Arrivederci Berlusconi

Oh, how the mighty have fallen.  In just a matter of days, two of Europe’s most venerable leaders have been toppled.  George Papandreou was the third member of the Papandreou dynasty to be prime minister of Greece.  Silvio Berlusconi had dominated Italian politics for nearly two decades.  But now they are both heading out the door and the international media have been reporting on their resignations with the kind of enthusiasm that is normally reserved for sporting events.  “Down goes Papandreou!  Down goes Berlusconi!”  If you didn’t know better, you would almost be tempted to think that some of the recent news reports were describing a boxing match.  But this is what happens when debt problems spiral out of control.  It is the leaders who take the fall.  So will the resignations of Papandreou and Berlusconi help anything?  Of course not.  Europe is still headed for a financial collapse of epic proportions.

As I wrote about recently, it has been the fumbling of the Greek debt crisis by European leaders which has set the stage for the burgeoning financial crisis in Italy to go to a whole new level.

Once the Greek debt deal was announced, I warned that it would shatter confidence in the sovereign debt of the rest of the PIIGS and it would cause their bond yields to soar.

That is exactly what has happened.

The yield on 10 year Italian bonds (probably the most important financial number in the world at the moment) is now up to 6.7 percent.

Never before in the euro era has the yield on Italian bonds been as high as we have seen this week.

So why is this important?

Well, the reality is that Italy simply cannot afford to service its massive national debt when yields are this high.

We are officially in the danger zone.

Carl Weinberg, the chief economist at High Frequency Economics, recently said the following about what would happen if Italian bond yields go up into the 8 to 10 percent range….

“If it has to pay those yields to finance itself, Italy is dead, and the sovereign crisis just blew up”

So watch that number very carefully over the next few months.

Italy is being called “too big to fail, too big to save”.  There is no way that Europe can afford Italy to crash, but there is also no way that the rest of Europe can put together enough money for a full scale bailout of Italy.

So there is panic in the air.

The Italian government is in a state of near chaos and over the past couple of weeks we have seen Berlusconi’s coalition break down.  Now Berlusconi has agreed to resign, and the future of Italian politics is murky at best.

The following is how a Reuters article described the agreement for Berlusconi step down….

Berlusconi confirmed a statement from President Giorgio Napolitano that he would step down as soon as parliament passed urgent budget reforms demanded by European leaders after Italy was sucked into epicenter of the euro zone debt crisis.

The votes in both houses of parliament are likely this month and they would spell the end of a 17-year dominance of Italy by the flamboyant billionaire media magnate.

Many believe that the departure of Berlusconi is going to pave the way for brutal austerity measures to be imposed on the Italian people.

Suddenly, it very much feels like we are watching a replay of what has happened in Greece over the past couple of years.  Just check out the following excerpt from a recent article in the London Evening Standard….

The Italians feel they’ve been humiliated by having to accept that monitors from the IMF will be arriving in the country this week to oversee a rise in pension ages, a sell-off of state assets and new rules to make jobs less secure.

Does that not sound like exactly what happened in Greece back near the beginning of their crisis?

In Greece, brutal austerity measures demanded by the EU and the IMF plunged the country into a depression, tax revenues plummeted, Greek debt exploded to even higher levels, bond yields soared into the stratosphere and the EU and the IMF demanded even more austerity measures be implemented.

Is the same sad story going to play out in Italy?

The Italians are definitely going to agree to some pretty significant budget cuts.  But if bond yields keep rising, they are going to wipe out all of the savings from the budget cuts and then some.

This is why I keep preaching about the horror of the U.S. national debt over and over and over.  If you don’t deal with it when you can, eventually interest rates rise to unbearable levels and a horror show quickly unfolds.

Anyway, right now Italy has a debt to GDP ratio of 118 percent.  If they keep expanding that debt it is going to result in a financial nightmare, but if they try to implement strict austerity measures it is also going to result in a financial nightmare.

They are damned if they do and they are damned if they don’t.

Of course we should not forget about Greece.

The EU has been freaking out for quite a while about what to do about tiny little Greece.

Now that George Papandreou has been kicked to the curb, it looks like Lucas Papademos is going to be the next prime minister of Greece.

Papademos previously served as the governor of the Greek central bank, as a vice president of the European Central Bank and as a senior economist at the Federal Reserve Bank of Boston.

In other words, he would be the ideal choice of the international banking community.

Not that anyone is going to be able to do much for Greece at this point.  Greece is a financial basket case, and unless someone gives them gigantic piles of money for free that is going to continue to be the case.

A year ago, the yield on 2 year Greek bonds was a bit above 10 percent.  Today, the yield on 2 year Greek bonds is over 100 percent.

If you want to see what a financial meltdown looks like, just check out what is happening in Greece.

The rest of Europe is in panic mode too.  For example, France is desperate to keep their AAA credit rating.  In an article for the Telegraph, Ambrose Evans-Pritchard described the austerity measures that France is implementing in an attempt to head off a debt crisis of their own….

The belt-tightening plan — the second package since August, taking total cuts to €112bn — include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.

In the end, all of this is too little, too late.

Europe is heading for a date with destiny.  They have spent themselves into oblivion and now they are going to pay the price.

Some members of the financial community fear that a full-blown crisis could erupt at any moment.  For example, according to Business Insider, Colin Tan of Deutsche Bank recently said that he believes that it is possible that “we could be in full crisis mode” by the time the week ends….

Its not inconceivable that we could be in full crisis mode by the end of this week. The situation with Italy feels increasingly like one that has little chance of materially improving until some
extreme pressure is put on someone to act. It may not come to a head this week but the signs are not good that we can avoid an extreme situation emerging soon.

