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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

GREECE: Bank Runs

TAGS: 06-30-12 Zero Hedge GREECE BANK RUNS DEPOSITS -1- EU Banking Crisis

Greek Bank Deposits Have Biggest One Month Outflow Ever In May 06-29-12 Zero Hedge

According to just released NBG data, May deposit outflows were €8.5 billion, or the highest on record, bringing the local banks' total private sector deposit base to just €157 billion, the lowest since January 2006, and represents a massive 5% outflow of the entire deposit base as of the end of April. And keep in mind rumors of epic bank jogs and trots did not really pick up until weeks into the second Greek election two weeks ago. At this rate of outflows the entire Greek banking system will have zero deposit cash left in under two years.

SPANISH BANKING: Housing Will Bring Down Spanish Banks

TAGS: 06-26-12 SocGen SPAIN HOUSING PROPERTY NPL -1- EU Banking Crisis

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

TAGS: 06-26-12 Zero Hedge TARGET2 GERMANY ECB -1- EU Banking Crisis

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

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ECB ACCEPTS BBB COLLATERAL: More Proof of Collateral Contagion

TAGS: 06-26-12 WSJ ECB COLLATERAL -1- EU Banking Crisis

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

EU: Key Unanswered Questions (Devil is in the Details)

TAGS: 06-30-12 GAVYN DAVIES EU SUMMIT QUESTIONS -2- Sovereign Debt Crisis

More Questions than Answers After the Summit 06/29/12 Gavyn Davies

• Some late night German concessions that MAY turn out to be significant,
• Spanish & Irish debt ratios will markedly benefit as costs of their bank bail-outs are removed from the sovereign balance sheet and absored by the Eurozone.
  

Europe's Unanswered Questions 06/29/12 Zero Hedge

As ever with a Euro summit there are unanswered questions. Grandiose statements are what heads of government specialise in – the details are left to later (it is one of the reasons why Maastricht produced a monetary union that was flawed from the outset. Once “create a single currency” had been agreed, politicians lost interest). The statement from the summit itself was woefully inadequate, and most of the details have been fleshed out with press conference statements. Doubtless more details will be forthcoming as heads of government return to their own countries and brief their local media on how they “won” in Brussels. So what additional questions need to be answered?

• Will the bank supervisor have real powers? In particular will the bank regulator be able to close down banks, even if those banks are national champions? They should have this power, otherwise the threats that they can make are going to be largely impotent. Ultimately, we would need to see the regulator able to force changes to banks even if they have not asked for capital injections (as happens in every other functioning monetary union). Are Euro area nations prepared to surrender their sovereignty to the extent that “foreigners close our banks / foreclose our mortgages”?
• Chancellor Merkel of Germany has declared that there must be conditions for direct bank recapitalisation. This does not, perhaps, occasion much surprise in financial markets as Chancellor Merkel of Germany is very keen on conditions. But how are these to be imposed? There needs to be a set of “standing conditions”, rather than case-by-case conditions, if the mechanism is to work properly – per the need for an apolitical capital injection process, outlined above.
• What about those countries that have already bailed out banks with Euro area assistance? Assuming that direct recapitalisation does not take place before the end of this year, that list is Greece, Ireland, Portugal, Spain and Cyprus (countries that have or will have used EFSF money to bail out their banking systems). Other countries have bailed out their banks with national funds. Where does the process stop? This is absolutely critical to resolve, and of course has a huge potential impact on sovereign bond markets (because it impacts individual sovereign debt to GDP considerations).
• Who guarantees deposits? This has not been clarified. If deposits are guaranteed nationally, but the banking regulator is supranational, why should a domestic sovereign have to bear the cost (deposit insurance) of a decision (close a bank) that is taken at a supranational level. However there is obviously a cost burden to guaranteeing banks’ deposits at a pan Euro level – and the question “why is our tax money being used to guarantee lax foreign banks’ depositors?” is bound to arise.

