Europe’s Lehman’s

May 14, 2015

Spurred on by low-interest rates coupled with the expansion of the money supply through QE in Japan, Europe and US, inflation is looming. Savings and long-term capital investment are parked and replaced with speculative, short-term borrowing. So far inflation has confined itself to stock markets, both Janet Yellen head of the FED and Christine Lagarde at the head of IMF, are both worried. They should be.

http://www.usatoday.com/story/money/business/2015/05/06/yellen-lagarde-conversation/70886172/

Banks and governments on bond buying sprees see more money to be made at the casino of the stock markets, than productive investment in the real economy on austerity shakedown.

With growth rates in Europe and US at close to zero in spite of QE, stock values have reached virtual heights inflated by QE  without reference to the disappearing real economy.bubbles

http://www.inflationomics.com/article.php?article=Keeping+Interest+Rates+Low

Bubbles are required to support the fungible inflation of stock prices and to keep  real economy and the shadow economy in business.

In Ireland, the real economy has been pillaged and looted  replaced by a virtual financial services driven economy dictated by  banks, government economic management committee, IMF and ECB and European Commission. Health care and education are under real attack and declines in services becoming more pronounced.

Developing in Orwellian Big Brother fashion Europe gains day by day more of the features of the defunct USSR in its relationship to satellite states with shots called by Germany leading inner core nations against outer core interests.

The lofty pricing model of property during Celtic Tiger years is being kept in place by banks and financial institutions to protect their asset base.

Shortages induced by NAMA and lack of investment in construction through induced shortages, has falsely inflated property prices. If property prices drop,  lending institutions on a knife edge regarding the servicing of their lending into the economy, face danger of default.

Banks now depend on a false bubble in the housing market!

The real economy with resources and assets siphoned out to pay eg extortionate variable rate interest rates and service unsustainable lending, is victim of the bubble.

Young people are priced out of the prospect of owning their own home. The future is ill- omened with imminent prospect of vulture fund acquisition of large housing stock and future extortionate rental rates driving serfs to emigrate.

In the US PE price of stock by valuations by share continue to rise to bubble levels.

According to Robert Schiller of Yale, stocks are very overvalued (markets extremely overvalued). Currently US stock market should be 50% of the size of the economy instead it is valued over 150-180%.

Margin debt, the economy divided by the amount people have borrowed to bet on stocks and shares, as percentage of the real economy, is at an all time high. Internals are weakening eg earnings are lower. Middle class is disappearing as wealth is more and more funnelled upwards where it lies dormant and unproductive. Unless spent on financial paper bubbles.

So far the shadow economy of derivatives has fuelled an internet bubble, and fuelled the 2008 crash. An ineffective Dodd Frank pr stunt has failed to curb excesses of the financial services industry through lack of regulation, QE has provided more fuel for the shadow economy dragon, to create more bubbles of fire.

Since 1970 the derivatives industry and the shadow banking economy have grown to estimated  $1.2 quadrillion: 20 times the size of the world economy. Its estimated that the world’s annual gross domestic product is between $50 trillion and $60 trillion..

2008 Lehman’s was a bank scapegoat for problems in the financial services industry. The Wall Street Crash of 2008 was executed by Lehman’s. But the real cause exploited by Lehman’s was lack of regulation. Remove opportunity and end the crime.

Bloating TBTF banking, burgeoning, bubbling. smoking, fire spitting dragon of unregulated out of control bush fires of the derivatives market, controlling, manipulating the shares market, welcome to Casino investment banking.

Instead of tackling the dragon, through austerity taxpayers are sacrificed to it; its worst excesses are refuelled to generate more havoc.

Lack of regulation of investment banking stocks and  gambling in shares led to the market crash of 1929. We are heading there again.

The problem is lack of regulation of the financial services industry now overwhelming  the real economy to the point where we no longer have a real economy, but a virtual one driven by virtual paper.

