By Peter B. Meyer – 25th of November 2012

Remember, how the EU and the USA, about a couple of years ago, were desperate to “prevent a catastrophic collapse?” The European banks bailed out their speculators. Then the governments bailed out their banks. Then, they bailed out the countries that had bailed out their banks.  In America, the government bailed out the banks, the insurance companies, the automakers and a few more.  Then, the Europeans and the Americans bailed out each other.

And today they’re still bailing. The US is running a budget deficit so large that track is lost how much it really is, was it $1.5 trillion or more? While in the EU it isn’t much different. Nonetheless as per today the Europeans keep preparing big bailouts for Greece, Cyprus, Spain, Portugal, Italy, and who knows whom else more.

Every bailout makes the world poorer, because it’s clearly bad money after good. Greece does not suddenly become a good credit risk just because it is lend more money. And Americans won’t be made richer because the feds offer them more debt at an even cheaper rate! Doing more of something that didn’t work is not a good idea. It is not a good objective to put more money into an investment that isn’t paying off, or to allocate more resources to an industry that stopped producing real benefits a generation ago.  

What happens when Greece finally defaults? In a bit of irony, Greece played a role in the first known debt crisis more than six thousand years ago. Bloomberg reports: "History's first sovereign default came in the 4th century BC, committed by 10 Greek municipalities. There was one creditor: the temple of Delos..."

Opinions on Greek default have settled into two camps. One side sees a catastrophic event to be avoided at all costs. The other, a healthy act of cleansing that can't come soon enough.

Angela Merkel, expressed her darkest fears, arguing a Greek default would "destroy investor confidence" and could "spark contagion" in the style of Lehman Brothers in 2008. "We need to take steps we can control. What we can't do is destroy the confidence of all investors mid-course and get a situation where they say that if we've done it for Greece, we will also do it for Spain, for Belgium, or any other country. Then not a single person would put their money in Europe anymore."

On the opposing side, Jim Rogers believes Greece cannot default fast enough -- and says he would buy euros if it did. Via a Reuters interview he explains:
Well I hope that Greece defaults. It would be good for Europe, it would be good for Greece, and it would be good for the world. It would be good for the euro if they finally accepted reality and made Greece default, made the people who made the bad loans take their losses, and they made that happen to a couple of other countries. Everything would go down a lot... but that would be such a magnificent buying signal I would buy all the euros I could at that point, because then we would know we're going to have a sound currency, we're going to have a strong euro. It's not going to happen, but if it happened that way, wow. Then we'd have a serious competitor to the U.S. dollar.

Let’s have that catastrophic collapse and get it over with. Better now than later. It will only be worse if it is postponed. The problem can’t be fixed. When you borrow too much money, you have to pay it back. Or default. Better to do it as soon as possible. The ‘fix’ is obvious. Bite the bullet.

But there’s more. There also is the zombie factor. This is something that can be fixed easily. As institutions age — including private industries — they attract parasites. It’s all part of the picture of a society in need of a revolution, or a kick in the pants. Allow businesses and nations to go broke. No subsidies. No bailouts. No below-market loans. Just let them crash and burn.

Then, cut taxes to 10%, without deductions. No ifs, or buts. Russia already has a tax like this. And it is booming. Prohibit borrowing, and money printing. These measures would solve the debt problems overnight. They would protect the dollar and the euro. These would reassure investors, businessmen and householders and most importantly budget deficits.

A flat 10% tax rate would cut out most of the zombies. Freed from the dead hand of zombidom the private sector could get back to work.

The biggest risk is political. EU politicians aren’t interested in a kind of overhaul, which is not in their own interest; too many of the lucrative well-paying jobs would be gone. Rather than buckle down to restoring confidence, they are bent on another time-consuming redesign. José Manuel Barroso, the European Commission president, asserts that the “fight for the economic and political future of Europe” requires “a new federal moment.” What nonsense: it requires apologies to the EU’s furious voters. A headline in the German DIE WELT this weekend says it all: YOUNGER GENERATION HAS NO IDEA WHAT TO EXPECT. Young Germans face huge debts: Only six percent know that the current national debt is more than two trillion euros, while a large part of that debt is hidden.

