Credit

18 Signs That The Banking Crisis In Europe Has Just Gone From Bad To Worse

With each passing day, the banking crisis in Europe escalates.  European banks are having their credit ratings downgraded in waves, bond yields are soaring and billions of euros are being pulled out of banks all across the eurozone.  The situation in Europe is rapidly going from bad to worse.  It is almost like watching air being let out of a balloon.  The key to any financial system is confidence, and right now confidence in banks in Greece, Italy, Spain and Portugal is declining at an alarming rate.  When things hit the fan in Europe, it is going to be much safer to have your money in Swiss banks or German banks than in Greek banks, Spanish banks or Italian banks.  Millions of people in Europe are starting to realize that a “euro” is not necessarily always going to be a “euro” and they are starting to panic.  The Greek banking system is already on the verge of total collapse, and at this rate it is only a matter of time before we see some major Spanish and Italian banks start to fail.  In fact it has already been announced that the fourth largest bank in Spain, Bankia, will be getting bailed out by the Spanish government.  It is only a matter of time before we hear more announcements like this.  Right now, events are moving so quickly in Europe that it is hard to keep up with them all.  But this is what usually happens in the financial world.  When things go well, it tends to happen over an extended period of time.  When things fall apart, it tends to happen very rapidly.

And at the moment, things across the pond are moving at a pace that is absolutely breathtaking.

The following are 18 signs that the banking crisis in Europe has just gone from bad to worse….

#1 Moody’s has announced that it has downgraded the credit ratings of 16 Spanish banks.  Included was Banco Santander, the largest bank in the eurozone.

#2 Shares of the fourth largest bank in Spain, Bankia, dropped 14 percent on Thursday.

#3 Overall, shares of Bankia have declined by 61 percent since last July.

#4 Shares of the largest bank in Italy, Unicredit, dropped by about 6 percent on Thursday.

#5 According to CNBC, a Spanish bond auction on Thursday went very poorly….

The Spanish Treasury had to pay around 5 percent to attract buyers of three- and four-year bonds. The longer-dated paper sold with a yield of 5.106 percent, way above the 3.374 percent the last time it was auctioned.

#6 The yield on 10 year Spanish bonds is back above 6 percent.

#7 In recent days, about eight times more money than usual has been pulled out of Greek banks.

#8 Fitch has slashed the long-term credit rating for Greece from B- to CCC.

#9 The European Central Bank has cut off direct lending to at least 4 Greek banks.

#10 According to a recent German documentary, financial records at the Ministry of Finance in Athens are being stored in garbage bags and shopping carts.

#11 The euro hit a 4 month low against the U.S. dollar on Thursday.

#12 It has been announced that the Spanish economy and the Italian economy are officially in recession.

#13 The Spanish government is becoming increasingly concerned about the bad loans that are mounting at major Spanish banks.  The following is from a recent Bloomberg article….

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. 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 euros of home loans and corporate debt.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, 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.

#14 Civil unrest is rising to dangerous levels in Italy.  The Italian government has assigned bodyguards to 550 individuals and has increased security at about 14,000 locations in response to recent violence related to the economic crisis.

#15 Governments all over Europe are rapidly making preparations for a Greek exit from the euro.  The following is from a recent article in the Guardian….

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

#16 According to CNBC, the banking crisis in Europe is beginning to affect global trade….

The euro zone debt crisis is affecting trade as companies shy away from dealing with firms and banks in countries deemed at risk of contagion, a senior banker said on Thursday.

#17 Moody’s downgraded the credit ratings of 26 Italian banks on Monday.

#18 Moody’s has announced that it is reviewing the credit ratings of 114 more European financial institutions.

Newspapers all over the globe are speaking breathlessly of a potential Greek exit from the euro, but it is very unlikely to happen before the next Greek election on June 17th.

The rest of Europe is going to continue to financially support Greece until a new government takes power.

If the new government is willing to accept the previous bailout agreements, then financial support for Greece will continue.

If the new government is not willing to accept the previous bailout agreements, then financial support for Greece will stop.

If that happens, the bank runs in Europe will likely become a lot worse.

But for now, Greece almost certainly has at least one more month in the euro.

Beyond that, there is no telling what is going to happen.

Greece is the first domino.  If Greece falls, you can count on others to eventually start tumbling as well.

The second half of 2012 is going to be fascinating to watch.

Hopefully things will not be as bad as many of us now fear they may be.

11 Quotes That Show How Worried The Financial World Is About Europe Right Now

The recent elections in France and in Greece have thrown the global financial system into an uproar.  Fear and worry are everywhere and nobody is quite sure what is going to happen next.  All of the financial deals that Greece has made over the past few years may be null and void.  Nobody is going to know for sure until a new government is formed, and at this point it looks like that is not going to happen and that there will need to be new elections in June.  All of the financial deals that France has made over the past few years may be null and void as well.  New French President Francois Hollande seems determined to take France on a path away from austerity.  But can France really afford to keep spending money that it does not have?  France has already lost its AAA credit rating and French bond yields have started to move up toward dangerous territory.  And Greek politicians are delusional if they think they have any other choice other than austerity.  Without European bailout money (which they won’t get if they don’t honor their current agreements), nobody is going to want to lend Greece a dime.