This is leading to a currency crisis. Triggers are in place. In Europe we have not only a Lehman’s, Greece, but we have sub prime lending and a bankrupt country whose extend and pretend prospects  fast running out.

 http://www.inflationomics.com/article.php?article=Keeping+Interest+Rates+Low

Forget all this ‘improving competitiveness’  emanating from EU and Central Banks across the world. Its only a mask for austerity and a cover to conceal the real problems effecting the global economy. If you want to improve competitiveness, dismantle the shadow economy and its financial services industry. Strict regulation of a gold standard to bring about stability and real growth.

Brexit and Grexit  loom  prospecting  imminent financial collapse of the euro under Europe’s QE race to hyperinflation. Germany should know better.

Werner Hoyer President of the EIB in an introduction to the European Investment Bank paper, begins well:

http://www.eib.org/attachments/efs/restoring_eu_competitiveness_en.pdf

“Europe’s competitiveness and long-term, sustainable growth potential suffer from a history of underinvestment in important areas, inefficient and fragmented financial markets, and institutional barriers. Seven years of crisis have undermined confidence, lowered aggregate investment, and further aggravated structural investment gaps. At the same time, limited fiscal space and the necessary regulatory response to the banking crisis are significantly limiting the ability of Member States and the European banking sector to take risks and catalyse valuable investment. ”

Thereafter, the paper rolls out a call to action with significant investment in key areas. But this paper fails to address the matter of problematic financial markets. Perhaps its been redacted.

The geopolitical interests of certain dominant inner core members at expense of the interests of outer core members, lets not delve into who will get the lions share of such investment.

Over and over we get these pious declarations of intent to fix  financial markets, but nothing concrete emerges.

Problems in the euro area are not due to under investment, nor will they be solved by over investment.

Problems are due to ‘  limited fiscal space and the necessary regulatory response to the banking crisis are significantly limiting the ability of Member States and the European banking sector to take risks and catalyse valuable investment ‘

Throwing money at the problem of under investment won’t cure the problem. The above paper names the problem but does not address it.

Let me try to put back and catalyse into that paper a missing chapter.

Both Janet Ellen and Nobel Laureat Schiller are aware of the problem. Stocks are overpriced. Property markets are overpriced.

Eventually this bubble in stock market pricing will turn into a bear market that will have to be controlled by a new financial formula to replace the low interest rate and QE formula that has led to the present bubble in stocks and property prices.

This may end in a global currency crash if matters continue to deteriorate as they have so far.

Low interest rates or negative interest rates cannot last forever.

http://www.bloombergview.com/quicktake/europes-qe-quandary

Market forces will eventually exert gravitational pull on bubbles bursting them. QE has generated bubbles, little else.

http://www.cnbc.com/id/102659042

Grexit is one such bubble  waiting to be cauterised. Its origin lies in the design of the euro itself with self regulation the norm. Its domino effect can bring the house down. For Greeks the choice is between accepting dictatorial austerity or some form of proto Icelandic Grexit.

Both these Hobson choices have an extremely negative side for the euro.

Future of the euro is on the table. Excision of the whole systemic economic failure of the euro, should be on the cards.

Failure to unwind the problems that have given rise to Grexit and Ireland’s massive default, should be of grave concern.

Lower interest rates and tax cuts wreaked havoc in Europe in the years following its inception when stability and growth pacts were watered down if not totally ignored:

https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp129.pdf

“While the latest reforms go in the right direction, it is far from clear whether they will be sufficient to ensure sound fiscal policies. The envisaged common approach to stronger domestic fiscal rules is insufficient, and it is unclear whether countries will make meaningful changes to domestic arrangements. Under the preventive arm of the revised framework, the monitoring of expenditure will probably play only a secondary role. The proposed stronger focus on developments in government debt under the corrective arm is welcome, but the precise nature of the debt rule raises doubts as to its effectiveness. It is also questionable whether the changes adopted in order to strengthen statistical governance will be sufficient to prevent misreporting in the future, as experienced especially by Greece. Most importantly, the new provisions still leave a considerable degree of administrative and political discretion at each stage of the process. All in all, the changes envisaged do not represent the “quantum leap” in the euro area’s fiscal surveillance which is necessary to ensure its stability and smooth functioning.” (note this from 2011…no real progress since then)

As the real economy declines due to massive private and public over borrowing, the prospect of massive unwinding and fallout whether through sub prime lending collapse, or massive default in Grexit, looms.

