Four Ticking Global Time-Bombs Few Even Hear

Submitted by Tyler Durden on 10/19/2015 10:25 -0400
http://www.zerohedge.com/news/2015-10-19/four-ticking-global-time-bombs-few-even-hear
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
A few charts help us grasp the magnitude of the four global time-bombs.
The geopolitical and financial risks facing the global economy are well-known. Hot wars and currency meltdowns garner headlines around the world.
But few even hear, much less discuss, four ticking global time-bombs:
1. The demographic time-bomb.
2. The public health time-bomb.
3. The food/water/soil time-bomb.
4. The oil-export time-bomb.
Each is largely self-explanatory:
1. The demographic time-bomb: as the global economy melts down, the realization that the pensions and healthcare promised to hundreds of millions of elderly cannot be funded out of tax revenues will upend the social contract in countries rich and poor.
As the chart below depicts, as the population of elderly rise, so do the non-communicable lifestyle diseases of aging. The costs of treating these lifestyle diseases (metabolic syndrome, heart disease, high blood pressure, etc.) soar as the population and incidence of these diseases both rise.
Global Aging 2010: An Irreversible Truth:
This Standard & Poor’s study warns that “no other force is likely to shape the future of national economic health, public finances, and policymaking as the irreversible rate at which the world's population is aging... The cost of caring for [the elderly] will profoundly affect growth prospects and dominate public finance policy debates worldwide.”

2. The public health time-bomb: 100 million diabetics and 500 million pre-diabetics in China, 80 million diabetics and hundreds of millions more pre-diabetics in India, and another 100 million diabetics in the developed world will overwhelm a global healthcare system that is already struggling to provide care for an aging population.
Diabetes Is a Major Public-Health Crisis in China
No Answers in Sight for India’s Diabetes Crisis
The Global Diabetes Epidemic (New York Times)
3. The food/water/soil time-bomb: the world's success in feeding its exploding population of humans and their favored animals has generated a complacent confidence that we can always grow more food, even as the weather gets increasingly wonky and global supplies of fresh-water are strained to the breaking. Loss of soil and the depletion of mineral fertilizers are also global issues.
It's not just the rising number of human mouths to feed--it's the rising appetite of humanity for grain/protein-fed animals and fish. Raising livestock requires abundant fresh water and feed. Even the most efficient meat sources (other than insects, of course) require three or four times their weight in feed; less efficient meat sources need ten times their finished weight in feed.
Fish such as salmon don't live on algae--they eat other fish. Their fish food is rich in protein, and so in effect, salmon and similar farm-raised fish sit atop a food-chain pyramid.
The risk that multiple crop failures around the world could strain global grain supplies and trigger geopolitical crises as costs soar are under-appreciated outside agricultural policy circles.
4. The oil-export time-bomb: as the populations of oil exporting nations rise, they consume so much of their dwindling oil production that there's little left to export.
The technologies of fracking have given oil/gas production in the US a mighty boost, and this may well continue increasing supply for a time.
But the larger global energy picture is dominated by the Export Land Model, which describes how oil exporting nations, which typically have rapidly rising populations and undiversified economies dependent on oil exports, begin consuming more of their oil domestically while production stagnates.
The net result is there may be plenty of oil still being pumped, but very little is available for export.
That leave oil importing nations without enough energy to sustain their industrial economies.
While it's possible to invest enough in alternative energy to keep some infrastructure working, globally, total alternative energy is a scant few percentage points of total energy consumption.
Even if we take global leader Germany, famous for generating large quantities of electricity from alt-energy sources--is Germany ready to replace its vehicle fleet with electric cars and trucks? How about building enough alt-energy capacity to recharge 30 million vehicles?
That is quite a tall order for a wealthy industrial power. What sort of challenge awaits the 2.6 billion residents of oil importers China and India?
This chart of the thermodynamic (i.e. energy) population equivalent--the human population plus our billions of energy slaves-- reveal the staggering magnitude of industrial civilization's reliance on fossil fuels.

These charts help us grasp the magnitude of the time-bombs:


Many people look to technology to solve these problems before the bombs go off. Perhaps miraculous advances in artificial photosynthesis and biochemistry will solve all these global crises. But a healthy skepticism is in order, for all sorts of wondrous technologies that work in the lab and small-scale experiments fail to scale, i.e. become cheap enough and reliable enough to spread quickly around the world.
Technologies require vast quantities of capital and energy to spread throughout the global economy. Capital and energy are precisely what will be in short supply as demands on resources, tax revenues and social safety nets skyrocket.

Here’s Why The Markets Have Suddenly Become So Turbulent

Posted on August 30, 2015 by Chris Martenson

http://www.washingtonsblog.com/2015/08/heres-why-the-markets-have-suddenly-become-so-turbulent.html 

When stock markets are free-falling 10+% in a matter of days, it’s natural to seek some answers to the question “why now?”
Some are saying it was all the result of high-frequency trading (HFT), while others point to China’s modest devaluation of its currency the renminbi (a.k.a. yuan) as the trigger.
Trying to finger the proximate cause of the mini-crash is an interesting parlor game, but does it really help us identify the trends that will shape markets going forward?
We might do better to look for trends that will eventually drag markets up or down, regardless of HFT, currency revaluations, etc.

Five Interconnected Trends

At the risk of stating the obvious, let’s list the major trends that are already visible.

The China Story is Over

And I don’t mean the high growth forever fantasy tale, I mean the entire China narrative is over:

1. That export-dependent China can seamlessly transition to a self-supporting consumer economy.
2. That China can become a value story now that the growth story is done.
3. That central planning will ably guide the Chinese economy through every rough patch.
4. That corruption is being excised from the system.
5. That the asset bubbles inflated by a quadrupling of debt from $7 trillion in 2007 to $28 trillion can all be deflated without harming the wealth effect or future debt expansion.
6. That development-dependent local governments will effortlessly find new funding sources when land development slows.
7. That workers displaced by declining exports and automation will quickly find high-paying employment elsewhere in the economy.

I could go on, but you get the point: the entire Story is over.  (I explained why in a previous essay, Is China’s “Black Box” Economy About to Come Apart? )
This is entirely predictable. Every fast-growing economy starting with near-zero debt and huge untapped reserves of cheap labor experiences an explosive rise as the low-hanging fruit is plucked and the same abrupt stall and stagnation when the low-hanging fruit has all been harvested, leaving only the unavoidable results of debt-fueled speculation: an enormous overhang of bad debt, malinvestment (a.k.a. bridges to nowhere and ghost cities) and policies that seemed brilliant in the good old days that are now yielding negative returns.

The Emerging Market Story Is Also Done

Emerging currencies and markets have soared on the back of the China Story, as China’s insatiable demand for oil, iron ore, copper, soy beans, etc. drove global demand to unparalleled heights.
This demand pushed prices higher, which then pushed production (supply) higher, as the low cost of capital globally enabled marginal resources to be put into production with borrowed money.
Now that China’s demand has fallen off—by some accounts, China’s GDP is actually in negative territory, despite official claims that it’s still growing at 7% annually—commodity prices have crashed, taking the emerging markets’ stock and currency markets down. (Source)
Here is a chart of Doctor Copper, a bellwether for industrial and construction demand:

Here is Brazil’s stock market, which has declined 54% in the past 12 months:

These are catastrophic declines, and with China’s growth story over, there is absolutely nothing on the global horizon to push demand back up.