And all of this talk about “austerity” is kind of silly anyway.  It isn’t as if either France or Greece was going to have a balanced budget any time soon.  Both nations were still running up huge amounts of debt even under the “austerity” budgets.

But the citizens of both nations have sent a clear message that they are not going to tolerate even a slowdown in government spending.  They want to go back to the debt-fueled prosperity of the last several decades, even if it makes their long-term financial problems a lot worse.

Unfortunately, as I mentioned earlier, Greece does not have that option.  Without the bailout money that they are scheduled to get, Greece does not have a prayer of avoiding a disorderly default.  Private investors would have to be insane to lend Greece money if the bailout deal falls apart.  Greece desperately needs the help of the EU, the ECB and the IMF and the only way they are going to get it is if they abide by the terms of the agreements that have already been reached.

The only way that Greece can avoid austerity at this point would be to leave the euro.  Nobody would want to lend money to Greece under that scenario either, but Greece could choose to print huge amounts of their own national currency if they wanted to.

The situation is different in France.  Investors are still willing to lend to France at reasonable interest rates, but if France chooses to run up huge amounts of additional debt at some point they will end up just like Greece.

What is even more important in the short-term is the crumbling of the French/German alliance on European fiscal matters.  Angela Merkel and Nicolas Sarkozy were a united front, but now Merkel and Hollande are likely to have conflict after conflict.

Instead of moving in one clear direction, the eurozone is now fractured and tensions are rising.

So what comes next?

Well, investors are not certain what comes next and that has many of them deeply concerned.

The following are 11 quotes that show how worried the financial world is about Europe right now….

#1 Tres Knippa of Kenai Capital Management: “What is going on in Europe is an absolute disaster…the risk-on trade is not the place to be. I want to be out of equities and very, very defensive because the situation in Europe just got worse after those elections.”

#2 Mark McCormick, currency strategist at Brown Brothers Harriman: “We’re going to have higher tensions, more uncertainty and most likely a weaker euro.”

#3 Nick Stamenkovic, investment strategist at RIA Capital Markets in Edinburgh: “Investors are questioning whether Greece will be a part of the single currency at the end of this year.”

#4 Jörg Asmussen, a European Central Bank executive board member: “Greece needs to be aware that there is no alternative to the agreed reform program if it wants to remain a member of the eurozone”

#5 Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment: “A Greek eurozone exit is on the cards although the probability and timing of such an event is uncertain.”

#6 Art Cashin: “Here’s the outlook on Greece from Wall Street watering holes. If a coalition government is formed or looks to be formed, global markets may rally. Any coalition is unlikely to make progress on goals, since austerity is political suicide. There will likely be another election around June 10/17. A workable majority/plurality remains unlikely, so back to square one. Therefore, Greece will be unable to attain goals by the deadline (June 30). Lacking aid funds, pensions are suspended and government workers are laid off. Protestors take to the streets and government is forced to revert to drachma to avoid social chaos. Pass the peanuts, please.”

#7 John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney: “Sentiment is very bearish, The euro is under a lot of pressure right now. I get the feeling that it’s going to be a nasty move lower for the euro finally”

#8 Kenneth S. Rogoff, a professor of economics at Harvard: “A Greek exit would underscore that there’s no realistic long-term plan for Europe, and it would lead to a chaotic endgame for the rest of the euro zone.”

#9 Chris Tinker of Libra Investment Services: “It’s a binary decision. If Greece gets itself to the point where the European administration says, ‘We can’t play this game anymore,’ that starts a domino effect”

#10 Nicolas Véron, a senior fellow at Bruegel: “France has very limited fiscal space and actually has to engage in fiscal consolidation”

#11 80-year-old Greek citizen Panagiota Makri: “I’m confused. I feel numb and confused. Only God can save us now”

All of this comes at a time when much of Europe is already descending into a new recession.  Economies all over Europe are contracting and unemployment rates are skyrocketing.  Until things start improving, there is going to continue to be a lot of civil unrest across Europe.

Meanwhile, things are not so great in the United States either.

JPMorgan Chase CEO Jamie Dimon claims that the U.S. economy is holding a “royal straight flush“, but the only part of that he got right was the “flush” part.

There are 100 million working age Americans that do not have jobs, the middle class continues to shrink, the rising cost of food and the rising cost of gas are severely stretching the budgets of millions of American families and the federal government continues to run up gigantic amounts of debt.

When Europe descends into financial chaos, the United States is not going to escape it.  The financial crisis of 2008 deeply affected the entire globe, and so will the next great financial crisis.

Let us hope that we still have a little bit more time before the next great financial crisis strikes, but things in Europe are rapidly unraveling and at some point the dominoes are going to begin to fall.

Greece Has Defaulted – Which Country In Europe Is Next?

