to the implosion of financial and economic systems."
"Market intervention fomented destabilizing speculation, which tended to incite volatility while subverting the marketplaces' capacity to effectively discount deteriorating financial and economic conditions. In the end, policies ensured catastrophic 'non-linear' breakdowns."
"Perhaps we're still some distance from a major financial crisis. From the Friday Perspective, my analysis seems more than Chicken Littlish. The Dow closed up 260 points today, and markets would like to believe that Italy may just have turned the corner. The thought that the marketplace could ever turn on Treasuries, as it's done with Italian and, increasingly, with French debt, is simply ludicrous."
"And in reading numerous accounts from the long litany of past financial fiascoes, I am invariably struck by market participants' voracity for continuing to play despite what should have been rather obvious indications that time was running short."
