- Europe Is Doing Its Best To Pull Itself Apart
By Richard Breslow, a former FX trader and fund manager who writes for Bloomberg
At the end of last week, the EU-27 held what was meant to be a reaffirmation of their joint commitment to solidarity and outline their plan to make Europe great again. It was all laid out in the loftily titled “The Bratislava Declaration.” Unfortunately, the document was about as far as things got.
But for the fact that it’ll be quickly and mercifully forgotten, the summit would go down in history as highlighting the very issues that render the continent dangerously divided. We no longer talk about the “sick man of Europe,” rather that Europe is sick.
The meeting was preceded by European Commission President Juncker’s 2016 State of the Union speech. He reminded the parliamentarians that “the next 12 months are decisive if we want to reunite our union.” How many times have we heard that before?
His punchline was ironic, given the ensuing finger-pointing and anger. “Europe is a cord of many strands -– it only works when we are all pulling in the same direction.”
Hungary Prime Minister Orban blasted the group’s efforts on immigration in vitriolic terms. Vowing to submit counter- proposals on behalf of eastern countries. Ideas in direct contravention of Merkel’s ideas.
Luxembourg, you’ll remember, recently suggested that Hungary should be excluded from the Union altogether for its “massive violation” of the core values of the EU. Now that’s cohesion for you.
Italian Prime Minister Renzi refused to take part in a joint press conference with Merkel and Hollande. He shed any diplomatic niceties over the unwillingness of those heads of state to give him the budgetary flexibility he needs to deal with a banking crisis in full bloom. He accused them, and Spain, of breaking Union rules while putting his economy at full risk.
About the only thing they all do agree on is that European banks can’t afford the capital levels suggested by Basil III. Not very comforting coming from a continent with nearly half of the world’s systemically important banks.
Angela Merkel said, “Europe is not at all in a good state.” And Europe is famous for waiting until the last second to actually address crises. The danger is that threats are flowing from so many holes that plugging up the leak at the last moment may take more fingers than the Little Dutch Boy of myth has.
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Full Bratislava Declaration below…
- The Grand Global Circus: 2016 US Presidential Elections
Submitted by Gulam Asgar Mitha via Orientalreview.org,
Politics is the art of looking for trouble,
finding it everywhere, diagnosing it incorrectly
and applying the wrong remedies—Groucho MarxWhen I was young I remember how excited many of us children would be to visit the circus when it came to town. For us the best part was the opening, the clown or the joker. We’d have bundles of laughs with their slapstick humour and pranks. Sometimes the clown would be a male and sometimes a female but that did not matter. It was the entertainment. After the laughter came the juggler with either 6 or 8 or 10 balls going from one to the other hand. Not one would drop. Incredible! Sometimes instead of the balls, it’d be rings of fire. Awesome! Breathtaking! There’d be few more circus acts that used to follow but nothing quite like the clown’s or the juggler’s entertainment.
Several decades have passed since I last visited a circus and now that I’m a grown-up, the circus is here on the global stage in the year 2016. I’m referring to the US Presidential elections in November, the last act of the circus whose outcome is known. However what is most interesting has been the clown and the juggler acts for this grown-up child. These two players have kept the world fully entertained.
The clown: Donald Trump. His verbiages and sarcasms are laughing matter and one wonders when they’ll change in the next few minutes because they’re so entertaining. Even when he does not speak, his silent facial expressions captured by the media are equally entertaining. At best he is honest.
The juggler: Hillary Clinton. Her very few verbiages and sarcasms are missing and she is a serious entertainer, unlike the clown. She even came with an assistant Bernie Sanders. The juggling is no laughing matter because it is a very serious act.
None of the Republicans even care to support their clown. They all want Hillary to be the successor to the incumbent Obama. She did a fantastic job in Libya as Obama’s Secretary of State, bombing the country to shambles and leaving a legacy of disarray and mayhem.
In one of my previous article “Beyond the Nuclear Deal: A Civil War in the Middle East“, I’d written that the two US political parties hiding under the garbs of “democracy” are both right wingers (conservatives, liberals, neocons, fascists, capitalists etc.) pursuing the same geopolitical agenda in the Middle East. On one hand the Republicans are pursuing a belligerent agenda while the Democrats are pursuing a diplomatic agenda. The goal for both parties is exactly the same, that being global hegemony and survival as an empire. This ideology is shared among their right wing NATO partners and all are beating on the war drums while at the same time working hypocritically for peace. It is lamentable that Muslims and their leaders fail to understand the obvious.
