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Saturday, 25 February 2012

Western financial and monetary system cannot be fixed

Listen to the empty words of the last bailout for Greece. Credibility was lost back on the third bailout, well over a year ago, out of the six bailouts in total. Perhaps it is seven comprehensive final bailouts. The pattern is clear. 
The price of gold and silver is set to rise
Expect Price inflation as the realisation dawns
The Western monetary and financial systems are broken

The politicians, without popular support, forge agreements on debt coverage with the Greek officials, but without critical banker support. The political leaders in France (Sarkozy) and Germany (Merkel) are due to lose their offices, yet they continue to attend summits and cut vacant deals. The people are not willing in Germany to hand over any more than the $3 trillion in savings to date, from the start of the common Euro currency experiment.

What is unfolding is a comprehensive Greek Govt debt default from the inability to contain the situation, the impracticality of the austerity budgets put in place, the wreckage that has come to the Greek Economy, and the intractable solution. Almost every bailout has been of bank assets in some sort of redemption, not budget assistance.

The owners of the US Federal Reserve and European Central Bank must be very angry to accumulate such a mountain of toxic paper. The bailouts would end when the riots amplify. They have amplified. Conclusion: prepare for debt default in Greece.

A great comment came out of the World Economic Forum in Davos. Economics Nobel Winner Joseph Stiglitz declared that the entire gathering was filled with platitudes on growth without any sense of what needs to be done, no sense of who owes what to whom, no concept of the risks of a Greek default.

No solution exists for Greece without liquidation of their debt, its restructure with huge writedowns if not total wipeout loss, a return to the Drachma currency, recapitalization of their banks, and a hands off to carpetbaggers. Almost none of these measures will be done, except blockage of the foreigners intending to exploit.

Talk is clear about a 70% bond haircut, which does not seem enough even though of brutal magnitude. The biggest practical impediments to the Greek Economy are the austerity plan and the absent ability to devalue the currency.

Every single austerity plan to date has been a failure, in every nation attempted. They result in worse economic slowdowns, greater job loss, broad cancelation of projects, reduced pension security, and much wider deficits. Yet they continue in a grand procession of ruin. One must wonder if ruin is the goal, even confiscation of assets including central bank gold, so that another technocrat can be put in power.

BIG BANK LOSSES: The big banks in Europe face staggering losses. Reality has entered the room, as a 70% write-down figure has been proposed on current bailout deals. The big banks are already reeling from credit portfolios damaged by property like home mortgage and commercial mortgage. They are hurt by sovereign debt generally, not just from Greece. The Italian and Spanish Govt debt losses will much bigger next. The Greek losses will strain the system to the hilt.

CONTAGION TO BANKS OUTSIDE EUROPE: The interwoven nature of Western banking does not add to its strength, but rather exposes its weakness. The London banks and New York banks are exposed. The big banks outside Europe are at great risk, just like those throughout the Continent. The Greek losses will strain the system to the hilt.

EUROPEAN CENTRAL BANK: Like the US Federal Reserve, these two central banks have served as the buyer of last resort for toxic bonds that both nobody wants and have nearly worthless value. The stability returned in the bond market after the Draghi ECB reluctantly bought a truck load of Italian and Spanish bonds, but at the high cost of further wrecking the EuroCB balance sheet. The Greek losses will strain the system to the hilt.

CREDIT DEFAULT SWAPS: The unregulated bond insurance market is even more corrupt than the mortgage market. Some fine analysts like Chris Whalen stated two and three years ago that without the derivative trade, the US banks would have keeled over dead long ago. They took in huge fees on contracts whose legitimacy and effectiveness are unclear. The ISDA has issued rulings on bond debt default that seem subservient to the current power structure, blocking insurance payouts. Like the SEC and CFTC, the ISDA is loaded with bankers from the everpresent Wall Street revolving door. The interwoven nature of Western bank exposure to CDSwaps does not add to its strength, but rather exposes its weakness. The Greek losses will strain the system to the hilt.

EXPOSURE OF PROFOUND FRAUD: The strain from any imposed default skein will expose the derivative market. The cast of counter-parties is too diverse. The obligations are too unclear. The nature of the contracts is too untested. The enforcement by the ISDA rulings are too flawed. Like with the mortgage sector, liquidations would reveal more fraud than the power center wishes. The system's foundation of integrity is burning. The Greek losses will strain the system to the hilt.

RECAPITALISE DOMESTIC BANKING: The banking system has operated in the Western nations amidst deep insolvency for three years or more. It will grow an order of magnitude worse. The need to rebuild the banking system will be an obvious and very painful realization, but the volume will result in shock. The sputtering big banks serve as the core for the domestic credit engines, the machinery to pump credit into the many businesses. Several $trillion will be needed to recapitalize the banking systems, not just a few banks. The Greek losses will strain the system to the hilt.

ECONOMICS SUFFER FROM AUSTERITY: The impact of every austerity plan is to put in place what appears to be a more rigid spending process. But the dependence of the domestic economies is so great upon the public sector for jobs and projects and grants and subsidies, that the damage is instant and deep. No austerity budget plan has resulted in improved finances in the first two years of emplacement. None! The economists seem blind to the effect. The Greek losses will strain the system to the hilt.

AMPLIFIED INFLATION RISK: All solutions proposed involve the disposition of new money, either from outright printing without backing or from grander fiscal deficits. The austerity plans result in worse deficits, thus worse pressure on inflation. Any banking system recapitalization would be the crown jewel of monetary inflation. Imagine the effect of $1 trillion or $2 trillion in recapped banks, only to find they require a third $trillion several months later. The inflation impact has been prevented, as the staggering hyper monetary inflation has yet to spill over into Main Streets across the nation. Look for the bank recapitalization project, if it occurs, to force a profound price inflation impact on the USEconomy in force. The Greek losses will strain the system to the hilt.

INTEREST RATE SWAP RISK: If price inflation rises in unexpected fashion, the pressure put on the USTreasury Bond market will be greater than any time in the last ten years. So far, the abuse of the Interest Rate Swap contract has provided outsized leverage in keeping down the USTBond yields generally, by creating artificial bond demand. Hardly has it been a flight to safety within the confines of a USTBond asset bubble supported by inflation machinery. However, the Greek Govt debt unraveling could place tremendous strain on the IRSwap device, even to expose it during a time of increased foreign creditor isolation. The Greek losses will strain the system to the hilt.

UNINTENDED CONSEQUENCE RISK: The last risk to cite is the risk of the unknown, the unexpected, that which cannot be properly planned. The potential unintended outcomes and pressures emanating from a comprehensive planned Greek Govt debt default defy description. In my view, it is like herding 100 cats freed from bondage on a truck in an open field. The attempt at solution via controlled demolition will be subject to unforeseen consequences.

The battle has been waged in the 1750 to 1800 price corridor for almost a full month. It is critically important. As a solution is worked out in Greece, or the absence of one with another in a series of grand missteps, watch the Gold price cast a vote. The zinger is the recapitalization of the banking system, an urgent need and requirement. For over three years, the monetary inflation leakover has been contained, to but the levies and barriers could easily be overrun. The anticipation of systemic price inflation could be seen this week in the Gold price, or else a brotherly response in sympathy to the rising crude oil price. Expect a strange favorable cloud to hover over the Gold market, as recognition that the Western financial and monetary system cannot be fixed. The Gold price could explode past $2000 per ounce very soon, the painful consequence to the illusion of solution, or realization that no solution exists at all.