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Russia Threatens To Abandon The U.S. Dollar And Start Dumping U.S. Debt

The Kremlin - Photo by Pavel KazachkovThe Obama administration and the hotheads in Congress are threatening to hit Russia with “economic sanctions” for moving troops into Crimea.  Yes, those sanctions would sting a little bit, but what our politicians should be made aware of is the fact that Russian officials are promising “to respond” if economic sanctions are imposed on them.  As you will read about below, one top Kremlin adviser is even suggesting that Russia could abandon the U.S. dollar and start dumping U.S. debt.  In addition, he is also suggesting that if sanctions are imposed that Russian companies would not repay the debts that they owe U.S. banks.  Needless to say, Russia could do far more economic damage to the United States than the United States could do to Russia.  The U.S. financial system relies on the fact that the rest of the planet is going to use our currency to trade with one another and lend gigantic piles of it back to us at super low interest rates.  If the rest of the world starts changing their behavior, we are going to be in a massive amount of trouble.  Those that believe that the United States is “economically independent” are being quite delusional.

In order for U.S. economic sanctions against Russia to be effective, Europe would also have to get on board.

But that simply is not going to happen.

As I noted yesterday, Russia is the largest exporter of natural gas on the planet.  And Russia is also Europe’s largest supplier of energy.

There is no way that Europe could risk having Russia cut off the gas, especially considering the economic condition that Europe is currently in.

To get an idea of just how incredibly dependent the rest of Europe is on Russian natural gas, check out the chart in this article.  A whole bunch of European nations get more than half their natural gas from Russia.

And according to the Telegraph, even the UK has already completely ruled out economic sanctions…

Europe would be pushed back into recession, Russia into financial meltdown. This is not the sort of self harm Europe is prepared to contemplate right now. Indeed, thanks to the indiscretion of a UK official, who was snapped going into Downing Street with his briefing documents on display for all the world to see, we know this to be the case. Trade and financial sanctions have already been ruled out.

So the U.S. can do whatever it wants, but Europe is not going to be any help.  Perhaps Canada will stand with the U.S., but that will be about it.

On the flip side, the Russian Foreign Ministry is promising “to respond” if the United States does impose economic sanctions…

Russia said on Tuesday that it would retaliate if the United States imposed sanctions over Moscow’s actions in Ukraine.

We will have to respond,” Foreign Ministry spokesman Alexander Lukashevich said in a statement. “As always in such situations, provoked by rash and irresponsible actions by Washington, we stress: this is not our choice.”

So what would the response look like?

Lukashevich did not say, but top Kremlin adviser Sergei Glazyev is suggesting that Russia could abandon the U.S. dollar and refuse to pay back loans to U.S. banks…

“In the instance of sanctions being applied to stated institutions, we will have to declare the impossibility of returning those loans which were given to Russian institutions by U.S. banks,” RIA quoted Glazyev as saying.

“We will have to move into other currencies, create our own settlement system.”

He added: “We have excellent trade and economic relations with our partners in the east and south and we will find a way to reduce to nothing our financial dependence on the United States but even get out of the sanctions with a big profit to ourselves.”

Glazyev also stated that Russia could start dumping U.S. debt and encourage other nations to start doing the same.  The following comes from a Russian news source

“We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner,” he said. “We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.

Clearly Russian officials understand the economic leverage that they potentially have.  In fact, Glazyev seems fully convinced that Russia could cause “a crash for the financial system of the United States”

“An attempt to announce sanctions would end in a crash for the financial system of the United States, which would cause the end of the domination of the United States in the global financial system.”

On that last point Glazyev is perhaps overstating things.

On their own, the Russians could do a considerable amount of damage to the U.S. financial system, but I doubt that they could completely crash it.

However, if much of the rest of the world started following Russia’s lead, then things could get very interesting.

Just yesterday, I wrote about how China has chosen to publicly stand in agreement with Russia on the Ukrainian crisis.

If China also decided to abandon the U.S. dollar and start dumping U.S. debt, it would be an absolute nightmare for the U.S. financial system.

And keep in mind that the Chinese were already starting to dump a bit of U.S. debt even before this latest crisis.  In fact, China dumped nearly 50 billion dollars of U.S. debt in December alone.

The only way that the current bubble of debt-fueled false prosperity in the U.S. can continue is if the rest of the world continues to lend us trillions of dollars at ridiculously low interest rates that are way below the real rate of inflation.

If the rest of the world stops behaving in such an irrational manner, interest rates on U.S. government debt would rise dramatically and that would also mean that interest rates on virtually all other loans throughout our financial system would rise dramatically.

And if that happened, it would be a complete and utter nightmare for our economy.

Unfortunately, most Americans have no understanding of these things.  They just assume that we are “the greatest economy in the world” and that nothing is ever going to threaten that.

Well, the truth is that we are rapidly approaching a “turning point”, and after this bubble of false prosperity pops things will never be the same in the United States again.

The Kremlin - Photo by Pavel Kazachkov

China Starts To Make A Power Move Against The U.S. Dollar

US Dollars - Photo by selbstfotografiertIn order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates.  Of course the number one foreign nation that we depend on to participate in our system is China.  China accounts for more global trade than anyone else on the planet (including the United States), and most of that trade is conducted in U.S. dollars.  This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost.  As a major exporting nation, China ends up with gigantic piles of our dollars.  They lend many of those dollars back to us at ridiculously low interest rates.  At this point, China owns more of our national debt than any other country does.  But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly.  Demand for the U.S. dollar would fall and prices would go up.  And interest rates on our debt and everything else in our financial system would go up to crippling levels.  So it is absolutely critical to our financial future that China continues to play our game.

Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game.  In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.

In addition, China has signed a whole host of international currency agreements with other nations during the past couple of years which are going to result in less U.S. dollars being used in international trade.  You can read about many of these agreements in this article.