The Greek debacle is the result of joining together incompatible economies. The 19th-century Latin Monetary Union embracing France, Italy, Spain, and Greece collapsed when the Greeks (and the pope) were caught debasing the common silver coinage, then too the world did not end.

The euro cannot be dismantled without a huge danger, in today’s turbulent conditions, but its long-term future is another matter. The colossal resentments generated by euro membership, in its debtor and creditor members alike, pose the real threat to Europe as an ideal. EU turmoil is a headache the world does not need. But headaches are seldom fatal.

In China, national economic policy keeps interest rates similarly to low too. It's an overt, albeit indirect, government subsidy to banks. The banks, in turn, make dicey loans, on favorable terms, to favored, often state-controlled entities.

The result of low Chinese interest rates and many years' worth of overly risky loans is embodied in stories about excess capacity across Chinese industry and uneconomic showcase projects that are monuments to the vanity of some big-shot official.

In China, as everywhere else, money that's "too cheap" leads to all manner of silly boondoggles. Just consider some of the stories, like empty airports, deserted shopping malls, see-through cities, bridges to nowhere, idle steel mills and silent shipyards.

The U.S. elections revealed the US is heading more toward the European economic model that the shift into gold should accelerate, as in China Gold is their hedge for the slowly eroding value of China's U.S. Treasury holdings.

Anyway for everyone with common sense, its time to prepare oneself for a historical turn in society, rather sooner than later the usual will change for the new future. In attached video a self-described libertarian, and his business partner, Dr. Steve Lantier, show how they transformed a hospital and staffs mentality for the new era, after they became disillusioned with the way patients were treated. In 1997, Smith and Lantier bought the shell of a former surgical center with the aim of creating a for-profit facility that could deliver first-rate care at a fraction of what traditional hospitals charge.

By Peter B. Meyer – September 8, 2012

Another round of Keynesian debt throwing of new debt after old, after three years of gloom and doom, it won’t cure the EU and Euro. What is the logic of this new ECB money printing, buying Spanish and Italian bonds? Evidently delaying the final execution by the guillotine.  
 
Democratic politics is a distasteful, mass-driven affair. The great mass of mankind is both neither smart nor dumb, good and bad. But it is subject to influence. And when it thinks, it can vote itself someone else’s money; it rushes to the ballot box. As a modern democracy matures, it shifts from being a nation of makers to becoming a nation of takers. Wealth and power are gradually transferred from those who earn it to those who use the system to commandeer it. The parasites take over, in other words creating this crisis.
 
Over a century and a half since the invention of modern social welfare democracy, politicians have learned how to game the system. They promise voters more and more ‘benefits’ from someone else’s money. If they only promised to give voters as much in benefits as they paid in taxes, they would be liars. It costs a lot of money to administer a government. At best, they can only return a portion of what the government receives in tax revenues. But as the welfare states have matured, more and more people found ways to get more and more out of it. From special parking places to tax credits, subsidies, to military contracts. ‘Benefits’ have expanded far beyond what the public can afford. No wonder sovereign budget surpluses are impossible!
 
Initially the crisis started by huge consumer debt, people spent money they didn’t have on things they didn’t need, and then obviously the problem can’t make go away by lending consumers more money. That’s why all the Central Banks and Governments’ efforts have failed, by spending about five times the original private debt quantity on things society doesn’t need, just to create illusionary new employment for the unemployed. Households are reluctant to borrow, first, because they don't have the income or the collateral to support it, and second, because they've already got too much debt and are eager to get rid of it. Consumers need to pay down what they can pay, and default on what they can’t. That’s an axiom not to be neglected. When the economy goes into a credit contraction, adding more debt is like pouring gasoline on a fire in de hope to extinguish it. It's not the kind of medicine that will work, to solve this debt crisis. That's why a depression is needed, with defaults, a bear market, and higher interest rates that can restore the economy.
 