For liquidity injections the announcements are full of good intentions, but they do not in fact change anything regarding the solvency of banks today. What is changing is who foots the bill for the solvency of banks (eventually) and thus the link between the banks and the sovereign. Although there has been some positive reaction in bank CDS so far, it is not clear whether this will suddenly make money markets more functional.

A healthy dose of economists’ cynicism is probably best taken at this point. Money market normalisation is likely to take more than a high-flying statement from the Euro area to resolve. As such, the economic effectiveness of liquidity injections is likely to remain low (to nil).

EU: Over-Indebtedness Roadmap to Catastrophe

TAGS: 06-29-12 EU Over-Indebtedness Roadmap to Catastrophe -2- Sovereign Debt Crisis

Europe's 'Over-Indebtedness' Roadmap To Catastrophe 06/27/12 Zero Hedge

Europe faces three systemic risks:

1. Sovereign (GRExit vs. GERxit),
2. Liquidity (unsustainable refinance rates and foreign capital outflows), and
3. Banking (insolvency and under-capitalization).

All of these can fundamentally be traced back to an era of excessive over-indebtedness, which as Pictet notes, leads to required deflationary policy responses that are incompatible with developed market government targets (of re-election, Keynesian pro-growth fiscal policy, and satisfying financial market's expectations). While LTRO did indeed address liquidity risk in the very short-term, it is now painfully clear (just look at European bank stock prices) that financials are driven by sovereign risk (not so much liquidity risk) at the margin.

It's not a liquidity problem, it's an insolvency problem...

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In an over-indebtedness regime, Developed Market governments have three incompatible targets:

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Decisions and policy actions are limited in capability as the Euro-Area roadmap to catastrophe remains clear:

monetization > permanent transfers > or default/restructuring

versus

Greek insolvency > exit, and > contagion)...

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and the tactical and strategic scenarios and probabilities remain as binary as ever:

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At this juncture, the EU authorities will have to decide whether to continue supporting Greece with more lending and postpone targets or whether to let Greece fall apart.

In order to keep Greece inside the euro area and prevent contagion from spreading, the EU will have to adopt some bold measures:

• Increase transfers: ESM, eurobonds, EIB, Federal deposits guarantee, fiscal union, etc.
• Debt monetisation: ECB’s own QE
• Debt restructuring for overindebted countries
• or a mix of the three options.

Unless it is addressing the backdrop issues (Great Divergence, lack of competitiveness), the euro area will not be able to survive in it current form over the longer term. The euro federalism, the only possible structural solution, will require an additional political commitment from all European countries. Even at this stage of the crisis, we do not perceive any early signs of such premises.

EU RISK: 6 Month Change

TAGS: 06-29-12 Bloomberg EU RISK 6 Month Change SPAIN BONDS CDS -2- Sovereign Debt Crisis

Spanish 10-year bond yields have increased by 181 basis points since the start of the year. Investor concerns about Spanish banks drove the 10-year yield above 7.1 percent on June 18 and again this morning. That contrasts with a 323 basis point decline in Portuguese yields since the start of 2012.

The rise in Spanish yields is mirrored by a 203 basis-point increase in the cost of five-year credit default swaps. The nation’s debt may be downgraded to junk status by the three major credit rating companies. That may prevent Spanish bonds from being used as collateral in ECB liquidity operations. The cost of insuring Portugal against defaulting has fallen by 261 basis points since the start of the year.

EU SUMMIT: 20th EU Summit and Still No Realistic Solutions on the Table

TAGS: 06-27-12 Zero Hedge EU SUMMIT 20th EU Summit and Still No Realistic Solutions on the Table Summit Scenario Matrix-2- Sovereign Debt Crisis

The EU Summit Scenario Matrix 06/26/12 Zero Hedge

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The current proposals revolve around three poles:

1) Deposit Guarantee Scheme:

The current deposit insurance proposal is essentially a patchwork quilt of national schemes with a European backstop rather than a truly federal scheme so pressure on the weakest sovereigns (and banking systems) would persist. We believe a truly federal scheme would be a far better outcome.

