Debt

A Financial Nightmare For Italy: The Yield Curve For Italian Bonds Is Turning Upside Down

What we are all watching unfold right now is a complete and total financial nightmare for Italy.  Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down.  So what does that mean?  Normally, government debt securities that have a longer maturity pay a higher interest rate.  There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods.  But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds.  This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts.  Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them.  An inverted yield curve is a major red flag.  Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.

We are witnessing a crisis of confidence in the European financial system.  All over Europe bond yields went soaring today.  When I finished my article about the financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent.  I awoke today to learn that it had risen to 7.2 percent.

But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.

The yield curve for Italian bonds is in the process of turning upside down.

If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.

Do phrases like “heading straight up” and “going through the roof” come to mind?

This comes despite rampant Italian bond buying by the European Central Bank.  CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.

So what does it say when even open market manipulation by the European Central Bank is not working?

Of course some in the financial community are saying that the European Central Bank is not going far enough.  Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.

Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.

But that doesn’t explain why bond yields all over Europe were soaring.

The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.

This is a crisis that is rapidly engulfing all of Europe.

But at this point, bond yields in Europe are still way too low.  European leaders shattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut.  So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.

There is no way in the world that any rational investor should invest in European bonds at these levels.

Are you kidding me?

If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.

But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.

The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy….

“In our view, 7% is a ‘tipping point’ for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance”

Other analysts are speaking of a “point of no return”.  For example, check out what a report that was just released by Barclays Capital had to say….

“At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented.”

But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.

Italy’s national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.

Plus, as I noted earlier, Spain is heading down the exact same road as Italy.

Europe has simply piled up way, way too much debt and now they are going to pay the price.

Global financial markets are very nervous right now.  You can almost smell the panic in the air.  As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a “banking crisis” by the end of November….

“There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks.”

Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.

It seems more likely to me that the European debt crisis will really unravel once we get into 2012.  And when it does, it just won’t be a few countries that feel the pain.

For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well.  As you can see from this chart, France has massive exposure to Italian debt.

Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes.  Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.

Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago.  For example, the following is what renowned investor Jim Rogers recently told CNBC….

“In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful”

Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then….

“Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse”

So what is the “endgame” for this crisis?

German Chancellor Angela Merkel is saying that fundamental changes are needed….

“It is time for a breakthrough to a new Europe”

So what kind of a “breakthrough” is she talking about?  Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integration for Europe….

“That will mean more Europe, not less Europe”

As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road.  In fact, at some point they are likely to propose a “United States of Europe” as the ultimate solution to this crisis.

But being more like the United States is not necessarily a solution to anything.

The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.

No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.

By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt.  Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.

Don’t we owe future generations something better than this?

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.

 

14 Reasons Why We Should Nationalize The Federal Reserve

One of the most important steps that we could take to bring prosperity back to America would be to nationalize the Federal Reserve.  Doing so would allow the federal government to quit borrowing money, dramatically reduce taxes and eventually pay off the entire U.S. national debt.  Instead of inheriting the largest debt in the history of the world, future generations would actually have a chance at economic prosperity because they would not be forced to pay off the horrific debt of previous generations.  The Federal Reserve is a perpetual debt machine, it has almost completely destroyed the value of the U.S. dollar and it has an absolutely nightmarish track record of incompetence.  There are no good reasons to keep the status quo.  Our current debt-based monetary system will inevitably lead to a complete and total economic collapse.  We desperately need to make a change while we still can.  As you will see below, there are a ton of good reasons why we should nationalize the Federal Reserve.

Right now, most Americans believe that the Federal Reserve is actually an agency of the federal government.  But that is simply not the case.  The truth is that the Federal Reserve is about as “federal” as Federal Express is.

The Federal Reserve openly admits as much.  For example, in defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated in court that it was “not an agency” of the U.S. government and therefore not subject to the Freedom of Information Act.

So who owns the Federal Reserve?

As the Federal Reserve’s own website describes, it is the member banks that own it….

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

The debt-based monetary system established by the Federal Reserve has greatly enriched the big banks and the people that own them.  This has been at the expense of the American people.

A private central bank should not issue our currency, set interest rates and run our economy.  Rather, we need to return control over the currency to the American people where it belongs.

The following are 14 reasons why we should nationalize the Federal Reserve….

#1 The U.S. Constitution says that the federal government is the one that should be issuing our money.

In particular, according to Article I, Section 8 of the U.S. Constitution, it is the U.S. Congress that has been given the responsibility to “coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.

#2 Our current debt-based monetary system is a perpetual debt machine.  It is absolutely imperative that we nationalize the Federal Reserve and begin to issue debt-free money.

In a previous article about money and debt, I explained how more government debt is created whenever the U.S. government puts more money into circulation….

When the government wants more money, the U.S. government swaps U.S. Treasury bonds for “Federal Reserve notes”, thus creating more government debt.  Usually the money isn’t even printed up – most of the time it is just electronically credited to the government.  The Federal Reserve creates these “Federal Reserve notes” out of thin air.  These Federal Reserve notes are backed by nothing and have no intrinsic value of their own.

This process creates a huge problem.  When each new dollar is created, the interest owed by the federal government on that new dollar is not also created at the same time.

Therefore, more debt is actually created than the amount of money that the federal government receives from the Federal Reserve.

This is a Ponzi scheme that is designed to drain wealth from the American people and transfer it to the banking system.

This is why I call the Federal Reserve system a perpetual debt machine.  Today, the U.S. national debt is more than 5,000 times larger than it was 100 years ago.

Back in 1910, prior to the passage of the Federal Reserve Act, the national debt was only about $2.6 billion.