More austerity and raising taxes even further in an effort to fill the budgetary gaps created by election-cycle promises in the absence of capable leadership don’t work. Stealing from those at home may at first appear to be a superior alternative to borrowing from the ECB, but the consequences are, invariably, more or less the same. The problem with socialism is, as one former English prime minister remarked, that you eventually run out of other people’s money. Added with diminishing “returns” on the stolen money.
 
The EU, world's largest economic area, has entered in a far more serious sovereign debt and banking crisis as generally is admitted. For example: Spain and Italy are already in a severe economic slump, which likely is to worsen as result of their austerity measures and increased taxes, to balancing the budget deficits.  
The ECB is buying sovereign debt without limitation pushing down interest rates to reduce borrowing costs for Spain and Italy. This plan is against the wishes of Germany’s central bank, which says the bond-buying is equal to financing sovereigns’ budgets, which is against the ECB’s own charter. However the Germans don’t have enough votes on ECB’s governing council to prevent this initiative. The size of the euro float will expand dramatically in support of the next stage ‘a huge euro-bond issue’ to prevent a full scale European banking panic. These actions, eventually, are the equivalent of a massive devaluation of the Euro with an immensely inflationary outcome, and when private lenders conclude that official lenders are going to demand priority in repayment in exchange for new lending, the end of the Euro is near. The real solution that will work is debt restructuring and default, as otherwise survival of the Euro remains a fantasy.
 
Marc Faber warned, "I believe central bankers are in this world to print money. They are, intellectually, completely dishonest or incompetent, and that's all they know."
“They will continue to do it (print money), and this will lead to a misallocation of capital as we had in the past, and to further bubbles here and there.  They can sterilize it (bond buying) to some point, but I think, in general, what usually happens is these measures are not fully “sterilized”. Thus, there will be no inflation, as these bond purchases are "sterilized," which means that for every new euro printed to buy these bonds, another euro elsewhere is removed from ECB’s balance sheet, as it is not clear from where exactly, you better asks Mr. Draghi himself. And bear in mind, if Greece defaults, the ECB are bust. 
 
As Clint Eastwood said during Obama’s election convention: "We own this country… Politicians are employees of ours. They're just going to come around and beg for votes every few years… It's the same old deal."
 
The real solution for this crisis is, no politician tolerates, letting Mr. Market sort it out himself. Mr. Market is a professional at this sort of things. He'll get the job done. He'd probably write down the value of all debt; and toss out the stuff that can't be repaid. In a few months, the crisis will be over. Then, the economy could stage a real recovery. In the meantime: “The Euro and the dollar pretend to be real money. Debt pretends to be capital. And regulators pretend to be smarter than capitalists.”
 
It seems crazy, but we need lots more sound liquidity. What about a Bretton Woods II with the dollar, Euro and Yuan convertible into gold at $10,000/ounce? This would give Spain and Italy each a €700 billion boost and eliminate a lot of problems. America would benefit as well because it both holds and produces some gold and because the inevitable inflation would drive oil to, say $200/b and force people to slash consumption even further.
Under a gold standard interest rates cannot be rigged, it would be eliminated. If the currency goes above a certain level, the central bank must remove excess money from the markets by selling bonds; if it goes below they must buy bonds to meet the demand for money. Setting interest rates would be a thing of the past.
 
Of course none of this will happen; all too often our policy makers exhibit a pathological preference for chaos. But even if the above ideas, once considered heretical, get floated, it’s progress. Sooner rather than later the idea that gold could be good will gain traction, and this will be the final, giant step on the road to re-monetization.  
 
Make no mistake: People who are unprepared could watch helplessly as years of savings and hard work slide right out the door, triggered by the coming inflation. Only hard valuable assets, like precious metals will safe your savings.
 
Watch this video to better understand what to expect next year and beyond: Jim Rogers talks EU, US Debt, Elections, and Next Recession/Depression. A dapper Jim Rogers covers a number of important issues in the clip below. Despite the Reuters interviewer, who acts almost as if she is speaking to a senile person, Rogers keeps his cool and seems as sharp as ever.
 