Diminishing Returns on Additional Debt

The simple truth is that expanding debt has fueled global growth. Though people identify China as the driver of global demand for commodities, China’s growth is debt-driven. As noted above, China quadrupled its officially tracked debt from $7 trillion in 2007 to $28 trillion as of mid-2014—an astonishing 282 percent of gross domestic product (GDP).  If we add the estimated $5 trillion of shadow-banking system debt and another year’s expansion of borrowing, China’s total debt of $35+ trillion is in excess of 300% of GDP—levels associated with doomed to default states such as Greece and Spain.
While China has moved to open the debt spigot in recent days by lowering interest rates and reserve requirements, this doesn’t make over-indebted borrowers good credit risks or more empty high-rises productive investments.
Borrowed money that poured into ramping up production in emerging nations is now stranded as prices have plummeted, rendering marginal production intensely unprofitable.
In sum: greatly expanding debt boosted growth virtually everywhere after the Global Financial Meltdown of 2008-2009. That fix is a one-off: not even China can quadruple its $35+ trillion debt to $140 trillion to reignite growth.
Here is a sobering chart of global debt growth:

Limits on Deficit-Spending (Borrowed) Fiscal Stimulus

When the global economy rolled over into recession in 2008, governments borrowed money by selling sovereign bonds to fund increased state spending.  In the U.S., federal borrowing soared to over $1 trillion per year as the government sought to replace declining private spending with public spending.
Governments around the world have continued to run large deficits, piling up immense debts since 2008.  The global move to near-zero yields has enabled governments to support these monumental debt loads, but even at near-zero yields, the interest payments are non-trivial. These enormous sovereign debts place some limits on how much governments can borrow in the next global recession—a slowdown many think has already started.
Here is a chart of U.S. sovereign debt, which has almost doubled since 2008:

As noted on the chart: what structural inadequacies or problems did governments fix by borrowing gargantuan sums to fund state spending?  The basic answer is: none. All the same structural problems facing governments in 2008 remain untouched in 2015. These include: over-indebtedness, bad debts that haven’t been written down, insolvent banks, soaring social spending as the worker-retiree ratio slips below 2-to-1, externalized environmental damage that has yet to be remediated, and so on.

Central Bank Stimulus (Quantitative Easing) as Social Policy Has Been Discredited

In the wake of the Global Financial Meltdown of 2008-2009, central banks launched monetary stimulus programs aimed at pumping money into the economy via bank lending. The stated goals of these stimulus programs were 1) boost employment (i.e. lower unemployment) and 2) generate enough inflation to stave off deflation, which is generally viewed as the cause of financial depressions.
While it can be argued that these unprecedented monetary stimulus programs achieved modest successes in terms of lowering unemployment and pushing inflation above the zero line, they also widened wealth and income inequality.
Even as these programs made modest dents in unemployment and deflation, they pushed asset valuations to the moon—assets largely owned by the few at the top of the wealth pyramid.

Here is a chart of selected developed economies’ income/wealth skew:

The widespread recognition that the benefits of central bank stimulus mostly flowed to the top of the pyramid places political limits on future central bank stimulus programs.

The 2008-09 Fixes Are No Longer Available

In summary, the fixes for the 2008-09 recession are no longer available in the same scale or effectiveness.  Expanding debt to push up demand and investment, rising state deficit spending, massive monetary stimulus programs—all of these now face limitations. This means the central banks and states have very limited tools to reignite growth as global recession trims borrowing, investment, hiring, sales and profits.

What Ultimately Matters: Capital Flows

In Part 2: What Happens Next Will Be Determined By One Thing: Capital Flows, we’ll look at the one dynamic that ultimately establishes assets prices: capital flows.
I personally don’t think the world has experienced a period in which capital preservation has become more important than capital appreciation since the last few months of 2008 and the first few months of 2009.  Other than these five months, the focus has been on speculating to obtain the highest possible yield/appreciation.
This suggests to me that the next period of risk-off capital preservation will last a lot longer than five months, and perhaps deepen as time rewards those who adopted risk-off strategies early on.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

The End Of "The Permanent Lie" Looms Large

Submitted by Tyler Durden on 08/30/2015 15:05 -0400
http://www.zerohedge.com/news/2015-08-30/why-we-need-lie-ourselves-about-state-economy
Submitted by Satyajit Das via The Sydney Morning Herald,
Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.
The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.
Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.
The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.
Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions. Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity.
For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.
Governments are unwilling to tell the truth about the magnitude of the economic problems, the lack of solutions and cost of possible corrective actions to the electorate. Politicians have taken regard of historian Simon Schama’s comment that no one ever won an election by telling voters it had come to the end of its “providential allotment of inexhaustible plenty”. The official policy articulated, in a moment of unusual candour, by Jean-Claude Juncker, the current head of the European Commission, was that when the situation becomes serious it is simply necessary to lie.
Ordinary people are complicit; refusing to acknowledge that maybe you cannot have it all. They sense that the ultimate cost of the inevitable adjustments will be large. It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride. It is a pervasive sense of powerlessness.
The political and social response is likely to be volatile. It was the fear and disaffection of the middle class who had lost their savings in the events of Great Depression that gave rise to totalitarianism.
For the moment, to paraphrase Alexander Solzhenitsyn, the “permanent lie [has become] the only safe form of existence”. But the world cannot postpone, indefinitely, dealing decisively with the economic, resource management, social and political challenges we face.

Only The Date Is Unknown

Submitted by Tyler Durden on 08/18/2015 23:45 -0400
http://www.zerohedge.com/news/2015-08-18/only-date-unknownVia Monty Pelerin's World,
The US and world economies are frauds that are coming unraveled. The Greek bailout is the most recent example of “kick the can down the road” solutions. The US housing bubble was an attempt to cover up/recover from the dot-com bust. Now the US is in a financial bubble engineered to recover from the housing bubble debacle. Soon this bubble will burst. Only the date is unknown.


Two predictions can be made with reasonable confidence:

• The stock market is likely to be halved and that might be optimistic. Only the date is unknown.
• The economy will eventually resemble the Great Depression. Only the date is unknown.

Nothing is ever certain. An experienced CFO told me at the beginning of my career that “even the impossible has a 20% probability.” In deference to him and years of empirical evidence, I put the the above two events as virtually certain, i.e., an 80% probability.

The Current Problem

Phoenix Capital provided reasons to expect horrible outcomes:

• The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.
• The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.
• Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.
• Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller noted recently, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal to nearly 50% of US GDP.
• The Central Banks are now all leveraged at levels greater than or equal to where Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.
• The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion (back in 2009). Today it’s over $4.5 trillion.