By going to a system of debt-free money, the U.S. government would never have to borrow a single dollar ever again.

#3 Our current debt-based monetary system requires very high personal income taxes to pay for it.  It is no accident that the personal income tax was introduced at about the same time that the Federal Reserve system came into existence.

If we nationalized the Federal Reserve and capped federal government spending at a reasonable percentage of GDP, it would be entirely possible to massively cut taxes and still keep our promises regarding Social Security and other important social programs at the same time.

I believe that eventually the entire personal income tax system could be completely wiped out and the IRS could be totally shut down.  This would save our economy billions upon billions of dollars in income tax compliance costs.

However, as an initial first step, I believe that we should eliminate all payroll taxes, all “self-employment taxes” and all taxes on the first $100,000 earned by every American.

This would provide much needed relief to the millions of poor and middle income families that have been hurt so badly by this economic downturn.

Also, I believe that we could instantly reduce the corporate tax rate to levels that would be competitive with the rest of the world, while closing corporate tax loopholes at the same time.  This would remove the temptation for companies to leave the United States in order to escape our brutally high corporate tax rates.

Yes, the proposals above would definitely cut taxes.

So where would we make up the difference?

Well, the U.S. Constitution provides one clue.  According to Article I, Section 8 of the U.S. Constitution, the U.S. Congress has the right to impose “duties, imposts and excises” on goods sold in this country.

For way too long, big corporations have been taking advantage of sweatshops in the third world.  For way too long, other nations have used predatory trade practices to take unfair advantage of us.  For way too long, we have allowed nations with horrific human rights records to ship their goods into our country for free.

Well, we need to bring that to an end.  By raising tariffs we would raise money for the federal government and we could potentially start to reverse the flow of jobs and businesses that have been leaving this country.

Access to the U.S. market is a privilege, not a right.  High tariffs would be imposed on goods from any country that allows slave labor wages to be paid.  Very high tariffs would be imposed on goods from any country that is using predatory trade practices against us.  Extremely high tariffs would be imposed on any nation that does not respect basic human rights.

However, please keep in mind that none of this would work if we did not nationalize the Federal Reserve.  The tax cuts proposed above would be suicidal under our current debt-based monetary system.  But if we nationalize the Fed, we really could do this.  It may sound crazy, but it really would work.

#4 If we nationalize the Federal Reserve, there would be no more budget deficits.  If the federal government was a bit short one year, it would just print up a little bit of extra money in order to make up the difference.

It would also be very important to cap federal government spending as a percentage of GDP so that we don’t have crazy Congress critters creating a lot of inflation by spending us into oblivion.

Just because we would be adopting a debt-free monetary system does not mean that we could throw spending discipline out the window.  Rather, it would actually become more important than ever.

#5 If we nationalize the Federal Reserve, we would instantly reduce the national debt by 1.6 trillion dollars.  That is the amount that is currently on the balance sheet of the Federal Reserve.  The Federal Reserve just created this money out of thin air anyway, so it was never their money to begin with.  Some members of Congress have already proposed cancelling the debt held by the Federal Reserve, and it is a great idea.

#6 If we nationalize the Federal Reserve, we could eventually get rid of the entire national debt.

Under our current system, the U.S. national debt will never, ever be paid off.  We are 15 trillion dollars in debt, and at this point we add more than a trillion dollars to that number every year.

As I have written about previously, if the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.

But under our current system we are not paying it off.  Rather we keep piling up more debt at an astounding pace.

In a system of debt-free money, there would be no more budget deficits, and we could actually start slowly paying off the national debt with newly issued “United States money”.

This would have to be done very slowly so as to not shock the financial system, but it could be done.  As U.S. debt becomes due, a small percentage of it could be retired each year.

It is entirely conceivable that within 30 to 40 years we could pay it off entirely without causing tremendous damage to the financial system.

#7 If we nationalize the Federal Reserve, we will eventually totally eliminate the interest on the national debt.  Most Americans don’t understand this, but each year we spend hundreds of billions of dollars just on interest on the national debt.  For example, the U.S. government spent over 454 billion dollars on interest on the national debt during fiscal year 2011.

Under a debt-free monetary system, that number would eventually go to zero.  That would save the federal government a ton of money.

#8 While there is certainly a danger that we would have inflation under a debt-free monetary system, the reality is that we are absolutely guaranteed inflation under the Federal Reserve system.

Most Americans believe that inflation is a fact of life, but the sad truth is that the United States has only had a major, ongoing problem with inflation since the Federal Reserve was created back in 1913.

If you do not believe this, just check out this chart.

Sadly, the U.S. dollar has lost well over 95 percent of its value since the Federal Reserve was created.

So, yes, there would be a need for monetary discipline under a debt-free monetary system, but it would be hard to do worse than the Federal Reserve has already been doing.

#9 If we nationalize the Federal Reserve, we would eliminate all of the financial bubbles that the Federal Reserve has been creating.

For example, there would not have been such a bad housing crash if the Federal Reserve had not created such perfect conditions for a housing bubble in the first place.

We should eliminate the Federal Reserve and allow the market to set interest rates.  Having a central authority that sets interest rates is just simply wrong and it creates all sorts of problems.

#10 The Federal Reserve has not been doing a good job.

In case anyone has not noticed, Federal Reserve Chairman Ben Bernanke has a very long track record of incompetence.  Nearly every major judgment that he has made since taking over that position has been dead wrong.

We are always told that we need someone to run the economy and that the Fed is there to keep depressions from happening.

Well, the truth is that the Fed actually greatly contributed to the Great Depression and it was at least partly responsible for the financial crash of 2008.