This week, we learned that China started to dump U.S. debt during the month of December.  Many have imagined that China would try to dump a flood of our debt on to the market all of a sudden once they decided to exit, but that simply does not make sense.  Instead, it makes sense for China to dump a bit of debt at a time so that the market will not panic and so that they can get close to full value for the paper that they are holding.

As Bloomberg reported the other day, China dumped nearly 50 billion dollars of U.S. debt during the month of December…

China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.

The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.

This is how I would do it if I was China.  I would try to dump 30, 40 or 50 billion dollars a month.  I would try to make a smooth exit and try to get as much for my U.S. debt paper as I could.

So if China is not going to stockpile U.S. dollars or U.S. debt any longer, what is it going to stockpile?

It is going to stockpile gold of course.  In fact, China has been voraciously stockpiling gold for quite some time, and their hunger for gold appears to be growing.

According to Bloomberg, more than 80 percent of the gold that was exported from Switzerland last month went to Asia…

Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said today in an e-mailed report. It imported most from the U.K.

Hong Kong was the top destination at 44 percent on a value basis, with India at 14 percent, the Bern-based customs agency said in its first breakdown of the gold trade data since 1980. Singapore accounted for 8.6 percent of exports, the United Arab Emirates 7.9 percent and China 6.3 percent.

When China imports gold, most of it goes through Hong Kong.  We know that imports of gold from Hong Kong into China are at an all-time record high, but we don’t know exactly how much gold China has accumulated at this point because they quit reporting that to the rest of the world a number of years ago.

When it comes to global finance, China is playing chess and the United States is playing checkers.  China knows that gold is a universal currency that will hold value over the long-term.  As the paper currencies of the world race toward collapse, China could end up holding most of the real money and that would be a huge game changer when they finally reveal that fact…

The announcement of China’s new gold hoard will send shockwaves through the financial markets, and make China and the Chinese yuan (their national currency) even bigger players at the international table.

International banking expert James Rickards compared it to a game of Texas Hold ‘Em poker:

“You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes [metric tons] of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”

There are some really good points made in the quote above, but I do take exception with a couple of things.  First of all, I believe that China now has far more than 5,000 tons of gold.  Secondly, I seriously doubt that the U.S. still actually has 8,000 tons of gold or that Europe still actually has 10,000 tons of gold.

As China (and eventually the rest of the world) moves away from a U.S.-based financial system, the consequences are going to be dramatic.

For instance, right now the average rate of interest that the U.S. government pays on debt is just 2.477 percent.  That is ridiculously low and it is way below the real rate of inflation.  It is simply not rational for anyone to lend the U.S. government money so cheaply, and at some point we are going to see a dramatic shift.

When that day arrives, interest rates are going to rise dramatically.  And if the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.

Even more frightening is what a rapidly changing interest rate environment would mean for our banking system.  There are four large U.S. banks that each have exposure to derivatives in excess of 40 trillion dollars.  You can find the identity of those banks right here.  Interest rate derivatives make up the biggest chunk of those derivatives contracts.  As John Embry told King World News just the other day, when that bubble bursts the carnage is going to be unprecedented…

“Stockman brought up a brilliant point, the fact that we have hundreds of trillions of dollars of interest rate swaps, which are polluting the world’s banking system. If we see growing volatility in interest rates, and I think that’s inevitable with what’s going on, that would cause spasms in the financial system. And if something goes wrong in the derivatives market, Heaven help us because the leverage that is imparted to the banking system through these derivatives is unholy.”

Unfortunately, very few of the “experts” will ever see this crash coming.

Very few of them saw it coming in 2000.

Very few of them saw it coming in 2008.

And very few of them will see it coming this time.

I really like what Paul B. Farrell had to say about this…

Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.

Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance. Then, says Ferguson, the crash is “accelerating suddenly, like a sports car … like a thief in the night.” It hits. Shocks us wide awake.

Don’t let the upcoming crash take you by surprise.

The warning signs are very clear.

Get ready while you still can.

Money - Photo by Pen Waggener

The Japanese Financial System Is Beginning To Spin Wildly Out Of Control

Wildly Out Of ControlThe financial system of the third largest economy on the planet is starting to come apart at the seams, and the ripple effects are going to be felt all over the globe.  Nobody knew exactly when the Japanese financial system was going to begin to implode, but pretty much everyone knew that a day of reckoning for Japan was coming eventually.  After all, the Japanese economy has been in a slump for over a decade, Japan has a debt to GDP ratio of well over 200 percent and they are spending about 50 percent of all tax revenue on debt service.  In a desperate attempt to revitalize the economy and reduce the debt burden, the Bank of Japan decided a few months ago to start pumping massive amounts of money into the economy.  At first, it seemed to be working.  Economic activity perked up and the Japanese stock market went on a tremendous run.  Unfortunately, there is also a very significant downside to pumping your economy full of money.  Investors start demanding higher returns on their money and interest rates go up.  But the Japanese government cannot afford higher interest rates.  Without super low interest rates, Japanese government finances would totally collapse.  In addition, higher interest rates in the private sector would make it much more difficult for the Japanese economy to expand.  In essence, pretty much the last thing that Japan needs right now is significantly higher interest rates, but that is exactly what the policies of the Bank of Japan are going to produce.

There is a lot of fear in Japan right now.  On Thursday, the Nikkei plunged 7.3 percent.  That was the largest single day decline in more than two years.  Then on Monday the index fell by another 3.2 percent.

And according to Business Insider, things are not looking good for Tuesday at this point…

In post-close futures trading, the Nikkei has dropped by another couple hundred points, and has dropped below 14,000.