The cumulative effects of decades of interventions to mask economic weakness are harmful to the economy. Statistical manipulation and outright lies in government reporting of economic conditions suggest that times are becoming ever more desperate for the political class. There is not enough bailing wire in the world to hold this train wreck in check. Nor is there any way to solve the massive problems created over decades.
Mac Slavo believes we are already in a world-wide depression stating:

With stock markets in China having self destructed, Greece and Europe in another crisis, and corporate earnings for some of the world’s biggest corporations showing lackluster performance, it should be clear that the situation is rapidly deteriorating.
But for the last several years America has appeared to remain fairly insulated from overt crisis. We were told that a recovery had taken hold, jobs were returning and consumer confidence had reached new highs, propaganda which drove millions of investors back into stock markets and real estate. No one in the mainstream world, it seems, believes there’s anything to be concerned about.

Except there is.

Nassim Taleb described the problem:

Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.

Each intervention has been bigger than the previous one. And they are needed more frequently. Bad times are here and have been despite what government says. Worse times lie ahead. Only the date is unknown.
Government is helpless at this point. Their cover-ups have made matters worse. When the unknown date arrives, America will likely look like some third-world country. Its political system may not survive.
Welcome to Venezuela with nuclear weapons.

John Kerry Warns "Dollar Will Cease To Be Reserve Currency Of The World" If Iran Deal Rejected

Submitted by Tyler Durden on 08/11/2015 14:16 -0400
http://www.zerohedge.com/news/2015-08-11/john-kerry-warns-american-dollar-will-cease-be-reserve-currency-world-if-iran-deal-r
Scaremongery... or maybe the whole point, as Obama's former chief economist noted, is to lose reserve status. Take That China!!

As Jared Bernstein previously explained...
There are few truisms about the world economy, but for decades, one has been the role of the United States dollar as the world’s reserve currency. It’s a core principle of American economic policy. After all, who wouldn’t want their currency to be the one that foreign banks and governments want to hold in reserve?
But new research reveals that what was once a privilege is now a burden, undermining job growth, pumping up budget and trade deficits and inflating financial bubbles. To get the American economy on track, the government needs to drop its commitment to maintaining the dollar’s reserve-currency status.
The reasons are best articulated by Kenneth Austin, a Treasury Department economist, in the latest issue of The Journal of Post Keynesian Economics (needless to say, it’s his opinion, not necessarily the department’s). On the assumption that you don’t have the journal on your coffee table, allow me to summarize.
It is widely recognized that various countries, including China, Singapore and South Korea, suppress the value of their currency relative to the dollar to boost their exports to the United States and reduce its exports to them. They buy lots of dollars, which increases the dollar’s value relative to their own currencies, thus making their exports to us cheaper and our exports to them more expensive.
In 2013, America’s trade deficit was about $475 billion. Its deficit with China alone was $318 billion.
Though Mr. Austin doesn’t say it explicitly, his work shows that, far from being a victim of managed trade, the United States is a willing participant through its efforts to keep the dollar as the world’s most prominent reserve currency.
When a country wants to boost its exports by making them cheaper using the aforementioned process, its central bank accumulates currency from countries that issue reserves. To support this process, these countries suppress their consumption and boost their national savings. Since global accounts must balance, when “currency accumulators” save more and consume less than they produce, other countries — “currency issuers,” like the United States — must save less and consume more than they produce (i.e., run trade deficits).
This means that Americans alone do not determine their rates of savings and consumption. Think of an open, global economy as having one huge, aggregated amount of income that must all be consumed, saved or invested. That means individual countries must adjust to one another. If trade-surplus countries suppress their own consumption and use their excess savings to accumulate dollars, trade-deficit countries must absorb those excess savings to finance their excess consumption or investment.
Note that as long as the dollar is the reserve currency, America’s trade deficit can worsen even when we’re not directly in on the trade. Suppose South Korea runs a surplus with Brazil. By storing its surplus export revenues in Treasury bonds, South Korea nudges up the relative value of the dollar against our competitors’ currencies, and our trade deficit increases, even though the original transaction had nothing to do with the United States.
This isn’t just a matter of one academic writing one article. Mr. Austin’s analysis builds off work by the economist Michael Pettis and, notably, by the former Federal Reserve chairman Ben S. Bernanke.
A result of this dance, as seen throughout the tepid recovery from the Great Recession, is insufficient domestic demand in America’s own labor market. Mr. Austin argues convincingly that the correct metric for estimating the cost in jobs is the dollar value of reserve sales to foreign buyers. By his estimation, that amounted to six million jobs in 2008, and these would tend to be the sort of high-wage manufacturing jobs that are most vulnerable to changes in exports.
Dethroning “king dollar” would be easier than people think. America could, for example, enforce rules to prevent other countries from accumulating too much of our currency. In fact, others do just that precisely to avoid exporting jobs. The most recent example is Japan’s intervention to hold down the value of the yen when central banks in Asia and Latin America started buying Japanese debt.
Of course, if fewer people demanded dollars, interest rates - i.e., what America would pay people to hold its debt - might rise, especially if stronger domestic manufacturers demanded more investment. But there’s no clear empirical, negative relationship between interest rates and trade deficits, and in the long run, as Mr. Pettis observes, “Countries with balanced trade or trade surpluses tend to enjoy lower interest rates on average than countries with large current account deficits, which are handicapped by slower growth and higher debt.”
Others worry that higher import prices would increase inflation. But consider the results when we “pay” to keep price growth so low through artificially cheap exports and large trade deficits: weakened manufacturing, wage stagnation (even with low inflation) and deficits and bubbles to offset the imbalanced trade.
But while more balanced trade might raise prices, there’s no reason it should persistently increase the inflation rate. We might settle into a norm of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a price worth paying for more and higher-quality jobs, more stable recoveries and a revitalized manufacturing sector. The privilege of having the world’s reserve currency is one America can no longer afford.
*  *  *
In the global race to debase, Reserve currency status is a curse!

Losing Control

Submitted by Tyler Durden on 07/10/2015 08:16 -0400
http://www.zerohedge.com/news/2015-07-10/losing-control
By Guy Haselmann of Scotiabank
Losing Control
Markets are beginning to signal that policy makers are losing control.  Many second-order-effects of the unprecedented and experimental global actions taken since the 2008 crisis are beginning to manifest.  There are always causes and effects that develop; but they do so at different speeds. Many actions in recent years have prioritized 'benefits today' over 'consequences tomorrow'.  'Tomorrow' is approaching ever more quickly. There is no 'free lunch'. 
Market damage and volatility due to policy interference, or due to the deliberate influence of security prices, are a shame.  Markets should ideally operate with unencumbered fluidity. Markets should operate in a manner where adjustments to new information allow buyers and sellers to rapidly, and seamlessly, find a natural clearing price.  Authorities and regulations should be like good referees in a soccer match; they provide the conditions for a fair match, and you rarely notice their presence.

• The beginning-of-the-end of official control happened earlier this year when the Swiss National Bank (SNB) retracted its currency-peg-promise, triggering a 40% move in the G-7 currency in 10 minutes. 
• In early May, shortly after the SNB event and the launch of ECB QE and EU negative interest rate experiments, the EU bond market became dysfunctional.  The absurdity of sustaining $4 trillion of negative rates came into focus. The German 10-year Bund moved from 0.05% to 0.75% in under a month.
• A series of Greek policy and troika bailout mistakes - actions that never resulted in a realistic and sustainable solution - are now culminating toward a tipping point. 
• Chinese authorities that have allowed and encouraged an equity bubble to manifest (and other central banks for that matter) are starting to see how ‘bubble blowing’ typically ends.  Other central banks are hopefully watching.  Chinese equities have lost $3.2 trillion in value in 30 days.  To put this into perspective, this is equivalent to the entire stock market capitalization of Germany and France combined.

