Tuesday, July 19, 2011

The Creaking of the Weathervane

WeathervaneAnyone who pays attention to the economic weather knows that a major financial storm is on the way.

The fiscal nor’easter is still below the horizon, but clouds have moved in and the rising wind is filling the windsock out by the airfield. The weathervane on the high gable is creaking and rattling as it flips back and forth in the face of the shifting monetary gusts.

Since I added the “Financial Crisis” section to the news feed a couple of years ago, the number of articles filed under that heading has steadily increased. It is now often the single largest section in the news feed.

Observant readers will have noticed during that time that the crisis has not eased, as was repeatedly predicted for the first eighteen months or so. Despite the upbeat announcements issued over and over by Mrs. Rosie Scenario, the recovery never quite showed up. It is now widely acknowledged that the world economy is certain to experience another major lurch downwards in the not-so-distant future.

To provide a sense of the looming storm, I’ve selected a sample of five articles more or less at random from tonight’s news feed.

First, the price of gold — always a significant bellwether — briefly surged above $1,600 per ounce:

Gold Soars Above $1,600 for First Time

The price of gold soared above $1,600 for the first time on Monday as investors bought the safe-haven metal amid deepening debt worries in the eurozone and the United States. Gold jumped as high as $1,603.40 an ounce at 1150 GMT on the London Bullion Market, as the precious metal extended its recent record-breaking surge. In later slipped back to $1,599.45, compared with $1,587 late Friday. “Gold hit another milestone ... at $1,600 as investors lose confidence in the ability of politicians to get to grip with the debt problems weighing down on sentiment,” said analyst Michael Hewson at trading group CMC Markets. “More advances look likely while this lack of confidence prevails as investors plough capital into the asset.”

The price has more than doubled since I first started paying attention to it a year or two ago. Obviously, it can go back down again, and probably will. But the overall trend has been steadily upwards ever since the real estate crash first hit.

Next comes a judicial assault on “speculation” in Italy. When governments start going after speculators, you know that the economy is in bad shape:

Market Speculation Probe as Italy Hit Again

Stocks, bonds suffer despite austerity package

(ANSA) — Milan, July 18 — An Italian prosecutor opened an investigation Monday into speculative attacks against Italy’s financial system.

The Milan bourse fell and bond spreads stayed close to recent highs amid fears of Greek debt-crisis contagion despite last week’s fast approval of a 70-billion-euro austerity package.

Prosecutor Michele Ruggiero, from the southern city of Trani, started the probe in response to complaints from two leading consumer protection associations, Adusbef and Federconsumatori.

Ruggiero travelled to Milan to gather information from Consob, the bourse regulator, as the bellwether FTSE MIB index fell by 3.22% and leading banks like Intesa Sanpaolo, Unicredit and Monte dei Paschi di Siena registered losses of 6-7% despite passing European Union stress tests Friday.

The real issue is not speculation, but the declining confidence in Italy’s ability to pay back its debts, leading to an increase in cost of government borrowing. The spread in bond yields is a sign that the market has begun to view Italy’s sovereign debt as somewhat risky:
The spread between Italian bond yields and those of benchmark German bunds, a measure of the premium Italy has to pay on its huge public debt, climbed back to levels seen last Tuesday, before the austerity package went through parliament in record time as politicians rallied together.

“The uncertainty about Italy remains high despite the approval of the budget,” analysts at the Goldman Sachs merchant bank said.

There’s no doubt that currency speculators can make huge profits during a crisis like the current one. But they don’t cause the crisis; they are a symptom of it.

Vast fortunes were made (and lost) during the German inflation of 1923. But the crisis that created those opportunities resulted from the printing of money by the Weimar government so that it could meet its reparations payments under the terms of the Treaty of Versailles — not because of “speculation.”

Next is a report that the Deputy Prime Minister of the United Kingdom has woken up to the fact that trouble lies ahead. Who knew?

Nick Clegg: ‘I Fear We’re on the Brink of Another Financial Crisis’

Nick Clegg has said he is “incredibly worried” that the world is on the brink of another financial crisis.

The Deputy Prime Minister said he was concerned the crisis in the eurozone could spread to Britain and have a “direct impact” on jobs. The admission is the first time that a senior British politician has suggested that the problems in Greece, Spain and Italy could affect Britain. European leaders are due on Thursday to convene an emergency summit in which they hope to approve a plan for private-sector involvement in bailing out Greece. Mr Clegg was asked on the BBC’s Andrew Marr Show: “How worried are you that we are on the edge of another really serious world financial crisis?” He replied: “I’m incredibly worried. I think the gravity of the uncertainty in the United States, which is basically a product of political gridlock, and the growing fiscal crisis, sovereign debt crisis in the eurozone is immensely serious.” He said that it was foolish to think that Britain was able to “wash our hands of it” because the country was not a member of the eurozone.

