September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not split
them up by selling off the assets to successful and solvent entities, set
the world on the path to global currency wars.
By lowering interest rates and effectively guaranteeing a weak dollar, the
US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless spending and
money printing with the policies of Quantitative Easing (QE) I and the
expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a “strong US$”. Meanwhile
with a straight face we deny that this is our intention.
Though prior to the 2008 financial crisis our largest banks had become
casino like speculators with public money lacking in fiduciary
responsibility, our elected officials bailed them out. Our leadership
placed America and the world unknowingly (knowingly?) on a preordained
destructive path because it was politically expedient and the easiest way
out of a difficult predicament. By kicking the can down the road our
political leadership, like the banks, avoided their fiduciary
responsibility. Similar to a parent wanting to be liked and a friend to
their children they avoided the difficult discipline that is required at
certain critical moments in life. The discipline to make America swallow a
needed pill. The discipline to ask Americans to accept a period of intense
adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future
that is now massively worse and with potentially fatal pain still to come.
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure
of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundres
South Korea Defense Minister Kim Tae-young resigned Thursday, two days after
North Korea attacked a South Korean island, killing four people. President Lee Myung-bak accepted the resignation, the government said, as he
ordered a full-scale review of the nation's defense. The government said it wouldn't immediately appoint a successor for Mr. Kim, who
was named defense minister in September 2009 and presided over the military as
it absorbed two attacks by North Korea: Tuesday's attack, which resulted in the
deaths of four people, and the March sinking of the patrol ship Cheonan, in
which 46 sailors died.
The move came on the same day that China's Ministry of Foreign
Affairs released a statement from Chinese Pemier Wen Jiabao, who
said Beijing opposes "any provocative military behavior" on the
Korean peninsula but stopped short of blaming North Korea for the
1- A four-year plan to
slash deficits by euro15 billion ($20 billion) 2- Cuts euro10 billion ($13.3 billion) from spending and raise euro5 billion ($6.7
billion) in extra taxes from 2011 to 2014. 3- Austerity plan axes thousands
of state jobs, trims welfare benefits and pensions, and
imposes new taxes on property and water. 4- EU-IMF
rescue loan, which Cowen said would be about euro85
billion ($115 billion). 5- Budgetary medicine will permit the country's 2014 deficit to fall to 3 percent
of gross domestic product, the limit for the 16 nations that use the euro
currency. 6- Ireland's deficit this year is forecast to reach 32 percent of
1- Ireland's 140-page National Recovery Plan proposes
to introduce property and water taxes, raise the sales tax
from 21 percent now to 23 percent in 2014, and cut the
minimum wage by euro1 to euro7.65 ($10.20).
2- Ireland's bloated civil service will be particularly
hard hit -- seeing cuts of about euro1.2 billion and
24,750 state jobs.
3- Income tax bands will be widened so more lower-paid
workers pay taxes, and higher-waged workers will see
annual taxes rise more than euro3,000 ($4,000). A raft of
welfare payments will be gradually reduced.
4- Young and old alike face higher bills and less
income. University fees will rise and monthly pensions
will fall up to 12 percent.
5- Ireland's legendary tax-free status for authors,
musicians and artists will be cut back so only the first
euro40,000 ($53,000) of income will avoid tax.
1- "The government is completely in denial about the amount of money they'll have
to borrow," said Constantin Gurdgiev, a finance lecturer at Trinity College
Dublin and an economics adviser to IBM in Europe. 2- The solution requires the total destruction of the existing
(bank) share base," said
David McWilliams, a former Irish Central Bank economist and European hedge fund
manager. He appealed for Ireland to abandon its 2008 bank guarantee to repay all of the
banks' borrowed billions, and instead require foreign bondholders to share the
losses as Germany wants.
"The end game is simple,"
McWilliams said. "Either we take the pain and the economy
is crushed, as the government insists, or the people who
lent the money ... take the pain, as they should, and the
economy can breathe."