For those of you that are freaking out about now, don’t worry too much.  A full-blown crisis is not going to happen this week.

But time is running out.

And when Europe comes apart, it is going to have a dramatic impact on the United States as well.

According to an article in the Financial Post, the Federal Reserve made the following statement in a report about a survey that it just released….

“About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries”

Big U.S. banks have a lot of exposure to European debt and to European banks.  When the financial dominoes start to fall, a lot of those dominoes are going to be in the United States.

One of the biggest dangers to be concerned about are all of the credit default swap contracts that U.S. banks have written on European debt.  Just check out what a recent article posted on the website of MSNBC had to say about that….

U.S. banks have written about $400 billion in CDS contracts on European sovereign debt, according to the Bank for International Settlements. Those payouts would be triggered if Greece or Italy defaults. Because financial institutions are not required to report their CDS holdings, little is known about which banks or investment firms are on the hook, and for how much.

As I have written about previously, there is a very good chance that the world could be facing a massive derivatives crisis at some point in the next five to ten years.

If you hear the news talk about a “problem with derivatives” or a “derivatives crisis” then you will want to pay very close attention.

Over the past 30 years, the global financial system has constructed a gigantic mountain of debt, risk and leverage unlike anything the world has ever seen before.

At some point the whole thing is going to come crashing down.

When it does, it is going to affect the entire globe.

A huge storm is coming.

Get prepared while you can.

 

Be Honest – The European Debt Deal Was Really A Greek Debt Default

Once the euphoria of the initial announcement faded and as people have begun to closely examine the details of the European debt deal, they have started to realize that this “debt deal” is really just a “managed” Greek debt default.  Let’s be honest – this deal is not going to solve anything.  All it does is buy Greece a few months.  Meanwhile, it is going to make the financial collapse of other nations in Europe even more likely.  Anyone that believes that the financial situation in Europe is better now than it was last week simply does not understand what is going on.  Bond yields are going to go through the roof and investors are going to start to panic.  The European Central Bank is going to have an extremely difficult time trying to keep a lid on this thing.  Instead of being a solution, the European debt deal has brought us several steps closer to a complete financial meltdown in Europe.

The big message that Europe is sending to investors is that when individual nations get into debt trouble they will be allowed to default and investors will be forced to take huge haircuts.

As this reality starts to dawn on investors, they are going to start demanding much higher returns on European bonds.

In fact, we are already starting to see this happen.

The yield on two year Spanish bonds increased by more than 6 percent today.

The yield on two year Italian bonds increased by more than 7 percent today.

So what are nations such as Italy, Spain, Portugal and Ireland going to do when it costs them much more to borrow money?

The finances of those nations could go from bad to worse very, very quickly.

When that happens, who will be the next to come asking for a haircut?

After all, if Greece was able to get a 50% haircut out of private investors, then why shouldn’t Italy or Spain or Portugal ask for one as well?

According to Reuters, German Chancellor Angela Merkel is already trying to warn other members of the EU not to ask for a haircut….

Chancellor Angela Merkel said on Friday it was important to prevent others from seeking debt reductions after European Union leaders struck a deal with private banks to accept a nominal 50 percent cut on their Greek government debt holdings.

“In Europe it must be prevented that others come seeking a haircut,” she said.

But investors are not stupid.  Greece was allowed to default.  If Italy or Spain or Portugal gets into serious trouble it is likely that they will be allowed to default too.

Investors like to feel safe.  They want to feel as though their investments are secure.  This Greek debt deal is a huge red flag which signals to global financial markets that there is no longer safety in European bonds.

So what is coming next?

Hold on to your seatbelts, because things are about to get interesting.

Around the globe, a lot of analysts are realizing that this European debt deal was not good news at all.  The following is a sampling of comments from prominent voices in the financial community….

*Economist Sony Kapoor: “The fact that a deal has been agreed, any deal, impresses people. Until they start de-constructing it and parts start unravelling.”

*Economist Ken Rogoff: “It feels at its root to me like more of the same, where they’ve figured how to buy a couple of months”

*Neil MacKinnon of VTB Capital: “The best we can say is that the EU have engineered a temporary reprieve”

*Graham Summers of Phoenix Capital Research:

First off, let’s call this for what it is: a default on the part of Greece. Moreover it’s a default that isn’t big enough as a 50% haircut on private debt holders only lowers Greece’s total debt level by 22% or so.

Secondly, even after the haircut, Greece still has Debt to GDP levels north of 130%. And it’s expected to bring these levels to 120% by 2020.

And the IMF is giving Greece another $137 billion in loans.

So… Greece defaults… but gets $137 billion in new money (roughly what the default will wipe out) and is expected to still be insolvent in 2020.

*Max Keiser: “There will be another bailout required within six months – I guarantee it.”

The people that are really getting messed over by this deal are the private investors in Greek debt.  Not only are they being forced to take a brutal 50% haircut, they are also being told that their credit default swaps are not going to pay out since this is a “voluntary” haircut.

This is completely and totally ridiculous as an article posted on Finance Addict pointed out…

We now know that private holders of Greek bonds will be “invited” (seriously–this was the word used in the EU summit statement) to take a write-down of 50%–halving the face value of the estimated $224 billion in bonds that they hold. This will help bring the Greek debt-to-GDP ratio down from 186% in 2013 to 120% by 2020. The big question–apart from how many investors they will get to go along with this, given that they couldn’t reach their target of 90% investor participation when the write-down was only going to be 21%–is whether this will trigger a CDS pay-out.

That this is even up for discussion is mind-boggling. These credit default swaps are meant to be an insurance policy in case Greece doesn’t pay the agreed upon interest and return the full principal within the agreed timeframe. If they don’t pay out when bondholders are taking a 50% hit then what’s the point?