2) Common rule book and single European level bank supervisor

A consequence of federalisation of banking is a common rule book and European level supervisor; again, there are competing proposals. We believe that investors should also not underestimate the need for federal level supervision of the banking systems hould a federal guarantee be put in place. Given the very natural domestic vested interests in banking systems (domestic lending, buying sovereign debt and so on), we should not underestimate the potential opposition.

3) Common resolution regime and potential for crisis recapitalization vehicle

We critically need to see a way to resolve – and support – institutions. The current proposals have much to commend them over a 10 year point of view. But our discussions with regulators underscore that the tools and ability to address the resolution of a large institution in today’s stress environment feels highly unlikely.

The base-case view is that the current set of EU banking union proposals, whilst directionally helpful, are too long-term or too timid to address the 'crisis' with supervision stratified and insufficiently federal leading investment implications of little meaningful relief in Eurozone banking and sovereign credit markets. Recent comments from European ministers suggest that the path to federalized Banking Union will be far from an easy one, given the tightly interconnected federal debate.

EUOPEAN BAILOUT MECHANISMS: The European Stability Mechanism (ESM)

TAGS: 06-27-12 UBS EUOPEAN BAILOUT MECHANISMS The European Stability Mechanism ESM-2- Sovereign Debt Crisis

Everything You Need To Know About The European Bailout Mechanisms In One Huge Slide 06/26/12 UBS

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EU BAILOUTS: Fudge & Smudge

TAGS: 06-27-12 Telegraph EU BAILOUTS Fudge & Smudge -2- Sovereign Debt Crisis

All the bail-out systems under the sun cannot make the eurozone work 06/24/12 Bootle (Telegraph)

• The main issue is well-known; bail-outs for indigent, non-tax-paying southerners at the expense of hard-working northerners.
• The proffered solution will be too little, too late.
• But the real issue goes deeper. All the bailout mechanisms under the sun cannot make the euro-zone work. Such bailouts are still, in the end, loans. Even if the interest rates are set very low, interest is due to be paid and the debt eventually to be repaid.

EURO EXPERIMENT: As some of the founders of the euro-zone recognised, if you are going to set up a monetary union, you need to stop nominal values getting out of line. That is why they placed such emphasis on achieving convergence before the union began, and on financial restraint afterwards in the shape of the Stability and Growth Pact. But they botched it. Countries were let in which were manifestly not converged, and the Stability and Growth Pact was both deeply flawed and not enforced.

EUROBONDS: This is fiscal union-lite. Northern countries would effectively share the burden of the south's debt. Without controls on the south's spending and borrowing, however, this would be an invitation for southerners to go on spending at the north's expense – or for everyone to go on spending in the belief that they will only pick up a fraction of the bill. It would be a bit like one of those dinners when twenty people agree to share the bill equally. There is an incentive for everyone to order expensive digestifs.

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.

JAPAN: EU Just a Warm-up for the Main Event!

Japanese manufacturing output falls for first time in 2012 to date Markit

KEY POINTS

• Decline in Factory Output Modest,
• New Orders Fall,
• Exports down at faster rate,
• Input costs decline for first time since October 2010.

Lawmakers in Japan OK hike in sales tax AP - Japan's lower house voted Tuesday to double the country's sales tax to 10 percent over three years in a bid to rein in a bulging national debt as an aging population burdens the country's social security system

Massive Japanese Debt Monetization Is Coming, Yen to be Devalued 06/29/12 Puplava

There eventually comes a point when the road ends and the can hits a brick wall. It appears that Japan is rapidly approaching that brick wall and there are two likely outcomes.

