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	PART I - Understanding FINANCIAL REPRESSION
	PART II - FINANCIAL REPRESSION in Europe
	PART III - FINANCIAL REPRESSION in the US & ASIA
	PART IV - Preparations for FINANCIAL REPRESSION

Password: macro

SPANISH BANKING: Housing Will Bring Down Spanish Banks

This Is The #1 Most Devastating Chart For The Spanish Banking System 06/25/12 SocGen

The flip side of that is this surge in Spanish non-performing loans.

TARGET2 - One Reason Germany Is Objecting to EU Bailout Plans

Let us compare the TARGET2 method with the financing of imports in a gold standard. In both systems, import surpluses may be financed by capital imports, i.e., A or Commerzbank buys a bond from B. If there is no private capital financing in a gold standard, the import must be paid by transferring gold. In contrast, in the Eurosystem, import surpluses can simply be financed by producing claims against the ECB. Instead of gold, the Bundesbank receives TARGET2 credits. While in a gold standard, the payment of imports (if not financed by private loans) is limited to the outflow of gold, there is no limit for TARGET2 credits, i.e., the import surpluses may be financed without any limit by the creation of Euro claims.

TARGET2 credits ultimately represent claims of savers, while TARGET2 debits represent debts of companies, governments, and individuals. TARGET2 accounts are just a consequence of an ongoing redistribution and of bailouts. For instance, TARGET2 accounts may mirror the tragedy of the euro, i.e., the monetization of government deficits.

TARGET2 is just the reflection of a substitute bailout. When governments issue bonds bought by their banks leading to a trade deficit, the result is a TARGET2 debit. The TARGET2 imbalances are just a sign of euros created in the periphery used to pay for goods from abroad.

Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2? 06/20/12 Mish

Click to Enlarge

ECB ACCEPTS BBB COLLATERAL: More Proof of Collateral Contagion

ECB Eases Collateral Standards for Loans 06/22/12 WSJ

The European Central Bank said Friday it will widen the range of securities it will accept from euro-zone banks in exchange for its loans. The ECB will now accept certain mortgage-backed securities, car loans and loans to small and medium-size firms.

• "The Bundesbank takes a critical stance on the new rules," said a spokesman.
• The ECB's latest move has also given rise to hopes it would launch another loan with a maturity of several years, as it is thought it will increase the effectiveness of coming long-term refinancing operations, or LTROs.
• Mildred Hager, an analyst at Erste Bank, said she now expects the ECB to announce another three-year LTRO or at least a one-year LTRO at its July 5 rate-setting meeting.
• As banks have become increasingly reliant on ECB money, the pool of securities they can put up as collateral with the ECB has been shrinking. Banks have become reluctant to lend to one another in fear that their counter-parties may be exposed to weak sovereign and other debt and may not pay back their loans.
• In addition to the asset-backed securities that are already eligible for use as collateral, the ECB and euro-zone national central banks will also accept certain commercial and residential mortgage-backed securities, auto loans, leasing and consumer finance asset-backed securities, with discounts, or 'haircuts'.

ECB Officially Announces Easing Of Collateral Rules, Confirms Europe Has Run Out Of Assets 06/22/12 Zero Hedge

• ECB DECIDED ON ADDL MEASURES TO IMPROVE BANKING SECTOR ACCESS
• ECB DECIDE TO REDUCE RATING THRESHOLD FOR SOME ABS
• ECB SAYS AUTO-LOAN ABS WILL BE ELIGIBLE
• ECB SAYS IT WILL APPLY 16% HAIRCUT TO A RATED ABS COLLATERAL
• ECB TO BROADEN SCOPE OF MEASURES INTRODUCED DEC. 8, 2011
• ECB SAYS BBB-RATED RMBS FACE 26% HAIRCUT
• ECB SAYS RMBS OF AT LEAST BBB MAY BE ELIGIBLE
• ECB SAYS BBB-RATED CMBS FACE 32% HAIRCU

SHADOW BANKING:

Anyone who wishes to learn some more, here is some additional info from Deloitte (generically correct perspective, but incomplete).