European politicians may believe that they have “solved” something, but the truth is that what they have really done is they have pulled the rug out from under the European financial system.

Faith in European debt is going to rapidly disappear and the euro is likely to fall like a rock in the months ahead.

The financial crisis in Europe is just getting started.  2012 looks like it is going to be an extremely painful year.

Let us hope for the best, but let us also prepare for the worst.

Prophets Of Doom: 12 Shocking Quotes From Insiders About The Horrific Economic Crisis That Is Almost Here

We are getting so close to a financial collapse in Europe that you can almost hear the debt bubbles popping.  All across the western world, governments and major banks are rapidly becoming insolvent.  So far, the powers that be are keeping all of the balls in the air by throwing around lots of bailout money.  But now the political will for more bailouts is drying up and the number of troubled entities seems to grow by the day.  Right now the western world is facing a debt crisis that is absolutely unprecedented in world history.  Europe has had a tremendously difficult time just trying to keep Greece afloat, and several much larger European countries are now on the verge of a major financial crisis.  In addition, there is a growing number of very large financial institutions all over the western world that are also rapidly approaching a day of reckoning.  The global financial system is a sea or red ink, and when we get to the point where there are hundreds of ships going under how is it going to be possible to bail all of them out?  The quotes that you are about to read show that quite a few top financial and political insiders know that things cannot hold together much longer and that a horrific economic crisis is coming.  We built the global financial system on a foundation of debt, leverage and risk and now this house of cards that we have created is about to come tumbling down.

A lot of people in politics and in the financial world know what is about to happen.  Once in a while they will even be quite candid about it with the media.

As I have written about previously, Europe is on the verge of a financial collapse.  If things go really badly, things could totally fall apart in a few weeks.  But more likely it will be a few more months until the juggling act ends.

Right now, the banking system in Europe is coming apart at the seams.  Because the global financial system is so interconnected today, when major European banks start to fail it is going to have a cascading effect across the United States and Asia as well.

The financial crisis of 2008 plunged us into the deepest recession since the Great Depression.

The next financial crisis could potentially hit the world even harder.

The following are 12 shocking quotes from insiders that are warning about the horrific economic crisis that is almost here….

#1 George Soros: “Financial markets are driving the world towards another Great Depression with incalculable political consequences. The authorities, particularly in Europe, have lost control of the situation.”

#2 PIMCO CEO Mohammed El-Erian: “These are all signs of an institutional run on French banks. If it persists, the banks would have no choice but to delever their balance sheets in a very drastic and disorderly fashion. Retail depositors would get edgy and be tempted to follow trading and institutional clients through the exit doors. Europe would thus be thrown into a full-blown banking crisis that aggravates the sovereign debt trap, renders certain another economic recession, and significantly worsens the outlook for the global economy.”

#3 Attila Szalay-Berzeviczy, global head of securities services at UniCredit SpA (Italy’s largest bank): “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”

#4 Stefan Homburg, the head of Germany’s Institute for Public Finance: “The euro is nearing its ugly end. A collapse of monetary union now appears unavoidable.”

#5 EU Parliament Member Nigel Farage: “I think the worst in the financial system is yet to come, a possible cataclysm and if that happens the gold price could go (higher) to a number that we simply cannot, at this moment, even imagine.”

#6 Carl Weinberg, the chief economist at High Frequency Economics: “At this point, our base case is that Greece will default within weeks.”

#7 Goldman Sachs strategist Alan Brazil: “Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world’s base currency?”

#8 International Labour Organization director general Juan Somavia recently stated that total unemployment could “increase by some 20m to a total of 40m in G20 countries” by the end of 2012.

#9 Deutsche Bank CEO Josef Ackerman: “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

#10 Alastair Newton, a strategist for Nomura Securities in London: “We believe that we are just about to enter a critical period for the eurozone and that the threat of some sort of break-up between now and year-end is greater than it has been at any time since the start of the crisis”

#11 Ann Barnhardt, head of Barnhardt Capital Management, Inc.: “It’s over. There is no coming back from this. The only thing that can happen is a total and complete collapse of EVERYTHING we now know, and humanity starts from scratch. And if you think that this collapse is going to play out without one hell of a big hot war, you are sadly, sadly mistaken.”

#12 Lakshman Achuthan of ECRI: “When I call a recession…that means that process is starting to feed on itself, which means that you can yell and scream and you can write a big check, but it’s not going to stop.”

*****

In my opinion, the epicenter of the “next wave” of the financial collapse is going to be in Europe.  But that does not mean that the United States is going to be okay.  The reality is that the United States never recovered from the last recession and there are already a lot of signs that we are getting ready to enter another major recession.  A major financial collapse in Europe would just accelerate our plunge into a new economic crisis.

If you want to read something that will really freak you out, you should check out what Dr. Philippa Malmgren is saying.  Dr. Philippa Malmgren is the President and founder of Principalis Asset Management.  She is also a former member of the Bush economic team. You can find her bio right here.

Malmgren is claiming that Germany is seriously considering bringing back the Deutschmark.  In fact, she claims that Germany is very busy printing new currency up.  In a list of things that we could see happen over the next few months, she included the following….

“The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.”

This is quite a claim for someone to be making.  You would think that someone that used to work in the White House would not make such a claim unless it was based on something solid.

If Germany did decide to leave the euro, you would see an implosion of the euro that would be truly historic.

But as I have written about previously, it should not surprise anyone that the end of the euro is being talked about because the euro simply does not work.

The only way that the euro would have had a chance of working is if all of the governments using the euro would have kept debt levels very low.

Unfortunately, the financial systems of the western world are designed to push governments into high levels of debt.