After implementing numerous procedures that encouraged equity risk taking, Chinese officials this week seemed fraught to stop the free fall in prices before it began to affect the broader economy, or led to social unrest. Officials have cut bank reserve requirements and interest rates.  They have advertised and published stories about the soaring stocks and upside potential. They have channeled pension assets into shares. They have targeted short sellers, suspended IPOs (to allay dilution), decreased trading fees, and loosened margin requirements. The Chinese central bank has also provided liquidity to state entities that make margin financing available to stock brokers. None of these actions are good for (free) markets.

• It appears China might not be learning from history.  In 1999, margin debt ran amok in NASDAQ doubled the index - which was followed by a 78% crash.  The subsequent FOMC easings and prolonged over-accommodation then fueled the housing and credit bubbles.

Too many central banks have entered into a dangerous trade-off:  providing excessive monetary accommodation (despite questionable economic benefits -particularly at the Zero Lower Bound) in order to lift equity markets, versus allowing financial instability to cultivate and amass.  This tradeoff embodies the fears of both FOMC camps: the fear of hiking too soon versus the risks of waiting too long.  There are enormous consequences on both sides - all of which are poorly understood.
Even those who do not believe that US equities are in a bubble (or that moral hazard troubles are rampant) must admit that debt issuance from low interest rates are at colossal levels.  The amount of debt issuance has broken a new record four years in a row.  The last two quarters are the largest quarters ever. 
This moonshot of global levels of indebtedness will be an economic headwind for decades to come particularly if and when interest rates rise.  Maintaining a policy tool that encourages such massive indebtedness (public and private issuance) is imprudent long run policy.  As mentioned above, it mortgages the future while attempting to immediately boast equity prices and economic activity. This trade-off has failed to play out as officials suspected; otherwise debt-to-GDP levels would have fallen. 
It is the Fed’s zero interest rate policy foremost that has provided the opportunity for the debt issuance to occur in the first place. As the Volcker Rule launches on July 20th, market making and liquidity will soon deteriorate further; a troubling result of over-zealous regulators.   In addition, a large portion of the debt issuance proceeds have gone into share buyback, further fueling the illusion of healthy EPS improvement.
Despite various attempts at redistribution, policies have also widened wealth inequality. As this gap widens and the underlying problems in the economy merely get patched-over with temporary remedies, social unease builds, giving rise to fringe political parties.  
Today, China’s extraordinary market meddling resulted in a one day reprieve from the recent implosion in various commodity, currency, and equity markets.  However, it is likely to prove temporary.  Where there is smoke there is fire, especially in China.   Typically, official information and data is often disregarded because it is taken with a healthy dose of skepticism.  In contrast, the magnitude of the drop in commodity and Chinese equity index prices is real and should be taken as a warning sign.
Chinese build-up of imbalances probably has much further to run after years of gargantuan stimulus.  Recent policy actions are likely to prove insufficient to arrest those adjustments.  Chinese troubles are likely to prove more important to markets in the near term than Greece.  Chinese troubles are unfolding now, they are immediate, and they are vast. The Greek tragedy will continue to unravel but do so more slowly with fits and starts, via false hopes, humanitarian aid, misinformation, and political posturing (more on Greece tomorrow). 
It has yet to be seen how the aggressive policies of the Fed, BoJ, and ECB eventually play out, but there are plenty of  signs that markets will not be as composed and containable as they had hoped.
“The government solution to a problem is usually as bad as the problem”.
    – Milton Friedman

BRICS kick starts $100bn reserve currency pool (or bye-bye reserve petro dollar...)

Published time: July 08, 2015 09:17
Edited time: July 08, 2015 10:01

http://rt.com/business/272362-brics-currency-pool-agreement/

Participants in the BRICS Finance Ministers and Central Bank Governors’ Meeting, Meeting of the Board of Governors of the BRICS New Development Bank (RIA Novosti / Vladimir Fedorenko)

The Central banks of BRICS countries have signed an operating agreement on the currency reserve pool, according to Central Bank of Russia. The $100 billion pool aims to protect BRICS member states from currency volatility shocks.
BRICS/SCO summits in Russian city of Ufa LIVE UPDATES
The agreement was signed Tuesday in Moscow after the meeting of the Finance Ministers and Chiefs heads of the Central Banks of BRICS, the statement of the Central Bank of Russia (CBR) said. It contains a detailed description of the procedures which are carried out by the central banks of BRICS states – the emerging economies of Brazil, Russia, India, China and South Africa - within the currency reserve pool, defines their rights and duties.
It will come into force on 30 July, according to the CBR head Elvira Nabiullina. She added that several other documents will be adopted to regulate the operation of governing bodies - the Governing Council and the Standing Committee.
China will make the biggest contribution to the pool: $41 billion. Russia, Brazil and India will donate $18 billion each, while South Africa’s investment will be $5 billion.

Read morePutin ratifies BRICS $100bn currency pool deal

Nabiullina explained that so far the money remain on the banks’ balance sheets and will be unlocked as soon as any of the BRICS member states ask for help.
In May, Russian President Vladimir Putin ratified a deal to establish a $100 billion foreign currency reserve pool for the BRICS group.
Last July, Russia, Brazil, India, China and South Africa signed the document to a reserve currency pool worth over $100 billion as well as $100 billion BRICS Development Bank.
The goal of the pool is to give BRICS member states opportunity to provide each other financial assistance in case of problems with their balance of payments.
Earlier, Putin said that Russia expects to launch the $100-billion BRICS New Development Bank along with a currency reserve pool at the BRICS summit in Ufa, Russia, which kicked off Wednesday.

Collapse, Part 5: Things Fall Apart

Submitted by Tyler Durden on 06/26/2015 13:37 -0400
http://www.zerohedge.com/news/2015-06-26/collapse-part-5-things-fall-apart
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
It is impossible to wean an economy that relies on debt and leverage for its "growth" of excessive debt and leverage. 

As noted earlier in this series, collapse is not an event, it's a process, a process we experience as things fall apart. The phrase famously appears in William Butler Yeats' 1919 poem, The Second Coming:
 

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
 

 

Why do things fall apart? I have addressed a number of dynamics in the first four essays of this series, but there are many more expressed in Yeats' few brief lines.
 

1. Magical thinking dominates all discussions. The truth, being too fearful to contemplate, is sidelined in favor of magical thinking:
 

-- we can grow our way out of debt by expanding debt
 

-- if we simply print enough money, we can pay for everything we want
 

-- a miraculous new technology (insert current example) will provide limitless energy/food at near-zero cost
 

-- if we tweak the system with some minor reforms, all the big problems will go away
 

-- new technology always creates more jobs than it destroys
 

and so on.
 