Well, it is official.  The restructuring deal between Greece and private investors has been pushed through and the International Swaps and Derivatives Association has ruled that this is a credit event which will trigger credit-default swap contracts.  The ISDA is saying that there are approximately $3.2 billion in credit-default swap contracts on Greek debt outstanding, and most analysts expect that the global financial system will be able to absorb these losses.  But still, 3.2 billion dollars is nothing to scoff at, and some of these financial institutions that wrote a lot of these contracts on Greek debt are going to be hurting.  This deal with private investors may have “rescued” Greece for the moment, but the consequences of this deal are going to be felt for years to come.  For example, now that Greece has gotten a sweet “haircut” from private investors, politicians in Portugal, Italy, Spain and other European nations are going to wonder why they shouldn’t get some “debt forgiveness” too.  Also, private investors are almost certainly going to be less likely to want to loan money to European nations from now on.  If they will be required to take a massive haircuts at some point, then why in the world would they want to lend huge amounts of money to European governments at super low interest rates?  It simply does not make sense.  Now that Greece has defaulted, the whole game is going to change.  This is just the beginning.

The “restructuring deal” was approved by approximately 84 percent of all Greek bondholders, but the key to triggering the payouts on the credit-default swaps was the fact that Greece decided to activate the “collective action clauses” which had been retroactively inserted into these bonds.  These collective action clauses force most of the rest of the bondholders to go along with this restructuring deal.

A recent article by Ambrose Evans-Pritchard explained why so many people were upset about these “collective action clauses”….

The Greek parliament’s retroactive law last month to insert collective action clauses (CACs) into its bonds to coerce creditor hold-outs has added a fresh twist. These CAC’s are likely to be activated over coming days. Use of retroactive laws to change contracts is anathema in credit markets.

If a government can go in and retroactively change the terms of a bond just before it is ready to default, then why should private investors invest in them?

That is a very good question.

But for now the buck has been passed on to those that issued the credit-default swaps.  As mentioned above, the ISDA says that there are approximately $3.2 billion in Greek credit-default swaps that will need to be paid out.

However, that number assumes that a lot of hedges and offsetting swaps cancel each other out.  When you just look at the raw total of swaps outstanding, the number is much, much higher.  The following is from a recent article in The Huffington Post….

If you remove all hedges and offsetting swaps, there’s about $70 billion in default-insurance exposure to Greece out there, which is a little bit bigger pill for the banking system to swallow. Is it possible that some banks won’t be able to pay on their default policies? We’ll find out.

Yes, indeed.  We will find out very soon.

If some counterparties are unable to pay we could soon see some big problems cascade through the financial system.

But even with this new restructuring deal with private investors, Greece is still in really bad shape.

German Finance Minister Wolfgang Schaeuble told reporters recently that it “would be a big mistake to think we are out of the woods”.

Even with this new deal, Greek debt is still projected to be only reduced to 120 percent of GDP by the year 2020.  And that number relies on projections that are almost unbelievably optimistic.

In addition, there are still a whole host of very strict conditions that the Greek government must meet in order to continue getting bailout money.

Also, the upcoming Greek elections in just a few weeks could bring this entire process to an end in just a single day.

So the crisis in Greece is a long way from over.

The Greek economy has been in recession for five years in a row and it continues to shrink at a frightening pace.  Greek GDP was 7.5 percent smaller during the 4th quarter of 2011 than it was during the 4th quarter of 2010.

Unemployment in Greece also continues to get worse.

The average unemployment rate in Greece in 2010 was 12.5 percent.  During 2011, the average unemployment rate was 17.3 percent, and in December the unemployment rate in Greece was 21.0 percent.

Young people are getting hit the hardest.  The youth unemployment rate in Greece is up to an all-time record of 51.1 percent.

The suicide rate in Greece is also at an all-time record high.

Unfortunately, there is no light at the end of the tunnel for Greece at this point.  The latest round of austerity measures that are now being implemented will slow the economy down even more.

Sadly, several other countries in Europe are going down the exact same road that Greece has gone.

Investors all over the globe are wondering which one will be the “next Greece”.

Some believe that it will be Portugal.  The following is from a recent article in The Telegraph….

“The rule of law has been treated with contempt,” said Marc Ostwald from Monument Securities. “This will lead to litigation for the next ten years. It has become a massive impediment for long-term investors, and people will now be very wary about Portugal.”

Right now, the combination of all public and private debt in Portugal comes to a grand total of 360 percent of GDP.

In Greece, the combined total of all public and private debt is about 100 percentage points less than that.

So yes, Portugal is heading for a world of hurt.  The following is more about Portugal from the recent Telegraph article mentioned above….

Citigroup expects the economy to contract by 5.7pc this year, warning that bondholders may face a 50pc haircut by the end of the year. Portugal’s €78bn loan package from the EU-IMF Troika is already large enough to crowd out private creditors, reducing them to ever more junior status.

So why should anyone invest in Portuguese debt at this point?

Or Italian debt?

Or Spanish debt?

Or any European debt at all?

The truth is that the European financial system is a house of cards that could come crashing down at any time.

German economist Hans-Werner Sinn is even convinced that the European Central Bank itself could collapse.

