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Sunday, 20 November 2011

The end of the financial system IS nigh

What is really going on and when did it happen?
Do you want to know?
I'm going to try to bring together all the economics posts of the last month and try to paint the picture of what is actually happening. Before you read on I remind you that ignorance is bliss.

On the 27th October I postulated that the collapse of Dexia bank was just the first in a series of dominoes which would fall, well we now see the systemic collapse continuing throughout western governments and banks.

The death of the monetary system has its main motive in the refusal of governments either to manage finances responsibly or to repay debt in the usual manner. Debt grows faster than the economies.

The plan is to swindle via the hidden inflation tax in return. Greece and now Italy have tumbled because they are locked in a single currency and cannot unilaterally devalue.

The creditors (the people who own the bonds) are not involved in the important decisions to debase the currency. Those decisions are made unilaterally by the debtors (the nations which issue the bonds). A run on the US Treasury Bonds is occurring by angry foreign creditors. With no security investors simply move their money somewhere else.

The federal reserve was hit with withdrawals of $83.3 billion on November 2nd, the largest withdrawals coming from its deposit accounts. This single day removal was the largest since February 2009. The common practice is to avert a government debt default by making the public pay for debt reduction in basic price inflation.
98 bailed out US Banks are on the verge of collapse
but the crisis will hit the European Union first.

The current financial crisis cannot no be remedied, only patched over. Vast inflation is the only politically viable method of repudiating these unmanageable obligations. The US Consumer Price Inflation runs at 11.1% in the honest broker Shadow Government Statistics calculation (which calculates inflation on the same statistical method as was used in the 1980's), which is painful enough.

The bond exodus is complemented by significant removal of depository funds from the major banks in the 'Move Your Money' movement. Despite pleading by the big US banks for customers not to extract their money, impressively 650 thousand customers moved a total $4.5 billion dollars out of the big banks. The damage done is 10x to 20x, due to fractional banking practices. The funds went into smaller banks and credit unions in October. Jersey's government will only allow the 100 biggest banks globally to operate here, meaning that there is no safe place for local people to deposit their currency.

What an incredible whirlwind of crisis from seven foul winds around the globe but mostly from Europe, which is far from its climax in crisis. Three steps will lead to full blown eruption, the first Italy with rising bond yields and a bank run, the second Spain with rising bond yields and admission that banks are far more insolvent than recognized, and third the failure of all three largest French banks as the principal swine creditor.

Watch as Paris becomes the appointed leader of the PIIGS nations (Portgual, Ireland, Italy, Greece, Spain). The common link across the Atlantic pond is derivative corruption. The Europeans attempt to redefine a debt default, while Americans resort to old fashioned missing funds, breaching the sacred segregated client fund directive. $600 million in clients money is missing from MF Global in the wake of its $39 billion bankruptcy filing.

JP Morgan used its MF Global patsy to anchor derivative trades, that just happened to be long sovereign debt in Europe. The MF Global vanished funds will eventually be measured over $3 billion.

Seven banks, including Jersey's biggest taxpayer the Royal Bank of Scotland, face litigation for failing to advise large pension funds of the true extent of MF Global's $6.3 billion bet on European sovereign debt.

Gold smells the destruction of the monetary and banking systems, aggravated by Western recession. Gold smells new application of debt to repair old failed debt structures, where central bankers chase their tails. Gold smells the vast reconstruction project for the giant Western banks, not too big to die of internal rot, only too big to let fail by a gavel. The twisted bizarre attempt to control commodity prices by presiding over a series of negligent policies is coming to an end.

The G-20 group actually suggested that Germany donate a block of gold reserves for European banking system stability, in a fortification of the stability fund. Obviously the Germans refused, bemused. The German nation has been the ox & yoke to pull the Southern European cart for a decade, but no more. Look for the PIIGS nations instead to forfeit their central bank gold in the next several months, part of the Chinese discounted purchase of sovereign bonds.

In doing so, the G-20 Ministers actually legitimized Gold as the premier asset. The fund seeks EUR 1 trillion but in reality needs EUR 3 trillion, possibly supplied via leverage. The recipient of the alleged transfer would be the most insolvent of global hedge funds, the European Central Bank. Germany will no longer sacrifice Euros at the foot of any PIIGS altar, plainly stated.