Now we are right on the verge of yet another massive financial implosion.

If someone keeps wrecking your car, you don’t let them keep driving it, do you?

#11 If we nationalize the Federal Reserve, we could potentially transition to “sound money” at some point.

There is great debate about this of course.  But it is a debate that we need to have.

But before we go to “hard money” we need to do something about this horrific debt that we have piled up for future generations first.  We simply cannot lock this debt in and expect them to pay for our mistakes.

We made this mess, so we need to clean it up.

Going to a debt-free monetary system would allow us to do that.

#12 If we nationalize the Federal Reserve, our local banks will have much more freedom.  Most Americans simply do not understand just how much power the Federal Reserve actually has over our local banks.

For example, just last year Federal Reserve officials walked into one bank in Oklahoma and demanded that they take down all the Bible verses and all the Christmas buttons that the bank had been displaying.

#13 If we nationalize the Federal Reserve, we won’t have trillions of dollars of secret loans being made to big financial institutions on Wall Street and in foreign countries.

Most Americans don’t realize this, but the Federal Reserve made $16.1 trillion in secret loans to their friends during the last financial crisis.

Meanwhile, hundreds of small banks were left out in the cold and the American people got no help.

This is rampant corruption and it needs to be stopped.

#14 The Federal Reserve needs to be nationalized because it is an unelected, unaccountable “fourth branch of government” that has gotten completely and totally out of control.  Even some members of Congress are now openly complaining about how much power the Fed has.  For example, Ron Paul told MSNBC last year that he believes that the Federal Reserve is now more powerful than Congress…..

“The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress.”

To learn much more about the Federal Reserve and how it is destroying prosperity in America, there is a great animated documentary on YouTube entitled “The American Dream” that you can watch right here.

It is absolutely imperative that the American people get educated about the Federal Reserve and about why a debt-based monetary system is bad for us.

In 1922, Henry Ford wrote the following….

“The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few.”

The U.S. government does not need to go into debt to anyone.

The U.S. government is a sovereign nation.

So why in the world are we 15 trillion dollars in debt?

We have allowed ourselves to become willingly enslaved.

In the book of Proverbs, it tells us the following….

The rich ruleth over the poor, and the borrower is servant to the lender.

By allowing ourselves to become enslaved to debt, we have become the servants of the international banking system.

Our founding fathers attempted to warn us about this.

For example, Thomas Jefferson strongly believed that when the federal government borrows money in one generation which must be paid back by future generations it is equivalent to stealing….

And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.

Not only that, Thomas Jefferson also once stated that if he could add just one more amendment to the U.S. Constitution it would be a ban on all government borrowing….

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its Constitution; I mean an additional article, taking from the federal government the power of borrowing.

If we had implemented that advice, how much better off would we be today?

We can still do this.

We can take back control of our financial system.

We can nationalize the Federal Reserve.

We can dramatically cut taxes and eventually shut down the IRS.

We can give our children and grandchildren a future that is debt free.

We can escape the tyranny of the international bankers.

The choice, America, is up to you.

15 Trillion Dollars In Debt, 45 Million Americans On Food Stamps And Zero Solutions On The Horizon

How does a country end up 15 trillion dollars in debt?  30 years ago, we were just a little over a trillion dollars in debt.  How in the world do supposedly rational people living in “the greatest nation on earth” allow themselves to commit national financial suicide by allowing government debt to explode like that?  It almost seems like there should be some sort of official ceremony in Washington D.C. to commemorate this achievement.  It really takes something special to be able to roll up 15 trillion dollars of debt.  To get to this level, we really had to indulge in some wild spending.  For example, did you know that the U.S. national debt grows by more than 2 million dollars every single minute?  All of this debt has fueled an unprecedented boom of prosperity for the last 30 years, but now that prosperity is drying up.  Today, there are over 45 million Americans that are on food stamps.  America is being deindustrialized at a blinding pace and there are not nearly enough jobs for everyone.  Poverty is exploding all over the nation, and millions of families have lost their homes to foreclosure.  Unfortunately, there are zero solutions on the horizon.  The leaders of both major political parties seem even more clueless right now than in past years.  We really could use some hope, but hope is in very short supply.

When evaluating the health of America’s economy, it is important not to look at the short-term numbers.  Rather, the key is to look at the long-term trends and the balance sheet numbers.

For example, if a mother and a father gave their teenage kids a bunch of credit cards and told them to go out and buy whatever they wanted, that would create a lot of “economic activity”, but it would also send that family to the poorhouse really quickly.

Well, we have basically done the same thing as a nation.  We are drowning in debt, and all of this debt is going to destroy us financially.

Unfortunately, the federal government continues to spend money as if there was no tomorrow.  Right now, spending by the federal government accounts for about 24 percent of GDP.  Back in 2001, it accounted for just 18 percent.

When you are running up a credit card, it can be a lot of fun and it can seem like there aren’t any consequences.

But when it comes to debt, there are always consequences.  The following is what former Republican Senator Alan Simpson (of the Simpson-Bowles Commission) recently had to say about the horrific debt crisis we are currently facing….

“It’s very simple. If you spend more than you earn, you lose your butt”

In the United States, we love to have the government spend money on all sorts of things, but we never want to pay for it.

So the debt just keeps piling up higher and higher.

A lot of Republicans say that spending on social programs has gotten out of control.  A lot of Democrats say that spending on the military has gotten out of control.

They are both right.  As I have written about previously, the U.S. military accounts for close to half of all the military spending in the world.  In fact, U.S. military spending is greater than the military spending of the next 15 countries combined.

Yes, we will always need a very powerful military, but we can have one without going broke in the process.