Tehran Times of 5 August 2016 reported Ali Akbar Velayti (close confidante of Iran’s supreme leader Ali Khamenei) stating that “There is no difference between the Republicans and Democrats in terms of their stance on our country and as we see the Democrats also create obstacles to the JCPOA agreement (of 14 July 2015) with Iran.” Khamenei asserted that “We do not violate the deal, but if the other party violates it, if they tear the agreement up, we will light it on fire,” He was referring specifically towards US belligerence with Iranian missile program and most recently after US Republican Congressman Peter Roskam’s bill of 9 July got passed blocking sale of Boeing and Airbus aircrafts without any significant Democratic opposition. Roskam cited that Iran would use the aircrafts for military purposes. Both US political parties are sowing the seeds of the great Shia-Sunni civil war.
The final act will be played out between the clown and the juggler and the winner will be declared by the media on 8 November. In the meantime, pollsters will be handing out questionnaires to the circus participants for their feedback and reporters will go around with questions as to who has been the best performer.
Now let’s get serious. I’m one of the circus participants, a Muslim. I’ve hated Trump because of his anti-Muslim or anti-immigrant verbiages and sarcasms so on the poll card I’m going to give him very low marks and when the reporter comes to me with his microphone, I’ll just say, without any thoughts, that I’m going to vote for Hillary, a pro-Muslim, pro-immigrant Presidential candidate.
Khizr Khan whose son died for America some few years ago did not come on his own to the DNC; he was invited because as a Muslim he’d be in a better position to convince his compatriots. Many things are known about him – some rumors, some facts – but one is that, as an attorney, he also used to work for Hogan, Hartson and Lovells law firm within Washington DC which has direct ties to the Clinton Foundation.
Khizr came to the DNC to convince Muslims (and immigrants) that Hillary is the hope for them. Not Trump. At least Trump is honest to state that “the elections are rigged in favor of the ‘Devil Hillary Clinton’?”. There is no doubt that the elections will be staged in favor of Clinton.
Very few Americans can see through Clinton’s design which will be revealed after she moves in to occupy the White House and forms her cabinet. One sure sign of an impending civil war will be the neo-cons in the cabinet. Victoria Nuland is Hillary’s protégé at the State department. Will she or her husband Robert Kagan, one of the co-founders of PNAC (Project for the New American Century) be selected Secretary of State in the cabinet? There are the other influential neo-con Kagans namely Fredrick Kagan (brother of Robert Kagan) or his wife Kimberly Kagan who founded the Institute for the Study of War- a hawkish Washington group favoring an aggressive American foreign policy. Clinton also has a Muslim protégé – Huma Abedin (fluent in Arabic as she had lived in Saudi Arabia with her Indian mother and Pakistani father) appointed as Clinton’s deputy chief of staff and vice chairwoman for 2016 campaign for president. Khizr will have good company in the state department.
On Election Day all the Muslims and the immigrants will vote for Hillary as the first woman President who will follow the first black president into the White House. The US does not tolerate gender, religious, color, ethnic or race discrimination. But what will Hillary do for Muslims in return that Trump would never have been able to do? You guessed it – start a Shia-Sunni civil war. For her it’ll be a simple matter, exactly what she did in Libya. John Kerry has prepared the groundwork for her with the Iran card to get the war started on a yet unknown pretext.
The civil war in the Middle East will not only be about Israel’s security but also an American imperative as a global empire and for the control of the vast energy resources under the desert sands.
- Chinese Loan Demand Drops To All Time Low
With China’s latest housing bubble once again in full swing, when as reported overnight the average new-home price in China’s 70 cities rose 1.2% in August, the biggest monthly increase in six years…
… the euphoria for home purchases can be easily explained: an epic burst of mortgage loan issuance, serving as the false foundation for China’s latest home buying spree.
However, step away from the residential housing market, and things turn decidedly sour. As Caixin reported overnight, loan demand in China, as opposed to record supply,
… has plunged to all time lows. Specifically, the willingness of Chinese companies to borrow reached dropped to the lowest print in the series’ 12 year history, according to a survey published by the country’s central bank on Sunday.
Amid China’s accelerating economic slowdown, the country’s overall index of loan demand was at 55.7 in the third quarter, the lowest since the People’s Bank of China started to compile the data in 2004. The index of loan demand from medium-sized enterprises fell to 52 and for small business to 55.8, both historic lows. However, the figure for large corporations slightly rebounded at 51.4, up 0.1 points from a quarter earlier.