There is a Der Spiegel article that everyone out there should read.  It is entitled “Euro-Zone Central Bank System Massively Imbalanced“. It is quite technical, but if this German economist is correct, the implications are staggering.

The following is from the first paragraph of the article….

More than a year ago, German economist Hans-Werner Sinn discovered a gigantic risk on the balance sheets of Germany’s central bank. Were the euro zone to collapse, Bundesbank losses could be half a trillion euros — more than one-and-a-half times the size of the country’s annual budget.

So no, the European debt crisis is not over.

It is just getting warmed up.

Get ready for a wild ride.

A Warning Sign For The World

Any financial system that is based on debt is doomed to fail.  Today, we are living in the greatest debt bubble that the world has ever seen, and if all of a sudden people could not use credit to buy things our economy would immediately ground to a halt.  Unfortunately, no debt bubble can last forever.  When this current debt bubble finally bursts, faith in the financial system is going to disappear, credit is going to freeze up and there is going to be a massive wave of bank failures.  Right now, Greece is a warning sign for the world.  Nobody wants to lend money to Greece, the Greek banking system is dying, one out of every four businesses has already shut down, unemployment is soaring and the Greek economy has now been in recession for five years in a row.  Sadly, the economic implosion in Greece is rapidly accelerating.  The Greek economy shrunk at a 7 percent annual rate during the 4th quarter of 2011.  That wasn’t supposed to happen.  Things were supposed to be getting better in Greece by now.  But instead the Greek depression is getting even worse, and very soon the rest of the world is going to be going through what Greece is currently experiencing.

Unfortunately, most in the mainstream media are treating what is happening in Greece as an “isolated incident” rather than as a very serious warning sign for the world.

Thankfully, there are at least a few reporters out there that are realizing the gravity of the situation.  The following is how one reporter from the New York Times recently described what life is like in Greece now….

By many indicators, Greece is devolving into something unprecedented in modern Western experience. A quarter of all Greek companies have gone out of business since 2009, and half of all small businesses in the country say they are unable to meet payroll. The suicide rate increased by 40 percent in the first half of 2011. A barter economy has sprung up, as people try to work around a broken financial system. Nearly half the population under 25 is unemployed. Last September, organizers of a government-sponsored seminar on emigrating to Australia, an event that drew 42 people a year earlier, were overwhelmed when 12,000 people signed up. Greek bankers told me that people had taken about one-third of their money out of their accounts; many, it seems, were keeping what savings they had under their beds or buried in their backyards. One banker, part of whose job these days is persuading people to keep their money in the bank, said to me, “Who would trust a Greek bank?”

Can you imagine?

Greece is experiencing a full-blown economic collapse and nobody can see a light at the end of the tunnel at this point.

As I have written about previously, the overall rate of unemployment in Greece has now risen above 20 percent and the youth unemployment rate in Greece has soared to an astounding 48 percent.

Deleveraging can be an extremely painful process.  Greece has been forced to try to reduce the size of its budget deficit, but every time it cuts government spending that causes economic activity (and thus government revenues) to slow down as well.

Now the EU and the IMF are demanding that even more very painful austerity measures be implemented in Greece even though Greece is already experiencing a full-blown depression.

The EU and the IMF are demanding that Greece fire 15,000 more government workers immediately and a total of 150,000 government workers by 2015.

The EU and the IMF are demanding that wages for government workers be cut by another 20 percent.

The EU and the IMF are demanding that the minimum wage be slashed by more than 20 percent.

The EU and the IMF are also demanding significant reductions in unemployment benefits and pension benefits.

Of course all of those cuts are going to make the short-term economic conditions in Greece even worse.

The rioting, looting and burning of buildings that we are witnessing right now in Greece is likely to continue for quite some time as exasperated citizens attempt to express their frustrations to politicians that simply do not seem to care.

According to the National Confederation of Greek Commerce, recent rioting resulted in damage to 153 businesses in Athens.  45 of those businesses were totally destroyed.

You can view some stunning footage of the current rioting in Greece right here.

Despite all of the austerity measures that have already been implemented, the truth is that Greece is very likely to default soon anyway.

There is a very good chance that the new austerity agreement that the Greek parliament just approved will never be implemented.  There are new elections scheduled for April and the current party in power is polling in the single digits.

The new Greek government is likely to look much different from the current one, and nobody knows for sure if the new government will follow through on any of the promises being made by the current government.

In addition, the German parliament must approve this new deal with Greece, and the German parliament is not scheduled to vote on it until February 27th.  Considering the mood in Germany right now, approval is not guaranteed.

So there are all kinds of things that could go wrong with the “deals” that are currently being discussed.  The truth is that a Greek default in the coming months seems to become more likely by the day.

Some in the financial world almost seem eager for a Greek default.  The following is what Jon Moulton, the chairman of Better Capital, recently told CNBC….

“If I was Greek, I wouldn’t be going for these measures, I’d be going for default and getting it over with. Would you like two to three years of pain or 20?”

But a disorderly Greek default would not be a pleasant thing for the global economy at all.  A recent article in the Guardian detailed what some of the consequences of a Greek default and exit from the eurozone might be….