1. YIELDS SPIKE: One option is that the bond vigilantes revolt and yields on Japanese debt spike or the second option is
2. YEN FALLS: A massive debt monetization by the Bank of Japan (BOJ). Given the massive amount of debt relative to the Japanese economy and associated interest payments on the debt, Japan can’t afford a sharp rise in yields. Thus, it appears the BOJ is likely to step in and monetize the debt and the currency markets may be signaling this very outcome.

US NATIONAL DEBT: Great Charts, Wrong Conclusion

These Two Charts Might Change Everything You Believe About The National Debt 06/26/12 BI

Here's The Solution To The 'Ultimate Financial Contradiction' 06/26/12 BI

For 30 years, yields have been falling (represented by a rising red line) at pretty much the exact same pace as the national debt has been rising. What really matters to Treasury yields are inflation, growth, and so on. Supply is irrelevant because supply of Treasuries is always matched by government spending, there's never an issue of where the money comes from.

BELOW: The blue line is the size of the national debt and the red line is 1/the yield on the 10-year Treasury (so the red line goes up when yields fall). The blue line (measured on the right-y-axis) is the total size of the national debt. The red line (measured on the left y axis) is 1 divided by the yield on the 10-year Treasury rate. So basically, as US borrowing costs fall, the red line rises (math).

It is beautiful the way the the yield (red line) moves along with the debt. When the national debt explodes during the financial crisis at the end of Bush's second term the red line soars to the moon (meaning yields are collapsing violently).

US interest rates are a function of several things: Growth, inflation, demographics, propensity to save and and so forth. When growth is good, government borrowing costs would logically be expected to rise, since people will want to take risks and get a good return... not just park their money with a risk-free entity. When inflation is high, nobody wants to be locked up in plain vanilla fixed income securities. And as the population gets older, more people will opt for risk-free Treasuries, thus depressing yields. Well all of those factors affect the debt as well. When growth slows, taxation dries up and the government spends more on welfare to the debt rises. As the population gets older, the government takes in less income tax and pays out more for entitlements and so forth. So it's very logical that yields on government borrowing would fall while the deficit explodes. People who think that higher debts should lead to spiraling interest rates are getting it backwards.

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.

EU SUMMIT: Yet Another (19th) Groundhog Day! Almost Laughable if it wasn't so Pathetic.

Spain, and France all want something that is virtually impossible. They demand actions that are against the German constitution. Simply put, it's not going to happen.

A "breakthrough" that supposedly will lower borrowing costs for Italy, Spain, and Ireland.

• The "breakthrough" is a modification to the terms of the ESM to allow "the possibility" to recapitalize banks directly.
• Amusingly, the existing ESM agreement has not even been ratified. The agreement is still on hold in Germany (numerous other countries have yet to ratify as well).

EURO AREA SUMMIT STATEMENT - 29 June 2021 -

Memorandum of Understanding

"We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure. These conditions should be reflected in a Memorandum of Understanding. We welcome that the ECB has agreed to serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner.

We task the Eurogroup to implement these decisions by 9 July 2021."

Laughable Text of EU "Memorandum of Understanding"; ESM Not Been Ratified Yet Already Requires Changes; How Much ESM Firepower Is There? 06/29/12 Mish

Breakthrough? Really? How Much Firepower is Needed?

1. The EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting its ability to lower the nations’ borrowing costs.
2. The EU’s two rescue mechanisms, the European Financial Stability Facility and the yet-to-start ESM, may have 500 billion euros ($621 billion) available for purchases.
3. Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans

Monti Withholds EU Growth Pact Approval Unless He Gets Interest Rate Relief Bloomberg

• Italian Prime Minister Mario Monti may block the 120 billion-euro ($149 billion) growth initiative announced by European Union President Herman Van Rompuy without an effort to reduce its borrowing costs, two Italian officials said.
• Italy is withholding its official endorsement as it pushes for collective action at an EU summit in Brussels to push down its bond yields, said the officials who spoke on the condition that they not be named.