Faced with a slower economy, small and medium-sized enterprises (SMEs) now find it difficult to expand their businesses, said an SME loan manager at one of China’s midtier commercial banks who did not want to be named, citing bank policy against speaking to the media. He said his bank has been losing borrowers since the first half of 2015.
Additionally, banks have imposed tougher rules on approving loans to SMEs amid rising non-performing loans. Tighter restrictions, in turn, have cooled companies’ enthusiasm to seek new funds from banks, the SME loan manager said.
And here is a stunning statistic you will likely not hear anywhere else as it may shake the very foundations of China’s house of cards: “20% to 30% of his business customers haven’t repaid their debt, he said.”
As we have reported for years, in the latest period, 12 out of China’s 16 publicly listed banks saw a rising level of non-performing loans in the first half of 2016 compared with the same period a year before.
At the same time, and explaining the rise in NPLs, the demand by manufacturers for loans declined in the third quarter, falling to 46.8 from the second quarter’s 48.
Chinese manufacturers’ growth stagnated in August, with the Caixin China Purchasing Managers’ Index coming in at 50, down from 50.6 the previous month. The PBOC’s index of loan demand from the non-manufacturing sector remained unchanged at 55.1.
Some more Chinese fiction peddling: more than half of the bankers from the 3,100 institutions surveyed by the central bank said the national economy in the third quarter was “cooling down,” while 44.6 percent of them thought the overall trend looked “normal.” That’s more than half who said China’s economy was set for more economic deterioration.
Finally, of the 20,000 residents surveyed, 53.7% said the housing prices are “high and unacceptable,” 0.3 percentage points more than in the second quarter. Only 3.4 percent described prices as “satisfactory,” and the remaining 42.9% considered them “acceptable.” Then again, if loan demands continues to collapse at this record pace, the clearest indication yet that China is indeed headed for a hard landing despite the trillions in new loans created (which go who knows where if they are not actually demanded), all those house prices will soon become far more affordable.
- US Supplies Saudi Arabia With White Phosphorus, Provided Bombs Used In Strike On MSF Hospital
Three years ago, the great democracies of the west used a specially produced media campaign in which they paraded a doctored YouTube clip showing a chemical attack allegedly perpetrated by the Assad regime against his own people, to unleash the first military intervention in Syria, with the intention of removing the country’s president; a military campaign that has not only gone nowhere, but has led to the deterioration of a bloody and relentless civil war whose refugees may soon cost Angela Merkel her political legacy, led to the advent of the Islamic State one year later, and the intervention of not only Russia one year ago but – most recently – China, also on the side of the Saudi regime.
Much less has been said about a the deadly military campaign waged by US ally, and generous Clinton Foundation donor, Saudi Arabia, which on March 26, 2015 began carrying out airstrikes in Yemen and imposing an aerial and naval blockade on the country, allegedly in response to requests for assistance from the contested government of president Manusur Hadi, who asked for help to quell an uprising by Houthi forces loyal to former president Ali Saleh, who had been deposed in the 2011 Arab Spring uprisings.
The reason why this particular campaign, which continues to this day with thousands of innocent civilian casualties, has been largely swept under the rug is because of the direct and indirect involvement of US support which according to a new report, may include the highly controversial compound, white phosphorus.
According to WaPo, Saudi Arabia appears to be using U.S.-supplied white phosphorous munitions in its war in Yemen, based on images and videos posted to social media, raising concerns among human rights groups that the highly incendiary material could be used against civilians, something which is banned by the Geneva convention. Under U.S. regulations, white phosphorous sold to other countries is to be used only for signaling to other troops and creating smoke screens. When the munition explodes, it releases white phosphorous that automatically ignites in the air and creates a thick white smoke. When used against soldiers or civilians, it can maim and kill by burning to the bone.
The WaPo reports that while it is unclear exactly how the Saudis are using the munitions, the government has already received widespread condemnation for its indiscriminate bombing in civilian areas since its campaign against rebel forces in Yemen began in 2015. U.S. officials confirmed that the American government has supplied the Saudis white phosphorous in the past but declined to say how much had been transferred or when. After reviewing a social media image taken from the battlefield that showed a white phosphorous mortar shell, a U.S. official told the Washington Post it appeared to be American in origin but could not trace it to a particular sale because some of the markings were obscured.
“The United States expects any recipient of U.S. military assistance to use those items in accordance with international law and under the terms and conditions of any U.S. transfer or sale,” said a State Department official, who spoke on the condition of anonymity to discuss politically sensitive issues. Only in this case, Saudi Arabia appears to have an exemption.
