LEAP/E2020: The insolvency of the global financial system (and financial road to serfdom)

(non-copyright public announcement)

Global systemic crisis – Last warning before the Autumn 2011 shock, when $15 trillion of financial assets go up in smoke

The insolvency of the global financial system, and of the Western financial system in the first place, returns again to the front of the stage after just over a year of political cosmetics aimed at burying this fundamental problem under truckloads of cash.

We estimated in 2009 that the world had about 30 trillion USD in ghost assets. Almost half went up in smoke in the six months between September 2008 and March 2009. For our team, it's now the other half’s turn, the 15 trillion USD of ghost assets remaining, purely and simply vanishing between July 2011 and January 2012. And this time, it will also involve government debt, unlike 2008/2009 where it was mostly private players who were affected. To gauge the extent of the coming shock, it is worth knowing that even US banks are starting to reduce their use of US Treasury Bonds to guarantee their transactions for fear of the increasing risks weighing on US government debt (6).

For the financial world’s players, the Autumn 2011 shock will literally be the ground giving way beneath their feet, since it’s really the foundation of the global financial system, the US Treasury Bond, which will plunge sharply (7).

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The detonating mechanism of European government debt

The Anglo-Saxon financial operators have played sorcerer's apprentice for the last year and a half and the first headlines in the Financial Times in December 2009 on the Greek crisis quickly became a so-called "Euro crisis". We will not dwell on the vicissitudes of this enormous chicanery with a news item (8) orchestrated from the City of London and Wall Street, as we have already devoted many pages to it in a number of GEAB issues throughout this period. Suffice it to say that eighteen months later the Euro is doing well while the dollar continues its downward spiral against major world currencies; and that all those who bet on the collapse of the Eurozone have lost a lot of money. As we anticipated the crisis favors the emergence of a new sovereign, Euroland, which now allows the Eurozone to be much better prepared than Japan, the United States or the United Kingdom (9) for the Autumn 2011 shock ... even if it ends up, quite reluctantly, playing the role of detonator. The "bombardment" (since we must call things by their proper name) (10), interspersed with breaks of several weeks (11), to which Euroland has been subjected during all this time, in fact had three consecutive major effects, two of them far from the results expected by Wall Street and the City:

1. at first (December 2009 - May 2010), it removed the European currency’s sense of invulnerability formed in 2007/2008, introducing doubts about its durability and more precisely putting the idea that the Euro was the natural alternative to the US dollar (or even its successor) into perspective

2. then (June 2010 - March 2011), it conducted Euroland leaders to start work at "top speed" on all measures to safeguard, protect and strengthen the single currency (measures which should have been taken many years ago). In so doing it has revitalized European integration and reinstated the founding core at the head of the European project, thus marginalizing the United Kingdom in particular (12). At the same time it has boosted increasing support for the European currency from the BRICS, headed by China, which after a moment of hesitation became aware of two fundamental points: first Europeans were acting seriously to face up to the problem and secondly, given the Anglo-Saxon determination, the Euro was obviously an essential tool for any attempt to exit the "dollar world" (13).

3. Finally, (April 2011 - September 2011), it is currently compelling the Eurozone to start reaching for the sacrosanct private investors to make them contribute to solving the Greek problem especially via “voluntary” repayment rescheduling (or any other form of cuts in expected profits) (14).

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And with this fourth series one enters the heart of the contagion process that will trigger the US federal debt bomb. Because, first, in creating a global media and financial environment ultra-sensitive to the issues of government indebtedness, Wall Street and the City have revealed the unsustainable size of US, British and Japanese government deficits (20). This has even forced the rating agencies, faithful watchdogs of the two financial centres, to engage in a mad race to downgrade countries’ ratings. It is for this reason that the United States now finds itself under the threat of a downgrade, as we had anticipated, even though it seemed unthinkable to most experts only a few months ago. At the same time, the United Kingdom, France, Japan... also find themselves in the rating agencies’ crosshairs (21).

