The Shape of the Debt Reset [Azizonomics]

By Aziz of

I was asked recently by Max Keiser who benefits in the case of a debt reset, and when we should expect such an event to occur.

I don’t think I answered it as comprehensively as I should have. I talked a little about the fact that events leading up to such an event could be extremely messy and its impact unpredictable, and so it is hard to say who will benefit, although we can expect the powers-that-be  — and particularly the Wall Street TBTF banks — to try and leverage events for political and financial gain. And of course, all three kinds of debt reset — heavy inflation, liquidation or an orderly debt jubilee — would look very different.

Here’s the problem:

The crisis in 2008 was one fuelled by excessive total debt. As society became more and more indebted the costs of servicing debt became proportionally higher, which has made it harder for countries to grow. Instead of individuals and businesses investing their income or growing their business, a higher and higher proportion of income becomes taken up by the costs of paying down debt.

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Marc Faber: Market Forces Will Prevail – July 27, 2012

LoL of the day: New BOJ board member: may need new easing approach on deflation

(Reuters) – The Bank of Japan will need to flexibly consider a new easing approach if current steps are deemed insufficient to beat deflation, a top economist newly appointed to the central bank’s policy board said on Tuesday.

Takahide Kiuchi, chief economist at Nomura Securities and one of two new board members whose appointments were formally approved earlier in the day, said uncertainty remains high on when the BOJ can achieve its inflation target of 1 percent, given current sluggish price moves.

The other new board member, Takehiro Sato, chief economist at Morgan Stanley MUFG Securities, said in a joint news conference it would be hard to expect the consumer price index to achieve the BOJ’s targeted 1 percent gain by next year.

He said it was necessary to cut real interest rates and raise inflation expectations.

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Argentine President Forces Leading Banks to Lend

BUENOS AIRES, Argentina (AP) — Facing clear signs of a looming recession, Argentina’s president is ordering the country’s biggest banks to lend $3.3 billion of their clients’ savings at rates below what many believe to be the inflation rate.

The requirements taking effect Thursday limit interest on the loans to 15 percent a year. The government says inflation is below 10 percent, but many analysts estimate it at around 25 percent, one of the world’s highest rates.

President Cristina Fernandez says the government saved the private banks when they were in trouble, and now it’s the banks turn to do their part to fan Argentina’s decelerating economy by lending 5 percent of their deposits to small and medium-sized businesses.

Argentina, one of the world’s leading grains suppliers, saw its economy expand by almost 9 percent last year on the back of high commodity prices and industrial output led by car sales to Brazil. But blistering growth has been reined in by less demand from its neighbor and leading trade partner Europe’s economic woes and surging inflation.

Fernandez has said that Argentina’s top 20 banks will lend more at a maximum interest rate of about 12 percent for a minimum three-year period. Economic analysts say the move is a quasi-subsidy imposed on the leading bankers that does not get to the core of what discourages investors: one of the world’s highest inflation rates and one of the most volatile business environments.

“This is a negative development inasmuch as requiring banks to lend at negative real rates erodes the capital base of banks and by distorting the cost of capital will lead to a misallocation of credit,” senior Goldman Sachs economist Alberto Ramos wrote in a research note.


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Top Fed Official: We’re Giving Big Banks ‘An Unfair Subsidy’ [huffingtonpost]

By Jonathan Weber

ASPEN, Colorado June 28 (Reuters) – Large financial firms that have grown even bigger since the financial crisis earn backdoor government subsidies because of a perception that they will be bailed out, a Federal Reserve official said on Thursday.

This offers these big banks lower borrowing costs and a leg up over smaller competitors, said Dallas Fed President Richard Fisher, who has repeatedly called for breaking up institutions seen as too big to fail.

“It’s an unfair subsidy,” he said during a question-and-answer session at the Aspen Ideas Festival. “They have a funding preference.”

While he did not single out specific firms, Fisher was responding to a question about JP Morgan’s massive recent trading loss, which is now estimated to range between $4 billion and $6 billion.

On the subject of monetary policy, Fisher, an anti-inflation hawk, reiterated his opposition to the Fed’s most recent effort to keep long-term borrowing costs low, known as Operation Twist.