The official said the department was looking into reports of Saudi forces’ improperly using U.S.-supplied white phosphorous munitions. “If a country is determined to have used U.S.-provided weapons for unauthorized purposes, the U.S. will take appropriate corrective action,” the official said.
While the United States has grown wary of its material support to the Saudi military, it continues to provide Saudi Arabia with billions worth of weapons in periodic “deals.” Still, in May, the Obama administration halted the sale of roughly 400 cluster bombs to the Saudis after human rights organizations documented the weapons’ use in civilian areas. This week, lawmakers on Capitol Hill moved to delay a $1 billion arms deal that would replace some of Saudi Arabia’s U.S.-supplied tanks that have been damaged in the conflict.
International humanitarian law does not ban the use of white phosphorous outright, but there is a strict requirement that it be used only in areas clearly separated from civilians. Even using it against enemy combatants has raised concerns, given that the munitions can cause particularly horrific injuries. In the case of Saudi Arabia, neither consideration has prevented the kingdom from using the substance under any conditions.
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But it’s not just the use of US-supplied white phosphorus that is an issue, however.
A report by Amnesty International confirmed that a US-made explosive was used in an attack on a Yemeni hospital on August 15. The medical facility – Abs Rural Hospital, run by Doctors Without Borders (MSF/Medecins Sans Frontieres) – was hit by a strike that left 11 people dead and 19 others injured. Over 4,500 patients had been treated in the hospital since MSF began supporting it. he attack was the fourth over the last 10 months on an MSF facility in Yemen, and led the organization to close its hospitals in the north of the country.
Damage is seen inside a hospital operated by Medecins Sans Frontieres
after it was hit by a Saudi-led coalition air strikeExperts analyzed photos of munitions used in the bombing and concluded that a US-made precision-guided Paveway-series aerial bomb was among them. “Any attack on a medical facility in a war zone is an affront to humanity, yet this bombing is sadly just the latest in a grim series of attacks on hospitals and clinics by the Saudi Arabia-led coalition,” Philip Luther, Research and Advocacy Director for the Middle East and North Africa at Amnesty International, said in the official press release. “Deliberate attacks on hospitals and medical facilities are serious violations of the laws of war and can never be justified. Hospitals, which have special protection under international humanitarian law, should be safe places of treatment and recovery,” he added.
“It is outrageous that states have continued to supply the Saudi Arabia-led coalition with weapons, including guided and general purpose aerial bombs and combat aircraft, despite stark evidence that those arms are being used to attack hospitals and other civilian objects and in other serious violations of international humanitarian law.”
Cited by RT, Luther called for a “comprehensive embargo on all weapons that could be used by any of the warring parties in Yemen,” and punishment for those behind the attack. Since he was referring to the US, that will not happen.
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Finally, and most troubling, two days ago the Guardian found that one third of 8,600 Saudi-led strikes in Yemen since March 2015 have targeted civilian sites such as hospitals, schools, and mosques. It comes as the US Senate is set to vote on a draft bill that could stop a $1.15 billion weapons and military equipment delivery by the US to Saudi Arabia. The bill was approved in August, but later that month 64 Senators signed a letter to halt the sale – ensuring that the Senate would discuss it.
Last November, the US State Department okayed the delivery of weapons worth $1.29 billion to Saudi Arabia, despite the fact that Amnesty International had repeatedly revealed they were being used in illegal and deadly attacks on civilians.
Since coming to office seven years ago, the Obama administration has made over $115 billion worth of arms sales to the Saudis – more than any other US presidential administration, a report in the Security Assistance Monitor said.
Over 3,700 civilians have been killed and some 2.8 million displaced by the ongoing war in Yemen, now in its second year, according to the latest estimates by the UN Office of the High Commissioner for Human Rights. Which is also why while the US airwaves are constantly bombarded with news about the Syrian conflict, hardly any major outlet will touch the just as deadly Yemen war with a ten foot pole.
- Why Is There So Much Confusion In Macroeconomics?
Submitted by Frank Hollenbeck via Mises.ca,
Should we print, not print? Stimulate, not stimulate? Is austerity the right or wrong policy? Is government spending or printing effective? If we ask two economists these questions, we will likely get three opinions for each question. Economists seem confused, yet these questions are more important today than ever. Where does this confusion come from? Doesn’t economic theory give us clear-cut answers? It does, but poor terminology and a lack of focus have muddied the waters. Many macroeconomic disagreements can be elucidated with a better understanding of the role played by holding cash, or hoarding, in economics.