Key points:
· US need to cut spending “with a chainsaw”.
· EU rescue will “absolutely not” work.
· Says Romney’s economic advisers “couldn’t be worse” than Obama’s, may be significantly better [count me skeptical on this point].
· Generally short on stocks, long on commodities.
· “Gold is going much higher over the decade.”
· “More interested in agriculture than anything else”.
· Buys Chinese Renminbi (YUAN) “whenever he gets the chance”.
· Thinks Facebook is sh1t (join the club).  

By Peter B. Meyer – 20th of July 2012

We are 45 months into this economic crisis and there is no end in sight. In fact, thanks to globally coordinated rounds of "easing", it is clear we are no better off now than we were then. Despite the bailouts, the half-cooked stimulus schemes and the promises that things will get better, nothing changed but the days on the calendar.

Spanish banks have dragged the EU economy to the brink and are going to receive a €100 billion bailout. In a letter, published by the German daily, Frankfurter Allgemeine Zeitung, economists said: “(Spanish) Banks’ debts are nearly three times higher than government debts...the taxpayers, retirees and savers in the so-far solid countries of Europe must not be made liable for backing these debts, particularly since gigantic losses are foreseeable from financing the southern countries’ inflationary economic bubbles.” For which reason Finland was so clever to require Spain to submit a collateral to cover the money provided to protect Finish taxpayers. Why aren’t Germany and The Netherlands so clever?

For sure, like in Greece, this latest Spanish bank bailout will not be the last one. Are our leaders crazy? They seem to have learnt nothing. How do we get a stable currency, which is a prerequisite for capital formation? Not by printing more money at every debt calamity. Apparently there is no understanding how an economy has to work. The trouble is that our leaders’ brains are taken over by Keynesian baloney; it was already nonsense when first implemented in the 1930s. The ones in charge are imposters, charlatans, yet nobody complains or pays attention to it.

There is no way to cure a debt deflation by adding more debt. Presumably the leaders do know that, but by admitting, they destroy their reputation, and generous paid jobs.

For well thinking people, it is obvious what is wrong and the solution is obvious too, there is just too much debt. Too many careers, businesses, and budgets depend on all this bad debt. It never made sense to lend debtors more money under the pretention that their debt is ‘good’. That’s where economic corrections are for; to get rid of debt, the sooner the better. The debtors are already notably broke. So let those happen and don’t play ‘hide and seek’.

For a genuine recovery real money is required, put in the hands of people who can make it happen. Like entrepreneurs, family operations, business people, but not the government. Governments are wealth consumers; they only can produce a phony recovery.

For a honest recovery let people keep their money so they can pay their bills, save, invest and spend, whatever they want to do with it. When governments take their money away it is wasted on matters without return on investment, only spent on boondoggles. The worst to do is to raise a tax, which makes people poorer. Wealth is created by capital formation, investment, production and eventually consumption.

Per definition governments are consumers and not producing anything. So what should be done; stop austerity, cut taxes and curtail government spending, eliminate all the bailout commitments, subsidies and whatever more is related. Necessary are balanced government’s budgets, leaving more money in private hands.

The solution: No austerity and no tax increases as are applied nowadays that only lengthen the crisis and let people unnecessary suffer. Those measures and not much else will produce the true resolution for this crisis.

“The longer we have to wait for the final resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point... My personal recommendation is to sit in gold, and non-financial high quality corporate credit, and blue-chip big cap non-financial global equities. Bond and currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears.” Says, Bob Janjuah, Nomura’s International Investment Strategist.

Tags: Solving the EU crisis, EU crisis, Spanish debt, European debt, EU debt crisis, solve EU crisis, Europe

By Peter B. Meyer – 2nd of July 2012

Twenty marathon meetings in two years time, - about once every month - EU leaders solved finally the debt crisis, at least the door went open letting the EU rescue fund inject money in the banks, to enable them buying the bonds from their respective troubled countries, to drive down the yields. The EU leaders agreed on a widely anticipated 120 billion euro ‘growth’ package. There was just one relevant phrase uttered in all, and ironically it came from Italy's own Mario Monti who said that there are "no plans for boosting bailout funds." And this really just is what matters.