But an even larger problem is our rampant spending on social programs.

The following comes from a recent article by Janet Tavakoli….

In 1950 spending for social programs was only one percent of the total Federal Budget. As the economy grew, social programs expanded to include Social Security, Medicare, Medicaid, Food Stamps, Unemployment Compensation, Supplemental Security for the Disabled, and educational programs. In 1983 as the United States pulled out of an ugly recession and brought inflation under control, social programs consumed 26% of the budget. In fiscal year 2012, they’ll eat up an estimated 57% of the budget.

Tens of millions of Americans have become absolutely addicted to government money.  Nobody ever wants “their government benefits” to be cut, but nobody ever seems to want to have their taxes raised to pay for them.

To get a really good idea of how government transfer payments have absolutely skyrocketed over the years, just check out this chart.

Obviously, the course that we are on is not anywhere close to sustainable.

To say that the “war on poverty” was a failure would be a huge understatement.

The more money we seem to spend on social programs, the more that poverty seems to grow.

Right now, there are over 45 million Americans on food stamps.  The economy is supposed to be “recovering”, but the number of Americans on food stamps has grown by over 8 percent in just the past year.

Food stamps are the modern equivalent of the old-fashioned bread lines.  The federal government is now feeding an almost unbelievable number of Americans.

According to the Wall Street Journal, nearly 15 percent of all Americans are now on food stamps.  That means that approximately one out of every seven Americans is dependent on the federal government for food.

That is not just a crisis – that is a total nightmare.

So what can be done?

Well, we certainly shouldn’t let our people starve in the streets.

But handouts should only be a temporary solution.

What these people really need are good jobs.  Unfortunately, our “leaders” have created a business environment in this country that is incredibly toxic, and they have stood by as millions upon millions of good jobs have been shipped out of the country.  That is one of the reasons why I write about the insane trade policies of the globalists over and over and over.  The American people need to understand that globalization is going to mean a continuing loss of jobs for this country and it is going to result in the destruction of the middle class.

If we are not going to provide good jobs for American workers, then we are going to have to pay higher taxes in order to feed them and take care of them.

But what happens when the “safety net” breaks?

Even now, a lot of state and local governments all over the country are flat broke and they are cutting back on assistance for the poor.

The following is a brief excerpt from a recent article about this issue that was posted on the Fiscal Times….

For years, hundreds of thousands of people in dire straits – mentally or physically disabled, homeless and unemployed, ineligible for federal welfare, disability, or food subsidies – could generally count on state or local government largesse for modest handouts of cash to help scrape by. Under the rubric of “General Assistance,” these down-and-out Americans received modest payments – often no more than a few hundred dollars a month – to help defray the cost of necessities including rent, food, clothing, toilet paper, aspirin, phone cards, and bus tickets.

But in the midst of the worst recession of modern times and changing attitudes about the poor, many states have been gradually chipping away at general assistance programs or eliminating them altogether. Only 30 of 50 states currently offer any form of general assistance – down from 38 in 1989. And just this week, Washington State formally ended its “Disability Lifeline” program for an estimated 18,000 to 22,000 economically desperate residents.

Sadly, even more of us may be joining the ranks of the poor soon.  The layoffs just keep on coming.

Normally, most major store closings do not happen until after the holiday season.  You see, the reality is that most troubled retailers tend to want to bring in one more year of holiday sales before they finally shut the doors.  If you announce store closings before the holidays, that is going to make holiday shoppers less likely to shop at those stores.

So that is why some of the recent store closing announcements have been so troubling.

For example, it just came out that all 46 Syms and Filene’s Basement stores are closing.

Also, Gap recently announced plans to close 189 stores in the United States.

So if this is what we are already seeing now, what is going to happen after the holidays?

That is a very good question.

So many jobs are being lost all around the nation.  These days, there is massive competition for just about any job that is available.

People are getting desperate.  They just want to be able to pay the bills and take care of their families.

The other day, thousands upon thousands of people lined up to apply for casino jobs in south Florida.  Scenes like this are going to become even more frequent in the years ahead.

So do our politicians have any solutions?

Of course not.

The worst of the Republican candidates are actually at the top of the polls.  The cold, hard truth is that Romney, Cain and Perry are all clueless when it comes to the economy.

Of course you might as well call Barack Obama “Captain Clueless” when it comes to the economy.  Obama keeps giving great speeches about jobs while at the same time signing more “free trade” agreements that will send thousands more businesses and millions more jobs out of the country.  Even the CEOs on Obama’s jobs creation panel are shipping huge numbers of jobs out of the United States.

Obama gave a speech in Washington D.C. today that exemplified his clueless approach to the economy.  During the speech, Obama made the following statement….

“If Congress tells you they don’t have time, they got time to do it. We’ve been in the House of Representatives, what have you guys been debating? John, you’ve been debating a commemorative coin for baseball? You have legislation reaffirming that In God We Trust is our motto. That’s not putting people back to work. I trust in God, but God wants to see us help ourselves by putting people back to work”

First of all, Obama is not putting people back to work.  He has been helping big corporations ship jobs out of the country at a record pace.

Secondly, how does he know what God wants?

A lot of people actually think that the phrase “God helps those who help themselves” is in the Bible.

But it isn’t.

A while after the Obama speech, White House Press Secretary Jay Carney made matters worse when he told reporters the following….

“I believe the phrase from the Bible is ‘The Lord helps those who help themselves”

But once again, there is no such verse in the Bible.

Okay, so quoting a “mystery verse” from the Bible is not that big of a thing at the end of the day, but this is yet another example of how the Obama administration just can’t seem to get anything right.