To a large degree, Keynes is to blame for much of this confusion by using a double entendre. In his “General Theory,” he did not clearly distinguish between savings (correctly defined) and hoarding. The paradox of thrift is a misnomer. Thrift is both savings and hoarding. It should correctly be called the “paradox of hoarding”. Economists should not be this careless with terminology.
Even today, confusion persists. When Paul Krugman discusses thrift he is alluding to the impact of hoarding. When Austrians talk of thrift they are referring to savings. Keynesians and Austrians seem to be on different planets and some of the blame can be attributed to poor terminology.
In a circular flow economy, the value of output must be equal to income. Income represents claims on goods and services, and can be divided into three categories. It can be consumed, saved or hoarded. Consumption is using claims on goods and services for personal satisfaction. The correct narrow definition of savings is a transfer of claims from one group to another. This is the definition found in the classical loanable funds theory of interest rates. The saver is giving up his claims to be able to consume more goods and services in the future. He makes this transfer to investors who use these claims to purchase plants and equipment to produce goods and services in the future. The last category is hoarding, or holding cash, which is the equivalent of stuffing money in your mattress. From income, it is the only claim that is not used to purchase currently produced goods and services. Keynes, and his followers, constantly uses the word “savings” to imply two very different and distinct acts: the activity of transferring claims and the activity of holding claims. Classical economists were never this careless.
Since these claims are unused, Keynesians fear, in a circular flow economy, the value of output would be higher than the amount of claims used to purchase that output. Since some output would remain unsold, inventories would rise, output would be curtailed, and a downward spiral in output would ensue. Any future shift in hoarding will create another spiral in output. In this scenario, prices do not fall to bring the value of output in line with the value of claims. In a Keynesian framework, prices are sticky downward.
Let me explain this point with a very uncomplicated example. Suppose you have 10 pencils and $10. What is the price of a pencil? It can’t be $2 since we would have pencils that remain unsold, so the price would tend to fall. It can’t be 50 cents since people would have money and nothing to buy. Prices would be bid up. This would lead to equilibrium where pencils would be sold for $1 each.
Since the government does not create pencils, the only way it can obtain pencils is by taking claims from others by borrowing, taxing or printing. If it prints $10 and used it to buy pencils, the price of pencils will increase to $2 (inflation) since we now have $20 chasing 10 pencils. The government will obtain 5 pencils by lowering the purchasing power of money. It has taxed cash balances the equivalent of 5 pencils. The same logic applies to taxes or borrowing. Every dollar printed, borrowed or taxed to finance government spending displaces an equivalent purchasing power from private consumption or investment spending. Government spending is robbing Peter to pay Paul. It rearranges the deck chairs, but does not add deck chairs.
Most economists would agree with this “crowding out” example. Why then do some economists advocate more government spending if government spending displaces an equivalent amount of private spending? The answer lies in the role played by hoarding.
From our initial example, suppose we hoard $5. The price of output will fall to $0.50, a period of deflation, since we now have a money supply of $5 chasing 10 pencils. If input prices also fall proportionately from $0.80 to $0.40, we are still making the same profit rate and the economy has simply adjusted input and output prices to a new level of hoarding. Hence, the level of hoarding is immaterial and the economy is operating as though we had started out with a money supply of $5 and 10 pencils.
The Keynesian fear is twofold.
If output prices are sticky, the price of a pencil will remain stuck at $1, or will only drop with a long lag. In this situation, with $5 chasing 10 pencils at a price of $1, we will be left with 5 unsold pencils. This excess output will lead businesses to curtail output, fire workers, until we are left with a new equilibrium of maybe only 5 pencils. The entire adjustment process has been in output and not in price.
The second fear is even if output prices adjust, input prices do not adjust quickly enough. If input prices remain at $0.80 while output prices are at $0.50 we are producing at a loss, which leads to less output, more hoarding, and a downward deflation-depression spiral in the economy.
The Keynesian prescription to avoid this depression in output is to have the government substitute its own claims for those being hoarded. The government’s claims are substituting for claims not being used. The price of pencils would remain at $1, with $5 of private demand and $5 of government demand. The government would have to print and use $5. It can neither borrow nor tax to finance this government spending since that would be mostly displacing claims that are not being hoarded.