The CME has advised that 1.42 million ounces of registered COMEX silver inventory is unavailable for delivery due to MF Global bankruptcy, as well as 16,645 registered ounces of gold also unavailable for delivery. That is a lot of bullion in breach of contract. The lawyers will be busy, as questions of COMEX integrity are addressed. As the grandiose destinations become clear for vast new monetary creation, the Gold & Silver prices will run higher.

The big immediate questions center on how much dithering the banker elite that run our governments will permit with malignant motive before the decisions are made, and how much economic deterioration will be permitted to contain commodity prices before the decisions are made. The destinations are bank bailouts for toxic sovereign bonds, recapitalization of the big Western banks, coverage of new USGovt debt, and economic stimulus. A few $trillion will be needed. The delay in reckoning is laden with frustration, but the day of $2000 is coming. It is something the bankers cannot stop. They are so busy kicking cans down the road, they do not see the Rotweillers and Dobermans sniffing their trails.

The biggest and most important danger signal for complete eruption of the European financial crisis is the Italian sovereign bond. Their yield surpassed the 7% mark to sound great alarms, completing a forecast over the last several months. This level is the recognized crisis signal, the call to stern reaction. The next PIIGS domino is soon to fall, for certain to take down Spanish Govt Bonds also. The new Draghi Euro Central Bank must cover the debt or watch the European Monetary Union crumble. If the crumble happens upon inaction, expect 20 Lehman events with numerous bank failures, starting with France.

The conflagration would extend to London and New York. The Italian Govt rollover of debt is in big trouble, as over EUR 360 billion (=US$490 bn) of debt must be refinanced before end 2012. Recall comments made a year ago. The prevailing opinion was that Italy had favorable debt ratios, like cumulative debt to GDP, like annual deficit to total budget. The objection was that ratios mattered little, when the required debt volume to finance was too large in a crisis filled bond market. The forecast was for Italy to erupt along with Spain eventually. That viewpoint has turned out to be correct.

Barclays has declared that Italy is finished futou. When Italy erupts, it will spread to Spain first, and then quickly to France as its primary creditor. The nation of Spain is not in the news much, but it will be next year, just like Italy with the same type of problems, but compounded by a bigger housing bust.

An invisible bank run is occurring in Italy. Their banks are trapped, attempting to de-leverage on a perilous tightrope forced by tightened bank reserve requirements. They have developed a big dependence on Euro Central Bank funds. They borrowed EUR 111.3 billion (=US$152 bn) from the central bank at the end of October, up from EUR 104.7 billion in September and a smaller EUR 41.3 billion in June, as per Bank of Italy data. That is dangerous dependence that cannot be sustained.

The Italian & Spanish Bovt Bonds are in big trouble, but the lurking story is how France will soon join the PIIGS as the ignominious leader. The main event upcoming is the sudden failure of all three of France's big banks

The European banking system is toppling. It cannot be stopped. Great controversy will result. Most large banks are posting huge losses from greek exposure. The next round of losses from the other PIIGS nations will be an order of magnitude larger.

The extreme breakdown will occur when the big French banks go bust. The French banks bear the largest load for Italian Govt debt, more than double the German load and almost half the entire European load. France is tied with the lethal umbilical cord from Italy. Its own severe budget cuts and tax hikes assure a worse outcome for their standard bearer banks. They have three times as much debt with Italian companies, versus Italian Govt debt. As the Italian Economy slides rapidly into recession, a considerable portion of the nearly $400 billion in total debt exposure will go rotten. One can see that Italy is Greece times seven.

The Spanish Govt Bond is the fuse that lights the Semex behind the French bank failures. Their bond yields surged past 6% as the contagion spreads. The Euro Central Bank is reported to be actively purchasing sovereign bond from both countries, to stem the crisis. Their efforts are futile, since private bank sales rise to supply the central bank at the window. After the official purchases, the private banks are highly reluctant to purchase anew, since that bond market has been badly tainted.

When Societe Generale, BNP Paribas, and Credit Agricole all go bust in a sudden burst wave of insolvency, illiquidity, and recorded losses to their artificially lifted balance sheets, the game is truly over. Then and only then, the great reconstruction of the European banking system will begin, complete with $3 trillion in freshly printed money.

The Gold market comprehends this fact, and anticipates it fully, with patience. The French government bond yield is yet another dangerous fuse being lit.