"The market will not turn around until it believes Europe's leaders have the resolve to inflate their debts away, as the U.S. has done in spades since 2009. And that's exactly what they'll do at some point this year".

Germany, Finland and The Netherlands couldn't let Spain, Italy, Greece, and their banks fail. As the banks support their government and the government their banks, they together are de facto sovereign credits entities ‘too-big-to-fail’.

“Simply put, we don't believe Europe's monetary authorities are going to let a run on the banks develop. Why not? That outcome would be disastrous for the world's major corporations and big banks. And these institutions exert massive influence on the world's major political leaders. A banking crisis is bad for business. That's why it won't happen.”

In other words, the ECB will now print as much money as is needed to "fix" every bank in the EU. Again another temporary fix or a can kicked down the road. The biggest problem remains, the high debt levels. You can't fix a debt problem with more debt. Expert investor and government critic Jim Rogers told, “The European bailout would lead to financial "Armageddon."” And that is going to happen eventually.

Nevertheless, these new measures appear to be a positive development for banks, stemming interbank lending pressures that have threatened to upset stability in the euro area. But the main problem with the significance of this new plan; it still doesn't fix the financial plumbing of the EU. The plan is merely an attempt to temporarily reduce borrowing costs for Spain and Italy, otherwise it would have addressed the root problem; too much debt without finance.

The lack of capital markets in Europe means that financing in general is hardly transparent. The public knows fewer details about investments and what goes on at banks because little of this data is public. These European bailout funds to finance new bond purchases by banks of sovereign debt do not fix any of the existing problems that plague sovereign borrowers. For the time being European banks can muddle through the crisis, thanks to the positive short-term effects.

The EU debate is mainly a dispute over which fraudulent solution will cause ‘growth’. The austerity crowd believes it has to clamp down on government spending. This will give investors confidence in government bonds. The sovereigns will be able to borrow again. The economy will grow. All will be well.

The stimulus crowd targets growth directly. It wants the governments to spend, creating jobs, incomes, and more spending. Economists worry about deflation, not inflation. So deflation is an obstacle to ‘growth’.

So GDP figures are important to measure ‘economic growth’, but those are almost completely worthless. “They tell you something; but do they tell anything important? Apparently not, if you look at this example: You cut our lawn. We pay you. We cut your lawn. You pay us. We both have jobs. And we each pay a portion of our earnings to the government. The GDP goes up. Government revenues increase. And economists tell us we are ‘growing.’”

“The biggest fraud in economics is economics itself. What’s the point of having an economy? It is so that people will get the stuff they need and want. The more efficient the economy, the more stuff people get with the least effort and expense of resources.” It makes no sense to waste trillions of dollars’ worth of resources just to “protect the economy.” The whole purpose of an economy is to create more - not to waste it.

A huge move upwards for gold and silver will certainly be the result of the absolute expansion in government debt, it continues with deficit spending, and money printing. Expecting that this irresponsibility will end without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as to force them to it.

“Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world’s money supply isn’t getting any smaller, and all that cash has to go somewhere.” Eventually Gold and Silver are one of the few save havens.

Tags: Gold, Silver, EU crisis, Euro, Eurozone, Europe

By Peter B. Meyer – 28th of June 2012
 
Four leaders of the largest EU nations again came together last week in Rome. Germany, France, Italy and Spain discussed a growth package of €130 billion to defend the Euro currency, but remained divided over the credit crisis as Germany –the only one with sound credit rating - resisted proposals about a common bailout fund to stabilize the financial market. Nevertheless the meeting was intended to demonstrate unity. Disagreement is over the need of short-term intervention, and to achieve greater political union. This kind of results is already old stuff; similar statements were issued many times over in the past. Nobody got any wiser, only that valuable time, energy, and money were wasted. Sadly the EU debt crisis continues and will continue forever; the more things change, the more they stay the same.