Debt is the modern dragon stalking the land and burning all before it.

Problems besetting the eurozone in the past have now been repeated with QE. Massive government bond buying programme inflating the money supply can only encourage irresponsibility making governments prone to throwing financial investment down the drain as eg in Ireland’s ill judged and disastrous Irish Water setup disaster for Irish taxpayers.

To stimulate the US economy trillions were thrown at banks and financial institutions hoping to kickstart the economy and save it from depression. Many argue the experiment has been a success but  results are not in and omens  not good. Now the eurozone has joined the party printing money hoping to kickstart economic growth. Japan and UK have already gone down this route.

http://research.stlouisfed.org/publications/review/13/01/Fawley.pdf

“A remarkable consistency among the monetary expansion policies of all four central banks is that while all measures led to sharp increases in the monetary base, none led to sharp increases in broader monetary aggregates (see Figure 4). The broader aggregates did not increase because banks voluntarily held the increased monetary base as bank reserves—safe, liquid assets in high demand during periods of economic uncertainty”

“For example, this article details the circumstances under which the ECB and BOJ generously lent money to banks to inject reserves into their bank-centric economies, but the Fed and BOE injected reserves into the U.S. and U.K. economies by purchasing bonds.” The question of the retrospective capitalisation of Irish banks and failure to qualify for such lending to pay for the loss suffered by taxpayers re Anglo is a failure of government that will not be dealt with here.

The experiment has led to the curious anomalous rich growing richer while the poor urged to competitiveness under the flag of austerity have grown poorer.

Stocks and shares in a bull market have hit astronomic heights while at the same time market share, purchasing power in an indebted population have decreased. This shows the financialisation of the global market place has become out of kilter with the real market place. Anxious remarks of Christine Lagarde to Janet Ellen regarding the policy of the Fed to lower interest rates leading to stock market bubbles….

How are we doing locally here in Ireland. Well, banks have returned to profit by raiding those unfortunate enough to have been fleeced and forced to take out a variable rate mortgage with them over the past number of years. Banks borrow from ECB at 2% approx and lend out at 100% profit to fleeced property owners.

Are banks lending into the real economy, no!

Money that could be spent in the local economy is sucked from the banks out of the domestic economy to pour into the black hole of bank losses.

Absurd rents, high value property, fears by banks the bull run is over and they won’t lend for such prices! How could they, with high rents how can young couples save 20% of €400,000 which is €80,000 and pay back an extortionate mortgage set at 4.7% interest rates with nothing left over to be spent in the real economy. This so-called real economy becomes more absurd by the day.

You guessed it, the financial system we live under has turned into a crazy bubble in need of immediate lancing. Financial sector want it fuelled.

It needs to be lanced before further damage and political, civil strife ensue.

In Ireland, according to the Irish Times ‘Rich List’, April 26, the Dunne family, owners of the retail chain, have entered the billionaires club. This must be on foot of their zero hour contracts provoking mass strike action from its workers. Even pilots at Ryanair are on these infamous contracts that profit at expense of uncertainty and exploitation of their victims.

http://www.wsj.com/articles/u-s-stock-futures-rise-1430914380

Its clear fallout from 2007-9 and Ireland’s financial crash has meant the buck to pay for it has successfully been transferred off the shoulders of the rich via austerity onto the shoulders of the poor. We are not alone in such trends.

Steps to even the balance however small need to be taken. One small step would be to legislate against tax exiles who exploit laws to have dual residency via off shore accounts and Ireland. Figures like Dennis O Brien and Bono avoid Irish taxes because of their tax exile status while sick people cannot obtain a hospital bed in an evermore compromised Irish hospital system.