Demands for Bond-Buying Agreement Roil European Summit Bloomberg

• French President Francois Hollande said Italy and Spain ought to receive support from the euro area’s firewall funds and that their yields are still too high after the efforts they’ve made to reform their economies.
• Spain’s 10-year yields breached 7 percent and Italy auctioned 10-year securities at the highest yields since December yesterday.
• Hollande said the growth remarks “aren’t enough” and that he’ll withhold endorsement of an EU fiscal pact, which was endorsed by his predecessor, Nicolas Sarkozy in December, at least until the end of the two-day summit.
• “The euro zone cannot stay in the current circumstance, without a budgetary union and even more without a banking union,” Hollande told reporters

The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leader still standing. Is it any wonder (given the conditionality and ratifications required) that the best the market could manage, on what is now obviously nothing but yet another watered-down talking-point ridden 'promise-of-more-to-come' plan (as opposed to the impossible becoming possible as Ireland's Kenny so eloquently described it), is a 1% pop in US equity futures.

STATE & LOCAL GOVERNMENT: Fiscal Drag

Fiscal Drag from the State and Local Sector? 06/27/12 NY Federal Reserve

• The sector employs nearly 20 million people, accounting for about one in seven U.S. nonfarm jobs and more than the manufacturing and construction sectors combined.
• Almost three-quarters of these jobs are in local government.
• Tax receipts collected by state and local governments fell 10 percent between second-quarter 2008 and second-quarter 2009—their worst drop since at least 1948, when this data series began.
• dependence on property tax revenue and intergovernmental aid, which together account for more than 70 percent of their general revenue
• The Bureau of Labor Statistics’ May employment report showed that of the more than 150,000 state and local government jobs lost over the last year, 136,000 came from the local sector. The report also showed that overall state and local employment declines continue to offset private sector growth.
• While home values fell by about 30 percent between April 2006 and March 2008, local property tax revenues only started to decline in 2010, a trend that continued through the first half of 2012. This ongoing decline in the local revenue base, combined with lower state aid, will continue to add significant stress to localities’ budgets, darkening the outlook for the sector, particularly local government employment.
• long-term structural challenges that states and localities face, include:
  • underfunded pension plans and
  • deficient infrastructure stocks.

• police layoffs have occurred in cities from Newark to San José, while 4.3 percent of teacher positions were eliminated across New York State.

Between fiscal years 2009 and 2011, states alone were compelled to make up more than $430 billion in budget shortfalls in order to satisfy their balanced budget requirements.

STATE & LOCAL GOVERNMENT: Fiscal Drag

Map Shows Which States Are The 'Greeces' Of America 06/26/12 BI

Below you'll see the geography of net federal transfer payments in the U.S. by state. The more pink the state, the more it takes out of the federal pot than it puts in...(or, if you prefer, the more freeloading off Uncle Sam is occurring).

And here's the same map showing the same stats according to household income:

STATE & LOCAL GOVERNMENT: Public Service Union Battles

Down and Out in Stockton The latest city to confront bankruptcy and how it got there. 06/26/12 WSJ