Remember that these agencies have never forecast anything of importance (neither subprime, nor the global crisis, nor the Greek crisis, nor the Arab Spring, ...). If they downgrade willy nilly today it’s because they have been caught at their own game (22). It’s no longer possible to downgrade A without affecting B’s rating if B is no better off. The "assumptions" on the fact that it’s impossible for any particular state to default on its debt have not withstood three years of crisis: this is where Wall Street and the City have fallen into the trap which threatens all aspiring sorcerers’ apprentices. They have not seen it would be impossible for them to control the hysteria kept up over Greek debt. So today it’s the US Congress, with the bitter debate on the debt ceiling and massive budget cuts, that the consequences of the misleading articles in recent months about Greece and the Eurozone enlarge. Once again, our team can only stress that if history has any sense, it’s certainly a sense of irony.

/Much more... http://www.leap2020.eu/GEAB-N-56-Special-Summer-2011-is-available-Global-systemic-crisis-Last-warning-before-the-Autumn-2011-shock-when-15_a6679.html

Financial markets bet on Icelandic recovery

The crucial difference between Iceland and Ireland is that Icelandic taxpayers relinquished responsibility for their banks' bondholders, while their Irish counterparts are on the hook for their banks' crushing debts. Even worse, we may not have seen the full scale of the Irish banking system's losses, given that it remains on government life support.

It is becoming clearer by the day that too many of Europe's banking crises were initially misdiagnosed as liquidity, rather than solvency, problems. For some countries, most notably Ireland, the policies prescribed for that misdiagnosis have transformed banking crises into sovereign-debt crises.

Europe's bailout path has only diverted ever-more resources to failing enterprises, postponing and deepening the problem. Iceland's restructuring was both painful and costly for the population, but the government did not throw good money after bad, and the taxpayers were spared a nationalization of private debts. Is it any wonder that forward-looking financial markets are now betting on the Icelandic recovery?

/... http://online.wsj.com/article/SB10001424052702304319804576387572241329838.html?mod=googlenews_wsj

The distinction between illiquidity and insolvency

If a homeowner loses his job and cannot pay his mortgage, he must sell the house or see the bank foreclose. Is he insolvent, or merely “illiquid”? If he merely has a liquidity problem, a loan will help him earn the funds to pay down the debt. But if he falls into the negative equity that now plagues a quarter of U.S. real estate, taking on more loans will only deepen his net deficit. Ending this process by losing his home does not mean that he is merely illiquid. He is in distress, and is suffering from insolvency. But to the ECB this is merely a liquidity problem.

The public balance sheet includes land and infrastructure as if they are surplus assets that can be forfeited without fundamentally changing the owner’s status or social relations. In reality it is part of the means of survival in today’s world, at least survival as part of the middle class.

For starters, renegotiating his loan won’t help an insolvency situation such as the jobless homeowner above. Lending him the money to pay the bank interest (along with late fees and other financial penalties) or stretching out the loan merely will add to the debt balance, giving the foreclosing bank yet a larger claim on whatever property the debtor may have available to grab.

But the homeowner is in danger of being homeless, living on the street. At issue is whether solvency should be defined in the traditional common-sense way, in terms of the ability of income to carry one’s current obligations, or a purely balance-sheet approach taken by creditors seeking to extract payment by stripping assets. This is Greece’s position. Is it merely a liquidity problem if the government is told to sell off $50 billion in prime tourist sites, ports, water systems and other public assets in order to pay foreign creditors?

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Creditors today are using debt leverage to force Greece to sell off its public domain – having extended credit beyond its ability to pay. So the question now being raised is whether the nation should be deemed “solvent” if the only way to carry its public debt (that is, roll it over by replacing bad old loans with newer and more inexorable obligations) is to forfeit its land and basic infrastructure. This would fundamentally alter the relationship between public and private sectors, replacing its mixed economy with a centrally planned one – planned by financial predators with little care that the economy is polarizing between rich and poor, creditors and debtors.

/Much more... http://www.informationclearinghouse.info/article28319.htm