The truth is that the euro was doomed from the very beginning.

Now we are approaching a day of reckoning.  We have been living in the greatest debt bubble in the history of the world, but the bubble is ending.  There are several ways that the powers that be could handle this, but all of them will lead to greater financial instability.

In the end, we will see that the debt-fueled prosperity that the western world has been enjoying for decades was just an illusion.

Debt is a very cruel master.  It will almost always bring more pain and suffering than you anticipated.

It is easy to get into debt, but it can be very difficult to get out of debt.

There is no way that the western world can unwind this debt spiral easily.

The only way that another massive economic crisis can be put off for even a little while would be for the powers that be to “kick the can down the road” a little farther by creating even more debt.

But in the end, you can never solve a debt problem with more debt.

The next several years are going to be an incredibly clear illustration of why debt is bad.

When the dominoes start to fall, we are going to witness a financial avalanche which is going to destroy the finances of millions of people.

You might want to try to get out of the way while you still can.

20 Signs Of Imminent Financial Collapse In Europe

Are we on the verge of a massive financial collapse in Europe?  Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money.  Without more bailout funds it is absolutely certain that Greece will soon default on their debts.  But German officials are threatening to hold up more bailout payments until the Greeks “do what they agreed to do”.  The attitude in Germany is that the Greeks must now pay the price for going into so much debt.  Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks.  As the economy shrinks, so do tax payments and the budget deficit gets even larger.  Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets.  If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well.  Needless to say, all hell would break loose at that point.

So why is Greece so important?

Well, there are two reasons why Greece is so important.

Number one, major banks all over Europe are heavily invested in Greek debt.  Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.

Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either.  It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.

If Italy or Spain were to go down, it would wipe out major banks all over the globe.

Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing….

Financial turmoil in Europe is no longer a problem of small, peripheral economies like Greece. What’s under way right now is a full-scale market run on the much larger economies of Spain and Italy. At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat.

Most Americans don’t spend a lot of time thinking about the financial condition of Europe.

But they should.

Right now, the U.S. economy is really struggling to stay out of another recession.  If Europe has a financial meltdown, there is no way that the United States is going to be able to avoid another huge economic downturn.

If you think that things are bad now, just wait.  After the next major financial crisis what we are going through right now is going to look like a Sunday picnic.

The following are 20 signs of imminent financial collapse in Europe….

#1 The yield on 2 year Greek bonds is now over 60 percent.  The yield on 1 year Greek bonds is now over 110 percent.  Basically, world financial markets now fully expect that Greece will default.

#2 European bank stocks are getting absolutely killed once again today.  We have seen this happen time after time in the last few weeks.  What we are now witnessing is a clear trend.  Just like back in 2008, major banking stocks are leading the way down the financial toilet.

#3 The German government is now making preparations to bail out major German banks when Greece defaults.  Reportedly, the German government is telling banks and financial institutions to be prepared for a 50 percent “haircut” on Greek debt obligations.

#4 With thousands upon thousands of angry citizens protesting in the streets, the Greek government seems hesitant to fully implement the austerity measures that are being required of them.  But if Greece does not do what they are being told to do, Germany may withhold further aid.  German Finance Minister Wolfgang Schaeuble says that Greece is now “on a knife’s edge“.

#5 Germany is increasingly taking a hard line with Greece, and the Greeks are feeling very pushed around by the Germans at this point.  Ambrose Evans-Pritchard made this point very eloquently in a recent article for the Telegraph….

Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been “Unconditional Capitulation”, and “Terrorization of Greeks”, and even “Fourth Reich”.

#6 Everyone knows that Greece simply cannot last much longer without continued bailouts.  John Mauldin explained why this is so in a recent article….

It is elementary school arithmetic. The Greek debt-to-GDP is currently at 140%. It will be close to 180% by year’s end (assuming someone gives them the money). The deficit is north of 15%. They simply cannot afford to make the interest payments. True market (not Eurozone-subsidized) interest rates on Greek short-term debt are close to 100%, as I read the press. Their long-term debt simply cannot be refinanced without Eurozone bailouts.

#7 The austerity measures that have already been implemented are causing the Greek economy to shrink rapidly.  Greek Finance Minister Evangelos Venizelos has announced that the Greek government is now projecting that the economy will shrink by 5.3% in 2011.

#8 Greek Deputy Finance Minister Filippos Sachinidis says that Greece only has enough cash to continue operating until next month.

#9 Major banks in the U.S., in Japan and in Europe have a tremendous amount of exposure to Greek debt.  If they are forced to take major losses on Greek debt, quite a few major banks that are very highly leveraged could suddenly be in danger of being wiped out.

#10 If Greece goes down, Portugal could very well be next.  Ambrose Evans-Pritchard of the Telegraph explains it this way….

Yet to push Greece over the edge risks instant contagion to Portugal, which has higher levels of total debt, and an equally bad current account deficit near 9pc of GDP, and is just as unable to comply with Germany’s austerity dictates in the long run. From there the chain-reaction into EMU’s soft-core would be fast and furious.

#11 The yield on 2 year Portuguese bonds is now over 15 percent.  A year ago the yield on those bonds was about 4 percent.

#12 Portugal, Ireland and Italy now also have debt to GDP ratios that are well above 100%.

#13 Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

#14 Major banks in the “healthy” areas of Europe could soon see their credit ratings downgraded.  For example, there are persistent rumors that Moody’s is about to downgrade the credit ratings of several major French banks.