2. Same as it always was: politics was always corrupt, humans have always been greedy, etc.--in other words,today's problems are no different from those of the past, which we handled without major difficulty. The possibility that today's extremes of financialization and political decay might actually be quantitatively and qualitatively different from the past 50 years is dismissed.
 

3. The political and financial Elites have lost touch with the citizenry. The falcon cannot hear the falconer, for the Elites have withdrawn into protected circles of privilege with little contact with the rest of us. Since all is well within these circles of wealth and power, all must be well in the system as a whole.
 

And if it isn't, the solution is to withdraw even deeper into circles of privilege and cast off in a luxury lifeboat, leaving the citizenry to muddle through on the doomed Titanic.
 

4. Things stop working well or stop working, period. The causes are many: inefficiency born of self-interest and historical habit, loss of accountability, The Ratchet Effect, Bureaucratic Complexity, diminishing returns, unproductive friction--the list is long.
 

The net result is things don't work well even when stupendous sums are thrown at them. Flush with the tax revenue bounty of a gargantuan bubble in housing and tech start-ups, the city and county of San Francisco now has an annual budget of $9 billion--a sum greater than the budgets of many states, all to serve a population of about 850,000.
 

One would be forgiven for assuming all the essential systems of a metropolis would be working smoothly, greased with an astonishing $9 billion. (It wasn't that long ago--the late 1990s--that San Francisco's budget was a mere $3 billion.)
 

But citizens aren't experiencing the system as working well. Lapses in public services tax San Franciscans’ patience:
 

Two weeks ago, we asked City Insider readers what they think of the fact that San Francisco’s budget hit a whopping $9 billion a year — more than the budgets of at least 10 states.
 

Now that more taxes are pouring into city coffers than ever before, do residents think they’re getting their money’s worth?
 

We were surprised by the deluge of e-mails, which continue to roll in, and the very vehement responses. Every single person who wrote had valid complaints, and not one thought city services were up to snuff for one of the richest cities in the world.
 

“One thing is for sure,” wrote Philip Snyder, a retired inspector for the Department of Public Health who lives North of the Panhandle. “If money was blood, San Francisco would make Dracula look like a mosquito.”
 

What happens when the budget declines by $1 billion in a run-of-the-mill recession? Right now, magical thinking reigns supreme, and the idea that bubbles need only stop expanding to trigger a business-cycle recession isn't in many minds. But recessions do happen, and those following explosive bubbles tend to be deeper than the average, so a $1 billion drop in tax revenues is to be expected.
 

In the same vein, the state of California, also flush with revenues from these same bubbles, has a "rainy day fund" of $3.46 billion and an annual budget of $117 billion. In previous recessions, state revenues drop by $10 to $20 billion--meaning the rainy day fund is woefully inadequate.
 

Here is the budget reality in Greece:
 

These budget numbers are dated--the current figures are much worse.
 

The European Status Quo is expending the last dregs of its legitimacy and cash defending its financial Elites. It is impossible to "reform" a Status Quo whose foundation is kleptocracy, just as it is impossible to wean an economy that relies on debt and leverage for its "growth" of excessive debt and leverage: financialization isn't a feature of the economy, it is the economy.
 

Things fall apart for systemic reasons that are deeply intertwined; minor policy tweaks and printing more money are simply expressions of magical thinking.

Collapse, Part 4: Loss Of Faith In Public Institutions

Submitted by Tyler Durden on 06/25/2015

inShare2

http://www.zerohedge.com/news/2015-06-25/collapse-part-4-loss-faith-public-institutions 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Public institutions are now devoted to serving their own vested interests or the interests of private financial Elites. 

Though we may think of collapse in terms of ATMs not working and rampaging mobs, collapse actually starts with the intangible loss of faith in public institutions: elected officials, law enforcement, the justice system and the agencies of financial regulation (anti-trust, etc.).
 

Unsurprisingly to those who discern the structural rot of the status quo, Americans No Longer Believe In Their Institutions:

“Americans’ confidence in most major U.S. institutions remains below the historical average for each one,” a Gallup spokesman said in a news release. All in all, it’s a picture of a nation discouraged about its present and worried about its future, and highly doubtful that its institutions can pull America out of its trough.

Only 8 percent have confidence in Congress, the lowest of all institutions rated. No wonder, given the Congressional credo that we have to pass this bill to find out what's in it.The latest monstrosity that is cloaked in secrecy and mumbo-jumbo is the Trans-Pacific Partnership (TPP), which Ellen Brown rightly describes as Straight out of Alice in Wonderland:

The terms of the TPP and the TiSA are so secret that drafts of the negotiations are to remain classified for four years or five years, respectively, after the deals have been passed into law. How can laws be enforced against people and governments who are not allowed to know what was negotiated?

If the Trans-Pacific Partnership is so good for the average American, then why not let us read it and be persuaded by the document itself? Instead, the vast machinery of the American central state is devoted to maintaining the secrecy of the bill and crushing all opposition with threats that are no longer even veiled.
 

One of the 39 senators who voted against the TPP, Jeff Sessions, concluded "They Won The Vote, But Lost The Trust Of The American People"

Americans increasingly believe that their country isn’t serving its own citizens. They need look no further than a bipartisan vote of Congress that will transfer congressional power to the Executive Branch and, in turn, to a transnational Pacific Union and the global interests who will help write its rules.

 

The same routine plays out over and again. We are told a massive bill must be passed, all the business lobbyists and leaders tell how grand it will be, but that it must be rushed through before the voters spoil the plan. As with Obamacare, the politicians meet with the consultants to craft the talking points—not based on what the bill actually does, but what they hope people will believe it does.

 

And when ordinary Americans who never asked for the plan, who don’t want the plan, who want no part of the plan, resist, they are scorned, mocked, and heaped with condescension.

 

Washington broke arms and heads to get that 60th vote--not one to spare--to impose on the American people a plan which imperils their jobs, wages, and control over their own affairs. It is remarkable that so much energy has been expended on advancing the things Americans oppose, and preventing the things Americans want.

No wonder Americans have lost faith in their institutions: those institutions are now devoted to serving their own vested interests or the interests of private financial Elites.
 

This same loss of trust is underway in Europe. The entire Greek debt issue could have been resolved with fewer losses and much less suffering if Greece had defaulted on the private bank debt in 2010.
 

But with the complicity of the public institutions that were supposed to serve the citizens' interests, private banks quickly shifted the vast majority of the Greek debt to the taxpayers: If Greece Defaults, Europe's Taxpayers Lose.
 

Here is the debt in 2009--mostly private:

a

Here is the debt in 2015--almost all public debt on the backs of taxpayers:

a

When institutions serve the interests of the few at the expense of the many, democracy is just a label slapped on financial totalitarianism. In case you missed it, here is Smith's Neofeudalism Principle #1:: "If the citizenry cannot replace a dysfunctional government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only."
 