On The Verge Of A Historic Inversion In Shadow Banking 06/25/12 Zero Hedge

This is an epic $6 trillion in flow being taken out of credit-money circulation, with a $143 billion drop in Q1 alone! (blue line on the chart below).

It is precisely this ongoing contraction that the Fed does all it can, via traditional financial means, to plug as continued declines in Shadow Banking notionals lead to precisely where we are now - a sideways "Austrian" market, in which no new credit-money money comes in or leaves. In fact, as the chart below shows, while the collapse in shadow banking has been somewhat offset by increasing liabilities at traditional banks solely courtesy of the Fed, the reality is that for two years in a row, consolidated US financial liabilities amount to just shy of $30 trillion and have barely budged. As long as this number is not increasing (or decreasing) substantially, the US stock market has virtually no chance of moving higher (or lower) materially. What is worse is that even when accounting for offsetting traditional bank liabilities, on a consolidated basis, the US total financial sector is still an epic $3.8 trillion below its all time highs, just above $33 trillion. Unless and until this $3.8 trillion hole is plugged, one thing is certain: risk is not going anywhere (also notable is that consolidated liabilities in Q1 declined by $86.2 billion at a time when the Fed was engaged in Twist but that is for Ben Bernanke to worry about, not us).

What shadow banking has been for America is nothing short of an inflation buffer. Recall what the primary characteristic of shadow banking is: it performs all the traditional credit intermediation transformations that conventional banking entities do: Maturity, Credit and Liquidity. However, unlike traditional banks, shadow banking has one huge deficiency: it has no deposits! In other words, the entire rickety shadow banking system is based simply on the good faith and credit that rehypothecated assets, converted into liabilities, and so on (think repos and reverse repos) courtesy of fractional reserve credit formation (recall rehypothecation), are valid and credible sources of liquidity. While that may be the case in a leveraging environment, i.e., in the expansionary phase of the ponzi, it no longer works when systematically deleveraging, i.e., where we are now. It also explains why with collapsing shadow banking system it is purely up to traditional banks to grow if not to create additional credit-money instruments, then simply to plug the hole that is created every quarter with the expiration of more shadow liabilities. Because, once again, these are not of the Federal Reserve note variety, but credit instruments themselves, which in time maturity, and effectively take money out of the system all else equal. Most importantly, it also explains why Goldman IS right, and the Fed has no choice but to shift to a "flow" reserve creation format, at least until such time as the balance of shadow liabilities is offset by generic liabilities: i.e., deposits.

SOCIAL UNREST: When Neo-Nazi Parties Emerge and Gain Elected Seats, You Need to Start Worrying!

The Two Scariest Charts In Europe (Got Scarier) 06/25/12 Zero Hedge

20%+ unemployment was the level at which National Socialists in Germany began to take seats away from liberal democratic parties during the 1930’s. If the jobs picture does not improve, other EU policy decisions may not matter much.

Unemployment and The End of Liberal Capitalism 1930s

Greek Neo-Nazi Party -Golden Dawn - Click to Explore

EU SUMMIT: Same Old?

Some unpleasant eurozone arithmetic 06/22/12 Gavyn Davies.

EU SUMMIT has three very familiar options all of which mean a further use of the ECB balance sheet. So we will probably see more debt mutualisation via the activities of the ECB. This could occur in several different flavours:

1. Outright bond purchases through the central bank’s Securities Markets Programme;
2. Allowing the ECB to provide leverage to the ESM; or
3. Further LTROs to encourage banks to hold more government debt.