1- Left untouched, to the
irritation of other EU nations, is Ireland's exceptionally
low 12.5 percent tax rate on business profits. That rate
is less than half the EU average and has helped to lure
about 1,000 high-tech multinationals to Ireland, far more
proportionally than any other European country. 2- Foreign companies, including 600 U.S. businesses like Microsoft and Google,
generate nearly 20 percent of Ireland's GDP. 3- France, Germany, Austria and Britain all have demanded that Ireland raise that
rate. They argue it amounts to unfair competition at a time when other EU
members will have to raise their own debt-fueled borrowings to loan money to
1- Allied Irish - 18% Government
Owned 2- Bank of Ireland - 36% Government Owned 3-
Ireland has already nationalized three other banks left
bankrupt by the 2008 collapse of the country's decade-long
real estate mania. 4- The bailout experts' requirement for greater capital reserves will have to be
provided by the government, a process that analysts say will quickly lead to
both banks' nationalization, a fate Ireland has spent billions already trying to
avoid. 5- Property prices have slumped by more than 50 percent, hundreds of thousands of
homeowners are trapped in homes no longer worth what they owe, and many of
Ireland's construction barons have declared bankruptcy or fled the country.
6- Britain and Germany both have exposures to Irish banks exceeding $200 billion
each, according to the Bank for International Settlements. Governments across
the 16-nation eurozone warn that allowing Irish loans to default would send
shockwaves through Europe's interdependent banking system.
Bottom line: An inequitable tax
scheme, overly optimistic growth expectations (especially
in light of austerity), and over optimistic funding cots.
First, it is based on the hope that the government can
implement extreme austerity and still grow the economy,,
which is incredibly dubious, especially without the
ability to make any big structural adjustments. The
biggest one they've envisioned is a cut in the minimum
Here's how Ireland hopes to bend down the curve on
Then there's the fact that all of the revenue hikes are
to fall on the backs of consumers and retirees (there will
be a hike in pension-related taxes) and not on
corporations or banks, which may be inevitable, but it's
the kind of strategy that will flip out the public street
and cause riots.
Here's another big problem... Check out the
government's funding expectations.
Note that under the PESSIMISTIC scenario, government
funding costs are assumed to 4.4%! That's like half of
what the funding cost are at right now, and lower than any
of the other PIIGS. So for this to work, we'd need a
massive hike in confidence, which seems implausible given
that even Greece with full access to the European
Financial Stability Fund enjoys a massively higher
German banks are "uneasy"
over the current Irish crisis, and their rivals in other
countries are concerned too.
Der Spiegel reports that the exposure of Germany's
banks amounts to $138 billion, with Hypo Real Estate
leading the way with €10.3 billion in debt.
British banks are also exposed to the crisis, holding
$150 billion in Irish debt.
Morgan Stanley (via
hedgeanalyst) were a bit more specific on potential
problem banks in a report last week. They suggested
Danske, KBC, Lloyds, and RBS had something to be concerned
about in the Irish situation.
Danske Bank: 3% of the bank's
total credit exposure, with only 3% as government
debt, and 41% as mortgages.
KBC: An emphasis on mortgages,
with €17.8 billion in loans, and only 15% at risk.
Lloyds: £21.7 billion in loans,
£11.7 billion in impaired loans.
RBS: "Significant" exposure,
according to Morgan Stanley, including £51.9 billion
Morgan Stanley mapped out some scenarios for future
losses. It looks like Lloyds has the most to lose from the
bear case, which includes significant increases in
There's chatter that the
initial jobless claims report, which was the best in a long time, deserves a
fat-old asterisk, because of the seasonal adjustments. Without the adjustments there would have been a big, weekly
jump. So, cancel it out and ignore? No, seasonality is real. Matt Busigin points us to this chart
of non-seasonally adjusted claims over the years. Notice anything?
Although the Fed rejected this policy, it suggests
that targeting a long-term rate might be an option if
inflation continues to fall...Such a policy would mean
promising to buy an unlimited number of such
A paper entitled "Reserve
Accumulation and International Monetary Stability" by the
Strategy, Policy and Review Department of the IMF recommends
that the world adopt a global currency called the "Bancor" and
that a global central bank be established to administer that
currency. The report is dated April 13, 2010 and a full copy
can be read
here. Unfortunately this is not hype and it is not a
rumor. This is a very serious proposal in an official document
from one of the mega-powerful institutions that is actually
running the world economy. Anyone who follows the IMF knows
that what the IMF wants, the IMF usually gets. So could a
global currency known as the "Bancor" be on the horizon? That
is now a legitimate question.
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important