Fisher said he is concerned that the central bank’s bloated balance sheet, which now stands at around $2.9 trillion, could complicate an eventual exit from a highly supportive monetary policy.

He said a lack of monetary stimulus was not the problem facing a “painfully slow” economic recovery. “There’s plenty of liquidity out there,” Fisher said. “Why isn’t it being put to work?”


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College subprime loans: the next bubble ready to pop

If no bank will lend your kid $100,000 to get a degree in sociology without the feds promising to assume all risk, there’s a reason: In 4 years, your kid will have the same job prospects he does now but will have $100,000 in debt and no way to pay it off. And colleges keep on jacking up prices because the federal gravy train keeps rolling. Subprime loans: When will we learn?

Tinker Bell Economics in Europe [Gary North]

If you have seen the stage version of Peter Pan, you know the scene in which the audience is asked to clap if they want Tinker Bell to live. It’s time.

Janet Daley wrote a provocative essay in London’s The Telegraph on the day before the Greek election (June 16). She did her best to explain why the eurozone is in crisis. Europe’s leaders are living in an illusion of their own making.

She began with what should be obvious to the financial markets by now. By entering into the eurozone, the politicians surrendered control over the money supply.

The problem is not that politicians surrendered control over the money supply. It is that they surrendered it to the European Central Bank. They should have surrendered it to the free market.

The politicians of Europe asserted control over the international money market in 1914, when they abandoned the international gold standard. They set the precedent. Everything that has followed has been one fiat money crisis after another. But only Austrian School economists teach this. In Europe, bureaucratic control over money has run the show ever since 1999.

The economy is now beyond the control of national governments, and therefore outside the remit of democratic politics. It has become truly global, and thus a law unto itself; nation states have gone broke in their attempt to feed its gargantuan appetites for consumption and debt.

It is not the “world economy” that has a gargantuan appetite for debt. It is each nation’s politicians, who want something (increased spending) for almost nothing (borrowed money at low rates). That was what northern commercial bankers gave the PIIGS’s governments at German rates of interest until the spring of 2010, when the Greek socialist government announced that its predecessor had cooked the books.

The losses must now be parceled out. The losses are in the past. They cannot be avoided. They can only be postponed by covering them up. In short, the eurozone must do what the Greek government did before 2010: cook the books. Thus, the bailouts continue.

The remedies for this began in panic and are now ending in delusion: first the banks went bust and were bailed out by governments; then the governments went bust and needed to be bailed out by – whom? International funding agencies which get their cash from – where? From central banks which will have to print gigantic amounts of money to replace all the money that simply disappeared in the bad debt that bankrupted the banks in the first place. And if we all agree to accept the illusion that this newly printed cash has actual value – if we all clap really hard and say that we believe in fairies – then the whole show can get back on the road and we will be rich again.

It was exactly a century ago that Ludwig von Mises’ book, The Theory of Money and Credit laid out the case against central bank wealth fairies, but few listened then, and fewer listen now. The message is unpleasant to politicians, who want to spend more than the government takes in through taxes. They do not want rising interest rates that will result if the government is to cover its deficit.

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With Hollande set to tax and spend, Cameron invites wealthy French to settle in London


A Socialist victory in France’s parliamentary elections means the country will now try to tax and spend its way out of trouble, putting it on collision course with Germany.

But as France prepared to ramp the top rate of tax up to 75 per cent to pay for increased public spending, David Cameron made an extraordinary promise to welcome wealthy firms and individuals who want to move to the UK.

He said: ‘I think it’s wrong to have a completely uncompetitive top rate of tax. If the French go ahead with a 75 per cent top rate of tax we will roll out the red carpet and welcome more French businesses to Britain and they can pay tax in Britain and pay for our health service and schools and everything else.’

Prime Minister David Cameron, speaking at the B20 business summit in Los Cabos, Mexico, said Britain would roll out the red carpet for wealthy French businesses 

French Prime Minister Jean-Marc Ayrault said the new government would quickly implement its reforms to reduce the pension age from 62 to 60 – at a cost of £17billion a year – and boost the public sector.