But default and “re-drachmatisation” would be a costly and chaotic process. In the long term the euro might be strengthened if some of its weaker members headed for the door. But in the short term banks across the eurozone might have to be closed to prevent a run on the single currency as investors speculated about which country might be next. A new wave of bank nationalisations would be likely to follow as lenders counted their losses on now worthless Greek debt.

Capital controls would have to be imposed and borders shut to stop money flooding out of Greece. Portugal, Italy and Spain would come under intense pressure from investors wary about the risk of another victim. Banks everywhere, already reluctant to lend, would cut back hard, nervous about their exposure to the bonds of all Europe’s crisis-hit states.

And the financial crisis in Europe is going to continue to spread well beyond Greece.  Moody’s Investors Service just downgraded the credit ratings of six European nations.  The following is how Bloomberg described the downgrades….

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also reduced the ratings of Slovakia, Slovenia and Malta.

Countries such as Italy, Spain, Portugal, Ireland and Hungary are heading down the exact same road that Greece has gone.  Greece was the first one to experience a full-blown depression, but soon Greece will have a lot of company.

Greece is most definitely a warning sign for the world.  If you keep recklessly piling up debt, eventually a day of reckoning comes.  It is inevitable.

But Barack Obama does not seem to understand this.  He continues to pile another 150 million dollars on to our national debt every single hour.  He knows that cutting spending significantly right now would hurt the economy and that would significantly hurt his chances for another term.

Needless to say, Barack Obama is not likely to do anything that is going to significantly hurt his chances for another four years in the White House.

So we continue to roll on toward disaster.

The U.S. financial system is like a car with no brakes that is heading straight toward a 5,000 foot drop at 100 miles an hour.

It is all going to seem like fun and games to some people until we hit the canyon floor.

Once that happens, nobody will be laughing.

The Financial Crisis Of 2008 Was Just A Warm Up Act For The Economic Horror Show That Is Coming

The people out there that believe that the U.S. economy is experiencing a permanent recovery and that very bright days are ahead for us should have their heads examined.  Unfortunately, what we are going through right now is simply just a period of “hopetimism” between two financial crashes.  Things may seem relatively stable right now, but it won’t last long.  The truth is that the financial crisis of 2008 was just a warm up act for the economic horror show that is coming.  Nothing really got fixed after the crash of 2008.  We are living in the biggest debt bubble in the history of the world, and it has gotten even bigger since then.  The “too big to fail” banks are larger now than they have ever been.  Americans continue to run up credit card balances like there is no tomorrow.  Tens of thousands of manufacturing facilities and millions of jobs continue to leave the country.  We continue to consume far more than we produce and we continue to become poorer as a nation.  None of the problems that caused the crisis of 2008 have been solved and we are even weaker financially than we were back then.  So why in the world are so many people so optimistic about the economy right now?

Just take a look at the chart posted below.  It shows the growth of total debt in the United States.  During the financial crisis of 2008 there was a little “hiccup”, but the truth is that not much deleveraging really took place at all.  And since the recession “ended”, total credit market debt has gone on to even greater heights….

So what does this mean for the future?

Well, if a small “hiccup” in the debt bubble caused so much chaos back in 2008, what is going to happen when this debt bubble finally bursts?

That is something to think about.

Sadly, most Americans seem oblivious to all of this.

If you go out to malls in the wealthy areas of America today, people are charging up a storm.  In all, Americans charged a whopping 2.5 trillion dollars on their credit cards during 2011.  Way too many people have already forgotten the lessons that we all learned back in 2008.

Of course some Americans pay off their credit cards every month, but way too many Americans are not doing that.  Today, Americans are carrying 793 billion dollars in revolving credit balances.

And student loan debt is an even bigger bubble than credit card debt is.  As I have written about previously, total student loan debt in America is rapidly approaching a trillion dollars.

So it looks like U.S. consumers have not learned to stay away from debt.

That is not good.

Well, what about the banks?

Has the financial system learned any lessons since 2008?

No, not really.

Sadly, the “too big to fail” banks are now even bigger than ever.  The total assets of the six largest U.S. banks increased by 39 percent between September 30, 2006 and September 30, 2011.  If they were to fail today, they would be even more of a threat to our financial system than they were back in 2008.

And our major banks continue to be very highly leveraged.  In fact, major banks all over the world are absolutely swamped with debt.

The following statistics come from Zero Hedge….

The U.S. banking system is leveraged 13 to 1.

The Japanese banking system is leveraged 23 to 1.

The French banking system is leveraged 26 to 1.

The German banking system is leveraged 32 to 1.

These are insane levels of leverage, and they are just inviting another major financial crisis.

Do you all remember Lehman Brothers?  The fact that they were leveraged so highly is what did them in back in 2008.  When the value of their holdings declined by just a little bit they were totally wiped out.

Well, during this next financial crisis large financial institutions are going to be wiped out all over the world.  Major banks all over the globe are going to be crying out for more bailouts when things take a turn against them.

They are making the exact same mistakes that they made before, and they are going to be expecting more government handouts when things go bad.

Will we ever learn?