Look, everyone makes mistakes once in a while.  I know that I certainly do.

But when you are wrong about almost everything almost all of the time, that is a major problem.

Especially when you are the president of the United States.

But both political parties are to blame for the mess that we are in.  Budget deficits exploded during Republican administrations just like they have under the Democrats.

Both political parties are responsible for us being 15 trillion dollars in debt.

Both political parties are responsible for 45 million Americans being on food stamps.

Both political parties are responsible for the fact that there are not nearly enough good jobs.

If Barack Obama, Mitt Romney or Rick Perry is elected in 2012, we are just going to have more of the same.

America is running out of time.  If we are going to change course, we need to do it immediately.

The borrower is the servant of the lender.  We are enslaving ourselves and we are enslaving future American generations by going into so much debt.

Shame on the politicians that have rolled up so much debt in our name and shame on us for continuing to send those same politicians back to Washington D.C. time after time after time.

It is so sad to watch what is happening to America.

This Is Yet Another Glaring Example Of Why The EU Is A Mind Blowing Failure

The debt crisis in Europe just seems to get worse with each passing day, and it is yet another glaring example of why the EU is a mind blowing failure.  The EU is made up of 27 nations that all have their own economic policies, and 17 of those nations are trying to use the euro as a common currency.  But when you have 27 different governments pulling in different directions, it is inevitable that there are going to be major problems.  The stunt that Greek Prime Minister George Papandreou just pulled is a perfect example of the nightmare that the EU has become.  European officials worked really hard to pull together a deal to address the debt crisis (of course the deal was a total mess, but that is another matter), and a couple of days later Papandreou decides that Greece should hold a national referendum on it.  It is so bizarre that it almost defies words.  But that is what happens in the EU.  Someone else always wants to have a say.  Someone else always wants to throw a fly into the ointment.  Someone else always want to throw in their two cents.  The EU is a bureaucratic nightmare and this latest episode is yet another example of that fact.  First the politicians in Europe come up with an idiotic plan that is going to make the financial crisis much worse, then Papandreou comes forward and pulls a stunt that shatters what little confidence the financial markets still had in Greece.  That is why the EU should break up.  It is a total failure and it is time that we all admitted it.

Financial markets reacted in horror to the news that Papandreou wants Greece to hold a referendum on the debt deal.

Apparently Papandreou wants the Greek people to willingly choose the harsh austerity measures contained in the package.  To be honest, that is not entirely unreasonable considering the tremendous economic damage that austerity measures have already done to the Greek economy.

So if there is a referendum, will the Greeks vote for the package?

That is not at all certain.

As month after month of protests have shown, austerity measures have been extremely unpopular in Greece.

But a lot of Greeks are not too keen on rejecting the bailouts and being forced to leave the euro either.

Both alternatives would be extremely unpleasant.

Greek Prime Minister George Papandreou apparently believes that the Greek people will vote in favor of the debt deal.  He made the following statement on Tuesday….

“We have faith in our citizens, we believe in their judgment and therefore in their decision. All the country’s political forces should support the (bailout) agreement. The citizens will do the same once they are fully informed”

Predictably, global financial markets were shocked by the announcement by Papandreou.  The Dow was down another 297 points on Tuesday, and bond yields for the PIIGS shot up significantly.

It really is mind blowing to watch what is happening to some of the bond yields over in Europe.

The yield on 1 year Greek bonds is now over 200 percent.  If you want to see what a financial meltdown looks like, just look at this chart.

The yield on 2 year Irish bonds is now over 9 percent, and the yield on 2 year Portuguese bonds is now over 20 percent.

Most importantly, the yield on Italian bonds continues to surge higher.

The higher those bond yields go, the worse things are going to get for Europe.

And those bond yield are skyrocketing in spite of rampant bond buying by the European Central Bank.

A CNBC article from earlier today noted the extraordinary intervention by the ECB that we are witnessing right now….

“Yesterday we had one of the biggest ever days of peripheral sovereign bond buying from the Securities Market Program, with some banks estimating that over 5 billion euros of peripheral sovereign bonds were purchased via the ECB’s bond buying program in an effort to keep a lid on peripheral sovereign bond yields” said Mike Riddell, a fund manager at M&G Investments in London.

Europe is falling apart financially and politicians all over Europe are furious with Papandreou right now.  The following comes from an article by Ambrose Evans-Pritchard that was published earlier today….

The Greek referendum – if it is not overtaken by a collapse of the government first – has left officials in Paris, Berlin, and Brussels speechless with rage. The ingratitude of them.

The spokesman of French president Nicolas Sarkozy (himself half Greek, from Thessaloniki) said the move was “irrational and dangerous”. Rainer Brüderle, Bundestag leader of the Free Democrats, said the Greeks appear to be “wriggling out” of a solemn commitment. They face outright bankruptcy, he blustered.

A number of European politicians are warning of severe consequences for Greece.  For example, the Finnish minister of European affairs and foreign trade, Alexander Stubb, even declared that if Greek citizens do not vote the right way it will mean an exit from the eurozone for Greece….

“The situation is so tight that basically it would be a vote over their euro membership”

If Greece ends up rejecting the bailout package, it would essentially mean a complete and total debt default by Greece.  The following is what Nobel prize-winning economist Christopher Pissarides said about the potential consequences of a “no” vote….

“In the scenario of a ‘No’ vote Greece would declare bankruptcy immediately, they would default immediately. I can’t see them staying within the euro”

But there is no guarantee that a referendum will actually be held.  The Greek government has been thrown into a state of chaos and is on the verge of collapse.