#15 Most major European banks are leveraged to the hilt and are massively exposed to sovereign debt.  Before it fell in 2008, Lehman Brothers was leveraged 31 to 1.  Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

#16 The ECB is not going to be able to buy up debt from troubled eurozone members indefinitely.  The European Central Bank is already holding somewhere in the neighborhood of 444 billion euros of debt from the governments of Greece, Italy, Portugal, Ireland and Spain.  On Friday, Jurgen Stark of Germany resigned from the European Central Bank in protest over these reckless bond purchases.

#17 According to London-based think tank Open Europe, the European Central Bank is now massively overleveraged….

“Should the ECB see its assets fall by just 4.23pc in value . . . its entire capital base would be wiped out.”

#18 The recent decision issued by the German Constitutional Court seems to have ruled out the establishment of any “permanent” bailout mechanism for the eurozone.  Just consider the following language from the decision….

“No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences”

#19 Economist Nouriel Roubini is warning that without “massive stimulus” by the governments of the western world we are going to see a major financial collapse and we will find ourselves plunging into a depression….

“In the short term, we need to do massive stimulus; otherwise, there’s going to be another Great Depression”

#20 German Economy Minister Philipp Roesler is warning that “an orderly default” for Greece is not “off the table“….

”To stabilize the euro, we must not take anything off the table in the short run. That includes, as a worst-case scenario, an orderly default for Greece if the necessary instruments for it are available.”

Right now, Greece is caught in a death spiral.  The more austerity measures they implement, the more their economy slows down.  The more their economy slows down, the more their tax revenues go down.  The more their tax revenues go down, the worse their debt problems become.

Greece could end up leaving the euro, but that would make their economic problems far, far worse and it would be very damaging to the rest of the eurozone as well.

Quite a few politicians in Europe are touting a “United States of Europe” as the ultimate solution to these problems, but right now the citizens of the eurozone are overwhelming against deeper economic integration.

Plus, giving the EU even more power would mean an even greater loss of national sovereignty for the people of Europe.

That would not be a good thing.

So what we are stuck with right now is the status quo.  But the current state of affairs cannot last much longer.  Germany is getting sick and tired of giving out bailouts and nations such as Greece are getting sick and tired of the austerity measures that are being forced upon them.

At some point, something is going to snap.  When that happens, world financial markets are going to respond with a mixture of panic and fear.  Credit markets will freeze up because nobody will be able to tell who is stable and who is about to collapse.  Dominoes will start to fall and quite a few major financial institutions will be wiped out.  Governments around the world will have to figure out who they want to bail out and who they don’t want to bail out.

It will be a giant mess.

For decades, the governments of the western world have been warned that they were getting into way too much debt.

For decades, the major banks and the big financial institutions were warned that they were becoming way too leveraged and were taking far too many risks.

Well, nobody listened.

So now we get to watch a global financial nightmare play out in slow motion.

Grab some popcorn and get ready.  It is going to be quite a show.

Even Goldman Sachs Secretly Believes That An Economic Collapse Is Coming

Goldman Sachs is doing it again.  Goldman is telling the public that everything is going to be just fine, but meanwhile they are advising their top clients to bet on a huge financial collapse.  On August 16th, a 54 page report authored by Goldman strategist Alan Brazil was distributed to institutional clients.  The general public was not intended to see this report.  Fortunately, some folks over at the Wall Street Journal got their hands on a copy and they have filled us in on some of the details.  It turns out that Goldman Sachs secretly believes that an economic collapse is coming, and they have some very interesting ideas about how to make money in the turbulent financial environment that we will soon be entering.  In the report, Brazil says that the U.S. debt problem cannot be solved with more debt, that the European sovereign debt crisis is going to get even worse and that there are large numbers of financial institutions in Europe that are on the verge of collapse.  If this is what people at the highest levels of the financial world are talking about, perhaps we should all start paying attention.

There is a tremendous amount of fear in the global financial community right now.  As I wrote about the other day, the financial world is about to hit the panic button.  Things could start falling apart at any time.  Most of these big banks will not admit how bad things are publicly, but privately there is a whole lot of freaking out going on.

According to the Wall Street Journal, Brazil believes that “as much as $1 trillion in capital may be needed to shore up European banks; that small businesses in the U.S., a past driver of job production, are still languishing; and that China’s growth may not be sustainable.”

Perhaps most startling of all is what the report has to say about the debt problems of the United States and Europe.

For example, this following excerpt from the report sounds like it could have come straight from The Economic Collapse Blog….

“Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world’s base currency?”

Remember, this statement was not written by some guy on the Internet.  A top Goldman Sachs analyst put it into a report for institutional investors.

The report also goes into great detail about the financial crisis in Europe.  Brazil writes about how the euro is headed for trouble and about how dozens of financial institutions in Europe could potentially be in danger of collapse.

But in any environment Goldman Sachs thinks that it can make money.  The following is how Business Insider summarized the advice that Brazil gave in the report regarding how to make money off of the impending collapse in Europe….

  • Buy a six-month put option on the Euro versus the Swiss Franc, thus betting the Euro will drop against the Franc (the Franc being the currency that an official Goldman report recently referred to as the most overvalued in the world)
  • Buy a five-year credit default swap on an index of European corporate debt—the iTraxx 9. This is a bet that some of these companies will default, and your insurance policy, the CDS, will pay off

This is so typical of Goldman Sachs.  They will say one thing publicly and then turn around and do the total opposite privately.

For example, prior to the financial crisis of 2008, Goldman Sachs was putting together mortgage-backed securities that they knew were garbage and marketing them to investors as AAA-rated investments.  On top of that, Goldman then often privately bet against those exact same securities.

The CEO of Goldman Sachs has even acknowledged that the investment bank engaged in “improper” behavior during 2006 and 2007.

For much more on the history of all this, please see this article: “How Goldman Sachs Made Tens Of Billions Of Dollars From The Economic Collapse Of America In Four Easy Steps“.