According to the well know Keynesian balance budget multiplier, if the government spends $1 and taxes $1, output will rise by $1. This output magic occurs because the amount taxed reduced consumption and hoarding. If, instead, the amount taxed had reduced savings, in the place of hoarding, $1 of government spending will displace $1 of consumption and (savings) investment spending: the multiplier is zero, and government spending, fiscal policy, has no direct aggregate demand influence on output. Of course, if we consider the supply side, the multiplier is negative. As Murray Rothbard eloquently said, this is a transfer of “resources from the productive [private sector] to the parasitic, counterproductive public sector.”
Much of Keynes’s economic analysis was to disproportionately elevate the importance of hoarding. Classical economist considered the level of hoarding inconsequential, and its changes even less so.
From this analysis we can draw the following conclusions from a Keynesian perspective. Government spending is only effective if it substitutes for claims that are being hoarded. This spending must occur while the public is increasing its desire to hoard, such as after a crash such as 2000 or 2008, and only justifiable if there is a slow adjustment of both output and input prices. Also, this substitution is only effective if it is done through monetary and not fiscal policy.
Of course, this analysis has only looked at the direct aggregate demand effects of such printing, and has not examined the microeconomic impacts, supply side and other negative effects of printing money.
Such printing is distortive (altering absolute and relative prices) and will cause a misallocation of resources since the new money will not be spent in the exact same areas or proportions as the money that is now being hoarded. Furthermore, even if the government could find the right areas or proportions, it would still lead to misallocations, since the hoarding reflects a desire to realign relative prices closer to what society really wants to be produced. The printing of money may actually increase the desire to hold cash, as we see today. Holding cash may be the preferred choice over consumption or investment (savings) when relative and absolute prices have been distorted by the printing press.
Of course, no one is asking the critical questions. Why did holding more cash, or hoarding, change the money supply, and why did the public and banks decide to increase their cash holdings in the first place? Without fractional reserve banking, neither the public nor the banks could significantly change the money supply by holding more cash, nor could banks extend credit faster than slow-moving savings. The boom and ensuing malinvestments would be a thing of the past and, thus, so would the desire to hold more cash during the bust phase of the business cycle.
If Keynesians are really concerned about this deflation-depression spiral, they should be addressing the cause — fractional reserve banking — and not the result. Telling a drunk that he can avoid the hangover by drinking more is simply making the situation worse. The real solution is to have him stop drinking.
In addition, what happens when the economy improves and people reverse their hoarding? We will now have 10 pencils and $15. Other things being equal, prices will rise from $1 to $1.50, unless the government retires the $5 it put into the system. If they do, this will create another round of altered relative prices. The medicine is likely to be worse than the disease.
While Keynesians may have been able to make a case for printing press money as a substitute for hoarding in 2008, it is impossible to do so today. Current government spending or printing is simply displacing claims from the private sector. Today, there is no theoretical justification for the current overzealous printing, borrowing and taxing. Economists should be united against this displacement of claims. Growth and employment are simply more likely if claims are in private hands than in public hands.
Surprisingly, Keynesians and Austrians should be uniting to achieve the same goal, albeit for different reasons. Austrians fear the boom caused by excessive credit growth, while Keynesians (and Monetarists) fear the bust created by increases in hoarding. End fractional reserve banking and satisfy two birds with one stone.
- MeRKeL UNDeR RePaiR…
- Italy's PM Unloads On Deutsche Bank's Unfixable Problem: "Hundreds And Hundreds Of Billions Of Derivatives"
After a tumultuous week for Deutsche Bank which saw the DOJ demand a $14 billion settlement for the bank’s past RMBS transgressions, it was another bad day for the giant German lender, whose stock and contingent converts tumbled after the investing community realized that even a modest $5.5 billion final settlement would leave it perilously undercapitalized and likely scrambling to raise more cash.
As SocGen’s Andrew Lim calculated, Germany’s biggest bank would be “significantly undercapitalized” even if an eventual settlement with the DoJ can be covered by the bank’s reserves. Any settlement above €5.4 billion would imply a capital increase is needed just to pay the fine, he wrote.
Taking prompt remedial action, news leaked over the afternoon that Deutsche Bank was hoping to bolster its balance sheet and boost its capitalization, when The Street first reported that it was trying to securitize at least some $5.5 billions of corporate loans to offload risk. The problem for Deutsche Bank, already ranked among the worst-capitalized lenders in European stress tests before the DOJ’s $14 billion demand, is that by admitting it is in balance sheet “recovery” mode it would make shareholders even more nervous: what if the bank failed to securitize those loans? Or what happens if yet another legal settlement arrives? Or, worst of all, what if Mario Draghi cuts rates again and pressures the bank’s inceome statement even more? There is little the bank can cut as is: CEO John Cryan already suspended the bank’s dividend to preserve capital and has repeatedly ruled out tapping investors for more; but if he has to, he surely will.