To many, it seems more likely that the government will fail and that we will see early elections in Greece.  For example, the following is a quote from an anonymous Greek trader that was posted in an article on Business Insider this morning….

I believe the present government will be history by the end of this week. Most probably this evening actually, when the already scheduled emergency cabinet meeting is to be held.

The important question to be resolved is whether the present government will be replaced by an interim national unity government for several months ratifying in parliament the Eurogroup decisions of last week and then proceeding with elections, or else whether national elections will be immediately announced with probable dates the 4th or 11th of December.

But in the final analysis, it is not the Greek government that is the problem.

The reality is that the way the eurozone was constructed was fatally flawed from the very beginning.

It was inevitable that trying to force 17 different countries with 17 different economic policies to use a common currency was going to end up creating a huge mess.

People all over Europe know this is true.  Just consider the following quotes….

* Stephane Deo, Paul Donovan, and Larry Hatheway of Swiss banking giant UBS: “Under the current structure and with the current membership, the euro does not work. Either the current structure will have to change, or the current membership will have to change.”

* EU President Herman Van Rompuy: “The euro has never had the infrastructure that it requires.”

* Former German Chancellor Gerhard Schroeder: “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal, economic and social policy”

* Professor Giacomo Vaciago of Milan’s Catholic University: “It’s clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that. We pretended to be Germans, but it was an illusion”

So why should those of us living in the United States care about all of this?

Well, it is because a financial collapse in the EU could plunge the entire globe into a horrific economic nightmare.

Today, the EU actually has a larger economy and a larger population than the United States does.  The EU also has more Fortune 500 companies that the United States does.

If Europe experiences a financial crash, it is going to send shockwaves to the very ends of the earth.

Another reason why Americans should care is because what is happening right now in Greece, in Italy and in some of these other countries is eventually going to come to the United States.

Just like Greece, we are in debt up to our eyeballs.

Just like Greece, our politicians thought that they could pile up gigantic mountains of debt indefinitely.

Just like Greece, this debt is going to have very, very serious consequences.

Just like Greece, we are going to have mass economic rioting in our streets.

The road that Greece is going down is the exact same road that the United States is going down.

Yes, the Federal Reserve could step in and print up trillions and trillions of dollars, but that would not solve our problems.  The truth is that a hyperinflationary crash can be even worse than a deflationary crash.

What is happening in Greece is just the beginning.  A bunch of other eurozone nations are also rapidly approaching a date with destiny.  At some point the United States is going to experience massive problems as well.

The epicenter for the financial collapse of 2008 was the United States.

The epicenter for the next financial collapse will almost certainly be Europe.

When Europe goes down, the rest of the world will be dragged down with them.

The next wave of the economic collapse is coming.

You better get ready.

The Air Has Been Let Out Of The Balloon

Do you hear that sound?  It is the sound of Europe being hit with a cold dose of financial reality.  The air has been let out of the balloon, and investors all over the world are realizing that absolutely nothing has been solved in Europe.  The solutions being proposed by the politicians in Europe are just going to make things worse.  You don’t solve a sovereign debt crisis by shredding confidence in sovereign debt.  But that is exactly what the “voluntary 50% haircut” has done.  You don’t solve a sovereign debt crisis by pumping up your “bailout fund” with borrowed money from China, Russia and Brazil.  More debt is just going to make things even worse down the road.  You don’t solve a sovereign debt crisis by causing a massive credit crunch.  By giving European banks only until June 2012 to dramatically improve their credit ratios, it is going to force many of them to seriously cut back on lending.  A massive credit crunch would significantly slow down economic activity in Europe and that is about the last thing that the Europeans need right now.  If the deal that was reached last week was the “best shot” that Europe has got, then we are all in for a world of hurt.

On Monday, investors all over the globe began to understand the situation that we are now facing.  The Dow was down 276 points, and the euphoria of late last week had almost entirely dissipated.

But much more important is what is happening to European bonds.

Investors are reacting very negatively to the European debt deal by demanding higher returns on bonds.

Perhaps the most important financial number in the world right now is the yield on 10 year Italian bonds.

The yield on 10 year Italian bonds is up over 6 percent, and the 6 percent mark is a key psychological barrier.  If it stays above this mark or goes even higher, that is going to mean big trouble for Italy.

The Italian government just can’t afford for debt to be this expensive.  The higher the yield on 10 year bonds goes, the worse things are going to be for Italy financially.

Of course it was completely and totally predictable that this would happen as a result of the “voluntary 50% haircut” that is being forced on private Greek bondholders, but the politicians over in Europe decided to go this route anyway.

Major Italian banks also got hammered on Monday.  The following is how a CNN article described the carnage….

Shares of UniCredit, the largest bank in Italy, sunk more than 4% on Friday in Milan and were down nearly another 6% Monday. Intesa, the second-largest Italian bank, slipped 7% Monday, while Mediobanca, Italy’s third-largest financial institution, fell about 4%.

The financial world can handle a financial collapse in Greece.  But a financial collapse in Italy would essentially be the equivalent of financial armageddon for Europe.

That is why Italy is so vitally important.

Another EU nation to watch closely is Portugal.

The yield on 2 year Portuguese bonds is now over 18 percent.  A year ago, the yield on those bonds was about 4 percent.

In many ways, Portugal is in even worse shape than Greece.

A recent article by Ambrose Evans-Pritchard discussed the debt problems that Portugal is faced with.  The following statistic was quite eye-opening for me….

Portugal’s public and private debt will reach 360pc of GDP by next year, far higher than in Greece.

Like Greece, Portugal is essentially insolvent at this point.  Their current financial situation is unsustainable and politicians in Portugal are already suggesting that they should be able to get a “sweet deal” similar to what Greece just got.