Are we witnessing the beginning of a colossal financial meltdown by the third largest economy on the planet?  The Bank of Japan is starting to lose control, and if Japan goes down hard the crisis could spread to Europe and North America very rapidly.  The following is from a recent article by Graham Summers

As Japan has indicated, when bonds start to plunge, it’s not good for stocks. Today the Japanese Bond market fell and the Nikkei plunged 7%. The entire market down 7%… despite the Bank of Japan funneling $19 billion into it to hold things together.

This is what it looks like when a Central Bank begins to lose control. And what’s happening in Japan today will be coming to the US in the not so distant future.

If you think the Fed is not terrified of this, think again. The Fed has pumped over $1 trillion into foreign banks, hoping to stop the mess from getting to the US. As Japan is showing us, the Fed will fail.

Investors, take note… the financial system is sending us major warnings…

If you are not already preparing for a potential market collapse, now is the time to be doing so.

And all of this money printing is absolutely crushing the Japanese yen.  Since the start of 2013, the yen has declined 16 percent against the U.S. dollar, even though the U.S. dollar is also being rapidly debased.   Just check out this chart of the yen vs. the U.S. dollar.  It is absolutely stunning…

Japanese Yen

The term “currency war” is something that you are going to hear a lot more over the next few years, and what you can see in the chart above is only the beginning.

What the Bank of Japan is doing right now is absolutely unprecedented.  It has announced that it plans to inject the equivalent of approximately $1.4 trillion into the Japanese economy in less than two years.

As Kyle Bass recently discussed, that dwarfs the quantitative easing that the Federal Reserve has been doing…

“What they’re doing represents 70% of what the Fed is doing here with an economy 1/3 the size of ours”

The big problem for Japan will come when government bond yields really start to rise.  The yield on 10 year government bonds has been creeping up over the past few months, and if they hit the 1.0% mark that will set off some major red flags.

Because Japan has a debt to GDP ratio of more than 200 percent, the only way that it can avoid a total meltdown of government finances is to have super low interest rates.  The video posted below does a great job of elaborating on this point…

It really is very simple.  If interest rates rise substantially, Japan will be done.

Investor Kyle Bass is one of those that have been warning about this for a long time…

There’s a fatalism, he says, in everyone he talks to in Japan. Their thinking is changing, and the way they talk to him about debt is changing. They already spend 50% of tax revenue on debt service.

“If rates go up, it’s game over.”

The financial problems in Cyprus and Greece are just tiny blips compared to what a major financial crisis in Japan would potentially be like.  The Japanese economy is larger than the economies of Germany and Italy combined.  If the house of cards in Japan comes tumbling down, trillions of dollars of investments all over the globe are going to be affected.

And what is happening right now in Japan should serve as a sober warning to the United States.  Like Japan, the money printing that the Federal Reserve has been doing has caused economic activity to perk up a bit and it has sent the stock market on an unprecedented run.

Unfortunately, no bubble that the Federal Reserve has ever created has been able to last forever.  At some point, we will pay a very great price for all of the debt that the U.S. government has been accumulating and all of the reckless money printing that the Fed has been engaged in.

So enjoy the calm before the storm while you still can.

It won’t last for long.

15 Signs That You Better Get Prepared For The Obama Recession Of 2013

15 Signs That You Better Get Prepared For The Obama Recession Of 2013 - Photo by DjembayzYou better get ready, because there are a whole host of signs that economic trouble is on the horizon.  U.S. economic growth slipped into negative territory during the fourth quarter of 2012.  That was the first time that has happened in more than three years.  Several important measures of manufacturing activity have also contracted in recent weeks, and consumer confidence is way down.  There is a tremendous amount of economic pessimism in the air right now, and Americans are pulling enormous amounts of money out of our banks and they are buying up precious metals at unprecedented rates.  Meanwhile, our “leaders” seem very confused about what is happening.  For example, Senate Majority Leader Harry Reid continues to insist that we are “in a recovery“, and some other Democrats are calling the latest GDP numbers “the best-looking contraction in U.S. GDP you’ll ever see“.  On the other hand, the Federal Reserve says that economic growth has “paused” in recent months, and therefore a continuation of their latest quantitative easing scheme is necessary.  Well, no matter how hard any of them try to spin the numbers, there is no way that they are going to get them to look good.  Despite four years of outrageous “stimulus” spending by the federal government, despite four years of record low interest rates, and despite four years of unprecedented money printing by the Federal Reserve, the U.S. economy continues to perform miserably.  Later this year the federal government will probably finally acknowledge that we have entered another recession, even though the truth is that if the federal government used honest numbers they would indicate that we are already in one.  In any event, nobody should have ever expected that our debt-fueled prosperity would last forever.  When the debt bubble that we have been living in completely bursts, a “recession” will be the least of our worries.

Hopefully this little stretch of false economic hope that we have been living in will last for a little while longer.  I don’t think that too many people are very eager to repeat the horrible economic pain that we experienced back in 2008 and 2009.  Unfortunately, we never fully recovered from that last downturn and now the incredibly foolish decisions that our “leaders” continue to make have made another major economic downturn inevitable.

Personally, I would very much prefer for 2013 to be a year of peace and prosperity for America.  But at this point there appears to be a great deal of downward momentum for the economy.

The following are 15 signs that you better get prepared for the Obama recession of 2013…

#1 The mainstream media was absolutely shocked when it was announced that U.S. GDP actually contracted at an annual rate of 0.1 percent during the fourth quarter of 2012.  This was the first contraction that the official numbers have shown in more than three years.  But of course the truth is that the official numbers always make things appear better than they really are.  According to John Williams of shadowstats.com, U.S. GDP growth has actually been continuously negative all the way back to 2005 once you account “for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting.”

#2 For the entire year of 2012, official U.S. GDP growth was only about 1.5%.  According to Art Cashin, every time economic growth has fallen that low (below 2 percent annually) the U.S. economy has always ended up going into a recession.