• Stockton has the second highest violent crime rate in the state.
• Stockton suffers from a high foreclosure rate, which has depressed property tax revenues and helped push the city's unemployment rate to 15%.
• The city of 290,000 also borrowed millions for projects that urban planners hoped would goose the economy and tax revenues—such as a $129 million waterfront development, a $68 million arena for minor league hockey, and a $35 million city hall that has since been repossessed.
• Debt financing is not the city's main cost driver. That would be labor costs, specifically retirement benefits. The city has a little over $300 million in general-fund backed debt, but an $800 million unfunded liability for pensions and retiree health benefits.
• Retirement benefits are not pre-funded and are expected to grow by 7.5% annually for the foreseeable future.
• Pension costs are about 40% of what the city pays on worker salaries and are also growing.
• The average firefighter costs the city about $157,000 a year in pay and benefits and can retire at age 50 with a pension equal to 90% of his highest year's salary plus nearly free lifetime health benefits.
• Stockton's unions haven't acceded to the significant benefit changes needed to rationalize the city's fisc. And creditors have resisted a reprise of the Chrysler bankruptcy in which investors got scalped while the unions walked. '
• The city has laid off a quarter of its police officers, 30% of its firefighters and 43% of general city staff to pay for these generous benefits.
• Yet the city still faces a $26 million deficit on a $180 million budget
• Unions have made few concessions save agreeing to give up sick leave payouts and scale back pensions for new hires—when there are any. City officials could freeze worker pensions and reduce benefits going forward, as San Jose did via ballot initiative earlier this month. However, such a move would set off an expensive and protracted legal battle with the unions, which a city on the edge of bankruptcy can hardly afford.
• Mr. Deis, the city manager, has said he won't try to modify pensions even in bankruptcy because of the cost of litigation.
• The California Public Employees' Retirement System pushed back hard when some on Vallejo's city council suggested restructuring current worker pensions in bankruptcy court a few years ago. That California city instead cut payments to bondholders, modified pensions for new hires, and scaled back retiree health benefits. Stockton is likely to do something similar.

PROVIDENCE RHODE ISLAND: AN EXAMPLE

• But perhaps a better model for Stockton and other insolvent cities is Providence. Rhode Island's capital city earlier this year faced a roughly $30 million structural deficit, $900 million unfunded pension liability and a shrinking tax base. Its city council—all Democrats—averted bankruptcy by voting to cap pension benefits at 150% of the median household income and suspending retiree cost-of-living increases. City workers and retirees overwhelmingly backed the deal.
• Providence heeded the canary in nearby Central Falls, which declared bankruptcy last year after workers and retirees refused to renegotiate their retirement benefits. Their pensions were cut by half in bankruptcy. Central Falls provided an instructive lesson in the high costs of delaying reform for Rhode Island's government workers and lawmakers.

Stockton, California Is About To Declare Bankruptcy 06/26/12 BI

• The problems were compounded by expensive city investments — including a promenade, a sports stadium, and a hotel — as well as the growing costs of the city's labor contracts and generous pension plans for retired city workers.
• Over the past three years, the city has eliminated one-fourth of it's police force, one-third of the fire department, and 40% of the rest of the municipal workforce to close a 90% budget deficit.
• The city is insolvent and facing a $26 million budget deficit.
• The city with the second largest foreclosure-rate in the nation has seen its property taxes and other revenues decline while retiree benefits drained city coffers, according to the SF Chronicle.

Stockton CA Bankrupt; Unions (Not Housing Bust) Primarily to Blame; Pension Death Trap for Cities; What's the Solution? 06/27/12 Mish

What's the Solution?

1. The immediate solution is bankruptcy. Expect to see more cities file. However, longer-term structural problems must also be addressed.
2. Untenable pension contracts need to be tossed out by the courts and benefits reduced. Every taxpayer not on the public dole should cheer bankruptcy, not resist it.
3. End defined benefit pension plans for public union workers.
4. End collective bargaining for public union workers. Governor Scott Walker in Wisconsin has proven that can be done.
5. Scrap Davis-Bacon and all state prevailing wage laws.
6. Institute national right-to-work laws. 
7. Merit pay for teachers
8. More competition from accredited online schools to drive education costs way down
9. Scrap student loan programs that only benefit administrators and educators, not the kids.

It's time to stop overpaying for all government-sponsored services including but not limited to police, fire, prison-workers, and education. The vicious, self-serving grip that unions and their political supporters have on this nation has to end. Governor Walker partially paved the way in Wisconsin. Other states must follow through. At the national level, we desperately need right-to-work laws while ending prevailing wages

US PRODUCTIVITY: Explaining False GDP Since Leaving the Gold Standard

Fiat Money Kills Productivity 06/27/12 Zero Hedge

Leaving the gold exchange standard was a free lunch.

GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.

TOTAL FACTOR PRODUCTIVITY - In 2009 the Economist explained TFP as follows:

Productivity growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked.

A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used.

Total factor productivity is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%.

1. Leaving the gold exchange standard was a free lunch for policymakers: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.
2. Leaving the gold exchange standard was a free lunch for businesses: revenue growth could be achieved without any real gains in productivity, or efficiency.

US DEBT PROJECTIONS: Even the Official Numbers Show Little Hope

Stepping Back From The Trees To Show These Two Charts Of The Forest 06/26/12 Zero Hedge

US ECONOMY: Last to Roll-Over

Supply Chain Slowdown Signals US Economic Slump Ahead 06/26/12 Zero Hedge

The American Chemistry Council's chief economist Kevin Swift created a 'Chemical Activity Barometer' which tracks chemical production and prices, hours worked at producers, and manufacturing output among other factors. As indicated in today's Bloomberg Chart-of-the-Day, this indicator, based on its 'earliness in the supply chain' provides a signal that "the outlook for the economy is slowing during the next six to nine months" since 96% of manufactured goods are derived in part from materials produced by the US chemical industry. Three-month declines of 3% or more have preceded all but one recession since 1947 and it is currently down over 2.5% from its highs in March suggesting sub-par growth is coming.

CENTRAL BANKS: Total Asset Growth

The Worldwide QE Quagmire 06/26/12 Zero Hedge

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!

ITS THE BANRUPTCY STUPID: Destroy the Leverage in Bankruptcy

Global Financial Crisis Management In Three Easy Charts 06/26/12 Housing Story

SOCIAL UNREST: Income Inequality & Fairness

The ‘American Dream’ Is a Myth: Joseph Stiglitz on ‘The Price of Inequality’ 06/08/12 Daily Ticker

In the last 30 years the share of national income held by the top 1% of Americans has doubled; for to the top 0.1%, their share has tripled, he reports. Meanwhile, median incomes for American workers have stagnated.

If the root causes of income inequality go unaddressed, America will truly become a two-class society and look much more like a third world economy, Stiglitz warns.

• "People will live in gated communities with armed guards. It's a ugly picture.
• There will be political, social and economic turmoil." (Hence the book's subtitle: 'How Today's Divided Society Endangers Our Future')

Stiglitz recommends improving education and nutrition for those at the bottom of society, and eliminating "corporate welfare" and other policies which "create wealth but not economic growth."

• Stiglitz cites the provision in Medicare Part D which forbids the federal government from negotiating prices with the drug companies. Over 10 years, that rule will generate approximately $500 billion for the industry, he estimates, but no tangible benefit for taxpayers or the economy as a whole.

Stiglitz believes inequality of wealth and opportunity are hurting the overall economy, by limiting competition, promoting cronyism and keeping those at the bottom from reaching their potential. "What I want is a more dynamic economy and a fairer society," he says, suggesting income inequality is ultimately detrimental to those at the top, too. "My point is we've created an economy that is not in accord with the principles of the free market."

The "American Dream" Is Now A Myth 06/10/12 BI

No one minds inequality as long as one's station in life is a function of one's own decisions and effort.

When inequality becomes the luck of the draw, however, if becomes much more profoundly unfair.

America's social mobility is now not only one of the lowest in the country's history--it's one of the lowest in the first world. If that doesn't change, the fundamental promise of America for the past 250 years will disappear. The country will no longer be a place in which you can control your economic destiny. Rather, it will become the sort of society that so many of those who emigrated here sought to escape: A country in which your destiny is determined at birth.

SOCIAL UNREST: Expectations and a Sense of Entitlement

Lawyer Explains Why The 'Real Housewives' Keep Going Bankrupt 06/26/12 BI

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