Such tax exiles should have their passports removed and be forced to pay taxes in their country of real domicile. A government tax strategy group has recommended: “there should be a “place of abode” test and a “centre of vital interest” test, According to the report, this would mean taxing individuals based on where their main economic activity is rather than where they reside.

A judgement based on a percentile measurement of what weight to give to “place of abode” and “centre of vital interest” should be made by Irish tax authorities. Those who flout such laws should have their passports removed and exiled.

This would prevent exploitation and looting of economies to serve the interests of the rich. It would criminalise such activities.

The question is can an economy re-engineer itself from the ground up to pay back its debts and not impose severe and growing austerity on its citizens.

Curiously there are no plans available for public scrutiny of such plans see below. Indeed. eurozone leaders have been adamant Greece must produce such plans fortwith, but still we have none. We do not know the detail of what austerity measures are being considered.

http://greece.greekreporter.com/2015/02/05/new-government-overhauls-greek-tax-system/

On the one hand, there is a tiered society with insiders holding the reins of power who do not want to lose their position. On the other hand, there is the squeezed middle who cannot give anymore. There is also the growing numbers of the severely impoverished.

Some argue it may be the time for Greece to remove itself from the EU and negotiate a better deal with its debtors. The benefits of such a deal are autonomy vs growing Big Brother control of the economy led by the troika. Time for Greece to do an Iceland.

Repercussions of a Grexit could be huge. Bond yields, negative interest rates, massive default … Will a Greek exist burst the current global bubble?

http://www.ft.com/intl/cms/s/0/ccd73f38-ec2f-11e4-8604-00144feab7de.html#axzz3YWLpw22u

Big Brother of financial interests is growing more autocratic and dictatorial by the day:

“Greece’s dire financial position is forcing euro zone authorities to look beyond
Mr Varoufakis to Alexis Tsipras, prime minister, much like in February when Jeroen Dijsselbloem, the Dutch finance minister who chairs the Eurogroup, brokered an extension of the current bailout programme.”

“According to two eurozone officials, Mr Dijsselbloem phoned Mr Tsipras from Riga in an effort to mend fences after Friday’s feisty eurogroup meeting, where Mr Varoufakis was rounded on by his eurozone colleagues.
In a sign that Mr Varoufakis’s combative approach is prompting concern in Greece as well, a senior Athens official said the Riga meeting was likely to lead to him being sidelined as Mr Tsipras and his deputy Yannis Dragasakis take a more hands-on role.
Amid the acrimony, differences over a new list of reforms that is to be agreed by Athens were barely discussed at the meeting, putting off indefinitely a deal to unlock access to the funds left from Greece’s €172bn bailout.”
“All the ministers told [Mr Varoufakis]: this cannot go on,” said Luis de Guindos, Spain’s finance minister.”

In such a situation calls to competitiveness are a hoax. Some debts cannot be repaid.

Lancing of global financial markets and decoupling of banks and financial services interests from politics with politicians willing to tackle the dragon required.

Financial markets are rumbled and they must be fixed. The growing threat posed by derivatives and the shadow banking sector need to be fixed. The world economy needs more sustainability than that provided by bubbles.

We do not even have proposals on the table from a global currency think tank to examine and report on problems in the global economy.

Perhaps Greece will be in Grexit the dose of reality that will cure the real problems in financial markets.

If not Grexit, then Euxit followed by a global currency run by Big Brother.

With zero interest rates and tax on any remaining  money,  its hide your money under the mattress time again. At least until hyperinflation hits.

 

till again

 

Postscript

Turns out you are not one of the inner circle unless you have appeared at the Banking Inquiry, did your Mea Culpa, and bounced through the limpid questioning with the requisite, prepared, obfuscations and denial of responsibility.

Perhaps more political show casing and hand washing can be avoided if the committee contain themselves to just one question:

“Do you know who put forward the proposal of ‘The Guarantee’.

Has that question ever been asked of anyone before the banking inquiry?

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