So will Goldman Sachs ever get into serious trouble for any of this?

No, of course not.

Yeah, they will get a slap on the wrist from time to time, but the reality is that the top levels of the federal government are absolutely littered with ex-employees of Goldman Sachs.  Goldman is one of the “too big to fail” banks and they are going to continue to do pretty much whatever they feel like doing.

Sadly, the power of the “too big to fail” banks just continues to grow.  At this point, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

Goldman Sachs was the second biggest donor to Barack Obama’s campaign in 2008, so don’t expect Obama to do anything about any of this.

We have a financial system that is deeply, deeply corrupt and all of that corruption is a big reason why things are falling apart.

Sadly, the 54 page report mentioned above is right – we really are facing a global debt meltdown and we really are heading for an economic collapse.

You aren’t going to hear the truth from the mainstream media or from our politicians because “keeping people calm” is much more of a priority to them than telling the truth is.

The debt crisis in the United States is unsustainable and the debt crisis in Europe is unsustainable.  Right now we are in the calm before the storm, and nobody knows exactly when the storm is going to strike.

But let there be no doubt – it is coming.

The amazing prosperity that we have enjoyed for the last several decades has largely been a debt-fueled illusion.  It was a great party while it lasted, but now it is coming to an end and the aftermath of the coming crash is going to be absolutely horrific.

Keep watch and get prepared.  We don’t know exactly when the collapse is going to happen, but it is definitely on the way and now even Goldman Sachs is admitting that.

A 634 Point Stock Market Crash And 8 More Reasons Why You Should Be Deeply Concerned That The U.S. Government Has Lost Its AAA Credit Rating

Are you ready for part two of the global financial collapse?  Many now fear that we may be on the verge of a repeat of 2008 after the events of the last several days.  On Friday, Standard & Poor’s stripped the U.S. government of its AAA credit rating for the first time in history.  World financial markets had been anticipating a potential downgrade, but that still didn’t stop panic from ensuing as this week began.  On Monday, the Dow Jones Industrial Average dropped 634.76 points, which represented a 5.5 percent plunge.  It was the largest one day point decline and the largest one day percentage decline since December 1, 2008.  Overall, stocks have fallen by about 15 percent over the past two weeks.  When Standard & Poor’s downgraded long-term U.S. government debt from AAA to AA+, it was just one more indication that faith in the U.S. financial system is faltering.  Previously, U.S. government debt had a AAA rating from S&P continuously since 1941, but now that streak is over.   Nobody is quite sure what comes next.  We truly are in unprecedented territory.  But one thing is for sure – there is a lot of fear in the air right now.

So exactly what caused S&P to downgrade U.S. government debt?

Well, it was the debt ceiling deal that broke the camel’s back.

According to S&P, the debt ceiling deal “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

As I have written about previously, the debt ceiling deal was a complete and total joke, and S&P realized this.

Forget all of the huge figures that the mainstream media has been throwing at you concerning this debt ceiling deal.  The only numbers that matter are for what happens before the next election.

The only way that the current debt ceiling deal will last beyond the 2012 election is if Obama is still president, the Democrats still control the Senate and the Republicans still control the House.  If any of those things change, this deal ceiling deal is dead as soon as the election is over.

Even if all of those things remain the same, there is still a very good chance that we would see dramatic changes to the deal after the next election.

So in evaluating this “deal”, the important thing is to look at what is going to happen prior to the 2012 election.

When we examine this “deal” that way, what does it look like?

Well, Barack Obama and the Democrats get the debt ceiling raised by over 2 trillion dollars and will not have to worry about it again until after the 2012 election.

The Republicans get 25 billion dollars in “savings” from spending increases that will be cancelled.

The “Super Congress” that is supposed to be coming up with the second phase of the plan may propose some additional “spending cuts” that would go into effect before the 2012 election, but that seems unlikely.

So in the final analysis, the Democrats won the debt ceiling battle by a landslide.

25 billion dollars is not even 1 percent of the federal budget.  The U.S. national debt continues to spiral wildly out of control, and our politicians could not even cut the budget by one percent.

Somehow our politicians believed that the rest of the world would be convinced that they were serious about cutting the budget, but it turns out that global financial markets are tired of getting fooled.

It has gotten to the point where now even the big credit rating agencies are being forced to do something.  Not that they really have much credibility left.  Everyone still remembers all of those AAA-rated mortgage-backed securities that imploded during the last financial crisis.  The reality is that the big credit rating agencies are a bad joke at this point.

Several smaller credit rating agencies have already significantly slashed the credit rating of the U.S. government.  But a lot of pressure had been put on the “big three” to keep them in line.

But now things have gotten so ridiculous that S&P felt forced to make a move.

Sadly, our politicians are still trying to maintain the charade that everything is okay.  Barack Obama says that financial markets “still believe our credit is AAA and the world’s investors agree”.

Once again, Barack Obama is dead wrong.

The truth is that the credit rating for the U.S. government should have been slashed significantly a long time ago.  This move by S&P was way, way overdue.

Moody’s might be the next one to issue a downgrade.  At the moment, Moody’s says that it will not be downgrading U.S. debt for now, but Moody’s also says that it has serious doubts about the enforceability of the “budget cuts” in the debt ceiling deal.

This crisis is just beginning.  It is going to play out over time, and it is going to be very messy.

The following are 8 more reasons why you should be deeply concerned that the U.S. government has lost its AAA credit rating….

#1 The U.S. dollar and U.S. government debt are at the very heart of the global financial system.  This credit rating downgrade just doesn’t affect the United States – it literally shakes the financial foundations of the entire world.