The private economy shrinks, while the size of governments’ debt explodes. The Fed and the ECB cannot print money forever and keep rates near zero. The low interest rates are an invitation for more financial bubbles. To recap; during the last 25 years we had numerous of financial bubbles fueled by government spending and easy money. Governments misused their power to print money to stave off financial devastation, and to proclaim the economy is doing better. Think about the 2000-2001-technology crash. The markets tanked. Investors got crushed. The economy tottered on the brink of total collapse. And again the Central Banks saved the day with low interest rates, pumping money into the economy and fueling an unprecedented unsustainable real estate boom. Once that bubble burst, the current credit crisis started in 2008-2009.

Our leaders have an awful habit; they think “doing something” is necessary. The Easy Money cash, made them popular, giving something for nothing to improve their standing. It gives a push, it encourage them in doing more of the same to increase demand by letting people buy things they don’t need. Statistics are massaged, giving the appearance of an improving and stable economy. Pretty soon, however, the market begins grinding to a halt. The stimulus didn’t work.

Then the leaders turn back to the source of artificial ecstasy. Injecting another dose of money, hoping for more improvement. It looks good again, but actually it is not quite as good as the first time. Something is missing. So they increase the amount and try it again. But the response is even less, the lackluster remains. Anyhow the outcome is clear, except for the leaders themselves.

Eventually, the economy is stumbling. But no matter how big the fix, how potent the mix, they never are able to obtain the necessary recovery. The essential problem roots in too much debt, without real finance.

European officials admitted, they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe’s borderless Schengen area. 

Some of these measures have already been implemented; upon the recommendation and approval of Italy’s bank regulator, customer accounts of Italian bank BNI were frozen on May 31st. No ATM withdrawals, no bill payments, nothing. Account holders were locked out overnight. 

In Greece, the government simply draws funds directly out of its citizens’ bank accounts; anyone, to government’s interpretation suspected of being a tax cheat, their funds -without any formal notification- are confiscated. It’s no wonder, according to the Greek daily paper Kathimerini, why over $125 million per day is fleeing the Greek banking system. European political leaders aim, in the worst possible manner, to put a tourniquet on capital flows. Capital controls are policies that restrict the free flow of capital in, out, or through, within a nation’s borders. They can take a variety of forms, including: 

Setting a fixed amount for bank withdrawals, or suspending them altogether. 
Forcing citizens or banks to hold government debt.
Curtailing or suspending international bank transfers. 
Curtailing or suspending foreign exchange transactions. 
Criminalizing the purchase and ownership of precious metals. 
Fixing an official exchange rate and criminalizing market-based transactions. 

Establishing capital controls is one of the worst forms of theft a government can impose. It traps people’s hard-earned savings and their future income within a nation’s borders. This trapped pool of capital allows the government to transfer wealth from the people to their own coffers through excessive taxation or rampant inflation. Ultimately, all governments want to do the same. 

When European financial leaders openly admit that they’re making plans to establish continent-wide capital controls, it really begs the question — what additional warning sign does one need? 

The dominos have already started falling. Iceland, Ireland, Greece, Spain, Portugal, Italy, Cyprus. Soon even France and the rest of Europe. And then it will come to the United States too. 

Spanish government released the results of two independent stress tests on the banking sector. The studies concluded Spanish banks would need between €16 billion and €62 billion of new capital. Spain is asking for a 100-billion euro line of credit. The actual capital needed to bail out Spain's banks will prove to be at least three times higher. And what about Italy, Portugal, or any other troubled European nation? They already are lined up for their respective bailouts. Cyprus is now the next one, after it was downgraded to junk status.

Gold and silver both will soar on this news. A king sized European bailout would require many rounds of money printing from the ECB and the Feds, driving up the value of precious metals. 