#3 According to the Conference Board, consumer confidence in the United States has hit its lowest level in more than a year.

#4 For the week ending January 26th, initial claims for unemployment rose to 368,000.  In future weeks, watch to see if it goes above 400,000.  If we hit that level, that will be a sign of real trouble for the economy.

#5 During the first full week of January, an astounding $114 billion was pulled out of U.S. banks.  That is the largest amount that we have seen moved out of U.S. banks in one week since 2001.

#6 The U.S. Mint was on pace to sell more silver eagles during the first month of 2013 than it did during the entire year of 2007.  Why is so much silver being sold all of a sudden?

#7 The payroll tax hike that went into effect in January has reduced the paychecks of average American workers by about $100 a month.

#8 Several important measures of manufacturing activity along the east coast missed expectations by a huge margin in January.  The following summary is from a recent Zero Hedge article

So much for the latest “recovery.” While everyone continued to forget that in the New Normal markets do not reflect the underlying economy in the least, and that the all time highs in the Russell 2000 should indicate that the US economy has never been better, things in reality took a deep dive for the worse, at least according to the Empire State Fed, the Philly Fed, and now the Richmond Fed, all of which missed expectations by a huge margin, and are now deep in contraction territory. Moments ago, the Richmond Fed reported that the Manufacturing Index imploded from a 9 in November, 5 in December and missed expectations of a 5 print at -12: this was the biggest miss to expectations since September 2009.

#9 An astounding 33 percent of all “subprime student loans” are at least 90 days past due.  Back in 2007, that number was only at 24 percent.  Could this be evidence that the student loan debt bubble is beginning to burst?

#10 Time Inc. has just announced that it will be eliminating hundreds of jobs.

#11 Blockbuster recently announced that they are closing hundreds of stores and eliminating about 3,000 jobs.

#12 Toy maker Hasbro has announced that the size of their workforce will be reduced by about 10 percent.

#13 According to a new Pew Research study that was just released, one out of every seven adults in the United States is financially supporting their kids and their parents at the same time.  Pew Research is calling it “the Sandwich Generation”.

#14 According to one recent Gallup poll, 65 percent of all Americans believe that 2013 will be a year of “economic difficulty“, and 50 percent of all Americans believe that the “best days” of America are now behind us.

#15 According to a different Gallup poll, Americans are now more pessimistic about where the U.S. economy will be five years from now than Gallup has ever recorded before.

So what is Barack Obama doing about all of this?

Not much.

Actually, he is shutting down his much ballyhooed “Council on Jobs and Competitiveness”.  It last convened more than a year ago on Jan. 17th, 2012, and apparently Obama does not feel that it is needed any longer.

Of course we all know that it was just a political stunt to begin with.

Sadly, the truth is that both parties have been leading us down a road toward economic oblivion.  The past four years under Obama have been absolutely nightmarish, and even though the Republicans have been in control of the House for the last couple of years they have done very little to even slow him down.

For much more on the decline of the economy over the past four years, please see this article: “37 Statistics Which Show How Four Years Of Obama Have Wrecked The U.S. Economy“.

Yes, I tend to criticize Obama’s economic policies a lot, and rightfully so, but neither political party is willing to tell the American people the truth.

40 years ago, the total amount of debt in the U.S. economic system was less than 2 trillion dollars.

Today, the total amount of debt in the U.S. economic system has grown to more than 55 trillion dollars.

It hasn’t mattered which party has occupied the White House or which party has been in control of Congress.  The debt bubble that we have been living in has just continued to grow.

And all bubbles eventually pop.

The mainstream media is endlessly obsessed with the little fights that the Republicans and the Democrats are having, but they never talk about the bigger picture.

The prosperity that we are enjoying today is the result of the biggest debt binge in the history of the world.

We have stolen a giant mountain of money from our children and our grandchildren and we have destroyed their futures.

People can debate about whether the next “recession” has already started or not, but the truth is that what we are experiencing now is nothing compared to what is coming.

In the end, we will pay a great price for our decades of foolishness.

The U.S. economy is going to completely collapse, and the last few years have only been the very beginning of that process.

United States Supreme Court Chief Justice John Roberts administers the oath of office to President Barack Obama in the Blue Room of the White House on Inauguration Day

Spain And Italy Are Toast Unless Germany Allows The ECB To Print Trillions Of Euros

The financial chess game in Europe is still being played out, but in the end it is going to boil down to one very fundamental decision.  Is Germany going to allow the ECB to print up trillions of euros and use those euros to buy up the sovereign debt of troubled eurozone members such as Spain and Italy or not?  Nothing short of this is going to solve the problems in Europe.  You can forget the ESM and the EFSF.  Anyone that thinks they are going to solve the problems in Europe is someone that would also take a water pistol to fight a raging wildfire.  No, the only thing that is going to keep Spain and Italy from collapsing under the weight of a mountain of debt is a financial nuke.  The ECB needs to have the power to print up trillions of euros and use that money to buy up massive amounts of sovereign debt in order to guarantee that Spain and Italy will be able to borrow lots more money at very low interest rates.  In fact, this is probably what European Central Bank President Mario Draghi has in mind when he says that he is going to “do whatever it takes to preserve the euro”.  However, there is one giant problem.  The ECB is not going to be able to do this unless Germany allows them to.  And after enduring the horror of hyperinflation under the Weimar Republic, Germany is not too keen on introducing trillions upon trillions of new euros into the European economy.  If Germany allows the ECB to go down this path, Germany will end up experiencing tremendous inflation and the only benefit for Germany will be that the eurozone was kept together.  That doesn’t sound like a very good deal for Germany.

Right now, the yield on 10 year Spanish bonds is above 7 percent and the yield on 10 year Italian bonds is above 6 percent.

Those are unsustainable levels.