#2 As the stock market crashes, investors are flocking to U.S. Treasuries right now.  However, once the current panic is over the U.S. could be faced with increased borrowing costs.  The credit rating downgrade is a signal to investors that they should be receiving a higher rate of return for investing in U.S. government debt.  If interest rates on U.S. government debt do end up going up, that is going to make it more expensive for the U.S. government to borrow money.  The higher interest on the national debt goes, the more difficult it is going to become to balance the budget.

#3 We could literally see hundreds of other credit rating downgrades now that long-term U.S. government debt has been downgraded.  For example, S&P has already slashed the credit ratings of Fannie Mae and Freddie Mac from AAA to AA+.  S&P has also already begun to downgrade the credit ratings of states and municipalities.  Nobody is quite sure when we are going to see the dominoes stop falling, and this is not going to be a good thing for the U.S. economy.

#4 10-year U.S. Treasuries are the basis for a whole lot of other interest rates throughout our economy.  If we see the rate for 10-year U.S. Treasuries go up significantly, it will suddenly become a lot more expensive to get a car loan or a home loan.

#5 The current financial panic caused by this downgrade is hitting financial stocks really hard.  The big banks led the decline back in 2008, and it looks like it might be happening again.  Just check out what CNN says happened to financial stocks on Monday….

Financial stocks were among the hardest hit, with Bank of America (BAC, Fortune 500) plunging 20%, and Citigroup (C, Fortune 500) and Morgan Stanley (MS, Fortune 500) dropped roughly 15%.

#6 China is freaking out. China’s official news agency says that China “has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets”.  If China starts dumping U.S. government debt that would make things a lot worse.

#7 There are already calls for the Federal Reserve to step in and do something.  If the U.S. economy drops into another recession, will we see more quantitative easing?  It seems like we have reached a point where the Fed is constantly in “emergency mode”.

#8 The U.S. national debt continues to get worse by the day.  Just check out what economics professor Laurence J. Kotlikoff recently told NPR….

“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap”

Dick Cheney once said that “deficits don’t matter”, but the truth is that all of the debt we have been piling up for decades is now catching up with us.

The United States is in such a huge amount of financial trouble that it is hard to put into words.  The days of easy borrowing for the U.S government are starting to come to an end.  We have been living in the greatest debt bubble in the history of the world, and it has fueled a tremendous amount of “prosperity”, but now the party is ending.

A whole lot of financial pain is on the horizon.  Please prepare for the hard times that are coming.

18 Signs That Global Financial Markets Smell Blood In The Water

Can you smell it?  There is blood in the water.  Global financial markets are in turmoil.  Banking stocks are getting slaughtered right now.  European bond yields are absolutely soaring.  Major corporations are announcing huge layoffs.  The entire global financial system appears to be racing toward another major crisis.  So could we potentially see a repeat of 2008?  Sadly, when the next big financial crisis happens it might be worse than 2008.  Back in the middle of 2008, the U.S. national debt was less than 10 trillion dollars.  Today it is over 14 trillion dollars. Back in 2008, none of the countries in the EU were on the verge of financial collapse.  Today, several of them are.  This time if the global financial system starts falling apart the big governments around the world are not going to be able to do nearly as much to support it.  That is why what is happening right now is so alarming.  As signs of weakness spread, the short sellers and the speculators are starting to circle.  They can smell the money.

Back in 2008, bank stocks led the decline.  Today, that appears to be happening again.  The “too big to fail” banks are getting absolutely pummeled right now.  Most people don’t have much sympathy for the banksters, but if we do see a repeat of 2008 they are going to be cutting off credit and begging for massive bailouts once again, and that would not be good news for the economy.

In Europe, the EU sovereign debt crisis just seems to get worse by the day.  Bond yields for the PIIGS are going haywire.  The higher the yields go, the worse the crisis is going to get.

Meanwhile, as I have written about previously, a bad mood has descended on world financial markets. Pessimism is everywhere and fear is spreading.  The short sellers and the speculators are eager to jump on any sign of weakness.  Investors all over the globe are extremely nervous right now.

So what happens next?

Well, nobody knows for sure.

But things certainly do not look good.

The following are 18 signs that global financial markets smell blood in the water….

#1 Banks stocks are absolutely getting hammered right now.  Bank of America hit a 52 week low on Monday.  Bank of America shares declined 4 percent to $9.61.

#2 So far this year, Bank of America stock is down about 27 percent.

#3 Bloomberg is reporting that Bank of America may be forced to increase its capital cushion by 50 billion dollars.

#4 Shares of Goldman Sachs and Morgan Stanley are near two year lows.

#5 Shares in Citigroup fell 2.5 percent on Monday.

#6 Moody’s recently warned that it may be forced to downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

#7 Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all either considering staff cuts or are already laying workers off.

#8 The deputy European director of the International Monetary Fund says that the Greek debt crisis is “on a knife’s edge“.

#9 Moody’s has slashed Ireland’s bond rating all the way to junk status.

#10 The yield on 2 year Portuguese bonds is now over 20 percent, the yield on 2 year Irish bonds is now over 23 percent and the yield on 2 year Greek bonds is now over 35 percent.

#11 Shares of Italy’s largest bank dropped by a whopping 6.4% on Monday.

#12 On Monday, the yield on 10 year Italian bonds was the highest it has been since the euro was adopted.

#13 On Monday, the yield on 10 year Spanish bonds was also the highest it has been since the euro was adopted.

#14 Shares of Germany’s largest bank fell by a staggering 7% on Monday and are down a total of 22% so far this month.

#15 Citigroup’s chief economist, William Buiter, says that without direct intervention by the ECB there is going to be a wave of sovereign defaults across Europe….