You are tired of living in the West with all those upcoming restrictions? Think about moving out to Georgia, probably the only sound economic environment within Europe without restrictions. Read the details at: Surprise! An economy with a pulse!

Tags: EU summit Brussels, German resistance, EU bonds, Banking crisis, domio effect in Europe, Spanish banks, Angela Merkel

By Peter B. Meyer – 9th of June 2012

The breakdown in the EU could happen fast. It is just a matter of who is to leave the Euro first, for two years the talking was about Greece that should have defaulted in 2010. But now the Spanish Banks are under fire, as a result of the huge real estate disaster. The banks own about 70% of the unsold real estate, from which over 50% is not even finished. But on their balance sheet these houses are hardly reduced in value, at least not to real market value, which actually is over 50% lower. When they would have done, as they should, almost all Spanish banks are broke.

The Spanish bank Bankia -the fourth largest- and the first one in a long row to go broke was consequently taken over by the government, while denying reports of a bank run. Spanish Secretary of State Fernando Jimenez Latorre denied the rumor that €1 billion have been withdrawn since the bank was taken over by the government. Bankia shares fell as much as 29%.

When government officials deny something like this, it usually means it's true. The bank's president, José Ignacio Goirigolzarri, said in a statement to the Madrid stock exchange, "Depositors at Bankia can be absolutely reassured that their savings are safe." Of course, all the financial news sources agree: But as valid proof, stock prices are falling due to Spanish banks.

Greece is out. Spain is now "the most important country in the world." It stole the title from Greece because the financial press is screaming most loudly about Spain these days.

How do we know Spain is about to collapse? For one thing, the prime minister said he's not going to allow it to happen. In an unprepared news conference, Prime Minister Mariano Rajoy said, "We are not going to let any regional government fall, or any bank fall, because they can't… If that happens, the country will fall." This is sort of like when a government says it won't devalue its currency, and later it does. They wouldn't say it if it weren't about to happen. It's like saying, "The check is in the mail." Rajoy might as well have said, "Spain is toast." His comments, believe it or not, are an attempt to calm a worried market.

So the EU blew up much worse and more rapidly than many expect, it actually stayed on the brink of disaster for too long. As Spanish banks factually were in big trouble already long ago. Not only are they sitting on a mountain of distressed real estate loans, but now their depositors are fleeing in droves too. The only place Spanish banks can turn to replace this lost funding is the ECB. Consequently the ECB is printing more Euros.

Spanish banks, in turn, are propping up the Spanish government by purchasing Spanish government bonds. Meanwhile, the Spanish economy is unraveling at the edges. It has many unresolved issues. A backlog of mortgage-related losses lurks unrecognized on the balance sheets of Spanish banks. The restructuring of the Spanish housing bubble has yet to begin. Housing prices remain at levels far above what would be justified by Spanish incomes and demand.

To highlight a shocking figure: 80% of Spanish household wealth is in real estate. And 24% of households own second homes. So when -not if- housing prices fall further, this decline will crush the rest of the Spanish economy.

The new government can make heroic efforts to cut spending. It can also push to reform the highly rigid labor markets. But these efforts will fail to get the country out of its hole. Support from the ECB is the only force propping up Spain’s teetering tower of debt. Carmel Asset Management estimates Spanish banks are undercapitalized by €200 billion, or 20% of Spanish GDP. This situation is screaming for a bankruptcy and debt restructuring. The Spanish economy will not rebound until its debt is restructured.

Unlike Argentina, which could seal its financial borders, and rob its own people blind, the whole point of the European project is that the borders are open. And the more Spain and Greece try to keep money in their respective countries, the more people with money are eager to leave.

If Greece or Spain leaves the EU, it will be a disaster for everyone. If at the other hand Germany leaves, it will merely be a surprise. No riots. No revolutions. No currency debacles. The new deutschemark will go up. The euro will go down. Problem solved.

Disasters seem to take longer than you expect to start, but gradually it moves faster than is anticipated. Remember the dot.com blow-up in 2001. One could see it coming for years. Then, when it happened, it blew up fast. So too the collapse of the housing industry was visible long before it happened. And then, when the catastrophe began, it went so fast, one couldn’t keep up with it.