So obviously the banking system has not learned any lessons.

What about the federal government?

Well, if you follow my blog regularly, you know that I love to write about how horrific U.S. government debt is.

Unfortunately, over the past four years things have gotten so much worse.

Back in 2008, the U.S. national debt crossed the 10 trillion dollar mark.

Just recently, it crossed the 15 trillion dollar mark.

So now we are in a much weaker position financially to respond to another major financial crisis.

Just check out the chart posted below.  This is a recipe for national financial suicide….

During fiscal 2011, the Obama administration stole close to 150 million dollars from our children and our grandchildren every single hour.

At the moment, the legacy of debt that we are passing on to future generations is sitting a grand total of $15,351,406,294,640.49.

But keep in mind that it is going up every single hour.

Meanwhile, our ability to service that debt is declining.  We are rapidly getting poorer as a nation.

During 2011, the amount of money that left the United States exceeded the amount of money that entered the United States by more than a half a trillion dollars.

This gap is called a trade deficit, and it is absolutely ripping our economy to shreds.

For a moment, imagine Uncle Sam standing next to a giant pile of money on a map of the United States.  Then imagine a half a trillion dollars being taken out of that pile every single year.

So why haven’t we totally run out of money yet?

Well, it is because we borrow those dollars back.  In order to maintain our false standard of living, our federal government, our state governments and our local governments have to go out and beg the rest of the world to lend us our dollars back.

Sadly, our government schools have “dumbed-down” the population so much that most of them don’t even know what a “trade deficit” is anymore.

Meanwhile, our economic infrastructure is being gutted like a fish.

Look, I know that I go over this point over and over and over, but it is absolutely imperative that we all understand this.

The half a trillion dollars a year that leaves this country every year could have gone to support businesses and jobs inside the United States.

But instead it is going to support businesses and jobs on the other side of the world.

The consequences of this are absolutely devastating.

According to U.S. Representative Betty Sutton, an average of 23 manufacturing facilities a day closed down in the United States during 2010.  Overall, more than 56,000 manufacturing facilities in the United States have shut down since 2001.

Even many so-called “American companies” have been bought up by the rest of the world.  The following comes from a recent article posted on Economy In Crisis….

RCA is now a French company, Zenith is a Korean company. Frigidaire is a Swedish company. IBM’s Personal Computer Division—with its 500 patents—is now a Chinese company. Westinghouse Nuclear Energy’s major shareholder is Toshiba—a Japanese Company. Lucent Technologies, a former research division of AT&T, along with all the patents acquired from the beginning of the phone system, is now a French company. In 2008, Brazilian-Belgian brewing company InBev purchased the iconic American brewer Anheuser-Busch, makers of Budweiser. With the sale of these manufacturing companies, the future profit and technologies all belong to foreign entities.

We once had the greatest economic machine in the history of the world.

Now it is being dismantled and bought up by foreigners.

When America’s economic infrastructure declines, that means that there are less jobs available for all of us.

As I wrote about the other day, the employment situation in this country is not getting better and we have never even come close to recovering from the recession that started back in 2008.

During 2008 and 2009, the U.S. economy lost millions of jobs.  Since the beginning of 2010, the percentage of the U.S. population that has had a job has remained very stable….

Normally, when a recession ends the percentage of Americans that have a job bounces back pretty dramatically.

So considering the fact that the employment situation has never recovered from the last financial crisis, what is going to happen when the next financial crisis hits?

And most of the jobs that have been “created” during this so-called “recovery” have been low income jobs.  In fact, if you look closely at the employment numbers that were released last Friday, you will find that the vast majority of the “new jobs” were part-time jobs.

But you cannot pay a mortgage and support a family on a part-time job.

Sadly, the truth is that median household income in America has been steadily dropping over the past several years.  Tens of millions of American families are deeply struggling and more Americans than ever are falling into poverty.

Back in the year 2000, about one out of every nine Americans was living in poverty.  Today, about one out of every seven Americans is living in poverty.

All of this is causing a great deal of anxiety in America today.  Large numbers of Americans know that something has fundamentally changed, even if they don’t understand the specifics.  That is one reason why sites such as this one have become so popular.  People want some answers.

And once people get some answers about what is really happening, they tend to want to prepare for the hard times that are coming.

In a few days, a new series on National Geographic entitled “Doomsday Preppers” premieres.  The mainstream media is starting to take notice of the growing “prepper” movement in America today.  It is estimated that there are at least 2 million “preppers” in the United States at this point.  Of course people are “prepping” for a whole host of reasons, but the number one concern among most groups of preppers is the economy.

As the economy crumbles, more Americans than ever have decided that it is not a good thing to be 100% dependent on the system.

Back in 2008 and 2009, millions of Americans suddenly lost their jobs.  Because they did not have any finances stored up, large numbers of them also lost their homes.  Many went from being solidly middle class to being out on the street in a matter of months.

That doesn’t have to happen to you.  Instead of blowing your money on frivolous things, do what you can to set something aside for the difficult times that are on the horizon.