“Nothing stands in the way of multiple sovereign defaults except the ECB: they are the only game in town, there is nothing else”

#16 Cisco has announced plans to axe 16 percent of its workers.

#17 Borders Group has announced that it will be liquidating all remaining assets.  That means that 399 stores will be closed and 10,700 workers will lose their jobs.

#18 During times of great crisis, many investors seek safe havens for their money.  On Monday, the price of gold shot past $1600 an ounce.

These are not normal financial times.  The worldwide debt bubble is starting to burst and nobody is quite sure what is going to happen next.  Certainly we are going to continue to see financial authorities all over the world do their best to keep the system going.  But as we saw in 2008, things can spiral out of control very quickly.

Just remember, back at the beginning of 2008 very few people would have ever imagined that the biggest financial institutions in America would be begging for hundreds of billions of dollars in bailouts by the end of that year.

When confidence disappears, the game can change very quickly.  To the vast majority of economists it would have been unimaginable that the yield on 2 year Greek bonds would be over 35 percent in mid-2011.

But here we are.

The entire global financial system is a house of cards built on a foundation of sand.  It is more vulnerable today than it has been at any other time since World War II.  When a couple of major dominoes fall, it is likely to set off a massive chain reaction.

The global financial system of today was not designed with safety and security in mind.  It was designed for greedy people to be able to make as much money as possible as quickly as possible.  The banksters don’t care about the greater good of mankind.  What they care about is making huge piles of cash.

There is way too much risk, way too much debt and way too much leverage in the global financial marketplace.  You would have thought that 2008 should have been a major wake up call for financial authorities around the world, but very few significant changes have been made since that time.

The financial news is just going to keep getting worse.  This financial system is simply unsustainable.  It is fundamentally unsound.  The reality is that financial bubbles cannot keep expanding forever.  Eventually they must burst.

Over the next few weeks, keep a close eye on banking stocks and keep a close eye on European bond yields.

Hopefully things will stabilize.

Hopefully the next wave of the financial collapse is not about to hit us.

Hopefully the entire global financial system is not on the verge of a major implosion.

But you might want to get prepared just in case.

The Sovereign Debt Crisis Is Never Going To End Until There Is A Major Global Financial Collapse

In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis.  There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time.  This sovereign debt crisis is never going to end until there is a major global financial collapse.  There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion.  Right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months.  Giving more loans to nations that are already drowning in red ink may “kick the can down the road” for a little while but it isn’t going to solve anything.  Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.

All of the bailouts that you are hearing about right now are simply delaying the pain.  The reality is that when the “emergency loans” for Greece stop, Greece is going to default.  Greece is toast.  The game is over for them.  You can stick a fork in Greece because it is done.

One of the big problems for Greece is that since it is part of the euro it can’t independently print more money.  If Greece cannot raise enough euros internally Greece must turn to outside assistance.

Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it.  By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.

The financial collapse of Greece is inevitable.  If they keep using the euro they will collapse.  If they quit using the euro they will collapse.  When the rest of Europe decides that it is tired of propping Greece up the game will be over.

At this point very few people are interested in lending Greece more money.

As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.

Well, nobody wants to lend money to Greece at a low rate of interest anymore.

Today, the yield on 2 year Greek bonds is back over 28 percent.

Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.

So why is there so much of a focus on Greece right now?

Well, there is a real danger that the panic will start to spread.

The other day, Moody’s Investors Service slashed the credit rating on Portuguese government debt by four notches.

Portuguese debt is now considered to be “junk”.

But even more alarming is that Moody’s stated that what is going on in Greece played a role in reducing the credit rating of Portugal.

The following is a portion of what Moody’s had to say when they cut the credit rating of Portugal by four notches….

Although Portugal’s Ba2 rating indicates a much lower risk of
restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

Do you understand what is being said there?

Basically, Moody’s is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.

If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.

The downgrade of Portugal is having all kinds of consequences.  The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.

If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.

But it is not just Portugal that is having problems.

Just recently, Moody’s warned that it may downgrade Italy’s Aa2 debt rating at some point within the next few months.

Spain is also on the verge of major problems and Ireland may need another bailout soon.

Things don’t look good.

Unfortunately, if the dominoes start to fall the entire EU is going to go down.

Big banks all over Europe are highly exposed to sovereign debt and they are leveraged to the hilt.

It is almost as if we are looking at a replay of 2008 in many ways.

When Lehman Brothers finally collapsed, it was leveraged 31 to 1.

Today, major German banks are leveraged 32 to 1, and major German banks are currently holding a tremendous amount of Greek debt.

Anyone with half a brain can see that this is going to end badly.

So how is the European Central Bank responding to this crisis?

They are raising interest rates once again.

That certainly is not going to help the PIIGS much.

But Europe is not the only one facing a horrific debt crunch.

In Japan, the national debt is now up to about 226 percent of GDP.  So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.

When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble.  In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.

Of course the biggest pile of debt sitting out there is the national debt of the United States.  The U.S. is so enslaved to debt that there is literally no way out under the current system.  To say that America is in big trouble would be a massive understatement.

In fact, the whole world is headed for trouble.

Right now government debt around the globe continues to soar at an exponential pace.  At some point a wall is going to be hit.

The Wall Street Journal recently quoted Professor Carmen Reinhart as saying the following about what we are facing….

“These processes are not linear,” warns Prof. Reinhart. “You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.”

That is the nature of debt bubbles – they keep expanding and expanding until the day that they inevitably burst.

Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone.  Debt to GDP ratios all over the globe continue to rise at a frightening pace.

Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet.  If even one domino is toppled there is no telling where things may end.

The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today.  Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.

There is only one way that the sovereign debt crisis can end.

Very, very badly.

I hope you are ready for what is coming.

The Economic Collapse