Paris is also putting itself at the forefront of international efforts to relax anti-austerity measures.

Countries such as Greece claim a forced reduction in public spending is forcing them into deeper financial problems by suffocating growth.

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Eurozone citizens moving billions to Switzerland [SoberLook]


Bloomberg/BW: – Switzerland saw its foreign currency reserves balloon by 66.2 billion Swiss francs ($69.5 billion) over the past month as the country’s central bank spent heavily to prevent its currency from appreciating against the euro, according to data released Thursday.

The franc is considered a safe haven for investors concerned about the euro-zone debt crisis.

The Swiss National Bank held foreign currency reserves worth 303.8 billion francs in May, an increase of 28 percent from the 237.6 billion francs in April.

“A large part of the increase in foreign currency reserves between the end of April and the end of May can be traced to the purchase of foreign currency to enforce the minimum exchange rate,” said SNB spokeswoman Silvia Oppliger.

Indeed we had a big spike in foreign currency reserves of the Swiss National Bank in May.

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Iceland economy grows at fastest pace in four years [Reuters]

(Reuters) – Iceland’s economy expanded in the first quarter at its fastest pace since its near-meltdown, powered by a surge in exports, tourism and domestic consumption.

Gross domestic product (GDP) grew 2.4 percent quarter-on-quarter in the first three months of the year to put annual economic growth at 4.5 percent in the period, the highest since the first quarter of 2008, data from the statistics office showed on Friday.



“It shows that the economy is growing rather rapidly, at least in an international comparison, at the moment,” Islandsbanki Chief Economist Ingolfur Bender said.

“The increase is broad-based, driven by consumption, investment and exports.”

Growth for the fourth quarter of 2011 was 1.9 percent on the quarter and 2.7 percent on the year.

The recovery has gathered momentum more quickly than expected after the small nation became a byword for the excesses of the liquidity boom which preceded the 2008 meltdown.

Its bank sector grew to 10 times the size of output and then collapsed when credit markets froze after the bankruptcy of Lehman Brothers.

Iceland successfully completed a bailout program led by the International Monetary Fund last year and has returned to bond markets. Forecasts for 2012 indicate GDP growth will be the strongest among developed countries, the central bank has said.

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The Swiss Have Been Buying $7 Million Worth Of Euros Every Minute [businessinsider]

The Swiss National Bank (SNB) intervened in support of its 1.2000 currency peg against the Euro to the tune of CHF 60 billion ($66B) in the month of May. The vast majority of this intervention occurred during European trading hours. That means that the SNB bought, on average, the equivalent of $7mm worth of Euros every minute during the month. That’s a staggering number to me.

I was aware that there was ongoing intervention. I thought it would end up being a big number. At one point late in the month I was advised that a big American bank dropped Euro 7B on the SNB in a single ticket (think Cetacea). But I’m blown out by the 28% increase in reserves in a single month.

The SNB was clearly concerned with its rapidly growing holdings of Euros. In an effort to diversify its newly acquired Euro reserves it sold Euro 25B and bought dollars, Yen, Sterling and the Canadian and Aussie dollar.

The Japanese must be pissed at the Swiss action. The last thing Japan needs is a stronger Yen, the SNB added to Japan’s problems in the month.

I wonder what the folks at the ECB are thinking about this. On one hand, a cheaper Euro is helpful to the Euro economies. But not if the adjustment takes place too quickly. The 8% deterioration in the Euro in May added to the instability in the debt markets of Europe. The Euro weakness was the shining example of all of the European problems. My guess is that the deciders in Brussels and Bonn are angry at the Swiss for trashing their currency at a very bad time. The SNB could have waited a month or two to diversify its holdings in an effort to avoid more market turmoil. But they chose to blast an already unstable market with very big supply.

I would suggest that the policy of diversification has added to the amount of Euros that the SNB had to buy in the EURCHF market. Every day that the EURUSD got weaker, it added to the demand for the Swiss Franc. I believe that the SNB contributed to the global market instability that occurred in May. It’s impossible to avoid the conclusion that the policy actions were a failure.

The question of the hour is, “Can the SNB continue to intervene at this pace?”

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