A lot of those “in the know” are quietly making their own preparations.  For example, legendary film director James Cameron (Avatar, Titanic and Terminator) has purchased more than 2600 acres of farmland in New Zealand and he is getting out of the U.S. for good apparently.

Unfortunately, most of us do not have the resources for something like that.  But what most of us can do is we can change our priorities and start focusing on the things that will help us survive the hard times that are coming.

So are you ready?

If The U.S. Government Keeps Spending Money Like This We Are Doomed And If The U.S. Government Stops Spending Money Like This We Are Doomed

If you increased your credit card spending by a couple thousand dollars per month would your lifestyle improve?  Of course it would.  By going into large amounts of debt, it is possible to live a lifestyle that you can’t really afford, at least for a while.  But if you keep racking up huge amounts of credit card debt every single month, eventually it gets to a point where it is extremely difficult to even keep up with the minimum monthly payments and the credit card companies will not lend you any more money.  Well, on a larger scale it is the same thing with government debt.  Right now, the U.S. government is spending more than a trillion dollars more than it takes in every year.  Even if the U.S. government spends all of that money on incredibly stupid stuff, it still gets into the pockets of ordinary Americans.  In turn, those ordinary Americans use that money to pay the mortgage, buy food, shop at the mall, etc.  All of this borrowing and spending by the U.S. government has created a “false prosperity” bubble that is not real.  It may feel real to you right now, but it is unsustainable by definition.  If the U.S. government suddenly started spending only the money that it actually brought in every year, our economy would be doomed and all of this “false prosperity” would rapidly disappear.  But if the U.S. government continues to rack up debt at this pace we are doomed as well.  In fact, every dollar that gets borrowed makes our eventual collapse ever worse.  We are heading down the exact same road that Greece has gone.  Eventually the rest of the world is not going to lend us gigantic mountains of super cheap money anymore.  When the flow of cheap money stops, it can be extremely painful.  Anyone that has ever seen the interest rates on their credit cards go above 20 percent knows how this feels.  If we had addressed these problems as a nation a decade or two ago, perhaps we could have found a solution.  But now there is no way out under our current financial system and a devastating economic collapse is on the horizon no matter what we do.

If there was a Hollywood movie where some crooks successfully stole 150 million dollars, what would you think of those crooks?

Would you have admiration for them?

Would you be disgusted with them?

Would you feel like your intelligence was insulted because nobody could ever steal 150 million dollars and get away with it?

Well, right now the federal government is stealing approximately 150 million dollars from our children and our grandchildren every single hour.

That’s right – the U.S. government is borrowing an astounding 150 million dollars an hour that our children and our grandchildren will be expected to deal with.

It is a theft so vast that it is almost unimaginable.

So what should be done?

A lot of people out there think that our problems would be solved if the government would just quit borrowing so much money.

Well, it is just not that simple.

Look at Greece.  They were forced by the EU and the IMF to dramatically reduce government spending.  But when Greece reduced government spending, that caused the economy to shrink rapidly and it caused tax receipts to go down more than expected.  So Greek budget deficits were even larger than anticipated and so Greece was forced to cut spending even more.  But that created even more economic problems.

A recent article by John Mauldin described the nightmarish effect that this cycle has had on Greece….

And as Greece began shake and bake its way to “austerity,” the very act of cutting deficits pushed the country into recession, which lowered tax revenues and increased expenses, putting the elusive goal of a balanced budget even further off. We should quickly note that this is not just a Greek problem. Spain’s “draconian” cuts have meant that its 6% deficit target for the year has this week been raised to a more likely 8%, making it harder to get back to even.

For country after country, this is the Endgame. It is the end of the Debt Supercycle. Debt has grown to the size that it cannot be sustained. The market will not lend any more money on terms that can be afforded, and any efforts to cut spending and raise taxes will result in an even worse economy, in various degrees of recession, with falling revenues and rising costs.

This is what happens when a country that has been spending far beyond its means is forced to dramatically cut back.

Those that are convinced that balancing the federal budget in the United States will be relatively painless should take a close look at what is happening in Greece.

As I have written about previously, the Greek economy has been plunged into a 21st century “Great Depression”.  In Greece, 20 percent of all retail stores have already shut down, the unemployment rate for those under the age of 24 is sitting at 39 percent, and one third of the entire nation is living in poverty.

And this is only just the beginning for Greece.

Things are going to get even worse.

Unfortunately, many believe that the United States is destined to experience far worse pain than Greece is currently experiencing.

For example, Peter Schiff insists that the United States is in worse financial shape than Europe at this point.  Just check out this video….

Anyone that attempts to downplay the U.S. debt problem is making a serious mistake.  Yes, we are still able to borrow trillions of dollars for next to nothing, but that is going to come to an end.

Remember all of those “suckers” that signed up for mortgages at “teaser rates” that later got jacked up dramatically?

Of course you do.

So what happened to them?

When the rates went up many of them ended up losing everything.

Well, we have gotten ourselves into the exact same kind of a position.  All of this cheap money has enabled us to live very nicely for now, but when the cheap money ends the nightmare will begin.