Of related interest:
 

Orwell and Kafka Do America: How the Government Steals Your Money--"Legally," Of Course (March 24, 2015) 

 

Collapse Part 3: No Institutional Path to Contraction

Posted on June 25, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-3-no-institutional-path-to-contraction.html 

One poorly understood source of collapse is the lack of pathways to contraction and a reduction of complexity/cost. The only pathway that is clearly marked is the one to expansion–of production, debt, credit, government, income, benefits, costs and complexity: more agencies, more regulations, more committees, more staff, more of everything.
The path to less complexity, less debt, less production and a contraction of the entire system doesn’t exist in most institutions.
Many dismiss any talk of collapse as mere fear-mongering. This is a legitimate issue to discuss, for if we focus exclusively on the lurid horrors of being killed by a shark in open water (for example) while ignoring the much higher risks of being killed by falling off a ladder at home, we have distorted the risks of accidental death and done a disservice to our understanding of various risks.
But collapse is not an event, it is a process. As a result, systemic collapse doesn’t lend itself to statistical calculations of probability. Processes are driven by dynamics, not odds.
So those dismissing any discussion of collapse as mere fear-mongering are doing a disservice to our understanding of processes–or lack thereof. One interesting feature of collapse is that it can result from either a choking over-abundance of complex, costly processes or a complete lack of essential processes, conceptually and practically.
Which brings us to the process that is lacking virtually everywhere–the process of contraction: shrinking the system, income, headcount, complexity and being productive with less of everything.
The corporate world offers many examples of what happens when the process of contraction and reducing complexity does not exist: companies buckle, fold and go bust. The world’s corporate darling Apple experienced this precise death-spiral in 1996-1997 before the company’s board brought Steve Jobs back as CEO. (So tentative was the board that Jobs was appointed “interim CEO.”)
Apple had only one path: expansion. More fiefdoms, more staff, more product lines, more models, more sales, more profits. The reversal from profits to losses marooned the company, for there was no institutional history of a vast reduction in products, fixed costs and organizational complexity.
Not only was there no institutional history of downsizing, there was no conceptual or practical pathway from unprofitable bloat and institutional failure to a leaner, flatter more productive system. Without an emergency infusion of cash from Microsoft and the appointment of a manager empowered to slash and burn fixed costs and re-set priorities and product lines, Apple would have collapsed.
The same can be said of the European Union. The bylaws of the EU (as I understand them) define the pathway of expanding the EU but not the pathway of forcibly shedding members. Member nations may elect to leave the EU of their own volition, but there is no mechanism in place for the EU to eject member nations such as Greece.
In other cases, systems are structured so any contraction leads to collapse. This is the nature of our debt/leverage-based financial system: any contraction in debt, credit or inflation will bring the system down because the system is predicated on the permanent expansion of collateral to support more debt and the expansion of income to service debt.
If either collateral or income declines, the system implodes:
a
This is not an event, it is a process. If debt and leverage expand while collateral and income decrease, the system becomes systemically more fragile and prone to destabilization. The financial system is dynamic and has multiple inputs; on its current setting, the system will become increasingly fragile. If alternative policies were put in place, it could become increasingly resilient.
Systems with no conceptual or practical pathway to contraction and reduced complexity/fixed costs are more at risk of collapse than systems with institutional pathways for successful reductions in debt, credit, income, fixed costs and complexity.
How many institutions have proven pathways for becoming smaller, leaner, and flatter in organizational structure? Very few, as the default setting for the past 60 years has been expansion and more of everything. Less of everything does not compute.

Collapse, Part 2: The Nine Dynamics of Decay

Posted on June 24, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-2-the-nine-dynamics-of-decay.html 

While collapse may be sudden, the decay that generated the collapse had been rotting away the foundation for years or decades. In distilling the vast literature on collapse into nine dynamics, I am drawing upon many other authors’ work, including:
The Collapse of Complex Societies
The Great Wave: Price Revolutions and the Rhythm of History
The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century
The Shock Doctrine: The Rise of Disaster Capitalism
Overshoot: The Ecological Basis of Revolutionary Change
The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization
Collapse: How Societies Choose to Fail or Succeed
The Long Descent: A User’s Guide to the End of the Industrial Age
Reinventing Collapse: The Soviet Example and American Prospects
Here are the nine dynamics of decay that lead to collapse:
1. complacency and intellectual laziness
2. profound political disunity
3. rise of unproductive complexity
4. those bearing the sacrifices opt out/quit
5. decay of effective leadership
6. rise of bread and circuses social welfare and entertainment to distract/placate restive citizenry
7. decline of wealth-producing capacity–status quo living off financial trickery
8. sclerosis–status quo controlled by vested interests
9. resource depletion/environmental damage
All of these dynamics are currently in play around the globe.
Michael Grant touched on many of these dynamics in his excellent account The Fall of the Roman Empire, a short book I have been recommending since 2009:
There was no room at all, in these ways of thinking, for the novel, apocalyptic situation which had now arisen, a situation which needed solutions as radical as itself. (The Status Quo) attitude is a complacent acceptance of things as they are, without a single new idea.
This acceptance was accompanied by greatly excessive optimism about the present and future. Even when the end was only sixty years away, and the Empire was already crumbling fast, Rutilius continued to address the spirit of Rome with the same supreme assurance.
This blind adherence to the ideas of the past ranks high among the principal causes of the downfall of Rome. If you were sufficiently lulled by these traditional fictions, there was no call to take any practical first-aid measures at all.
If our idea of intellectual rigor is Paul Krugman dancing around the Neo-Keynesian Cargo Cult campfire waving dead chickens and spewing nonsensical claims of grand success, we’re doomed. Placing our faith in failed monetary-legerdemain and policies of the past is the height of hubris and complacency. There is a cost to complacency and it’s called collapse.
A lengthier book on the same subject by Adrian Goldsworthy, How Rome Fell: Death of a Superpower, found that a key driver of decline was the constant political struggle for power drained resources and led to ineffective leadership.
This profound political disunity is not the usual staged battles of the Demopublicans vs. the Republicrats. The real disunity is between a doomed Status Quo and those willing to deal with reality. Right now those willing to deal with reality are few, but they have the distinct advantage of reality on their side, while the Status Quo has only propaganda, artifice, phony political theater and empty promises.
Another dynamic of decay is expansive, sclerotic bureaucracies that lose sight of their purpose while piling on unproductive complexity. The top leadership abandons the pursuit of the common good for personal gain, wealth and power, and this rot at the top soon spreads down the chain of command to infect and corrupt the entire institutional culture.

Grant describes how key classes of productive citizens opt out as their sacrifices are squandered on propping up rapacious elites. Those making the sacrifices look around at what they’ve sacrificed to maintain and decide it’s no longer worth it. So they opt out or quit, draining the status quo of talent, drive and wealth-producing assets.
As the masses become debt-serfs or dependents on the state, the costs of providing bread and circuses becomes unsustainable. The state and central banks are currently papering over this mismatch by printing or borrowing money in the trillions of dollars. But financial trickery is no substitute for actual wealth creation: printing money is not the same as printing real-world wealth.
As for resource depletion and environmental damage–look no further than aquifer depletion, soil erosion, the stripmining of the seas and the poisoning of our air/water/soil on a grand scale.
Rome didn’t fall so much as erode away, its many strengths squandered on in-fighting, mismanagement of resources, complacency and personal aggrandizement/corruption. That’s the template for collapse, and you see it in every status quo globally.