• Another week, another summit. Once again, we are being told, this time by Italian prime minister Mario Monti, that there is only one week left to save the euro.
• Yet the crisis still does not seem sufficiently acute to persuade eurozone leaders that a full resolution is necessary.
• The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union, which in better economic circumstances could appear highly impressive. But the market is currently focused on the shorter term.
• Unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen. Debt mutualisation can come in many forms.
• The European Redemption Fund, proposed by the Council of Economic Experts in Germany (and discussed here) seems to have receded into the background this week but could still have an eventual role.
• The main option on the table seems to be the use of the eurozone firewall (ie a combination of the EFSF and ESM) to buy secondary government debt, or inject capital directly to the banks.
• But the problem here is simple: a lack of money. So far, the EFSF has lent €248bn of its original €440bn lending capacity. At the end of this month, the ESM treaty is supposed to be ratified, and the entity will become immediately operational with a maximum lending capacity of €500bn. However, there have been problems with ratification in several member states, including Germany, where the legal challenge being brought by the Left at the constitutional court could take a while to resolve. This is not necessarily fatal, however, because the EFSF can fill the breach by undertaking new lending up to July 2013.
• The key is that the EFSF and the ESM together can lend an additional €500bn from now on. If the EFSF does more in the next 12 months, the ESM will have less money available later.
• The first call on this money will be the €100bn which will be disbursed for the Spanish bank bail out. That €100bn will presumably need to come out of the total €500bn of new lending capacity, leaving €400bn for other purposes.
• Germany has been very insistent on maintaining the €500bn ceiling, because this sets a limit on its potential losses from this form of debt mutualisation. There is no sign of this changing.
• If unleveraged, this €400bn looks like a very small number, compared with the financing needs of Spain and Italy in the next couple of years. It used to be said in the markets that the eurozone firewall might just be large enough to deal with a loss of market access for Spain, but would not be large enough to deal with Italy as well. That assessment could turn out to be too optimistic.
• The arithmetic of eurozone government refinancing needs, relative to the size of the current firewall, looks increasingly unpleasant. In Spain, government refinancing needs in 2013 amount to around €232bn, or 21 per cent of GDP. Of this, around one quarter stems from the budget deficit, while three quarters stems from maturing debt. Maturing debt is normally easier to refinance, because bond managers re-allocate the money they receive from redemptions back into the bond market. But that can quickly change during a crisis, when bond managers typically sit on their hands rather than reinvesting their cash.
• Spain has not yet lost market access, but is in danger of doing so. Italy is different. Total refinancing needs in 2013 amount to €380bn on the IMF figures, but 93 per cent of those needs stem from maturing debt, a lot of which is very short term.
• The primary budget surplus in Italy is a very strong defence against a market crisis, but not necessarily a sufficient defence if there are increasing fears of a euro break-up. Former prime minister Silvio Berlusconi’s flirtation with a return to the lira this week will not help scotch these fears.
• Overall, the remaining €400bn firepower in the EFSF/ESM is probably inadequate to finance a full bail-out programme for Spain (lasting several years without market access), and would of course be dwarfed by the needs of both Spain and Italy.
• In the near term, what this means is that there is very little spare money in the EFSF/ESM to initiate a bond buying programme in the secondary market, which was the favoured option in the G20 summit discussions this week.
• If the EFSF/ESM uses its lending capacity in the near future to support Spanish and Italian secondary bond markets, it will rapidly absorb funds which might soon be needed for a Spanish debt programme.
• The IMF will hopefully be able to contribute to such a programme, but the attitude of the US to providing more financial support for the eurozone ahead of the Presidential election could be very hostile. Without IMF money, the arithmetic gets even more difficult.
• The markets can do arithmetic, and would quickly realise that a programme of secondary bond purchases would have inadequate firepower to restore confidence.
• Increasing the lending capacity of the ESM, before it has even been ratified, in the current German political climate, is a non-starter. Leveraging the effective size of the EFSF/ESM by providing first tranche loss insurance to private bond investors has already been tried after previous summits, without any obvious success.
• That leaves one very familiar final option, which is a further use of the ECB balance sheet. So we will probably see more debt mutualisation via the activities of the ECB.
• This could occur in several different flavours:
  1. outright bond purchases through the central bank’s Securities Markets Programme;
  2. allowing the ECB to provide leverage to the ESM; or
  3. further LTROs to encourage banks to hold more government debt.

The ECB probably does not like any of this, but may well prefer the second and third flavours to the first. Once again, it is all up to Mario Draghi.