You see, the truth is that what this Greek debt deal has done is that it has opened up Pandora’s Box.  Most of the financially troubled nations in Europe are eventually going to want a “deal”, and this uncertainty is going to drive investors crazy.

There is very little positive that can be said about this debt deal.  It has bought Europe a few months perhaps, but that is about it.

As the new week dawned, financial professionals all over the globe were harshly criticizing this deal….

*The CEO of TrimTabs Investment Research, Charles Biderman, says that the big problem with this deal is that the fundamental issues have not been addressed….

“The euphoria about the latest euro zone bailout will fade quickly, as investors realize that the underlying solvency issues have not been addressed”

*Bob Janjuah of Nomura Securities International in London was even harsher….

“This latest round of euro zone shock and awe is, in my view, nothing more than a confidence trick and has possibly even set up an even worse financial outcome.”

In fact, Janjuah says that the debt deal is essentially a “Ponzi scheme”….

This latest bailout relies on the market not calling what I see is a huge “bluff”, because if the market does call it, the bailout simply won’t be credible or even deliverable. It is instead akin to a self-referencing ponzi scheme, and I can’t believe eurozone policymakers have even considered going down this route. After all, we all have recent experience of how such ponzi schemes end, and we all remember how eurozone officials often belittled and berated US policymakers for their role in the US housing/CDO/SIV financial bubble.

*The chief economist at High Frequency Economics, Carl Weinberg, is calling the European debt deal a scheme “of Madoffian proportions“….

“Now they (EU Leaders) are keen to tap into resources that are not their own to fund this crazy scheme of guarantees, leveraged off guarantees to sell bonds and bank shares that no one may want to buy, (in order) to restore value in the banking system destroyed by other bonds that no one wants to own right now. This is a construct of Madoffian proportions”

Even George Soros is criticizing the deal.  George Soros is saying that this European debt deal will help stabilize things for a maximum of three months.

Of course with Soros there is always an agenda and you never know what his motives are.  Perhaps he is honestly concerned about the financial health of Europe, or perhaps he is trying to feed the panic to get Europe to crash even faster.  With Soros you never really know what he is up to.

In any event, the crisis in Europe is already claiming financial casualties in the United States.

MF Global, a securities firm headed up by former New Jersey governor Jon Corzine, has filed for bankruptcy protection.

As a recent CNBC article noted, the firm failed because of bad debts on European sovereign debt….

The bankruptcy protection filing from MF Global — a mid-sized trading firm run by former New Jersey Gov. and Goldman Sachs CEO Jon Corzine — only helped amplify the realization that more difficulties remain. MF Global got into trouble mainly because Corzine made tragically wrong bets on European sovereigns that unraveled when it became clear that bondholders of Greek debt will not be made whole as the nation tries to make its way out of its fiscal morass.

As time goes on, there will be more financial casualties.  The truth is that someone is going to pay the price for the financial foolishness of these countries in Europe.

Politicians in Europe did not want to increase the “bailout fund” with any of their own money, so they are going to go crawling to China, Russia and Brazil and beg those countries to lend them huge amounts of money.

This is incredibly foolish, and it is already fairly clear that China is going to play hardball with Europe.  China has Europe exactly where China wants them, and China will likely demand all sorts of crazy things before they will lend Europe any cash for this bailout fund.

As a recent CNN article noted, Europe is going to be in a lot of trouble if they can’t get money out of China, Russia and Brazil….

The hope is that China and other sovereign wealth fund will invest in new special vehicles that will allow the EFSF to add leverage to increase the amount of funding available.

Without the help of China, Brazil, Russia and others, Europe is back where it started. And it still seems clear that the stronger northern European nations aren’t keen on the idea of a full bailout of their southern siblings.

What a mess.

It is a comedy of errors for the politicians over in Europe.  They can’t seem to get anything right.  In fact, everything that they do seems to make a financial collapse in Europe even more likely.

Keep a close eye on the bond yields over in Europe.  Especially keep a close eye on the yield on 10 year Italian bonds.

A massive financial storm is coming to Europe.

It is going to rock the entire globe.

Now is the time to make certain that your financial house is not built on a foundation of sand.  Get your assets into safe places and keep them safe because the road ahead is going to be quite rocky.

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.

Europe Tries To Kick The Can Down The Road But It Will Only Lead To Financial Disaster

Have you heard the good news?  Financial armageddon has been averted.  The economic collapse in Europe has been cancelled.  Everything is going to be okay.  Well, actually none of those statements is true, but news of the “debt deal” in Europe has set off a frenzy of irrational exuberance throughout the financial world anyway.  Newspapers all over the globe are declaring that the financial crisis in Europe is over.  Stock markets all over the world are soaring.  The Dow was up nearly 3 percent today, and this recent surge is helping the S&P 500 to have its best month since 1974.  Global financial markets are experiencing an explosion of optimism right now.  Yes, European leaders have been able to kick the can down the road for a few months and a total Greek default is not going to happen right now.  However, as you will see below, the core elements of this “debt deal” actually make a financial disaster in Europe even more likely in the future.

The two most important parts of the plan are a 50% “haircut” on Greek debt held by private investors and highly leveraging the European Financial Stability Facility (EFSF) to give it much more “firepower”.

Both of these elements are likely to cause significant problems down the road.  But most investors do not seem to have figured this out yet.  In fact, most investors seem to be buying into the hype that Europe’s problems have been solved.

There is a tremendous lack of critical thinking in the financial community today.  Just because politicians in Europe say that the crisis has been solved does not mean that the crisis has been solved.  But all over the world there are bold declarations that a great “breakthrough” has been achieved.  An article posted on USA Today is an example of this irrational exuberance….