But not even that is the biggest problem facing Deutsche Bank.
Recall that several years ago, we were the first to point out the true “elephant in the room”, namely Deutsche Bank’s $75 trillion at the time in gross notional derivatives which as we said then was about 20 times bigger than Germany’s GDP, and 5 times bigger than the entire economic output of the Eurozone.” Much to the chagrin of those who did (and still do) accuse of being conspiratorial something or another, since then Deutsche Bank stocks has plunged, reaching all time lows as recently as a few months ago.
Still, Deutsche Bank’s “derivative problem” was largely ignored by the “experts” because why bring attention to something which is fundamentally a devastating break in the narrative that “Europe is fine” and the financial crisis is contained.
Fast forward to today when Europe is once again not fine, only this time one can’t blame Europe’s problems on Greece or Brexit, when in a surprising admission of reality, none other than Italy’s prime minister Matteo Renzi, “went there” and slammed Deutsche Bank as the true “derivative problem” facing Europe.
To be sure, Renzi has his own problems, chief among which is how to conclude the latest and greatest bail out of Italy’s third largest and most insolvent bank, Monte Paschi, a process which we hear is not going well at all, without resorting to a government-funded rescue – a plan which the Germans have repeatedly frowned upon.
So it is not surprising that when faced with stiff resistance from the Germans, Renzi decided to call a spade a spade when, as Reuters reports, he said that the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives.
As Reuters reports, Renzi once again broke with the fine European tradition of ignoring the massively overlevered elephant in the roon, and said on Monday that Germany’s central bank chief Jens Weidmann should concentrate on fixing the problems of his own country’s banks, after Weidmann had urged Italy to cut its huge public debt.
Specifically, Renzi told reporters in New York that Weidmann needed to solve the problem of German banks which had “hundreds and hundreds and hundreds of billions of euros of derivatives” on their books.
He was, of course, referring to Deutsche Bank.
Renzi, who has staked his career on a referendum on constitutional reform this autumn, has repeatedly criticized other European leaders in the last few days over what he sees as an inadequate European Union response to the problems of his country’s economy and Europe’s immigration crisis, which in 2016 has slammed Italy most acutely, largely bypassing Germany for the time being. In this particular case, Renzi was responding to an interview Jens Weidmann gave to daily La Stampa on Monday, in which the German said Italy needed to consolidate its budget to avoid doubts emerging about the sustainability of its public debt.
Renzi’s angry response was predictable: stop worrying about Italy’s debt problem, after all that’s what the ECB is for, to monetize it and keep rates artificially low indefinitely. Instead worry about your own mega bank, which judging by its stock price, is something the market has been doing for quite a few months now.
And while Renzi may be wrong about almost everything else, he is right about Deutsche Bank’s “hundreds and hundreds and hundreds of billions of euros of derivatives.”
€42 trillion to be precise.
Then again, it’s more than just Deutsche Bank’s problem; more than just Germany’s problem. If something bad happens to DB, it is Europe’s problem.
So while DB may or may not find a few billion under the rug to plug its latest leaking hole, the real question is what happens when, not if, another crisis flares up and one or more counterparties to the bank’s trillions in various derivatives suddenly is unable to post margin, as its obligation becomes a pre-petition claim, sticking DB with the entire gross notional derivative amount and forcing the German giant to foot the gross, not net. Something tells us that like in 2013, nobody will acknowledge the biggest elephant in the room: after all, at this point financial liabilities are now a political issue (especially when one can blame Putin). The only difference with 2013 is that as Europe continues to splinter, more disenchanted political leaders (because the “enemy of my enemy is my friend”) will join Renzi in admitting that Europe’ emperor – Germany – and its mega bank, is not only naked but one needs scientific notation to express just how big its financial problems truly are.
- The Gravest Threat To Your Retirement
Submitted by Tom Dyson via InternationalMan.com,
It’s one of the most exciting, most incredible charts in human history…
Unfortunately, it’s also one of the scariest.
Take a look:
It’s a chart from the U.S. Census Bureau. It shows the centenarian population.
A centenarian is a person aged 100 or older.
The arrow shows how many centenarians exist in America today. The curved line after it shows the explosion of the 100-year-old population in the years to come.
In every developed nation worldwide (such as the United Kingdom, Canada, Australia, and Japan), you’ll see the same trends.