CHINA: Manipulated Statistics due to Upcoming Decade Long Regime Change (and promotions throughout Party)

Turns Out China IS Lying About Everything 06/23/12 Zero Hedge

NEW YOUR TIMES: As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles. Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said

Questions about the quality and accuracy of Chinese economic data are longstanding, but the concerns now being raised are unusual. This year is the first time since 1989 that a sharp economic slowdown has coincided with the once-a-decade changeover in the country’s top leadership. Officials at all levels of government are under pressure to report good economic results to Beijing as they wait for promotions, demotions and transfers to cascade down from Beijing. So narrower and seemingly more obscure measures of economic activity are being falsified, according to the executives and economists. “The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

So... let's see here: huge disparity between what is represented and what the reality is... a crucial political election... and a regime that many have accused of misreporting critical data for years (even if others captured media outlets accuse the former of being conspiracy theorists)... Why... could this possibly mean that every piece of data out of the US is just as made up and just as meaningless? Now that would be truly unpossible.

GLOBAL MONETARY POLICY: At its Limits

BIS: More Monetary Stimulus, More Problems 06/24/12 BIS

During the current economic downturn, governments have been slow to use the fiscal tools at their disposal, due to political obstruction and high debt levels. That leaves central banks as one of the only sources of stimulus and financial sector rescue. In its recently released annual report, the Bank of International Settlements argues that continued dependence on the central bank actually entrenches the issues slowing down growth throughout the world. Here's their chart:

FINANCIAL REPRESSION: One cannot operate a capitalist system if the state can borrow at a negative cost.

"One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost" 06/23/12 Charles Gave

Consumption bubbles fuelled by negative real rates always contain the seeds of their own destruction.

Debt levels get too high and force household deleveraging; meanwhile the currency falls, which improves competitiveness in the global marketplace. The combined effect is a narrowing of the current account deficit.

When the world’s reserve currency nation experiences such a narrowing, the supply of dollars outside of the US falls, and inevitably catches some countries out.

Excluding oil and China, the annualized US current account has moved from a deficit of 3% of GDP in 2003 to a recent surplus of 1% of GDP. This improvement in the current account position has taken place despite the fact that most of the world is growing well below its potential. In effect, the US economy has exercised an immense deflationary pressure on the margins of companies outside of the US, and in so doing has managed to “recover” roughly 4 % of its GDP.

While the oil producers and China may still be sitting on a ton of US dollars—which they are recycling into USTs and thus keeping US government borrowing costs at bargain-basement levels—the dollar supply elsewhere in the world has fallen sharply. The countries which have no access to the US currency have to start using their foreign exchange reserves to meet their payments (very often to oil producers and China), thus amplifying the problem. When a country is forced to sell reserves, then it has to follow restrictive monetary and budget policies to depress domestic demand and recreate a current account surplus. The cost of capital rises sharply for the private sector. India today offers a prime example of a country stuck in this corner. In the chart below , I am showing the 12-month variations of foreign central bank reserves deposited at Fed—this is excluding China (I would also exclude the oil producers, but could not find a way of estimating their forex reserves). Past periods of rundowns in global forex reserves always have been associated with crises.

When the US current account deficit starts closing, the dwindling supply of dollars eventually leads to a panicked rush for dollars. Non-US companies that binged on dollars when the money was cheap and the dollar was forever going down, now find themselves caught out. Every entity with a negative cash flow in dollars scrambles for dollars — even through selling local assets and converting the proceeds — depressing risk assets everywhere. The US dollar and USTs outperform everything, including industrial metals (see chart overleaf). And of course equities are not spared (see chart overleaf). Needless to say, if one has to be invested in equities in these periods, stay in the US stock market (as US companies will not have such troubles) and avoid non-US equities except when they become extraordinarily cheap versus the US market (e.g., a ratio below 1.2x).

could go on and on with other examples, but let’s just get to the point: one cannot operate a capitalist system if the state can borrow at a negative cost. Years of irresponsibly loose monetary policy in the US has led to cheap funding for the US (and other) governments, but difficult credit conditions for the private sector all around the world. As I underlined in How The World Works, negative real rates leads to misallocation of capital which ends in asset deflation, while simultaneously limiting the capacity for recovery by driving out the private sector. The Fed has been managed by a bunch of Keynesians who care nothing about the role of the dollar as a reserve currency and who probably believed they were managing the central bank of Belorussia or Zimbabwe!