Collapse, Part 1: Greece

Posted on June 22, 2015 by Charles Hugh Smith

http://www.washingtonsblog.com/2015/06/collapse-part-1-greece.html 

The theme this week is collapse. It’s a big, complex topic because there are as many types of collapse as there are systems. Some systems appear stable on the surface but collapse suddenly; others visibly decay for decades before finally slipping beneath the waves of history, and some go through stages of collapse.
The taxonomy of collapse is broad, and each unsustainable system (i.e. a system that will fail despite claims to the contrary) has its unique characteristics.
Which brings us to Greece.
I have written extensively about Greece and the doomed financial arrangement known as the euro for many years–for example: Greece, Please Do The Right Thing: Default Now (June 1, 2011).
When Debt is More Important Than People, The System Is Evil (February 18, 2012)
Greece at the Crossroads: the Oligarchs Blew It (January 27, 2015)
Greece and the Endgame of the Neocolonial Model of Exploitation(February 19, 2015)
When Europe Gets Greece’s Jingle Mail: Dealing with Default (May 15, 2015)
With the bankruptcy of Greece now undeniable, we’ve finally reached the endgame of the Neocolonial-Financialization Model. There are no more markets in Greece to exploit with financialization, and the fact that the mountains of debt are unpayable can no longer be masked.
Europe’s financial Aristocracy has an unsolvable dilemma: writing off defaulted debt also writes off assets and income streams, for every debt is somebody else’s asset and income stream. When all those phantom assets are recognized as worthless, collateral vanishes and the system implodes.
The peripheral nations of the EU are effectively neocolonial debtors of the core, and the taxpayers of the core nations are now feudal serfs whose labor is devoted to making good on any loans to the periphery that go bad. (see chart of Greece’s debtors below)
Greece’s financial/political Elites milked the entry into the EU for all it was worth, effectively destroying the Greek economy in their limitless looting: Misrule of the Few: How the Oligarchs Ruined Greece.
What has already collapsed is the faith that institutions within Greece and the European Union can effectively manage the inevitable Greek default. As noted in the essay linked above, Greece’s power structure is designed to do one thing: protect vested interests and dissipate accountability.
The same can be said of the European central Bank (ECB) and the European Union (EU). Both were sold as abstract financial magic: the Elitist power structures of every nation in the union–the ultimate source of the rot that is now emitting the foul stench of collapse–would be left intact while the economies of all member nations would magically produce more goods and services based on ever-expanding debt and leverage.
This leads to the critical question of the hour: who’s saving whom? Are last-ditch bailouts saving the Greek people and the integrity of their nation, or are they simply saving the political/financial Elites who benefited from EU membership and the systemic expansion of debt?

Here’s another key question: who’s being punished by the Troika’s “nobody defaults and gets away with it” policy? Clearly, the Greek people are being punished–but to what end? What about punishing the political/financial Elites who benefited from Greece’s entry into the EU and the banking Elites who profited from the irresponsible expansion of loans to Greece?
If Greece had defaulted four years ago when default was already visibly inevitable, the Greek citizenry would already have worked through the painful crisis of adjusting to a dearth of external credit and perhaps a new currency, and maybe they would have jettisoned their corrupt and self-serving Elites, clearing the way for sustainable growth and governance.
Instead, the Greek people have suffered for nothing. Default is still inevitable, as is the resulting EU-wide currency-political crises.
When systems are broke and broken, collapse is the only way forward. Only collapse breaks the grip of vested interests and opens the political process to non-Elite participation. By pushing default/collapse forward for four long years, the Greek Elites have punished their citizens for absolutely no yield on their immense suffering. Greece can no more escape the black hole of default than it could four years ago.
Central and private banking magic has failed. The idea that corrupt, self-serving Elites would magically create widespread prosperity by borrowing money that could never be paid back has collapsed, though the Power Elites of the Troika cling to this foolish fantasy because they have no other choice if they want to retain power.
The only faith remaining in the EU Elite is belief in the goddess TINA–there is no alternative. But there is always another alternative: collapse of the status quo and the assembly of an alternative arrangement that doesn’t concentrate power in the hands of a few at the expense of the many.

Goldman And SocGen Unleash The "C"-Word: ECB Alone Can't Contain Grexit Risks

Submitted by Tyler Durden on 06/21/2015 22:16 -0400
http://www.zerohedge.com/news/2015-06-21/new-greek-proposals-hit-socgen-goldman-unleash-c-word-fear-ecb-alone-cant-contain-gr
Unnamed "officials" have proclaimed a new set of Greek proposals received by Brussels tonight as "a good base," according to AFP, and thusly the Euro is very modestly bid. However, both Socgen (without a 3rd bailout of €60-80 billion over the next 3 years, Greek uncertainty remains high and leaves Grexit risk merely semi-stable) and Goldman (a deal will come only after the introduction of capital controls, a technical default on the IMF and issuance of IOUs/and a further build-up of arreas... and the damage resulting from a breaking of the integrity of the Euro would not be fixed by monetary policy alone) leave us wondering just who is buying Euros and US stocks and selling Swiss Francs as D(efault) Day looms and the 'C' word (contagion) spreads.
Sure why not...

A good early start to the rumor mill...
But SocGen remains unconvinced...

At best, a semi-stable agreement is in the making

In calling Monday’s emergency summit on Greece, European Council President Greece warned Friday that we are “close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default”. He further added that “there is still time, but only a few days”. In Athens, the weekend saw a flurry of activity that concluded with a conference call with Prime Minister Tsipras, Chancellor Merkel, President Hollande and Commission President Juncker. Few details have emerged, however, on what was said on the call.

Back in early June, both Greece and its creditors presented proposals for an agreement. At the time, Prime Minister Tsipras was told that any measures replaced must deliver the same fiscal impact. The proposed alternatives have, however, so far not been deemed credible by Greece’s creditors.

Reducing tax exemptions: According to the news flow, the new proposal contains scrapping of a range of tax exemptions and a further reduction in early retirement schemes. The aim is to protect broader pensions from further cuts (the creditors want to see savings of 1% of GDP annually by 2016-17) and avoid a VAT increase on electricity. Furthermore, the creditors want no reversal of labour market reforms. Combined, Greek tax exemptions amount to around €3bn.

A six-month extension: Press reports suggest that in addition to unlocking the remaining €7.2bn of bailout funds, Greece’s creditors are preparing to offer a six-month extension of the current programme, allocating €10bn of bailout funds initially set aside to recapitalise banks to ensure that Greece has sufficient liquidity to meet its obligations until year-end. The Greek authorities fear that a short-term solution would leave the economy in a state of lingering uncertainty that would weigh further on confidence and thus growth. The next batch of PMI data will give an idea of how much damage the crisis has inflicted on business confidence. Meanwhile, bank lending rates remain high, and notably for SMEs (cf. charts below).

CHART

No talk yet of debt rescheduling: An important point for the Greek government is rescheduling of the debt. At the press conference after Thursday’s Eurogroup, President Dijsselbloem not that “We have not discussed this proposal, because the logical order of things is that we first reach an agreement on the terms of fiscal measures, reforms, etc. , before we look into the future. The Greek proposal was part of their vision of the future”. This confirms our view that there will be no “unconditional” debt rescheduling for Greece, i.e. this would come only after measures are delivered and is more likely to be part of the discussion of a third bailout programme.