The Eurozone leaders are dancing around the idea of a Greek default. But no one wants to call it that — announcing a nation’s default on its sovereign debt can have major repercussions in the global financial markets — so the preferred euphemism is “debt restructuring”.

Is there really anyone who is fooled by this ludicrous euphemism? Aren’t all major investors aware of what “restructuring” means?

Pressure for Deal at Thursday Eurozone Summit

Berlin Working on Plans for Greek Debt Cut

The leaders of the euro zone are becoming convinced that the only way to save Greece is to restructure its growing mountain of debt. The only remaining question is how.

The German Finance Ministry is analyzing a number of options, including the EU rescue fund purchasing Greek debt. The appeal was a dramatic one, but the situation warranted it. “The current mood is not helping us pull ourselves out of the crisis,” Greek Prime Minister Giorgios Papandreou said in an interview with the Financial Times Deutschland published last Thursday “This insecurity frightens off investors.”

Papandreou is undoubtedly right. As his country stands dangerously close to national bankruptcy, finance ministers from the 17 euro-zone countries remain divided on how to organize a second bailout package for Greece.

Still, last Monday, they at least agreed on one thing: that, so far, all rescue efforts aimed at buying Greece some time to gain some control over its debt problems had failed. Indeed, Greece’s economy is on the verge of collapse, and its skyrocketing debt level has now reached 150 percent of GDP.

Finally, a bracing essay from Prof. Walter Williams, one of my favorite writers on economic matters. He is a professional, and I am an amateur, yet we have come to the same conclusion about what lies ahead.

Does that mean that what is staring us in the face is so obvious that anyone with even a lick of common sense could figure it out?

Can This Union be Saved?
by Walter Williams

National debt is over $14 trillion, the federal budget deficit is $1.4 trillion and, depending on whose estimates are used, the unfunded liability or indebtedness of the federal government (mostly in the form of obligations for Social Security, Medicare, Medicaid and prescription drugs) is estimated to be between $60 and $100 trillion.

Those entitlements along with others account for nearly 60 percent of federal spending. They are what Congress calls mandatory or non-discretionary spending. Then there’s discretionary spending, half of which is for national defense. Each year, non-discretionary spending consumes a higher and higher percent of the federal budget.

The spending path that Congress has chosen for the last half-century is unsustainable and will end up with economic collapse but little or nothing can be done about it unless I’m grossly wrong about the American people. Americans who detest our country and those who love our country are hell-bent, wittingly or unwittingly, on destroying it.


To put this in perspective: Defense spending is called discretionary and totals $685 billion. Our deficit is $1.4 trillion. Defense spending could be entirely eliminated and we’d still have a massive deficit. Any congressman unwilling to make cuts in entitlement spending is not to be taken seriously about sparing our nation from economic collapse.


Everyone who receives government largesse and special favors deems his needs as vital, deserving, proper and in the national interest. It is entirely unreasonable to expect a politician to honor and obey our Constitution and in the process commit political suicide. What’s even worse for our nation is that voters ousting a politician who’d refuse to bring, say, aid to higher education back to his constituents is perfectly rational. If, for example, he’s a Virginia politician and doesn’t bring higher education grants back to his constituents, it doesn’t mean Virginian taxpayers will pay a lower income tax. All that it means is that Marylanders will get the money instead. Once legalized theft begins, it pays for everyone to participate. Those who don’t will be losers.

That’s the nation’s dilemma…

Ladies and gentlemen, a major economic storm is bearing down on us. Time to gather up the family and head for the cyclone cellar.

To quote a well-known verse from Bard of the Boomers: “You don’t need a weatherman to know which way the wind blows.”

Or again: “It’s a hard rain’s a-gonna fall.”

Hat tips: Fjordman, Insubria.


Sol Ta Triane said...

The bellweathers are appearing...
Cisco, 11,000 jobs
Borders 11,000 jobs

Nick said...

Mr. Weatherman

English Pensioner said...

Is it because people in Greece (and maybe other countries) are worried that their Euros will be compulsorily converted into Drachma (or Lira, etc) which will then fall like a brick? I'm sure that I'd buy gold if I lived in any of these countries.

1389 said...

Now you may be able to understand why I'm a secessionist.

As long as some of the States think that they can continue to loot the other States (or each of the States think they can continue to loot all of the other States) it ain't gonna work.

Secession looks to be the only real way to get the grabbermint under control.