The only thing that is going to bring those bond yields down permanently to where they need to be is unlimited ECB intervention.

But that is not going to happen without German permission.

Meanwhile, the situation in Spain gets worse by the day.

An article in Der Spiegel recently described the slow motion bank run that is systematically ripping the Spanish banking system to shreds….

Capital outflows from Spain more than quadrupled in May to €41.3 billion ($50.7 billion) compared with May 2011, according to figures released on Tuesday by the Spanish central bank.

In the first five months of 2012, a total of €163 billion left the country, the figures indicate. During the same period a year earlier, Spain recorded a net inflow of €14.6 billion.

If those numbers sound really bad to you, that is because they are really bad.

At this point, authorities in Spain are starting to panic.  According to Graham Summers, Spain has imposed the following new capital restrictions during the last month alone….

  • A minimum fine of  €10,000 for taxpayers who do not report their foreign accounts.
  • Secondary fines of  €5,000 for each additional account
  • No cash transactions greater than €2,500
  • Cash transaction restrictions apply to individuals and businesses

How would you feel if the U.S. government permanently banned all cash transactions greater than $2,500?

That is how crazy things have already become in Spain.

We should see the government of Spain formally ask for a bailout pretty soon here.

Italy should follow fairly quickly thereafter.

But right now there is not enough money to completely bail either one of them out.

In the end, either the ECB is going to do it or it is not going to get done.

A moment of truth is rapidly approaching for Europe, and nobody is quite sure what is going to happen next.  According to the Wall Street Journal, the central banks of the world are on “red alert” at this point….

Ben Bernanke and Mario Draghi, with words but not yet actions, demonstrated this week that they are on red alert about the global economy.

Expectations are now high that Mr. Bernanke’s Federal Reserve and Mr. Draghi’s European Central Bank will act soon to address those worries. But both face immense tactical and political challenges and neither has a handbook to follow.

So what happens if Germany does not allow the ECB to print up trillions of new euros?

Financial journalist Ambrose Evans-Pritchard recently described what is at stake in all of this….

Failure to halt a full-blown debt debacle in Spain and Italy at this delicate juncture – with China, India and Brazil by now in the grip of a broken credit cycle and the US on the cusp of fresh recession even before the “fiscal cliff” hits – would tip the entire global system into a downward spin, triggering the sort of feedback loop that caused such havoc in late 2008.

As I have written about so frequently, time is running out for the global financial system.

Even Germany is starting to feel the pain.  This week we learned that unemployment in Germany has risen for four months in a row.

So what comes next?

There is actually a key date that is coming up in September.  The Federal Constitutional Court in Germany will rule on the legality of German participation in the European Stability Mechanism on September 12th.

If it is ruled that Germany cannot participate in the European Stability Mechanism then that is going to create all sorts of chaos.  At that point all future European bailouts would be called into question and many would start counting down the days to the break up of the entire eurozone.

If Germany did end up leaving the eurozone, the transition would not be as difficult as many may think.

For example, most Americans may not realize this but Deutsche Marks are currently accepted at many retail stores throughout Germany.  The following comes from a recent Wall Street Journal article….

Shopping for pain reliever here on a recent sunny morning, Ulrike Berger giddily counted her coins and approached the pharmacy counter. She had just enough to make the purchase: 31.09 deutsche marks.

“They just feel nice to hold again,” the 55-year-old preschool teacher marveled, cupping the grubby coins fished from the crevices of her castaway living room sofa. “And they’re still worth something.”

Behind the counter of Rolf-Dieter Schaetzle’s pharmacy in this southern German village lay a tray full of deutsche mark notes and coins—a month’s worth of sales.

I have a feeling that it would be much easier for Germany to leave the euro than it would be for most other eurozone members to.

The months ahead are certainly going to be very interesting, that is for sure.

Europe is heading for a date with destiny, and what transpires in Europe is going to shake the rest of the globe.

Sadly, most Americans still aren’t too concerned with what is going on in Europe right now.

Well, if you still don’t think that the problems in Europe are going to affect the United States, just check this news item from the Guardian….

General Motors’ profits fell 41% in the second quarter as troubles in Europe undercut strong sales in North America.

America’s largest automaker made $1.5bn in the second quarter of 2012, compared with $2.5bn for the same period last year. Revenue fell to $37.6bn from $39.4bn in the second quarter of 2011. The results exceeded analysts’ estimates, but further underlined Europe’s drag on the US economy.

Profits at General Motors are down 41 percent and Europe is being blamed.

The global economy is more tightly integrated than ever before, and there is no way that the financial system of Europe collapses without it taking down the United States as well.

And considering the fact that the U.S. economy has already been steadily collapsing, the last thing we need is for Europe to come along and take our legs out from underneath us.

So what do all of you think about the problems in Europe?

Do you see any possible solution?

Please feel free to post a comment with your thoughts below….

What Have The Central Banks Of The World Done Now?

The central banks of the world are acting as if it is 2008 all over again.  Desperate times call for desperate measures, and right now the central bankers are pulling out all the stops.  The Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank have announced a coordinated plan to provide liquidity support to the global financial system.  According to the plan, the Federal Reserve is going to substantially reduce the interest rate that it charges the European Central Bank to borrow dollars.  In turn, that will enable the ECB to lend dollars to European banks at a much cheaper rate.  The hope is that this will alleviate the credit crunch which has gripped the European financial system by the throat.  So where is the Federal Reserve going to get all of these dollars that it will be loaning out at very low interest rates?  You guessed it – the Fed is just going to create them out of thin air.  Our currency is being debased so that Europe can be helped out.  Unfortunately, the impact of this move will be mostly “psychological” because it really does nothing to address the fundamental problems that Europe is facing.  It is up to Europe to solve those problems, and so far Europe has shown no signs of being able to do that.