“You don’t have to look very far ahead to see what would happen. Just wait ’til people start lining up in front of the banks to get their money out. If you were in Athens and you saw people lining up to get their money out of the banks... wouldn’t you get in line too? Most people would. And the banks don’t have enough money to honor all those depositors’ claims. So the banks have to go broke... and the whole thing falls down hard.”

The only way to protect your wealth now, is buying gold and silver immediately, before everyone else is doing it and prices rise sky high. 

By Peter B. Meyer – May 22, 2012

The European monetary union in its current form is doomed. Greece is a basket case. Nearly everything the politicians tell the public is a lie. Nearly everything the public expects, as "free" health care, lavish pensions, etc. is an illusion. Europe is shifting from austerity to “growth”,  which actually means more debt. “It becomes harder and harder to pay off the debt as interest payments get higher, so their debt grows larger and larger.”

They think the key to solving the world’s financial problems is more spending, by creating more debt that turns into more “growth.” But you know they can’t really give the world more growth. Real growth requires real investment, real output, real risk, skills, and real customers with money. All they can give the world is more debt. And that stays on happening till the bitter end has arrived.

Real austerity, with deep cuts and balanced budgets, could work. But it contradicts the whole idea of government’s welfare mentality, which is to transfer as much wealth from the outsiders to the insiders as possible. While such deep cutbacks most likely trigger a zombie revolution.

The austerity show has been playing in EU for the last two years. That’s why half of Europe is in recession, with the other half not far behind. Europeans are tired of it.

The people seem to be giving up on phony austerity and turning to phony growth. They are going to spend more borrowed and printed money. This will look vaguely like “growth.” There will be more jobs and more incomes. But there will be none to little of the needed real prosperity.

The EU founders made a debt bubble possible by establishing a single currency bloc, with harmonized interest rates. All of a sudden Greece and Ireland could borrow as easily and cheaply as France and Germany. And so they did; they borrowed their way to the brink of bankruptcy.

Now, Francois Hollande has a plan, called the Eurobonds. He wants to make Europe more like America, with a central bank that lends to government directly and “collective” credit risk. In other words, he wants to do what Alexander Hamilton did to the US in 1791: make the states collectively responsible for each other’s debt. And then he’ll let the ECB print the money to buy sovereign Eurobonds directly.

Of course, going for growth is precisely what got the developed world into such a jam in the first place. Too many people spent too much money they didn’t have on too many things they didn’t need. What should be done is what Sweden did in the 90s:

“As noted, the way that Sweden durably solved its own banking crisis in the early 1990′s was to take receivership of a large portion of the banking system, wipe out shareholders, write down bad assets, protect depositors, give partial recovery to bank bondholders, and then recapitalize banks by issuing the restructured, solvent entities back into private ownership. Europe is finding out that default itself can’t be avoided – it’s merely a question of whether you default on your promises to citizens, or whether you default on your promises to bondholders.”

Now the question is, who will be first to leave the EU, Greece, Spain or one of the other PIIGS?

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by €54 billion to €166 billion. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than €1.4 trillion of home loans and corporate debt.

Bloomberg:

Spain’s home-loan defaults were 2.7 percent in December 2011, according to the Spanish mortgage association.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or €270 billion, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

“The big problem for Spain is not its trade and current account deficit – that’s relatively small. The big problem there is how they’re going to finance both their fiscal deficit and the rollover of the debt that’s coming due. Those two together will be some 20% of GDP of Spain this year. So that’s not something that’s going to be easy to do when the banks are under tremendous pressure, and when foreign bond-buyers of Spanish sovereign debt are walking away.

Spain is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that Spain, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

And as more austerity is impossible, the final alternative is to exit the Euro, under the slogan “Don’t blame me! Blame the Euro!” For which move Rajoy likely will receive his citizen’s support. As the alternative most likely would be a civil war still engraved in Spanish memory.