Right now, our debt is growing much, much faster than our economy is.  Between 2007 and 2010, U.S. GDP grew by only 4.26%, but the U.S. national debt soared by 61% during that same time period.

What would your household finances look like if your total debt grew by 61 percent next year but your income only grew by 4 percent?

When I was a little boy, the U.S. national debt was considered to be a huge national crisis.  Politicians from both major political parties were promising that they would fix things.

But what has happened since then?

Well, when Ronald Reagan took office the U.S. national debt was less than 1 trillion dollars.  Today, the U.S. national debt is over 15.2 trillion dollars.

During 2011, the federal government went into more debt than the U.S. government accumulated from the time that George Washington became president to the time that Ronald Reagan became president.

That may be hard to believe, but it is true.

During fiscal year 2011, the U.S. government spent 3.7 trillion dollars but it only brought in 2.4 trillion dollars.

That is utter insanity, and yet most Americans have become convinced that this is “normal” and that there is nothing to worry about.

It is hard to grasp how much money a trillion dollars is.

If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

That is how much money a trillion dollars is.

And things look even worse when you look at the balance sheet of the U.S. government.

The U.S. government has total assets of 2.7 trillion dollars and has total liabilities of 17.5 trillion dollars.  Those liabilities do not even count 4.7 trillion dollars of intragovernmental debt that is currently outstanding.

But it is not just the federal government that has been living a fantasy.

The chart posted below shows the growth of total debt in America over the past several decades.  Consumers, businesses and government officials have been on a debt binge that is absolutely unprecedented….

The scary thing is that even with all of this borrowed money, our economy is still in the dumps.

So what in the world is it going to look like when the debt bubble totally bursts?

Even with all of this “borrowed prosperity”, anger at the government is rapidly growing.  A recent Gallup poll found that “satisfaction with government” in the United States is now at an all-time record low of 29 percent.

So how angry will the American people be when all of this “borrowed prosperity” disappears?

When this whole thing comes tumbling down, a lot of people are going to blame our problems on “capitalism”.

In fact, it is already happening.  Just check out what the founder of the World Economic Forum is saying….

“We have a general morality gap, we are over-leveraged, we have neglected to invest in the future, we have undermined social coherence, and we are in danger of completely losing the confidence of future generations,” said Klaus Schwab, host and founder of the annual World Economic Forum.

“Solving problems in the context of outdated and crumbling models will only dig us deeper into the hole.

“We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual,” the 73-year-old said, adding that “capitalism in its current form, has no place in the world around us.”

But capitalism is not the problem.  Capitalism has produced the greatest eras of prosperity that the world has ever seen.

No, the real problem is our debt-based financial system that is managed and run by the central banks of the world.

You see, debt-based central banking is not capitalism.  But way too many people equate the two.

A lot of people cannot even imagine this, but theoretically you could have capitalism without any debt whatsoever.

But what we have today is a financial system that has debt as the very foundation.  And such a system is inevitably going to fail someday.

As I have written about so many times before, the Federal Reserve is at the very heart of our economic problems here in the United States.

The Federal Reserve was designed to be a perpetual debt machine.  And it has performed that task very well.  The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created.

So yes, even though things seem somewhat “stable” for the moment, there are all kinds of reasons to be concerned about the viability of our economy and our financial system in the years ahead.

The other day, I was quoted in a Reuters article about our coming economic problems….

“Most people have a gut feeling that something has gone terribly wrong, but that doesn’t mean that they understand what is happening,” he said. “A lot of Americans sense that a massive economic storm is coming and they want to be prepared for it.”

Of course the Reuters reporter did not even bother to spell my name correctly, but at least he got the quote right.

A great economic storm is coming.

Don’t let this false prosperity and this “calm before the storm” fool you.

We are living in the greatest debt bubble the world has ever seen, and no matter how it plays out there is going to be a massive amount of pain.

You might want to get yourself and your family prepared for that.

Bam! Bam! Bam! Huge Financial Bombs Just Got Dropped All Over Europe

The European debt crisis has just gone to an entirely new level.  Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe.  Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations.  This included both France and Austria losing their cherished AAA credit ratings.  When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation.  Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters.  Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge.    Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did.  Standard & Poor’s unleashed a barrage of credit downgrades on Friday….

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better.  Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a “voluntary haircut” that is supposed to be a key component of the “rescue plan” for Greece.

Greece desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed.  There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following….

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt”

The IIF says that negotiations are “paused for reflection” right now, but they are hoping that they will be able to resume before too long….

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach”

Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent.  Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren’t hearing much about it in the U.S. media, but Hungary is a total basket case right now.  The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary.  The following is from an article in the Daily Mail….

The European Union has stepped up pressure on Hungary over the country’s refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country’s credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.

Slovenia is a total mess right now as well.  The following comes from a recent article posted on EUObserver.com….

Slovenia’s borrowing costs have reached ‘bail-out territory’ after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia’s capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country’s president set to re-cast his name or propose someone new within two weeks.

Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times.  What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama’s first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt.  If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things.  The kinds of “financial bombs” that we saw dropped today are going to become much more frequent.  As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be “normal” again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

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