The major central banks of the world say that they want to “enhance their capacity to provide liquidity support to the global financial system.”  But essentially what is happening is that the Federal Reserve is going to be zapping large amounts of dollars into existence and loaning them out to the ECB very, very cheaply.  Think of it as a type of “quantitative easing” on a global scale.

The decision to do this was reportedly made by the Federal Reserve on Monday morning.  For the moment, this move seems to have stabilized the European financial system.  It is quite unlikely that any major European banks will fail this weekend now.

But as mentioned above, this move does nothing to solve the very serious financial problems that Europe is facing.  This intervention by the central banks is merely just a speed bump on the road to financial oblivion.

Most Americans are not going to understand what the central banks of the world just did, but it really is not that complicated.

The following is how CNN chief business correspondent Ali Velshi broke down what the central banks have done….

In an attempt to stave off the consequences of a global credit freeze, the Federal Reserve, in coordination with major central banks, has created a credit line available to those central banks, whereby they can borrow dollars at reduced interest rates for periods of three months. The central banks, in turn, can lend to commercial banks in their respective countries. This is meant to reduce the cost of short-term borrowing for troubled European banks and to give them immediate access to dollars.

This was done immediately after the collapse of Lehman Brothers as well, to alleviate the consequences of banks being largely unwilling to lend to other banks, even for short periods, for fear that the borrowing banks could fail.

Okay – so the Federal Reserve is loaning giant piles of cheap money to the European Central Bank.

So where in the world does all of that money come from?

As a CNBC article recently explained, all of this money is created right out of thin air by the Federal Reserve….

Neither the dollars nor the Euros come from anywhere. They aren’t moved or debited from anywhere. They are invented right on the spot with a few taps on the key pad. And that’s all. There’s no printing press fired up to make new dollars or euros.

This is sometimes called “fiat money.” But that makes it sound as if some command from a sovereign created the money. It’s really closer to “keyboard money,” since it is created by data entry in a computer.

Does that sound bizarre to you?

It should.

But that is how the global financial system really works.

We live in a crazy world.

So what did the financial markets of the world think of this move by the Federal Reserve?

It turns out that they absolutely loved it.

The Dow was up 490 points, and that was the biggest gain of the year so far.

Unfortunately, this stock market rally is not going to last indefinitely.  If you are still in the market, enjoy this while you can because eventually a whole lot of pain is going to be coming.

Again, nothing has been solved.  Europe is still in a massive amount of trouble.  But the announcement did make everyone feel all “warm and fuzzy” for at least a day.

Michelle Girard, a senior economist at RBS Securities, said the following about this move….

“The impact is more psychological than anything else”

Just think of it as “comfort food” for the financial markets.

It was also a very desperate move.

In fact, some even believe that this move happened because a major European bank was in danger of failing.

Just check out some of the things that Jim Cramer of CNBC has been saying on Twitter….

If the Fed didn’t act we would have had the largest bank failure ever this weekend, i believe.

The actions the governments took today shows that there was without a doubt a major bank about to fall this weekend.  That’s very dire….

I believe a major European bank would have gone under this weekend…. That’s why they did this….

An article in Forbes has also speculated that this move was made because a major European bank was in imminent danger of failing….

Did a big European bank come close to failing last night?  European banks, especially French banks, rely heavily on funding in the wholesale money markets.  Given the actions of the world’s largest central banks last night, it raises the question of whether a major bank was having difficulty funding its immediate liquidity needs.

Perhaps we will never know the truth, but the reality is that the Federal Reserve and the European Central Bank would have never taken coordinated action like this if they did not believe that there was some sort of imminent threat to the global financial system.

Sadly, this latest move is also going to have some side effects.

Pimco senior vice president Tony Crescenzi says that all of this “liquidity” is going to dramatically increase the size of the U.S. monetary base….

Keep in mind that any use of the Fed’s swap facility expands the Fed’s monetary base: all dollars, no matter where they are deposited, whether it be Kazakhstan, Japan, or Mexico, wind up back in an American bank. This means that any time a foreign central bank engages in a swap with the Federal Reserve, the Fed will create new money in order to make the swap. Use of the Fed’s liquidity swap line in late 2008 was the main cause of a surge in the Fed’s monetary base at that time. The peak for the swap line was about $600 billion in December 2008. Some observers will therefore say that the swap line is a backdoor way to engage in more quantitative easing.

When there is more money floating around out there but the same amount of goods and services, prices go up.

So will we eventually see more inflation in the United States because of all this?

That is what some are fearing.

Meanwhile, politicians in Europe have failed to come up with a plan to address the European financial crisis once again.

They are calling it a “delay”, but the truth is that it should be called a “failure”.  The following comes from an article in USA Today….

The ministers delayed action on major financial issues — such as the concept of a closer fiscal union that would guarantee more budgetary discipline — until the heads of state meet next week in Brussels.

So will European politicians come up with a real plan next week in Brussels?

That seems unlikely.

The reality is that this latest move by the major central banks of the world does not change the fact that Europe is in a huge amount of trouble and is most likely headed for a very painful financial collapse.

One more thing that this latest move by the central banks of the world highlights is the fact that we do not have any control over what they do.

All of these central banks are run by unelected bureaucrats that answer to nobody.  The decisions that these central bankers make affect all of our lives in a very significant way, and yet we have zero input into these decisions.

Most of the decisions that these central bankers make seem to benefit big banks and big financial institutions.  They always claim that the benefits will “filter down” to the rest of us.  But most of the time what ends up filtering down to us is the economic pain that comes from their bad decisions.

As I have written about so many times before, these central banks need to be abolished.  The American people need to tell Congress to shut down the Federal Reserve and to start issuing debt-free United States currency.

We do not want a bunch of unelected central bankers to “centrally plan” the U.S. economy or to “centrally plan” the global economy.