Lifespans are increasing at an unprecedented rate. And the 100-year-plus age bracket is the fastest-growing group of people.
Let that sink in for a minute.
Right now, the U.S. has an estimated 72,000 centenarians.
If the population of centenarians continues to increase at its current rate, the U.S. will have close to 500,000 people over the age of 100 by 2055. A sixfold increase from today’s numbers.
Some of you reading this will live to 100. Many experts believe the first humans to live past 125 have already been born.
Thanks to advances in medicine, diet, lifestyle, and hygiene, we’re living longer than ever before. And it’s only going to get better (or worse, depending on how you look at it).
Living to 100 is an amazing prospect. It means more time with grandkids… more time with friends… more time to see the world… more books to read… additional hobbies to learn.
That’s the exciting, incredible part of getting older in America.
The scary part is paying for it all.
Those additional years will also contain health care bills, food bills, electric bills, insurance bills, and dozens of other bills. That’s why one of your greatest concerns should be running out of money in retirement.
Thirty years ago, the solution to money worries in retirement was relatively simple.
There was no concern about the solvency of Social Security.
Many corporations paid their retired employees pensions.
Back then, you could put your saved money in safe corporate bonds that paid over 9% in interest. Even short-term government bonds paid over 6% in interest.
These days, the solvency of Social Security and just about every government program is in question. Pensions from corporations have all but disappeared. And with interest rates near zero percent, government bonds yield less than 2%.
Add to this the coming volatility in the stock market as The Great Unwinding unfolds.
(The Great Unwinding is what I call the largest credit contraction in history. The world has binged on debt since the Great Depression in the 1920s and ‘30s. We’re now at the breaking point. Trillions in debt are starting to go bad and leave the system. I think the market is now in a primary downtrend. This means we’re in a bear market where assets and markets will fall steadily for a long time.)
The risk of running out of money because of all these factors is real… and growing.
It’s perhaps the scariest time to be a retiree.
I don’t think many see it coming. And I don’t see many people preparing for it.
Now, most people are counting on Social Security to bail them out. After all, with Social Security, you get steady, consistent income not tied to volatility in the stock market… for the rest of your life.
But if you rely, or will rely, on Social Security for a big portion of your retirement income, it’s time to start paying close attention.
With increasing life expectancy rates, I have serious concerns many retirees aren’t taking their financial futures into their own hands. And that they don’t have another plan in place.
If this sounds like you, don’t lose hope. A longer life is a blessing. And no matter how unprepared you may feel at the moment… there’s still time to set yourself up for a fulfilling, worry-free retirement. But you must start taking the right steps to prepare.
- House Committee Reviewing "Oh Shit" Guy's "Troubling" Reddit Thread
Earlier today we wrote about a Reddit thread that was allegedly created by Paul Combetta, the “Oh Shit” guy of Platte River Networks, seeking tech advice on how to “strip out a VIP’s (VERY VIP) email address from a bunch of archived emails” (see details here: “Dear FBI, This Is Intent: Hillary’s “Oh Shit” Guy Sought Reddit Advice On How To ‘Strip VIP’s Emails’“).
“Ironically,” the day before the Reddit thread appeared, the Benghazi Committee reached an agreement with the State Department on the production of email and other records related to their investigation. How weird, right?
Well, it seems as though the Reddit thread is getting some attention on Capitol Hill as well. Earlier, Mark Meadows (R-NC), Chair of the Government Operations subcommittee of the House Oversight Committee, told The Hill that committee staff are reviewing the Reddit thread and find the “date of the Reddit post in relationship to the establishment of the Select Committee on Benghazi [to be] troubling.”
“The Reddit post issue and its connection to Paul Combetta is currently being reviewed by OGR staff and evaluations are being made as to the authenticity of the post.”
“If it is determined that the request to change email addresses was made by someone so closely aligned with the Secretary’s IT operation as Mr. Combetta, then it will certainly prompt additional inquiry. The date of the Reddit post in relationship to the establishment of the Select Committee on Benghazi is also troubling.”
Of course, as we mentioned a couple of weeks ago, the “Oh Shit” guy was granted immunity by the DOJ for cooperating with the FBI’s investigation into Hillary’s email scandal (see “The “Oh Shit” Guy That Wiped Hillary’s Server With BleachBit Was Just Granted Immunity“).
Therefore, the only question left to answer is what recourse, if any, Congress and/or the FBI has to nullify Combetta’s immunity agreement with the DOJ if he is found to have withheld information and/or committed perjury while being questioned by federal agents?
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