Investors — at least for now — don’t have to worry about a financial collapse like the one in 2008, after Wall Street investment bank Lehman Bros. filed for bankruptcy, sparking a global financial crisis.

“Financial Armageddon seems to have been taken off the table,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott.

Wow, doesn’t that sound great?

But now let’s look at the facts.

You can’t solve a debt problem with even more debt.  But that is what this debt deal is trying to do.

The politicians in Europe did not want to raise more money for the EFSF the “hard way”.  Voters in Germany (and other European nations) are overwhelmingly against contributing even more cash to a fund that many see as a financial black hole.

So what do you do when more money is needed but nobody wants to contribute?

You borrow it.

Essentially, this debt deal calls for the EFSF to become four or five times larger by “leveraging” the existing funds in the EFSF.

But isn’t that risky?

Of course it is.

There are some leaders in Europe that recognize this.  For example, an article in The Telegraph notes the reservations that the president of the Bundesbank has about this plan….

Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot.

He warned that the scheme could be hit by market turbulence with taxpayers left holding the bill for risky investments in Italian and Spanish bonds.

So who is going to fund all of this new debt?

Well, it turns out that the Europeans are counting on the same folks that the U.S. government is constantly borrowing money from.

The Chinese.

French President Nicolas Sarkozy has already spoken directly with Chinese President Hu Jintao about funding this new bailout effort.

So is borrowing money from the Chinese to fund bailouts for Greece and other weak sisters in Europe sound policy?

Of course not.

And the sad thing is that this expanded EFSF is still not going to be enough to solve the financial problems in Europe.

According to an article in The Telegraph, a recent survey of economists found that most of them do not believe that this new plan is going to raise enough money….

The plan to increase the European Financial and Stability Facility to €1  trillion on paper was attacked by economists as not enough to “stave off” worsening debt problems in Italy and Spain.

In a survey of economists, 26 of 48 thought the firepower was not enough.

But the worst part of this new plan is the 50 percent “haircut” that private investors are being forced to take.

This is essentially a partial default by the Greek government.  A lot of folks are going to get hit really hard by losses from this.  Instead of making financial institutions in Europe stronger, these losses are going to make a lot of them even weaker.

Normally, in the event of a default, credit default swap contracts would be triggered.  But apparently because this was considered to be a “voluntary” haircut, that is not going to happen in this instance.

A Bloomberg article explained this in greater detail.  The following is a brief excerpt….

The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules.

That means that investors and financial institutions all over the world are just going to have to eat these losses.

Greek Prime Minister George Papandreou is already acknowledging that a number of Greek banks will have to be nationalized because of the severity of this “haircut”.  A recent CNBC article detailed this….

The haircut is expected to impose big losses on the country’s banks and state-run pension funds, which are up their necks in toxic Greek government bonds of about 100 billion euros.

The government will replenish pension funds’ capital, but banks may face temporary nationalisation, Papandreou said.

“It is very likely that a large part of the banks’ shares will pass into state ownership,” Papandreou said. He pledged, however, that these stakes will be sold back to private investors after the banks’ restructuring.

So where will the Greek government get the funds to “replenish” the capital of those banks?

That is a very good question.

But we haven’t even discussed the worst part of this “debt deal” yet.

If you don’t remember any other part of this article, please remember this.

The debt deal in Europe sends a very frightening message to the market.

The truth is that Europe could have totally bailed out Greece without any sort of a “haircut” taking place.

But they didn’t.

So now investors all over the globe have got to be thinking that if they are holding Portuguese bonds, Italian bonds or Spanish bonds there is a really good chance that they will be forced to take a massive “haircut” at some point as well.

At this time last year, the yield on two year Italian bonds was about 2.5 percent.  Now it is about 4.5 percent.  As investors begin to price in the probability of having to take a future “haircut” on Italian debt, those bond yields are going to go much, much higher.

That means that it is going to become much more expensive for the Italian government to borrow money and that also means that it is going to become much more difficult for the Italians to get their financial house in order.

In essence, the haircut on Greek debt is a signal to investors that they should require a much higher rate of return on the debt of all of the PIIGS.  This is going to make the financial collapse of all of the PIIGS much more likely.

Remember, about this time last year the yield on two year Greek bonds was about 10 percent.  Today, it is over 70 percent.

As I wrote about in a previous article, the western world is in debt up to its eyeballs right now and trying to kick the can down the road is not going to solve anything.

Our leaders may succeed in delaying the pain for a while, but it most definitely is coming.

Greece, Portugal, Ireland and Italy all have debt to GDP ratios that are well over 100% right now.  Spain is in a huge amount of trouble as well.

When you add up all the debt, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

If Italy or Spain goes down, the rest of Europe is going to be helpless to stop it.  There simply is not going to be enough money to bail either one of them out.

That is why this “debt deal” is so alarming.  All investors in Italian or Spanish debt will now have to factor in the probability that they will be required to accept a 50 percent haircut at some point in the future.

If the markets behave rationally (and if the ECB does not manipulate them too much), it appears inevitable that bond yields over in Europe are going to rise substantially, and that will put tremendous additional financial strain on governments all over Europe.

Basically, we have got a huge mess on our hands, and this debt deal just made it a lot worse.

Yes, a financial collapse has been averted in Greece for the moment, but the truth is that there is no real reason to be celebrating this deal.

A massive financial storm is coming to Europe, and this “debt deal” has made that all the more certain.

Once again, politicians in Europe have tried to kick the can down the road, but in the end their efforts are only going to lead to complete and total financial disaster.

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