The more these central bankers monkey with things, the more they mess things up.

Yes, this latest move has stabilized things for the moment, but big trouble is on the horizon for the global financial system.

Count on it.

Without Low Interest Rates, The U.S. Financial System Dies

Right now, interest rates are near historic lows.  The U.S. government is able to borrow gigantic mountains of money for next to nothing.  U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates.  When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy.  Without low interest rates, the U.S. financial system dies.  When it comes to borrowing money, it is the rate of interest that causes the pain.  If you could borrow as much money as you wanted at a zero rate of interest for the rest of your life you would never, ever have a debt problem.  But when there is a cost to borrowing money that changes things.  The higher the rate of interest goes, the more painful debt becomes.

The only reason that U.S. government finances have not fallen apart completely already is because the federal government is still able to borrow huge amounts of money very cheaply.  If interest rates on U.S. government debt even return just to “average” levels, it is going to be absolutely catastrophic.

So what happens if rates go above “average”?

The reality is that if there is a major crisis that causes interest rates on U.S. Treasuries to go well beyond “normal” levels it is going to cause a complete and total collapse.

In 2010, the U.S. government paid out just $413 billion in interest even though the national debt soared to 14 trillion dollars by the end of the year.

That means that the U.S. government paid somewhere in the neighborhood of 3 percent interest for the year.

Considering how rapidly the U.S. dollar has been declining and how much money printing the Federal Reserve has been doing, a rate of interest that low is absolutely ridiculous.

The shorter the term, the more ridiculous the rates of interest on U.S. Treasuries are.

For example, the rate of interest on 3 month U.S. Treasuries right now is just barely above zero.

The Federal Reserve has been playing all kinds of games in an attempt to keep interest rates on U.S. government debt low, and so far they have been pretty successful at it.

But they aren’t going to be able to do it forever.

Up until now, other nations and investors around the world have continued to participate in the system even though they know that the Federal Reserve is cheating.

However, there are signs that a lot of investors are finally getting fed up and are ready to walk away from U.S. government debt.

China has been dumping short-term U.S. government debt.  Russia has been dumping U.S. government debt. Pimco has been dumping U.S. government debt.

Others are taking things even farther.

In fact, there are some investors that plan on cashing in on the loss of confidence in U.S. Treasuries.  Renowned investor Jim Rogers says that he is now going to be shorting 30 year U.S. government bonds.

Just check out what Rogers recently told CNBC….

“I cannot imagine or conceive lending money to the United States government for 30-years at 3, 4, 5 or 6 percent —you pick a number — in U.S. dollars”

And he is right.  Who in the world would be stupid enough to loan the U.S. government money at a 4 or 5 percent rate of interest for the next 30 years?

Actually, most U.S. government debt is financed in the short-term these days.  In fact, the U.S. government issues a higher percentage of short-term debt than any other industrialized nation.

This trend really got started during the Clinton administration.  Back then they figured out that the U.S. could reduce its borrowing costs substantially by relying much more heavily on short-term debt.  The Bush and Obama administrations have continued this trend.

So these days the U.S. government constantly has huge amounts of debt that are maturing and that need to be rolled over.

This is great as long as interest rates stay very, very low.

But when interest rates rise the whole game will change.

In a recent article, Pat Buchanan explained that the Obama administration is being completely unrealistic when it assumes that interest rates on U.S. government debt will stay incredibly low over the next decade….

“The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.

A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit”

Most Americans really cannot grasp how incredibly low interest rates are right now.

Sometimes a picture is worth a thousand words.

The following chart shows how interest rates on 10 year U.S. Treasury bonds have declined over the last several decades.

As confidence in the U.S. dollar and in U.S. government debt declines, interest rates will go up.

In fact, there are troubling signs that we are starting to see a move in that direction right now.  Last week, the yield on 5 year U.S. Treasuries experienced the biggest one week percentage jump ever recorded.

The big danger is that the political wrangling in Washington D.C. will start to cause a panic.  The managing director of Standard & Poor’s recently told Reuters that if the U.S. government starts defaulting on debt at the beginning of August, the credit rating on U.S. Treasury bonds that are supposed to mature on August 4th will go from AAA all the way down to D….

Chambers, who is also the chairman of S&P’s sovereign ratings committee, told Reuters on Tuesday that U.S. Treasury bills maturing on August 4 would be rated ‘D’ if the government fails to honor them. Unaffected Treasuries would be downgraded as well, but not as sharply, he said.

“If the U.S. government misses a payment, it goes to D,” Chambers said. “That would happen right after August 4, when the bills mature, because they don’t have a grace period.”

When a credit rating gets slashed, interest rates on that debt can go up dramatically.

Just ask the citizens of Greece.

Today, the interest rate on 2 year Greek bonds is over 26 percent.

You are delusional if you believe that something like that can never happen here.

Right now the U.S. national debt is completely and totally out of control.  If the U.S. government had to start paying interest rates of 10, 15 or 20 percent to borrow money it would be a total nightmare.

This year the U.S. government will have income of about 2.2 trillion dollars.

If in future years the U.S. government is spending a trillion or a trillion and a half dollars just on interest on the national debt, then how in the world is it going to be possible to even run the government, much less balance the budget?

But rising interest rates would not just devastate the federal government.

It would become much more expensive for state and local governments to borrow money.

Student loans would become much more expensive.

Car loans would become much more expensive.

Home loans would become out of reach for everyone except the very wealthy.

As we saw during the housing crash of a few years ago, rising interest rates can absolutely wipe homeowners out.

On a standard home loan, if you change the rate of interest from 5 percent to 10 percent you increase the mortgage payment by approximately 50 percent.

If you change the rate of interest from 5 percent to 15 percent, you roughly double the mortgage payment.

As the 30 year fixed rate mortgage chart below shows, interest rates are near historic lows right now….