At best semi stable: If agreement is reached along the lines outlined above, it would to our minds be only semi-stable. First, implementation risks and political risks would remain elevated. Second, negotiating a third bailout programme for Greece is likely to be a challenging exercise. As a result, uncertainty would remain high, leaving Greece at risk of further economic disappointment. We estimate that the country needs €60-80bn over the coming three years, and that is assuming a still fairly benign economic environment and no new bank recapitalisation programme. Given the frail stance of the economy, the risk to our estimate is very clearly biased to the upside.

And Goldman Sachs even less so...

Our central case that a deal will come only after (or thanks to) the introduction of capital controls, a technical default on the IMF and issuance of IOUs/and a further build-up of arreas. The logic is that it is only when the cash constraint is fully binding and associated economic and financial stresses escalate that the Greek authorities would be able return to the negotiating table and compromise with official creditors. With many precedents to point to, we recognize that going into Monday’s policy meetings risks are skewed in favour of a last minute appeasement. This would allow a partial disbursement of funds withheld under Greece’s 5th review upon the passage of new measures, avert a credit event on the IMF and the ECB and buy time for more strategic discussions, i.e. push the problems to a future date. Should this not occur, and the base case be realized, risk would flip in the direction of outright Grexit.

Mapping Market Response to Three Possible Scenarios
To start, it is important to recognize that the financial risk emanating from developments in Greece is very specific. An increase in the correlation between Greek public debt securities and those of other EMU peripherals has not given way to a decline in asset prices of the proportions seen during 2011-12. There are good reasons for this. The majority of Greece’s public sector exposure is now with the foreign official sector (the roughly EUR 40bn of government bonds held in private hands are for the most part marked-to-market). As tensions have increased since the new Greek government took power, private claims against Greek banks (deposits and credit lines) have declined, with the ECB filling the void. Finally, the ECB has also been active in the secondary government bond market, and is expected to absorb between 40 and 80% of the gross supply of Euro area government bonds this year. The main effect of Greece thus far has been on volumes, and market liquidity. This is particularly evident in fixed income, especially in Euro area corporate credit. In our view, Greek risk would materialize on broader asset prices in much more prominent way if the chances of Grexit were to increase.
Our market stance since the start of the second quarter has called for higher core rates and wider, more volatile peripheral spreads as the July bond redemptions approached. Here we map the three possible scenarios mentioned above to market responses, using the average spread between 10-yr Italian and Spanish government bonds to their German counterparts as a gauge (for brevity, we refer to this differential as the ‘bond spread’ henceforth).

The ‘base case’: Should the imposition of capital controls and the introduction of IOUs prove to be the only way to reach a compromise, we would expect the bond spread to drift wider from the current 150bp to eventually as much as 200-250bp. To be sure, a ‘default’ and ‘capital controls’ are now consensus (going by our client interactions, we would say that at least 2-in-3 investors expect these joint events to occur). But by the same token, those anticipating Grexit remain a minority, as most point to opinion polls suggesting that the Greek population still wants to stay in the single currency. The reasons we are more pessimistic are twofold. Capital controls in Cyprus were an integral part of a negotiated package designed to restructure an insolvent banking sector.

On the reverse, in the case of Greece, they would come because efforts to agree on a plan have repeatedly failed. Once cash is blocked and state payments are in other means than the EUR, the distinction between being part of the Euro system and not could start becoming more blurred. Also, the political and social reaction in Greece to a failure to find a compromise is unpredictable. After all, Europe has so far not offered a ‘growth strategy’ for its member states and too frequently remains a synonym for myopic austerity. As the base case unfolds, we think the market would adjust upwards the probability of Grexit.

The ‘accommodation’: Probably spurred by news of a gathering at the highest political level, investors have started to hope that an appeasement is in sight. After all, this would conform to the pattern of Euro area negotiations seen in the past. A compromise could be centred around the structure contained in the 5th program review (e.g., higher direct taxes, some changes to access to pensions, etc) and -conditional on the Greek government passing measures in Parliament - unlock just enough financial resources to allow the government to make payments to official sector creditors during the Summer months and pay wages and pensions. This would probably lead to more strategic discussions over the second half of the year, with no major concessions until after the Spanish election booths are closed. The market would likely salute another ‘kick to the can’ with a relief rally. This could take the bond spread 20-30bp tighter to the 120-130 area, as hedges are covered and quick gains are sought. German Bunds in this scenario would still stay in the 80-90bp range. But without indications on what the strategy for Greece entails, however, we doubt that intra-EMU capital flows and market liquidity would materially improve. The Greek government would still operate on a very tight cash constraints, deposits might continue to decline, and the economic contraction extend.

ECB President Draghi stated at a press conference on 03 June that a ‘strong agreement’ for Greece should have four characteristics: ‘produce growth’, have ‘social fairness’, be ‘fiscally sustainable’ and ‘address the remaining sources or factors of financial instability in the financial sector’. The order in which Mr Draghi chose to order these elements is significant. What, in our view, would meet the criteria for a strong deal is (i) an emphasis on deep structural adjustments and their timely implementation, (ii) realistic growth and primary balance targets and (iii) an explicit re-profiling of public debt, possibly going beyond the promises made to Greece in November 2012. Realistically, seeing this happen on Monday is far fetched, but a move in this direction in coming months could see the bond spread returning below 100bp by the end of the third quarter.

The Road to ‘Grexit’: As discussed previously there is a myriad of possible interim currency arrangements, including dual currency circulation, which would qualify Greece still being formally ‘in’ but de facto having a foot out the door. In the extreme event of Greece introducing a new currency and defaulting on its exposures vs the ECB and the other Euro area member countries, we have stated that the bond spread could widen to 350-400bp, involving yields on BTPs and Bonos of around 4.00%.

A widespread assumption is that if we were to head this way, the ECB would intervene to stem financial contagion in other EMU members. An effective way of doing so would be, for example, instructing national central banks in the core countries to purchase bonds issued by peripheral member states, signalling cross-country risk transfers (currently, each central bank is buying its own debt so that credit risk is not mutualized).

Provided they are pre-emptive, policy countermeasures of this sort would support financial asset prices. But the damage resulting from a breaking of the integrity of the Euro would not be fixed by monetary policy alone, in our view. For all its specificities, the failure to keep Greece in the Euro would highlight the limitations of the growth and fiscal arrangements of the current Euro area policy framework, offer a precedent to other governments (and their oppositions), and crystallize the convertibility risk on all Euro area securities. Institutional upgrades to the economic and monetary union, along the lines of those included in the Four Presidents Report which European leaders are to discuss at the end of this month, would be required to overcome the ‘shock’. A key dimension over which these upgrades would be judged is the degree of ex ante risk sharing among Member States they involve. Examples include Euro area-wide bank deposit guarantees or an embryonic Euro area Treasury.

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Crucially - as we already noted - the most important factor tomorrow will be the ECB's decision and implicitly the potential collateral availability. Before talking heads spout their usual blather on last minute deals and how great they are, perhaps a detailed read of the collateral problems ahead is in order (or - quite simply - you are entirely unqualified to judge the next steps).