Keep in mind that even with such ridiculously low interest rates the U.S. real estate market has been deader than a doornail.

So what would a significant spike in interest rates do to it?

When all of these low interest rates go away the entire financial system is going to change dramatically.

A significant spike in interest rates would wipe out U.S. government finances, it would push state and local governments all over the country to the brink of bankruptcy, it would bring economic activity to a standstill and it would destroy any hopes for a housing recovery.

This country, and in particular the federal government, is enslaved to debt but right now we are not feeling the full pain of that debt because interest rates are so low.

If you want to know when things are really going to start coming apart, just keep an eye on interest rates.  When they really start spiking you can start sounding the alarm.

The truth is that the state of the economy is going to continue to get worse.  Our debt is growing every single day and our country is getting poorer every single day.  When interest rates start surging it is going to start knocking over a lot of dominoes.

I hope you are getting prepared for when that happens.

Debt Problem: Who In The World Is Going To Buy The Billions Of Dollars Of Debt The U.S. Government Is Constantly Pumping Out Now?

Is the U.S. government on the verge of a massive debt problem?  For years, the U.S. government has been able to borrow all the money that it has wanted to at extremely low interest rates.  But now many of the lending sources that the U.S. government has been depending on are drying up.  Even before this recent crisis in Japan, a number of big players were moving away from U.S. Treasuries and the U.S. Federal Reserve was having to step in to pick up the slack.  But now this debt crunch is about to get a whole lot worse.  For years, many had feared that it would be China that would start dumping U.S. government debt, but now it turns out that Japan is going to be the real problem.  Right now, Japan is the second largest foreign holder of U.S. government debt.  Japan currently holds about $882 billion in U.S. Treasury bonds and they are likely going to have to liquidate much of that in order to fund the rebuilding of their nation.  So needless to say they won’t be accumulating any more U.S. government debt.  But the U.S. government still needs to borrow a trillion and a half dollars from someone every single year.  So where in the world are they going to get it?

This is called a debt problem.  Have you ever gotten to the point where you are in debt up to your eyeballs and nobody wants to lend you any more money?

Well, the U.S. government is rapidly reaching that point.

Even before the crisis in Japan, several of the big boys had starting moving away from U.S. government debt.

PIMCO, the biggest bond fund on the entire globe, recently acknowledged that they are dumping all of their U.S. Treasuries.

So if foreign nations like Japan are not gobbling up U.S. government debt and big bond funds like PIMCO are not buying any of it, then who in the world is going to be purchasing the massive amounts of debt that the U.S. government is constantly pumping out?

Well, many of you already know that answer.

The Federal Reserve is going to step in of course.  The Federal Reserve knows that if the U.S. government cannot borrow gigantic quantities of money at super low interest rates it will go broke.  So the Federal Reserve is just going to keep buying up most new U.S. government debt.  It is just that simple.

But isn’t that a Ponzi scheme?

Of course it is.  Let’s not mince words here.  It is a total scam.

And it is a scam that cannot go on indefinitely.

The truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as PIMCO’s Bill Gross noted in his March newsletter….

“Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t.”

Gross also noted in his recent newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.

So now that Japan is out of the picture, how high will that figure go now?

80 percent?

90 percent?

Over the past several weeks there has been all kinds of speculation about whether “quantitative easing” will be extended past June or not.

Well, whether they call it “quantitative easing” or not, the truth is that the Federal Reserve is going to have to continue to “buy” most new U.S. government debt or the system will crash.

We have gotten to the point where the U.S. federal government cannot continue to function without Federal Reserve monetization of the debt.

This is a sign that we are rapidly approaching the financial endgame.

So why doesn’t the U.S. government just stop spending so much stinking money and stop getting us all into so much debt?

Well, because there isn’t enough political will in Washington D.C. to do any real budget cuts, and if our politicians did balance the budget at this point it would crash the economy.

Just the other day, the U.S. House of Representatives passed a continuing resolution to fund the federal government that would cut 6 billion dollars from U.S. government spending.

On that exact same day, the official U.S. national debt figure rose by 72 billion dollars.

Now the debt normally does not go up that much on a typical day.  But what this example does show is the losing battle that our politicians are fighting.

On Wednesday, U.S. Treasury Secretary Timothy Geithner warned a House of Representatives appropriations subcommittee that they should not even think about not raising the debt ceiling….

“Congress has to do it. There’s no alternative.”

The truth is that the U.S. government has to keep going into more debt.  Under the current system the alternative would be to collapse the economy.

But the debt that we have already piled on to the backs of future generations is absolutely criminal.

How mad do you think future generations are going to be with us for heaping 14 trillion dollars of debt on to their shoulders?

Talk about a debt problem!

But this is what we get for allowing a private central bank to run our financial system.  This debt-based system was designed to fail from its very inception.

The man supposedly “in charge” over at the Federal Reserve, Ben Bernanke, has a track of record of incompetence that is absolutely staggering.  It is a mystery why our representatives in Washington D.C. are not howling for his resignation.

Instead, most of our politicians continue to express blind faith in our current financial system and they continue to insist that everything is going to be okay.

Well, everything is not going to be okay.  The Obama administration is projecting that the federal budget deficit for this fiscal year will be an all-time record 1.65 trillion dollars.

Of course they are also trying to convince us that budget deficits will go down in future years, but by now we should all know not to trust the rosy future projections of government officials.

After all, it was only a few short years ago that Bush administration officials were promising that we would be swimming in huge budget surpluses by now.

The truth is that the government has been lying about all of this for a long time.  For now, the Federal Reserve is just going to keep monetizing U.S. government debt for as long as it can.

This Ponzi scheme will keep on working and working and working until someday it simply doesn’t anymore.

When that day arrives, the U.S. government debt problem is going to unleash hell on world financial markets.

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